SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 0-25704
FIRST FEDERAL BANCORPORATION
----------------------------
(Exact name of Registrant as specified in its Charter)
Minnesota 41-1796238
- - ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
214 5th Street, Bemidji, Minnesota 56601-9983
- - ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (218) 751-5120
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at June 30, 1996
- - ---------------------------- ----------------------------
Common Stock, $.01 par value 778,406
FIRST FEDERAL BANCORPORATION
CONTENTS
PART I - FINANCIAL INFORMATION Page
----
Item 1: Financial Statements
Consolidated Balance Sheets at
June 30, 1996 and September 30, 1995 3
Consolidated Statements of Earnings for
the Three Months Ended and Nine Months
Ended June 30, 1996 and 1995 5
Consolidated Statement of Stockholders'
Equity for the Nine Months Ended
June 30, 1996 6
Consolidated Statements of Cash Flows for
the Nine Months Ended June 30, 1996 and
1995 7
Notes to Consolidated Financial Statements 9
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 18
Item 2: Changes in Securities 18
Item 3: Defaults Upon Senior Securities 18
Item 4: Submission of Matters to a Vote of
Security Holders 18
Item 5: Other Materially Important Events 18
Item 6: Exhibits and Reports on Form 8-K 18
Signatures 19
2
PART 1 - FINANCIAL STATEMENTS
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30 September 30
Assets 1996 1995
Cash............................................. $ 1,601,548 $ 1,753,449
Interest-bearing deposits with banks............. 4,175,457 8,432,369
------------ ------------
Cash and cash equivalents 5,777,005 10,185,818
Securities available for sale:
Mortgage-backed and related securities
(amortized cost of $20,975,853 and
$20,528,123).................................. 20,632,959 20,417,009
Other securities (amortized cost of
$24,383,519 and $15,781,367).................. 24,134,672 15,631,682
------------ ------------
Total securities available for sale 44,767,631 36,048,691
Securities held to maturity:
Mortgage-backed and related securities
(estimated market value of $986,337
and $1,119,855)............................... 903,632 1,106,402
------------ ------------
Total securities held to maturity 903,632 1,106,402
Loans receivable, net............................ 49,133,631 48,043,625
Federal Home Loan Bank stock, at cost............ 700,500 686,700
Foreclosed real estate, net...................... 188,645 152,074
Accrued interest receivable...................... 832,647 650,989
Premises and equipment, net...................... 1,981,471 2,116,857
Other assets..................................... 683,816 515,671
------------ ------------
Total Assets $104,968,978 $ 99,506,827
Liabilities and Stockholders' Equity
Deposits......................................... $ 79,860,343 $ 82,060,466
Repurchase Agreements............................ 4,400,000 1,000,000
Federal Home Loan Bank Advances.................. 5,454,000 0
Advance payments by borrowers for taxes
and insurance.................................. 109,702 122,086
Accrued interest payable......................... 512,547 525,064
Accrued expenses and other liabilities........... 714,702 708,609
------------ ------------
Total liabilities 91,051,294 84,416,225
------------ ------------
(continued)
Commitments and contingencies
Stockholders' Equity:
Common stock ($.01 par value): authotized
4,000,000 shares; issued and outstanding
778,406 and 862,500 shares.................... 7,784 8,625
Additional paid-in-capital.................... 7,142,382 7,964,894
Retained earnings, subject to certain
restrictions................................. 8,087,281 7,892,170
Unrealized loss on securities available
for sale, net of tax effect.................. (349,127) (154,087)
Unearned employee stock ownership plan
shares....................................... (569,250) (621,000)
Unearned shares management recognition
plan......................................... (401,386) 0
------------ ------------
Total stockholders' equity 13,917,684 15,090,602
------------ ------------
Total liabilities and stockholders $104,968,978 $ 99,506,827
See accompanying notes to consolidated financial statements.
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Nine Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
---- ---- ---- ----
Interest income:
Loans receivable $1,109,273 $1,088,678 $3,335,415 $3,155,207
Mortgage-backed and related securities 359,267 295,241 1,062,480 817,377
Other Securities 342,831 257,960 934,984 761,134
Interest-bearing deposits with banks 39,937 120,812 136,280 183,721
Other 12,192 11,984 37,795 38,549
---------- ---------- ---------- ----------
1,863,500 1,774,675 5,506,954 4,955,988
Interest expense:
Deposits 915,401 908,030 2,822,224 2,598,202
Borrowings 69,035 3,712 99,860 13,756
874,436 911,742 2,922,084 2,611,958
Net interest income 879,064 862,933 2,584,870 2,344,030
Provision for loan losses 0 (11,808) 0 3,701
Net interest income after provision
for loan losses 879,064 874,741 2,584,870 2,340,329
---------- ---------- ---------- ----------
Noninterest income:
Fees and service charges 117,606 74,914 292,769 216,598
Gain (loss) on sales of securities 2,211 0 5,037 (10,029)
Gain on sales of foreclosed real estate 3,464 167 4,781 2,477
Other 36,276 17,785 68,511 41,374
Total noninterest income 159,557 92,866 371,098 250,420
---------- ---------- ---------- ----------
Noninterest expense:
Compensation and employee benefits 345,132 316,142 1,030,911 918,774
Occupancy 125,524 106,791 374,881 313,832
Federal deposit insurance premiums 55,826 52,953 165,619 156,558
Data processing 17,129 17,506 52,972 53,169
Advertising 28,693 34,411 68,978 63,325
Other 119,185 88,102 400,566 250,815
---------- ---------- ---------- ----------
Total noninterest expense 691,489 615,905 2,093,927 1,756,473
---------- ---------- ---------- ----------
Earnings before income tax expense 347,132 351,702 862,041 834,276
Income tax expense 142,227 144,946 351,039 339,514
Net earnings $ 204,905 $ 206,756 $ 511,002 $ 494,762
---------- ---------- ---------- ----------
Earnings per common share and
common share equivalents $ 0.27 $ 0.26 $ 0.66 $ 0.26
---------- ---------- ---------- ----------
Pro forma earnings per common share $ N/A $ N/A $ N/A $ 0.62
Weighted average number of common shares
and common share equivalents outstanding 741,103 793,538 771,827 793,538
---------- ---------- ---------- ----------
N/A Not applicable.
See accompanying notes to consolidated financial statements.
5
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Unaudited)
Unearned
Unrealized shares Unearned
gain (loss) on Employee shares
Additional securities Stock Management Total
Common Paid-in Retained available for Ownership Recognition Treasury Stockholders'
Stock Capital earnings sale, net Plan Plan Stock Equity
-------- ---------- --------- -------------- ----------- ----------- ---------- ------------
Balance, September 30, 1995 $8,625 7,964,894 7,892,170 (154,087) (621,000) 15,090,602
Net earnings 511,002 511,002
Change in unrealized gain
(loss) on securities
available for sale, net
of tax effect (195,040) (195,040)
Purchase of treasury stock (473,930) (473,930)
Purchase and retirement of
common stock (841) (840,098) (315,891) (1,156,830)
Adoption of Management
Recognition Plan (1,711) (472,219) 473,930 0
Earned management
recognition plan shares 70,833 70,833
Earned employee stock
ownership plan shares 19,297 51,750 71,047
-------- --------- --------- ---------- --------- ----------- ---------- -----------
Balance, June 30, 1996 $7,784 7,142,382 8,087,281 (349,127) (569,250) (401,386) 0 13,917,684
See accompanying notes to consolidated financial statements.
6
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months
Ended June 30,
1996 1995
---- ----
Operating activities:
Net earnings $ 511,002 $ 494,762
Adjustments to reconcile net earnings to net
cash provided (used) by operations:
Provision for loan losses 0 3,701
Depreciation 195,985 173,120
Amortization of premium and discount, net 4,377 47,787
Increase in accrued interest receivable (181,658) (84,572)
(Decrease) increase in accrued interest payable (12,517) 119,257
FHLB stock dividend (13,800) 0
(Gain) loss on sales of securities (5,037) 10,029
Gain on sales of foreclosed real estate (4,781) (2,477)
Earned ESOP shares priced above original cost 19,297 4,313
(Increase) decrease in other assets (25,093) 1,469
Decrease in accrued expenses and other
liabilities 6,093 58,298
------------ -----------
Net cash provided by operating activities 493,868 825,687
Investing activities:
Net increase in loans receivable (1,090,006) (1,506,891)
Purchases of:
Other securities -- available for sale (14,674,529) (2,153,059)
Other securities -- held to maturity 0 (5,350,828)
Mortgage-backed & related securities --
available for sale (4,518,974) (5,530,574)
Premises and equipment (60,599) (253,516)
Proceeds from sales of:
Other securities -- available for sale 750,000 84,230
Proceeds from maturities or calls of:
Other securities -- available for sale 5,294,247 2,350,000
Other securities -- held to maturity 0 4,857,000
Proceeds from sales of:
Mortgage-backed & related securities --
available for sale 1,184,785 0
Principal payments on:
Mortgage-backed & related securities --
available for sale 2,911,682 1,375,750
Mortgage-backed & related securities --
held to maturity 203,968 283,479
Net (increase) decrease in foreclosed
real estate (36,571) 86,978
Net cash used by investing activities (10,035,997) (5,757,431)
(continued)
7
Nine Months
Ended June 30,
1996 1995
---- ----
Financing activities:
Net (decrease) increase in deposits $ (2,200,123) $ 525,277
Decrease (increase) in Unearned ESOP Shares 51,750 (655,500)
Proceeds from sale of common stock 0 7,959,017
Decrease in Unamortized Restricted Stock 70,833 0
Purchase of Treasury Stock (473,930) 0
Purchase and retirement of common stock (1,156,830) 0
Decrease in advance payments by
borrowers for taxes and insurance (12,384) (77,218)
Increase in Federal Home Loan Bank advances 5,454,000 0
Increase in borrowings 3,400,000 102,938
Net cash provided by
financing activities 5,133,316 7,854,514
(Decrease) increase in cash
and cash equivalents (4,408,813) 2,922,770
Cash and cash equivalents, beginning of period 10,185,818 7,268,855
------------ ------------
Cash and cash equivalents, end of period $ 5,777,005 $ 10,191,625
Supplemental cash flow disclosures:
Cash paid for interest $ 2,934,601 2,492,701
Cash paid for income taxes 341,076 372,792
Supplemental noncash flow disclosures: $ 45,756 0
Transfer of loans to real estate
See accompanying notes to consolidated financial statements.
8
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1996
(1) First Federal Bancorporation (the "Company") was incorporated under the
laws of the State of Minnesota for the purpose of becoming the savings and
loan holding company of First Federal Banking and Savings, FSB (the
"Bank") in connection with the Bank's conversion from a federally
chartered mutual savings bank to a federally chartered stock savings bank,
pursuant to its Plan of Conversion. On April 3, 1995 the Company sold
862,500 shares of common stock in connection with the Conversion of the
Bank from mutual to stock form.
The consolidated financial statements included herein are for the Company,
the Bank and the Bank's wholly owned subsidiary, First Federal Service
Corporation. All financial information prior to April 3, 1995 contained
herein relates solely to the Bank and its subsidiary.
(2) Basis of Preparation
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-QSB and, therefore, do not
include all disclosures necessary for a complete presentation of the
consolidated balance sheets, consolidated statements of earnings,
consolidated statement of stockholders' equity and consolidated statements
of cash flows in conformity with generally accepted accounting principles.
However, all adjustments, consisting only of normal recurring adjustments,
which are, in the opinion of management, necessary for the fair
presentation of the interim financial statements have been included. The
statements of earnings for the three and nine month periods ended June 30,
1996 are not necessarily indicative of the results which may be expected
for the entire year.
(3) Earnings Per Common Share and Common Share Equivalents
Earnings per share are based upon the weighted average number of common
shares and common share equivalents, if dilutive, outstanding during the
period. The only common stock equivalents are stock options. The weighted
average number of common stock equivalents is calculated using the
treasury stock method. Net earnings per common share were calculated using
741,103 shares, and 771,827 shares, as the weighted average number of
shares outstanding for the three month period and nine month period,
respectively, ended June 30, 1996. Pro forma net earnings per share were
calculated using 793,538 shares as the weighted average outstanding shares
for the three and nine month period ended June 30, 1995. The pro forma net
earnings computation does not reflect the pro forma effects of the
investment income that would have been earned had the net proceeds from
conversion been received at the beginning of the nine month period.
(4) Regulatory Capital Requirements
At June 30, 1996, the Bank met each of the three current minimum
regulatory capital requirements. The following table summarizes the Bank's
regulatory capital position at June 30, 1996:
9
Amount Percent(1)
-----------------------
(Dollar in Thousands)
Tangible Capital:
Actual $10,298 9.92%
Required 1,558 1.50
------- -----
Excess $ 8,740 8.42%
Core Capital:
Actual $10,298 9.92%
Required 3,116 3.00
------- -----
Excess $ 7,182 6.92%
Risk-Based Capital:
Actual $10,754 20.42%
Required 4,212 8.00
------- -----
Excess $ 6,542 12.42%
- - -------------------------
(1) Tangible and core capital levels risk-based are shown as a percentage of
total adjusted assets; capital levels are shown as a percentage of risk-
weighted assets.
(5) Stockholders' Equity and Stock Conversion
The Bank converted from a federally-chartered mutual savings bank to a
federally-chartered stock savings bank pursuant to its Plan of Conversion
which was approved by the Bank's members on March 23, 1995. The conversion
was effected on April 3, 1995, and resulted in the issuance of 862,500
shares of common stock (par value $0.01) at $10.00 per share for a gross
sales price of $8,625,000. Costs related to conversion (primarily
underwriters' commission, printing, and professional fees) aggregated
$665,983 and were deducted to arrive at the net proceeds of $7,959,017. The
Company established an employee stock ownership trust which purchased
69,000 shares of common stock of the Company at the issuance price of
$10.00 per share from funds borrowed from the holding company.
During the quarter ended December 31, 1995, the Company repurchased 34,500
shares of the Company's outstanding common stock representing 4% of the
outstanding shares. The average repurchase price was $13.70 per share.
Repurchased shares are held as treasury shares and will be utilized for the
issuance of shares in conjunction with the Management Recognition Plan.
During the three months ended March 31, 1996, the Company approved a stock
repurchase program to acquire up to 43,125 shares of the Company's common
stock which represented 5.0% of the outstanding common stock. This
repurchase program was completed on February 8, 1996. The repurchased
shares were retired by the Company.
During the three months ended June 30, 1996, the Company approved a stock
repurchase program to acquire up to 40,969 shares of the Company's common
stock which represented 5.0% of the outstanding common stock. This
repurchase program was completed on May 30, 1996. The repurchased shares
were retired by the Company.
(6) Litigation Settlement
The Bank was involved in a lawsuit between a national motel chain and a
partnership which was formerly a borrower of the Bank. The parties to the
lawsuit reached an agreement in principle. Settlement documents have been
drafted and circulated for
10
signature. The litigation has been dismissed by the court with prejudice.
Substantially all of the amount of the settlement had been previously
reserved by the Bank. The settlement is reflected in the financial
statements for the quarter ended June 30, 1996.
(7) Change in Method of Accounting by Creditors for Impairment of a Loan
Effective October 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by Creditors for
Impairment of a Loan and SFAS No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures. SFAS No. 114
requires that impaired loans, including all loans that are restructured in
a troubled debt restructuring involving a modification of terms, be
measured at the present value of expected future cash flows discounted at
the loan's initial effective interest rate. The fair value of the
collateral of an impaired collateral-dependent loan or an observable
market price, if one exists, may be used as an alternative to discounting.
If the measure of the impaired loan is less than the recorded investment
in the loan, impairment is to be recognized through the allowance for loan
losses. A loan is considered impaired when, based on current information
and events, it is probable that a creditor will be unable to collect all
amounts due according to the contractual terms of the loan agreement. SFAS
No. 118 amends SFAS No. 114 to allow a creditor to use existing methods
for recognizing interest income on impaired loans and to clarify
disclosure requirements. The adoption of SFAS No. 114 and SFAS No. 118 did
not impact the Company's results of operations for the second quarter of
fiscal 1996 or any prior period. In accordance with SFAS No. 114 and SFAS
No. 118, prior period financial statements have not been restated to
reflect the change in accounting method. At June 30, 1996, the Company had
an immaterial amount of loans which were considered impaired.
(8) Management Recognition Plan
The Company adopted a Management Recognition Plan on October 17, 1995. The
plan provides for the grant of shares of stock to eligible directors and
employees in the form of restricted stock, which vest over a five-year
period at the rate of 20% per year. Under the plan, 34,500 shares of
restricted stock were granted.
(9) Stock Option Plan
The Company adopted a stock option plan on October 17, 1995. The plan
provides for the granting of options for the purpose of attracting and
retaining key personnel and to facilitate their purchase of a stock
interest in the Company. Options on 86,250 shares were granted at an
exercise price of $13.8675 per share. The options become exercisable over
a five-year period at the rate of 20% per year. If unused, the options
expire in October 2005.
11
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND OPERATIONS
General:
The Company's net earnings are dependent primarily on its net interest
income, which is the difference between interest earned on loans and
investments, and the interest paid on interest-bearing liabilities, primarily
deposits. Net interest income is determined by (i) the difference between the
yield earned on interest earning assets and rates paid on interest-bearing
liabilities ("interest rate spread") and (ii) the relative amounts of interest
earning assets and interest-bearing liabilities. The Company's interest rate
spread is also affected by regulatory, economic and competitive factors that
influence interest rates, loan demand and deposit flows. The Company's net
earnings are also affected by the generation of non-interest income, which
primarily consists of fees and service charges. In addition, net earnings are
affected by the level of operating expenses and provisions for loan losses.
The operations of financial institutions, including the Bank, are
significantly affected by prevailing economic conditions, competition,
regulatory policies, and the monetary and fiscal policies of the U.S. Government
and government agencies. Lending activities are influenced by the demand for,
and supply of housing, competition among lenders, the level of interest rates
and the availability of funds. Deposit flows and costs of funds are influenced
by prevailing market rates of interest primarily on competing investments,
account maturities and the levels of personal income and savings in the market
area of the Bank.
Financial Condition:
Total assets increased by $5.46 million, or 5.49%, from $99.51 million at
September 30, 1995, to $104.97 million at June 30, 1996. The increase was
primarily due to an increase in the investment portfolio of the Bank and loans
receivable, net, offset by a decrease in cash and cash equivalents. Cash and
cash equivalents totaled $5.78 million at June 30, 1996, a decrease of $4.41
million from September 30, 1995. The Company's investment portfolio increased
$8.50 million, or 54.40%, from $15.63 million at September 30, 1995, to $24.13
million at June 30, 1996. The Company's mortgage-backed and related securities
portfolio remained relatively constant during the nine months ended June 30,
1996, increasing $13,180, or 0.06%, from $21.52 million at September 30, 1995,
to $21.54 million at June 30, 1996. The general decline in interest rates
during a major portion of the nine months ended June 30, 1996, caused an
increase in the prepayments on loans. Increased activity in the commercial real
estate and non-real estate lending area and an expansion of the indirect lending
program offset the effect lower interest rates had on the prepayment on loans.
The Company's total loan portfolio increased by $1.09 million, or 2.27%, from
$48.04 million at September 30, 1995, to $49.13 million at June 30, 1996. The
increase in real estate acquired through foreclosure, from $152,000 at September
30, 1995, to $189,000 at June 30, 1996 resulted from the foreclosure on one
residential property.
Deposits decreased by $2.20 million, or 2.68%, from $82.06 million at
September 30, 1995, to $79.86 million at June 30, 1996. This decrease was
primarily due to a shift in public funds from deposits to repurchase agreements.
Borrowings increased $8.85 million, from $1.00 million at September 30,
1995, to $9.85 million at June 30, 1996. Federal Home Loan Bank advances
increased $5.45 million during the nine month period ended June 30, 1996, while
borrowings in the form of Repurchase Agreements increased $3.40 million during
the same nine month period.
12
Stockholders' equity decreased during the nine months ended June 30, 1996
by $1.17 million, or 7.77%, from $15.09 million at September 30, 1995, to $13.92
million at June 30, 1996. This decrease was due primarily to the $474,000
purchase of Company stock to be used for the Management Recognition Plan
approved by the stockholders at a special meeting of the stockholders held on
October 17, 1995 and the $1.16 million purchase of Company stock under the stock
repurchase programs approved during the nine months ended June 30, 1996. This
decrease was also due to a decrease of $195,000 in unrealized gain, net of
taxes, on the available for sale securities. These decreases were offset by net
earnings of $511,000 for the nine months ended June 30, 1996, and an increase of
$142,000 in the earned management recognition plan shares and the employee stock
ownership plan shares during the nine months ended June 30, 1996.
Net Earnings:
Net earnings for the three months ended June 30, 1996 decreased $2,000, or
0.90%, compared to the three months ended June 30, 1995, from $207,000 to
$205,000, respectively. This decrease was primarily the result of an increase
in net interest income and non-interest income, offset by an increase in non-
interest expense for the period. Net earnings for the nine months ended June
30, 1996 increased $16,000, or 3.28%, compared to the nine months ended June 30,
1995, from $495,000 to $511,000, respectively. This increase was primarily the
result of an increase in net interest income and non-interest income, offset by
an increase in non-interest expense for the period.
Net Interest Income:
Net interest income increased by $16,000, or 1.87%, for the three months
ended June 30, 1996 compared to the three months ended June 30, 1995. The
Company increased its average interest earning assets by $7.34 million due
primarily to the investment of proceeds from the stock conversion on April 3,
1995 while the net interest margin decreased from 3.79% for the three months
ended June 30, 1995, to 3.56% for the three months ended June 30, 1996. Net
interest income increased by $241,000 for the nine months ended June 30, 1996
compared to the nine months ended June 30, 1995. This increase was primarily
due to an increase of $8.75 million in average interest earning assets while the
net interest margin remained unchanged between periods.
Interest Income:
Interest income increased by $89,000, or 5.01%, from $1.77 million for the
three months ended June 30, 1995 to $1.86 million for the three months ended
June 30, 1996. The increase in interest income is primarily a result of a $7.34
million increase in average interest earning assets offset by a decrease in the
average yield on interest earning assets from 7.80% for the three months ended
June 30, 1995 to 7.56% for the three months ended June 30, 1996. Interest
income increased by $551,000, or 11.12%, from $4.96 million for the nine months
ended June 30, 1995 to $5.51 million for the nine months ended June 30, 1996.
The increase in interest income is primarily a result of an increase in average
yield on interest earning assets from 7.59% for the nine months ended June 30,
1995 to 7.65% for the nine months ended June 30, 1996, along with a $8.75
million increase in average interest earning assets.
Interest Expense:
Interest expense increased by $73,000, or 7.97%, from $912,000 for the
three months ended June 30, 1995 to $985,000 for the three months ended June 30,
1996. The increase in interest expense is primarily a result of a decrease in
average cost on interest bearing liabilities from 4.55% for the three months
ended June 30, 1995 to 4.46% for the three months ended June 30, 1996, along
with a $7.79 million increase in average interest
13
bearing liabilities. Interest expense increased by $310,000, or 11.87%, from
$2.61 million for the nine months ended June 30, 1995 to $2.92 million for the
nine months ended June 30, 1996. This increase in interest expense is primarily
a result of an increase in average cost on interest bearing liabilities from
4.33% for the nine months ended June 30, 1995 to 4.58% for the nine months ended
June 30, 1996, along with a $4.45 million increase in average interest bearing
liabilities.
Provision for Losses on Loans:
The Bank's provision for losses on loans increased by $12,000, from
($12,000) for the three months ended June 30, 1995 to $0 for the three months
ended June 30, 1996. The Bank's provision for losses on loans decreased by
$4,000, from $4,000 for the nine months ended June 30, 1995 to $0 for the nine
months ended June 30, 1996. Adjustments to the Bank's provision for losses on
loans is a result of management's evaluation of the loan portfolio.
Non-Interest Income:
Total non-interest income increased by $67,000, or 71.81%, from $93,000 for
the three months ended June 30, 1995 to $160,000 for the three months ended June
30, 1996. This increase was primarily for the following reasons: (i) a $10,000
increase in loan related fees; (ii) a $32,000 increase in transaction account
service fees; (iii) a $10,000 net increase in the gain on the sale of loans,
real estate owned and investments; (iv) a $3,000 increase in insurance
commissions on credit life insurance; and, (v) a net increase of $12,000 in
other non-interest income accounts. Total non-interest income increased by
$121,000, or 48.19%, from $250,000 for the nine months ended June 30, 1995 to
$371,000 for the nine months ended June 30, 1996. This increase was primarily
for the following reasons: (i) an $18,000 increase in loan related fees; (ii) a
$57,000 increase in transaction account service fees; (iii) a $27,000 net
increase in the gain on the sale of loans, real estate owned and investments;
(iv) a $10,000 increase in insurance commissions on credit life insurance; and,
(v) a net increase of $9,000 in other non-interest income accounts.
Non-Interest Expense:
Total non-interest expense increased by $76,000, or 12.27%, from $616,000
for the three months ended June 30, 1995 to $692,000 for the three months ended
June 30, 1996. This increase was primarily for the following reasons: (i)
compensation increased by $29,000 mainly due to a $14,000 increase in employee
benefits primarily for the employee stock ownership plan and the management
recognition plan, a $3,500 increase in director fees and benefits, a $60,000
decrease in salaries due to a pre-retirement package offered in the previous
year, with the remainder caused by the compensation associated with the opening
of the new branch office in 1995 and normal employee pay raises; (ii) the Bank
experienced a $19,000 increase in occupancy expense mainly due to a $9,000
increase related to the opening of the new branch in 1995; (iii) a decrease of
$6,000 in advertising expense; (iv) a $35,000 increase in legal and other
professional fees; and, (v) and a decrease of $1,000 in various other non-
interest expense categories. Total non-interest expense increased by $338,000,
or 19.21%, from $1.76 million for the nine months ended June 30, 1995 to $2.09
million for the nine months ended June 30, 1996. This increase was primarily
for the following reasons: (i) compensation increased $112,000 mainly due to an
$8,000 increase in director compensation and benefits, a $60,000 decrease in
salaries due to a pre-retirement package offered in the previous year, a
$112,000 increase in employee benefits primarily for the employee stock
ownership plan and the management recognition plan, with the remainder caused by
normal employee pay raise and the additional compensation required for the new
branch opened in 1995; (ii) the Bank experienced a $61,000 increase in occupancy
expense mainly due to a $41,000 increase related to the opening of the new
branch in 1995; (iii) an increase of $6,000 in
14
advertising expense; (iv) a $21,000 increase in the cost of office supplies and
printing costs, (v) a $113,000 increase in legal and other professional fees;
and, (vi) an increase of $25,000 in various other non-interest expense
categories.
Income Tax Expense:
Income tax expense decreased by $3,000, or 1.88%, from $145,000 for the
three months ended June 30, 1995 to $142,000 for the three months ended June 30,
1996. This increase was primarily the result of decreased pre-tax income for
the three months ended June 30, 1996. Income tax expense increased by $11,500,
or 3.39%, from $339,500 for the nine months ended June 30, 1995 to $351,000 for
the nine months ended June 30, 1996. This increase was primarily the result of
increased pre-tax income for the nine months ended June 30, 1996.
Non-Performing Assets:
The following table sets forth the amounts and categories of non-performing
assets in the Company's portfolio at June 30, 1996 and September 30, 1995:
March 31, September 30,
1996 1995
--------- -------------
(Dollars in Thousands)
Non-Accruing Loans
One-to four-family real estate $ 31 $ 14
Commercial real estate 0 0
Consumer 0 0
------- ---------
Total 31 14
Accruing Loans Delinquent 90 Days or More
One-to four-family real estate 0 0
Consumer 45 73
Commercial 159 0
------- ---------
Total 204 73
Foreclosed Assets
One-to four-family real estate 33 0
Commercial real estate 189 179
------- ---------
Total 222 179
Total non-performing assets $ 457 $ 266
------- ---------
Total as a percent of total assets 0.44% 0.27%
------- ---------
Total non-performing loans $ 235 $ 87
------- ---------
Total as a percentage of total
loans receivable, net 0.48% 0.18%
------- ---------
SAIF Premium Disparity:
As a result of a recent reduction by the FDIC of deposit insurance rates
applicable to commercial banks, savings institutions could be at a significant
disadvantage in competing with banks. Generally, commercial banks are insured
by and pay their premiums to the Bank Insurance Fund (BIF), and savings
associations are insured by and pay their premiums to the Savings Association
Insurance Fund (SAIF), with both the BIF and the SAIF administered by the FDIC.
To the extent a commercial bank has deposits acquired from a
15
savings association, premiums on such deposits are assessed by the SAIF rather
than the BIF. Commercial banks and savings associations both previously paid a
deposit insurance premium to the FDIC based upon the same rate schedule, which
ranged, in 1995, from 0.23% to 0.31%. On August 8, 1995, the FDIC voted to lower
the minimum insurance premiums charged to BIF-insured institutions from 0.23% to
0.04% while leaving the level of premiums intact for SAIF-insured institutions.
Under the new rate structure, the best-rated BIF-insured institutions will pay
annual assessments of $2,000, while the weakest rated institutions will continue
to pay at the 0.31% rate. This new rate structure was effective for the quarter
ended September 30, 1995. The actual premium charged depends upon that
institution's assigned assessment risk classification, which in turn is based
upon its capital levels and supervisory evaluation.
As a result of this premium disparity, BIF-insured institutions could have
a significant competitive advantage over SAIF-insured institutions in attracting
and retaining deposits. For instance, SAIF-insured institutions could lose
deposits to BIF-insured institutions that, because of the premium disparity, are
able to pay higher rates of interest on deposits with little or no impact on
their net earnings. In contrast, SAIF-insured institutions that attempt to
compete by similarly raising their interest rates in order to maintain their
existing deposit base would increase their overall cost of funds and thus
possibly reduce their net earnings. Further, while other sources of funds are
generally available to savings associations, they usually bear a higher rate
than the average cost of funds of a savings association's deposit base. The
Bank believes that this premium disparity could have a material adverse effect
on its results of operations and financial condition in future periods.
Among proposals being considered by the FDIC and Congress to eliminate this
premium disparity is a similar reduction in premium rates charged to SAIF-
insured institutions. Such a reduction would be accompanied by a one-time
additional assessment of SAIF-insured institutions of approximately 0.85% of
deposits to increase the SAIF reserve level to 1.25% of SAIF-insured deposits,
which is the same level attained by the BIF prior to the reduction of BIF
premium rates. If such a special assessment were required, effective as of
March 31, 1995, it would have result in a charge to the Bank of $450,000
(assuming such charge would be tax deductible) which would have the effect of
reducing the Bank's tangible and core capital to $9.85 million, or 9.52% of
adjusted assets, and risk-based capital to $10.30 million, or 19.57% of risk-
weighted assets, on a pro forma basis as of June 30, 1996. Assuming such a
special assessment were made and, as a result, the SAIF was fully recapitalized,
it could have the effect of reducing the Bank's deposit insurance premiums to
SAIF, thereby increasing net earnings in future periods, and restoring
competitive equality between BIF-insured and SAIF-insured institutions.
In addition, another proposal under consideration by Congress would require
savings associations to convert their charters to that of commercial banks in
connection with a merger of the BIF and the SAIF. Under current tax laws, a
savings association converting to a commercial bank charter must recapture into
taxable income the amount of its bad debt reserve that would not have been
allowed if the savings association had operated as a commercial bank. The tax
associated with the recapture of all or part of its tax bad debt reserve would
immediately reduce the capital of the savings association even though such tax
would actually be paid out over succeeding years. The Bank estimates that the
amount of the tax expense associated with a recapture of its tax bad debt
reserves if it were to convert to a national bank at June 30, 1996 was
approximately $1.10 million.
The Bank cannot predict at this time if any of the foregoing proposals will
be adopted in their current form or, if adopted, whether such proposals would
remedy some or all of the related adverse financial and tax affects.
Liquidity and Capital Resources:
The Company's primary source of funds for operations are deposits from its
market area; principal and interest payments on loans, securities available for
sale and
16
securities held to maturity; proceeds from the sale or maturation of
securities and advances from the FHLB of Des Moines. While maturities and
scheduled amortization of loans and securities are predictable sources of funds,
deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions, and competition.
The primary investing activities of the Company are the origination and
purchase of mortgage loans, the origination of consumer loans and the purchase
of securities. During the three months ended June 30, 1996, the Bank's loan
originations and purchases totaled $5.61 million. The Company purchased
investment securities and mortgage-backed and related securities during the
three months ended June 30, 1996 of $8.04 million. During the nine months ended
June 30, 1996, the Bank's loan origination and purchases totaled $12.70 million.
The Company purchased investment securities and mortgage-backed and related
securities during the nine months ended June 30, 1996 of $19.19 million.
The primary financing activity of the Bank is the attraction of deposits.
During the three months ended June 30, 1996, the Bank experienced a net decrease
in deposits of $2.20 million. During the nine months ended June 30, 1996, the
Bank experienced a net decrease in deposits of $2.20 million.
The Bank has the ability to borrow additional funds from the FHLB of Des
Moines by pledging additional securities. At June 30, 1996, the Bank had an
undrawn borrowing capacity with the FHLB for $9.02 million. At June 30, 1996,
the Bank had borrowings outstanding from the FHLB of Des Moines for $5.45
million. Other sources of liquidity include the sale of securities held in the
available for sale portfolio.
The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which may be varied by the OTS depending
upon economic conditions and deposit flows, is based upon a percentage of
deposits and short-term borrowings. The required minimum liquidity ratio is
currently 5.00% and the short-term liquidity ratio is 1.00%. The Bank's average
daily liquidity ratio for the month of June 1996 was 28.53% and its short-term
liquidity for the same month was 13.01%.
The Company's most liquid assets are cash and cash equivalents, which
consist of short-term highly liquid investments with original maturities of less
than three months that are readily convertible to known amounts of cash and
interest-bearing deposits. The level of these assets is dependent on the
Company's operating, financing and investing activities during any given period.
At June 30, 1996, cash and cash equivalents totaled $5.78 million.
The Bank anticipates that it will have sufficient funds available to meet
its current commitments. At June 30, 1996, the Bank had commitments to
originate or purchase loans of $874,000. Certificates of deposits which are
scheduled to mature in one year of less at June 30, 1996 totaled $30.18 million.
Management believes that a significant portion of such deposits will remain with
the Bank.
Recent Events--Litigation Settlement
The Bank was involved in a lawsuit between a national motel chain and a
partnership which was formerly a borrower of the Bank. The parties to the
lawsuit reached an agreement in principle. Settlement documents have been
drafted and circulated for signature. The litigation has been dismissed by the
court with prejudice. Substantially all of the amount of the settlement had
been previously reserved by the Bank. The settlement is reflected in the
financial statements for the quarter ended June 30, 1996.
17
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
None.
ITEM 2: Changes in Securities
Not Applicable.
ITEM 3: Defaults Upon Senior Securities
Not Applicable.
ITEM 4: Submission of Matters to a Vote of Security Holders.
None.
ITEM 5: Other Information.
None.
ITEM 6: Exhibits and Reports on Form 8-K.
On May 21, 1996, the Company filed a Current Report of Form 8-K
announcing the adoption of a stock repurchase program.
18
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST FEDERAL BANCORPORATION
Registrant
Date: August 8, 1996 /s/ William R. Belford
----------------------- ------------------------------
William R. Belford, President and Chief
Executive Officer (Duly Authorized
Officer)
Date: August 8, 1996 /s/ Dennis M. Vorgert
----------------------- -------------------------------
Dennis M. Vorgert, Vice President
(Principal Financial Officer)
19