ANNUAL REPORT
[PHOTO OMITTED]
2005
Earning your trust
every penny of the way.
[LOGO]First
Federal
BANKSHARES, INC.
HIGHLIGHTS
Annual Report
o 33% increase in Annual Dividends
o 24% decrease in Outstanding Shares
o 36% increase in Book Value per Share
[GRAPHIC OMITTED]
Comments From The Chairman
[PHOTO OMITTED]
In the past two years we have been discussing our progress in realigning our
balance sheet asset mix. The shift from longer-term residential loans to
shorter-term commercial real estate and business loans was undertaken in order
to improve our net interest margin and to better manage interest-rate risk. The
"Analysis of Loan Portfolio" section of this report shows the shift that has
occurred over the past five years. Commercial real estate and business loans
made up more than 50% of our loan portfolio at June 30, 2005, compared to only
37% at June 30, 2001.
The loan-loss reserve allowance has been significantly increased to better
match the inherent risk involved with commercial lending. More specifically,
additional reserves were provided on two commercial loans presently in the
portfolio that have a risk concern, even though they are presently performing
loans.
The "Non-performing Assets" table in the report shows a reduction in
non-performing assets to $1.8 million at June 30, 2005, from levels in excess of
$5.0 million for 2004, 2003, and 2002.
This year the offices in Orange City and Sheldon, Iowa, were sold, and a
new office was opened in Johnston, Iowa, a suburb of Des Moines. We feel that
the strategy of branching in the Des Moines metro area offers opportunities for
retail and commercial expansion. During fiscal 2006 we plan to build a new
office in Newton, Iowa, which will replace the two existing offices in order to
provide operational efficiencies and improve customer service in Newton.
Other areas we are highlighting this coming year are expense control and
improved efficiencies throughout the organization. Our business plan contains a
variety of strategies to address these areas.
Equity Services, Inc., our real estate development subsidiary, is
completing the sale of the final units in Brookshire Condominiums, a 22-unit
project located in the southeast part of Sioux City. A new 20-unit condominium
project in Dakota Dunes, South Dakota, is just getting underway. Sioux Financial
Co., a subsidiary that owns two abstract companies in northwest Iowa, and First
Federal Financial Services, a service division of First Federal Bank that
provides non-insured investment products to its customers, have completed a
successful year and added significantly to the Company's non-interest income.
The cash dividend to our shareholders increased to 10 cents per share per
quarter this year, and the Company's book value per share increased to $19.81.
The management team is committed to increase core deposit balances. We
have a variety of competitive products that we will stress in future marketing
campaigns.
"Welcome" to Ronald Jorgensen, our newest Board member, who was appointed
in July. Mr. Jorgensen brings an abundance of financial and commercial lending
background to our organization.
We strive to improve in those areas that need special attention, and
"Thank you, our shareholders, for your support."
/S/ Barry Backhaus
Barry Backhaus,
Chairman, President, and CEO
LOCATIONS
Bank
Grinnell, IA
1025 Main St
Johnston, IA
[PHOTO OMITTED] 5260 NW 86th St
Grinnell - Branch Manager Le Mars, IA
Rich Gogg (left) helped 301 Plymouth St NW
Grinnell Private
Investment Corporation Monroe, IA
President Jim Ramsey 108 E Washington
(right) finance the
restoration of the Strand Newton, IA
Theatre. 123 W 2nd St N
1907 1st Ave E
Onawa, IA
921 Iowa Ave
[PHOTO OMITTED] Sioux City, IA
329 Pierce St
924 Pierce St
Johnston - Branch Manager 3839 Indian Hills Dr
Heather Wilson (left) 4211 Morningside Ave
helped Barb Brodie (right) 4701 Singing Hills Blvd
make her dream of owning a 2727 Hamilton Blvd
Planet Sub(R) franchise
come true. South Sioux City, NE
2738 Cornhusker Dr
West Des Moines, IA
3900 Westown Pkwy
[PHOTO OMITTED] Sioux City - Commercial Relationship
Managers Erin Hoekstra (left) and Kevin Owens
analyze their clients' account activity data
with Vice President, Commercial Banking,
Cindy Aspeotis (right).
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 2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
Total assets $ 586,813 615,522 627,879 650,757 660,124
Securities available-for-sale 49,978 84,693 78,526 92,313 87,598
Securities held-to-maturity 18,197 23,186 44,505 63,295 22,725
Loans receivable, net 433,634 431,857 415,267 418,382 417,898
Office property and equipment, net 13,109 13,277 13,166 13,770 14,686
Federal Home Loan Bank (FHLB) stock, at cost 5,762 6,096 5,707 5,038 9,469
Goodwill 18,417 18,524 18,524 18,524 18,524
Deposits 407,562 429,209 448,944 472,648 488,708
Advances from FHLB and other borrowings 104,564 109,886 102,387 99,065 89,118
Stockholders' equity 70,295 71,458 69,661 71,263 72,587
Operations Data for Years Ended June 30
Total interest income 29,226 30,526 $ 35,117 40,020 50,578
Total interest expense 11,839 12,666 16,122 22,947 32,271
--------- --------- --------- --------- ---------
Net interest income 17,387 17,860 18,995 17,073 18,307
Provision for losses on loans 2,985 1,225 1,730 3,835 5,155
--------- --------- --------- --------- ---------
Net interest income after provision for
losses on loans 14,402 16,635 17,265 13,238 13,152
--------- --------- --------- --------- ---------
Noninterest income:
Service charges on deposit accounts 3,585 3,931 3,702 3,024 2,712
Service charges on loans 466 670 940 1,064 415
Gain on sale of bank branch offices 2,185 -- -- 165 --
Gain on sale of real estate held for 60 150 19 331 282
development
Net gain (loss) on sale of securities (121) (65) 309 103 1,583
Gain on sale of loans 760 1,612 1,544 1,289 905
Real estate related activities 705 1,274 1,509 1,453 1,206
Other income 1,622 1,792 1,773 1,599 1,306
--------- --------- --------- --------- ---------
Total noninterest income 9,262 9,364 9,796 9,028 8,409
--------- --------- --------- --------- ---------
Noninterest expense:
Compensation and benefits 10,135 10,402 10,215 9,400 8,605
Office property and equipment 2,591 2,542 2,666 2,544 2,419
Amortization of goodwill -- -- -- -- 844
Other noninterest expense 4,910 4,649 5,781 5,116 4,923
--------- --------- --------- --------- ---------
Total noninterest expense 17,636 17,593 18,662 17,060 16,791
--------- --------- --------- --------- ---------
Earnings before income taxes 6,028 8,406 8,399 5,206 4,770
Income taxes 1,815 2,788 2,794 1,696 1,764
--------- --------- --------- --------- ---------
Net earnings 4,213 5,618 5,605 3,510 3,006
========= ========= ========= ========= =========
Earnings per share:
Basic earnings per share $ 1.19 1.54 1.44 0.85 0.68
========= ========= ========= ========= =========
Diluted earnings per share $ 1.16 1.50 1.41 0.83 0.67
========= ========= ========= ========= =========
"Adjusted" earnings per share (1)
Basic earnings per share $ 1.19 1.54 1.44 0.85 0.87
========= ========= ========= ========= =========
Diluted earnings per share $ 1.16 1.50 1.41 0.83 0.86
========= ========= ========= ========= =========
Cash dividends declared per common share $ 0.40 0.35 0.32 0.32 0.32
========= ========= ========= ========= =========
- -----------------------------------------------
(1) "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
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
Performance Ratios:
Return on assets (net income divided
by average total assets) 0.72% 0.89% 0.88% 0.54% 0.43%
Return on equity (net income divided
by average equity) 5.87 7.93 7.91 4.89 4.16
Average net interest rate spread (1) 3.06 3.06 3.27 2.75 2.46
Net yield on average interest-earning
assets (2) 3.34 3.24 3.42 2.99 2.83
Net interest income after provision for
loan losses to total other expenses 81.66 94.56 92.51 77.60 78.33
Average interest-earning assets to
average interest-bearing liabilities 112.45 107.96 105.21 106.04 107.48
Asset Quality Ratios:
Nonperforming loans to total loans 0.37 0.99 1.13 1.48 0.64
Nonperforming loans to total assets 0.28 0.70 0.75 0.95 0.40
Nonperforming assets as a percentage
of total assets (3) 0.30 0.81 0.81 1.01 0.42
Nonperforming loans and real estate
owned to total loans and real
estate owned 0.41 1.16 1.23 1.58 0.67
Allowance for loan losses to total loans 1.53 0.99 1.10 1.08 1.12
Capital, Equity and Dividend Ratios:
Tangible capital (4) 8.38 8.01 7.65 7.62 7.60
Core capital (4) 8.38 8.01 7.65 7.62 7.60
Risk-based capital (4) 12.24 11.92 12.64 12.66 13.25
Average equity to average assets ratio 12.30 11.26 11.50 11.11 10.22
Dividend payout ratio 33.61 22.73 22.22 37.65 47.06
Other Data:
Book value per common share $ 19.81 $ 19.10 $ 18.29 $ 16.95 $ 15.95
Number of full-service offices 14 15 15 15 17
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(1) Represents the difference between the average tax-equivalent yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(2) Represents net interest income, tax-effected, 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.
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 2005 2005 2004 2004
------------------ ------- ------- ------- -------
Interest income $ 7,588 7,331 7,044 7,263
Interest expense 3,239 2,931 2,783 2,886
------- ------- ------- -------
Net interest income 4,349 4,400 4,261 4,377
Provision for losses on loans (1) 1,990 130 105 760
------- ------- ------- -------
Net interest income after provision 2,359 4,270 4,156 3,617
Noninterest income 1,774 1,595 1,862 4,031
Noninterest expense 4,110 4,570 4,602 4,354
------- ------- ------- -------
Earnings before income taxes 23 1,295 1,416 3,294
Income taxes (149) 397 430 1,137
------- ------- ------- -------
Net earnings $ 172 898 986 2,157
======= ======= ======= =======
Earnings per share:
Basic $ 0.05 0.25 0.28 0.60
======= ======= ======= =======
Diluted $ 0.05 0.25 0.27 0.58
======= ======= ======= =======
(1) As a result of the Company's periodic review of the credit quality of the
loan portfolio during the June 2005 quarter, management concluded that
additional loss reserves totaling $2.0 million were required primarily against
the previously classified loans of two commercial borrowers.
June March December September
Three Months Ended 2005 2005 2004 2004
------------------ ------- ------- ------- -------
Interest income $ 7,171 7,629 7,764 7,962
Interest expense 2,978 3,106 3,227 3,355
------- ------- ------- -------
Net interest income 4,193 4,523 4,537 4,607
Provision for losses on loans 150 450 100 525
------- ------- ------- -------
Net interest income after provision 4,043 4,073 4,437 4,082
Noninterest income 2,207 2,759 2,051 2,347
Noninterest expense 4,520 4,568 4,401 4,104
------- ------- ------- -------
Earnings before income taxes 1,730 2,264 2,087 2,325
Income taxes 577 751 673 787
------- ------- ------- -------
Net earnings $ 1,153 1,513 1,414 1,538
======= ======= ======= =======
Earnings per share:
Basic $ 0.32 0.41 0.39 0.42
======= ======= ======= =======
Diluted $ 0.31 0.40 0.38 0.41
======= ======= ======= =======
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. 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. 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 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, advertising expense, 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 is dedicated to maximizing shareholder value through a strong focus
on customer service provided by well-trained and motivated employees. The
Company seeks to accomplish this goal by: (1) emphasizing strong credit quality;
(2) focusing on profitable commercial banking growth; (3) developing and
implementing programs designed to enhance the Company's sales culture; (4)
increasing the profitability of the Bank's branch network and further investing
in metro Des Moines markets; (5) developing specific marketing and incentive
programs that emphasize core deposit growth and retention; and, (6) improving
efficiency through cost containment, appropriate staffing and enhanced
technology.
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
2005 2004 2003
--------------------------------------------------------------------------------------------
| | | |
Rate at
June 30, Average Average Average Average Average Average
2005 Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
---- ------- -------- ---------- ------- -------- ------------------ -------------------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) 6.05% $ 434,029 25,845 5.95% 446,030 26,582 5.96% 414,171 29,129 7.03%
Investment securities (2) 4.30% 87,157 3,467 3.98% 108,479 4,158 3.83% 144,552 6,184 4.28%\
Short-term investments
and other interest-
earning assets (3) 2.87% 6,956 173 2.49% 5,134 39 0.77% 4,403 46 1.04%
---- ------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-earning
Assets 5.65% 528,142 29,485 5.58% 559,643 30,779 5.50% 563,126 35,359 6.28%
---- ------ ---- ------ ---- ------ ----
Noninterest-earning assets 55,737 69,026 71,801
------- ------- -------
TOTAL ASSETS $ 583,879 628,669 634,927
========= ======= =======
Interest-bearing liabilities:
Deposits 2.37% $ 362,351 7,231 2.00% 401,800 7,728 1.92% 429,330 11,064 2.58%
Borrowings 4.33% 107,315 4,608 4.29% 116,596 4,938 4.24% 105,912 5,085 4.78%
---- ------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-bearing
Liabilities 2.80% 469,666 11,839 2.52% 518,396 12,666 2.44% 535,242 16,122 3.01%
---- ------ ---- ------ ---- ------ ----
Noninterest-bearing:
Deposits 38,055 34,405 21,976
Liabilities 4,351 5,104 6,845
------- ------- -------
TOTAL LIABILITIES 512,072 557,905 564,063
Stockholders' equity 71,807 70,764 70,864
------- ------- -------
TOTAL LIABILITIES
AND STOCK-
HOLDERS' EQUITY $ 583,879 628,669 634,927
========= ======= =======
Net interest income (2) $ 17,646 18,113 19,237
Interest rate spread (4) 2.85% 3.06% 3.06% 3.27%
====== ====== ======
Net yield on average
interest-earning assets(5) 3.18% 3.34% 3.24% 3.42%
====== ====== ======
Ratio of average interest-
earning assets to
average interest-
bearing liabilities 112.45% 107.96% 105.21%
====== ====== ======
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(1) Average balances include nonaccrual loans. Interest income includes loan
fees which are not material.
(2) Investment securities income and yields are tax-effected.
(3) Includes interest-earning deposits in other financial institutions.
(4) Interest rate spread represents the difference between the average
tax-equivalent yield on interest-earning assets and the average
interest-bearing liabilities. cost of interest-bearing liabilities.
(5) Net yield on average interest-earning assets represents net interest
income, tax-effected, 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
2005 vs. 2004 2004 vs. 2003
-------------------------------------------- --------------------------------------------
-------------------------------- --------------------------------
| 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 $ (715) (45) 23 $ (737) $ 2,240 (4,432) (355) $ (2,547)
Investment securities (817) 163 (37) (691) (1,544) (650) 168 (2,026)
Other interest-earning assets 14 88 32 134 8 (12) (3) (7)
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning assets (1,518) 206 18 (1,294) 704 (5,094) (190) (4,580)
-------- -------- -------- -------- -------- -------- -------- --------
Interest expense:
Deposits (757) 321 (61) (497) (710) (2,834) 208 (3,336)
Borrowings (394) 58 6 (330) 511 (572) (59) (120)
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing (1,151) 379 (55) (827) (199) (3,406) 149 (3,456)
-------- -------- -------- -------- -------- -------- -------- --------
Net change in net interest income $ (367) (173) 73 $ (467) $ 903 (1,688) (339) $ (1,124)
======== ======== ======== ======== ======== ======== ======== ========
Overview
The Company sold two branch offices located in rural communities of northwest
Iowa in September 2004 resulting in a pre-tax gain of $2.2 million on the sale
for fiscal 2005. In March 2005, the Company opened a new branch office in
Johnston, Iowa which is close to the Des Moines, Iowa, metropolitan area.
Management believes that branching in the metro Des Moines market area offers
increased opportunities for the expansion of its retail and commercial services
in that rapidly growing area. The Company recorded net earnings of $4.2 million
in fiscal 2005, a decrease of $1.4 million from net earnings of $5.6 million in
fiscal 2004. Fiscal 2005 earnings were negatively impacted by an increase of
$1.8 million in provision for loan loss expense and a reduction in net interest
income due primarily to the Company's smaller asset base after the branch sales.
Although the Federal Reserve Board increased short-term market interest rates
steadily during fiscal 2005, longer-term rates remained at historically low
levels. This flattened yield curve negatively impacted pricing on longer-term
real estate loans. Consequently, the average yield on loans of 5.95% in fiscal
2005 was little-changed from the average yield on loans of 5.96% in fiscal 2004.
Financial Condition
Total assets decreased by $28.7 million, or 4.7%, to $586.8 million at June 30,
2005 from $615.5 million at June 30, 2004, primarily due to the sale of the two
branch offices in September 2004. In the sale, the purchaser assumed deposits of
$27.1 million and acquired loans totaling $17.0 million in addition to the
branch office buildings and certain furniture and equipment. The Company funded
the transfer of the deposit liabilities with proceeds from sales and maturities
of investment securities. The balance of securities available-for-sale decreased
by $34.7 million, or 41.0%, to $50.0 million at June 30, 2005 from $84.7 million
at June 30, 2004 while the balance of securities held-to-maturity decreased by
$5.0
6
million, or 21.5%, to $18.2 million at June 30, 2005 from $23.2 million at June
30, 2004. Net loans increased by $1.8 million, or 0.4%, to $433.6 million at
June 30, 2005 from $431.8 million at June 30, 2004. The Company replaced the
residential and consumer loans sold in the branch office sale with commercial
real estate and business loans, increasing the percentage of the net loan
portfolio comprised by commercial real estate and business loans to 50.1% at
June 30, 2005 from 40.8% at June 30, 2004.
Deposits decreased by $21.6 million, or 5.0%, to $407.6 million at June 30, 2005
from $429.2 million at June 30, 2004 primarily due to the transfer of $27.1
million of deposits in the branch office sale. In response to the increase in
market interest rates during fiscal 2005, the Company increased rates on certain
deposit products; introduced products designed to attract core deposits in the
higher market interest rate environment; and, offered premium-rate certificates
of deposit in order to generate and retain deposits, maintain adequate liquidity
and meet certain asset/liability management objectives. The balance of advances
from FHLB and other borrowings decreased by $5.3 million, or 4.8%, to $104.6
million at June 30, 2005 from $109.9 million at June 30, 2004 as liquid funds
were available to fund FHLB advance maturities. Stockholders' equity decreased
by $1.2 million, or 1.6%, to $70.3 million at June 30, 2005 from $71.5 million
at June 30, 2004. The decrease in stockholders' equity was largely due to stock
repurchases. Under a stock repurchase program announced in August 2003 the
Company repurchased 236,000 shares of Company common stock at a cost of $5.3
million, or $22.24 per share, in fiscal 2005. The current repurchase program
authorizes an additional repurchase of up to 81,000 issued and outstanding
shares. Management believes that stock repurchases are an appropriate deployment
of a portion of the Company's capital that enhances shareholder value when the
common stock is repurchased at an appropriate price. In addition, stock
repurchase programs may reduce price volatility and enhance the liquidity of the
Company's common stock, which is generally advantageous for shareholders. With
capital levels in excess of regulatory requirements, as demonstrated in the
capital table included in Note 13 of the financial statements, and a liquidity
ratio of 15.11% at June 30, 2005, the Company believes that it can implement the
repurchase program without adversely affecting its capital or liquidity
positions or its ability to pay future dividends. The Company's dividend payout
ratio for fiscal 2005 was 33.6%. Dividends declared during the year ended June
30, 2005 totaled $1.4 million excluding dividends paid on unallocated Employee
Stock Ownership Plan ("ESOP") shares. Partly offsetting the decrease in
stockholders' equity due to stock repurchases and dividends were net earnings of
$4.2 million for fiscal 2005.
Asset Quality
Restructured loans increased to $7.5 million at June 30, 2005 from $3.7 million
at June 30, 2004 primarily due to loans totaling $4.2 million to a commercial
contractor. The borrower had experienced losses on several large contracts and
its loans were added to the Company's classified assets in September 2004. Due
to uncertainties about the borrower's ability to meet the contractual terms of
the loan agreements, the Company established loss reserves totaling $2.3 million
against the loans of this borrower during fiscal 2005.
Non-performing assets decreased to $1.8 million, or 0.30% of total assets, at
June 30, 2005 from $5.0 million, or 0.81% of total assets, at June 30, 2004
primarily due to a decrease in non-performing loans. Non-performing loans
decreased by $2.7 million, or 62.2%, to $1.6 million at June 30, 2005 from $4.3
million at June 30, 2004, representing 0.37% and 0.99%, respectively, of total
loans at those dates. The decrease in non-performing loans was primarily due to
a decrease of $1.5 million in non-accrual commercial real estate loans and a
decrease of $1.3 million in non-accrual and delinquent one- to four-family
residential loans.
The allowance for loan losses is increased by the provision for loan losses
charged to operations and reduced by net charge-offs. Management establishes the
allowance for loan losses through a process that begins with estimates of
probable loss inherent in the portfolio based on various statistical analyses.
These analyses consider historical and projected default rates and loss
severities; internal risk ratings; and geographic, industry and other
environmental factors. In establishing the allowance for loan losses,
7
management also considers the Company's current business strategy and credit
processes, including compliance with established guidelines for credit limits,
credit approvals, loan underwriting criteria and loan workout procedures.
The policy of the Company is to segment the allowance to correspond to the
various types of loans in the loan portfolio according to the underlying
collateral, which corresponds to the respective levels of quantified and
inherent risk. The initial assessment takes into consideration non-performing
loans and the valuation of the collateral supporting each loan. Non-performing
loans are risk-rated generally on a case-by-case basis based on qualitative and
quantitative factors that include, but are not limited to, collateral type and
estimated value, financial statement analysis, specific economic factors, cash
flow analysis, delinquency history and loan workout situations and progress.
Based upon this analysis, a quantified risk factor is assigned to each
non-performing loan. This results in an allocation to the overall allowance for
the corresponding type and severity of each non-performing loan.
Performing loans are also reviewed by collateral type, with similar risk factors
being assigned. These risk factors take into consideration, among other matters,
the borrower's ability to pay and the Company's past loan loss experience with
each type of loan. The assigned risk factors result in allocations to the
allowance corresponding to the risk-rated portfolio of performing loans.
In order to determine its overall adequacy, the allowance for loan losses is
reviewed by management on a monthly basis. While management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary, based on changes in economic and local market conditions beyond
management's control. In addition, various regulatory agencies periodically
review the Company's loan loss allowance as an integral part of the examination
process. Accordingly, the Company may be required to take certain charge-offs
and/or recognize additions to the allowance based on the judgment of regulators
as determined by information provided to them during their examinations.
Based on relevant and presently available information, management believes that
the current allowance for loan losses is adequate. Following are tables
presenting (a) an analysis of the loan portfolio; (b) a summary of the allowance
for loan losses; and (c) non-performing assets at the dates indicated.
8
(a) Analysis of Loan Portfolio.
The following table sets forth information regarding the Company's loan
portfolio, by type of loan on the dates indicated.
At June 30,
-------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
Amount % Amount % Amount % Amount % Amount %
-------------------------------------------------------------------------------------
(Dollars in Thousands)
One- to four-family residential (1) $ 144,238 33.26 164,579 38.11 191,890 46.22 164,816 39.40 181,034 43.32
Multi-family residential (2) 46,070 10.62 45,156 10.45 35,051 8.44 56,537 13.51 62,040 14.85
Commercial real estate (3) 133,626 30.82 101,297 23.46 78,064 18.80 81,232 19.42 79,025 18.91
Commercial business loans 37,485 8.64 29,633 6.86 16,256 3.91 15,502 3.71 14,976 3.58
Home equity & second mortgage 32,134 7.41 38,377 8.89 36,962 8.90 40,347 9.64 38,224 9.15
Auto loans 9,611 2.22 17,755 4.11 26,292 6.33 32,168 7.69 24,212 5.79
Other non-mortgage loans (4) 37,038 8.54 39,786 9.21 35,588 8.57 33,241 7.94 23,340 5.58
-------------------------------------------------------------------------------------
Total loans $ 440,202 101.51 436,583 101.09 420,103 101.17 423,843 101.31 422,851 101.18
Less:
Allowance for loan losses 6,718 1.55 4,316 1.00 4,615 1.11 4,584 1.10 4,737 1.13
Loans in process 44 0.00 801 0.19 41 0.10 1,500 0.36 458 0.11
Net unearned premiums on loans (1,539) (0.35) (1,880) (0.44) (1,965) (0.47) (2,076) (0.50) (1,537) (0.37)
Deferred loan fees 1,345 0.31 1,489 0.34 1,776 0.43 1,453 0.35 1,295 0.31
-------------------------------------------------------------------------------------
Total loans, net $ 433,634 100.00 431,857 100.00 415,267 100.00 418,382 100.00 417,898 100.00
=====================================================================================
- -------------------------------------------------
(1) Includes construction loans on one- to four-family residential units.
(2) Includes construction loans on multi-family residential units.
(3) Includes construction loans on commercial real estate.
(4) Includes other secured non-mortgage loans, unsecured personal loans, loans
on deposits and credit card loans for 2002 and 2001.
(b) Analysis of the Allowance for Loan Losses.
The following table sets forth information regarding the Company's allowance for
loan losses at or for the years indicated.
At or for years ended June 30,
--------------------------------------------------------------
2005 2004 2003 2002 2001
--------------------------------------------------------------
(Dollars in Thousands)
Total loans outstanding $ 440,202 436,583 420,103 423,843 422,851
Average loans outstanding 434,029 446,030 414,171 422,805 484,911
Allowance balance (at beginning of period) 4,316 4,615 4,584 4,737 3,394
Provision charged to operations 2,985 1,225 1,730 3,835 5,155
Charge-offs:
Residential (90) (109) (115) (5) --
Commercial real estate (8) (229) (721) (697) (70)
Commercial business (115) (691) (131) (2,640) (3,551)
Consumer (473) (624) (1,098) (859) (269)
Recoveries 103 129 366 213 78
--------------------------------------------------------------
Allowance balance (at end of period) $ 6,718 4,316 4,615 4,584 4,737
==============================================================
Allowance for loan losses as a % of total loans outstanding 1.53% 0.99 1.10 1.08 1.12
Net loans charged off as a % of average loans outstanding 0.13% 0.34 0.41 0.94 0.79
9
(c) Non-performing assets.
The following table sets forth information regarding non-accrual loans, loans
past due 90 days or more and still accruing and other non-performing assets at
the dates indicated.
At June 30,
-------------------------------------------
2005 2004 2003 2002 2001
-------------------------------------------
(Dollars in Thousands)
-------------------------------------------
Loans accounted for on a non-accrual basis:
One-to-four family residential $ 496 $ 966 335 527 --
Multi-family residential -- -- 2,426 2,857 --
Commercial real estate 143 1,645 628 824 --
Commercial business 227 113 -- 584 1,094
Consumer 301 267 302 314 --
-------------------------------------------
Total 1,167 2,991 3,691 5,106 1,094
-------------------------------------------
Loans accounted for on an accrual basis (1)(2):
One-to-four family residential 468 1,332 997 780 970
Commercial real estate -- -- -- -- 233
Consumer -- -- -- 305 363
-------------------------------------------
Total 468 1,332 997 1,085 1,566
-------------------------------------------
Total non-performing loans 1,635 4,323 4,688 6,191 2,660
-------------------------------------------
Other non-performing assets (3) (4) 142 693 412 410 130
-------------------------------------------
Total non-performing assets $1,777 5,016 5,100 6,601 2,790
===========================================
Restructured loans not included in
other non-performing categories above (5) $7,517 3,691 3,005 -- 449
===========================================
Non-performing loans as a percentage of total loans 0.37% 0.99 1.13 1.48 0.64
Non-performing loans as a percentage of total assets 0.28% 0.70 0.75 0.95 0.40
Non-performing loans and real estate owned to
Total loans and real estate owned 0.41% 1.16 1.23 1.58 0.67
Non-performing assets as a percentage of total assets 0.30% 0.81 0.81 1.01 0.42
- --------------------------------------------------------------
(1) Includes loans 90 days or more contractually delinquent.
(2) Delinquent FHA/VA guaranteed loans and delinquent loans with past due
interest that, in the opinion of management, is collectible, are not
placed on non-accrual status.
(3) Represents the net book value of real property acquired by the Company
through foreclosure or deed in lieu of foreclosure. Upon acquisition, this
property is carried at the lower of cost or fair market value less
estimated costs of disposition.
(4) For fiscal 2005, 2004, 2003 and 2002, includes repossessed automobiles,
boats and trailers carried at the lower of cost or fair market value less
estimated costs of disposition. Total carrying amount was $73,000,
151,000, $240,000 and $325,000, respectively, at June 30, 2005, 2004, 2003
and 2002.
(5) Restructured loans have had amounts added to the principal balance and/or
the terms of the debt modified. Modification terms include payment
extensions, interest only payments, and longer amortization periods, among
other possible concessions that would not normally be considered.
10
Comparison of Operating Results for Fiscal Years Ended June 30, 2005 and 2004
General. Net earnings totaled $4.2 million, or $1.16 per diluted share, for
fiscal 2005 as compared to net earnings totaling $5.6 million, or $1.50 per
diluted share, for fiscal 2004.
Interest Income. Interest income decreased by $1.3 million, or 4.3%, to $29.2
million in fiscal 2005 from $30.5 million in fiscal 2004. The decrease in
interest income was primarily due to a decrease of $31.5 million, or 5.6%, in
the average balance of interest-earning assets to $528.1 million in fiscal 2005
from $559.6 million in fiscal 2004.
Interest income on loans decreased by $737,000, or 2.8%, to $25.8 million for
fiscal 2005 from $26.6 million for fiscal 2004. The decrease in interest income
on loans was primarily due to a decrease in the average balance of loans. The
average balance of loans decreased by $12.0 million, or 2.7%, to $434.0 million
for fiscal 2005 from $446.0 million for fiscal 2004. The decrease in the average
balance of loans was largely due to the sale of $17.0 million in loans in
connection with the sale of two branch offices in September 2004. A portion of
the sold loan balances was replaced with new production during fiscal 2005.
Interest income on investment securities decreased by $697,000, or 17.9%, to
$3.2 million for fiscal 2005 from $3.9 million for fiscal 2004. The decrease in
interest income on investment securities was primarily due to a decrease in the
average balance of investment securities. The average balance of investment
securities decreased by $21.3 million, or 19.7%, to $87.2 million in fiscal 2005
from $108.5 million in fiscal 2004 as the Company funded the decrease in deposit
liabilities, primarily due to the branch office sales, with proceeds from sales
and maturities of investment securities. As market interest rate increased
during fiscal 2005, the average tax-equivalent yield on investment securities
increased by 15 basis points to 3.98% for fiscal 2005 from 3.83% for fiscal
2004.
Interest Expense. Interest expense decreased by $827,000, or 6.5%, to $11.8
million in fiscal 2005 from $12.7 million in fiscal 2004. The decrease in
interest expense was primarily due to a decrease of $48.7 million, or 9.4%, in
the average balance of interest-bearing liabilities to $469.7 million for fiscal
2005 from $518.4 million for fiscal 2004. Interest expense on deposits decreased
by $496,000, or 6.4%, to $7.2 million in fiscal 2005 from $7.7 million in fiscal
2004. The decrease in interest expense on deposits was primarily due to a
decrease in the average balance of interest-bearing deposits. The average
balance of interest-bearing deposits decreased by $39.4 million, or 9.8%, to
$362.4 million for fiscal 2005 from $401.8 million for fiscal 2004 largely due
to the branch office sale in which deposits totaling $27.1 million were
transferred. Interest paid on borrowings decreased by $331,000, or 6.7%, to $4.6
million for fiscal 2005 from $4.9 million for fiscal 2004. The average balance
of borrowings decreased by $9.3 million, or 8.0%, to $107.3 million in fiscal
2005 from $116.6 million in fiscal 2004. The average cost of borrowings
increased to 4.29% in fiscal 2005 from 4.24% in fiscal 2004.
Net Interest Income. Net interest income before provision for loan losses
decreased by $474,000, or 2.7%, to $17.4 million for fiscal 2005 from $17.9
million for fiscal 2004. The Company's interest rate spread was 3.06% for both
fiscal 2005 and 2004, while the net yield on average interest-earning assets
increased by 10 basis points to 3.34% for fiscal 2005 from 3.24% for fiscal
2004.
Provision for Loan Losses. Provision for loan loss expense increased by $1.8
million, or 143.7%, to $3.0 million for fiscal 2005 from $1.2 million for fiscal
2004. As a result of the Company's periodic review of the credit quality of the
loan portfolio during the quarter ended June 30, 2005, management concluded that
additional loss reserves totaling $2.0 million were required primarily against
the previously classified loans of two commercial and industrial borrowers. The
loans of these borrowers continue to be classified with loss reserves totaling
$3.0 million against outstanding balances of $5.3 million at June 30, 2005. At
June 30, 2005 the allowance for loan losses as a percentage of total loans
outstanding increased to 1.53% from 0.99% at June 30, 2004. 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. See
"Asset Quality" for information regarding the Company's loan loss allowance
policy and loan loss experience.
11
Noninterest Income. Noninterest income decreased by $101,000, or 1.1%, to $9.3
million for fiscal 2005 from $9.4 million for fiscal 2004. The Company recorded
a pre-tax gain of $2.2 million on the sale of two northwest Iowa branch offices
to a local financial institution in fiscal 2005; however, decreases in other
types of noninterest income more than offset that gain. Gain on sale of loans
decreased by $852,000, or 52.8%, to $760,000 for fiscal 2005 from $1.6 million
for fiscal 2004 primarily due to a prior-year gain on the sale of $37.1 million
of fixed-rate residential mortgage loans to a government sponsored agency. The
net gain on the sale of the loans in fiscal 2004 totaled $791,000. Income from
real estate-related activities such as abstracting and escrow services decreased
by $568,000, or 44.6%, and service charges on loans decreased by $204,000, or
30.4%, in fiscal 2005 as compared to fiscal 2004, primarily due to a
continuation of the slowdown in mortgage refinancing activity in fiscal 2005
after an extended period of historically low market interest rates. In addition,
gain on the sale of real estate held for development decreased by $90,000 for
fiscal 2005 as compared to fiscal 2004 and losses on the sale of securities
increased to $121,000 in fiscal 2005 from $65,000 in fiscal 2004. The decrease
in noninterest income was also due to a decrease in service charges on deposit
accounts. Service charges on deposit accounts decreased by $345,000, or 8.8%, to
$3.6 million for fiscal 2005 from $3.9 million for fiscal 2004 largely due to a
reduction in the number of transaction accounts subject to such service charges.
The reduction in transaction accounts was largely due to the transfer of
approximately 2,500 accounts in the sale of the two northwest Iowa branch
offices in fiscal 2005.
Noninterest Expense. Noninterest expense totaled $17.6 million for both fiscal
2005 and 2004. Compensation and benefits expense decreased by $267,000, or 2.6%,
to $10.1 million for fiscal 2005 from $10.4 million for fiscal 2004. The
decrease in compensation and benefits expense was primarily due to a decrease in
the number of average full-time-equivalent employees to 207 for fiscal 2005 from
223 for fiscal 2004 as a result of decreased staffing needs due to the Company's
reduced asset size. The decrease in compensation and benefits expense was also
due to an adjustment to reflect the appropriate liability for paid-time-off
(PTO). In fiscal 2005 the Company implemented a new PTO policy that resulted in
a reduction of $126,000 in the liability for PTO at June 30, 2005 as compared to
the liability for earned vacation pay at June 30, 2004 under the former benefit
structure. Compensation expense also decreased due to lower net earnings for
fiscal 2005 which resulted in a decrease in the portion of incentive pay accrual
based on earnings goals.
The decrease in compensation and benefits expense was more than offset by
increases in other noninterest expense items. Office property and equipment
expense and data processing expense increased by $50,000, or 2.0%, and $41,000,
or 9.4%, respectively for fiscal 2005 as compared to fiscal 2004. In addition,
advertising expense increased by $93,000, or 25.6%, to $458,000 for fiscal 2005
from $365,000 for fiscal 2004 as the Company ran aggressive advertising
campaigns to promote its commercial banking services, a new branch location in
Johnston, Iowa and other deposit and loan products throughout fiscal 2005. Other
noninterest expense increased by $126,000, or 3.3%, to $4.0 million in fiscal
2005 from $3.8 million in fiscal 2004 partly due to expenses related to
Sarbanes-Oxley first-year Section 404 compliance that totaled approximately
$75,000 for fiscal 2005, not including internal staffing costs.
Income Tax Expense. Net earnings before income taxes decreased to $6.0 million
for fiscal 2005 from $8.4 million for fiscal 2004. Income tax expense totaled
$1.8 million, or an effective tax rate of 30.1%, for fiscal 2005 and $2.8
million, or an effective tax rate of 33.2%, for fiscal 2004. The effective tax
rate decreased in fiscal 2005 because tax exempt income comprised a larger
percentage of pre-tax income for fiscal 2005 than for fiscal 2004.
12
Comparison of Operating Results for Fiscal Years Ended June 30, 2004 and 2003
General. Net earnings totaled $5.6 million, or $1.50 per diluted share, for
fiscal 2004 as compared to net earnings totaling $5.6 million, or $1.41 per
diluted share, for fiscal 2003.
Interest Income. Interest income decreased by $4.6 million, or 13.1%, to $30.5
million in fiscal 2004 from $35.1 million in fiscal 2003. The decrease in
interest income was primarily due to a decrease in the average yield on
interest-earning assets which decreased by 78 basis points to 5.50% in fiscal
2004 from 6.28% in fiscal 2003 primarily due to lower yields on interest-earning
assets in the generally lower market interest rate environment.
Interest income on loans decreased by $2.5 million, or 8.7%, to $26.6 million
for fiscal 2004 from $29.1 million for fiscal 2003. The decrease in interest
income on loans was primarily due to a decrease in the average yield on loans.
The average yield on loans decreased by 107 basis points to 5.96% for fiscal
2004 from 7.03% for fiscal 2003. The decrease in yield on loans was partly
offset by increases in the average balance of loans as the Company funded loan
growth with proceeds from investment securities' maturities and sales. The
average balance of loans receivable increased by $31.8 million, or 7.7%, to
$446.0 million for fiscal 2004 from $414.2 million for fiscal 2003.
Interest income on investment securities decreased by $2.0 million, or 34.3%, to
$3.9 million for fiscal 2004 from $5.9 million for fiscal 2003. The decrease in
interest income on investment securities was primarily due to a decrease in the
average balance of investment securities. The average balance of investment
securities decreased by $36.1 million, or 25.0%, to $108.5 million in fiscal
2004 from $144.6 million in fiscal 2003 as the Company reinvested funds from
maturities and sales into loans. In addition, the average tax-equivalent yield
on investment securities decreased by 45 basis points to 3.83% for fiscal 2004
from 4.28% for fiscal 2003. Purchases during the historically low interest rate
environment of fiscal 2004 and the downward repricing of adjustable rate
mortgage-backed securities ("MBS") contributed to the decrease in interest
income on investment securities.
Interest Expense. Interest expense decreased by $3.4 million, or 21.4%, to $12.7
million in fiscal 2004 from $16.1 million in fiscal 2003. The decrease in
interest expense was due to a decrease of 57 basis points in the average cost of
interest-bearing liabilities to 2.44% for fiscal 2004 from 3.01% for fiscal 2003
and to a decrease of $16.8 million in the average balance of interest-bearing
liabilities to $518.4 million for fiscal 2004 from $535.2 million for fiscal
2003. Interest expense on deposits decreased by $3.4 million, or 30.2%, to $7.7
million in fiscal 2004 from $11.1 million in fiscal 2003. The decrease in
interest expense on deposits was primarily due to a decrease of 66 basis points
in the average rate paid on deposits to 1.92% in fiscal 2004 from 2.58% in
fiscal 2003. The average balance of deposits decreased by $27.5 million, or
6.4%, to $401.8 million for fiscal 2004 from $429.3 million for fiscal 2003.
Interest paid on borrowings totaled $4.9 million and $5.1 million, respectively,
for fiscal 2004 and 2003. The average balance of borrowings increased by $10.7
million, or 10.1%, to $116.6 million in fiscal 2004 from $105.9 million in
fiscal 2003. The average cost of borrowings decreased by 54 basis points to
4.24% in fiscal 2004 from 4.78% in fiscal 2003 as higher-rate fixed-term
borrowings matured and were replaced with lower-rate borrowings in the generally
lower market interest rate environment during fiscal 2004.
Net Interest Income. Net interest income before provision for loan losses
decreased by $1.1 million, or 6.0%, to $17.9 million for fiscal 2004 from $19.0
million for fiscal 2003. The Company's interest rate spread decreased by 21
basis points to 3.06% for fiscal 2004 from 3.27% for fiscal 2003 and the net
yield on average interest-earning assets decreased by 18 basis points to 3.24%
for fiscal 2004 from 3.42% for fiscal 2003.
Provision for Loan Losses. Provision for loan loss expense decreased by
$505,000, or 29.2%, to $1.2 million for fiscal 2004 from $1.7 million for fiscal
2003. 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. See "Asset Quality" for information regarding the Company's
loan loss allowance policy and loan loss experience.
13
Noninterest Income. Noninterest income decreased by $433,000, or 4.4%, to $9.4
million for fiscal 2004 from $9.8 million for fiscal 2003. The decrease in
noninterest income was largely due to a net loss on sale of securities that
totaled $65,000 for fiscal 2004 as compared to a gain of $309,000 on the sale of
securities for fiscal 2003. Service charges on loans receivable decreased by
$270,000 for fiscal 2004 when compared to fiscal 2003. The decrease in service
charges on loans was primarily due to a decrease of $244,000 in prepayment
penalties for fiscal 2004 as compared to fiscal 2003. Partially offsetting these
decreases in noninterest income was a $229,000 increase in service charges on
deposit accounts for fiscal 2004 as compared to fiscal 2003. The increase in
service charges on deposit accounts was primarily due to an increase in
overdraft activities on retail accounts and the resulting service fees assessed.
In addition, the restructuring of the Company's checking and savings accounts
included a more favorable service charge schedule. Gain on sale of loans and
gain on sale of real estate held for development also increased in fiscal 2004.
Gain on sale of loans increased by $67,000, or 4.3%, to $1.6 million for fiscal
2004 from $1.5 million for fiscal 2003. The increase in gain on sale of loans
was due to the sale of $37.1 million of fixed-rate residential mortgage loans to
a government sponsored agency during in March 2004. The net gain on the sale of
these loans totaled $791,000. The gain generated by this sale was largely offset
by lower gains from the origination and sale of current mortgage production
during fiscal 2004. Gains from the Company's ongoing origination and concurrent
sale of fixed rate mortgages to investors decreased by $724,000 for fiscal 2004
when compared to fiscal 2003 due to a slowdown in mortgage refinancing activity
after an extended historically low market interest rate environment. Gain on
sale of real estate held for development increased to $150,000 for fiscal 2004
from $19,000 for fiscal 2003 as new residential units were completed and sold by
the Company's real estate development subsidiary. Real estate-related income
from the Company's subsidiaries also decreased by $236,000 for fiscal 2004 as
compared to fiscal 2003 as a result of the slowdown in mortgage activity in the
current fiscal year.
Noninterest Expense. Noninterest expense decreased by $1.1 million, or 5.7%, to
$17.6 million for fiscal 2004 from $18.7 million for fiscal 2003. The decrease
in noninterest expense was primarily due to a decrease of $1.2 million in other
noninterest expense. The decrease in other noninterest expense was partly due to
a decrease in expense for the amortization of prior period mortgage servicing
assets which were fully amortized in fiscal 2003. In March 2004 a $268,000
mortgage servicing asset was recorded in conjunction with the sale of $37.1
million in residential loans. Amortization expense related to mortgage servicing
assets totaled $8,000 and $332,000, respectively, for fiscal 2004 and 2003.
Other noninterest expense also decreased due to a decrease of $124,000 in
recruiting expense, a decrease of $165,000 in per account service fee expense
for certain retail transaction accounts and a $79,000 decrease in loan
origination expense resulting from decreases in loan production volumes for
fiscal 2004 as compared to fiscal 2003. During fiscal 2004, the Company reduced
expense for contributions and various professional services by $296,000 when
compared to fiscal 2003. Additionally, losses on other real estate owned
properties and repossessed assets decreased by $105,000 for fiscal 2004 as
compared to fiscal 2003.
Noninterest expense also decreased due to decreases in office property and
equipment expense and advertising expense that totaled $125,000 and $59,000,
respectively, for fiscal 2004 as compared to fiscal 2003. The decreases in
noninterest expense were partly offset by an increase of $188,000, or 1.8%, in
compensation and benefits expense. Within compensation and benefits expense,
pension expense increased by $343,000 for fiscal 2004 as compared to fiscal
2003. The increase in pension expense was more than offset by a decrease in
incentive payments related to loan production since production volumes declined
in fiscal 2004 from fiscal 2003 levels. Also offsetting the decreases in
noninterest expense was an increase in data processing expense. Data processing
expense increased by $122,000, or 38.7%, in fiscal 2004 as compared to fiscal
2003 as the Company invested in software and data lines in order to enhance
products and expedite data communications.
Income Tax Expense. Net earnings before income taxes totaled $8.4 million for
both fiscal 2004 and 2003, and income tax expense totaled $2.8 million for both
fiscal 2004 and 2003. The Company's effective tax rate was 33.2% and 33.3%,
respectively, for fiscal 2004 and 2003.
14
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 reprise 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. At June 30, 2005 the Company had a
positive one-year gap of $31.4 million, or 1.32 expressed as a ratio.
The Company has utilized the following strategies in recent years in an effort
to reduce interest rate risk: (a) the Company seeks to originate commercial and
consumer loans; (b) the Company closely manages the extent to which fixed-rate
residential mortgage loans are held in portfolio; (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; (e) the
Company seeks to originate and hold in portfolio adjustable rate loans which
have annual interest rate adjustments; (f) the Company uses Federal Home Loan
Bank advances, within approved limits, to fund the origination of fixed rate
loans; (g) the Company utilizes various investment portfolio strategies to
manage the cash flow, prepayment and effective maturity of the investment
portfolio within the context of the entire balance sheet; and (h) the Company
also uses brokered deposits and retail repurchase agreements, within approved
limits, to fund loan production.
The Company has an asset/liability committee (the "ALCO"), which includes the
Company's President, Chief Financial Officer and other senior Company officers.
The ALCO meets monthly to review loan pricing and production, deposit pricing
and production, interest rate risk analysis, investment portfolio activities,
liquidity position and compliance with the ALM Policy and Investment Policy of
the Company. The ALM Policy and the Investment Policy were established by the
ALCO and approved by the Company's Board of Directors. These policies contain
specific guidance regarding balance sheet and investment portfolio management.
The ALM Policy specifically limits the exposure of earnings at risk. ALCO
reports are provided to the Board of Directors on a monthly basis detailing
asset/liability management performance measurements.
15
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 2005 have changed significantly when compared
to fiscal 2004. The net portfolio value (the "NPV") of the Company, assuming no
change in interest rates (the "Base Case Scenario"), was $57.8 million and $56.1
million, respectively, at June 30, 2005 and 2004. The NPV ratio in the Base Case
Scenario was 10.00% and 9.22%, respectively, at June 30, 2005 and 2004. The
Board of Directors has established market risk limits based on the Company's
tolerance for risk. At June 30, 2005, the NPV 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 is
defined as the present value of expected net cash flows from existing assets
minus the present value of expected net cash flows from existing liabilities
plus or minus the present value of net expected cash flows from existing
off-balance-sheet contracts. The Model estimates the current economic value of
each type of asset, liability, and off-balance sheet contract after various
assumed instantaneous, parallel shifts in the Treasury yield curve both upward
and downward.
The Model uses an option-based pricing approach to value one-to-four family
mortgages, mortgages serviced by or for others, and firm commitments to buy,
sell, or originate mortgages. This approach makes use of an interest rate
simulation program to generate numerous random interest rate paths that, in
conjunction with a prepayment model, are used to estimate mortgage cash flows.
Prepayment options and interest rate caps and floors contained in mortgages and
mortgage-related securities introduce significant uncertainty in estimating the
timing of cash flows for these instruments that warrants the use of this
sophisticated methodology. All other financial instruments are valued using a
static discounted cash flow method. Under this approach, the present value is
determined by discounting the cash flows the instrument is expected to generate
by the yields currently available to investors from an instrument of comparable
risk and duration.
The following table sets forth the present value estimates for major categories
of financial instruments of the Company at June 30, 2005, as calculated by the
Model. The table shows the present value of the instruments under rate shock
scenarios of -200 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 due to the abnormally low market interest rate environment.
Starting with the March 2005 reporting cycle, the OTS resumed providing NPV
estimates for the -200 basis point rate shock scenario. As a result, no data is
presented in the table for the -300 basis point rate shock scenario. As
illustrated in the table, the Company's NPV decreases in the rising rate
scenarios and increases in the falling rate scenarios. As market interest rates
increase, the market values of the Company's portfolio of loans and securities
decrease and prepayments slow. As market 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. Interest rate risk limits established by ALCO include: (a) a
post-shock NPV ratio of 4.0% or greater; (b) the interest rate sensitivity
measure resulting from an adverse rate shock of 200 basis points should not
exceed 200 basis points; and (c) the OTS "level of risk" should be "minimal" or
"moderate". As of June 30, 2005 the Company's interest rate risk, as measured by
the Model, was within ALCO guidelines and the OTS "level of risk" was reported
as "minimal".
16
Present Value Estimates by Interest Rate Scenario
Calculated at June 30, 2005
--------------------------Base--------------------------------------
-200 bp -100 bp 0 bp +100 bp +200 bp +300 bp
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Financial Instrument:
Mortgage loans and securities $393,654 390,564 384,231 377,077 369,656 362,122
Non-mortgage loans 76,299 74,720 73,215 71,773 70,406 69,103
Cash, deposits and securities 67,293 66,483 65,664 64,557 63,399 62,146
Other assets 49,035 51,215 54,783 58,445 61,910 65,200
-------- -------- -------- -------- -------- --------
Total assets 586,281 582,982 577,893 571,852 565,371 558,571
======== ======== ======== ======== ======== ========
Deposits 411,136 408,836 406,582 404,380 402,231 400,123
Borrowings 110,341 108,203 106,222 104,492 103,157 102,278
Other liabilities 7,260 7,256 7,253 7,250 7,246 7.242
-------- -------- -------- -------- -------- --------
Total liabilities 528,737 524,295 520,057 516,122 512,634 509,643
-------- -------- -------- -------- -------- --------
Off-balance-sheet positions 2,153 1,083 -50 -1,309 -2,674 -4,133
-------- -------- -------- -------- -------- --------
Net portfolio value $ 59,697 59,770 57,786 54,421 50,063 44,795
======== ======== ======== ======== ======== ========
Net portfolio value ratio 10.18% 10.25% 10.00% 9.52% 8.86% 8.02%
======== ======== ======== ======== ======== ========
Interest rate sensitivity +18 bp +25 bp Base -48 bp -114 bp -198 bp
======== ======== ======== ======== ======== ========
Liquidity and Capital Resources
The Company is required by OTS regulation to maintain sufficient liquidity to
assure its safe and sound operation. The Company's liquidity ratio averaged
12.9% during the quarter ended June 30, 2005. 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, 2005, 2004, and 2003, totaled $64.8 million,
$82.7 million, and $134.9 million, respectively.
Deposits are the Company's primary source of externally generated funds. The
level of deposit inflows or outflows 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. In fiscal 2005, deposits increased by $7.6
million, excluding $27.1 million of deposits transferred in the September 2004
branch sale transaction. Deposits decreased by $19.7 million and $23.7 million,
respectively, in fiscal 2004 and 2003. Similarly, the general level of market
interest rates heavily influences the amount of principal repayments on loans
and mortgage-backed securities. Principal repayments on loans during fiscal
2005, including $17.0 million received for loans sold to
17
another financial institution in the branch sale transaction in September 2004,
totaled $196.7 million as compared to $192.5 million in fiscal 2004 and $200.8
million in fiscal 2003. Funds received from sales and maturities of investment
securities, net of purchases, for fiscal 2005, 2004 and 2003, totaled $39.9
million, $12.9 million and $32.9 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, 2005 and 2004, the Company had $102.0 million and $109.5 million,
respectively, in outstanding advances from the FHLB.
At June 30, 2005, the Company had outstanding loan commitments and consumer and
commercial approved, but unused, lines of credit totaling $85.0 million.
Certificates of deposit scheduled to mature in one year or less at June 30, 2005
totaled $120.1 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. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
Critical Accounting Policies
The Company's critical accounting policies relate to the allowance for loan
losses and intangible assets. A description of the Company's critical accounting
policy related to intangible assets is summarized in Note 1 of the Notes to
Consolidated Financial Statements (the "Notes") under "Goodwill". In addition,
Note 7 of the Notes includes information about the carrying amounts and
amortization expense related to intangible assets. With regard to the Company's
critical accounting policy for the allowance for loan losses, 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. This
evaluation involves a high degree of complexity and requires management to make
subjective judgments that often require assumptions or estimates about uncertain
matters. The Company's critical accounting policies and their application are
periodically reviewed by the Audit Committee of the Board of Directors and by
the full Board of Directors. See also "Asset Quality" in Management's Discussion
and Analysis of Financial Condition and Results of Operations.
18
McGladrey & Pullen
Certified Public Accountants
Report of Independent Registered Public Accounting Firm
The Board of Directors
First Federal Bankshares, Inc.
Sioux City, Iowa
We have audited the consolidated balance sheets of First Federal Bankshares,
Inc. and subsidiaries as of June 30, 2005 and 2004, and the related consolidated
statements of income, stockholders' equity and cash flows for the years then
ended. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 2005 and 2004 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, 2005 and 2004 and the
results of their operations and their cash flows for the years then ended in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of First Federal
Bankshares, Inc. and subsidiaries' internal control over financial reporting as
of June 30, 2005, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated September 13, 2005 expressed an
unqualified opinion on management's assessment of the effectiveness of First
Federal Bankshares, Inc. and subsidiaries' internal control over financial
reporting and an unqualified opinion on the effectiveness of First Federal
Bankshares, Inc. and subsidiaries' internal control over financial reporting.
Des Moines, Iowa
September 13, 2005
McGladrey & Pullen, LLP is an independent member firm of RSM International,
an affiliation of separate and independent legal entities.
19
[LOGO]KPMG
KPMG LLP
2500 Ruan Center
666 Grand Avenue
Des Moines, IA 50309
Report of Independent Registered Public Accounting Firm
The Board of Directors
First Federal Bankshares, Inc.
and Subsidiaries
Sioux City, Iowa:
We have audited the accompanying consolidated statements of income,
stockholders' equity and comprehensive income, and cash flows of First Federal
Bankshares, Inc. and subsidiaries (the Company) for the year ended June 30,
2003. 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 audit.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). 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
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of First Federal Bankshares, Inc. and subsidiaries for the year ended June, 30,
2003, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Des Moines, Iowa
August 8, 2003
20
McGladrey & Pullen
Certified Public Accountants
Report of Independent Registered Public Accounting Firm
To the Board of Directors
First Federal Bankshares, Inc.
Sioux City, Iowa
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that First
Federal Bankshares, Inc. maintained effective internal control over financial
reporting as of June 30, 2005, based on criteria established in Internal Control
- - Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). First Federal Bankshares, Inc.'s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Because management's assessment
and our audit were conducted to also meet the reporting requirements of Section
112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA),
management's assessment and our audit of First Federal Bankshares, Inc.'s
internal control over financial reporting included controls over the preparation
of financial statements in accordance with the instructions to the Consolidated
Statements of Condition and Operations (Thrift Financial Report instructions). A
company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company's assets that could have a
material effect on the financial statements.
McGladrey & Pullen, LLP is an independent member firm of RSM International,
an affiliation of separate and independent legal entities.
21
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that First Federal Bankshares, Inc.
maintained effective internal control over financial reporting as of June 30,
2005 is fairly stated, in all material respects, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also in our opinion, First
Federal Bankshares, Inc. maintained, in all material respects, effective
internal control over financial reporting as of June 30, 2005, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
First Federal Bankshares, Inc. and subsidiaries as of June 30, 2005 and 2004 and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the two years in the period ended June 30, 2005, and our
report dated September 13, 2005 expressed an unqualified opinion.
Des Moines, Iowa
September 13, 2005
22
[LOGO]First
Federal
Bank
MANAGEMENT'S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
The management of First Federal Bankshares, Inc. (the Company) is responsible
for establishing and maintaining adequate internal control over financial
reporting. The Company's internal control system was designed to provide
reasonable assurance to the Company's management and board of directors
regarding the preparation and fair presentation of published financial
statements. All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.
The Company's management assessed the effectiveness of the Company's internal
control over financial reporting as of June 30, 2005. In making this assessment,
it used the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based
on our assessment we believe that, as of June 30, 2005, the Company's internal
control over financial reporting is effective based on those criteria. The
independent registered public accounting firm that audited the financial
statements included in the annual report has issued an attestation report on
management's assessment of the Company's internal control over financial
reporting.
/s/ Barry Backhaus
Barry Backhaus
Chairman, President and CEO
/s/ Katherine Bousquet
Katherine Bousquet
Vice President, Treasurer and Interim CFO
23
First Federal Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2005 and 2004
2005 2004
- ----------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 15,102,382 $ 18,176,852
Interest-bearing deposits in other financial institutions 16,233,325 2,282,875
------------------------------
Cash and cash equivalents 31,335,707 20,459,727
------------------------------
Securities available-for-sale (Note 2) 49,978,244 84,693,332
Securities held-to-maturity (fair value of $18,611,291 in 2005
and $23,762,072 in 2004) (Note 2) 18,196,627 23,185,899
Loans receivable (Note 3) 440,351,738 436,173,780
Less allowance for loan losses (Note 4) 6,717,956 4,316,286
------------------------------
Net loans 433,633,782 431,857,494
------------------------------
Office property and equipment, net (Note 5) 13,108,654 13,276,834
Federal Home Loan Bank (FHLB) stock, at cost 5,762,400 6,096,100
Accrued interest receivable (Note 6) 2,293,315 2,230,053
Refundable income taxes 272,017 17,872
Deferred tax asset (Note 10) 481,000 943,000
Goodwill 18,417,040 18,523,607
Other assets (Note 7) 13,334,105 14,238,191
------------------------------
Total assets $ 586,812,891 $ 615,522,109
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 8) $ 407,562,405 $ 429,208,928
Advances from FHLB and other borrowings (Note 9) 104,564,262 109,886,261
Advance payments by borrowers for taxes and insurance 953,281 1,119,486
Accrued interest payable (Note 8 and 9) 1,311,724 1,206,994
Accrued expenses and other liabilities 2,126,014 2,642,718
------------------------------
Total liabilities 516,517,686 544,064,387
------------------------------
CONTINGENCIES (Note 17)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 1,000,000 shares; issued none -- --
Common stock, $.01 par value, authorized 12,000,000 shares;
issued 2005 4,977,029 shares; issued 2004 4,939,262 shares 49,770 49,393
Additional paid-in capital 37,761,587 37,086,235
Retained earnings, substantially restricted (Note 13) 55,028,733 52,240,273
Treasury stock, at cost, 2005 1,428,826 shares; 2004 1,198,990 shares (21,747,743) (16,519,093)
Accumulated other comprehensive income (loss), net unrealized
gain (loss) on securities available-for-sale 158,570 (329,644)
Unearned ESOP (Note 11) (913,890) (1,044,710)
Unearned RRP (Note 11) (41,822) (24,732)
------------------------------
Total stockholders' equity 70,295,205 71,457,722
------------------------------
Total liabilities and stockholders' equity $ 586,812,891 $ 615,522,109
==============================
See Notes to Consolidated Financial Statements.
24
First Federal Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended June 30, 2005, 2004 and 2003
2005 2004 2003
- ------------------------------------------------------------------------------------------------------
Interest income:
Loans receivable $ 25,845,134 $ 26,581,896 $ 29,129,117
Investment securities 3,207,590 3,904,681 5,941,742
Other interest-earning assets 173,172 39,673 45,911
--------------------------------------------
29,225,896 30,526,250 35,116,770
--------------------------------------------
Interest expense:
Deposits (Note 8) 7,231,553 7,727,545 11,063,560
Advances from FHLB and other borrowings 4,607,828 4,938,640 5,058,338
--------------------------------------------
11,839,381 12,666,185 16,121,898
--------------------------------------------
Net interest income 17,386,515 17,860,065 18,994,872
Provision for loan losses (Note 4) 2,985,000 1,225,000 1,730,000
--------------------------------------------
Net interest income after provision for
losses on loans 14,401,515 16,635,065 17,264,872
--------------------------------------------
Noninterest income:
Service charges on deposit accounts 3,585,448 3,930,651 3,701,711
Service charges on loans 466,288 670,081 939,887
Gain on sale of bank branch offices 2,185,284 -- --
Gain on sale of real estate held for development 60,000 150,000 18,561
Net gain (loss) on sale of securities (121,209) (64,797) 308,626
Gain on sale of loans 760,065 1,611,901 1,544,992
Gain (loss) on sale of office property and equipment (16,459) 69,977 (5,551)
Real estate related activities 705,458 1,273,605 1,509,468
Other income 1,637,329 1,722,176 1,778,743
--------------------------------------------
Total noninterest income 9,262,204 9,363,594 9,796,437
--------------------------------------------
Noninterest expense:
Compensation and benefits (Note 11) 10,135,141 10,402,497 10,214,874
Office property and equipment 2,591,070 2,541,500 2,666,028
Data processing 478,056 437,123 315,198
Advertising 457,906 364,626 423,640
Other expense (Note 14) 3,973,172 3,847,033 5,042,152
--------------------------------------------
Total noninterest expense 17,635,345 17,592,779 18,661,892
--------------------------------------------
Income before income taxes 6,028,374 8,405,880 8,399,417
Income taxes (Note 10) 1,815,000 2,788,000 2,794,000
--------------------------------------------
Net income $ 4,213,374 $ 5,617,880 $ 5,605,417
============================================
Earnings per share:
Basic earnings per share $ 1.19 $ 1.54 $ 1.44
============================================
Diluted earnings per share $ 1.16 $ 1.50 $ 1.41
============================================
See Notes to Consolidated Financial Statements.
25
First Federal Bankshares, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 2005, 2004 and 2003
Comprehensive Common Additional Retained
Income Stock Paid-in Capital Earnings
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002 $ 48,711 $ 36,247,480 $ 43,542,299
Net income $ 5,605,417 -- -- 5,605,417
Net change in unrealized gains on securities
available-for-sale 413,429 -- -- --
Less reclassification adjustment for net realized gains
included in net income (net of tax expense) (193,509) -- -- --
------------
Total comprehensive income $ 5,825,337
============
Stock options exercised 258 206,293 --
Treasury stock acquired -- -- --
Recognition and retention plan (RRP) award -- 9,050 --
Amortization of RRP -- -- --
ESOP shares allocated -- -- --
Stock appreciation of allocated ESOP shares -- 74,310 --
Dividends on common stock at $.32 per share (Note 13) -- -- (1,246,935)
----------------------------------------------
Balance at June 30, 2003 48,969 36,537,133 47,900,781
Net income $ 5,617,880 -- -- 5,617,880
Net change in unrealized gains (losses) on
securiites available-for-sale (1,080,650) -- -- --
Less reclassification adjustment for net realized losses
included in net income (net of tax expense) 40,628 -- -- --
------------
Total comprehensive income $ 4,577,858
============
Stock options exercised 424 385,804 --
Treasury stock acquired -- -- --
RRP (award) forfeiture -- (7,000) --
Amortization of RRP -- -- --
ESOP shares allocated -- -- --
Stock appreciation of allocated ESOP shares -- 170,298 --
Dividends on common stock at $.35 per share (Note 13) -- -- (1,278,388)
Balance at June 30, 2004 49,393 37,086,235 52,240,273
Net income $ 4,213,374 4,213,374
Net change in unrealized gains (losses) on
securiites available-for-sale 412,216 -- -- --
Less reclassification adjustment for net realized losses
included in net income (net of tax expense) 75,998 -- -- --
------------
Total comprehensive income $ 4,701,588
============
Stock options exercised 377 392,667 --
Treasury stock acquired -- -- --
RRP (award) forfeiture -- 124,530 --
Amortization of RRP -- -- --
ESOP shares allocated -- -- --
Stock appreciation of allocated ESOP shares -- 158,155 --
Dividends on common stock at $.40 per share (Note 13) -- -- (1,424,914)
Balance at June 30, 2005 $ 49,770 $ 37,761,587 $ 55,028,733
==============================================
Accumulated
Other
Treasury Comprehensive Unearned Unearned
Stock Income (Loss) ESOP RRP Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002 $ (7,577,646) $ 490,458 $ (1,330,000) $ (158,507) $ 71,262,795
Net income -- -- -- -- 5,605,417
Net change in unrealized gains on securities
available-for-sale -- 413,429 -- -- 413,429
Less reclassification adjustment for net realized gains
included in net income (net of tax expense) -- (193,509) -- -- (193,509)
Total comprehensive income
Stock options exercised -- -- -- -- 206,551
Treasury stock acquired (6,685,228) -- -- -- (6,685,228)
Recognition and retention plan (RRP) award (1,800) -- -- (7,250) --
Amortization of RRP -- -- -- 80,235 80,235
ESOP shares allocated -- -- 144,300 -- 144,300
Stock appreciation of allocated ESOP shares -- -- -- -- 74,310
Dividends on common stock at $.32 per share (Note 13) -- -- -- -- (1,246,935)
-------------------------------------------------------------------------
Balance at June 30, 2003 (14,264,674) 710,378 (1,185,700) (85,522) 69,661,365
Net income -- -- -- -- 5,617,880
Net change in unrealized gains (losses) on
securiites available-for-sale -- (1,080,650) -- -- (1,080,650)
Less reclassification adjustment for net realized losses
included in net income (net of tax expense) -- 40,628 -- -- 40,628
Total comprehensive income
Stock options exercised -- -- -- -- 386,228
Treasury stock acquired (2,229,219) -- -- -- (2,229,219)
RRP (award) forfeiture (25,200) -- -- 32,200 --
Amortization of RRP -- -- -- 28,590 28,590
ESOP shares allocated -- -- 140,990 -- 140,990
Stock appreciation of allocated ESOP shares -- -- -- -- 170,298
Dividends on common stock at $.35 per share (Note 13) -- -- -- -- (1,278,388)
-------------------------------------------------------------------------
Balance at June 30, 2004 (16,519,093) (329,644) (1,044,710) (24,732) 71,457,722
Net income 4,213,374
Net change in unrealized gains (losses) on
securiites available-for-sale -- 412,216 -- -- 412,216
Less reclassification adjustment for net realized losses
included in net income (net of tax expense) -- 75,998 -- -- 75,998
Total comprehensive income
Stock options exercised -- -- -- -- 393,044
Treasury stock acquired (5,306,158) -- -- -- (5,306,158)
RRP (award) forfeiture 77,508 -- -- (202,038) --
Amortization of RRP -- -- -- 184,948 184,948
ESOP shares allocated -- -- 130,820 -- 130,820
Stock appreciation of allocated ESOP shares -- -- -- -- 158,155
Dividends on common stock at $.40 per share (Note 13) -- -- -- -- (1,424,914)
-------------------------------------------------------------------------
Balance at June 30, 2005 $(21,747,743) $ 158,570 $ (913,890) $ (41,822) $ 70,295,205
=========================================================================
See Notes to Consolidated Financial Statements.
26
First Federal Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended June 30, 2005, 2004 and 2003
2005 2004 2003
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,213,374 $ 5,617,880 $ 5,605,417
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Loans originated for sale to investors (40,721,000) (38,683,060) (62,703,013)
Proceeds from sale of loans originated for sale 41,103,187 40,329,362 64,447,843
Provision for losses on loans 2,985,000 1,225,000 1,730,000
Depreciation and amortization 1,715,708 1,433,963 1,858,764
Provision for deferred taxes 172,000 189,000 (746,000)
Net (gain) loss on sale of loans (760,065) (1,611,901) (1,544,992)
Net (gain) loss on sale of securities available-for-sale 121,209 64,797 (308,626)
Net (gain) loss on sale of bank branch offices (2,185,284) -- --
Net (gain) loss on sale of office property and equipment 16,459 (69,977) 5,551
Net (gain) loss on sale of real estate held for development (60,000) (150,000) (18,561)
Net loan fees deferred (63,127) 11,051 322,922
Amortization of premiums and discounts on loans,
mortgage-backed securities and investment securities 127,562 493,932 334,044
(Increase) decrease in accrued interest receivable (88,418) 258,407 315,203
(Increase) decrease in other assets 436,374 1,784,737 (1,302,970)
Increase (decrease) in accrued interest payable 229,646 (588,354) (1,844,691)
Increase (decrease) in accrued expenses and other liabilities (484,103) (643,898) 731,334
Increase (decrease) in accrued taxes on income (272,017) (346,167) 492,908
--------------------------------------------
Net cash provided by operating activities 6,486,505 9,314,772 7,375,133
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities held-to-maturity (1,297,010) -- (1,375,682)
Proceeds from maturities of securities held-to-maturity 6,254,621 21,232,413 20,024,583
Proceeds from sale of securities available-for-sale 30,226,184 13,585,515 36,421,869
Purchase of securities available-for-sale (5,389,323) (38,356,923) (38,825,509)
Proceeds from maturities of securities available-for-sale 10,097,391 16,437,392 16,671,842
Purchase of bank owned life insurance -- (2,555,755) --
(Purchase) redemption of FHLB stock 333,700 (388,800) (669,500)
Loans purchased (32,148,000) (36,666,000) (15,827,000)
Proceeds from sale of loans -- 37,370,941 2,357,433
Cash effect of bank branch office sales (9,753,387) -- --
(Increase) decrease in loans receivable 10,340,050 (19,088,995) 13,551,064
Proceeds from sale of office property and equipment 4,125 108,972 1,215
Purchase of office property and equipment (1,449,227) (1,236,002) (462,321)
Proceeds from sale of foreclosed real estate 1,196,270 122,585 578,238
Proceeds from sale of real estate held for development 1,490,537 1,733,683 54,298
Net expenditures on real estate held for development (1,322,440) (1,765,003) (363,000)
--------------------------------------------
Net cash provided by (used in) investing activities 8,583,491 (9,465,977) 32,137,530
--------------------------------------------
(Continued)
27
First Federal Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Years Ended June 30, 2005, 2004 and 2003
2005 2004 2003
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits $ 7,632,216 $(19,735,111) $(23,704,297)
Proceeds from advances from FHLB 7,178,001 25,386,261 50,167,000
Repayment of advances from FHLB and other borrowings (12,500,000) (17,886,888) (47,012,511)
Net decrease in advance payments by borrowers
for taxes and insurance (166,205) (339,469) (23,788)
Issuance of common stock under stock options exercised 393,044 386,228 206,551
Repurchase of common stock (5,306,158) (2,229,219) (6,685,228)
Cash dividends paid (1,424,914) (1,278,388) (1,246,935)
--------------------------------------------
Net cash used in financing activities (4,194,016) (15,696,586) (28,299,208)
--------------------------------------------
Net increase (decrease) in cash and cash equivalents 10,875,980 (15,847,791) 11,213,455
CASH AND CASH EQUIVALENTS
Beginning of year 20,459,727 36,307,518 25,094,063
--------------------------------------------
End of year $ 31,335,707 $ 20,459,727 $ 36,307,518
============================================
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest $ 11,734,651 $ 13,254,539 $ 17,966,589
Income taxes 1,876,382 2,963,039 3,047,092
See Notes to Consolidated Financial Statements.
28
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 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, in Sioux City, Iowa and parts of northwest Iowa, northeast
Nebraska and southeast South Dakota and in West Des Moines, Johnston, Newton,
Grinnell and surrounding areas of 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. and its wholly owned
subsidiaries, 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 generally accepted
accounting principles 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. Material estimates that are
particularly susceptible to change relate to the determination of the allowance
for loan losses.
Segment reporting: An operating segment is defined as a component of a business
- -----------------
for which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and evaluate performance. The Company has one operating segment,
community banking.
Cash flow statement and 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. In conjunction with the sale of the net assets of
two bank branch offices in fiscal 2005, the Company divested non-cash assets
(primarily loans) with book values of $17.5 million, including goodwill of
$106,567, and liabilities with book values of $27.3 million, resulting in cash
to buy of $9.8 million.
Earnings per share: Basic earnings per share computations for the years ended
- ------------------
June 30, 2005, 2004 and 2003 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.
29
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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, 2005, 2004
and 2003:
2005 2004 2003
----------------------------------
Basic EPS computation:
Net earnings $4,213,374 $5,617,880 $5,605,417
Weighted average common shares outstanding 3,552,072 3,642,977 3,879,569
----------------------------------
Basic EPS $ 1.19 $ 1.54 $ 1.44
==================================
Diluted EPS computation:
Net earnings $4,213,374 $5,617,880 $5,605,417
----------------------------------
Weighted average common shares outstanding 3,552,072 3,642,977 3,879,569
Incremental option and RRP shares using
treasury stock method 73,336 113,072 91,827
----------------------------------
Diluted shares outstanding 3,625,408 3,756,049 3,971,396
==================================
Diluted EPS $ 1.16 $ 1.50 $ 1.41
==================================
Securities: Securities which the Company has the positive intent and ability to
- ----------
hold to maturity are classified as held-to-maturity and 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 which the Company intends to hold indefinitely, but not necessarily
to maturity, are classified as available-for-sale and 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. A decision to sell a
security classified as available-for-sale would be based on various factors,
including significant movements in market interest rates, changes in the
maturity of the Company's assets and liabilities, liquidity needs, regulatory
capital considerations and other similar factors.
Realized gains and losses from the sale of securities are recognized in earnings
using the specific identification method. Unrealized losses on securities,
determined to be other-than-temporary, are charged to operations. In estimating
other-than-temporary impairment losses on securities management considers (a)
the length of time and the extent to which the fair value has been less than
cost, (b) the financial condition and near-term prospects of the issuer, and (c)
the intent and ability of the Company to retain the security for a period of
time sufficient to allow for an anticipated recovery in fair value.
Loans receivable: Loans receivable are stated at unpaid principal balances less
- ----------------
the allowances for loan losses and net of deferred loan origination fees or
costs. Interest is calculated using the simple interest method or the daily
balance of the principal amount outstanding.
30
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Allowances 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.
The allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as doubtful, substandard
or special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value or
observable market price) of the impaired loan is lower than the carrying value
of that loan. The general component covers non-classified loans and is based on
historical loss experience adjusted for qualitative factors. An unallocated
component is maintained to cover uncertainties that could affect management's
estimate of probable losses. The unallocated component of the allowance reflects
the margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when it is probable the Company will be unable to
collect all contractual principal and interest payments due in accordance with
the terms of the loan agreement. 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.
Accrued interest receivable in arrears which management believes is doubtful of
collection (generally when a loan becomes 90 days delinquent) is charged against
operations. Subsequent interest income is not recognized on such loans until
collected or until determined by management to be collectible.
Other real estate owned: Real estate acquired through foreclosure 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 operations is made, and the real estate is
written down to fair value less estimated costs of disposition.
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 upon extension of credit is based on management's credit evaluation of
the borrower.
31
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Deferred loan fees and costs: 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.
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, software, and equipment.
Maintenance and repairs are charged against income. Improvements 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. The related gain or loss from such
transactions is credited or charged to income.
Goodwill: Goodwill is not amortized and is evaluated for impairment annually or
- --------
whenever events or changes in circumstances indicate 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. The Company performed
their annual impairment analysis during 2005 and determined the recorded
goodwill of $18,417,040 was not impaired.
Mortgage servicing assets: The Company recognizes the rights to service mortgage
- -------------------------
loans for others, whether acquired or internally originated. Mortgage servicing
assets are initially recorded based on fair value determined from comparable
market quotes and are amortized as other expense in proportion to and over the
period of estimated net servicing income.
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 a consolidated corporate income tax return.
The Company utilizes the asset and liability method for taxes on income, and
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date.
32
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Stock option plan: 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:
2005 2004 2003
---------------------------------------------
Basic EPS computation:
Net earnings $ 4,213,374 $ 5,617,880 $ 5,605,417
Pro forma 4,151,867 5,536,867 5,534,479
Basic earnings per share:
Net earnings 1.19 1.54 1.44
Pro forma 1.17 1.52 1.43
Diluted earnings per share:
Net earnings 1.16 1.50 1.41
Pro forma 1.15 1.47 1.39
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 2005, 2004 and 2003, respectively: dividend yield of
2.44%, 3.31% and 3.41%; expected volatility of 24.26%, 22.96% and 22.76%; risk
free interest rate of 4.54%, 6.08% and 6.29%; and expected life of 7.5 years for
all fiscal years presented.
Reclassifications: Certain amounts previously reported have been reclassified to
- -----------------
conform to the presentation in these consolidated financial statements. These
reclassifications did not affect previously reported net income or retained
earnings.
Fair value of financial instruments: The Company's fair value estimates,
- --------------------------------------
methods, and assumptions for its financial instruments are set forth below:
Cash and cash equivalents: The recorded amount of cash and cash
----------------------------
equivalents approximates fair value.
Securities: The fair value of securities is estimated based on pricing
----------
quotations provided by a national industry source.
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.
33
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Federal Home Loan Bank stock: The fair 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
--------
checking, money market and savings 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.
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.
Off-balance-sheet items: Off-balance-sheet items have a fair value of zero
-----------------------
since there is no expected gain or loss.
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: The Accounting Standards Executive Committee
- ----------------------------------
has issued Statement of Position 03-3, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer. This Statement applies to all loans acquired
in a transfer, including those acquired in the acquisition of a bank or a
branch, and provides that such loans be accounted for at fair value with no
allowance for loan losses, or other valuation allowance, permitted at the time
of acquisition. The difference between cash flows expected at the acquisition
date and the investment in the loan should be recognized as interest income over
the life of the loan. If contractually required payments for principal and
interest are less than expected cash flows, this amount should not be recognized
as a yield adjustment, a loss accrual, or a valuation allowance. For the
Company, this Statement is effective for fiscal year 2006 and, early adoption,
although permitted, is not planned. No significant impact is expected on the
Company's consolidated financial statements at the time of adoption.
34
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement No. 123 (Revised 2004), Share-Based Payment (SFAS123R) which replaces
SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees. SFAS123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values. The pro
forma disclosures previously permitted under SFAS No. 123 will no longer be an
alternative to financial statement recognition. In accordance with a
recently-issued Securities and Exchange Commission rule, companies will be
required to implement SFAS123R as of the beginning of the first annual period
that begins after June 15, 2005. The Company will adopt SFAS123R effective July
1, 2005. Under SFAS123R, the Company must determine the appropriate fair value
model to be used for valuing share-based payments, the amortization method for
compensation cost and the transition method to be used at date of adoption. The
permitted transition methods include either retrospective or prospective
adoption. The prospective method requires that compensation be recorded for all
unvested stock options at the beginning of the first quarter after adoption of
SFAS123R, while the retrospective method records compensation expense for all
unvested stock options beginning with the first period presented. The Company
has not yet determined the method of adoption or whether the adoption will
result in amounts that are similar to the current pro forma disclosures under
SFAS No. 123. The Company is currently assessing the impact that SFAS 123R will
have on its consolidated financial statements at the time of adoption.
Note 2. Securities
Following is a schedule of amortized costs and estimated fair values as of June
30, 2005 and 2004:
2005
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
-----------------------------------------------------------
Available-for-sale:
Mortgage-backed securities:
Governmental National Mortgage
Association (GNMA) $ 9,344,035 $ 56,709 $ (38,661) $ 9,362,083
Federal Home Loan Mortgage
Association (FHLMC) 6,730,566 32,328 (14,557) 6,748,337
Federal National Mortgage
Association (FNMA) 4,105,332 10,909 (51,181) 4,065,060
United States treasury securities 7,612,024 -- (43,024) 7,569,000
United States government agency securities 9,034,708 -- (111,508) 8,923,200
Local government securities 3,470,000 110,217 -- 3,580,217
Other investment securities 9,428,010 316,837 (14,500) 9,730,347
-----------------------------------------------------------
$ 49,724,675 $ 527,000 $ (273,431) $ 49,978,244
===========================================================
Held-to-maturity:
Mortgage-backed securities:
GNMA $ 229,189 $ 13,887 $ -- $ 243,076
FHLMC 1,751,758 30,677 -- 1,782,435
FNMA 6,349,662 190,133 -- 6,539,795
Local government securities 9,866,018 218,172 (38,205) 10,045,985
-----------------------------------------------------------
$ 18,196,627 $ 452,869 $ (38,205) $ 18,611,291
===========================================================
35
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2004
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
-----------------------------------------------------------
Available-for-sale:
Mortgage-backed securities:
Governmental National Mortgage
Association (GNMA) $ 11,950,908 $ 4,828 $ (347,860) $ 11,607,876
Federal Home Loan Mortgage
Association (FHLMC) 7,145,615 39,063 (46,830) 7,137,848
Federal National Mortgage
Association (FNMA) 5,746,287 32,813 (46,073) 5,733,027
United States treasury securities 7,910,113 -- (67,925) 7,842,188
United States government agency securities 9,077,741 -- (139,616) 8,938,125
Investments in mutual funds 30,154,923 -- (151,669) 30,003,254
Local government securities 2,310,000 -- (39,594) 2,270,406
Other investment securities 10,922,388 268,603 (30,383) 11,160,608
-----------------------------------------------------------
$ 85,217,975 $ 345,307 $ (869,950) $ 84,693,332
===========================================================
Held-to-maturity:
Mortgage-backed securities:
GNMA $ 360,887 $ 26,924 $ -- $ 387,811
FHLMC 2,548,433 49,323 -- 2,597,756
FNMA 9,201,034 335,103 -- 9,536,137
Local government securities 9,575,141 205,607 (46,530) 9,734,218
Other investment securities 1,500,404 5,746 -- 1,506,150
-----------------------------------------------------------
$ 23,185,899 $ 622,703 $ (46,530) $ 23,762,072
===========================================================
Following is a schedule of the fair value and gross unrealized losses,
aggregated by investment category and length of time that individual securities
have been in a continuous loss position, at June 30, 2005 and 2004.
2005
--------------------------------------------------------------------------------------------
Less than 12 months 12 months or longer Total
----------------------------- ---------------------------- ----------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value (Losses) Value (Losses) Value (Losses)
----------------------------- ---------------------------- ----------------------------
Mortgage-backed securities:
GNMA $ -- $ -- $ 3,365,337 $ (38,661) $ 3,365,337 $ (38,661)
FHLMC 1,944,523 (2,816) 2,600,854 (11,741) 4,545,377 (14,557)
FNMA 13,064 (343) 3,139,312 (50,838) 3,152,376 (51,181)
United States treasury
securities -- -- 7,569,000 (43,024) 7,569,000 (43,024)
United States government
agency securities -- -- 8,923,200 (111,508) 8,923,200 (111,508)
Local government securities 529,503 (28,032) 734,093 (10,173) 1,263,596 (38,205)
Other investment securities -- -- 4,314,698 (14,500) 4,314,698 (14,500)
--------------------------------------------------------------------------------------------
$ 2,487,090 $ (31,191) $ 30,646,494 $ (280,445) $ 33,133,584 $ (311,636)
============================================================================================
36
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2004
--------------------------------------------------------------------------------------------
Less than 12 months 12 months or longer Total
----------------------------- ---------------------------- ----------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value (Losses) Value (Losses) Value (Losses)
----------------------------- ---------------------------- ----------------------------
Mortgage-backed securities:
GNMA $ 11,103,695 $ (347,860) $ -- $ -- $ 11,103,695 $ (347,860)
FHLMC 3,689,614 (46,830) -- -- 3,689,614 (46,830)
FNMA 4,442,047 (46,073) -- -- 4,442,047 (46,073)
United States treasury securities 7,842,187 (67,925) -- -- 7,842,187 (67,925)
United States government
agency securities 8,938,125 (139,616) -- -- 8,938,125 (139,616)
Local government securities 3,232,374 (73,257) 363,125 (12,867) 3,595,499 (86,124)
Investments in mutual funds 30,003,254 (151,669) -- -- 30,003,254 (151,669)
Other investment securities 5,768,331 (30,383) -- -- 5,768,331 (30,383)
--------------------------------------------------------------------------------------------
$ 75,019,627 $ (903,613) $ 363,125 $ (12,867) $ 75,382,752 $ (916,480)
============================================================================================
For the investment securities in the schedule of the fair value and gross
unrealized losses above, the unrealized losses are generally due to increases in
the market interest rate environment and, as such, are considered to be
temporary by the Company. In addition, the Company has the intent and ability to
hold these investment securities for a period of time sufficient to allow for an
anticipated recovery in fair value.
The amortized cost and fair value at June 30, 2005 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
------------------------- -------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
-----------------------------------------------------
Due in 1 year or less $13,626,362 $13,533,600 $ 915,805 $ 922,879
Due after 1 year through 5 years 3,020,370 2,958,600 2,360,711 2,403,381
Due after 5 years through 10 years 1,775,000 1,779,645 2,273,759 2,320,897
Due after 10 years 11,123,010 11,530,919 4,315,743 4,398,828
-----------------------------------------------------
29,544,742 29,802,764 9,866,018 10,045,985
Mortgage-backed securities 20,179,933 20,175,480 8,330,609 8,565,306
-----------------------------------------------------
$49,724,675 $49,978,244 $18,196,627 $18,611,291
=====================================================
Proceeds from the sale of securities available for sale were $30,226,184,
$13,585,515 and $36,421,869 during 2005, 2004 and 2003, respectively. Gross
realized gains on these sales were $0, $0 and $322,226 and gross realized losses
on these sales were $121,209, $64,797 and $13,600 in 2005, 2004 and 2003,
respectively.
Securities with an amortized cost of $8.9 million and an estimated fair value of
approximately $8.9 million and securities with an amortized cost of $8.1 million
and an estimated fair value of approximately $8.1 million were pledged to
various entities and depositors at June 30, 2005 and 2004, respectively.
37
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 3. Loans receivable
Loans receivable at June 30, 2005 and 2004 are summarized as follows:
2005 2004
------------------------------
First mortgage loans:
Secured by one to four family residences $ 144,237,903 $ 164,578,993
Secured by other properties 179,696,291 146,452,772
Home equity and second mortgage loans 32,133,906 38,377,251
Automobile loans 9,610,771 17,755,328
Commercial business loans 37,484,980 29,633,251
Other nonmortgage loans 37,037,977 39,785,522
------------------------------
440,201,828 436,583,117
Less:
Allowance for loan losses (Note 4) 6,717,956 4,316,286
Undisbursed portion of loans in process 44,401 800,838
Net unamortized premiums on loans (1,538,798) (1,880,738)
Net deferred loan fees 1,344,487 1,489,237
------------------------------
$ 433,633,782 $ 431,857,494
==============================
At June 30, 2005 and 2004, the Company had nonaccrual loans of $1,167,000 and
$2,991,000, respectively, and restructured loans of $7,517,000 and $3,691,000,
respectively. Interest income recorded during 2005, 2004 and 2003 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 $42,290 in 2005,
$129,046 in 2004 and $238,531 in 2003.
Loans are considered impaired when it is probable the company will be unable to
collect all contractual principal and interest payments due in accordance with
the terms of the loan agreement, including loans placed on nonaccrual. The
following table sets forth information on impaired loans at June 30, 2005 and
2004.
2005 2004
----------------------- -----------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
-------------------------------------------------
Valuation allowance required $5,339,728 $2,525,424 $2,968,126 $ 493,480
Valuation allowance not required -- -- 22,874 --
-------------------------------------------------
$5,339,728 $2,525,424 $2,991,000 $ 493,480
=================================================
Interest foregone on nonaccrual loans, as reported above, approximates interest
income on impaired loans that would have been accrued in fiscal 2005, 2004 and
2003 if such loans were not impaired. At June 30, 2005, there were no material
commitments to lend additional funds to borrowers whose existing loans were
considered impaired at that date.
38
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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, 2005.
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balance of
these loans was $60,209,000, $66,713,000 and $50,794,000 at June 30, 2005, 2004
and 2003, 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 $415,000, $477,000 and $430,000 at June 30,
2005, 2004 and 2003, 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 geographic 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
$52.4 million at June 30, 2005, and included approximately $22.7 million in
loans that are geographically located in the Midwestern United States, with the
largest geographic concentration in Minnesota with $14.0 million. The remaining
loans are distributed throughout the United States, with the largest geographic
concentration in Colorado with $25.2 million.
The Company's commercial mortgage loan portfolio consists of $101.5 million of
commercial real estate loans, $35.8 million of multi-family housing loans, and
$42.4 million of construction, land acquisition and development loans as of June
30, 2005. The Company's commercial mortgage loan portfolio as of June 30, 2004
consisted of $81.8 million of commercial real estate loans, $38.5 million of
multi-family housing loans, and $26.2 million of construction, land acquisition
and development loans.
Note 4. Allowance for Loan Losses
A summary of the allowance for loan losses follows:
2005 2004 2003
-------------------------------------------
Balance, beginning of year $ 4,316,286 $ 4,615,285 $ 4,583,897
Provision for losses 2,985,000 1,225,000 1,730,000
Charge-offs (685,852) (1,652,716) (2,064,179)
Recoveries 102,522 128,717 365,567
-------------------------------------------
Balance, ending of year $ 6,717,956 $ 4,316,286 $ 4,615,285
===========================================
39
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 5. Office Property and Equipment
At June 30, 2005 and 2004, the cost and accumulated depreciation of office
property and equipment were as follows:
2005 2004
-----------------------
Land and improvements $ 3,587,625 $ 3,667,038
Building and improvements 12,837,474 13,016,637
Furniture, fixtures, automobiles, software and equipment 7,591,112 6,985,556
Deposits on assets not in service 23,792 111,386
-----------------------
Total cost 24,040,003 23,780,617
Less accumulated depreciation 10,931,349 10,503,783
-----------------------
$13,108,654 $13,276,834
=======================
Depreciation expense on premises, furniture, fixtures, automobiles, software,
and equipment was $1,153,726, $1,085,977 and $1,059,949 for fiscal 2005, 2004
and 2003, respectively.
Note 6. Accrued Interest Receivable
Accrued interest receivable is summarized as follows:
2005 2004
-------------------------
Loans receivable $1,832,357 $1,724,717
Securities 460,958 505,336
-------------------------
$2,293,315 $2,230,053
=========================
40
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 7. Intangible Assets
The gross carrying amount of intangible assets subject to amortization and the
associated accumulated amortization at June 30, 2005 is presented in the table
below. Intangible assets' balances are included in the line item `Other assets'
of the Consolidated Balance Sheets. Amortization expense for intangible assets
was $88,059, $60,482 and $398,770 for fiscal 2005, 2004 and 2003, respectively.
2005
------------------------------------
Gross Unamortized
Carrying Accumulated Intangible
Amount Amortization Assets
------------------------------------
Intangible assets:
Core deposit premium $690,140 $521,440 $168,700
Mortgage servicing rights 268,379 50,771 217,608
------------------------------------
$958,519 $572,211 $386,308
====================================
2004
------------------------------------
Gross Unamortized
Carrying Accumulated Intangible
Amount Amortization Assets
------------------------------------
Intangible assets:
Core deposit premium $690,140 $476,044 $214,096
Mortgage servicing rights 268,379 8,108 260,271
------------------------------------
$958,519 $484,152 $474,367
====================================
Projections of amortization expense are based on existing asset balances and the
existing interest rate environment as of June 30, 2005. 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
--------------------------------------------
2006 $ 44,604 $ 64,840 $ 109,444
2007 44,604 50,947 95,551
2008 44,604 37,814 82,418
2009 34,888 27,213 62,101
2010 -- 18,828 18,828
Thereafter -- 17,966 17,966
--------------------------------------------
Total estimated future amortization expense $ 168,700 $ 217,608 $ 386,308
============================================
41
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 8. Deposits
At June 30, 2005 and 2004, deposits are summarized as follows:
2005 2004
------------------------------
Noninterest-bearing checking $ 43,240,004 $ 36,408,235
Interest-bearing checking accounts 49,126,980 49,338,938
Money market accounts 70,831,594 84,521,513
Savings accounts 32,040,580 35,862,059
Certificates of deposit 212,323,247 223,078,183
------------------------------
$407,562,405 $429,208,928
==============================
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $38.7 million and $32.5 million at June 30, 2005 and
2004, respectively.
At June 30, 2005, the scheduled maturities of certificates of deposit were as
follows:
2006 $120,099,374
2007 52,170,325
2008 34,527,378
2009 2,229,060
2010 3,036,477
Thereafter 260,633
------------
$212,323,247
============
Interest expense on deposits is summarized as follows:
2005 2004 2003
---------------------------------------
Interest-bearing checking accounts $ 241,948 $ 113,276 $ 140,156
Money market accounts 979,809 573,890 1,060,596
Savings accounts 124,077 73,489 92,585
Certificates of deposit 5,885,719 6,966,890 9,770,223
---------------------------------------
$ 7,231,553 $ 7,727,545 $11,063,560
=======================================
At June 30, 2005 and 2004, accrued interest payable on deposits totaled
$1,302,759 and $1,197,413, respectively.
42
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 9. Advances from FHLB and other borrowings
A summary at June 30, 2005 and 2004 follows:
Weighted Weighted
Average Average
Interest Interest
Rate 2005 Rate 2004
-----------------------------------------------------------
FHLB of Des Moines (A)
Stated maturity in fiscal year ending June 30:
2005 --% $ -- 3.20% $ 12,500,000
2006 2.85 17,000,000 2.85 17,000,000
2007 3.39 25,500,000 3.35 20,500,000
2008 (B) 4.98 32,000,000 4.98 32,000,000
2009 (B) 5.21 24,500,000 5.21 24,500,000
2010 (B) 5.49 3,000,000 5.49 3,000,000
------------- -------------
102,000,000 109,500,000
Fed Funds advance with FHLB (C) -- --
Other borrowings 2,564,262 386,261
------------- -------------
$ 104,564,262 $ 109,886,261
============= =============
(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 FHLB convertible advances. Convertible advances are
advances that the FHLB may terminate and require the Company to
repay prior to the stated maturity date. 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, 2005 and 2004 $51.0 million of
convertible advances with a weighted average interest rate of 5.32%
were callable quarterly.
(C) 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 fiscal 2005, the
Company's average outstanding balance of Fed Funds Advances was $2.2
million and the interest rate at which these advances repriced
ranged from 1.45% to 3.62%. Fed Funds Advances are collateralized as
described in (A) above.
At June 30, 2005 and 2004, accrued interest payable on advances from FHLB
totaled $8,965 and $9,581, respectively. Note 1.
43
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 10. Taxes on Income
Taxes on income for the years ended June 30, 2005, 2004 and 2003 were comprised
as follows:
Current Deferred Total
-------------------------------------------------
2005:
Federal $ 1,402,000 $ 137,000 $ 1,539,000
State 241,000 35,000 276,000
-------------------------------------------------
$ 1,643,000 $ 172,000 $ 1,815,000
=================================================
2004:
Federal $ 2,208,000 $ 169,000 $ 2,377,000
State 391,000 20,000 411,000
-------------------------------------------------
$ 2,599,000 $ 189,000 $ 2,788,000
=================================================
2003:
Federal $ 3,021,000 $ (646,000) $ 2,375,000
State 519,000 (100,000) 419,000
-------------------------------------------------
$ 3,540,000 $ (746,000) $ 2,794,000
=================================================
Taxes on income differ from the amounts computed by applying the Federal income
tax rate of 35% to earnings from continuing operations before taxes on income
for the following reasons:
2005 2004 2003
-----------------------------------------
Computed "expected" tax expense $ 2,109,931 $ 2,942,058 $ 2,939,796
Nontaxable income (397,751) (374,561) (297,683)
State income taxes 134,259 227,895 276,540
Other, net (31,439) (7,392) (124,653)
-----------------------------------------
$ 1,815,000 $ 2,788,000 $ 2,794,000
=========================================
44
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Tax effects of temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities at June 30, 2005 and 2004
are presented below:
2005 2004
--------------------------
Deferred tax assets:
Allowance for loan losses $ 1,106,000 $ 1,184,000
Deferred compensation 91,000 110,000
Accrued vacation pay 65,000 112,000
Deferred directors fees 167,000 155,000
Reserve for uncollected interest 6,000 19,000
Unrealized loss on securities available-for-sale -- 195,000
Other -- 16,000
--------------------------
Total gross deferred tax assets 1,435,000 1,791,000
--------------------------
Deferred tax liabilities:
FHLB stock dividends (347,000) (347,000)
Fixed assets (320,000) (324,000)
Mortgage servicing rights (81,000) (97,000)
Unrealized gain on securities available-for-sale (95,000) --
Purchase accounting adjustments (63,000) (80,000)
Other (48,000) --
--------------------------
Total gross deferred tax liabilities (954,000) (848,000)
--------------------------
Net deferred tax asset $ 481,000 $ 943,000
==========================
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.
Note 11. Employee Benefit Plans
Pension: The Bank is a participant in the Financial Institutions Retirement Fund
- -------
(FIRF), a defined benefit pension plan, 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. Pension expense for fiscal
2005, 2004 and 2003 totaled $660,000, $686,000 and $340,000, respectively. The
defined benefit pension plan was frozen effective August 1, 2005. The Company
does not expect any significant reduction in pension expense as a result of this
change until fiscal 2009 due to continuing amortization charges for benefits in
place prior to August 1, 2005.
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 3 months of continuous employment (during which at least 250 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, 2005, 2004 and 2003 was $58,763, $60,489 and $51,991,
respectively. Effective August 1, 2005 the employer match increased to 50% of
the first 6% of the employee's compensation.
45
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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, 2005 and 2004, allocated shares were 152,992 and 159,530,
respectively. Shares committed to be released were 6,558 and 7,072,
respectively. The fair value of the 91,389 and 104,471 unallocated shares was
approximately $1.9 million and $2.4 million, respectively.
Plan expense was $288,975, $311,288 and $217,928 for the years ended June 30,
2005, 2004 and 2003, respectively.
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.
46
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Changes in options outstanding and exercisable during 2005, 2004 and 2003 were
as follows:
Exercisable Outstanding Option Price
Options Options Per Share
------------------------------------------
June 30, 2002 98,579 220,278 $3.066 - $20.341
Granted -- 25,000 13.80 - 14.41
Forfeited (200) (7,500) 9.00
Vested 40,200 -- 7.6875 - 11.00
Exchange of shares (902) (902) 13.00 - 15.70
Exercised (25,746) (25,746) 3.066 - 11.00
---------------------
June 30, 2003 111,931 211,130 7.6875 - 20.341
Granted -- 5,000 20.85 - 22.00
Forfeited (1,647) (3,047) 9.25 - 20.341
Vested 41,699 -- 7.6875 - 14.41
Exercised (42,405) (42,405) 7.6875 - 11.00
---------------------
June 30, 2004 109,578 170,678 7.6875 - 22.00
Granted -- 13,650 23.46
Forfeited (200) (7,100) 9.25 - 23.46
Vested 41,300 -- 7.6875 - 22.00
Exercised (37,767) (37,767) 9.25 - 14.25
---------------------
June 30, 2005 112,911 139,461 7.6875 - 23.46
=====================
The weighted-average fair value per option of options granted during fiscal
years 2005, 2004 and 2003 was $6.64, $6.09 and $3.63, respectively. Shares
remaining available for future grant under the 1999 Plan total 15,450 at June
30, 2005. The weighted average exercise price of all outstanding options was
$12.09 and the weighted average contractual remaining life of all outstanding
options was 5.2 years at June 30, 2005.
47
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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, 2005, 2004 and 2003 was
$184,948, $28,590 and $80,235, respectively.
Changes in the number of recognition and retention plan shares awarded under the
Plan and yet to vest were as follows:
June 30, 2002 42,400
Granted 2,000
Forfeited (2,200)
Vested (13,200)
-------
June 30, 2003 29,000
Granted --
Forfeited (2,800)
Vested (11,800)
-------
June 30, 2004 14,400
Granted 9,250
Forfeited (638)
Vested (11,800)
-------
June 30, 2005 11,212
=======
Shares available for future grant under the RRP total 638 at June 30, 2005.
Note 12. Related Party Transactions
In the ordinary course of business, the Bank has granted loans to principal
officers and directors and their affiliates amounting to $1.5 million at both
June 30, 2005 and 2004. During the year ended June 30, 2005, total principal
additions were $265,000, total principal payments were $78,000 and changes due
to resignation of principal officer totaled $192,000.
Deposits from related parties held by the Bank at June 30, 2005 and 2004
amounted to $8.0 million and $8.8 million, respectively.
Note 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.
48
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 and was categorized as "well
capitalized" at June 30, 2005 and 2004. Management believes that no conditions
or events have occurred since those dates that would have changed the Bank's
category.
The Bank's actual and required capital amounts and ratios as of June 30, 2005
and 2004 are presented in the following table:
2005
--------------------------------------------------------------------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ ------------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------------
Tangible capital $ 47,468,000 8.38% $ 8,501,000 1.50% $ -- 0.00%
Tier 1 leverage (core) 47,468,000 8.38 22,670,000 4.00 28,338,000 5.00
Tier 1 risk-based capital 47,468,000 10.98 17,289,000 4.00 25,934,000 6.00
Risk-based capital 52,887,000 12.24 34,579,000 8.00 43,223,000 10.00
2004
--------------------------------------------------------------------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ ------------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------------
Tangible capital $ 47,689,000 8.01% $ 8,934,000 1.50% $ -- 0.00%
Tier 1 leverage (core) 47,689,000 8.01 23,823,000 4.00 29,779,000 5.00
Tier 1 risk-based capital 47,689,000 10.93 17,280,000 4.00 25,919,000 6.00
Risk-based capital 52,005,000 11.92 34,905,000 8.00 43,631,000 10.00
Retained earnings at June 30, 2005 and 2004 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:
49
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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.
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 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.
Note 14. Other Noninterest Expense
Other noninterest expense amounts are summarized as follows for the years ended
June 30:
2005 2004 2003
------------------------------------
Printing, postage, courier, stationery and supplies $ 784,332 $ 775,429 $ 811,509
Professional fees 736,448 476,666 648,461
Bank accounts and item processing 278,064 186,364 120,187
Contributions and public relations 275,129 259,275 478,453
ATM expense 228,392 259,405 309,222
Loan-related expense 192,369 198,032 277,273
OTS assessments and application fees 130,798 136,985 136,826
Telephone 115,287 136,993 139,206
Insurance 96,864 99,788 76,391
Amortization of intangibles 88,059 60,482 398,770
Other 1,047,430 1,257,614 1,645,854
------------------------------------
$3,973,172 $3,847,033 $5,042,152
====================================
50
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 15. 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, 2005 and 2004, the Company had commitments to originate and purchase
loans approximating $62,527,000 and $50,693,000, 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
$7,383,000 and $18,027,000 at June 30, 2005 and 2004, respectively. The Company
had approved, but unused, commercial lines of credit of approximately
$15,072,000 and $13,924,000 at June 30, 2005 and 2004, respectively.
At June 30, 2005 and 2004, the Company had commitments to sell loans
approximating $1,613,000 and $4,565,000, respectively.
Note 16. Fair Value of Financial Instruments
The estimated fair values of Company's financial instruments (as described in
note 1) were as follows:
2005 2004
--------------------------- ----------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
----------------------------------------------------------
Financial assets:
Cash and due from banks $ 15,102,382 $ 15,102,382 $ 18,176,852 $ 18,176,852
Interest-bearing deposits in other
financial institutions 16,233,325 16,233,325 2,282,875 2,282,875
Investment securities available-for-sale 49,978,244 49,978,244 84,693,332 84,693,332
Investment securities held-to-maturity 18,196,627 18,611,291 23,185,899 23,762,072
Loans receivable, net 433,633,782 426,970,000 431,857,494 427,438,000
FHLB stock 5,762,400 5,762,400 6,096,100 6,096,100
Accrued interest receivable 2,293,315 2,293,315 2,230,053 2,230,053
Financial liabilities:
Deposits $407,562,405 $406,582,000 $429,208,928 $432,972,000
Advances from FHLB and other borrowings 104,564,262 106,222,000 109,886,261 113,174,000
Advance payments by borrowers for
taxes and insurance 953,281 953,281 1,119,486 1,119,486
Accrued interest payable 1,311,724 1,311,724 1,206,994 1,206,994
51
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2005 2004
---------------------------- ----------------------------
Notional Unrealized Notional Unrealized
Amount Gain (loss) Amount Gain (loss)
-----------------------------------------------------------
Off-balance-sheet assets (liabilities):
Commitments to extend credit $ 62,527,000 $ -- $ 50,693,000 $ --
Consumer lines of credit 7,383,000 -- 18,027,000 --
Commercial lines of credit 15,072,000 -- 13,924,000 --
Commitments to sell loans (1,613,000) -- (4,565,000) --
Note 17. 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.
52
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 18. Parent Company Financial Information
Condensed statements of financial condition at June 30, 2005 and 2004 and
condensed statements of income and cash flows for the years ended June 30, 2005,
2004 and 2003 are shown below for First Federal Bankshares, Inc.:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
2005 2004
----------------------------
ASSETS
Cash deposited at First Federal Bank $ 435,610 $ 3,366,634
Interest-bearing deposits in other financial institutions 233,325 316,167
----------------------------
Cash and cash equivalents 668,935 3,682,801
Investment securities available-for-sale at fair value 680,372 700,300
Loans receivable, net 1,138,351 1,329,806
Investment in subsidiaries 65,905,913 65,770,034
Refundable income taxes 24,791 99,371
Other assets 2,018,236 19,604
----------------------------
Total assets $ 70,436,598 $ 71,601,916
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deferred tax liability $ 75,000 $ 74,000
Accrued expenses and other liabilities 66,393 70,194
----------------------------
Total liabilities 141,393 144,194
----------------------------
STOCKHOLDERS' EQUITY
Preferred stock -- --
Common stock 49,770 49,393
Additional paid-in capital 37,761,587 37,086,235
Retained earnings 55,028,733 52,240,273
Treasury stock (21,747,743) (16,519,093)
Accumulated other comprehensive income (loss), net unrealized
gain (loss) on securities available-for-sale 158,570 (329,644)
Unearned ESOP (913,890) (1,044,710)
Unearned RRP (41,822) (24,732)
----------------------------
Total stockholders' equity 70,295,205 71,457,722
----------------------------
Total liabilities and stockholders' equity $ 70,436,598 $ 71,601,916
============================
53
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
2005 2004 2003
-----------------------------------------
Interest income:
Loans receivable $ 87,561 $ 113,802 $ 100,677
Investment securities 50,336 46,798 45,743
Other interest-earning assets 33,448 45,041 10,326
Gain (loss) on sale of investment securities -- -- 221,143
Other income -- 34,420 --
Other general and administrative expenses (412,916) (307,572) (409,753)
-----------------------------------------
(Losses) before income taxes (241,571) (67,511) (31,864)
Taxes on income 94,000 28,000 10,000
-----------------------------------------
(Losses) before subsidiary income (147,571) (39,511) (21,864)
Equity in earnings of subsidiaries 4,360,945 5,657,391 5,627,281
-----------------------------------------
Net income $ 4,213,374 $ 5,617,880 $ 5,605,417
=========================================
54
First Federal Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
2005 2004 2003
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,213,374 $ 5,617,880 $ 5,605,417
Adjustments to net income:
Equity in earnings of subsidiaries (4,360,945) (5,657,391) (5,627,281)
Dividends received from subsidiaries 3,185,102 4,443,117 7,435,426
Net gain on sale of securities available-for-sale -- -- (221,143)
Amortization of premiums and discounts (1,972) (3,029) 53,915
(Increase) decrease in other assets 1,369 (4,387) 620
Increase (decrease) in accrued expense and other liabilities (3,801) (10,443) 32,973
Increase (decrease) in accrued taxes on income 74,580 (61,555) (16,823)
--------------------------------------------
Net cash provided by (used in) operating activities 3,107,707 (118,925) (172,322)
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities available-for-sale 25,000 -- 2,646,855
Purchase of investment securities available-for-sale -- -- (17,823)
(Increase) decrease in loans receivable 191,455 124,556 (23,337)
--------------------------------------------
Net cash provided by investing activities 216,455 4,567,673 10,041,121
--------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock, net 393,044 386,228 206,550
Repurchase of common stock (5,306,158) (2,229,219) (6,685,228)
Cash dividends paid (1,424,914) (1,278,388) (1,246,935)
--------------------------------------------
Net cash used in financing activities (6,338,028) (3,121,379) (7,725,613)
--------------------------------------------
Net increase (decrease) in cash and
cash equivalents (3,013,866) 1,327,369 2,143,186
CASH AND CASH EQUIVALENTS
Beginning 3,682,801 2,355,432 212,246
--------------------------------------------
Ending $ 668,935 $ 3,682,801 $ 2,355,432
============================================
55
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[LOGO]First
Federal
BANKSHARES, INC.
LEADERSHIP
BOARD OF DIRECTORS
[PHOTO OMITTED] [PHOTO OMITTED] [PHOTO OMITTED]
Barry Backhaus, Chairman David S. Clay Jon G. Cleghorn
[PHOTO OMITTED] [PHOTO OMITTED] [PHOTO OMITTED]
Gary L. Evans Arlene T. Curry, J.D. Allen J. Johnson
[PHOTO OMITTED] [PHOTO OMITTED] [PHOTO OMITTED]
Ronald A. Jorgensen Steven L. Opsal David Van Engelenhoven
[PHOTO OMITTED] OFFICERS:
Katherine A. Bousquet
Vice President/
Treasurer/Interim CFO
Steven L. Opsal
Executive Vice President
Barry Backhaus
President & CEO
Suzette F. Hoevet
Corporate Secretary
Stockholder
INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 9:00 a.m., Thursday, October
27, 2005, at the Marina Inn Conference Center 4th and B Streets, South Sioux
City, NE.
STOCK LISTING
First Federal Bankshares, Inc. Common Stock is traded on the NASDAQ National
Market System using the symbol FFSX. As of August 17, 2005, the Company had
1,925 shareholders of record and 3,548,703 outstanding shares of common stock.
This does not reflect the number of persons whose stock is held in nominee or
"street" name accounts through brokers.
PRICE RANGE OF COMMON STOCK
The following represents the reported high and low trading prices:
FISCAL 2005
Quarter Ended High Low
June 30, 2005 $22.97 $19.60
March 31, 2005 $23.69 $21.40
December 31, 2004 $24.00 $22.39
September 30, 2004 $23.60 $20.00
FISCAL 2004
Quarter Ended High Low
June 30, 2004 $24.00 $20.60
March 31, 2004 $25.10 $20.70
December 31, 2003 $25.24 $21.57
September 30, 2003 $22.60 $17.55
GENERAL COUNSEL GENERAL INQUIRIES
Corbett, Anderson, Corbett, AND REPORTS
Poulson & Vellinga, LLP The Company is required to file an Annual
423 6th St, Suite 400 Report on Form 10-K for its fiscal year
Sioux City, IA 51101 ended June 30, 2005, with the Securities and
Exchange Commission. Copies of this Annual
SPECIAL COUNSEL Report and the Company's quarterly reports
Luse Gorman Pomerenk & may be obtained without charge by
Schick, PC contacting:
5335 Wisconsin Ave NW, Ste 400
Washington, DC 20015
INDEPENDENT REGISTERED SUZETTE F. HOEVET, CORPORATE SECRETARY
PUBLIC ACCOUNTING FIRM First Federal Bankshares, Inc.
McGladrey & Pullen, LLP 329 Pierce St, PO Box 897
400 Locust St, Suite 640 Sioux City, IA 51102
Des Moines, IA 50309 712-277-0200
800-352-4620
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Dr
Cranford, NJ 07016
800-368-5948
www.rtco.com
EXPANSION
In April of 2005 the
Johnston branch opened in
a retail mall on the
rapidly growing northwest [PHOTO OMITTED]
side of Des Moines at the
junction of I-80 and 86th
Street.
The Johnston branch takes shape in the mall
as construction continued through the
winter.
[PHOTO OMITTED] [PHOTO OMITTED]
On April 27, Johnston city Steven Opsal, Executive
officials and bank Vice President, is
employees helped Heather interviewed on live radio
Wilson, Johnston Branch while Branch Manager
Manager, cut the ribbon to Heather Wilson looks on
officially open the new during the grand opening
Johnston branch. celebration on April 30.
The Johnston branch is strategically located [PHOTO OMITTED]
in a busy retail mall to attract both
drive-up and walk-in traffic.
[LOGO]First
Federal
BANKSHARES, INC.
329 Pierce St o PO Box 897 o Sioux City, IA 51102
712-277-0200 o 800-352-4620 o www.firstfederalbank.com