EXHIBIT 13
ANNUAL REPORT TO SECURITY HOLDERS
1999 Highlights
o Conversion to full stock corporation complete, $26 million
raised in new stock sale
o Acquisition of Mid-Iowa Financial Corp. completed
o Earnings grow to $4.6 million
o Assets increased to $681 million
o New bank building in Grinnell completed
[GRAPHIC-GRAPH DEPICTING NET INCOME]
[GRAPHIC-GRAPH DEPICTING TOTAL ASSETS]
[GRAPHIC-GRAPH DEPICTING NONPERFORMING ASSETS]
[GRAPHIC-GRAPH DEPICTING COMMERCIAL LOAN ORIGINATIONS]
[GRAPHIC-CONSUMER LOAN ORIGINATIONS]
[GRAPHIC OMITTED PHOTO OF BANK PRESIDENT]
[GRAPHIC OMITTED First Federal Savings changes to First Federal Bank]
[GRAPHIC OMITTED Public bought $26 million in First Federal Bankshares stock
[GRAPHIC OMITTED Office in downtown Newton, IA.]
[GRAPHIC OMITTED New Grinnell IA office]
To Our Shareholders:
We are pleased to report to you the operating results of First Federal
Bankshares, Inc. for the fiscal year ended June 30, 1999.
Again, this past year has been historic and full of changes.
In April we converted our mutual holding company to a full stock owned
corporation, First Federal Bankshares, Inc. At the same time, the acquisition of
Mid-Iowa Financial Corp., Newton, Iowa, and its wholly-owned subsidiary,
Mid-Iowa Savings Bank, was completed.
During the conversion process, an additional 2.6 million shares were sold to
the public at the price of $10 per share. The existing shareholders received new
First Federal Bankshares, Inc. consumer stock at an exchange ratio of 1.64696
shares.
The employees of Mid-Iowa Financial Corp. and First Federal Bankshares, Inc.
are to be commended for their hard work and time away from families to complete
the Mid-Iowa acquisition successfully. This was the first time a second step
stock conversion and a cash acquisition had been done simultaneously.
During the first weekend of June, the Mid-Iowa computer conversion phase was
completed and again our employees stepped up to accomplish this tough
undertaking.
We also want to thank our new customers from Mid-Iowa for their patience and
understanding during this process of change.
The construction of a new bank facility has been completed in Grinnell, Iowa.
It is located on the site of the old office with more space, three drive-up
lanes and a drive-up ATM. We are looking forward to serving our customers in
Poweshiek County from this new, more efficient office.
During the second quarter of the fiscal year, three of our small, rural
branches were sold to local banks in their market area. We realized a $1.1
million pre-tax gain on those sales.
[GRAPHIC OMITTED Commercial lenders Gary Wood and Kevin Owens work with tire
recycler Les Pederson.]
[GRAPHIC OMITTED Sandy Sabel, Sr. Vice President and Matt Schroeder, Vice
President of Information Services discuss Y2K preparations.]
[GRAPHIC OMITTED First Federal's Bruce Davis and Tom Geier of Bache Funding
with Madison, WI developer Erik Minton.]
[GRAPHIC OMITTED First Federal's subsidiary Equity Services provides prime
building lots in Sgt. Bluff, IA.]
We ended our fiscal year with assets totaling $680.7 million and net earnings
of $4.6 million. This equates to a return on average assets of .78%, up from
.71% for fiscal 1998. Return on average equity rose to 9.48% from 8.39% a year
ago. I invite you to examine the financial data contained in the following pages
of the report.
We are now spending much of our time consolidating the recent acquisitions
into our systems. We are also examining ways to be more efficient and cost
effective. Our assets and liabilities continue to be restructured with emphasis
on consumer and commercial lending on the asset side and growth of transaction
accounts on the liability side.
Year 2000 (Y2K) preparation has been a high priority. Our staff has been
diligent about being prepared. We feel we are ready and our regulators have
confirmed what we have done to make a successful transition into the new year.
Between now and the new year, we will check and recheck our findings.
We wish to acknowledge and thank the fine people of Bache Funding,Madison,
Wisconsin. This commercial mortgage banking relationship was acquired through
the acquisition of Grinnell Federal in 1998. Their quality commercial-multi
family-single family loans have added to the successful growth of our commercial
loan department.
We have been successful in many nontraditional banking affiliations. These
involve the development of bare land into lots for construction of single family
homes, abstract title work in two northwest Iowa counties and a full service
real estate brokerage company, among other profitable ventures.
Fiscal 1999 was busy and ever-changing as we took on new challenges and
expanded into the high growth area of central Iowa. Fiscal 2000 will also
challenge our ingenuity to fine tune and expand the profitability of your
company.
Thank you for your continued support.
/s/Barry Backhaus
- -----------------
Barry Backhaus
Chairman, President and CEO
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 1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
Total assets $680,672 551,450 468,568 443,516 434,122
Loans receivable, net 457,058 404,800 341,254 320,408 311,775
Securities, held to maturity 32,006 32,023 29,758 22,459 96,802
Securities, available for sale 122,047 65,195 64,098 74,498 -
FHLB stock, at cost 8,094 5,671 5,000 4,769 4,675
Office property and equipment, net 15,412 10,845 9,638 8,697 7,559
Excess of cost over fair value of assets
acquired 20,946 8,158 318 355 190
Deposits 464,169 392,425 326,734 335,223 339,426
FHLB advances 138,617 107,901 96,500 66,000 54,500
Stockholders' equity 68,273 42,020 38,865 36,857 34,864
Operations Data for Year Ended June 30
Total interest income 41,136 35,364 33,691 31,686 29,007
Total interest expense 24,864 21,377 20,328 19,645 17,707
-------- ------- ------- ------- -------
Net interest income 16,272 13,987 13,363 12,041 11,300
Provision for losses on loans 365 345 258 233 142
-------- ------- ------- ------- -------
Net interest income after provision for
losses on loans 15,907 13,642 13,105 11,808 11,158
-------- ------- ------- ------- -------
Noninterest income:
Fees and service charges 2,146 1,392 1,143 1,092 771
Gain on sale of branch deposits 1,088 - - - -
Gain on sale of loans held for sale 296 242 207 290 160
Other income 2,016 1,544 1,179 1,124 692
-------- ------- ------- ------- -------
Total noninterest income 5,546 3,178 2,529 2,506 1,623
-------- ------- ------- ------- -------
Noninterest expense:
Compensation and benefits 7,674 6,702 5,655 5,150 4,615
Office property and equipment 1,901 1,500 1,293 1,159 1,064
Special deposit insurance assessment - - 2,233 - -
Other noninterest expense 4,614 3,326 3,490 3,410 3,327
-------- ------- ------- ------- -------
Total noninterest expense 14,189 11,528 12,671 9,719 9,006
-------- ------- ------- ------- -------
----------
Earnings before income taxes 7,264 5,292 2,963 4,595 3,775
Income taxes 2,701 1,874 1,024 1,543 1,259
-------- ------- ------- ------- -------
Net earnings $4,563 3,418 1,939 3,052 2,516
======== ======= ======= ======= =======
Earnings per share (1):
Basic earnings per share $.97 .73 .42 .66 .55
======== ======= ======= ======= =======
Diluted earnings per share $.96 .72 .41 .64 .53
======== ======= ======= ======= =======
Cash dividends declared per common share $.29 .29 .28 .27 .22
======== ======= ======= ======= =======
- --------------
(1) Adjusted for stock distributions and April 1999, stock conversion.
1
Selected Consolidated Financial and Other Data (Continued)
Key Financial Ratios and Other Data at or for the Years Ended June 30
1999(8) 1998(7) 1997 1996 1995
------ ------ ------ ------ ------
Performance Ratios:
Return on assets (net income divided
by average total assets) (1) .78 % .71 % .43 % .70 % .60 %
Return on equity (net income divided
by average equity) (1) 9.48 8.39 5.20 8.44 7.42
Average net interest rate spread (2) 2.72 2.74 2.71 2.52 2.49
Net yield on average interest-earning
assets (3) 2.99 3.07 3.07 2.88 2.82
Net interest income after provision for
loan losses to total other expenses (1) 112.11 118.34 103.25 121.50 123.90
Asset Quality Ratios:
Nonperforming loans to total loans .54 .33 .15 .22 .22
Nonperforming loans to total assets .36 .24 .11 .16 .16
Nonperforming assets as a percentage
of total assets (4) .37 .34 .11 .17 .17
Nonperforming loans and real estate
owned to total loans and real
estate owned .54 .47 .15 .24 .23
Average interest-earning assets to
average interest-bearing liabilities 105.83 107.14 107.69 107.74 107.27
Capital, Equity and Dividend Ratios:
Tangible capital (5) 6.52 6.20 8.24 8.37 7.99
Core capital (5) 6.52 6.20 8.24 8.37 7.99
Risk-based capital (5) 13.20 12.51 17.00 18.45 18.02
Average equity to average assets ratio 8.24 8.46 8.20 8.32 8.14
Dividend payout ratio 30.10 39.67 68.12 40.74 40.00
Per Share Data:
Book value per common share (6) $14.17 8.99 8.34 7.94 7.54
Other Data:
Number of full-service offices 19 15 13 13 12
- -------------------
(1) Excluding the SAIF assessment, the Company's return on assets, return on
equity, and net interest income after provision for loan losses to total
other expenses would have been .73%, 8.95%, and 125.29%, respectively, for
the year ended June 30, 1997.
(2) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
(3) Represents net interest income as a percentage of average interest-earning
assets.
(4) Nonperforming assets include nonaccruing loans, accruing loans delinquent
90 days or more, and foreclosed assets but do not include restructured
loans.
(5) End of period ratio
(6) Adjusted for stock distributions and April 1999, stock conversion.
(7) Operating data includes effect of the acquisition of GFS Bancorp, Inc. for
periods subsequent to March 31, 1998.
(8) Operating data includes effect of the acquisition of Mid-Iowa Financial
Corp. for periods subsequent to April 13, 1999.
2
Selected Consolidated Financial and Other Data (Continued)
Quarterly Financial Data:
June March December September
Three Months Ended 1999 1999 1998 1998
------- ------- ------- -------
Interest income $11,412 9,595 10,073 10,056
Interest expense 6,796 5,673 6,112 6,283
------- ------- ------- -------
Net interest income 4,616 3,922 3,961 3,773
Provision for losses on loans 110 105 75 75
------- ------- ------- -------
Net interest income after provision 4,506 3,817 3,886 3,698
Noninterest income 1,505 1,016 2,123 902
Noninterest expense 4,187 3,281 3,759 2,962
------- ------- ------- -------
Earnings before income taxes 1,824 1,552 2,250 1,638
Income taxes 719 563 799 620
------- ------- ------- -------
Net Earnings $ 1,105 989 1,451 1,018
======= ======= ======= =======
Earnings per share:
Basic $ .23 .21 .31 .22
Diluted .23 .21 .31 .21
======= ======= ======= =======
June March December September
Three Months Ended 1998 1998 1997 1997
------- ------- ------- -------
Interest income $9,966 8,486 8,402 8,510
Interest expense 6,050 5,066 5,089 5,172
------ ------ ------ ------
Net interest income 3,916 3,420 3,313 3,338
Provision for losses on loans 105 95 75 70
------ ------ ------ ------
Net interest income after provision 3,811 3,325 3,238 3,268
Noninterest income 1,139 691 672 675
Noninterest expense 3,437 2,826 2,626 2,639
------ ------ ------ ------
Earnings before income taxes 1,513 1,190 1,284 1,304
Income taxes 526 417 467 463
------ ------ ------ ------
Net Earnings $ 987 773 817 841
====== ====== ====== ======
Earnings per share:
Basic $ .21 .16 .18 .18
Diluted .21 .16 .17 .18
====== ====== ====== ======
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
This report contains certain "forward-looking statements." The Company desires
to take advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 and is including this statement for the express
purpose of availing itself of the protections of the safe harbor with respect to
all such forward-looking statements. These forward-looking statements, which are
included in Management's Discussion and Analysis, describe future plans or
strategies and include the Company's expectations of future financial results.
The words "believe," "expect," "anticipate," "project," and similar expressions
identify forward-looking statements. The Company's ability to predict results or
the effect of future plans or strategies or qualitative or quantitative changes
based on market risk exposure is inherently uncertain. Factors which could
affect actual results include but are not limited to (a) change in general
market interest rates, (b) general economic conditions, (c) legislative and
regulatory changes, (d) monetary and fiscal policies of the U. S. Treasury and
the Federal Reserve, (e) changes in the quality or composition of the Company's
loan and investment portfolios, (f) deposit flows, (g) competition, and (h)
demand for financial services in the Company's market area. These factors should
be considered in evaluating the forward-looking statements, and undue reliance
should not be placed on such statements, since results in future periods may
differ materially from those currently expected because of various risks and
uncertainties.
General
First Federal Bankshares, Inc. (the Company) was organized under Delaware law in
December 1998 by First Federal Bank (the Bank) and First Federal Bankshares,
M.H.C. (the Mutual Holding Company) to be the savings and loan holding company
of the Bank. The acquisition of the Bank by the Company was consummated on April
13, 1999 in connection with the Mutual Holding Company's 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. Consequently, the net income of the Company is primarily derived from the
Bank. In addition to the Bank, the Company owns Equity Services, Inc., a real
estate development company and Mid-Iowa Security Corporation, which generates
revenues primarily by providing real estate brokerage services. The Bank is a
federally chartered stock savings bank headquartered in Sioux City, Iowa. The
Bank is the successor of First Federal Savings and Loan Association of Sioux
City, which was founded in 1923.
The Company's results of operations are primarily dependent on its net interest
income. Net interest income is the difference between interest income earned on
loans, mortgage-backed securities and investment securities and interest expense
consisting of interest paid and payable on deposits and borrowings. The
Company's net income also is affected by its provision for loan losses, as well
as the amount of noninterest income, including loan fees and service charges,
and noninterest expense, such as salaries and employee benefits, deposit
insurance premiums, occupancy and equipment costs and income taxes. Earnings of
the Company also are affected significantly by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory authorities.
Business Strategy
The Company's current business strategy is to operate as a well-capitalized,
profitable and independent community savings bank dedicated to providing quality
banking services to our customers. The Company has sought to implement this
strategy in recent years by: (1) closely monitoring the needs of customers; (2)
emphasizing family financial services such as residential mortgage loans,
4
consumer loans and various checking and savings products; (3) offering
commercial real estate loans and small business lending services; (4) monitoring
and reducing interest rate risk exposure; (5) controlling operating expenses;
and (6) maintaining strong asset quality.
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
1999 1998 1997
----------------------------- ---------------------------- ----------------------------
Rate at
June 30, Average Average Average Average Average Average
1999 Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
---- ------- ------- ---------- ------- -------- --------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning Assets:
Loans receivable (1) 7.83% $416,631 32,736 7.86% 358,209 28,797 8.04% 331,144 26,562 8.02%
Mortgage-backed
securities 6.60% 34,824 2,361 6.78% 40,501 2,713 6.70% 45,680 2,988 6.54%
Investment securities 6.46% 87,677 5,764 6.57% 53,720 3,694 6.88% 58,660 4,125 7.03%
Short-term invest-
ments and other
interest-earning
assets (2) 5.50% 4,864 275 5.64% 2,959 160 5.41% 275 16 5.82%
Total interest-earning
assets 7.51% 543,996 41,136 7.56% 455,389 35,364 7.77% 435,759 33,691 7.73%
Noninterest-earning assets 40,590 26,303 18,999
-------- -------- --------
TOTAL ASSETS $584,586 481,692 454,758
======== ======== ========
Interest-bearing Liabilities:
Deposits 4.41% $394,722 17,884 4.53% 333,196 15,827 4.75% 322,426 15,377 4.77%
Borrowings 5.75% 119,329 6,980 5.85% 91,863 5,550 6.04% 82,206 4,951 6.02%
Total interest-bearing
liabilities 4.72% $514,051 24,864 4.84% 425,059 21,377 5.03% 404,632 20,328 5.02%
Noninterest-bearing:
Deposits 11,031 8,527 6,346
Liabilities 11,352 7,356 6,473
-------- --------- -------
TOTAL LIABILITIES 536,434 440,942 417,451
Stockholders' equity 48,152 40,750 37,307
-------- --------- -------
TOTAL LIABILITIES
AND STOCK-
HOLDERS' EQUITY $584,586 481,692 454,758
======== ======= =======
Net interest income 16,272 13,987 13,363
========= ========= =========
Interest rate spread (3) 2.79% 2.72% 2.74% 2.71%
==== ==== ==== ====
Net yield on interest-
earning assets (4) 3.05% 2.99% 3.07% 3.07%
==== ==== ==== ====
Ratio of average interest-
earning assets to
average interest-
bearing liabilities 105.83% 107.14% 107.69%
====== ====== ======
- -------------------------------
(1) Average balances include nonaccrual loans.
(2) Includes interest-bearing deposits in other financial institutions.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of
Iinterest-bearing liabilities.
interest-bearing liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
5
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(change in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume); and (iv) the net
change.
Years Ended June 30
1999 vs. 1998 1998 vs. 1997
------------------------------------------------ ------------------------------------------------
Increase (Decrease) Due To TOTAL Increase (Decrease) Due To TOTAL
RATE/ INCREASE RATE/ INCREASE
VOLUME RATE VOLUME (DECREASE) VOLUME RATE VOLUME (DECREASE)
--------- -------- ---------- ------------- --------- -------- ---------- -------------
(Dollars in Thousands)
Interest Income:
Loans receivable $4,696 (645) (111) 3,940 2,171 66 (2) 2,235
Mortgage-backed (380) 32 (4) (352) (339) 73 (9) (275)
securities
Investments 2,335 (167) (98) 2,070 (347) (88) 4 (431)
Other interest-earning
assets 103 7 4 114 156 (1) (11) 144
------ ---- ---- ----- ----- -- --- -----
Total interest-earning assets $6,754 (773) (209) 5,772 1,641 50 (18) 1,673
------ ---- ---- ----- ----- -- --- -----
Interest Expense:
Savings deposits $2,923 (733) (133) 2,057 514 (64) 0 450
Borrowings 1,659 (175) (54) 1,430 582 16 1 599
------ ---- ---- ----- ----- -- --- -----
Total interest-bearing
liabilities $4,582 (908) (187) 3,487 1,096 (48) 1 1,049
------ ---- ---- ----- ----- -- --- -----
Net change in net interest
income $2,172 135 (22) 2,285 545 98 (19) 624
====== === === ===== === == === ===
Financial Condition
The 53.5% ownership of the Bank by the Mutual Holding Company prior to April 13,
1999 was offered for sale to the public in a subscription offering (the
Offering) that resulted in net proceeds totaling $24.9 million. On April 13,
1999, the Company contributed all but $5.0 million of the net proceeds to the
Bank. With these proceeds and other funds, the Bank acquired Mid-Iowa Financial
Corp. (Mid-Iowa), the parent company of Mid-Iowa Savings Bank, F.S.B., with
assets of $155.4 million. Total assets increased by $129.2 million, or 23.4%, to
$680.7 million at June 30, 1999, from $551.5 million at June 30, 1998, primarily
due to the acquisition of Mid-Iowa. Total loans receivable increased by $52.3
million, or 12.9%, during the same period. The increase in loans receivable
reflected an increase of $13.7 million, or 23.4%, during fiscal 1999 in
commercial multi-family and nonresidential real estate loans, an increase of
$14.0 million, or 28.6%, in consumer and commercial loans, and an increase of
$24.7 million, or 8.2%, in single-family residential loans. Deposits increased
by $71.8 million, or 18.3%, to $464.2 million at June 30, 1999 from $392.4
million at June 30, 1998 and advances from the Federal Home Loan Bank (FHLB)
increased by $30.7 million, or 28.5%, to $138.6 million from $107.9 million at
June 30, 1998. These increases were primarily attributable to the Mid-Iowa
acquisition. The acquisition was accounted for as a purchase. The excess of cost
over fair value of assets acquired in this acquisition was $12.6 million.
Stockholders' equity increased by $26.3 million from $42.0 million at June 30,
1998 to $68.3 million at June 30, 1999. This increase resulted primarily from
the receipt of $24.9 million in net proceeds from the stock offering and net
income of $4.6 million less funds used to pay cash dividends totaling $635,000.
The Company loaned $1.8 to the First Federal Employee Stock Ownership Plan to
purchase 184,450 shares, or 7%, of the common stock sold in the Offering.
6
Comparison of Operating Results for Fiscal Years Ended June 30, 1999 and 1998
General. Net earnings for the year ended June 30, 1999 increased by $1.2
million, or 33.5%, to $4.6 million from $3.4 million for the year ended June 30,
1998. Diluted earnings per share totaled $.96 and $.72, respectively, for fiscal
1999 and 1998. The acquisition of Mid-Iowa Financial Corp. effective on April
13, 1999 was accounted for as a purchase; therefore, Mid-Iowa's results of
operations are included in the Company's operating results for fiscal 1999 from
April 14, 1999 through June 30, 1999. In addition, the acquisition of GFS
Bancorp, Inc. (GFS) effective on March 31, 1998 was accounted for as a purchase;
therefore, GFS results of operations are included in the Company's operating
results for fiscal 1998 from April 1, 1998 through June 30, 1998.
Interest Income. Interest income increased by $5.7 million, or 16.3%, to $41.1
million in fiscal 1999 from $35.4 million in fiscal 1998. The increase in
interest income was primarily due to an increase of $88.6 million, or 19.5%, in
the average balance of interest-earning assets to $544.0 million in fiscal 1999
from $455.4 million in fiscal 1998. The increase in the average balance of
interest-earning assets was primarily due to the acquisitions of GFS and
Mid-Iowa in March 1998, and April 1999, respectively. The average yield on
interest-earning assets decreased to 7.56% in fiscal 1999 from 7.77% in fiscal
1998. The increase in interest income reflects a $3.9 million, or 13.7%,
increase in interest income on loans to $32.7 million in fiscal 1999 from $28.8
million in fiscal 1998. Interest income on mortgage-backed securities (MBS)
decreased by $352,000, or 13.0%, to $2.4 million in fiscal 1999 from $2.7
million in fiscal 1998. During the same period, interest income on investment
securities increased by $2.1 million, or 56.1%, to $5.8 million from $3.7
million. The increase in interest income on loans resulted from an increase of
$58.4 million, or 16.3%, in the average balance of loans receivable to $416.6
million at June 30, 1999, from $358.2 million at June 30, 1998. The average
yield on loans receivable decreased by 18 basis points to 7.86% for fiscal 1999
from 8.04% for fiscal 1998. The decrease in interest income on MBS was primarily
due to a decrease of $5.7 million in the average balance of MBS to $34.8 million
in fiscal 1999 from $40.5 million in fiscal 1998. Partially offsetting the
decrease in MBS balances was an increase of 8 basis points in the average yield
on MBS to 6.78% in fiscal 1999 from 6.70% in fiscal 1998. The increase in
interest income on investment securities was primarily due to an increase of
$34.0 million in the average balance of investment securities to $87.7 million
in fiscal 1999 from $53.7 million in fiscal 1998. Investments totaling $46.1
million were added with the acquisition of Mid-Iowa in April 1999. The yield on
investment securities decreased to 6.57% in fiscal 1999 from 6.88% in fiscal
1998, partially offsetting the increase in average balances. The generally lower
interest rate environment during fiscal 1999 resulted in declining yields on
investment securities as higher yielding, callable securities were redeemed in
the first three quarters of fiscal 1999.
Interest Expense. Interest expense totaled $24.9 million in fiscal 1999,
representing a $3.5 million, or 16.3%, increase from $21.4 million in fiscal
1998. The increase was due to an increase of $89.0 million, or 20.9%, in the
average balance of interest-bearing liabilities to $514.1 million in fiscal 1999
from $425.1 million in fiscal 1998. The increase in the average balance of
interest-bearing liabilities was primarily due to the GFS and Mid-Iowa
acquisitions. The average cost of interest-bearing liabilities decreased by 19
basis points to 4.84% in fiscal 1999 from 5.03% in fiscal 1998. Interest expense
on deposits increased by $2.1 million, or 13.0%, to $17.9 million in fiscal 1999
from $15.8 million in fiscal 1998 and interest paid on borrowings increased by
$1.4 million, or 25.8%, to $7.0 million in fiscal 1999 from $5.6 million in
fiscal 1998. The increase in interest expense on deposits was primarily due to
an increase of $61.5 million, or 18.5%, in the average balance of deposits to
$394.7 million for fiscal 1999 from $333.2 million for fiscal 1998. The average
rate paid on deposits declined to 4.53% in fiscal 1999 from 4.75% in fiscal
1998. The increase in interest expense on borrowings resulted from a $27.5
million increase in the average balance of borrowings to $119.3 million in
fiscal 1999 from $91.9 million in fiscal 1998. The average rate paid on
borrowings decreased to 5.85% in fiscal 1999 from 6.04% in fiscal 1998 in the
generally lower interest rate environment during fiscal 1999.
7
Net Interest Income. Net interest income before provision for loan losses
increased by $2.3 million, or 16.3%, to $16.3 million for fiscal 1999 from $14.0
million for fiscal 1998. The increase in net interest income in fiscal 1999 was
primarily due to increases in the average balances of interest-earning assets
resulting from acquisitions. Increases in the average balance of
interest-earning assets in fiscal 1999 resulted in an increase in interest
income of $6.8 million, while increases in the average balance of
interest-bearing liabilities resulted in an increase in interest expense of $4.5
million. The Company's interest rate spread was 2.72% and 2.74%, respectively,
and the net yield on interest-earning assets was 2.99% and 3.07%, respectively,
for fiscal 1999 and 1998.
Provision for Loan Losses. The Company maintains an allowance for loan losses
through a provision for loan losses based on management's periodic evaluation of
the loan portfolio and reflects an amount that, in management's opinion, is
adequate to absorb losses in the current portfolio. During fiscal 1999 and 1998
the Company provided $365,000 and $345,000, respectively, for loan losses. Net
charge-offs as a percentage of average loans outstanding were .04% and .09%,
respectively, for fiscal years 1999 and 1998. In evaluating the portfolio,
management takes into consideration numerous factors, including current economic
conditions, prior loan loss experience, the composition of the loan portfolio,
and management's estimate of anticipated credit losses.
Noninterest Income. Noninterest income increased by $2.3 million, or 74.5%, to
$5.5 million for fiscal 1999 from $3.2 million for fiscal 1998. The increase in
noninterest income was largely due to the recognition of a $1.1 million gain on
the sale of the deposits of three branch offices. Deposits totaling $19.4
million were sold to local financial institutions. Over 80% of the deposits sold
were fixed-rate, fixed-maturity certificates of deposit with average interest
rates higher than the Company's weighted average rate paid on total deposits.
The sale of these deposits reduced the average interest rate paid on the
Company's total deposits by approximately 10 basis points. A gain on the sale of
real estate owned totaling $137,000 was recorded in fiscal 1999, primarily due
to the sale of a commercial property located in Grinnell, Iowa. Sales of lots by
the Company's real estate development subsidiary generated a gain totaling
$43,000. The increase in noninterest income was also due to growth related to
the acquisitions of GFS in March, 1998 and Mid-Iowa in April 1999. Income from
fees and service charges, real estate related income and other noninterest
income increased by $754,000, $231,000 and $199,000, respectively, in fiscal
1999 when compared to fiscal 1998. The increase in fees and service charges was
partially due to increases in transaction accounts that typically generate more
service charge income than fixed maturity deposits and also to the addition of
the GFS and Mid-Iowa deposit accounts. Gain on sale of loans held for sale
increased by $54,000 over the prior year and a loss on sale of fixed assets
totaling $33,000 was recorded in fiscal 1999 compared to a gain on sale of fixed
assets totaling $104,000 in fiscal 1998. The increase in other income was
primarily due to increased activity in the Company's non-bank subsidiaries.
Noninterest Expense. Noninterest expense increased by $2.7 million, or 23.1%, to
$14.2 million in fiscal 1999 from $11.5 million in fiscal 1998. The principal
component of the Company's noninterest expense has been and continues to be
salaries and employee benefits. Compensation and benefit expense increased by
$972,000, or 14.5%, to $7.7 million in fiscal 1999 from $6.7 million in fiscal
1998. During fiscal 1998 the Bank recognized the liability for an early
retirement incentive program that totaled approximately $277,000. Office
property and equipment expense increased by $400,000, or 26.7%. Deposit
insurance premium expense increased by $30,000, or 13.9%, to $246,000 in fiscal
1999 from $216,000 in fiscal 1998. Deposits totaling approximately $62.3 million
and $105.6 million, respectively, were added with the GFS and Mid-Iowa
acquisitions. Data processing expense and advertising expense increased by
$108,000, or 30.3%, and by $176,000, or 43.1%, respectively, in fiscal 1999 as
compared to fiscal 1998. Amortization of intangibles increased by $371,000, to
$479,000 in fiscal 1999, from $108,000 in fiscal 1998 primarily due to the
excess of cost over fair value of assets totaling $7.9 million and $12.6
million, respectively, for the GFS and Mid-Iowa acquisitions. The excess of cost
over fair value of assets related to these acquisitions is being amortized over
8
a period of 25 years. Other general and administrative expense increased by
$592,000, or 26.5%, to $2.8 million for fiscal 1999 from $2.2 million for fiscal
1998. The increase in other general and administrative expense in fiscal 1999
was partially due to acquisition-related expenses.
Income tax expense. Net earnings before income taxes increased by $2.0 million,
or 37.3%, to $7.3 million for fiscal 1999 from $5.3 million for fiscal 1998.
Income tax expense increased by $826,000, or 44.1%, to $2.7 million for fiscal
1999 from $1.9 million for fiscal 1998. The federal and state effective tax rate
on earnings was 37.2% and 35.4%, respectively, for fiscal years 1999 and 1998.
Comparison of Operating Results for Fiscal Years Ended June 30, 1998 and 1997
General. Net earnings for the year ended June 30, 1998 increased by $1.5
million, or 76.3%, to $3.4 million from $1.9 million for the year ended June 30,
1997. Diluted earnings per share totaled $.72 and $.64, respectively, for fiscal
1998 and 1997. Net earnings for fiscal 1997, excluding the SAIF one-time
assessment, net of tax effect, totaled $3.3 million. The acquisition of GFS
Bancorp, Inc. effective on March 31, 1998 was accounted for as a purchase;
therefore, GFS results of operations are included in the Company's operating
results for fiscal 1998 from April 1, 1998 through June 30, 1998.
Interest Income. Interest income increased by $1.7 million, or 5.0%, to $35.4
million in fiscal 1998 from $33.7 million in fiscal 1997. The average balance of
interest-earning assets increased by $19.6 million, or 4.5%, to $455.4 million
in fiscal 1998 from $435.8 million in fiscal 1997. In addition, the average
yield on interest-earning assets increased to 7.77% in fiscal 1998 from 7.73% in
fiscal 1997. The increase in interest income resulted primarily from a $2.2
million, or 8.4%, increase in interest income on loans to $28.8 million in
fiscal 1998 from $26.6 million in fiscal 1997. Interest income on
mortgage-backed securities (MBS) decreased by $275,000, or 9.2%, to $2.7 million
in fiscal 1998 from $3.0 million in fiscal 1997. During the same period,
interest income on investment securities decreased by $431,000, or 10.5%, to
$3.7 million from $4.1 million. The increase in interest income on loans
resulted from an increase of $27.1 million, or 8.2%, in the average balance of
loans receivable to $358.2 million at June 30, 1998, from $331.1 million at June
30, 1997. The average yield on loans receivable was 8.04% and 8.02%,
respectively, for fiscal 1998 and 1997. The decrease in interest income on MBS
was primarily due to a decrease of $5.2 million in the average balance of MBS to
$40.5 million in fiscal 1998 from $45.7 million in fiscal 1997. Partially
offsetting the decrease in MBS balances was an increase of 16 basis points in
the average yield on MBS to 6.70% in fiscal 1998 from 6.54% in fiscal 1997. The
decrease in interest income on investment securities was primarily due to a
decrease of $5.0 million in the average balance of investment securities to
$53.7 million in fiscal 1998 from $58.7 million in fiscal 1997. In addition, the
yield on investment securities decreased to 6.88% in fiscal 1998 from 7.03% in
fiscal 1997. The generally lower interest rate environment during fiscal 1998
resulted in declining yields on investment securities.
Interest Expense. Interest expense totaled $21.4 million in fiscal 1998,
representing a $1.1 million, or 5.2%, increase from $20.3 million in fiscal
1997. The increase was due to an increase of $20.4 million in the average
balance of interest-bearing liabilities to $425.0 million in fiscal 1998 from
$404.6 million in fiscal 1997. The average cost of interest-bearing liabilities
increased slightly to 5.03% in fiscal 1998 from 5.02% in fiscal 1997. Interest
expense on deposits increased by $450,000, or 2.9%, to $15.8 million in fiscal
1998 from $15.4 million in fiscal 1997 and interest paid on borrowings increased
by $600,000, or 12.1%, to $5.6 million in fiscal 1998 from $5.0 million in
fiscal 1997. The increase in interest expense on deposits was primarily due to
an increase of $10.8 million, or 3.3%, in the average balance of deposits. The
average rate paid on deposits declined slightly to 4.75% in fiscal 1998 from
4.77% in fiscal 1997. The increase in interest expense on borrowings resulted
from a $9.6 million increase in the average balance of borrowings to $91.9
million in fiscal 1998 from $82.2 million in fiscal 1997. In addition, the
average rate paid on borrowings increased slightly to 6.04% in fiscal 1998 from
6.02% in fiscal 1997.
9
Net Interest Income. Net interest income before provision for loan losses
increased by $624,000, or 4.7%, to $14.0 million for fiscal 1998 from $13.4
million for fiscal 1997. The increase in net interest income in fiscal 1998 was
primarily due to increases in the average balance of interest-earning assets
resulting from acquisitions. Such increases in fiscal 1998 resulted in an
increase in interest income of $1.6 million, while increases in the average
balance of interest-bearing liabilities resulted in an increase in interest
expense of $1.1 million. The Company's interest rate spread was 2.74% and 2.71%,
respectively, and the net yield on interest-earning assets was 3.07% for both
fiscal 1998 and 1997.
Provision for Loan Losses. During fiscal 1998 and 1997 the Company provided
$345,000 and $258,000, respectively, for loan losses. Net charge-offs as a
percentage of average loans outstanding were .09% and .06%, respectively, for
fiscal years 1998 and 1997.
Noninterest Income. Noninterest income increased by $627,000, or 24.6%, to $3.2
million for fiscal 1998 from $2.6 million for fiscal 1997. Income from fees and
service charges, abstracting income and other noninterest income increased by
$249,000, $124,000 and $106,000, respectively, in fiscal 1998 when compared to
fiscal 1997. Gain on sale of loans held for sale increased by $35,000 over the
prior year and a gain on sale of fixed assets totaling $104,000 was recorded in
fiscal 1998. The increase in fees and service charges was partially due to
increases in transaction accounts that typically generate more service charge
income than fixed maturity deposits and also to the addition of the GFS deposit
accounts. The increase in other income was primarily due to increased activity
in the Company's non-bank subsidiaries.
Noninterest Expense. Noninterest expense decreased by $1.2 million, or 9.2%, to
$11.5 million in fiscal 1998 from $12.7 million in fiscal 1997. Fiscal 1997
included a $2.2 million charge for the special deposit insurance assessment that
was mandated in September, 1996. Excluding this one-time assessment, the
principal component of the Company's noninterest expense has been and continues
to be salaries and employee benefits. Compensation and benefit expense increased
by $1.0 million, or 18.5%, to $6.7 million in fiscal 1998 from $5.7 million in
fiscal 1997. During fiscal 1998 the Company recognized the liability for an
early retirement incentive program that totaled approximately $277,000. Office
property and equipment expense increased by $207,000, or 16.0%. Deposit
insurance premium expense decreased by $240,000, or 52.6%, to $216,000 in fiscal
1998 from $457,000 in fiscal 1997 due to a reduction in premium rates which was
a direct result of the recapitalization of the Savings Association Insurance
Fund (SAIF) and the payment of the special assessment mentioned above. Deposits
totaling approximately $62.3 million were added to the Company's assessment base
with the GFS acquisition. Data processing expense and advertising expense
increased by $30,000, or 9.4%, and by $70,000, or 20.8%, respectively, in fiscal
1998 as compared to fiscal 1997. No loss on sale of securities available for
sale was recorded in fiscal 1998 as compared to a loss of $122,000 in fiscal
1997. Amortization of intangibles increased by $82,000, to $108,000 in fiscal
1998, from $26,000 in fiscal 1997 primarily due to the excess of cost over fair
value of assets added in the GFS acquisition that totaled approximately $7.9
million. This excess is being amortized over a period of 25 years.
Income tax expense. Net earnings before income taxes increased by $2.3 million,
or 78.6%, to $5.3 million for fiscal 1998 from $3.0 million for fiscal 1997.
Income tax expense increased by $850,000, or 83.0%, to $1.9 million for fiscal
1998 from $1.0 million for fiscal 1997. The federal and state effective tax rate
on earnings was 35.4% and 34.6%, respectively, for fiscal years 1998 and 1997.
Asset and Liability Management - Interest Rate Sensitivity Analysis
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
10
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. Interest rate sensitivity is based on
numerous assumptions, such as prepayment estimates, which are revised annually
to reflect the anticipated interest rate environment.
During a period of rising interest rates, a negative gap would tend to adversely
affect net interest income while a positive gap would tend to positively affect
net interest income. During a period of falling interest rates a negative gap
would tend to positively affect net interest income while a positive gap would
tend to negatively affect net interest income.
The Company has utilized the following strategies in recent years to reduce
interest rate risk: (a) the Company seeks to originate and hold in portfolio
adjustable rate loans which have annual interest rate adjustments; (b) the
Company seeks to originate shorter-term commercial and consumer loans; (c) the
Company seeks to lengthen the maturity of deposits, when cost effective, through
the pricing and promotion of certificates of deposit; (d) the Company seeks to
attract low cost checking and transaction accounts which tend to be less
interest rate sensitive when interest rates rise; and (e) the Company has used
long term Federal Home Loan Bank (FHLB) advances to fund the origination of
fixed rate loans. The Company does not solicit negotiated high-rate jumbo
certificates of deposit or brokered deposits, which are extremely rate
sensitive.
At June 30, 1999, total interest-bearing liabilities maturing or repricing
within one year exceeded total interest-earning assets maturing or repricing in
the same period by $94.6 million, representing a cumulative one-year gap ratio
of negative 13.9%. The Company has established an asset/liability committee
(ALCO), which includes the Company's president and senior Company officers. The
ALCO meets weekly to review loan and deposit pricing and production volumes,
interest rate risk analysis, liquidity and borrowing needs, and other asset and
liability management topics. The ALCO reports quarterly to the Board of
Directors on interest rate risk and trends, as well as liquidity and capital
ratios and requirements.
Market Risk Management
Market risk is the risk of loss arising from adverse changes in market prices
and rates. The Company's market risk is comprised primarily of interest rate
risk resulting from its core banking activities of lending and deposit taking.
Interest rate risk is the risk that changes in market interest rates might
adversely affect the Company's net interest income or the economic value of its
portfolio of assets, liabilities, and off-balance sheet contracts. Management
continually develops and applies strategies to mitigate this risk. Management
does not believe that the Company's primary market risk exposures and how those
exposures were managed in fiscal 1999 have changed when compared to fiscal 1998.
Market risk limits have been established by the Board of Directors based on the
Company's tolerance for risk.
The Company primarily relies on the OTS Net Portfolio Value Model (the Model) to
measure its susceptibility to interest rate changes. Net portfolio value (NPV)
is defined as the present value of expected net cash flows from existing 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 NPV Model uses an option-based pricing approach to value one-to-four family
mortgages, mortgages serviced by or for others, and firm commitments to buy,
sell, or originate mortgages. This approach makes use of an interest rate
simulation program to generate numerous random interest rate paths that, in
conjunction with a prepayment model, are used to estimate mortgage cash flows.
11
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, 1999, as calculated by the
OTS NPV Model. The table shows the present value of the instruments under rate
shock scenarios of -300 basis points to +300 basis points in increments of 100
basis points. As illustrated in the table, the Company's NPV is more sensitive
in a rising rate scenario than in a falling rate scenario. As market rates
increase, the market value of the Company's large portfolio of mortgage loans
and securities declines significantly and prepayments slow. As interest rates
decrease, the market value of mortgage loans and mortgage-backed securities
increase less dramatically due to prepayment risk, periodic rate caps, and other
embedded options.
Actual changes in market value will differ from estimated changes set forth in
this table due to various risks and uncertainties.
Present Value Estimates by Interest Rate Scenario
Calculated at June 30, 1999
---------------------------------------------- Base---------------------------------------------
-300 bp -200 bp -100 bp 0 bp +100 bp $200 bp +300 bp
-------- ------- ------- ------- ------- ------- -------
(Dollars in Thousands)
Financial Instrument:
Mortgage loans and securities $496,670 490,120 483,220 474,176 463,174 451,092 438,544
Non-mortgage loans 30,801 30,316 29,846 29,390 28,947 28,518 28,101
Cash, deposits and securities 158,947 150,254 142,208 134,760 127,844 121,432 115,484
Other assets 29,637 31,555 34,117 37,754 41,490 45,001 48,318
-------- ------- ------- ------- ------- ------- -------
Total assets 716,055 702,245 689,391 676,080 661,455 646,043 630,447
-------- ------- ------- ------- ------- ------- -------
Deposits 472,803 469,747 466,745 463,822 460,962 458,151 455,403
Borrowings 148,068 144,978 142,002 139,136 136,374 133,713 131,146
Other liabilities 9,490 9,482 9,477 9,471 9,466 9,461 9,456
-------- ------- ------- ------- ------- ------- -------
Total liabilities 630,361 624,207 618,224 612,429 606,802 601,325 596,005
-------- ------- ------- ------- ------- ------- -------
Commitments 1,262 772 297 (200) (678) (1,132) (1,566)
-------- ------- ------- ------- ------- ------- -------
Net portfolio value $86,956 78,810 71,464 63,451 53,975 43,586 32,876
======= ====== ====== ====== ====== ====== ======
Net portfolio value ratio 12.14% 11.22% 10.37% 9.39% 8.16% 6.75% 5.21%
======= ====== ====== ====== ====== ====== ======
NPV minimum: board limit 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50%
======= ====== ====== ====== ====== ====== ======
Liquidity and Capital Resources
On April 13, 1999 the Company completed its reorganization and stock offering in
connection with the conversion of First Federal Bankshares, M.H.C. The Company
sold 2,635,000 shares of common stock for $10.00 per share in the offering. Cash
proceeds after costs and funding of the Company's ESOP was approximately $23
million. The Company also issued 2,182,807 additional shares (based on the
exchange ratio of 1.64696 new shares for each existing share) to existing First
Federal Savings Bank of Siouxland public stockholders. The net proceeds were
used to fund the acquisition of Mid-Iowa Financial Corp. simultaneously with the
reorganization.
12
The Company is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which varies from time to time, is
currently 4% of deposits and short-term borrowings. The Company historically has
maintained a level of liquid assets in excess of regulatory requirements, and
the Company's liquidity ratio averaged 31.0% during the quarter ended June 30,
1999. The Company adjusts its liquidity levels in order to meet funding needs
for deposit outflows (including anticipated outflows for the Y2K problem),
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 which provides liquidity to meet lending
requirements.
Investments and other assets qualifying for liquidity, outstanding at June 30,
1999, 1998, and 1997, amounted to $150.1 million, $96.4 million, and $28.4
million, respectively.
Deposits are the Company's primary source of externally generated funds. The
level of deposit inflows during any given period is heavily influenced by
factors outside of management's control, such as the general level of short-term
and long-term interest rates in the economy, as well as higher alternative
yields that investors may obtain on competing investment instruments such as
money market mutual funds. The Company's net deposits before interest credited
increased by $53.5 million for fiscal 1999, due primarily to the Mid-Iowa
acquisition, net of the branch deposit sales. The Company's net deposits before
interest credited increased by $49.1 million for fiscal 1998, due primarily to
the GFS acquisition, and decreased by $21.9 million for fiscal 1997.
Similarly, the amount of principal repayments on loans and mortgage securities
are heavily influenced by the general level of interest rates in the economy.
Funds received from principal repayments on mortgage securities for fiscal 1999,
1998 and 1997, totaled $12.1 million, $11.0 million, and $9.3 million,
respectively. Principal repayments on loans for fiscal 1999 totaled $163.1
million as compared to $123.3 million in fiscal 1998 and $81.6 million in fiscal
1997. The acceleration of loan and mortgage securities principal repayments over
the respective periods reflects the refinancing activity of homeowners due to
generally lower mortgage interest rates in recent years.
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, 1999, the Company had $138.6 million in
outstanding advances from the FHLB.
At June 30, 1999, the Company had outstanding loan commitments totaling $33.6
million. Certificates of deposit scheduled to mature or reprice in one year or
less at June 30, 1999 totaled $178.0 million. Management believes that a
significant portion of such deposits will remain with the Company.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
13
the Company's operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Company are monetary. As a result, interest rates
have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
Effect of New Accounting Standards
The Company adopted the provisions of SFAS No. 130, Reporting Comprehensive
Income, effective July 1, 1998. SFAS No. 130 establishes the standards for the
reporting and display of comprehensive income in the financial statements.
Comprehensive income represents net earnings and certain amounts reported
directly in stockholders' equity, such as the net unrealized gain or loss on
available-for-sale securities. The statement requires additional disclosures in
the consolidated financial statements; it does not affect the Company's
financial position or results of operations. Prior year consolidated financial
statements have been reclassified to conform to the requirements of SFAS No.
130.
The Company adopted the provisions of SFAS No. 131, Disclosure about Segments of
an Enterprise and Related Information, effective July 1, 1998. SFAS No. 131
establishes disclosure requirements for segment operations. The adoption had no
effect on the Company's financial statement disclosures because the Company
operates as a single business segment.
SFAS 133, Accounting for Derivative Instruments and Hedging Activities, and its
related amendment SFAS No. 137, Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,
will be effective for the Company for the year beginning July 1, 2000.
Management is evaluating the impact the adoption of SFAS 133 will have on the
Company's consolidated financial statements. The Company expects to adopt SFAS
No. 133 when required.
Year 2000
The Year 2000 (Y2K) issue is a serious operational problem that is widespread
and complex, affecting all industries. The problem consists essentially of the
risk that programming code in existing computer systems will fail to properly
recognize the new millennium when it occurs in the year 2000. Many computer
programs and related hard-printed memory circuits were developed with six-digit
date fields (MMDDYY, or some variation) with the YY two-digit field representing
the year that is used in calculations related to that field. Any of the
Company's programs that recognize a date using "00" as the year 1900 rather than
the year 2000 could cause miscalculations or system failures.
The Company has identified the systems that will be affected by the Year 2000
problem. The Company's Year 2000 action team has completed the awareness and
inventory phases of the Year 2000 project in which potential Year 2000 risk
areas and systems have been identified. The assessment of the Company's Year
2000 exposures is complete. Programming changes, system upgrades and
replacements and other actions necessary to prepare for Year 2000 have been
completed. Testing and assessing the validity of Year 2000 changes was completed
during fiscal 1999 and Year 2000-ready systems have been implemented.
The Company has identified and assessed its computer operating systems and
networking software; applications software; data processing hardware platforms
such as personal computers and automated teller machines; third party
interfaces; and environmental systems including, but not limited to, climate
control systems, sprinklers, elevators, and security systems. The Company has
identified its mission-critical systems including its "core" data processing
system for loans, deposits and the general ledger. Contingency plans have been
developed for these systems on a department-by-department basis in anticipation
of the possibility of unplanned system difficulties or failure of third parties
to successfully prepare for Year 2000. Most of these plans provide for some type
of manual recordkeeping and reporting procedures, and were completed by June 30,
14
1999 as part of the Company's overall contingency planning process.
It is the intention of the Company to maintain normal business operations during
the Year 2000 transition and beyond. The Company has developed a Year 2000
Business Continuity and Contingency Plan as an addition to the Company's
Disaster Recovery Plan. Together, these plans help insure the continuity of
daily operations in the event of a loss of essential resources due to Year 2000
induced failures. These plans describe individual contingency plans concerning
specific software and hardware issues, operational plans for continuing
operations, and specific policies and procedures that would be put in place upon
the occurrence of a power outage, computer interruptions, telecommunications
interruptions, natural disaster, etc. Such plans identify participants,
processes and equipment that will be necessary to permit the Company to resume
and continue operations until the problem is resolved.
A Year 2000 budget has been established. The Company has identified
approximately $100,000 in total costs including hardware, software and
consulting fees for completing the Year 2000 project. In addition, the Company
has incurred and will continue to incur internal staff-related costs. Of the
budgeted amount, approximately $75,000 was incurred in fiscal 1999 with the
remainder budgeted for fiscal 2000.
In addition to expenses related to its own computer systems, the Company is
aware of potential Year 2000 risks to third parties, including vendors (and to
the extent appropriate, depositors and borrowers) and the possible adverse
impact on the Company resulting from failures by these parties to adequately
address the Year 2000 problem. The Company has contacted all mission-critical
vendors and service providers regarding their Year 2000 readiness. The potential
risks posed by these entities have been analyzed and periodic updates on the
Year 2000 progress of currently non-compliant vendors are being performed. To
date, the Company has not been advised by such parties that they do not have
plans in place to address and correct the issues associated with the Year 2000
problem; however, no assurance can be given as to the adequacy of such plans or
to the timeliness of their implementation.
The risk exists that some of the Company's commercial borrowers may not be
prepared for Year 2000 issues and may suffer financial harm as a result. This,
in turn, represents risk to the Company regarding the repayment of loans from
those commercial customers. The Company has surveyed its existing commercial
customers with aggregate outstanding loan balances of $250,000 or more regarding
their Year 2000 preparedness. Based on the results of the survey process the
overall level of Year 2000 risk in the Company's commercial loan portfolio is
believed to be relatively low. In addition, repayment sources for the majority
of loans in the Company's commercial loan portfolio are from multi-family real
estate projects that tend to be less computer-dependent than, for example, a
manufacturing business. Accordingly, the Company considers its commercial loan
portfolio to contain a relatively low level of Year 2000 risk. Nevertheless, the
Company has established a $75,000 reserve for loan losses related to unforeseen
Year 2000 problems of its commercial customers. The Company analyzes Year 2000
risk posed by prospective commercial loan customers prior to approving their
loan requests. Commercial loan customers are asked to sign an acknowledgement
demonstrating their commitment to address Year 2000 problems inherent in their
operations and agreeing to provide the Company with specific information
regarding their Year 2000 status.
The Company has also analyzed the Year 2000 risk posed by its 20 largest
commercial depositors that do not have commercial loan relationships. The
Company currently considers its commercial deposit portfolio to contain a
relatively low level of Year 2000 risk since the majority of these depositors
are small business customers with limited computer technology dependence in
their core business function. The Company analyzes potential Year 2000 risk of
prospective commercial deposit customers prior to accepting their deposits.
The Company has assigned responsibility to a committee of staff members to
provide information to customers and employees about the Company's progress in
addressing the Year 2000 problem. The mission of the committee is to maintain
15
customer confidence in the Company's ability to operate in Year 2000 and to
educate employees about its Year 2000 efforts so that they may adequately
address customer concerns.
The preceding paragraphs include forward-looking statements that involve
inherent risks and uncertainties. The actual costs of Year 2000 compliance and
the impact of Year 2000 issues could differ materially from what is currently
anticipated. Factors that might result in such differences include incomplete
inventory and assessment results, higher than anticipated costs to update
software and hardware and vendors', customers' and other third parties'
inability to effectively address the Year 2000 issue.
Savings Association Insurance Fund Recapitalization
On September 30, 1996, legislation went into effect to resolve the deposit
insurance premium disparity between savings institutions (such as the Bank) and
banks which included the payment of a one-time special assessment to
recapitalize the Savings Association Insurance Fund (SAIF). The required payment
resulted in a non-recurring expense for the Company totaling $2.2 million ($1.4
million, or $.30 per share, after tax effect) for fiscal 1997. The industry-wide
assessment was supported by savings institutions to fully capitalize the SAIF
fund and reduce future deposit insurance premium costs to a level at which
SAIF-insured institutions can compete with Bank Insurance Fund institutions.
16
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First Federal Bankshares, Inc.
and Subsidiaries
Sioux City, Iowa:
We have audited the accompanying consolidated balance sheets of First
Federal Bankshares, Inc. and subsidiaries (the Company) as of June 30, 1999
and 1998, and the related consolidated statements of operations,
stockholders' equity and comprehensive income, and cash flows for each of
the years in the three-year period ended June 30, 1999. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Federal Bankshares, Inc. and subsidiaries as of June 30, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each
of the years in the three-year period ended June 30, 1999, in conformity
with generally accepted accounting principles.
/s/KPMG LLP
-----------
KPMG LLP
July 30, 1999
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1999 and 1998
June 30,
--------------------------------
1999 1998
------------- ---------
Assets
Cash and cash equivalents $ 13,220,130 9,725,007
Interest-bearing deposits in other financial institutions 1,847,826 7,500,000
Securities available for sale (note 2) 122,047,213 65,194,875
Securities held to maturity (fair value of $31,756,870 in 1999
and $32,371,990 in 1998) (note 2) 32,006,095 32,023,240
Loans receivable, net (notes 3 and 4) 457,058,054 404,800,425
Office property and equipment, net (note 5) 15,411,818 10,844,964
Federal Home Loan Bank (FHLB) stock, at cost 8,094,300 5,670,600
Accrued interest receivable (note 6) 4,602,258 3,526,679
Deferred tax asset (note 9) 1,197,000 250,000
Excess of cost over fair value of assets acquired 20,946,396 8,158,212
Other assets 4,240,648 3,756,098
------------- ---------
Total assets $ 680,671,738 551,450,100
Liabilities
Deposits (note 7) $ 464,169,478 392,425,285
Advances from FHLB (notes 2 and 8) 138,617,385 107,900,878
Advance payments by borrowers for taxes and insurance 2,557,118 2,276,049
Accrued taxes on income (note 9) 419,106 (84,884)
Accrued interest payable (notes 7 and 8) 4,172,328 3,636,142
Accrued expenses and other liabilities 2,463,316 3,276,547
------------- ---------
Total liabilities 612,398,731 509,430,017
Stockholders' Equity
Preferred stock, $.01 par value; authorized;
1,000,000 shares, none issued -- --
Common stock, $.01 par value, 12,000,000 shares authorized;
4,817,807 and 4,677,273 shares issued and outstanding
at June 30, 1999 and 1998, respectively 48,178 46,773
Additional paid-in capital 35,957,560 11,059,966
Retained earnings, substantially restricted (note 11) 36,283,211 30,678,991
Accumulated other comprehensive income - Net
unrealized (loss) gain on securities available for sale (2,202,184) 234,353
Employee stock ownership plan (1,813,758) --
------------- ---------
Total stockholders' equity 68,273,007 42,020,083
Contingencies (note 14)
Total liabilities and stockholders' equity $ 680,671,738 551,450,100
============= ===========
See accompanying notes to consolidated financial statements.
2
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended June 1999, 1998 and 1997
Years ended June 30,
-----------------------------------------------
1999 1998 1997
------------ ------------ ------------
Interest income:
Loans receivable $ 32,736,304 28,796,484 26,562,097
Mortgage-backed securities 2,361,176 2,713,326 2,988,212
Investment securities 5,764,481 3,694,024 4,124,948
Other interest-earning assets 274,191 160,432 15,522
------------ ------------ ------------
Total interest income 41,136,152 35,364,266 33,690,779
------------ ------------ ------------
Interest expense:
Deposits (note 7) 17,884,113 15,826,758 15,376,823
Advances from FHLB and other borrowings 6,980,013 5,550,478 4,950,702
------------ ------------ ------------
Total interest expense 24,864,126 21,377,236 20,327,525
------------ ------------ ------------
Net interest income 16,272,026 13,987,030 13,363,254
Provision for losses on loans (note 4) 365,000 345,000 258,000
------------ ------------ ------------
Net interest income after provision for losses on loans 15,907,026 13,642,030 13,105,254
------------ ------------ ------------
Noninterest income:
Fees and service charges 2,146,078 1,392,400 1,143,190
Gain on sale of branch deposits 1,087,884 -- --
Gain (loss) on sale of real estate owned and held for development 179,695 -- (21,627)
Gain on sale of loans held for sale 295,812 241,690 206,898
Gain (loss) on sale of fixed assets (32,689) 103,936 (8,259)
Real estate related activities 950,131 719,239 595,128
Other income, net 918,895 720,213 613,722
------------ ------------ ------------
Total noninterest income 5,545,806 3,177,478 2,529,052
------------ ------------ ------------
Noninterest expense:
Compensation and benefits (note 10) 7,673,781 6,701,960 5,654,626
Office property and equipment 1,900,655 1,500,265 1,293,189
Deposit insurance premiums 246,462 216,405 456,651
Special deposit insurance assessment -- -- 2,232,519
Data processing 463,220 355,508 325,112
Advertising 585,348 409,102 338,701
Net loss on sale of securities 12,141 -- 121,913
Amortization of excess purchase price 479,200 108,244 26,244
Other expense, net 2,828,560 2,236,111 2,222,150
------------ ------------ ------------
Total noninterest expense 14,189,367 11,527,595 12,671,105
------------ ------------ ------------
Earnings before income taxes 7,263,465 5,291,913 2,963,201
Income taxes (note 9) 2,700,000 1,874,000 1,024,000
------------ ------------ ------------
Net earnings $ 4,563,465 3,417,913 1,939,201
============ ========= =========
Earnings per share:
Basic earnings per share $ 0.97 0.73 0.42
============ ========= =========
Diluted earnings per share 0.96 0.72 0.41
============ ========= =========
See accompanying notes to consolidated financial statements.
3
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended 1999, 1998 and 1997
Accumulated
Additional Other
Capital paid-in Retained Comprehensive
stock capital earnings Income
----------- ---------- ---------- ----------
Balance at June 30, 1996 $ 28,117 6,940,080 30,584,794 (658,700)
Net earnings -- -- 1,939,201 --
Net change in unrealized gains on
securities available for sale -- -- -- 351,932
Plus: reclassification adjustment for net
realized losses included in net income
(net of tax expense) -- -- -- 234,153
----------- ---------- ---------- ----------
Total comprehensive income -- -- 1,939,201 586,085
----------- ---------- ---------- ----------
Stock options exercised 117 57,375 -- --
Principal payment on ESOP borrowing -- -- -- --
Amortization of recognition
and retention plan -- -- -- --
Issuance of 10% stock dividend
(281,882 shares) 2,819 4,019,277 (4,022,096) --
3-for-2 stock split in the form of
a stock dividend (1,552,774 shares) 15,528 (15,528) -- --
Dividends on common stock
at $.2848 per share (note 11) -- -- (611,803) --
----------- ---------- ---------- ----------
Balance at June 30, 1997 46,581 11,001,204 27,890,096 (72,615)
----------- ---------- ---------- ----------
Net earnings -- -- 3,417,913 --
Net change in unrealized gains on securities
available for sale -- -- -- 306,968
----------- ---------- ---------- ----------
Total comprehensive income -- -- 3,417,913 306,968
----------- ---------- ---------- ----------
Stock options exercised 192 58,762 -- --
Dividends on common stock
at $.2914 per share (note 11) -- -- (629,018) --
----------- ---------- ---------- ----------
Balance at June 30, 1998 46,773 11,059,966 30,678,991 234,353
----------- ---------- ---------- ----------
Net earnings -- -- 4,563,465 --
Net change in unrealized losses on
securities available for sale -- -- -- (2,432,261)
Less: reclassification adjustment for net
realized gains included in net income
(net of tax expense) -- -- -- (4,276)
----------- ---------- ---------- ----------
Total comprehensive income -- -- 4,563,465 (2,436,537)
----------- ---------- ---------- ----------
Reorganization of MHC -- -- 1,675,313 --
Proceeds of stock offering, net 1,238 24,842,903 -- --
Stock options exercised 167 54,691 -- --
Employee stock ownership plan
(ESOP) borrowing -- -- -- --
Principal payment on ESOP borrowing -- -- -- --
Dividends on common stock --
at $.2914 per share (note 11) -- -- (634,558) --
----------- ---------- ---------- ----------
Balance at June 30, 1999 $ 48,178 35,957,560 36,283,211 (2,202,184)
=========== ========== ========== ==========
Recognition
ESOP and
borrowing retention
guarantee plan Total
--------- ---- -----
Balance at June 30, 1996 (29,470) (7,560) 36,857,261
Net earnings -- -- 1,939,201
Net change in unrealized gains on
securities available for sale -- -- 351,932
Plus: reclassification adjustment for net
realized losses included in net income
(net of tax expense) -- -- 234,153
---------- ----------
Total comprehensive income -- -- 2,525,286
---------- ----------
Stock options exercised -- -- 57,492
Principal payment on ESOP borrowing 29,470 -- 29,470
Amortization of recognition
and retention plan -- 7,560 7,560
Issuance of 10% stock dividend
(281,882 shares) -- -- --
3-for-2 stock split in the form of
a stock dividend (1,552,774 shares) -- -- --
Dividends on common stock
at $.2848 per share (note 11) -- -- (611,803)
---------- ----------
Balance at June 30, 1997 -- -- 38,865,266
---------- ----------
Net earnings -- -- 3,417,913
Net change in unrealized gains on securities
available for sale -- -- 306,968
---------- ----------
Total comprehensive income -- -- 3,724,881
---------- ----------
Stock options exercised -- -- 58,954
Dividends on common stock
at $.2914 per share (note 11) -- -- (629,018)
---------- ----------
Balance at June 30, 1998 -- -- 42,020,083
---------- ----------
Net earnings -- -- 4,563,465
Net change in unrealized losses on
securities available for sale -- -- (2,432,261)
Less: reclassification adjustment for net
realized gains included in net income
(net of tax expense) -- -- (4,276)
---------- ----------
Total comprehensive income -- -- 2,126,928
---------- ----------
Reorganization of MHC -- -- 1,675,313
Proceeds of stock offering, net -- -- 24,844,141
Stock options exercised -- -- 54,858
Employee stock ownership plan
(ESOP) borrowing (1,844,500) -- (1,844,500)
Principal payment on ESOP borrowing 30,742 -- 30,742
Dividends on common stock
at $.2914 per share (note 11) -- -- (634,558)
---------- ----------
Balance at June 30, 1999 (1,813,758) -- 68,273,007
========== ====== ==========
See accompanying notes to consolidated financial statements.
4
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1999, 1998 and 1997
Years ended June 30,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
Net earnings $ 4,563,465 3,417,913 1,939,201
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Loans originated for sale to investors (39,229,306) (24,816,168) (12,797,315)
Proceeds from sale of loans originated for sale 39,397,920 24,282,687 12,798,822
Provision for losses on loans and other assets 365,000 345,000 258,000
Depreciation and amortization 1,420,630 814,703 618,381
Provision for deferred taxes (166,000) 354,000 --
Net gain on sale of loans (295,812) (241,690) (206,898)
Net loss on sale of securities available for sale 12,141 -- 121,913
Net gain on sale of branch deposits (1,087,884) -- --
Net (gain) loss on sale of office property
and equipment 32,689 (103,936) 8,259
Net (gain) loss on sale of real estate owned
and held for development (179,695) -- 21,627
Net loan fees deferred 88,902 230,147 122,839
Amortization of premiums and discounts on loans,
mortgage-backed securities, and investment
securities 102,264 (61,505) (190,969)
(Increase) decrease in accrued interest receivable (220,578) 381,057 (100,569)
Increase in other assets (368,112) (70,700) (322,044)
(Decrease) increase in accrued interest payable (389,503) 920,719 481,768
(Decrease) increase in accrued expenses
and other liabilities (1,203,050) (370,743) 620,828
Increase (decrease) in taxes payable 1,153,878 (607,177) 92,902
------------ ------------ ------------
Net cash provided by operating activities 3,996,949 4,474,307 3,466,745
------------ ------------ ------------
Cash flows from investing activities:
Purchase of securities held to maturity $(10,656,182) (21,986,639) (17,171,388)
Proceeds from maturities of securities held to maturity 20,603,333 24,771,834 9,873,142
Proceeds from sale of securities available for sale 4,864,324 -- 35,096,652
Purchase of securities available for sale (82,741,656) (43,965,468) (45,706,062)
Proceeds from maturities of securities available for sale 54,168,500 43,875,540 21,919,842
(Purchase) redemption of FHLB stock (623,700) 488,400 (231,200)
Loans purchased (4,870,000) (13,769,000) (33,736,000)
Decrease in loans receivable 19,095,423 28,961,591 12,808,438
Proceeds from sale of office property and equipment 9,147 293,303 --
Purchase of office property and equipment (2,922,414) (1,880,935) (1,552,896)
Proceeds from sale of foreclosed real estate 975,396 -- --
Proceeds from sale of real estate held for development 140,987 -- --
MHC Reorganization 292,474 -- --
Net cash and cash equivalents of acquisitions 7,097,244 (8,195,352) --
------------ ------------ ------------
Net cash provided by (used in) investing activities 5,432,876 8,593,274 (18,699,472)
------------ ------------ ------------
5
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Years ended June 30, 1999, 1998 and 1997
Years ended June 30,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
Cash flows from financing activities:
(Decrease) increase in deposits (32,750,620) 899,482 (8,488,951)
Proceeds from advances from FHLB 16,000,000 62,000,000 91,500,000
Repayment of advances from FHLB and other borrowings (19,176,065) (71,015,544) (61,000,000)
Issuance of common stock, net 24,898,999 58,954 57,492
Cash dividends paid (634,558) (629,018) (611,803)
Net increase (decrease) in advances from
borrowers for taxes and insurance 75,368 365,385 (132,822)
------------ ------------ ------------
Net cash (used in) provided by financing activities (11,586,876) (8,320,741) 21,323,916
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (2,157,051) 4,746,840 6,091,189
Cash and cash equivalents at beginning of year 17,225,007 12,478,167 6,386,978
------------ ------------ ------------
Cash and cash equivalents at end of year $ 15,067,956 17,225,007 12,478,167
============ ============ ============
Supplemental disclosures:
Cash paid during the year for:
Interest $ 25,253,629 20,455,443 19,845,757
============ ============ ============
Taxes on income $ 1,797,480 1,700,105 908,529
============ ============ ============
See accompanying notes to consolidated financial statements.
6
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(1)Summary of Significant Accounting Policies and Practices
Organization
First Federal Bankshares, Inc. (the Company) is the holding company for
First Federal Bank (the Bank). The Company owns 100% of the Bank's
common stock. Currently, the Company engages in no other significant
activities beyond its ownership of the Bank's common stock.
Consequently, its net income is derived primarily from the Bank. The
Bank is organized as a federally chartered stock savings bank engaging
in retail and commercial banking and related financial services,
primarily in the Sioux City metropolitan area, adjacent counties,
including parts of Nebraska and South Dakota, and in Central Iowa. The
Bank provides traditional products and services of banking, such as
deposits and mortgage, consumer, and commercial loans.
Prior to April 13, 1999, the Bank was owned approximately 53.49% by
First Federal Bankshares, M.H.C. (the Mutual Holding Company) and 46.51%
by public shareholders. On April 13, 1999, pursuant to a plan of
conversion and reorganization, and after a series of transactions: (1)
the Company was formed to own all of the capital stock of the Bank, (2)
the Company sold the ownership interest in the Bank previously held by
the Mutual Holding Company to the public in a subscription offering (the
Offering) (2,635,000 common shares at $10.00 resulting in net cash
proceeds after costs and funding the ESOP (note 10) of approximately $23
million), (3) previous public shareholders of the Bank had their shares
exchanged into 2,182,807 common shares of the Company (exchange ratio of
1.64696 to 1) (the Exchange) and (4) the Mutual Holding Company ceased
to exist. The total number of shares of common stock outstanding
following the Offering and Exchange was 4,817,807. The reorganization
was accounted for in a manner similar to a pooling of interests and did
not result in any significant accounting adjustments. As a result of the
reorganization, the consolidated financial statements for prior periods
have been restated to reflect the changes in the par value of common
stock from $1.00 to $.01 per share and in the number of authorized
shares of common stock from 20,000,000 to 12,000,000. The primary
purpose of the Offering was to fund the acquisition of Mid-Iowa
Financial Corp. and its wholly-owned subsidiary, Mid-Iowa Savings Bank,
FSB (Note 1: Acquisitions).
Principles of Presentation
The accompanying consolidated financial statements include the accounts
of First Federal Bankshares, Inc., the Bank and the Bank's wholly-owned
subsidiaries, a real estate brokerage company, and a real estate
development company. 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.
7 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
Regulatory Capital
The Bank is required by the Office of Thrift Supervision (OTS) to
maintain prescribed levels of regulatory capital. At June 30, 1999, the
Company met the requirements, and management anticipates meeting the
requirements at June 30, 2000 (see note 11).
Acquisitions
On March 31, 1998, the Company acquired GFS Bancorp, Inc, Grinnell, Iowa
(GFS), parent company of Grinnell Federal Savings Bank. The shareholders
of GFS received $18.1 million cash for all outstanding shares. The
acquisition was accounted for as a purchase; accordingly, GFS's results
of operations were included in the financial statements from the
acquisition date. The excess of the purchase price over the fair value
of the net identifiable assets of $7.9 million has been recorded as
goodwill and is being amortized on a straight-line basis over 25 years.
The following unaudited pro forma financial information presents the
combined results of operations as if the acquisition of GFS had occurred
at the beginning of the years ended June 30, 1998 and 1997, after giving
effect to certain adjustments relating to goodwill, premiums on loans
and deposits, and related income tax effects. The pro forma information
does not necessarily reflect the results of operations that would have
occurred from a single entity during such periods.
1999 1998
---- ----
($000's except earnings
per share) (unaudited)
Interest income $41,141 40,709
Interest expense 24,648 24,926
Provision for losses on loans 1,166 379
Noninterest income 3,569 2,700
Noninterest expense 13,589 14,879
------- ------
Income before income taxes 5,307 3,225
Income taxes 1,867 1,188
------- ------
Net income $ 3,440 2,037
======= =====
Earnings per common share - basic $ 0.74 0.44
======= ====
On April 13, 1999, the Company acquired Mid-Iowa Financial Corp.,
Newton, Iowa (Mid-Iowa), parent company of Mid-Iowa Savings Bank. The
shareholders of Mid-Iowa received $28.3 million cash for all outstanding
shares. The acquisition was accounted for as a purchase; accordingly,
Mid-Iowa's results of operations were included in the financial
statements from the acquisition date. The excess of purchase price over
the fair value of the net identifiable assets of $12.6 million has been
recorded as goodwill and is being amortized on a straight-line basis
over 25 years.
8 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
The following unaudited pro forma financial information presents the
combined results of operations as if the acquisition of Mid-Iowa had
occurred at the beginning of the years ended June 30, 1999 and 1998
after giving effect to certain adjustments relating to goodwill,
premiums on loans and deposits, and related income tax effects. The
proforma information does not necessarily reflect the results of
operations that would have occurred from a single entity during such
periods.
1999 1998
------- ------
($000's except earnings
per share) (unaudited)
Interest income $48,264 44,650
Interest expense 29,463 27,334
Provision for losses on loans 410 414
Noninterest income 6,883 4,554
Noninterest expense 17,113 15,165
------- ------
Income before income taxes 8,161 6,291
Income taxes 3,140 2,317
------- ------
Net income $ 5,021 3,974
======= =====
Earnings per common share - basic $ 1.06 0.85
======= ====
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. Amounts of interest-bearing deposits included as cash
equivalents at June 30, 1999 and 1998, were approximately $1,848,000 and
$7,500,000, respectively.
Earnings Per Share
Basic earnings per share computations for the years ended June 30, 1999,
1998, and 1997, were determined by dividing net earnings by the
weighted-average number of common shares outstanding during the years
then ended. Diluted net earnings per common share amounts are computed
by dividing net income by the weighted-average number of common shares
and all dilutive potential common shares outstanding during the year.
The average number of common shares have been restated for stock
distributions in 1997, and for the stock conversion in 1999.
9 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
The following information was used in the computation of net income per
common share on both a basic and diluted basis for the years ended June
30, 1999, 1998, and 1997.
June 30,
----------------------------------------
1999 1998 1997
---------- --------- ---------
Basic EPS computation:
Net earnings $4,563,465 3,417,913 1,939,201
Weighted-average common shares outstanding 4,714,720 4,668,646 4,653,225
Basic EPS $ 0.97 0.73 0.42
========== ========= =========
Diluted EPS computation:
Net earnings $4,563,465 3,417,913 1,939,201
Weighted-average common shares outstanding 4,714,720 4,668,646 4,653,225
Incremental option shares using
treasury stock method 32,772 80,798 84,547
---------- --------- ---------
Diluted shares outstanding 4,747,492 4,749,444 4,737,772
Diluted EPS $ 0.96 0.72 0.41
========== ========= =========
Securities
Securities which the Company has the positive intent and ability to hold
to maturity are classified as held to maturity. Such securities are
carried at cost, adjusted for unamortized premiums and unearned
discounts. Premiums are amortized and discounts are accreted using the
interest method over the remaining period to contractual maturity,
adjusted in the case of mortgage-backed securities for actual
prepayments. Original issue discounts on short-term securities are
accreted as accrued interest receivable over the lives of such
securities.
Securities classified as available for sale are carried at estimated
fair value. Unrealized gains and losses on such securities are reported
as a separate component of stockholders' equity, net of deferred taxes.
Securities transferred from the available for sale category are recorded
in the held to maturity category at estimated fair value at the transfer
date. Unrealized gains and losses at transfer, which are reflected in
stockholders' equity, are amortized to interest income over the
remaining term of the securities. Realized gains and losses from the
sale of securities are recognized using the specific identification
method.
Loans Receivable
Loans receivable are stated at unpaid principal balances less the
allowances for loan losses and net of deferred loan origination fees and
discounts. Discounts on first mortgage loans are amortized to income
using the interest method over the remaining period to contractual
maturity, adjusted for anticipated prepayments.
10 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
Allowances for Losses on Loans and Real Estate
The allowance for losses on loans is based on management's periodic
evaluation of the loan portfolio and reflects an amount that, in
management's opinion, is adequate to absorb losses in the existing
portfolio. In evaluating the portfolio, management takes into
consideration numerous factors, including current economic conditions,
prior loan loss experience, the composition of the loan portfolio, and
management's estimate of anticipated credit losses.
Under the Company's credit policies, all loans with interest more than
90 days in arrears and restructured loans are considered impaired loans.
Loan impairment is measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate
except, where more practical, at the observable market price of the loan
or the fair value of the collateral if the loan is collateral dependent.
Real estate acquired is carried at the lower of cost or fair value less
estimated costs of disposition. When a property is acquired through
foreclosure or a loan is considered impaired, any excess of the loan
balance over fair value of the property is charged to the allowance for
losses on loans. When circumstances indicate additional loss on the
property, a direct charge to the provision for losses on real estate is
made, and the real estate is recorded net of such provision.
Accrued interest receivable in arrears which management believes is
doubtful of collection (generally when a loan becomes 90 days
delinquent) is charged to income. Subsequent interest income is not
recognized on such loans until collected or until determined by
management to be collectible.
Financial Instruments with Off Balance Sheet Risk
In the normal course of business to meet the financing needs of its
customers, the Company is a party to financial instruments with off
balance sheet risk, which include commitments to extend credit. The
Company's exposure to credit loss in the event of nonperformance by the
other party to the commitments to extend credit is represented by the
contractual amount of those instruments. The Company uses the same
credit policies in making commitments as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there are no violations of any conditions established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since certain of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company, upon extension of credit is based on
management's credit evaluation of the counterparty.
Unearned Loan Fees and Discounts
Certain fees and direct expenses incurred in the loan origination
process are deferred, with recognition thereof over the contractual life
of the related loan as a yield adjustment using the interest method of
amortization. Any unamortized fees on loans sold are credited to income
in the year such loans are sold.
11 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
Premiums and discounts in connection with mortgage loans purchased are
amortized over the terms of the loans using the interest method.
Office Property and Equipment
Office property and equipment are recorded at cost, and depreciation is
provided primarily on a straight-line basis over the estimated useful
lives of the related assets, which range from 15 to 40 years for office
buildings and from 3 to 10 years for automobiles and equipment.
Maintenance and repairs are charged against income. Betterments are
capitalized and subsequently depreciated. The cost and accumulated
depreciation of properties retired or otherwise disposed of are
eliminated from the asset and accumulated depreciation accounts. Related
profit or loss from such transactions is credited or charged to income.
Goodwill
Goodwill is being amortized on a straight-line basis over its estimated
useful life of 25 years. Goodwill is evaluated by management for
impairment whenever events or changes in circumstances indicate that the
carrying amount of goodwill may not be recoverable based on facts and
circumstances related to the value of net assets acquired that gave rise
to the goodwill.
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, the Company and its other subsidiaries file
corporate income tax returns.
The Company utilizes the asset and liability method for taxes on income,
and deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes the
enactment date.
Stock Option Plan
The Company provides pro forma net income and pro forma earnings per
share disclosures for material employee stock option grants made after
1996 as if the fair-value-based method, which recognizes as expense over
the vesting period the fair value of stock-based awards at the date of
grant, had been applied.
Reclassifications
Certain amounts previously reported have been reclassified to conform
with the presentation in these consolidated financial statements. These
reclassifications did not affect previously reported net income or
retained earnings.
12 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
Fair Value of Financial Instruments
The Company's fair value estimates, methods, and assumptions for its
financial instruments are set forth below:
Securities
The fair value of securities is estimated based on bid prices
published in financial newspapers, bid quotations received from
securities dealers, or quoted market prices of similar
instruments, adjusted for differences between the quoted
instruments and the instruments being valued. The fair value of
mortgage-backed and related securities is estimated based on bid
prices published in financial newspapers and bid quotations
received from securities dealers.
Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
real estate, consumer, and commercial.
The fair value of loans is calculated by discounting scheduled
cash flows through the estimated maturity using estimated market
discount rates that reflect the credit and interest rate risk
inherent in the loan. The estimate of maturity is based on the
Company's historical experience with repayments for each loan
classification, modified, as required, by an estimate of the
effect of current economic and lending conditions. The effect of
nonperforming loans is considered in assessing the credit risk
inherent in the fair value estimate.
Federal Home Loan Bank Stock
The value of FHLB stock is equivalent to its carrying value
because it is redeemable at par value.
Deposits
The fair value of deposits with no stated maturity, such as
passbook; money market; noninterest bearing checking; and checking
accounts, is equal to the amount payable on demand. The fair value
of certificates of deposit is based on the discounted value of
contractual cash flows. The discount rate is estimated using the
rates currently offered for deposits of similar remaining
maturities. The fair value estimates do not include the benefit
that results from the low-cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the market.
Advances from Federal Home Loan Bank
The fair value of advances from FHLB is based on the discounted
value of contractual cash flows.
13 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
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 Company adopted the provisions of SFAS No. 130, Reporting
Comprehensive Income, effective July 1, 1998. SFAS No. 130 establishes
the standards for the reporting and display of comprehensive income in
the financial statements. Comprehensive income represents net income and
certain amounts reported directly in shareholders'equity, such as the
net unrealized gain or loss on available-for-sale securities. The
statement requires additional disclosures in the consolidated financial
statements; it does not affect the Company's financial position or
results of operations. Prior year consolidated financial statements have
been reclassified to conform to the requirements of SFAS No. 130.
The Company adopted the provisions of SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information, effective July 1,
1998. SFAS No. 131 establishes disclosure requirements for segment
operations. The adoption had no effect on the Company's financial
statement disclosures because the Company operates as a single business
segment.
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, and its related amendment SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, will be effective for the
Company for the year beginning July 1, 2000. Management is evaluating
the impact the adoption of SFAS No. 133 will have on the Company's
consolidated financial statements. The Company expects to adopt SFAS No.
133 when required.
14 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(2) Securities
Following is a schedule of amortized costs and estimated fair values as of June
30, 1999 and 1998.
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
------------ ------------ ------------ ------------
1999:
Available for sale:
Mortgage-backed securities:
Government National Mortgage
Association (GNMA) $ 15,349,580 92,145 -- 15,441,725
Federal Home Loan Mortgage
Corporation (FHLMC) 3,864,950 27,604 24,212 3,868,342
Federal National Mortgage
Association (FNMA) 4,698,895 45,349 26,417 4,717,827
United States government agency
securities 95,373,105 -- 3,681,120 91,691,985
Other investment securities 6,271,867 126,956 71,489 6,327,334
------------ ------------ ------------ ------------
$125,558,397 292,054 3,803,238 122,047,213
============ ============ ============ ============
Held to maturity:
Mortgage-backed securities:
GNMA 2,637,183 33,031 16,207 2,654,007
FHLMC 3,358,887 -- 38,900 3,319,987
FNMA 11,240,714 37,088 101,274 11,176,528
United Stated govermnent agency
securities 1,174,963 -- 18,987 1,155,976
United States treasury securities 4,015,127 4,580 5,646 4,014,061
Local government securities
and commercial paper 9,579,221 25,574 168,484 9,436,311
------------ ------------ ------------ ------------
$ 32,006,095 100,273 349,498 31,756,870
============ ============ ============ ============
15 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
------------ ------------ ------------ ------------
1998:
Available for sale:
Mortgage-backed securities:
GNMA $12,350,708 262,953 -- 12,613,661
FHLMC 4,855,529 39,653 -- 4,895,182
FNMA 3,137,515 31,301 -- 3,168,816
United States government agency
securities 44,477,355 89,041 49,180 44,517,216
----------- ----------- ----------- -----------
$64,821,107 422,948 49,180 65,194,875
=========== =========== =========== ===========
Held to maturity:
Mortgage-backed securities:
GNMA $ 3,244,845 79,910 -- 3,324,755
FHLMC 2,138,801 10,553 2,227 2,147,127
FNMA 11,909,059 217,394 10,787 12,115,666
United Stated govermnent agency
securities 4,819,611 5,920 -- 4,825,531
United States treasury securities 4,999,371 10,629 312 5,009,688
Local government securities
and commercial paper 4,911,553 37,905 235 4,949,223
----------- ----------- ----------- -----------
$32,023,240 362,311 13,561 32,371,990
=========== =========== =========== ===========
16 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
The amortized cost and fair value at June 30, 1999, are shown below by
contractual maturity. Expected maturities will differ from contractual
maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Available for sale Held to maturity
----------------------------- ----------------------------
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
Due in 1 year or less $ -- -- 2,452,431 2,455,132
Due after 1 year through 5 years 6,932,043 6,769,239 5,331,911 5,297,052
Due after 5 years through 10 years 53,039,051 51,178,113 3,051,781 3,077,438
Due after 10 years 41,673,878 40,071,967 3,933,188 3,776,726
------------ ---------- ---------- ----------
101,644,972 98,019,319 14,769,311 14,606,348
Mortgage-backed securities 23,913,425 24,027,894 17,236,784 17,150,522
------------ ---------- ---------- ----------
$125,558,397 12,047,213 32,006,095 31,756,870
============ ========== ========== ==========
Proceeds from the sale of securities available for sale were $4,864,324,
$0 and $35,096,652 during 1999, 1998 and 1997, respectively. Gross
realized gains on these sales were $16,392, $0 and $73,466 and gross
realized losses on these sales were $28,533, $0 and $195,379 in 1999,
1998 and 1997, respectively.
Securities with an amortized cost of $17,900,386 and a market value of
approximately $17,500,000 at June 30, 1999, were pledged to various
entities.
17 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(3) Loans Receivable
Loans receivable at June 30, 1999 and 1998, are summarized as follows:
1999 1998
------------ -----------
First mortgage loans:
Secured by one to four family residences $326,125,446 301,414,974
Secured by other properties 72,132,208 58,440,141
Home equity and second mortgage loans 32,314,769 21,682,284
Home improvement loans 346,541 727,553
Automobile loans 13,602,920 16,417,179
Commercial loans 6,193,496 1,798,000
Other nonmortgage loans 10,669,464 8,475,244
------------ -----------
Less:
Allowance for loan losses (3,134,664) (2,607,167)
Undisbursed portion of loans in process (941,862) (874,752)
Net unearned premiums on loans 1,994,943 1,483,404
Deferred loan fees (2,245,207) (2,156,304)
------------ -----------
$457,058,054 404,800,425
============ ===========
Troubled Debt Restructurings
At June 30, 1999, 1998, and 1997, the Company had nonaccrual loans of
$2,064,000, $1,120,000, and $242,000, respectively, and restructured
loans of $32,000, $694,000, and $460,000, respectively. Interest income
recorded during 1999, 1998, and 1997 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 $50,259 in 1999; $48,293 in
1998; and $1,611 in 1997.
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.
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal
balance of these loans was $46,079,709, $54,669,613, and $28,574,337 at
June 30, 1999, 1998, and 1997, respectively. Servicing loans for others
generally consists of collecting mortgage payments, maintaining escrow
accounts, disbursing payments to investors and foreclosure processing.
18 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
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
$142,002, $158,660, $189,529, at June 30, 1999, 1998, and 1997,
respectively.
Concentrations of Credit Risk
The Company conducts the majority of its loan origination activities in
its market area, which includes Northwest and Central Iowa and portions
of Nebraska and South Dakota. In addition to loan origination, the
Company has purchased loans outside of its primary lending area.
Although the Company has a diversified loan portfolio, a substantial
portion of its borrowers' ability to repay their loans is dependent upon
economic conditions in the Company 's market area.
Loans purchased outside of the Company's primary lending area totaled
approximately $80,000,000 at June 30, 1999, and included approximately
$65,000,000 in loans that are geographically distributed in the
midwestern United States. The remaining loans are scattered throughout
the United States, with the largest geographic concentrations including
Colorado with $5,900,000; Connecticut with $2,600,000; Arizona with
$1,200,000; and Georgia with $1,100,000.
Included in the totals of loans purchased outside of the Company's
primary lending area are loans purchased from a mortgage banking firm
headquartered in Madison, Wisconsin. The Company has an exclusive
agreement with this firm, which gives the Company first right of refusal
on any real estate loans generated, including one-to-four family,
multi-family, commercial real estate and land development loans secured
by properties located primarily in the Madison, Wisconsin metropolitan
area. The Company has sold, and anticipates that it will continue to
sell, participation interests in these loans to other financial
institutions located in Iowa and contiguous states. At June 30, 1999 the
outstanding principal balance of loans purchased under the above
agreement was approximately $72.2 million and partial interests in these
balances sold to other financial institutions totaled approximately
$30.0 million.
(4) Allowance for Losses and Loans
A summary of the allowance for losses on loans follows:
June 30,
---------------------------------------------
1999 1998 1997
----------- --------- ---------
Balance at beginning of year $ 2,607,167 1,795,791 1,730,691
Additions related to acquisitions 325,143 801,486 --
Provision for losses 365,000 345,000 258,000
Charge-offs (247,118) (422,140) (200,797)
Recoveries 84,472 87,030 7,897
----------- --------- ---------
Balance at end of year $ 3,134,664 2,607,167 1,795,791
=========== ========= =========
19 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(5)Office Property and Equipment
At June 30, 1999 and 1998, the cost and accumulated depreciation of
office property and equipment were as follows:
1999 1998
------------ ------------
Office property and equipment:
Land and improvements $ 3,291,997 2,824,198
Building and improvements 12,884,351 8,062,055
Furniture, fixtures, equipment, and
automobiles 5,406,179 4,019,215
Deposits on assets not in service and not
depreciated 106,994 108,964
------------ ------------
Total cost - office properties 21,689,521 15,014,432
Less accumulated depreciation (6,277,703) (4,169,468)
------------ ------------
Office property and equipment, net $ 15,411,818 10,844,964
============ ============
(6)Accrued Interest Receivable
Accrued interest receivable is summarized as follows:
June 30,
------------------------------
1999 1998
---------- ---------
Loans receivable
Mortgage-backed securities $2,674,732 2,533,664
Investment securities 243,059 238,557
1,684,467 754,458
---------- ---------
$4,602,258 3,526,679
========== =========
20 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(7) Deposits
At June 30, 1999 and 1998, deposits are summarized as follows:
1999 1998
------------ ------------
Noninterest-bearing checking $ 14,211,299 11,284,489
Savings accounts 35,109,373 26,230,786
Demand and NOW accounts 45,881,367 37,083,820
Money market accounts 81,952,541 61,793,831
Certificates of deposit 287,014,898 256,032,359
------------ ------------
$464,169,478 392,425,285
============ ============
The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was approximately $28,153,000 and $16,651,000
at June 30, 1999 and 1998, respectively.
At June 30, 1999, the scheduled maturities of certificates of deposit
were as follows:
2000 $177,584,058
2001 72,406,937
2002 28,568,705
2003 5,373,701
2004 and thereafter 3,081,497
------------
$287,014,898
============
Interest expense on deposits is summarized as follows:
1999 1998 1997
----------- ----------- -----------
Savings $ 505,205 656,199 416,814
Money market and checking 3,614,159 2,301,888 2,326,764
Certificates of deposit 13,764,749 12,868,671 12,633,245
----------- ----------- -----------
$17,884,113 15,826,758 15,376,823
=========== =========== ===========
At June 30, 1999 and 1998, accrued interest payable on deposits totaled
$4,155,544 and $3,615,871, respectively.
21 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(8) Advances from FHLB
A summary at June 30, 1999 and 1998, follows:
Weighted-average Weighted-average
interest rate 1999 interest rate 1998
------------- ------------- ---------------- ------------
FHLB of Des Moines (A)
Maturity in fiscal year
year ending June 30:
1999 -- -- 6.06 17,000,000
2000 5.88 18,500,000 5.95 15,500,000
2001 6.06 27,450,000 6.10 23,450,000
2002 6.17 14,000,000 6.31 11,000,000
2003 5.90 21,000,000 6.12 15,000,000
2004 and thereafter 5.38 48,892,573 5.42 23,000,000
------------ ------------
129,842,573 104,950,000
------------ ------------
Amortizing Advances 5,774,812 950,878
------------ ------------
Fed Funds advance with FHLB (B) Variable 2,000,000 --
LIBOR advances with FHLB (C) Variable 1,000,000 2,000,000
FHLB line of credit (D) Variable -- --
------------ ------------
$138,617,385 107,900,878
============ ============
(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 150 percent of outstanding
balances.
(B) 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 1999, the interest
rate at which these advances repriced ranged from 4.53 percent to
6.14 percent and at June 30, 1999 was 5.86 percent. Fed Funds
Advances are collateralized as described in (A) above.
(C) London Interbank Offered Rate (LIBOR) advances from the FHLB are
collateralized as described in (A) above. A $1 million advance
matures July 2, 2012; is callable by the FHLB after January 2,
2000; and accrues interest at a rate of .04 percent below the
published LIBOR rate. The LIBOR advance is prepayable by the
Company.
(D) Line of credit with the FHLB with a limit of $5,000,000 matures on
April 20, 2000. The line has an interest rate which fluctuates
daily and is prepayable without penalty.
At June 30, 1999 and 1998, accrued interest payable on advances from
FHLB totaled $16,784 and $20,271, respectively.
22 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(9) Taxes on Income
Taxes on income for the years ended June 30, 1999, 1998 and 1997, were
comprised as follows:
1999 1998
---------------------------------------------- -----------------------------------------
Federal State Total Federal State Total
Current $ 2,482,000 384,000 2,866,000 1,315,000 205,000 1,520,000
Deferred (144,000) (22,000) (166,000) 308,000 46,000 354,000
----------- ------- --------- --------- ------- ---------
$ 2,338,000 362,000 2,700,000 1,623,000 251,000 1,874,000
=========== ======= ========= ========= ======= =========
1997
---------------------------------------------
Federal State Total
Current $ 881,000 143,000 1,024,000
Deferred -- -- --
----------- ------- ---------
$ 881,000 143,000 1,024,000
=========== ======= =========
Taxes on income differ from the amounts computed by applying the federal
income tax rate of 34 percent to earnings from continuing operations
before taxes on income for the following reasons:
1999 1998 1997
----------- --------- ---------
Computed "expected" tax expense $ 2,469,578 1,799,250 1,007,488
Purchase accounting adjustments 144,000 (14,000) (26,000)
Decrease in valuation allowance -- -- (125,000)
State income taxes 287,100 165,660 94,380
Other, net (200,678) (76,910) 73,132
----------- --------- ---------
$ 2,700,000 1,874,000 1,024,000
=========== ========= =========
23 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June
30, 1999 and 1998, are presented below:
1999 1998
---------- ----------
Deferred tax assets: $
Deferred loan fees 185,000 261,000
Loan loss allowance 1,058,000 880,000
Unrealized loss on securities available for sale 1,357,000 --
Deferred compensation 493,000 513,000
Accrued vacation pay 92,000 95,000
Deferred directors fees 78,000 62,000
Accrued expenses 79,000 16,000
Other 43,000 41,000
----------- -----------
Total gross deferred tax assets 3,385,000 1,868,000
----------- -----------
Deferred tax liabilities:
Unrealized gain on securities available for sale -- (140,000)
FHLB stock dividends (725,000) (791,000)
Bad debt reserve in excess of base year (403,000) (336,000)
Fixed assets (190,000) (112,000)
Purchase accounting adjustments (870,000) (239,000)
----------- -----------
Total gross deferred tax liabilities (2,188,000) (1,618,000)
----------- -----------
Net deferred tax asset $ 1,197,000 250,000
=========== ===========
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.
(10) Employee Benefit Plans
Pension Plan
The Bank is a participant in the Financial Institutions Retirement Fund
(FIRF), and substantially all of its officers and employees are covered
by the plan. FIRF does not segregate the assets, liabilities, or costs
by participating employer. According to FIRF's administrators, as of
June 30, 1998, the date of the latest actuarial valuation, the book and
market values of the fund assets exceeded the value of vested benefits
in the aggregate. In accordance with FIRF's instructions, there was no
pension contribution in 1999, 1998 or 1997 because the plan was fully
funded.
Effective September 1, 1996, Bank employees began participating in the
Financial Institutions Thrift Plan (the Thrift Plan). Employees who are
at least 21 years of age become eligible for participation after 12
months of continuous employment (during which at least 1,000 hours of
service are completed). The Bank matches an amount equal to 25 percent
of the first 4 percent of the employee's contributions. Thrift Plan
expense for the years ended June 30, 1999, 1998, and 1997 was $40,895,
$29,213, and $21,167, respectively.
24 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
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 paid off 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 percent 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.
Plan expense was $58,822, $96,000, and $112,888 for the years ending
June 30, 1999, 1998 and 1997, respectively. Interest expense was
$27,592, $0, and $813 on the Plan's borrowing for the years ending June
30, 1999, 1998 and 1997.
Stock Appreciation Rights
In connection with the acquisition of GFS certain GFS stock options were
exchanged for Company stock appreciation rights (SAR). The SAR entitled
the holder to receive a cash payment equal to the appreciation in value
of the SAR over a base amount. At June 30, 1998, the Company's liability
for SAR was approximately $947,000 and SAR expense for the three months
then ended was approximately $23,000. The Company received a benefit to
earnings of approximately $82,000 regarding the SAR before they were
extinguished with a cash payment to the holders of $864,500 during the
year ended June 30, 1999.
Stock Options
The Company's stock option plan permits the board of directors to grant
options to purchase up to 124,510 shares of the Company's $.01 par value
common stock. The options may be granted to directors and officers of
the Company. The price at which options may be exercised cannot be less
than the fair value of the shares at the date the options are granted.
The options are subject to certain vesting requirements and maximum
exercise periods, as established by the board of directors.
25 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
Changes in options outstanding and exercisable during 1999, 1998, and
1997, as restated for stock distributions and the stock conversion, were
as follows:
Exercisable Outstanding Option price
options options per share
-------- ------- --------------
June 30, 1996 $ 48,244 99,858 3.066 - 5.213
Forfeited (497) (623) 3.066
Vested 26,801 -- 3.066
Exercised (18,757) (18,757) 3.066 - 5.213
-------- -------
June 30, 1997 55,791 80,478 3.066 - 5.213
Granted -- 9,058 20.341
Vested 28,805 -- 3.066 - 20.341
Exercised (19,227) (19,227) 3.066
-------- -------
June 30, 1998 65,369 70,309 3.066 - 20.341
Vested 1,647 -- 20.341
Exercised (16,750) (16,750) 3.066 - 5.213
-------- -------
June 30, 1999 $ 50,266 53,559 3.066 - 20.341
======== =======
Recognition and Retention Plan
The Company has a recognition and retention plan (RRP) for certain
executive officers. The employees vest in the shares of stock over a
period of time as determined by the Management Retention Plan committee
of the board of directors. RRP expense for the years ended June 30,
1999, 1998, 1997 was $0, $0 and $7,560, respectively.
(11) Stockholders' Equity
Regulatory Capital Requirements
The Financial Institution Reform, Recovery, and Enforcement Act of 1989
(FIRREA) and the capital regulations of the OTS promulgated thereunder
require institutions to have minimum regulatory tangible capital equal
to 1.5 percent of total assets, a minimum 3 percent leverage capital
ratio, and a minimum 8 percent risk-based capital ratio. These capital
standards set forth in the capital regulations must generally be no less
stringent than the capital standards applicable to national banks.
FIRREA also specifies the required ratio of housing-related assets in
order to qualify as a savings institution.
The 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
percent, a tier risk-based capital ratio of at least 6 percent, and a
total risk-based capital ratio of at least 10 percent. 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.
26 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
The Bank met all regulatory capital requirements at June 30, 1999 and
1998.
The Bank's actual and required capital amounts and ratios as of June 30,
1999, are presented in the following table:
To be well capitalized
For capital under prompt corrective
Actual adequacy purposes action provisions
----------------------- ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Tangible capital $42,859,000 6.5% $ 9,866,000 1.5% $ -- -- %
Tier 1 leverage (core) capital 42,859,000 6.5 19,732,000 3.0 32,887,000 5.0
Risk-based capital 45,986,000 13.2 27,871,000 8.0 34,839,000 10.0
Tier 1 risk-based capital 42,859,000 12.3 -- -- 20,903,000 6.0
Retained earnings at June 30, 1999 and 1998, included approximately
$9,165,000 and $7,380,000, respectively, 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 On July 22, 1999, the board of
directors of the Company declared a dividend of 7.5(cent) per share,
payable on August 31, 1999, to shareholders of record as of August 16,
1999. The Plan of Conversion (note 1) provided for the establishment of
a special "liquidation account" for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders in an amount equal to
the greater of:
1. the sum of the Mutual Holding Company's ownership interests in the
surplus and reserves of the Bank as of the date of its latest
balance sheet contained in the final offering circular, and the
amount of any dividends waived by the Mutual Holding Company; or
2. the retained earnings of the Bank at the time that the Bank
reorganized into the Mutual Holding Company in July 1992.
Each eligible Account Holder and Supplemental Eligible Account Holder,
if such person were to continue to maintain such person's deposit
account at the Bank, would be entitled, upon a complete liquidation of
the Bank after the conversion, to an interest in the liquidation account
prior to any payment to the Company as the sole stockholder of the Bank.
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 percent and 75 percent 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.
27 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(12) 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, 1999 and 1998, the Company had commitments to originate and
purchase loans approximating $18,432,000 and $21,943,000, 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 $13,273,000 and $10,110,000 at June 30, 1999 and 1998,
respectively. At both dates, over 60% of the consumer lines outstanding
were for the Company's credit card program. The Company had approved,
but unused, commercial lines of credit of approximately $1,906,000 and
$2,060,000 at June 30, 1999 and 1998, respectively.
At June 30, 1999 and 1998, the Company had commitments to sell loans
approximating $4,091,000 and $1,055,000, respectively.
28 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(13) Fair Value of Financial Instruments
The estimated fair values of Company's financial instruments (as
described in note 1) were as follows:
June 30, 1999 June 30, 1998
----------------------------- ----------------------------
Carrying Fair Carrying Fair
amount value amount value
------------ ---------- ----------- -----------
Financial assets:
Cash and cash equivalents $ 13,220,130 13,220,130 9,725,007 9,725,007
Interest-bearing deposits in other
financial institutions 1,847,826 1,847,826 7,500,000 7,500,000
Investment securities available for sale 122,047,213 122,047,213 65,194,875 65,194,875
Investment securities held to maturity 32,006,095 31,756,870 32,023,240 32,371,990
Loans receivable, net 457,058,054 459,470,000 404,800,425 412,045,000
FHLB stock 8,094,300 8,094,300 5,670,600 5,670,600
Financial liabilities:
Deposits 464,169,478 463,822,000 392,425,285 392,578,000
Other borrowings 138,617,385 139,136,000 107,900,878 107,809,000
=========== =========== =========== ===========
Notional Unrealized Notional Unrealized
Amount gain (loss) amount gain (loss)
------ ----------- ------ -----------
Off balance sheet assets (liabilities):
Commitments to extend credit $ 18,432,000 -- 21,943,000 --
Consumer lines of credit 13,273,000 -- 10,110,000 --
Commercial lines of credit 1,906,000 -- 2,060,000 --
Commitments to sell loans (4,091,000) -- (1,055,000) --
============ ============ ============ ============
(14) Contingencies
The Company is involved with various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's financial position or results of its operations.
(15) Federal Deposit Insurance Corporation (FDIC) Special Assessment
On September 30, 1996, the United States Congress passed, and the
President signed, legislation that imposed a one-time assessment of 65.7
basis points on deposits insured by the Savings Association Insurance
Fund (SAIF). Substantially all of the deposits of the Company are
SAIF-insured. The Company incurred a one-time pre-tax expense of
$2,232,519 that is recorded in the Company's statement of operations for
the year ended June 30, 1997.
29 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(16) Parent Company Financial Information
Condensed Statement of Financial Condition at June 30, 1999 and
Condensed Statements of Operations and Cash Flows for the period April
13, 1999 through June 30, 1999 are shown below for First Federal
Bankshares, Inc. which was formed on April 13, 1999 in a reorganization
accounted for in a manner similar to a pooling of interests:
Condensed Statement of Financial Condition
1999
------------
Assets
Cash deposited at First Federal $ 271,460
Interest - bearing deposits in other financial institutions 1,847,826
Investment securities available for sale
at market value 1,857,571
Loans receivable, net 2,013,758
Investment in subsidiaries 62,340,692
Accrued interest receivable 6,508
Other assets 7,790
------------
Total assets $ 68,345,605
============
Liabilities and Stockholders' Equity
Liabilities:
Accrued taxes on income $ 22,000
Accrued expenses and other liabilities 50,598
------------
Total liabilities 72,598
------------
Stockholders' Equity:
Preferred stock; $.01 par value:
authorized 1,000,000 shares;
non issued and outstanding --
Common stock; $.01 par value; authorized
12,000,000 shares; issued and outstanding
4,817,807 shares at June 30, 1999 48,178
Paid in capital 35,957,560
Employee stock ownership plan (1,813,758)
Retained earnings 36,283,211
Accumulated other comprehensive income -
Net unrealized loss on securities
available for sale (2,202,184)
------------
Total stockholders' equity 68,273,007
------------
Total liabilities and stockholders' equity $ 68,345,605
============
30 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
Condensed Statement of Operation
For the period
April 13, 1999
through
June 30, 1999
-------------
Loans receivable $ 31,581
Investment securities 6,044
Other interest-earning assets 33,415
Other general and administrative expense (9,702)
-----------
Earnings before income taxes 61,338
Taxes on income (22,000)
-----------
Earnings before subsidiary income 39,338
Equity in net earnings of subsidiaries 1,065,412
-----------
Net income $ 1,104,750
===========
31 (Continued)
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
Condensed Statement of Cash Flows
For the period
April 13, 1999
through
June 30, 1999
------------
Cash used by operating activities:
Net income $ 1,104,750
Adjustments to net income:
Equity in earnings of subsidiaries (1,065,412)
Increase in income tax payable 22,000
Increase in payable to First Federal 2,598
Increase in other assets (7,790)
Amortization of premiums and discounts 200
Increase in accrued interest receivable (6,508)
------------
Net cash used by operating activities 49,838
------------
Cash used by investing activities:
Purchase of investment securities
available for sale (1,113,875)
Increase in loans receivable (1,813,758)
------------
Net cash used by investing activities (2,927,633)
------------
Cash provided by financing activities:
Net proceeds from issuance of common stock 24,844,141
(Investment in)/amounts received
from First Federal Bank (19,847,060)
------------
Net cash provided by financing activities 4,997,081
------------
Net increase in cash and cash equivalents 2,119,286
Cash and cash equivalents - beginning of period --
------------
Cash and cash equivalents - end of period $ 2,119,286
============
32
[GRAPHICS OMITTED PHOTOS OF ALL DIRECTORS LISTED BELOW]
Board of Directors:
Barry Backhaus, Chairman
Nancy A. Boysen
David S. Clay
Jon G. Cleghorn
Gary L. Evans
Allen J. Johnson
Harland D. Johnson
Paul W. Olson
Steven L. Opsal
Dennis B. Swanstrom
David Van Engelenhoven
First Federal Bank Officers:
Barry Backhaus
President & CEO
Jon G. Cleghorn
Executive Vice President & COO
Steven L. Opsal
Executive Vice President
Sandra Sabel
Sr. Vice President
Katherine A. Bousquet
Vice President/Treasurer
Bill Bomgaars
Vice President
Bruce A. Davis
Vice President
Judi Dorn
Vice President
Janis Hartnett
Vice President
Larry W. Joslin
Vice President
Howard R. Larson
Vice President
B.J. Schneiderman
Vice President
Matt Schroeder
Vice President
Peggy E. Smith
Vice President
Suzette F. Hoevet
Corporate Secretary
Cindy Aspeotis
Assistant Vice President
Marilyn Berke
Assistant Vice President
Susan R. Geddes
Assistant Vice President
Randall J. Jacobsma
Assistant Vice President
Lois Ohlendorf
Assistant Vice President
Kevin Owens
Assistant Vice President
Gary Wood
Assistant Vice President
Dawn Bratvold
Administrative Officer
Florence Campbell
Senior Loan Officer
Annette M. Carlson
Administrative Officer
Sterling Crim
Administrative Officer
Melissa K. Durst
Senior Loan Officer
Terry Framke
Administrative Officer
Nyla Fritz
Administrative Officer
Lisa Gunderson
Administrative Officer
Jeffrey L. Hayes
Administrative Officer
Babette K. Hickson
Administrative Officer
Hope Jeffrey
Administrative Officer
Jan Neustrom
Administrative Officer
Paula Oehlerking
Administrative Officer
Central Iowa Division
Steven L. Opsal
President & CEO
Katherine A. Rose
Senior Vice President
Cathy A. Carter
Vice President
Chris L. Christinson
Vice President
Glenyce R. Conway
Vice President
Thomas E. Pierce
Vice President
Everett E. Cook
Assistant Vice President
Joel E. Meredith
Assistant Vice President
Ginger L. Sterk
Administrative Officer
First Federal Bank Locations:
SIOUX CITY
Main Office
329 Pierce St.
Drive Up
924 Pierce St.
Hamilton
2727 Hamilton Blvd.
Indian Hills
3839 Indian Hills Dr.
Morningside
4211 Morningside Ave.
Singing Hills
4701 Singing Hills Blvd.
CHEROKEE
2 Bow Dr. o Cherokee, IA 51012
LE MARS
301 Plymouth St. NW o Le Mars, IA 51031
ONAWA
921 Iowa Ave. o Onawa, IA 51040
ORANGE CITY
104 1st St. SE o Orange City, IA 51041
SHELDON
1201 2nd Ave. o Sheldon, IA 51201
SOUTH SIOUX CITY,NE
2738 Cornhusker Dr. o S. Sioux City, NE 68776
GRINNELL
1025 Main St. o Grinnell, IA 50112
NEWTON
123 W 2nd St. N o Newton, IA 50208 1907 1st Ave. E o Newton, IA 50208
BAXTER
100 E State St. o Baxter, IA 50028
COLFAX
15 E Howard St. o Colfax, IA 50054
MONROE
108 E Washington, IA o Monroe, IA 50170
PRAIRIE CITY
101 W Jefferson St. o Prairie City, IA 50228
WEST DES MOINES
3900 Westown Pkwy. o West Des Moines, IA 50266
Stockholder Information
Annual Meeting
The Annual Meeting of Stockholders will be held at 10:30 a.m., Thursday, October
21, 1999 at the Sioux City Convention Center, 801 4th St., Sioux City, IA
Stock Listing
First Federal Bankshares, Inc. Common Stock is traded on the NASDAQ National
Market System using the symbol FFSX. As of September 13, 1999, the Company had
2,645 shareholders of record and 4,824,784 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 which have
been adjusted, when applicable, for stock dividends.
[GRAPHIC-GRAPH DEPICTING TOTAL STOCKHOLDERS' EQUITY]
Fiscal 1999 Fiscal 1998
Quarter Ended High Low Quarter Ended High Low
June 30, 1999 $11.38 $9.13 June 30, 1998 $23.68 $21.10
March 31, 1999 $14.72 $10.51 March 31, 1998 $21.71 $18.37
December 31, 1998 $15.33 $12.14 December 31, 1997 $20.95 $17.91
September 30, 1998 $20.34 $13.05 September 30, 1997 $18.67 $13.36
Note: All trading prices adjusted for exchange of 1.64696 shares of Company
common stock for each share of First Federal Bank common stock in April 1999.
General Counsel
Corbett, Anderson, Corbett, Poulson, Flom and Vellinga
400 Security Building
Sioux City, Iowa 51101
Independent Auditor
KPMG LLP
2500 Ruan Center
Des Moines, Iowa 50309
Special Counsel
Luse Lehman Gorman
Pomerenk & Schick
5335 Wisconsin Ave. NW, Ste. 400
Washington, D.C. 20015
Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
800-368-5948
General Inquiries and Reports
The Company is required to file an Annual Report on Form 10-K for its fiscal
year ended June 30, 1999, with the Securities and Exchange Commission. Copies of
this Annual Report and the Company's quarterly reports may be obtained without
charge by contacting:
Barry Backhaus
First Federal Bankshares, Inc.
329 Pierce Street, P.O. Box 897
Sioux City, Iowa 51102
712-277-0200