UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended DECEMBER 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-51243
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 85-0453611
(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)
300 NORTH PENNSYLVANIA AVENUE, ROSWELL, NEW MEXICO 88201
(Address of principal executive offices)
(505) 622-6201
(Issuer's telephone number including area code)
N/A
(Former name, address, and fiscal year, if changed since last report)
Indicate by check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 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.
(1) [X] Yes [ ] No
(2) [X] Yes [ ] No
State the number of shares outstanding of each of the issuer's classes of common
equity as of February 6, 2006.
3,979,453 shares of common stock, par value $0.01 per share
Transitional Small Business Disclosure Format (check one), [ ] Yes [X] No
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
Item 1 Consolidated Statements of Financial Condition 2
Consolidated Statements of Income 3
Consolidated Statements of Stockholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
Item 3 Controls and Procedures 21
PART II OTHER INFORMATION
- ------- -----------------
Item 1 Legal Proceedings 21
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3 Defaults Upon Senior Securities 21
Item 4 Submission of Matters to Vote of Security Holders 22
Item 5 Other Information 22
Item 6 Exhibits 22
Signatures 23
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Section 302
of Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Section 302
of Sarbanes-Oxley Act of 2002
Exhibit 32 Certification Pursuant to Section 906 of Sarbanes-Oxley Act of
2002
1
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
Consolidated Statements Of Financial Condition
- -----------------------------------------------------------------------------------------------------
December 31, 2005 Compared to September 30, 2005
ASSETS DECEMBER 31, September 30,
2005 2005
------------- -------------
(UNAUDITED)
($ IN THOUSANDS)
Cash and due from banks $ 14,502 $ 11,777
Interest-bearing deposits with banks 26,246 26,185
Held-to-maturity investments securities 395 2,132
Available-for-sale investment securities 60,177 64,902
Loans held for sale 1,571 2,892
Loans receivable, net 416,547 412,073
Accrued interest receivable 2,027 2,036
Federal Home Loan Bank stock, at cost, restricted 6,066 6,373
Property, equipment, and construction in progress, net 13,932 13,726
Identifiable Intangibles 3,540 3,645
Goodwill 2,286 2,286
Investment in non-bank subsidiaries 310 310
Other assets 1,695 1,605
------------- -------------
TOTAL ASSETS $ 549,294 $ 549,942
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $ 62,537 $ 62,106
Interest bearing 311,902 315,609
Advances from the Federal Home Loan Bank 109,173 107,991
Escrows from borrowers for taxes and insurance 869 1,561
Accrued and other liabilities 3,936 3,156
Long term subordinated debt 10,310 10,310
------------- -------------
TOTAL LIABILITIES 498,727 500,733
------------- -------------
Commitments and contingencies - -
Stockholders' Equity
Preferred stock, $0.01 par value; 500,000 shares
authorized; no shares issued and outstanding - -
Common stock, $0.01 par value; 6,000,000
shares authorized; 4,300,045 shares issued and
3,979,453 shares outstanding at December 31, 2005;
4,289,445 shares issued and 3,968,853 shares
outstanding at September 30, 2005 43 43
Additional paid-in capital 18,011 17,916
Retained earnings 35,621 34,345
Accumulated other comprehensive income (387) (374)
Treasury stock, at cost, 320,592 shares at December 31, and
September 30, 2005 respectively (2,721) (2,721)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 50,567 49,209
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 549,294 $ 549,942
============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended December 31, 2005 and 2004
THREE MONTHS ENDED
DECEMBER 31,
---------------------------------------
2005 2004
---------------------------------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest Income
Interest and fees on loans $ 7,771 $ 4,288
Interest on investment securities 615 254
Interest and dividends on other investments 291 137
------------------ ------------------
Total interest income 8,677 4,679
------------------ ------------------
Interest Expense
Deposits 1,504 690
Borrowed funds 1,254 615
------------------ ------------------
Total interest expense 2,758 1,305
------------------ ------------------
Net interest income before provision
for loan losses 5,919 3,374
Provision for loan losses 140 -
------------------ ------------------
Net interest income after provision
for loan losses 6,059 3,374
------------------ ------------------
Other Income
Fees for services to customers 327 215
Gain on sale of loans 160 129
Gain on sale of available-for-sale investment securities - -
Other 152 116
------------------ ------------------
Total other income 639 460
------------------ ------------------
Other Expenses
Compensation and related benefits 2,418 1,531
Occupancy 268 209
Data processing 273 128
Advertising 49 17
Telephone 74 64
Postage 47 44
Printing & supplies 73 48
Employee expenses 98 56
Depreciation and amortization 317 148
Professional fees 131 43
Other 364 268
------------------ ------------------
Total other expenses 4,112 2,556
------------------ ------------------
Income before income taxes 2,586 1,278
Income tax expense 1,032 512
------------------ ------------------
Net income $ 1,554 $ 766
================== ==================
Net income per average common share
Basic .39 .24
Diluted .38 .23
Average common shares - basic 3,974,853 3,193,800
Average common shares - diluted 4,063,504 3,293,400
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
For the Three Months Ended December 31, 2005 and the Year Ended September 30, 2005
($ in thousands, except share data)
Additional Accumulated
COMMON Paid-in TREASURY Retained Other Comp.
STOCK Capital STOCK Earnings Loss Total
--------------------- ------------------------
Shares Value Shares Cost
BALANCE AT SEPTEMBER 30, 2005 4,289,445 $ 43 $ 17,916 320,592 $ (2,721) $ 34,345 $ (374) $ 49,209
Stock issued for stock options 10,600 - 95 95
Dividends - $0.07 per share (278) (278)
Comprehensive income:
Change in unrealized gain
on investment securities,
net of taxes (13)
Net income - - - - - 1,554 - -
TOTAL 1,541
--------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2005 4,300,045 $ 43 $ 18,011 320,592 $ (2,721) $ 35,621 $ (387) $ 50,567
==================================================================================================
Reconciliation of Other Comprehensive Income (Loss) FOR THE THREE MONTHS
ENDED DECEMBER 31,
--------------------------
2005 2004
------------ ------------
Unrealized losses on securities:
Unrealized holding losses arising during period $ (22) $ (75)
Related taxes 9 30
Reclassification adjustments for net losses in net income - -
Related taxes - -
------------ ------------
TOTAL OTHER COMPREHENSIVE LOSS $ (13) $ (45)
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended December 31, 2005 and 2004
THREE MONTHS ENDED
DECEMBER 31,
---------------------------------------
2005 2004
------------------ ------------------
(IN THOUSANDS)
Cash Flows from Operating Activities
Net income $ 1,554 $ 766
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation & amortization of intangibles 317 148
Net loss (gain) on sale of REO - -
Accretion of deferred loan fees (108) (59)
Proceeds from sales of loans held for sale 11,730 7,039
Origination of loans held for sale (10,250) (6,986)
Gain on sale of sold loans (160) (129)
Provision (benefit) for loan losses (140) -
Amortization of investments, net (39) 61
FHLB Stock dividend (63) (20)
Change in accrued interest & dividend receivable 9 61
Change in prepaid/other assets (217) (91)
Change in accounts payable & accrued liabilities 781 411
Accretion of market-to-market, net (57) -
Other, net (89) 30
------------------ ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,268 1,231
------------------ ------------------
Cash Flows from Investing Activities
Change in deposits in banks (60) 1,515
Proceeds from maturity and principal paydowns
of held-to-maturity securities 1,725 7,025
Principal payments on mortgage backed securities
held-to-maturity 11 7
Proceeds from sales, maturities and principal paydowns
of available-for-sale securities 3,081 -
Purchases of available-for-sale securities - (3,488)
Principal payments on mortgage backed securities
available-for-sale 1,759 733
Loan origination and principal repayment on loans, net (4,223) (3,992)
Proceeds from sale of loans - -
Proceeds from sale of foreclosed properties 127 -
Proceeds from redemption of FHLB stock 369 -
Proceeds from sale of property and equipment - -
Purchases of FHLB stock - -
Purchases of Building and Equipment (417) (89)
------------------ ------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 2,372 1,711
------------------ ------------------
Cash Flows from Financing Activities
Net increase (decrease) in transaction accounts, savings
and now deposits (3,303) 1,113
Net increase (decrease) in mortgage escrow funds (692) (280)
Proceeds from FHLB advances 3,951 -
Repayments on FHLB Advances (2,688) (1,577)
Dividends paid or to be paid in cash (278) (120)
Proceeds from exercise of stock options 95 105
Proceeds from sale of subordinated debentures - -
Purchase of treasury stock, net - -
------------------ ------------------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (2,915) (759)
NET CASH AND DUE FROM BANKS $ 2,725 $ 2,183
================== ==================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended December 31, 2005 and 2004
THREE MONTHS ENDED
DECEMBER 31,
---------------------------------------
2005 2004
------------------ ------------------
(IN THOUSANDS)
Increase (decrease) in cash and due from banks $ 2,725 2,183
Cash and due from banks at beginning of year 11,777 9,528
------------------ ------------------
CASH AND DUE FROM BANKS AT END OF YEAR $ 14,502 11,711
================== ==================
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for
Interest on deposits and advances $ 2,614 1,309
Income taxes - 26
Decrease in unrealized loss, net of deferred taxes
on available-for-sale securities (other comprehensive income) (13) (45)
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
FIRST FEDERAL BANC OF THE SOUTHWEST, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The financial statements include the accounts of First Federal Banc of
the Southwest, Inc. (the "Company") and its wholly owned subsidiary, First
Federal Bank (the "Bank"). All significant intercompany balances and
transactions have been eliminated in consolidation. First Federal NM Trust I and
First Federal NM Trust II ("Trust I" and "Trust II") are wholly owned
subsidiaries of the Company and are not consolidated in these financial
statements (see Note 3 below for additional information).
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-QSB. Accordingly, they do not include all the
information and disclosures required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, the financial statements contain all adjustments
(consisting only of normal reoccurring adjustments) necessary to present fairly
the financial condition of First Federal Banc of the Southwest, Inc. as of
December 31, 2005, and the results of operations for all interim periods
presented. Operating results for the three months ended December 31, 2005, are
not necessarily indicative of the results that may be expected for the entire
fiscal year. The unaudited consolidated financial statements presented herein
should be read in conjunction with the annual consolidated financial statements
and related notes of the Company for the fiscal year ended September 30, 2005
filed on Form 10-KSB.
Certain 2004 amounts have been reclassified to conform to the 2005
presentation. Such reclassifications had no effect on net income.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS AND REGULATORY DEVELOPMENTS
In December 2003, the Accounting Standards Executive Committee of the
AICPA issued Statement of Position (SOP) 03-3, ACCOUNTING FOR CERTAIN LOAN OR
DEBT SECURITIES ACQUIRED IN A TRANSFER. The SOP requires loans acquired in a
transfer to be accounted for at fair value. No allowance for loan losses or
other valuation is permitted at the time of acquisition. The provisions of the
SOP are required to be adopted for fiscal years beginning after December 15,
2004, although early adoption is permitted.
In November 2005, the FASB issued FASB Staff Position (FSP) FAS 115-1
and 124-1, THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO
CERTAIN INVESTMENTS. The FASB addresses the determination of when an investment
is considered impaired,
7
whether that impairment is other than temporary, and the measurement of an
impairment loss. The FSP also includes accounting considerations subsequent to
the recognition of an other-than-temporary impairment and requires certain
disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. The FSP amends FASB Statement No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, FASB Statement
No. 124, ACCOUNTING FOR CERTAIN INVESTMENTS HELD BY NOT-FOR-PROFIT ORGANIZATIONS
and APB Opinion No. 18, THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS IN
COMMON STOCK. The FSP nullifies certain requirements of EITF Issue No. 03-1, THE
MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN
INVESTMENTS and supersedes EITF Abstracts, Topics D-44, RECOGNITION OF
OTHER-THAN-TEMPORARY IMPAIRMENT UPON THE PLANNED SALE OF A SECURITY WHOSE COST
EXCEEDS FAIR VALUE. The FSP is required to be applied to reporting periods
beginning after December 15, 2005. The Company does not expect adoption to have
a material impact on the consolidated financial statements.
On April 14, 2005, the Securities and Exchange Commission (SEC)
announced the adoption of a new rule that amends the compliance dates for SFAS
No. 123R. Under SFAS No. 123R, the Company would have been required to implement
the standard as of the beginning of the first interim period that begins after
June 15, 2005. The SEC's new rule allows certain companies to implement SFAS No.
123R as of the beginning of the next reporting period that begins after December
15, 2005. The SEC's new rule does not change the accounting required by SFAS No.
123R; it changes only the dates for compliance with the standard. As a result of
the SEC rule change, the Company will begin complying with the Statement on
January 1, 2006.
NOTE 3. JUNIOR SUBORDINATED DEBT OWED TO UNCONSOLIDATED TRUSTS
The following table presents details on the junior subordinated debt
owed to the unconsolidated trusts listed below as of December 31, 2005:
FIRST FEDERAL NM FIRST FEDERAL NM
TRUST I TRUST II
-------------------- --------------------
Date of Issue JANUARY 19, 2005 MAY 23, 2005
Amount of trust preferred securities issued $ 7,000,000 $ 3,000,000
Rate on trust preferred securities 5.7% 6.145%
Maturity March 15, 2035 June 15, 2035
Date of first redemption March 15, 2010 June 15, 2010
Common equity securities issued $ 217,000 $ 93,000
Junior subordinated deferrable interest
debentures owed $ 7,217,000 $ 3,093,000
Rate on junior subordinated deferrable interest debentures 5.7% 6.145%
In 2005, the Trusts, each being a Delaware statutory business trust,
issued trust preferred securities in the amounts and at the rates indicated
above. These securities represent preferred beneficial interests in the assets
of the Trusts. The trust preferred securities will mature on the dates
indicated, and are redeemable in whole or in part at the option of the Company
at any time
8
after the date of first redemption indicated above, and in whole at any time
upon the occurrence of certain events affecting their tax or regulatory capital
treatment. The Trusts also issued common equity securities to the Company in the
amounts indicated above. The rates on the trust preferred securities are fixed
through the respective first redemption dates. Subsequent to those dates, the
interest rate will be equal to LIBOR plus 1.85%. The Trusts used the proceeds of
the offering of the trust preferred securities to purchase junior subordinated
deferrable interest debentures (the debentures) issued by the Company, which
have terms substantially similar to the trust preferred securities. The Company
has the right to defer payments of interest on the debentures at any time or
from time to time for a period of up to 20 consecutive quarterly periods with
respect to each interest payment deferred. Under the terms of the debentures, in
the event that under certain circumstances there is an event of default under
the debentures, or the Company has elected to defer interest on the debentures,
the Company may not, with certain exceptions, declare or pay any dividends or
distributions on its capital stock or purchase or acquire any of its capital
stock. The Company used the proceeds from the sale of the debentures, in part,
to fund the cash portion of the acquisition of GFSB Bancorp, Inc.
The Company owns all of the outstanding common securities of the Trusts.
Each Trust is considered a variable interest entity (VIE) under Financial
Accounting Standards Board Interpretation (FIN) No. 46, Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51, as revised. Prior to FIN 46, VIEs were generally consolidated by an
enterprise when the enterprise had a controlling financial interest through
ownership of a majority of voting interest in the entity. Under FIN 46, a VIE
should be consolidated by its primary beneficiary. Because the Company is not
the primary beneficiary of the Trusts, the financial statements of the Trusts
are not included in the consolidated financial statements of the Company.
Payments of distributions on the trust preferred securities and payments
on redemption of the trust preferred securities are guaranteed by the Company on
a limited basis. The obligations of the Company under the junior subordinated
debentures, the related indentures, the trust agreements establishing the
Trusts, the guarantees and the agreements as to expenses and liabilities, in the
aggregate, constitute a full and unconditional guarantee by the Company of the
Trusts' obligations under the trust preferred securities.
NOTE 4. STOCK OPTION PLANS
In December 2004, the FASB issued SFAS No. 123R, SHARE-BASED PAYMENT,
which is an Amendment of FASB Statement Nos. 123 and 95. SFAS No. 123R changes,
among other things, the manner in which share-based compensation, such as stock
options, will be accounted for by both public and non-public companies. For
public companies, the cost of employee services received in exchange for equity
instruments, including options and restricted stock awards, generally will be
measured at fair value at the grant date. The grant date fair value will be
estimated using option-pricing models adjusted for the unique characteristics of
those options and instruments, unless observable market prices for the same or
similar options are available. The cost will be recognized over the requisite
service period, often the vesting period, and will be remeasured at each
reporting date through the settlement date. The changes in accounting will
replace existing requirements under SFAS No. 123, ACCOUNTING FOR STOCK-BASED
9
COMPENSATION, and will eliminate the ability to account for share-based
compensation transactions using APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, which does not require companies to expense options if the
exercise price is equal to the trading price at the date of grant. The
accounting for similar transactions involving parties other than employees or
the accounting for employee stock ownership plans that are subject to AICPA
Statement of Position 93-6, EMPLOYERS' ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP
PLANS, would remain unchanged. As a result of actions by the SEC, SFAS 123R will
be effective for the Company beginning on January 1, 2006.
Currently, the employee compensation expense under stock option plans is
reported using the intrinsic value method. No stock-based compensation costs are
reflected in net income as all options granted had an exercise price equal to or
greater than the market price of the underlying common stock at date of grant.
During the current period, the Company granted 69,950 stock options to directors
and officers of the Company and its subsidiary bank. The exercise price was
equal to or greater than the closing price on the grant date. As discussed, the
Company has not adopted the provisions of SFAS No.123R and therefore no
stock-based compensation costs are included in these financial statements. Using
the intrinsic value method, the expense associated with the stock options
granted during the three-month period ending December 31, 2005 is deemed to be
immaterial.
NOTE 5. EARNINGS PER SHARE
Earnings per share are presented pursuant to the provisions of SFAS No.
128, EARNINGS PER SHARE. Basic earnings per share are calculated based on the
weighted average number of common shares outstanding during the respective
periods.
Diluted earnings per share are computed taking into consideration common
shares outstanding and dilutive potential common shares to be issued under the
Company's stock option plans and recognition and retention plan.
All earnings per share computations are presented on a split-adjusted
basis to reflect the 8 for 1 stock split that was completed on May 20, 2005.
10
NOTE 6. ACQUISITION
After the close of business on May 31, 2005, the Company completed its
acquisition of GFSB Bancorp, Inc (GFSB). The results of GFSB's operations have
been included in the consolidated financial statements since June 1, 2005. The
following table depicts select balances of GFSB as of May 31, 2005. All amounts
are presented at book value.
May 31, 2005
(In thousands)
Cash and due from banks $ 7,404
Available for sale investment securities 24,516
Available for sale mortgage-backed securities 23,285
Loans receivable, net 139,604
Other assets 7,677
------------------
Total assets $ 202,486
==================
Demand deposits and NOW accounts $ 32,727
Savings and money market accounts 22,834
Time deposits 73,915
Advances from Federal Home Loan Bank 48,154
Other liabilities 5,250
------------------
Total liabilities 182,880
Total stockholders' equity 19,606
------------------
Total liabilities and stockholders' equity $ 202,486
==================
The acquisition of GFSB increased the geographic footprint of the
Company and allowed shareholders an interest in a larger entity with access to
the public markets. The Company hopes to realize cost savings and efficiencies
by combining the respective operations. The value of the long-term nature of the
customer base contributed to a purchase price in excess of GFSB's book values.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
The information in this report may contain forward-looking statements
about the Company's growth and acquisition strategies, new products and
services, and future financial performance, including earnings and dividends per
share, return on average assets, return on average equity, efficiency ratio and
capital ratio. These and other statements in this report constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking information is based upon
certain underlying
11
assumptions, risks and uncertainties. Because of the possibility of change in
the underlying assumptions, actual results could differ materially from these
forward-looking statements. Risks and uncertainties that may affect future
results include: interest rate risk, competitive pressures, pricing pressures on
loans and deposits, actions of bank and non-bank competitors, changes in local
and national economic conditions, changes in regulatory requirements, actions of
the SEC and/or the Office of Thrift Supervision, and customer acceptance of the
Company's products and services. The Company undertakes no obligation to revise
or update such forward-looking statements to reflect current events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are described in the Notes
to Consolidated Financial Statements set forth in the consolidated financial
statements as of September 30, 2005, which were filed with the SEC on Form
10-KSB (File No. 000-51243). Based on its consideration of accounting policies
that involve the most complex and subjective estimates and judgments, management
has identified its most critical accounting policy to be that related to the
allowance for loan losses. The allowance for loan losses is established through
a provision for loan losses charged to expense. Loans are charged against the
allowance for loan losses when management believes that collectibility of the
principal is unlikely. The Company has policies and procedures for evaluating
the overall credit quality of its loan portfolio including timely identification
of potential problem credits. On a quarterly basis, management reviews the
appropriate level for the allowance for loan losses incorporating a variety of
risk considerations, both quantitative and qualitative. Quantitative factors
include the Company's historical loss experience, delinquency and charge-off
trends, collateral values, known information about individual loans and other
factors. Qualitative factors include the general economic environment in the
Company's market areas and the expected trend of those economic conditions. To
the extent actual results differ from forecasts and management's judgment, the
allowance for loan losses may be greater or less than future charge-offs.
FINANCIAL CONDITION
DECEMBER 31, 2005 COMPARED TO SEPTEMBER 30, 2005.
Total assets remained nearly unchanged at $549.3 million as of December
31, 2005, down approximately $650,000 from the September 30, 2005 balance of
$549.9 million.
Total net loans, excluding loans held for sale, increased $4.5 million,
or 1.1%, from $412.0 million as of September 30, 2005, to $416.5 million as of
December 31, 2005. The majority of the net increase in loans was attributable to
an increase of approximately $5.0 million in one-to-four family residential
construction loans. This category increased from $30.8 million to $35.7 million
at December 31, 2005. The majority of this increase is from the Las Cruces
market where the demand for housing is very high and the housing construction
industry is experiencing record breaking growth. The majority of these loans are
made to the homebuilders after the home is pre-sold. The mortgage loan portfolio
declined slightly during the quarter;
12
however, this decline was generally offset by small increases in the commercial
loan portfolio and the consumer loan portfolio.
The total investment securities owned by the Company declined from
approximately $67.0 million at September 30, 2005 to $60.6 million at December
31, 2005. The $6.4 million decrease was attributed to investment securities
maturing and principal payments on asset backed securities. The Company made no
significant purchases of investments during this period and instead allowed the
portfolio to decline to partially fund the loan growth mentioned above. In the
opinion of management, the flat yield curve is not affording the return
necessary to warrant the interest rate risk from placing fixed rate investments
in the portfolio with very little yield improvement compared to liquid assets.
Construction loans for one-to-four family residential units generally are six
months in duration and are floating with Wall Street Journal prime rate. While
the yield curve remains in this flat position, management anticipates keeping
any excess funds in very short-term investments.
Total deposits declined approximately $3.3 million from the September
30, 2005 level of $377.7 million to $374.4 million at December 31, 2005.
Non-interest bearing deposits increased approximately $430,000 during this
period, while interest bearing deposits decreased $3.7 million. Within interest
bearing deposits, numerous changes between types of accounts have taken place.
Savings accounts declined approximately $10.0 million while money market
accounts increased $5.0 million and NOW accounts increased approximately $1.0
million. Time deposits decreased a net of approximately $1.3 million during the
reporting period. However, within time deposits, public funds over $100,000
decreased $6.5 million while retail time certificates under $100,000 grew $6.3
million. As discussed in previous Securities and Exchange Commission filings,
the goal of the Company is to replace the amounts of large time deposits with
public entities that were acquired with the GFSB Bancorp Inc. acquisition in
June 2005 with a more retail deposit base structure. Pricing on these large
public deposits is generally established by the State of New Mexico and provide
no opportunity to cross-sell any other types of bank services. In an effort to
change the deposit structure, we have been offering different types of deposit
products with different rates and terms to attract new customers and retain
existing retail customers. While this does not necessarily translate to lower
cost deposits, we believe developing relationships with customers is in the best
interest of the Company rather than using wholesale funding sources. We will
continue to use a variety of sources to meet our funding needs in an effort to
maximize our earnings opportunities and increase the value of our franchise.
Federal Home Loan Bank of Dallas ("FHLB") borrowings increased $1.2
million from $108 million at September 30, 2005 to $109.2 million at December
31, 2005. The Company continues to use borrowings as a funding source for
certain long-term loans. Through the use of long-term borrowings to fund
long-term loans, the Company is able to fix a spread to minimize the interest
rate risk associated with long-term loans. Prepayment penalties are required on
these loans to compensate the Company in the event the borrower wants to prepay
the loan.
Stockholders' equity increased $1.4 million, or 2.8%, to $50.6 million
as of December 31, 2005, compared to $49.2 million as of September 30, 2005.
This increase is primarily attributable to the quarterly earnings of the Company
of $1.6 million, less the cash dividend
13
declared of approximately $280,000. Additional paid in capital increased
approximately $100,000 due to the exercise of stock options during the reporting
period.
RESULT OF OPERATIONS
The Company's results of operations depend primarily upon the level of
net interest income, which is the difference between the interest income earned
on its interest-earning assets such as loans and investments, and the costs of
interest-bearing liabilities, primarily deposits and borrowings. Results of
operations are also dependent upon the level of non-interest income, including
fee income and service charges, and are also affected by the level of its
non-interest expense, including its general and administrative expenses. Net
interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them,
respectively.
Due to the fact that the Company grew by approximately 60% in size with
the acquisition of GFSB Bancorp Inc on June 1, 2005, all the results of
operations are materially impacted by this change. It is important to note that
the application of purchase accounting requires that the acquiring entity not
recognize any of the income or expenses of the acquired entity prior to the
merger date. Consequently, the following discussions regarding results of
operations for the three months ended December 31, 2005 and 2004 will all have
significant variances due to the acquisition. The entire three-month period
ended December 2005 contains a complete quarter "with" the acquired entity while
the three-month period ended December 31, 2004 contains the information
"without" the acquired entity.
NET INCOME. Net income increased by approximately $788,000 from $766,000
for the three months ending December 31, 2004, to $1.6 million for the three
months ending December 31, 2005, or approximately 103%. The increase was
primarily due to an increase in net interest income of $2.5 million.
Non-interest income increased $179,000 while non-interest expenses increased
$1.5 million for the three-month period of 2005 as compared to the same period
in 2004. This resulted in pre-tax income increasing $1.3 million or 102%, less
the increase of tax expense of $520,000.
NET INTEREST INCOME. Net interest income before loan loss provision
increased $2.5 million from approximately $3.4 million for the three months
ending December 31, 2004, to $5.9 million for the three months ending December
31, 2005. Total interest income increased $4 million from $4.7 million for the
quarter ending Deceber 31, 2004 to $8.7 million for the quarter ending December
31, 2005. As depicted in the Yield and Cost Data table below, average interest
earning assets increased approximately $179 million, from $325 million to $504
million, while the annualized average yield increased approximately 1.1% from
5.3% to 6.4%.
Likewise, interest expense for the three-month period ending December
31, 2005 increased $1.5 million, or 116%, over the same period in 2004. The
Yield and Cost Data table shows average interest bearing liabilities increased
from approximately $278 million for the three-month period ended December 31,
2004 to $422 million for the same period in 2005. Generally, GFSB's cost of
funds was higher than the Company's cost of funds. Additionally, the Company's
issuance of the Trust Preferred Securities adversely affected the cost of
borrowings
14
since these debentures have fixed costs for the first five years of
approximately 5.8%. As reflected in the table, the annualized cost of interest
bearing liabilities increased from 1.9% for the period in 2004 to 2.6% for the
same quarter in 2005. As the Federal Reserve Bank has continued to increase
short-term interest rates, an increasing number of consumers have become
"rate-sensitive" and now shop for the best interest rates on their funds.
Ultimately this causes financial institutions to raise deposit rates to remain
competitive and retain their customers. Management of the Company believes that
deposit rates will continue to increase. We will compete for funds to retain
customers and support funding needs that provide a positive interest spread for
the Company.
PROVISION FOR LOAN LOSSES. The Company reversed approximately $140,000
from the allowance for loan losses during the quarter ended December 31, 2005.
This was necessary to comply with the methodology the Company uses to estimate
the level of allowance required to cover potential losses in the loan portfolio.
This methodology is more fully described in the Notes to Consolidated Financial
Statements set forth in the consolidated financial statements as of September
30, 2005, which were filed with the SEC on Form 10-KSB (File No. 000-51243).
Under current accounting and regulatory requirements, management must
consistently apply a methodology that estimates an allowance sufficient to cover
probable losses based on historical experience and certain qualitative factors.
The Company then must increase or decrease the estimated allowance through a
provision for loan losses that is reported in the income statement. Although the
institution maintains its allowance for loan losses at a level it considers
adequate to provide for probable losses as discussed earlier, there can be no
assurance that such losses will not exceed the estimated amounts or that
additional substantial provisions for loan losses will not be required in future
periods.
OTHER INCOME. For the three-month period ending December 31, 2005, total
other income increased approximately $179,000, or 39%, as compared to the same
period in 2004. The majority of this increase was attributed to additional fees
and service charges. Much of this increase is related to the merger. Fees
associated with the sale of mortgage loans increased approximately $31,000 or
24%. This increase is attributable to loans generated in the new markets
acquired with the merger. However, on a broader scale, the origination of
mortgage loans to be sold continues to decline. While this adverse trend has
continued over the past two years, it is consistent with mortgage activity on a
national basis. The Company continues to seek other markets and types of
products to supplement the loss of volume in this line of business. As other
competitors face the same challenges of dwindling mortgage orignations, the
profit potential associated with each transaction is also reduced.
NON-INTEREST EXPENSE. Non-interest expense increased approximately $1.5
million, or 59%, to $4.1 million for the 2005 reporting period in comparison to
$2.6 million for the 2004 period.
As would be expected, compensation expense increased 58% from $1.5
million in the 2004 period to $2.4 million for the same period in 2005. The
Company added approximately 55 full-time equivalent employees with the merger.
In addition, the tight labor market for certain types of highly-skilled
employees has generally forced the cost of labor up in most of the
15
markets the Company operates in. Management is working diligently to identify,
hire and retain quality employees that will allow expansion of our business.
Generally, the other areas of non-interest expense reflect increases
consistent with the size of the new entity as reported in the period ending
December 31, 2005.
Data processing increased $145,000 or 113% between the reporting
periods. A significant portion of the increase is attributable simply to the
volume of processing associated with the merger. In addition, the Company has
moved to implement electronic check clearing, commonly referred to as Check 21.
The Company completed a study in 2005 and determined that given the delays and
costs in processing paper checks and getting them delivered to a Federal Reserve
check processing center it was benefical on a long-term basis to move to an
imaging platform to clear checks electronically. While certain costs associated
with this conversion are offset by earnings on accelerated clearings, the full
economic value does involve a payback period of approximately five years. As a
result, certain personnel expenses associated with check processing have
declined while other areas have increased, like data processing and to a lesser
extent depreciation. Some of expenses are offset by earnings on collected funds.
Management believes that as the Federal Reserve moves to completely implement
Check 21, nationally over the next several years, the benefits will continue to
grow for the Company.
Another anticipated increase is in the area of depreciation and
amortization. For the quarter ended December 31, 2004 this expense item was
$148,000. It increased $169,000 to $317,000 for the same period in 2005. This
increase is directly attributable to the merger.
INCOME TAX EXPENSE. During the three months ending December 31, 2005,
income tax expense increased $520,000, or 102%, over the three months ending Dec
30, 2004. Income tax expense increased due to the 102% increase in pre-tax
income from $1.3 million for the period ended December 31, 2004 to $2.6 million
at December 31, 2005.
YIELD AND COST DATA
The following table sets forth average balance sheets, average yields
and costs, and certain other information for the periods indicated. No
tax-equivalent yield adjustments were made, as the effect thereof was not
material. All average balances are daily average balances. Non-accruing loans
have been included in the table as loans carrying a zero yield. Not included in
interest income on loans are loan fees and other charges on loans totaling
$773,000 and $473,000 for the three months ended December 31, 2005 and 2004,
respectively.
16
THREE MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------------
2005 2004
-------------------------------- --------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
OUTSTANDING RATE OUTSTANDING RATE
BALANCE INTEREST (3) BALANCE INTEREST (3)
----------- ---------- ------- ----------- ---------- -------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans................................ $ 410,894 $ 7,158 7.0% $ 254,664 $ 3,944 6.2%
Investment securities................ 71,778 685 3.8% 45,197 275 2.4%
Interest-earning deposits............ 21,030 217 4.1% 24,754 116 1.9%
----------- ---------- ------- ----------- ---------- -------
Total interest-earning assets..... 503,702 8,060 6.4% 324,615 4,335 5.3%
Non-interest-earning assets.......... 36,676 21,748
----------- -----------
Total assets...................... $ 540,378 $ 346,363
=========== ===========
INTEREST-BEARING LIABILITIES:
Passbook savings..................... $ 78,706 $ 246 1.3% $ 88,485 $ 163 0.7%
NOW/Interest bearing checking........ 63,115 22 0.1% 46,265 13 0.1%
Money market......................... 21,767 73 1.3% 7,578 7 0.4%
Certificates of deposit.............. 141,316 1,163 3.3% 79,219 508 2.6%
----------- ---------- ------- ----------- ---------- -------
Total deposits.................... 304,904 1,504 2.0% 221,547 691 1.2%
FHLB advances........................ 106,852 1,104 4.1% 56,297 615 4.4%
Long-term subordinated debt.......... 10,310 150 5.8% - - 0.0%
----------- ---------- ------- ----------- ---------- -------
Total borrowings.................. 117,162 1,254 4.3% 56,297 615 4.4%
Total interest-bearing liabilities... 422,066 2,758 2.6% 277,844 1,306 1.9%
Non-interest-bearing liabilities..... 60,532 37,920
----------- -----------
Total liabilities................. 482,598 315,764
Stockholders' equity................. 57,524 30,600
----------- -----------
Total liabilities and
stockholders' equity............ $ 540,122 $ 346,364
=========== ===========
Net interest income.................. $ 5,302 $ 3,029
========== ==========
Net interest rate spread (1)......... 3.8% 3.5%
Net interest-earning assets.......... $ 81,636 $ 46,771
=========== ===========
Net interest margin (2).............. 4.2% 3.7%
Average interest-earning assets to
interest-bearing liabilities...... 119.3% 116.8%
- ---------------------
(1) The average interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the
weighted-average cost of interest-bearing liabilities for the period.
(2) The net interest margin represents net interest income as a percent of
average interest-earning assets for the period.
(3) The yield has been annualized for comparable purposes.
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and those related to the changes in interest rates. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume ( i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
17
THREE MONTHS ENDED DECEMBER 31,
2005 VS. 2004
----------------------------------------------------
INCREASE (DECREASE)
DUE TO TOTAL
--------------------------------- INCREASE
(DECREASE)
VOLUME RATE INTEREST
--------------- -------------- ---------------
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans................................... $ 2,420 $ 794 $ 3,214
Investment securities................... 162 248 410
Interest-earning deposits............... (17) 118 101
--------------- -------------- ---------------
Total interest-earning assets....... 2,565 1,160 3,725
--------------- -------------- ---------------
INTEREST-BEARING LIABILITIES:
Passbook savings........................ 18 (101) (83)
NOW/Interest bearing checking........... (5) (4) (9)
Money market accounts................... (13) (53) (66)
Certificates of deposit................. (398) (257) (655)
--------------- -------------- ---------------
Total deposits...................... (398) (415) (813)
FHLB advances........................... (552) 63 (489)
Long-term subordinated debt............. (150) - (150)
--------------- -------------- ---------------
Total borrowings.................... (702) 63 (639)
Total interest-bearing liabilities.. (1,100) (352) (1,452)
--------------- -------------- ---------------
Change in net interest income.................. $ 1,465 $ 808 $ 2,273
=============== ============== ===============
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
The Company's profitability, like that of many financial institutions,
is dependent to a large extent upon its net interest income. When
interest-bearing liabilities mature or reprice more quickly (liability
sensitive) than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net interest income.
Similarly, when interest-earning assets mature or reprice more quickly (asset
sensitive) than interest-bearing liabilities, falling interest rates could
result in a decrease in net interest income. Finally, a flattening of the "yield
curve" ( i.e. , a decline in the difference between long- and short-term
interest rates) could adversely impact net interest income to the extent that
the Company's assets have a longer average term than its liabilities.
The Company is also subject to interest rate risk to the extent that the
value of its net assets fluctuates with interest rates. In general, the value of
a portion of the Company's assets will decline in the event of an increase in
interest rates. Historically, the Company's lending activity consisted primarily
of one-to four-family mortgages with long terms and fixed rates. These assets
are interest rate sensitive and therefore decline in value during a period of
rising interest rates. Conversely, these assets can increase in value during a
period of decreasing interest rates to the extent they do not prepay. As part of
the Company's business strategy and asset/liability management policy, a primary
focus of lending activity is the acquisition of variable rate and/or shorter
term loans thereby decreasing interest rate risk and fluctuations in the
18
value of the Company's assets. At December 31, 2005, the Company had
approximately $173.4 million, or roughly 41% of the total loan portfolio in
variable rate loans.
Economic Value of Equity ("EVE") analysis provides a quantitative
measure of interest rate risk. In essence, this approach calculates the
difference between the market value of assets and liabilities under different
interest rate environments. The degree of change between interest rate shock
levels is a measure of the volatility of value risk. The following table sets
forth, as of December 31, 2005, the estimated changes in First Federal Bank's
EVE in the event of the specified instantaneous changes in interest rates.
ECONOMIC VALUE OF EQUITY
------------------ --------------- ---------------- ---------------
Change in
Interest
Rates Amount of Percent
(Basis Points) Estimated EVE Change Change
-------------------------------------------------------------------
(Dollars in Thousands)
-------------------------------------------------------------------
+300 $ 70,371 $ (6,581) -9%
+200 73,189 (3,763) -5%
+100 75,523 (1,429) -2%
0 76,952 - -
-100 78,612 1,660 +2%
-200 76,698 (253) -%
------------------ --------------- ---------------- ---------------
Certain assumptions were employed in preparing the previous table. These
assumptions relate to interest rates, loan prepayment rates varied by categories
and rate environment, deposit decay rates varied by categories and rate
environment and the market values of certain assets under the various interest
rate scenarios. In addition, an intangible asset is created that approximates
the value of the deposits at $23.3 million as of December 31, 2005. It was also
assumed that delinquency rates will not change as a result of changes in
interest rates although there can be no assurance that this will be the case. In
the event that interest rates do change in the designated amounts, there can be
no assurance that First Federal's assets and liabilities would perform as set
forth above. In addition, a change in Treasury rates in the designated amounts
accompanied by a change in the shape of the Treasury yield curve would cause
significantly different changes to the EVE than indicated above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are deposits and borrowings,
scheduled payments and prepayment of loan principal and mortgage-backed
securities, scheduled payments and maturities of investment securities and
operations. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan repayments are more
influenced by general interest rates, floors and caps on loan rates, general
economic conditions and competition. The Company generally manages the pricing
of its deposits to be competitive and to increase core deposit relationships.
From time to time the Company has decided not to pay deposit rates that are as
high as those of its competitors. In such cases, to
19
meet funding needs the Company can supplement deposits with less expensive
alternative sources of funds, such as FHLB borrowings.
The primary investing activities of the Company are originating loans
and, to a much lesser extent, purchasing mortgage-backed and investment
securities. For the three months ended December 31, 2005 and 2004, the Company
increased outstanding loans balances by $4.2 million and $4.0 million,
respectively. The net growth was primarily funded by the maturities and
principal payments on investment securities, and FHLB advances were used to fund
a portion of loan originations.
The primary financing activities of the Company are deposits and
borrowings. During the three months ended December 31, 2005, the Company
experienced a net decrease in deposits of $3.3 million compared to a net
increase of $1.1 million during the three months ending December 31, 2004.
Certificates of deposits as of December 31, 2005, maturing within one year,
totaled $88.6 million. Management expects most of the non-public deposits to
remain with the Bank. The net increase in FHLB borrowings for the three-month
period ended December 31, 2005, was $1.2 million. This was primarily related to
funding certain long-term fixed rate loans.
The Company's most liquid assets are cash and cash equivalents, which
consist of currency on hand, items in process of clearing and due from banks.
These items are non-interest bearing. The level of these assets is dependent on
the Company's operating, financing and investing activities during any given
period. At September 30, 2005 and December 31, 2005, cash and cash equivalents
totaled $11.8 million and $14.5 million, respectively. Additionally, the Company
maintains overnight funds that are interest-bearing. As of September 30, 2005
and December 31, 2005, the balances were $26.2 million at each date.
Liquidity management is both a daily and long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-earning deposits and investment
securities, and (iv) the objectives of its asset/liability management program.
Excess liquidity is invested generally in interest-earning overnight deposits,
short- and intermediate-term U.S. Government and agency obligations and
mortgage-backed securities of short duration. If the Company requires funds
beyond its ability to generate them internally, the Bank has additional
borrowing capacity with the FHLB of Dallas, which is, in the opinion of
management, adequate to provide any funds needed.
At September 30, 2005, the Company had outstanding unfunded loan
commitments totaling $52 million and $54 million as of December 31, 2005. The
Company anticipates that it will have sufficient funds available to meet current
loan commitments.
First Federal Bank is required to maintain minimum levels of regulatory
capital. At December 31, 2005, First Federal Bank exceeded all of the capital
requirements.
20
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related consolidated financial
data presented herein have been prepared in accordance with accounting
principles generally accepted in the United States of America, which require the
measurement of financial position and operating results in terms of historical
dollars without consideration for changes in the relative purchasing power of
money over time due to inflation. The impact of inflation can be found in the
increased cost of the Company's operations. Nearly all the assets and
liabilities of the Company are financial, unlike most industrial companies. As a
result, the Company's performance is directly impacted by changes in interest
rates, which are indirectly influenced by inflationary expectations. Changes in
interest rates do not necessarily move to the same extent as changes in the
price of goods and services.
ITEM 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act)
as of the end of the period covered by this quarterly report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this quarterly report, our
disclosure controls and procedures were effective to ensure that information
required to be disclosed in the reports that the Company files or submits under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
During the last quarter, the Company has revised its disclosure control
process with respect to the review of information required in filings with the
Securities and Exchange Commission. On a quarterly basis, the Chief Financial
Officer and the Vice-President of Accounting review an itemized checklist for
the report with respect to the applicable period. Other than this change, there
have not been any significant changes in internal control over financial
reporting in the last quarter that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
21
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
31.1 Certification of Aubrey L. Dunn, Jr. pursuant to Rule 13a-14
under the Securities Exchange Act of 1934
31.2 Certification of George A. Rosenbaum, Jr. pursuant to Rule
13a-14 under the Securities Exchange Act of 1934
32 Certification of Aubrey L. Dunn, Jr. and George A. Rosenbaum,
Jr. pursuant to 18 U.S.C. 1350 as adopted pursuant to Section
906 of the Sarbanes Oxley Act of 2002
22
SIGNATURES
In accordance with section 13 or 15(d) 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 BANC OF THE SOUTHWEST, INC.
Registrant
February 14, 2006 By: \s\ Aubrey L. Dunn, Jr.
- --------------------------- -----------------------------------------
Date Aubrey L. Dunn, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
February 14, 2006 By: \s\ George A. Rosenbaum, Jr.
- --------------------------- -----------------------------------------
Date George A. Rosenbaum, Jr.
Executive Vice President and
Chief Financial Officer (Principal
Accounting and Financial Officer)
23