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
related notes included elsewhere herein.
- -----------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except per share amounts
- -----------------------------------------------------------------------------------------------------------------------
Financial Condition at June 30 2002 2001 2000 1999 1998
---------- ---------- --------- ---------- ----------
Total assets $650,757 660,124 723,382 680,672 551,450
Securities available-for-sale 92,313 87,598 117,326 122,047 65,195
Securities held-to-maturity 63,295 22,725 23,737 32,006 32,023
Loans receivable, net 418,382 417,898 505,090 457,058 404,800
Office property and equipment, net 13,770 14,686 15,315 15,412 10,845
Federal Home Loan Bank (FHLB) stock, at cost cccost 5,038 9,469 8,929 8,094 5,671
cost
Goodwill 18,524 18,524 19,367 20,277 8,158
Deposits 472,648 488,708 471,626 464,169 392,425
FHLB advances 99,065 89,118 174,020 138,617 107,901
Stockholders' equity 71,263 72,587 68,113 68,273 42,020
Operations Data for Year Ended June 30
Total interest income $40,020 50,578 47,973 41,136 35,364
Total interest expense 22,947 32,271 29,814 24,864 21,377
---------- ---------- --------- ---------- ----------
Net interest income 17,073 18,307 18,159 16,272 13,987
Provision for losses on loans 3,835 5,155 554 365 345
---------- ---------- --------- ---------- ----------
Net interest income after provision for
losses on loans 13,238 13,152 17,605 15,907 13,642
---------- ---------- --------- ---------- ----------
Noninterest income:
Fees and service charges 4,825 3,681 2,901 2,146 1,392
Gain on sale of branch deposits 165 -- -- 1,088 --
Net gain (loss) on sale of securities 103 1,583 (170) (12) --
Gain on sale of loans 552 351 180 296 242
165
Real estate related activities 1,453 1,206 1,464 950 719
Other income 1,930 1,588 2,135 1,066 825
---------- ---------- --------- ---------- ----------
Total noninterest income 9,028 8,409 6,510 5,534 3,178
---------- ---------- --------- ---------- ----------
Noninterest expense:
Compensation and benefits 9,400 8,605 8,992 7,674 6,702
Office property and equipment 2,544 2,419 2,282 1,901 1,500
Amortization of goodwill -- 844 844 449 108
Other noninterest expense 5,116 4,923 4,480 4,154 3,218
---------- ---------- --------- ---------- ----------
Total noninterest expense 17,060 16,791 16,598 14,178 11,528
---------- ---------- --------- ---------- ----------
Earnings before income taxes 5,206 4,770 7,517 7,263 5,292
Income taxes 1,696 1,764 2,641 2,700 1,874
---------- ---------- --------- ---------- ----------
Net earnings 3,510 3,006 4,876 4,563 3,418
========== ========== ========= ========== ==========
Earnings per share (1):
Basic earnings per share 0.85 0.68 1.07 0.97 0.73
========== ========== ========= ========== ==========
Diluted earnings per share 0.83 0.67 1.07 0.96 0.72
========== ========== ========= ========== ==========
"Adjusted" earnings per share (2)
Basic earnings per share 0.85 0.87 1.26 1.06 0.76
========== ========== ========= ========== ==========
Diluted earnings per share 0.83 0.86 1.25 1.06 0.74
========== ========== ========= ========== ==========
Cash dividends declared per common share 0.32 0.32 0.30 0.29 0.29
========== ========== ========= ========== ==========
- -----------------------------------------------
(1) Adjusted for stock distributions and April 1999 stock conversion.
(2) "Adjusted" earnings exclude amortization of goodwill.
1
Selected Consolidated Financial and Other Data (Continued)
Key Financial Ratios and Other Data at or for the Years Ended June 30
2002 2001 2000 1999 (7) 1998 (6)
------------- ------------- ------------- ------------- -------------
Performance Ratios:
Return on assets (net income divided
by average total assets) 0.54 % .43 % .70 % .78 % .71 %
Return on equity (net income divided
by average equity) 4.89 4.16 7.22 9.48 8.39
Average net interest rate spread (1) 2.71 2.44 2.50 2.72 2.74
Net yield on average interest-earning
assets (2) 2.95 2.81 2.81 2.99 3.07
Net interest income after provision for
loan losses to total other expenses 77.60 78.33 106.07 112.20 118.34
Average interest-earning assets to
average interest-bearing liabilities 106.04 107.48 106.64 105.83 107.14
Asset Quality Ratios:
Nonperforming loans to total loans 1.48 .64 .42 .54 .33
Nonperforming loans to total assets 0.95 .40 .29 .36 .24
Nonperforming assets as a percentage
of total assets (3) 1.01 .42 .30 .37 .34
Nonperforming loans and real estate
owned to total loans and real
estate owned 1.58 .67 .43 .54 .47
Average for loan losses to total loans 1.08 1.12 .67 .68 .64
Capital, Equity and Dividend Ratios:
Tangible capital (4) 7.62 7.60 6.71 6.52 6.20
Core capital (4) 7.62 7.60 6.71 6.52 6.20
Risk-based capital (4) 12.66 13.25 12.46 13.20 12.51
Average equity to average assets ratio 11.11 10.22 9.68 8.24 8.46
Dividend payout ratio 37.65 47.06 28.04 30.10 39.67
Other Data:
Book value per common share (5) 16.95 15.95 14.52 14.17 8.99
Number of full-service offices 15 17 18 19 15
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
(2) Represents net interest income as a percentage of average interest-earning
assets.
(3) Non-performing assets include non-accruing loans, accruing loans delinquent
90 days or more, and foreclosed assets but do not include restructured
loans.
(4) End of period ratio.
(5) Adjusted for stock distributions and April 1999 stock conversion.
(6) Operating data includes effect of the Company's acquisition of GFS Bancorp,
Inc. for periods subsequent to March 31, 1998.
(7) 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 2002 2002 2001 2001
------------------
------------- ------------- ------------- --------------
Interest income $9,585 9,600 9,962 10,873
Interest expense 5,012 5,357 5,989 6,589
------------- ------------- ------------- --------------
Net interest income 4,573 4,243 3,973 4,284
Provision for losses on loans 1,520 1,035 400 880
------------- ------------- ------------- --------------
Net interest income after provision 3,053 3,208 3,573 3,404
Noninterest income 2,162 2,125 2,356 2,385
Noninterest expense 4,458 4,263 4,219 4,120
------------- ------------- ------------- --------------
Earnings before income taxes 757 1,070 1,710 1,669
Income taxes 194 325 581 596
------------- ------------- ------------- --------------
Net earnings $563 745 1,129 1,073
============= ============= ============= ==============
Earnings per share:
Basic $0.138 0.182 0.276 0.255
Diluted $0.135 0.179 0.271 0.249
============= ============= ============= ==============
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
============= ============= ============= ==============
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 within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for the express purpose of availing itself
of these safe harbor provisions. Forward-looking statements, which are based on
certain assumptions and describe future plans, strategies and expectations of
the Company, are generally identifiable by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project" or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the Company's future activities and operating results include, but are
not limited to, changes in: interest rates, general economic conditions,
legislation, regulation, U.S. monetary and fiscal policies, the quality or
composition of the Company's loan and investment portfolios, deposit flows,
competition, demand for products and services and accounting policies,
principles and guidelines. These risks and uncertainties should be considered in
evaluating forward-looking statements, and undue reliance should not be placed
on such statements.
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 stock form of ownership (the
"Conversion"). The Company's principal activity consists of ownership of all of
the stock in the Bank. The net income of the Company is primarily derived from
the operations of 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.
Business Strategy
The Company's current business strategy is to operate 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.
4
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
2002 2001 2000
----------------------------- ------------------------------ ----------------------------
Rate at
June 30, Average Average Average Average Average Average
2002 Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
---- ------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) 7.47% $422,805 $32,797 7.76% 484,911 39,573 8.16% 480,377 37,146 7.73%
Mortgage-backed
securities 5.36% 46,212 2,572 5.57% 38,661 2,678 6.93% 34,528 2,235 6.47%
Investment securities (2) 3.71% 82,963 3,956 4.77% 119,729 7,924 6.62% 129,135 8,441 6.54%
Short-term investments
and other interest-
earning assets (3) 1.58% 26,977 695 2.58% 9,314 403 4.33% 2,805 151 5.38%
----- ------ --- ----- ----- --- ----- ----- --- -----
Total interest-earning
assets 6.65% 578,957 40,020 6.91% 652,615 50,578 7.75% 646,845 47,973 7.42%
----- ------ ----- ------ ----- ------ -----
Noninterest-earning assets 67,523 53,433 50,944
----------- --------- ----------
TOTAL ASSETS $646,480 706,048 697,789
=========== ========= ==========
Interest-bearing liabilities:
Deposits 3.21% $457,001 17,937 3.92% 457,439 23,070 5.04% 450,272 20,521 4.56%
Borrowings 5.22% 88,974 5,010 5.63% 149,756 9,201 6.14% 156,271 9,293 5.95%
----- ------ ----- ----- ------- ----- ----- ------- ----- -----
Total interest-bearing
Liabilities 3.56% 545,975 22,947 4.20% 607,195 32,271 5.31% 606,543 29,814 4.92%
----- ------ ----- ------ ----- ------ -----
Noninterest-bearing:
Deposits 20,032 16,286 13,584
Liabilities 8,622 10,434 10,099
----------- --------- ----------
TOTAL LIABILITIES 574,629 633,914 630,226
Stockholders' equity 71,851 72,133 67,563
----------- --------- ----------
TOTAL LIABILITIES
AND STOCK-
HOLDERS' EQUITY $646,480 706,048 697,789
=========== ========= ==========
Net interest income $17,073 18,307 18,159
======== ========= ========
Interest rate spread (4) 3.09% 2.71% 2.44% 2.50%
========= ============= =========== ===========
Net yield on interest-
earning assets (5) 3.29% 2.95% 2.81% 2.81%
========= ============= =========== ===========
Ratio of average interest-
earning assets to
average interest-
bearing liabilities 106.04% 107.48% 106.64%
============= =========== ===========
- ----------------------------------------------------------------------------------------------------------------------------------
(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 interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
5
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
2002 vs. 2001 2001 vs. 2000
---------------------------------------------- --------------------------------------------
Increase (Decrease) Due To TOTAL Increase (Decrease) Due To TOTAL
------------------------------- -------------------------------
RATE/ INCREASE RATE/ INCREASE
VOLUME RATE VOLUME (DECREASE) VOLUME RATE VOLUME (DECREASE)
--------- -------- ---------- ------------ ---------- ------- --------- ------------
(In Thousands)
Interest income:
Loans receivable ($5,069) (1,940) 233 (6,776) 351 2,066 11 2,428
Mortgage-backed securities 523 (526) (103) (106) 268 159 16 443
Investments (2,433) (2,215) 680 (3,968) (615) 103 (5) (517)
Other interest-earning 350 (29) (69) 252
assets 764 (163) (309) 292
--------- -------- ---------- ------------
---------- -------- --------- -------------
Total interest-earning assets (6,215) (4,844) 501 (10,558) 354 2,299 (47) 2,606
---------- --------- ---------- ------------ ---------- -------- --------- -------------
Interest expense:
Savings deposits (22) (5,123) 12 (5,133) 327 2,161 62 2,550
Borrowings (3,735) (764) 308 (4,191) (387) 297 (2) (92)
--------- -------- ---------- ------------ ---------- ------- --------- ------------
Total interest-bearing (3,757) (5,887) 320 (9,324) (60) 2,458 60 2,458
liabilities
--------- -------- ---------- ------------ ---------- ------- --------- ------------
Net change in net interest income ($2,458) 1,043 181 (1,234) 414 (159) (107) 148
========= ======== ========== ============ ========== ======= ========= ============
Financial Condition
Total assets decreased by $9.4 million, or 1.4%, to $650.8 million at June 30,
2002 from $660.1 million at June 30, 2001. Cash and cash equivalents decreased
by $54.7 million, or 70.2%, to $23.2 million at June 30, 2002 from $78.9 million
at June 30, 2001 as the Company used funds from interest-bearing deposits in
other financial institutions to purchase relatively higher-yielding investment
securities and other assets. The Company purchased $52.0 million and $83.0
million, respectively, of securities held-to-maturity and securities
available-for-sale during fiscal 2002. The balance of securities
held-to-maturity increased by $40.6 million, or 178.5%, to $63.3 million at June
30, 2002 from $22.7 million at June 30, 2001. The balance of securities
available-for-sale increased by $4.7 million, or 5.4%, to $92.3 million at June
30, 2002 from $87.6 million at June 30, 2001 as proceeds from sales, calls and
maturities largely offset purchases during the fiscal year. The Company
purchased bank owned life insurance ("BOLI") in the amount of $7.0 million in
November and December 2001. Largely due to the BOLI purchase, other assets
increased by $6.4 million, or 93.1%, to $13.3 million at June 30, 2002 from $6.9
million at June 30, 2001. Federal Home Loan Bank ("FHLB") stock decreased by
$4.4 million, or 46.8%, to $5.0 at June 30, 2002 from $9.5 million at June 30,
2001 after the FHLB redeemed excess member stock during fiscal 2002.
Deposit balances decreased by $16.1 million, or 3.3%, to $472.6 million at June
30, 2002 from $488.7 million at June 30, 2001 and accrued interest payable
decreased by $2.0 million, or 35.9%, to $3.6 million at June 30, 2002 from $5.7
million at June 30, 2001 due to a decrease in the balance of certificates of
deposit and in the average cost of deposits and borrowings in fiscal 2002 as
compared to fiscal 2001. Partly offsetting the decrease in deposit balances was
an increase in FHLB advances. The balance of advances from FHLB increased by
$9.9 million, or 11.2%, to $99.1 million at June 30, 2002 from $89.1 million at
June 30, 2001.
6
Stockholders' equity decreased by $1.3 million, or 1.8%, to $71.3 million at
June 30, 2002 from $72.6 million at June 30, 2001. The decrease in stockholders'
equity was largely due to a stock repurchase program under which 366,000 shares
of Company common stock were repurchased during fiscal 2002 at a cost of $4.8
million, or $13.00 per share. In August 2002 the Company completed this stock
repurchase program pursuant to which a total of 460,000 shares were repurchased
and announced a new stock repurchase program pursuant to which the Company
intends to repurchase up to 10% of its issued and outstanding shares, or up to
426,000 shares. Partially offsetting the decrease in stockholders' equity due to
stock repurchases were earnings of $3.5 million and an increase of $834,000 in
other comprehensive income. The increase in other comprehensive income was the
result of an unrealized gain in the Company's available-for-sale portfolio that
totaled $490,000 at June 30, 2002 as compared to an unrealized loss of $344,000
in that portfolio at June 30, 2001. Higher valuations for the available-for-sale
portfolio occurred as market interest rates dropped after five Federal Reserve
Board rate-cutting decisions between June 2001 and June 2002. Dividends declared
during the year ended June 30, 2002 totaled $1.3 million excluding dividends
paid on unallocated Employee Stock Ownership Plan ("ESOP") shares.
Comparison of Operating Results for Fiscal Years Ended June 30, 2002 and 2001
General. Net earnings totaled $3.5 million, or $0.83 per diluted share, for the
year ended June 30, 2002 as compared to net earnings totaling $3.0 million, or
$0.67 per diluted share, for the year ended June 30, 2001. The Company early
adopted Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill
and Other Intangible Assets on July 1, 2001. As required by the Statement,
amortization of goodwill was discontinued in fiscal 2002.
Interest Income. Interest income decreased by $10.6 million, or 20.9%, to $40.0
million in fiscal 2002 from $50.6 million in fiscal 2001. The decrease in
interest income was primarily due to a decrease in the balance of
interest-earning assets. The average balance of interest-earning assets
decreased by $73.6 million, or 11.3%, to $579.0 million in fiscal 2002 from
$652.6 million in fiscal 2001. In addition, the average yield on
interest-earning assets decreased by 84 basis points to 6.91% for fiscal 2002
from 7.75% for fiscal 2001 due to lower yields on interest-earning assets in the
generally lower market interest rate environment and to changes in the mix of
interest-earning assets.
Interest income on loans receivable decreased by $6.8 million, or 17.1%, to
$32.8 million for fiscal 2002 from $39.6 million for fiscal 2001. The decrease
in interest income on loans receivable was primarily due to a decrease of $62.1
million, or 12.8%, in the average balance of loans receivable to $422.8 million
for fiscal 2002 from $484.9 million for fiscal 2001. The decrease in the average
balance of loans receivable for fiscal 2002 as compared to fiscal 2001 was
largely due to a reduction in the Company's one-to-four family fixed-rate
residential loan portfolio that resulted from the securitization and sale of
$112.7 million of such loans in March 2001. The average yield on loans
receivable decreased by 40 basis points to 7.76% for fiscal 2002 from 8.16% for
fiscal 2001, which also contributed to the decrease in interest income on loans
receivable.
Interest income on mortgage-backed securities ("MBS") decreased by $106,000, or
4.0%, to $2.6 million in fiscal 2002 from $2.7 million in fiscal 2001. The
decrease in interest income on MBS was primarily due to a decrease in the
average yield on MBS. The average yield on MBS decreased by 136 basis points to
5.57% in fiscal 2002 from 6.93% in fiscal 2001. The decrease in the average
yield on MBS was primarily due to purchases of MBS yielding relatively lower
rates during fiscal 2002. In addition, adjustable-rate MBS repriced at lower
rates in the generally lower market interest rate environment during fiscal
2002. Partly offsetting the decrease in yield on MBS was an increase in the
average balance of those securities. The average balance of MBS increased by
$7.5 million, or 19.5%, to $46.2 million for fiscal 2002 from $38.7 million for
fiscal 2001.
Interest income on investment securities decreased by $4.0 million, or 50.1%, to
$4.0 million for fiscal 2002 from $7.9 million for fiscal 2001. The decrease in
interest income on investment securities was primarily
7
due to a decrease of $36.7 million, or 30.7%, in the average balance of
investment securities to $83.0 million in fiscal 2002 from $119.7 million in
fiscal 2001. In addition, the average yield on investment securities decreased
by 185 basis points to 4.77% for fiscal 2002 from 6.62% for fiscal 2001.
Interest income on other interest-earning assets increased by $292,000, or
72.4%, to $695,000 for fiscal 2002 from $403,000 for fiscal 2001 due to an
increase in the average balance of such assets. The average balance of other
interest-earning assets increased by $17.7 million, or 189.7%, to $27.0 million
for fiscal 2002 from $9.3 million for fiscal 2001 due to increased liquidity in
fiscal 2002. Partly offsetting the increases in the average balance of other
interest-earning assets was a decrease in the average yield. The average yield
on other interest-earning assets decreased by 175 basis points to 2.58% in
fiscal 2002 from 4.33% in fiscal 2001 in the generally lower market interest
rate environment in the current fiscal year period.
Interest Expense. Interest expense decreased by $9.3 million, or 28.9%, to $22.9
million in fiscal 2002 from $32.3 million in fiscal 2001. The decrease in
interest expense was due to a decrease of 111 basis points in the average cost
of interest-bearing liabilities to 4.20% for fiscal 2002 from 5.31% for fiscal
2001 and to a decrease of $61.2 million in the average balance of
interest-bearing liabilities to $546.0 million for fiscal 2002 from $607.2
million for fiscal 2001. Interest expense on deposits decreased by $5.1 million,
or 22.3%, to $17.9 million in fiscal 2002 from $23.1 million in fiscal 2001. The
decrease in interest expense on deposits was primarily due to a decrease of 112
basis points in the average rate paid on deposits to 3.92% in fiscal 2002 from
5.04% in fiscal 2001. The average balance of deposits decreased by 0.1% to
$457.0 million for fiscal 2002 from $457.4 million for fiscal 2001. Interest
paid on borrowings decreased by $4.2 million, or 45.6%, to $5.0 million for
fiscal 2002 from $9.2 million for fiscal 2001. The average balance of borrowings
decreased by $60.8 million, or 40.6%, to $89.0 million in fiscal 2002 from
$149.8 million in fiscal 2001. The Company repaid short-term borrowings during
the final quarter of fiscal 2001 with proceeds from the securitization and sale
of residential mortgage loans and consequently the average balance of borrowings
during fiscal 2002 was lower than that balance in fiscal 2001. The average cost
of borrowings decreased by 51 basis points to 5.63% in fiscal 2002 from 6.14% in
fiscal 2001 as higher-rate fixed-term borrowings matured and were replaced with
lower-rate borrowings in the generally lower market interest rate environment
during fiscal 2002.
Net Interest Income. Net interest income before provision for loan losses
decreased by $1.2 million, or 6.7%, to $17.1 million for fiscal 2002 from $18.3
million for fiscal 2001. The Company's interest rate spread increased by 27
basis points to 2.71% for fiscal 2002 from 2.44% for fiscal 2001 and the net
yield on interest-earning assets increased by 14 basis points to 2.95% for
fiscal 2002 from 2.81% for fiscal 2001. The increase in the interest rate spread
and net yield on interest-earning assets was more than offset by the decrease in
the volume of interest-earning assets during fiscal 2002 as compared to fiscal
2001.
Provision for Loan Losses. Provision for loan loss expense decreased by $1.3
million, or 25.6%, to $3.8 million for fiscal 2002 from $5.2 million for fiscal
2001. Provision for loan loss expense in fiscal 2002 was largely due to a $2.2
million charge-off of loans to a local commercial and industrial borrower.
Provision for loan loss expense in fiscal 2001 was largely due to a $3.5 million
charge-off of loans to a local borrower in a high technology industry. In
addition, provision for loan loss expense increased in fiscal 2002 and 2001 in
comparison with prior fiscal years due to increased growth in commercial real
estate and business loan balances and in consumer loan balances, which generally
involve a greater degree of risk than one-to-four family residential mortgage
loans. Net charge-offs as a percentage of average loans outstanding were 0.94%
and 0.79%, respectively, for fiscal years 2002 and 2001. The Company has
established a systematic method of reviewing the credit quality of the loan
portfolio in order to establish a sufficient allowance for losses on loans. The
allowance for losses on loans is based on management's current judgments about
the credit quality of individual loans and segments of the loan 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 known and inherent losses that are both
probable and reasonably estimable.
Noninterest Income. Noninterest income increased by
8
$619,000, or 7.4%, to $9.0 million for fiscal 2002 from $8.4 million for fiscal
2001. The increase in noninterest income was partly due to a pretax gain of
$456,000 on the sale of a northwest Iowa branch office in July 2001 to a local
financial institution. The purchaser assumed deposits of $8.9 million and
acquired loans totaling $2.8 million in addition to the branch building and
certain fixtures. The gain on the sale of the branch deposits, loans and
building and fixtures totaled $165,000, $44,000 and $247,000, respectively. The
increase in noninterest income was also due to an increase of $1.1 million, or
31.1%, in income from fees and service charges to $4.8 million for fiscal 2002
from $3.7 million for fiscal 2001. The increase in fees and service charges
resulted from an increase in loan origination activity in the generally lower
market interest rate environment and from increases in service fees on deposit
accounts. The increase in loan origination activity in the favorable rate
environment for borrowers during fiscal 2002 also contributed to increases in
gain on sale of loans and other real estate-related activities. Gain on sale of
loans held for sale, including the sale of the branch office loans mentioned
earlier, increased by $201,000, or 57.4%, to $552,000 for fiscal 2002 from
$351,000 for fiscal 2001 and income from other real estate-related activities
increased by $247,000, or 20.5%, to $1.5 million for fiscal 2002 from $1.2
million for fiscal 2001. Income from other real estate-related activities
consists primarily of real estate sales commissions and fees for abstracting
services generated by subsidiaries of the Company. Increases in all categories
of noninterest income, other than gain on sale of securities, more than offset a
much lower gain on sale of securities in fiscal 2002 as compared to fiscal 2001.
In fiscal 2002 the Company recorded a net gain on sale of securities that
totaled $103,000 as compared to a net gain on sale of securities that totaled
$1.6 million in fiscal 2001. The fiscal 2001 gain was primarily due to a $1.7
million gain realized on the sale of $112.7 million of the Company's residential
fixed-rate mortgage loans securitized in March 2001.
Noninterest Expense. Noninterest expense increased by $269,000, or 1.6%, to
$17.1 million in fiscal 2002 from $16.8 million in fiscal 2001. The principal
component of the Company's noninterest expense is salaries and employee
benefits. Compensation and benefit expense increased by $795,000, or 9.2%, to
$9.4 million in fiscal 2002 from $8.6 million in fiscal 2001. The increase in
compensation and benefits expense was largely due to the cost of discontinuing
the Company's self-insured health insurance plan that totaled approximately
$395,000 during fiscal 2002 and to annual salary increases. Office property and
equipment expense and advertising expense increased by $125,000, or 5.2%, and by
$33,000, or 9.3%, respectively, in fiscal 2002 as compared to fiscal 2001.
Partly offsetting the increases in noninterest expense for fiscal 2002 as
compared to fiscal 2001, were decreases in other noninterest expense categories.
Due to the Company's early adoption of SFAS No.142, amortization of goodwill was
discontinued in fiscal 2002. Amortization of goodwill expense totaled $844,000
in fiscal 2001. Data processing expense decreased by $150,000, or 30.6%, to
$340,000 for fiscal 2002 from $490,000 for fiscal 2001 largely due to a decrease
in software amortization expense. Other general and administrative expense
increased by $317,000, or 8.0%, to $4.3 million for fiscal 2002 from $4.0
million for fiscal 2001. The increase in other expense during fiscal 2002 was
partly due to the cost of handling the higher loan origination volume, to higher
costs of recruiting new staff members and to increased costs related to an
increase in the volume of transaction accounts. Transaction accounts generally
involve a higher cost to the Company than certificates of deposit due to the
ability of the account holder to withdraw funds by check, automated teller
machine and debit card, over the counter transactions and other means. Losses
due to fraud, forgery and overdrawn accounts add to the Company's cost of
maintaining transaction accounts.
Income tax expense. Net earnings before income taxes increased by $436,000, or
9.1%, to $5.2 million for fiscal 2002 from $4.8 million for fiscal 2001. Income
tax expense decreased by $68,000, or 3.9%, to $1.7 million for fiscal 2002 from
$1.8 million for fiscal 2001. The Company's effective tax rate decreased to
32.6% for fiscal 2002 from 37.0% for fiscal 2001. The lower effective tax rate
for fiscal 2002 resulted from an increase in tax-exempt investments such as
municipal bonds and BOLI. In addition, non-deductible goodwill amortization in
fiscal 2001 resulted in a higher effective tax rate when compared to fiscal 2002
in which no goodwill expense was recorded.
9
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
fiscal 2001 as compared to net earnings totaling $4.9 million, or $1.07 per
diluted share, for fiscal 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 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 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 borrowers 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 $4.1
million, or 12.0%, in the average balance of MBS to $38.7 million at June 30,
2001 from $34.5 million at 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 $2.5 million, or
12.4%, to $23.0 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 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 $7.2 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
10
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 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.
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 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 $610,000, or
18.1%, to $4.0 million for fiscal 2001 from $3.4 million for fiscal 2000,
largely due to increases in professional and consulting fees related to
strategic planning and to increases in contributions and Delaware 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.
11
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 checking and other transaction accounts which generally have a
lower interest cost and 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, 2002, total interest-earning assets maturing or repricing within one
year exceeded total interest-bearing liabilities maturing or repricing in the
same period by $42.8 million, representing a cumulative positive one-year gap
ratio of 1.16, or 6.6% if expressed as a percentage of total assets. 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 2002 have changed significantly when compared
to fiscal 2001. The net portfolio value of the Company, assuming no change in
interest rates (the "Base Case Scenario"), was $64.4 million and $64.2 million,
respectively, at June 30, 2002 and 2001. The net portfolio value ratio in the
Base Case Scenario was 9.86% and 9.75%, respectively, at June 30, 2002 and 2001.
The Board of Directors has established market risk limits based on the Company's
tolerance for risk. At June 30, 2002, the net portfolio value ratio was inside
the board limits in all measured 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
12
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, 2002, as calculated by the
Model. The table shows the present value of the instruments under rate shock
scenarios of -100 basis points to +300 basis points in increments of 100 basis
points. The OTS suppressed NPV estimates for interest rate scenarios of -300
basis points and -200 basis points beginning with the September 2001 and
December 2001 cycles, respectively, due to the abnormally low market interest
rate environment. Therefore, no data is presented in the table for those rate
shock scenarios. As illustrated in the table, the Company's NPV decreases in a
rising rate scenario and increases in the 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.
Present Value Estimates by Interest Rate Scenario
Calculated at June 30, 2002
------------------------------ Base ------------------------------
-100 bp 0 bp +100 bp $200 bp +300 bp
---------- ---------- ---------- ----------- ----------
(Dollars in Thousands)
Financial Instrument:
Mortgage loans and securities $432,479 425,518 417,127 408,270 399,213
Non-mortgage loans 76,475 74,939 73,465 72,050 70,692
Cash, deposits and securities 104,298 100,808 96,690 92,751 89,166
Other assets 47,468 51,550 55,377 59,014 62,363
--------- ---------- ---------- ----------- ----------
Total assets 660,720 652,815 642,659 632,085 621,434
Deposits 479,201 476,548 473,965 471,440 468,981
Borrowings 105,940 103,358 101,235 99,472 97,975
Other liabilities 8,726 8,723 8,721 8,718 8,715
--------- ---------- ---------- ----------- ----------
Total liabilities 593,867 588,629 583,921 579,630 575,671
--------- ---------- ---------- ----------- ----------
Commitments 567 193 (336) (925) (1,516)
--------- ---------- ---------- ----------- ----------
Net portfolio value $67,420 64,379 58,402 51,530 44,247
========= ========== ========== =========== ==========
Net portfolio value ratio 10.20% 9.86% 9.09% 8.15% 7.12%
========= ========== ========== =========== ==========
NPV minimum: board limit 6.50% 6.50% 6.50% 6.50% 6.50%
========= ========== ========== =========== ==========
13
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. The Company's
liquidity ratio averaged 31.6% during the quarter ended June 30, 2002. 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, 2002, 2001, and 2000, totaled $156.8 million, $172.4 million, and
$142.7 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 $26.7 million in fiscal 2002 partly due to the sale of a northwest
Iowa branch office in July 2001. Deposits transferred on the sale of that office
totaled $8.9 million. The Company's net deposits before interest credited
decreased by $7.1 million during fiscal 2001 and increased by $12.6 million in
fiscal 2000. Similarly, the general level of market interest rates heavily
influences the amount of principal repayments on loans and mortgage securities.
Principal repayments on loans during fiscal 2002 totaled $219.7 million as
compared to $177.9 million in fiscal 2001 and $156.9 million in fiscal 2000.
Funds received from principal repayments on mortgage-backed securities for
fiscal 2002, 2001 and 2000, totaled $9.9 million, $7.1 million and $8.4 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, 2002 and 2001, the Company
had $99.1 million and $89.1 million, respectively, in outstanding advances from
the FHLB.
At June 30, 2002, the Company had outstanding loan commitments and consumer and
commercial approved, but unused, lines of credit totaling $48.9 million.
Certificates of deposit scheduled to mature or reprice in one year or less at
June 30, 2002 totaled $175.6 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 have been
prepared in accordance with accounting principles generally accepted in the
United States of America, 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.
14
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
In July 2001, the Financial Accounting Standards Board ("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 evaluated 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 was required to adopt the provisions of SFAS No. 141 immediately.
The Company elected to early adopt SFAS No. 142 as of
July 1, 2002.
In connection with SFAS No. 142's transitional goodwill impairment evaluation,
the Company performed an assessment of whether there was an indication that
goodwill was impaired as of the date of adoption. There was no impairment
indicated.
As of the date of adoption, the Company had unamortized goodwill in the amount
of $18.5 million and unamortized identifiable intangible assets in the amount of
$419,000. Amortization expense related to goodwill was $844,000 for the year
ended June 30, 2001. Amortization expense related to identifiable intangible
assets was $86,000 and $110,000, respectively, for the years ended June 30, 2002
and 2001.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the Company to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development and/or normal use of
assets. The Company also records a corresponding asset which is depreciated over
the life of the asset. The Company is required to adopt SFAS No. 143 for fiscal
years beginning after June 15, 2002. The Company does not expect this statement
to have a material effect on its consolidated financial statements.
In August, 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121 and the
accounting and reporting provision of APB Opinion No. 30 for the disposal of a
segment of a business. SFAS No. 144 addresses financial accounting and reporting
for the impairment or disposal of long-lived assets and requires that long-lived
assets be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. SFAS No. 144 requires
companies to separately report discontinued operations and extends that
reporting to a component of an entity that either has been disposed of (by sale,
abandonment, or in a distribution to owners) or is classified as held for sale.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. The Company is required to adopt SFAS No. 144 for
fiscal years beginning after December 15, 2001. The adoption of this Statement
is not expected to have a material effect on the consolidated financial
statements.
SFAS No. 145 Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections was issued April 2002. This
Statement rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of
Debt, and an amendment of that Statement, SFAS No. 64,
15
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
Statement also rescinds SFAS No. 44, Accounting for Intangible Assets of Motor
Carriers. This Statement amends SFAS No. 13, Accounting for Leases, to eliminate
an inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions.
The provisions of this Statement related to the rescission of Statement 4 shall
be applied in fiscal years beginning after May 15, 2002. The provisions in
paragraphs 8 and 9(c) of this Statement related to Statement 13 shall be
effective for transactions occurring after May 15, 2002. The effects of
implementation are not expected to have a material effect on the consolidated
financial statements.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities
was issued June 2002. This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring.)
The provisions of this Statement are effective for exit and disposal activities
that are initiated after December 31, 2002.
Critical Accounting Policy
The Company's critical accounting policy relates to the allowance for losses on
loans. The Company has established a systematic method of periodically reviewing
the credit quality of the loan portfolio in order to establish a sufficient
allowance for losses on loans. The allowance for losses on loans is based on
management's current judgments about the credit quality of individual loans and
segments of the loan portfolio. The allowance for losses on loans is established
through a provision for loan losses based on management's evaluation of the risk
inherent in the loan portfolio, and considers all known internal and external
factors that affect loan collectibility as of the reporting date. 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, management's knowledge of inherent
risks in the portfolio that are probable and reasonably estimable and other
factors that warrant recognition in providing an appropriate loan loss
allowance.
16
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, 2002 and 2001,
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, 2002. 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, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended June 30, 2002, in conformity with
accounting principles generally accepted in the United States of America.
/s/ KPMG
--------
KPMG
August 30, 2002
Des Moines, Iowa
17
Assets 2002 2001
------------------ -------------------
Cash and due from banks $ 23,114,024 20,241,215
Interest-bearing deposits in other financial institutions 103,197 57,708,338
------------- -------------
Cash and cash equivalents 23,217,221 77,949,553
------------- -------------
Securities available-for-sale (note 2) 92,313,472 87,598,252
Securities held-to-maturity (fair value of $64,009,952 in 2002
and $22,882,470 in 2001) (note 2) 63,294,694 22,725,200
Loans receivable, net (notes 3 and 4) 418,381,872 417,897,877
Office property and equipment, net (note 5) 13,770,198 14,686,405
Federal Home Loan Bank (FHLB) stock, at cost 5,037,800 9,468,700
Accrued interest receivable (note 6) 2,803,663 3,793,058
Refundable income taxes (note 11) 146,741 112,365
Deferred tax asset (note 11) -- 500,000
Goodwill (note 7) 18,523,607 18,523,607
Other assets (note 8) 13,267,904 6,869,333
------------- -------------
Total assets $ 650,757,172 660,124,350
============= =============
Liabilities and Stockholders' Equity
Deposits (note 9) $ 472,648,336 488,708,229
Advances from FHLB (note 10) 99,064,679 89,117,564
Advance payments by borrowers for taxes and insurance 1,482,743 1,910,376
Deferred tax liability (note 11) 103,000 --
Accrued interest payable (notes 9 and 10) 3,640,039 5,676,823
Accrued expenses and other liabilities 2,555,580 2,123,911
------------- -------------
Total liabilities 579,494,377 587,536,903
------------- -------------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 1,000,000 shares,
none issued -- --
Common stock, $.01 par value; authorized 12,000,000 shares;
4,871,112 and 4,849,536 shares issued at June 30, 2002
and 2001, respectively 48,711 48,495
Additional paid-in capital 36,247,480 36,053,892
Retained earnings, substantially restricted (note 13) 43,542,299 41,357,535
Treasury stock, at cost, 665,764 and 298,375 shares
at June 30, 2002 and 2001, respectively (7,577,646) (2,803,832)
Accumulated other comprehensive income:
Net unrealized gain (loss) on securities available-for-sale 490,458 (343,831)
Unearned ESOP (note 12) (1,330,000) (1,473,470)
Unearned RRP (note 12) (158,507) (251,342)
------------- -------------
Total stockholders' equity 71,262,795 72,587,447
Contingencies (note 16)
------------- -------------
Total liabilities and stockholders' equity $ 650,757,172 660,124,350
============= =============
See accompanying notes to consolidated financial statements
18
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended June 30, 2002, 2001, and 2000
2002 2001 2000
----------------- ------------------ -----------------
Interest income:
Loans receivable $32,797,235 39,573,543 37,145,258
Mortgage-backed securities 2,571,732 2,677,812 2,235,090
Investment securities 3,956,160 7,924,018 8,441,174
Other interest-earning assets 694,957 403,045 151,037
----------- ----------- -----------
Total interest income 40,020,084 50,578,418 47,972,559
----------- ----------- -----------
Interest expense:
Deposits (note 9) 17,936,952 23,069,897 20,520,340
Advances from FHLB and other borrowings 5,009,983 9,201,508 9,293,181
----------- ----------- -----------
Total interest expense 22,946,935 32,271,405 29,813,521
----------- ----------- -----------
Net interest income 17,073,149 18,307,013 18,159,038
Provision for losses on loans (note 4) 3,835,000 5,155,000 554,000
----------- ----------- -----------
Net interest income after provision
for losses on loans 13,238,149 13,152,013 17,605,038
----------- ----------- -----------
Noninterest income:
Fees and service charges 4,825,009 3,681,102 2,901,004
Gain on sale of branch deposits 164,730 -- --
Gain on sale of real estate owned and held
for development 314,558 291,923 602,134
Net gain (loss) on sale of securities 102,828 1,583,419 (169,856)
Gain on sale of loans 551,926 350,758 180,240
Gain (loss) on sale of office property and equipment 249,979 (1,811) 108,462
Real estate related activities 1,453,255 1,206,120 1,463,766
Other income 1,365,724 1,297,235 1,423,966
----------- ----------- -----------
Total noninterest income 9,028,009 8,408,746 6,509,716
----------- ----------- -----------
Noninterest expense:
Compensation and benefits (note 12) 9,400,076 8,605,079 8,991,983
Office property and equipment 2,543,772 2,419,203 2,282,175
Deposit insurance premiums 88,804 95,249 189,022
Data processing 340,136 490,393 444,582
Advertising 388,975 355,917 475,256
Amortization of goodwill -- 843,680 843,677
Other expense 4,298,297 3,981,345 3,371,408
----------- ----------- -----------
Total noninterest expense 17,060,060 16,790,866 16,598,103
----------- ----------- -----------
Earnings before income taxes 5,206,098 4,769,893 7,516,651
Income taxes (note 11) 1,696,000 1,764,000 2,641,000
----------- ----------- -----------
Net earnings $ 3,510,098 3,005,893 4,875,651
=========== =========== ===========
Earnings per share:
Basic earnings per share $ 0.85 0.68 1.07
Diluted earnings per share 0.83 0.67 1.07
See accompanying notes to consolidated financial statements
19
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended June 30, 2002, 2001, and 2000
Accumulated
Additional other
Common paid-in Retained Treasury comprehensive Unearned Unearned
stock capital earnings stock income ESOP RRP Total
------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Balance at June 30, 1999 $ 48,178 35,957,560 36,283,211 -- (2,202,184) (1,813,758) -- 68,273,007
------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Net earnings -- -- 4,875,651 -- -- -- -- 4,875,651
Net change in unrealized losses on
securities available-for-sale -- -- -- -- (2,112,605) -- -- (2,112,605)
Less: reclassification adjustment for net
realized gains included in net income
(net of tax expense) -- -- -- -- (28,260) -- -- (28,260)
------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Total comprehensive incom -- -- 4,875,651 -- (2,140,865) -- -- 2,734,786
------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Stock options exercised 158 48,398 -- -- -- -- -- 48,556
Treasury stock acquired -- -- -- (1,930,138) -- -- -- (1,930,138)
Recognition and retention plan (RRP -- 8,250 -- 657,000 -- -- (675,250) --
Amortization of RRP -- -- -- -- -- -- 205,576 205,576
ESOP shares allocated -- -- -- -- -- 179,158 -- 179,158
Stock depreciation of allocated ESO -- (21,485) -- -- -- -- -- (21,485)
Dividends on common stock
at $0.30 per share (note 12) -- -- (1,376,541) -- -- -- -- (1,376,541)
------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Balance at June 30, 2000 48,336 36,002,723 39,782,321 (1,273,138) (4,343,049) (1,634,600) (469,674) 68,112,919
------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Net earnings -- -- 3,005,893 -- -- -- -- 3,005,893
Net change in unrealized gains on
securities available-for-sale -- -- -- -- 4,992,022 -- -- 4,992,022
Less: reclassification adjustment for net
realized gains included in net income
(net of tax expense) -- -- -- -- 992,804 -- -- 992,804
------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Total comprehensive incom -- -- 3,005,893 -- 3,999,218 -- -- 7,005,111
------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Stock options exercised 159 55,478 -- -- -- -- -- 55,637
Treasury stock acquired -- -- -- (1,530,694) -- -- -- (1,530,694)
Amortization of RRP -- -- -- -- -- -- 218,332 218,332
ESOP shares allocated -- -- -- -- -- 161,130 -- 161,130
Stock depreciation of allocated ESO -- (4,309) -- -- -- -- -- (4,309)
Dividends on common stock
at $0.32 per share (note 12) -- -- (1,430,679) -- -- -- -- (1,430,679)
------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Balance at June 30, 2001 48,495 36,053,892 41,357,535 (2,803,832) (343,831) (1,473,470) (251,342) 72,587,447
------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Net earnings -- -- 3,510,098 -- -- -- -- 3,510,098
Net change in unrealized gains on
securities available-for-sale -- -- -- -- 898,762 -- -- 898,762
Less: reclassification adjustment for net
realized gains included in net income
(net of tax expense) -- -- -- -- 64,473 -- -- 64,473
------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Total comprehensive incom -- -- 3,510,098 -- 834,289 -- -- 4,344,387
------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Stock options exercised 216 140,777 -- -- -- -- -- 140,993
Treasury stock acquired -- -- -- (4,772,014) -- -- -- (4,772,014)
Recognition and retention plan (RRP -- 15,700 -- (1,800) -- -- (13,900) --
Amortization of RRP -- -- -- -- -- -- 106,735 106,735
ESOP shares allocated -- -- -- -- -- 143,470 -- 143,470
Stock appreciation of allocated ESO -- 37,111 -- -- -- -- -- 37,111
Dividends on common stock
at $0.32 per share (note 12) -- -- (1,325,334) -- -- -- -- (1,325,334)
------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Balance at June 30, 2002 $ 48,711 36,247,480 43,542,299 (7,577,646) 490,458 (1,330,000) (158,507) 71,262,795
======= ========== ========== ========= ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
20
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 2002, 2001, and 2000
2002 2001 2000
---------------- ---------------- ---------------
Cash flows from operating activities:
Net earnings $ 3,510,098 3,005,893 4,875,651
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Loans originated for sale to investors (69,916,000) (51,027,680) (24,583,322)
Proceeds from sale of loans originated for sale 70,871,101 49,374,634 24,441,563
Provision for losses on loans and other assets 3,835,000 5,155,000 554,000
Depreciation and amortization 2,144,912 2,702,411 2,602,628
Provision for deferred taxes 104,000 (516,000) 61,000
Net gain on sale of loans (551,926) (350,758) (180,240)
Net (gain) loss on sale of securities available-for-sale (102,828) (1,583,419) 169,856
Net gain on sale of branch deposits (164,730) -- --
Net (gain) loss on sale of office property and equipment (249,979) 1,811 (108,462)
Net gain on sale of real estate owned and held for
development (314,558) (291,923) (602,134)
Net loan fees deferred 157,716 (79,841) 85,339
Amortization of premiums and discounts on loans,
mortgage-backed securities, and investment securities 853,791 741,313 974,710
Decrease (increase) in accrued interest receivable 989,395 1,007,357 (198,157)
Increase in other assets (258,732) (658,979) (1,475,968)
(Decrease) increase in accrued interest payable (2,036,784) 1,379,309 125,186
Increase (decrease) in accrued expenses and other liabilities 431,669 (80,128) (212,777)
Increase in refundable income taxes (34,376) (405,105) (126,366)
------------ ------------ ------------
Net cash provided by operating activities 9,267,769 8,373,895 6,402,507
------------ ------------ ------------
Cash flows from investing activities:
Purchase of securities held-to-maturity (52,047,645) (2,375,000) (519,205)
Proceeds from maturities of securities held-to-maturity 8,441,621 3,388,388 6,562,213
Proceeds from sale of securities available-for-sale 14,442,044 130,677,652 8,367,496
Purchase of securities available-for-sale (82,950,770) (12,553,258) (11,060,185)
Proceeds from maturities of securities available-for-sale 68,145,813 31,182,842 6,132,470
Purchase of bank owned life insurance (6,984,000) -- --
Redemption (purchase) of FHLB stock 4,430,900 (539,800) (834,600)
Loans purchased (19,001,000) (21,760,000) (20,861,000)
Decrease (increase) in loans receivable 13,127,299 (6,910,671) (30,475,278)
Proceeds from sale of office property and equipment 523,725 525 182,214
Purchase of office property and equipment (584,482) (607,930) (1,186,425)
Proceeds from sale of foreclosed real estate 222,750 373,789 2,069,491
Proceeds from sale of real estate held for development 703,500 792,000 1,316,500
Net expenditures on real estate held for development (9,001) (508,728) (821,410)
------------ ------------ ------------
Net cash (used in) provided by investing activities (51,539,246) 121,159,809 (41,127,719)
------------ ------------ ------------
Cash flows from financing activities:
(Decrease) increase in deposits (15,895,163) 17,082,698 7,456,053
Proceeds from advances from FHLB 31,075,000 36,500,000 76,155,665
Repayment of advances from FHLB and other borrowings (21,256,704) (121,509,920) (40,800,790)
Net (decrease) increase in advance payments by borrowers
for taxes and insurance (427,633) (917,899) 271,157
Issuance of common stock, net 140,993 55,637 48,556
Purchase of treasury stock (4,772,014) (1,530,694) (1,930,138)
Cash dividends paid (1,325,334) (1,430,679) (1,376,541)
------------ ------------ ------------
Net cash (used in) provided by financing activities (12,460,855) (71,750,857) 39,823,962
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (54,732,332) 57,782,847 5,098,750
Cash and cash equivalents at beginning of year 77,949,553 20,166,706 15,067,956
------------ ------------ ------------
Cash and cash equivalents at end of year $ 23,217,221 77,949,553 20,166,706
============ ============ ============
See accompanying notes to consolidated financial statements
21
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 2002, 2001, and 2000
Supplemental disclosures:
Cash paid during the year for:
Interest $ 24,983,719 30,892,096 29,688,335
Income taxes 1,626,371 2,687,949 2,678,647
Noncash activities:
Loans converted to securities available-for-sale -- 111,495,480 --
22
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
(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.
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.
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, 2002,
2001, and 2000 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.
(Continued)
23
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,
2002, 2001, and 2000:
2002 2001 2000
---------- ---------- ----------
Basic EPS computation:
Net earnings $3,510,098 3,005,893 4,875,651
Weighted-average common shares outstanding 4,115,350 4,407,780 4,552,159
---------- ---------- ----------
Basic EPS $ 0.85 0.68 1.07
========== ========== ==========
Diluted EPS computation:
Net earnings $3,510,098 3,005,893 4,875,651
---------- ---------- ----------
Weighted-average common shares outstanding 4,115,350 4,407,780 4,552,159
Incremental option shares using
treasury stock method 90,654 55,545 22,088
---------- ---------- ----------
Diluted shares outstanding 4,206,004 4,463,325 4,574,247
---------- ---------- ----------
Diluted EPS $ 0.83 0.67 1.07
========== ========== ==========
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 current
judgments about the credit quality of individual loans and segments of the
loan portfolio. The allowance for losses on loans is established through a
provision for loan losses based on management's evaluation of the risk
inherent in the loan portfolio, and considers all known internal and
external factors that affect loan collectibility as of the reporting date.
Such evaluation, which includes a review of all loans on which full
collectibility may not be
24
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
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, management's knowledge of
inherent risks in the portfolio that are probable and reasonably estimable
and other factors that warrant recognition in providing an appropriate loan
loss allowance.
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.
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.
25
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
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 adopted Statement of Financial Accounting Standards (SFAS) No.
142, Goodwill and Other Intangible Assets, 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 evaluated for
impairment at least annually in accordance with the provisions of Statement
142.
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.
(continued)
26
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
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.
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 accrued 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.
(continued)
27
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
Advance Payments by Borrowers for Taxes and Insurance
The recorded amount of advance payments by borrowers for taxes and
insurance approximates fair value.
Accrued Interest Payable
The recorded amount of accrued 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.
Effect of New Accounting Standards
In July 2001, the Financial Accounting Standards Board (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 evaluated 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 was required to adopt the provisions of SFAS No. 141
immediately. The Company elected to early adopt SFAS No. 142 as of July 1,
2002.
In connection with SFAS No. 142's transitional goodwill impairment
evaluation, the Company performed an assessment of whether there was an
indication that goodwill was impaired as of the date of adoption. There was
no impairment indicated.
As of the date of adoption, the Company had unamortized goodwill in the
amount of $18,523,607 and unamortized identifiable intangible assets in the
amount of $418,687. Amortization expense related to goodwill was $843,680
for the year ended June 30, 2001. Amortization expense related to
identifiable intangible assets was $85,698 and $109,999, respectively, for
the years ended June 30, 2002 and 2001.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the Company to record the fair value of
an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction,
development and/or normal use of assets. The Company also
(continued)
28
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
records a corresponding asset which is depreciated over the life of the
asset. The Company is required to adopt SFAS No. 143 for fiscal years
beginning after June 15, 2002. The Company does not expect this statement
to have a material effect on its consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121 and
the accounting and reporting provision of APB Opinion No. 30 for the
disposal of a segment of a business. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets and requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If
the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount
of the asset exceeds the fair value of the asset. SFAS No. 144 requires
companies to separately report discontinued operations and extends that
reporting to a component of an entity that either has been disposed of (by
sale, abandonment, or in a distribution to owners) or is classified as
held-for-sale. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. The Company is required
to adopt SFAS No. 144 for fiscal years beginning after December 15, 2001.
The adoption of this Statement is not expected to have a material effect on
the consolidated financial statements.
SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections was issued April 2002.
This Statement rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
Statement also rescinds SFAS No. 44, Accounting for Intangible Assets of
Motor Carriers. This Statement amends SFAS No. 13, Accounting for Leases,
to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions.
The provisions of this Statement related to the rescission of SFAS No. 4
shall be applied in fiscal years beginning after May 15, 2002. The
provisions in paragraphs 8 and 9(c) of this Statement related to SFAS No.
13 shall be effective for transactions occurring after May 15, 2002. The
effects of implementation are not expected to have a material effect on the
consolidated financial statements.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, was issued June 2002. This Statement addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring.)
The provisions of this Statement are effective for exit and disposal
activities that are initiated after December 31, 2002.
(continued)
29
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
(2) Securities
Following is a schedule of amortized costs and estimated fair values as of
June 30, 2002 and 2001:
2002
--------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
----------- ----------- ----------- -----------
Available-for-sale:
Mortgage-backed securities:
Government National Mortgage
Association (GNMA) $17,849,350 134,390 14,799 17,968,941
Federal Home Loan Mortgage
Corporation (FHLMC) 14,151,314 223,999 -- 14,375,313
Federal National Mortgage
Association (FNMA) 3,841,150 42,379 3,692 3,879,837
Investments in mutual funds 45,281,762 33,252 2,618 45,312,396
Other investment securities 10,405,438 372,886 1,339 10,776,985
----------- ----------- ----------- -----------
$91,529,014 806,906 22,448 92,313,472
=========== =========== =========== ===========
Held-to-maturity:
Mortgage-backed securities:
GNMA $ 1,141,609 53,014 3,582 1,191,041
FHLMC 11,235,890 78,608 -- 11,314,498
FNMA 26,108,262 360,423 -- 26,468,685
United States treasury securities 9,993,287 75,463 -- 10,068,750
Local government securities 11,289,873 144,864 14,342 11,420,395
Other investment securities 3,525,773 22,544 1,734 3,546,583
----------- ----------- ----------- -----------
$63,294,694 734,916 19,658 64,009,952
=========== =========== =========== ===========
(Continued)
30
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
2001
-----------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------------- --------------- ------------- ----------------
Available-for-sale:
Mortgage-backed securities:
GNMA $ 2,262,940 894 17,473 2,246,361
FHLMC 2,320,052 45,939 -- 2,365,991
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
=============== =============== ============= ================
The amortized cost and fair value at June 30, 2002 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 $ 45,281,761 45,312,391 3,921,659 3,953,288
Due after 1 year through 5 years -- -- 14,205,093 14,312,985
Due after 5 years through 10 years 5,318,748 5,326,258 2,576,118 2,624,229
Due after 10 years 5,086,691 5,450,732 4,106,063 4,145,226
---------------- ---------------- ---------------- ----------------
55,687,200 56,089,381 24,808,933 25,035,728
Mortgage-backed securities 35,841,814 36,224,091 38,485,761 38,974,224
---------------- ---------------- ---------------- ----------------
$ 91,529,014 92,313,472 63,294,694 64,009,952
================ ================ ================ ================
(Continued)
31
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
Proceeds from the sale of securities available for sale were $14,442,044,
$130,677,652, and $8,367,496 during 2002, 2001, and 2000, respectively.
Gross realized gains on these sales were $155,960, $1,731,569, and $3,784
and gross realized losses on these sales were $53,132, $148,150, and
$173,640 in 2002, 2001, and 2000, respectively.
Securities with an amortized cost of $8,007,389 and an estimated fair value
of approximately $8,080,000 at June 30, 2002 were pledged to various
entities.
(3) Loans Receivable
Loans receivable at June 30, 2002 and 2001 are summarized as follows:
2002 2001
------------- -------------
First mortgage loans:
Secured by one to four family residences $ 164,815,983 181,034,482
Secured by other properties 137,769,304 141,064,808
Home equity and second mortgage loans 40,347,072 38,223,700
Automobile loans 32,167,935 24,212,132
Commercial business loans 15,502,233 14,975,815
Other nonmortgage loans 33,241,139 23,339,750
------------- -------------
423,843,666 422,850,687
Less:
Allowance for loan losses (note 4) 4,583,897 4,736,738
Undisbursed portion of loans in process 1,500,316 458,055
Net unearned premiums on loans (2,075,647) (1,537,496)
Deferred loan fees 1,453,228 1,295,513
------------- -------------
$ 418,381,872 417,897,877
============= =============
Troubled Debt Restructurings
At June 30, 2002, 2001, and 2000, the Company had nonaccrual loans of
$5,106,000, $1,094,000, and $25,000, respectively, and restructured loans
of $393,000, $130,000, and $65,000, respectively. Interest income recorded
during 2002, 2001, and 2000 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 $313,300 in 2002, $105,653 in 2001, and
$1,250 in 2000.
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, 2002.
(Continued)
32
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 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 $98,771,932, $142,730,413, and $42,865,542 at
June 30, 2002, 2001, and 2000, 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 $648,486, $814,977,
and $110,483 at June 30, 2002, 2001, and 2000, 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 $93.5 million at June 30, 2002, and included approximately
$78.7 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 $10.9 million and Connecticut with $1.4 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, 2002, the outstanding principal balance
of loans purchased under the above agreement was approximately $65.5
million and participation interests in these balances sold to other
financial institutions totaled approximately $14.9 million.
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. There were no mortgage loans sold in
securitized transactions during the fiscal year ended June 30, 2002.
(Continued)
33
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
(4) Allowance for Loan Losses
A summary of the allowance for loan losses follows:
2002 2001 2000
----------- ----------- -----------
Balance at beginning of year $ 4,736,738 3,394,448 3,134,664
Provision for losses 3,835,000 5,155,000 554,000
Charge-offs (4,200,710) (3,890,291) (380,133)
Recoveries 212,869 77,581 85,917
----------- ----------- -----------
Balance at end of year $ 4,583,897 4,736,738 3,394,448
=========== =========== ===========
(5) Office Property and Equipment
At June 30, 2002 and 2001, the cost and accumulated depreciation of office
property and equipment were as follows:
2002 2001
----------- -----------
Office property and equipment:
Land and improvements $ 3,688,053 3,260,070
Building and improvements 12,857,264 13,350,537
Furniture, fixtures, equipment, and automobiles 6,303,356 5,884,001
Deposits on assets not in service and not depreciated 9,949 280,565
----------- -----------
Total cost - office properties 22,858,622 22,775,173
Less accumulated depreciation 9,088,424 8,088,768
----------- -----------
Office property and equipment, net $13,770,198 14,686,405
=========== ===========
(6) Accrued Interest Receivable
Accrued interest receivable is summarized as follows:
2002 2001
---------- ----------
Loans receivable $2,113,906 2,446,262
Securities 689,757 1,346,796
---------- ----------
$2,803,663 3,793,058
========== ==========
(Continued)
34
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
(7) Goodwill and Other Intangible Assets
The table below reconciles reported earnings for fiscal years ended June
30, 2001 and 2000 to "adjusted" earnings, which exclude goodwill
amortization.
2002 2001
--------------- -------------------------------------------------
Reported Reported Goodwill Adjusted
earnings earnings amortization earnings
--------------- ------------- -------------- ------------
Net income $ 3,510,098 3,005,893 843,680 3,849,573
Earnings per share:
Basic EPS 0.85 0.68 0.19 0.87
Diluted EPS 0.83 0.67 0.19 0.86
The gross carrying amount of intangible assets subject to amortization and
the associated accumulated amortization at June 30, 2002 is presented in
the table below. Amortization expense for intangible assets was $85,698,
$109,999, and $135,877 for fiscal 2002, 2001, and 2000, respectively.
2000
-------------------------------------------------
Reported Goodwill Adjusted
earnings amortization earnings
------------- --------------- ------------
Net income $ 4,875,651 843,677 5,719,328
Earnings per share:
Basic EPS 1.07 0.19 1.26
Diluted EPS 1.07 0.19 1.26
Gross Unamortized
carrying Accumulated intangible
amount amortization assets
---------- ------------ -----------
Intangible assets:
Core deposit premium $ 690,140 357,150 332,990
Mortgage servicing rights 700,250 368,000 332,250
---------- ---------- ----------
Total $1,390,390 725,150 665,240
========== ========== ==========
(Continued)
35
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
Projections of amortization expense are based on existing asset balances
and the existing interest rate environment as of June 30, 2002. What the
Company actually experiences may be significantly different depending upon
changes in mortgage interest rates and market conditions. The following
table shows the estimated future amortization expense for amortizing
intangible assets for each of the years ended June 30:
Core deposit Mortgage
premium servicing rights Total
------------ ---------------- --------
2003 $66,516 332,250 398,766
2004 52,374 -- 52,374
2005 45,396 -- 45,396
2006 44,604 -- 44,604
2007 44,604 -- 44,604
(8) Other Assets
Included in other assets at June 30, 2002 and 2001 are mortgage servicing
rights. The changes in capitalized mortgage servicing rights for the years
ended June 30, 2002 and 2001 were as follows:
2002 2001
--------- ---------
Balance at beginning of year $ 674,750 --
Originated -- 700,250
Amortization (342,500) (25,500)
--------- ---------
Balance at end of year $ 332,250 674,750
========= =========
The fair value of mortgage servicing rights was approximately $332,250 at
June 30, 2002.
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 %
(Continued)
36
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
At June 30, 2002, 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 $332,250
Expected weighted average life 0.92 years
Prepayment speed assumption 22.92%
Decrease in fair value from a 50 basis point change $ 25,000
Decrease in fair value from a 100 basis point change 47,000
Discount rate assumption 7.38%
Decrease in fair value from a 50 basis point change $ 25,000
Decrease in fair value from a 100 basis point change 47,000
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.
(9) Deposits
At June 30, 2002 and 2001, deposits are summarized as follows:
2002 2001
------------ ------------
Noninterest-bearing checking $ 21,129,556 21,157,593
Savings accounts 31,322,593 27,899,162
Demand and NOW accounts 55,255,465 49,175,576
Money market accounts 108,190,942 84,003,514
Certificates of deposit 256,749,780 306,472,384
------------ ------------
$472,648,336 488,708,229
============ ============
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $25,800,000 and $30,500,000 at June 30, 2002
and 2001, respectively.
At June 30, 2002, the scheduled maturities of certificates of deposit were
as follows:
2003 $175,595,647
2004 43,167,051
2005 20,205,730
2006 7,366,330
2007 and thereafter 10,415,022
------------
$256,749,780
============
(Continued)
37
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
Interest expense on deposits is summarized as follows:
2002 2001 2000
----------- ----------- -----------
Savings $ 247,323 392,534 474,073
Money market and checking 2,776,654 4,396,509 4,350,896
Certificates of deposit 14,912,975 18,280,854 15,695,371
----------- ----------- -----------
$17,936,952 23,069,897 20,520,340
=========== =========== ===========
At June 30, 2002 and 2001, accrued interest payable on deposits totaled
$3,627,634 and $5,665,642, respectively.
(10) Advances from FHLB
A summary at June 30, 2002 and 2001 follows:
Weighted- Weighted-
average average
interest interest
rate 2002 rate 2001
---------- ------------ ----------- ------------
FHLB of Des Moines (A)
Stated maturity in fiscal year
ending June 30:
2002 --% $ -- 6.17% $ 18,000,569
2003 (B) 5.22 17,575,000 6.24 13,000,000
2004 4.35 9,000,000 5.91 3,000,000
2005 4.00 7,500,000 -- --
2006 4.87 3,000,000 -- --
2007 and thereafter (C) 5.51 53,832,280 5.55 50,702,891
------------- ------------
90,907,280 84,703,460
Amortizing advances (D) 5.25 4,157,399 5.25 4,414,104
Fed Funds advance with FHLB (E) Variable 4,000,000 Variable --
------------- ------------
$ 99,064,679 $ 89,117,564
============= ============
(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 120% of
outstanding balances.
(B) Includes one FHLB short-term Repo Advance for year 2002 that matures on
July 25, 2002 in the amount of $2,075,000. The interest on this advance is
due at maturity at a rate of 2.07% and the term is 30 days.
(Continued)
38
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
(C) Includes 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 a
range of 10% to 20% of the Company's total assets by the FHLB. At June 30,
2002 and 2001, the advances included in this maturity range are callable
after an initial lock-out period according to the following schedule:
Weighted- Weighted-
average average
interest interest
rate 2002 rate 2001
------------ ------------ ------------ ------------
Callable in fiscal year
ending June 30:
2002 --% $ -- 5.17% $ 12,000,000
2003 5.35 32,989,139 5.45 20,975,123
2004 5.91 17,843,141 5.92 17,727,768
------------ ------------
$ 50,832,280 $ 50,702,891
============ ============
(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 2002,
the interest rate at which these advances repriced ranged from 1.38% to
4.40%. Fed Funds Advances are collateralized as described in (A) above.
At June 30, 2002 and 2001, accrued interest payable on advances from FHLB
totaled $12,405 and $11,181, respectively.
(Continued)
39
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
(11) Taxes on Income
Taxes on income for the years ended June 30, 2002, 2001, and 2000 were
comprised as follows:
2002 2001
-------------------------------------------------------------------------------------------------------
Federal State Total Federal State Total
---------- ---------- ---------- ---------- ---------- ----------
Current $1,343,000 249,000 1,592,000 1,975,000 305,000 2,280,000
Deferred 90,000 14,000 104,000 (447,000) (69,000) (516,000)
---------- ---------- ---------- ---------- ---------- ----------
$1,433,000 263,000 1,696,000 1,528,000 236,000 1,764,000
========== ========== ========== ========== ========== ==========
2000
----------------------------------------------
Federal State Total
---------- ---------- -----------
$2,234,000 346,000 2,580,000
53,000 8,000 61,000
---------- ---------- -----------
$2,287,000 354,000 2,641,000
========== ========== ===========
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:
2002 2001 2000
----------- ----------- -----------
Computed "expected" tax expense $ 1,770,073 1,621,764 2,555,661
Purchase accounting adjustments -- 278,000 278,000
Nontaxable income (234,313) (97,000) (131,000)
State income taxes 173,580 155,760 233,640
Other, net (13,340) (194,524) (295,301)
----------- ----------- -----------
$ 1,696,000 1,764,000 2,641,000
=========== =========== ===========
(Continued)
40
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
Tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at June 30, 2002
and 2001 are presented below:
2002 2001
----------- -----------
Deferred tax assets:
Allowance for loan losses $ 816,000 1,258,000
Unrealized loss on securities available-for-sale -- 205,000
Deferred compensation 148,000 188,000
Accrued vacation pay 103,000 106,000
Deferred directors fees 134,000 117,000
Reserve for uncollected interest 82,000 --
Deferred loan fees -- 21,000
Accrued expenses -- 11,000
Other 39,000 24,000
----------- -----------
Total gross deferred tax assets 1,322,000 1,930,000
----------- -----------
Deferred tax liabilities:
FHLB stock dividends (347,000) (725,000)
Fixed assets (413,000) (255,000)
Mortgage servicing rights (124,000) --
Unrealized gain on securities available-for-sale (294,000) --
Purchase accounting adjustments (165,000) (251,000)
Bad debt reserves in excess of base year (82,000) (199,000)
----------- -----------
Total gross deferred tax liabilities (1,425,000) (1,430,000)
----------- -----------
Net deferred tax (liability) asset $ (103,000) 500,000
=========== ===========
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.
(12) 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,
2001, 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 2002, 2001, and 2000 because the plan was fully funded.
(Continued)
41
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
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 compensation. The Profit Sharing Plan expense for the years
ended June 30, 2002, 2001, and 2000 was $48,265, $44,555, and $42,619,
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, 2002 and 2001, allocated shares were 153,801 and 138,423,
respectively. Shares committed to be released were 7,398 and 7,746,
respectively. The fair value of the 133,000 and 147,347 unallocated shares
was approximately $1.8 million and $1.9 million, respectively.
Plan expense was $180,581, $156,821, and $173,367 for the years ended June
30, 2002, 2001, and 2000, respectively. Interest expense was $105,566,
$114,174, and $123,359 on the Plan's borrowing for the years ended June 30,
2002, 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 $0.01 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.
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 $0.01 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.
42
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
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 No. 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:
2002 2001 2000
---------- ---------- ----------
Net income:
As reported $3,510,098 3,005,893 4,875,651
Pro forma 3,446,038 2,942,362 4,828,003
Basic earnings per share:
As reported 0.85 0.68 1.07
Pro forma 0.84 0.67 1.06
Diluted earnings per share:
As reported 0.83 0.67 1.07
Pro forma 0.82 0.66 1.06
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 2002, 2001, and 2000: dividend
yield of 3.41%; expected volatility of 22.76%; risk free interest rate of
6.29%; and expected life of 7.5 years.
Changes in options outstanding and exercisable during 2002, 2001, and 2000
were as follows:
Exercisable Outstanding Option price
options options per share
------------ ----------- --------------
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
Granted -- 2,000 11.00
Forfeited (500) (22,200) 9.25
Vested 47,000 -- 7.6875 - 9.25
Exchange of shares (335) (335) 12.25
Exercised (21,577) (21,577) 3.066 - 9.25
------------ ----------- --------------
June 30, 2002 98,579 220,278 3.066 - 20.341
============ =========== ==============
(Continued)
43
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
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 April
1999. The shares of stock vest over a five year period. RRP expense for the
years ended June 30, 2002, 2001, and 2000 was $106,735, $218,332, and
$205,576, respectively.
Changes in the number of recognition and retention plan shares awarded
under the Plan and yet to vest were as follows:
Granted October 21, 1999 $ 73,000
Vested (2,000)
-----------
June 30, 2000 71,000
Vested (14,200)
-----------
June 30, 2001 56,800
Granted 7,000
Forfeited (7,200)
Vested (14,200)
-----------
June 30, 2002 $ 42,400
===========
(13) Stockholders' Equity
Regulatory Capital Requirements
The Financial Institution Reform, Recovery, and Enforcement Act of 1989
(FIRREA) and the capital regulations of the Office of Thrift Supervision
(OTS) promulgated thereunder require institutions to have 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.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established additional capital requirements which require regulatory action
against depository institutions in one of the undercapitalized categories
defined in implementing regulations. Institutions such as the Bank, which
are defined as well capitalized, must generally have a leverage capital
(core) ratio of at least 5%, a tier 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, 2002 and 2001.
(Continued)
44
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
The Bank's actual and required capital amounts and ratios as of June 30,
2002 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 $47,855,000 7.6% $ 9,418,000 1.5% $ -- --%
Tier 1 leverage (core) capital 47,855,000 7.6 18,836,000 3.0 31,393,000 5.0
Tier 1 risk-based capital 47,855,000 11.6 16,386,000 4.0 24,578,000 6.0
Risk-based capital 52,434,000 12.7 33,138,000 8.0 41,423,000 10.0
Retained earnings at June 30, 2002 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
In July 1992, the Bank converted from a mutual to a stock organization
through the formation of a Mutual Holding Company. In April 1999, the
Mutual Holding Company converted to a stock organization.
The 1992 and 1999 Plans of Conversion 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.
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
(Continued)
45
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
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.
(14) 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, 2002 and 2001, the Company had commitments to originate and
purchase loans approximating $31,530,000 and $48,276,000, 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 $12,489,000 and $15,185,000 at June 30, 2002 and 2001,
respectively. At June 30, 2002 and 2001, approximately 67% and 56%,
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 $4,907,000 and $10,502,000 at June 30, 2002 and
2001, respectively.
At June 30, 2002 and 2001, the Company had commitments to sell loans
approximating $4,155,000 and $4,750,000, respectively.
(Continued)
46
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
(15) Fair Value of Financial Instruments
The estimated fair values of Company's financial instruments (as described
in note 1) were as follows:
2002 2001
----------------------------- -----------------------------
Carrying Fair Carrying Fair
amount value amount value
------------ ------------ ------------ ------------
Financial assets:
Cash and due from banks $ 23,114,024 23,114,024 20,241,215 20,241,215
Interest-bearing deposits in
other financial institutions 103,197 103,197 57,708,338 57,708,338
Investment securities
available-for-sale 92,313,472 92,313,472 87,598,252 87,598,252
Investment securities
held-to-maturity 63,294,694 64,009,952 22,725,200 22,882,470
Loans receivable, net 418,381,872 425,259,000 417,897,877 422,691,000
FHLB stock 5,037,800 5,037,800 9,468,700 9,468,700
Accrued interest receivable 2,803,663 2,803,663 3,793,058 3,793,058
Financial liabilities:
Deposits 472,648,336 476,548,000 488,708,229 492,674,000
Other borrowings 99,064,679 103,219,000 89,117,564 90,828,000
Advances payments by borrowers
for taxes and insurance 1,482,743 1,482,743 1,910,376 1,910,376
Accrued interest payable 3,640,039 3,640,039 5,676,823 5,676,823
Notional Unrealized Notional Unrealized
amount gain (loss) amount gain (loss)
------------ ----------- ---------- -----------
Off-balance sheet assets (liabilities):
Commitments to extend credit $ 31,530,000 -- 48,276,000 --
Consumer lines of credit 12,489,000 -- 15,185,000 --
Commercial lines of credit 4,907,000 -- 10,502,000 --
Commitments to sell loans (4,155,000) -- (4,750,000) --
(16) 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.
(Continued)
47
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
(17) Parent Company Financial Information
Condensed Statements of Financial Condition at June 30, 2002 and 2001 and
Condensed Statements of Operations and Cash Flows for the years ended June
30, 2002 and 2001 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.
Condensed Statements of Financial Condition
2002 2001
------------ ------------
Assets
Cash deposited at First Federal Bank $ 109,048 100,447
Interest-bearing deposits in other financial institutions 103,198 1,208,338
------------ ------------
Cash and cash equivalents 212,246 1,308,785
Investment securities available-for-sale at fair value 3,271,908 3,141,489
Loans receivable, net 1,431,025 1,553,991
Investment in subsidiaries 66,484,451 66,497,031
Refundable income taxes 20,993 48,257
Accrued interest receivable -- 12,498
Other assets 15,835 51,684
------------ ------------
Total assets $ 71,436,458 72,613,735
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Deferred tax liability $ 126,000 --
Accrued expenses and other liabilities 47,663 26,288
------------ ------------
Total liabilities 173,663 26,288
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value;
authorized 1,000,000 shares; none issued -- --
Common stock, $.01 par value, authorized 12,000,000
shares; issued and outstanding 4,871,112 and 4,849,536
shares at June 30, 2002 and 2001, respectively 48,711 48,495
Additional paid in capital 36,247,480 36,053,892
Retained earnings 43,542,299 41,357,535
Treasury stock (7,577,646) (2,803,832)
Accumulated other comprehensive income -
net unrealized loss on securities available-for-sale 490,458 (343,831)
Unearned ESOP (1,330,000) (1,473,470)
Unearned RRP (158,507) (251,342)
------------ ------------
Total stockholders' equity 71,262,795 72,587,447
------------ ------------
Total liabilities and stockholders' equity $ 71,436,458 72,613,735
============ ============
(Continued)
48
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
Condensed Statements of Operations
2002 2001
----------- ----------
Interest income:
Loans receivable $ 105,566 115,889
Investment securities 105,842 186,707
Other interest-earning assets 12,203 109,478
(Loss) gain on sale of investment securities (25,332) 17,143
Other general and administrative expense (367,717) (478,266)
----------- ----------
Losses before income taxes (169,438) (49,049)
Taxes on income (72,000) (25,000)
----------- ----------
Losses before subsidiary income (97,438) (24,049)
Equity in undistributed earnings of subsidiaries 3,607,486 3,029,942
----------- ----------
Net income $ 3,510,048 3,005,893
=========== ==========
(Continued)
49
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
Condensed Statements of Cash Flows
2002 2001
----------- -----------
Cash flows from operating activities:
Net income $ 3,510,098 3,005,893
Adjustments to net income:
Equity in undistributed earnings of subsidiaries (3,607,486) (3,029,942)
Net loss (gain) on sale of securities available-for-sale 25,332 (17,143)
Increase (decrease) in income tax payable 27,264 (38,879)
Decrease (increase) in other assets 42,849 (7,844)
Amortization of premiums and discounts 66,236 7,875
Decrease (increase) in accrued interest receivable 12,498 24,346
Increase in accrued expense and other liabilities 21,376 10,288
----------- -----------
Net cash provided by (used in) provided by
operating activities 98,167 (45,406)
----------- -----------
Cash flows from investing activities:
Proceeds from maturities of securities available-for-sale -- 100,000
Proceeds from sale of securities available-for-sale 2,960,168 1,032,143
Purchase of investment securities available-for-sale (2,867,021) (1,500,453)
Decrease in loans receivable 122,966 122,967
----------- -----------
Net cash provided by (used in) investing activities 216,113 (245,343)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock 140,993 55,637
Purchase of treasury stock (4,772,014) (1,530,694)
Cash dividends paid (1,325,334) (1,430,679)
Dividends received from subsidiaries 4,545,536 2,795,440
----------- -----------
Net cash used in financing activities (1,410,819) (110,296)
----------- -----------
Net (decrease) in cash and cash equivalents (1,096,539) (401,045)
Cash and cash equivalents - beginning of period 1,308,785 1,709,830
----------- -----------
Cash and cash equivalents - end of period $ 212,246 1,308,785
=========== ===========
50