Back to GetFilings.com

FIRST FEDERAL BANCSHARES, INC.

Form 10-Q Quarterly Report

Index

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

First Federal Bancshares, Inc. and Subsidiary
Consolidated Statements of Financial Condition
(In thousands of dollars, except share data)
(unaudited)

First Federal Bancshares, Inc. and Subsidiary
Consolidated Statements of Income
(in thousands of dollars, except share data)
(unaudited)

First Federal Bancshares, Inc. and Subsidiary
Consolidated Statements of Shareholders’ Equity
Nine Months Ended September 30, 2002 and 2003
(in thousands of dollars, except share data)
(unaudited)

First Federal Bancshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(in thousands of dollars)
(unaudited)

FIRST FEDERAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(table amounts in thousands of dollars, except share data)

Note 1 — Basis of Presentation

The accompanying interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by accounting principles generally accepted in the United States of America are not included herein. These interim statements should be read in conjunction with First Federal Bancshares, Inc.’s (“First Federal Bancshares” or the “Company”) Annual Report on Form 10-K. The December 31, 2002 balance sheet presented herein has been derived from the audited financial statements included in the Company’s Annual Report on Form 10-K, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Interim statements are subject to possible adjustment in connection with the annual audit of the Company for the year ending December 31, 2003. In the opinion of management of the Company, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial position and consolidated results of operations for the periods presented. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

Note 2 – Acquisition of PFSB Bancorp, Inc.

On November 22, 2002, the Company completed the acquisition of PFSB Bancorp, Inc. (“PFSB”), and its wholly owned subsidiary, Palmyra Savings, pursuant to an Agreement and Plan of Merger dated as of June 4, 2002, by and between the Company and PFSB. The acquisition was completed through the merger of PFSB with and into the Company. As part of the acquisition, Palmyra Savings merged with and into First Federal Bank (“First Federal” or the “Bank”), the Company’s wholly owned subsidiary, with First Federal being the surviving bank. First Federal Bancshares paid approximately $4.4 million in cash and issued approximately 252,000 shares of the Company’s common stock to the former stockholders of PFSB. The PFSB acquisition included total assets of approximately $73.8 million and three banking offices in northeast Missouri.

PFSB results of operations have been reflected in the Company’s consolidated statements of income beginning as of the acquisition date. The total net interest income, total income, net income, and basic and diluted earnings per share for the three and nine months ended September 30, 2003 and the proforma net interest income, total income, net income, and basic and diluted earnings per share for the three and nine months ended September 30, 2002 after giving effect to the PFSB acquisition as if it occurred on January 1, 2002 are as follows:

6

Note 2 – Acquisition of PFSB Bancorp, Inc. (continued)

Note 3 – Earnings Per Share

For purposes of per share calculations, the Company had 1,722,273 and 1,664,320 shares of common stock outstanding at September 30, 2003 and 2002. Basic earnings per share for the nine months ended September 30, 2003 and 2002 were computed by dividing net income by the weighted average number of shares outstanding. Diluted earnings per share for the nine months ended September 30, 2003 and 2002 were computed by dividing net income by the weighted average number of shares outstanding, adjusted for the dilutive effect of the outstanding stock options and stock awards. Computations for basic and diluted earnings per share are provided below.

7

Note 4 – Stock Options

The Company applies Accounting Principles Board (APB) Opinion 25 and related interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized at the date of grant. Had compensation cost been determined based on the fair value at the grant dates for awards under the plan consistent with the method of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” the Company’s net income and earnings per share would have been reduced to the pro forma amounts in the table below. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options’ vesting period.

Pursuant to its 2001 stock-based incentive plan, the Company awarded 89,700 shares of restricted stock during 2001. These shares vest over a five-year period. The unamortized cost of shares not yet earned (vested) is reported as a reduction of shareholders’ equity.

Note 5 – Transfer of Securities Held to Maturity

During the first quarter of 2003, as a result of the acquisition of PFSB, changes in the structure of the balance sheet, and for asset/liability management purposes, management revised the Company policy to classify all securities as available for sale. Effective January 31, 2003, the Company reclassified all of its securities held-to-maturity to securities available-for-sale. The securities that were reclassified had a book value of $24.2 million and a fair value of $24.5 million as of that date. The reclassification of these securities resulted in a decrease in securities held-to-maturity of $24.5 million from December 31, 2002 to March 31, 2003, and the majority of the $35.2 million increase in available-for-sale securities during the same period.

Note 6 – Sale of Branch

The Company’s subsidiary, First Federal Bank, completed the sale of its Mt. Sterling, Illinois branch office to Beardstown Savings s.b. on September 26, 2003. The sale included the assumption of approximately $6.2 million in deposits at a 6.5% premium and miscellaneous other assets totaling approximately $106,000. A gain of $428,000 was recorded on the sale.

8

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                RESULTS OF OPERATIONS

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995 as amended, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words such as “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on the operations and future prospects of the Company and its wholly-owned subsidiaries include, but are not limited to, changes in: interest rates; general economic conditions; legislative/regulatory provisions; monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board; the quality or composition of the loan or investment portfolios; demand for loan products; deposit flows; competition; demand for financial services in the Company’s market area; and accounting principles, policies, and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company’s financial results, is included in the Company’s filings with the Securities and Exchange Commission.

The following discussion compares the financial condition of First Federal Bancshares and its wholly owned subsidiary, First Federal, at September 30, 2003 to its financial condition at December 31, 2002 and the results of its operations for the three-month and nine-month periods ended September 30, 2003 to the same periods in 2002. This discussion should be read in conjunction with the interim financial statements and footnotes included herein.

FINANCIAL CONDITION

Total assets were $312.4 million at September 30, 2003 and $316.4 million at December 31, 2002. During the nine months ended September 30, 2003, cash and cash equivalents decreased $24.5 million primarily due to the timing of called and purchased securities and the sale of the Mt. Sterling, Illinois branch office. Securities available-for-sale increased $56.5 million to $148.1 million at September 30, 2003 due to the Company’s reevaluation of the classification of the securities portfolio effective January 31, 2003. As a result of the acquisition of PFSB, changes in the structure of the balance sheet, and for asset/liability management purposes, management revised the Company’s policy to classify all securities as available-for-sale. The securities that were reclassified had a book value of $24.2 million and a fair value of $24.5 million as of that date. The reclassification of these securities resulted in a decrease in securities held-to-maturity of $24.5 million from December 31, 2002 to September 30, 2003. The remaining $32.1 million increase in securities available-for-sale was primarily a result of additional purchases funded through a decrease in cash and cash equivalents and principal repayments on loans. Loans decreased $17.3 million to $133.0 million at September 30, 2003 primarily as a result of portfolio loans refinancing into the Federal Home Loan Bank Mortgage Partnership Finance fixed rate program and also to other competitors due to the lower interest rate environment. The Company also had an amount due from broker at September 30, 2003 for securities that matured or were sold but not yet settled.

The allowance for loan losses was $980,000 at September 30, 2003 and $976,000 at December 31, 2002. There were no impaired loans at either date. The allowance for loan losses represented .73% of total loans and 61.25% of nonperforming loans at September 30, 2003 compared to .65% of total loans and 50.89% of nonperforming loans at December 31, 2002. Nonperforming assets totaled $1.8 million and $2.2 million at September 30, 2003 and December 31, 2002, respectively. The ratio of non-performing assets to total assets at September 30, 2003 was .56% compared to .69% at December 31, 2002.

9

Total liabilities at September 30, 2003 were $271.8 million compared to $269.4 million at December 31, 2002, an increase of $2.4 million. The increase in total liabilities was primarily due to a $4.0 million Federal Home Loan advance recorded in September 2003, partially offset by a decrease in customer deposits due to the sale of the Mt. Sterling, Illinois branch office.

Shareholders’ equity at September 30, 2003 was $40.6 million compared to $47.0 million at December 31, 2002, a decrease of $6.5 million. The decrease primarily reflects the repurchase of treasury stock totaling $7.3 million and a decrease in the fair value of securities available-for-sale, net of tax, of $1.8 million, offset by net income of $2.3 million.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002

Net income increased $428,000 to $925,000 for the quarter ended September 30, 2003 compared to the same period in 2002. The increase in net income was primarily a result of an increase in net interest income and an increase in non-interest income offset by increases in noninterest expense and the income tax provision.

Net interest income was $2.4 million for the quarter ended September 30, 2003 compared to $1.7 million for the same prior year period. The increase in net interest income was primarily a result of an increase in the net interest spread and the net interest margin to 2.73% and 3.02%, respectively, for the quarter ended September 30, 2003 from 2.42% and 2.89% for the same period in 2002 and an increase in volume of interest-earning assets and interest-bearing liabilities as a result of the acquisition of PFSB in the last quarter of 2002. The increase in the spread and the margin was due largely to the decrease in the cost of funds exceeding the decrease in the yield on interest-earning assets as interest-earning assets and interest-bearing liabilities repriced downward in reaction to the continued decreasing interest rate environment. The average yield on interest-earning assets decreased to 4.93% for the quarter ended September 30, 2003 from 5.40% for the same quarter in 2002, while the average yield on interest-bearing liabilities decreased to 2.20% for the quarter ended September 30, 2003 from 2.98% for the same period in 2002. The ratio of average interest-earning assets to average interest-bearing liabilities decreased to 115.06% from 118.84% for the three-month periods, respectively.

The provision for loan losses was $60,000 for the quarter ended September 30, 2003 and zero for the quarter ended September 30, 2002. The increase in the provision for loan losses can be attributed to increased charge-offs of consumer loans, increased classified loans, and a shift in the composition of the loan portfolio during the three month period. The shift in the loan portfolio occurred due to a decrease in lower risk one-to-four-family mortgage loans, offset by an increase in commercial loans which are inherently higher risk in nature. On a quarterly basis, management of the Company meets to review the allowance for loan losses. Management classifies loans in compliance with regulatory classifications. Classified loans are individually reviewed to arrive at specific reserves for those loans. Once the specific portion of the allowance is calculated, management calculates a historical portion for each loan category based on loan loss history, peer data, current economic conditions and trends in the portfolio, including delinquencies and impairments, as well as changes in the composition of the loan portfolio. Although management believes that the allowance for loan losses reflected probable incurred losses on existing loans at September 30, 2003, there can be no assurance that such losses will not exceed estimated amounts. Future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions that may be beyond the Company’s control. The allowance for loan losses as of September 30, 2003 was maintained at a level that represents management’s best estimate of losses in the loan portfolio and such losses were both probable and reasonably estimatable.

Noninterest income was $953,000 for the three-month period ended September 30, 2003 compared to $130,000 for the same period in 2002. The increase in noninterest income was primarily a result of a $111,000 increase in loan origination and servicing fees related to increased loan originations in the FHLB Mortgage Partnership Finance program, a $223,000 increase in net gains on the sale of securities, and a $428,000 gain on the sale of the Mt. Sterling, Illinois branch office. The remainder of the increase in noninterest income was attributed to an increase of $18,000 in service charges, an increase of $16,000 in other fee income, and an increase of $27,000 in other income. The increases in service charges and fee income are primarily due to the acquisition of PFSB

10

resulting in an increase in deposits and associated fee income. The decrease in deposits resulting from the sale of the Mt. Sterling branch on September 26, 2003 did not have an impact on fee income during this quarter.

Noninterest expense was $1.7 million and $1.0 million for the quarters ended September 30, 2003 and 2002. The increase in noninterest expense primarily reflects increased compensation and benefits expense of $399,000 associated with an increase in the number of employees as a result of the PFSB acquisition in November 2002, and an increase in employee benefits including health insurance premiums and retirement funds. Occupancy and equipment expense, data processing expense, advertising expense, professional fees, and other noninterest expenses also experienced increases during the period, primarily due to the acquisition.

The Company’s income tax expense increased $321,000 to $614,000 for the quarter ended September 30, 2003 compared to $293,000 during the same period in 2002. Income tax expense was approximately 40% and 37% of pretax income for 2003 and 2002. The increase in the effective tax rate was a result of increases in nondeductible expenses primarily related to the ESOP.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002

Net income increased $831,000 to $2.3 million for the nine months ended September 30, 2003 compared to the same period in 2002. The increase in net income was primarily a result of an increase in net interest income and an increase in non-interest income, offset by increases in noninterest expense and the income tax provision.

Net interest income was $6.6 million for the nine months ended September 30, 2003 compared to $5.2 million for the same period in 2002. The increase in net interest income was primarily a result of an increase in volume of interest-earning assets and interest-bearing liabilities as a result of the acquisition of PFSB in the last quarter of 2002. The increase in the volume of these interest-earning assets and interest-bearing liabilities during the nine months ended September 30, 2003 was offset by a decrease in the net interest margin to 2.83% from 2.92% for the same period in 2002. The net interest spread increased to 2.52% from 2.41% for the nine-month periods ended September 30, 2003, as the decrease in the cost of funds exceeded the decrease in the yield on interest-earning assets due to the continued declining interest rate environment. The average yield on interest-earning assets decreased 46 basis points to 5.00% for the nine months ended September 30, 2003 from 5.46% for the same period in 2002, while the average yield on interest-bearing liabilities decreased 57 basis points to 2.48% for the nine months ended September 30, 2003 from 3.05% for the same prior year period. The ratio of average interest-earning assets to average interest-bearing liabilities was 114.44% compared to 120.16% for the nine-month periods ended September 30, 2003 and September 30, 2002.

The provision for loan losses was $60,000 for the nine months ended September 30, 2003 and $7,000 for the same period in 2002. The increase in the provision for loan losses can be attributed to increased charge-offs of consumer loans increased classified loans, and a shift in the composition of the loan portfolio during the nine-month period. The shift in the loan portfolio was a result of decreases in lower risk one-to-four-family mortgage loans, offset by an increase in commercial loans, which are inherently higher risk in nature.

Noninterest income was $2.1 million for the nine-month period ended September 30, 2003 compared to $389,000 for the same period in 2002. The increase in noninterest income was primarily a result of a $317,000 increase in loan origination and servicing fees related to increased loan originations in the FHLB Mortgage Partnership Finance program, a $482,000 increase in net gains on the sale of securities, a $355,000 recovery from an impairment loss related to certificates of deposit purchased through a broker who was charged by the SEC with securities fraud in relationship to these certificates, and a $428,000 gain on the sale of the Mt. Sterling, Illinois branch office. Services charges increased $55,000 and other fee income increased $59,000. The increases in service charges and fee income are primarily due to the acquisition of PFSB resulting in an increase in deposits and associated fee income. The decrease in deposits resulting from the sale of the Mt. Sterling branch on September 26, 2003 did not have an impact on fee income during this period.

11

Noninterest expense was $4.9 million and $3.2 million for the nine-months ended September 30, 2003 and 2002. The increase in noninterest expense primarily reflects increased compensation and benefits expense of $972,000 associated with an increase in the number of employees as a result of the PFSB acquisition in November 2002, and an increase in employee benefits including health insurance premiums and retirement funds. Occupancy and equipment expense, data processing expense, advertising expense, professional fees and other noninterest expenses also experienced increases during the period, primarily due to the acquisition.

The Company’s income tax expense increased $576,000 to $1,481,000 for the nine-months ended September 30, 2003 compared to the same period in 2002. Income tax expense was approximately 39% and 38% of pretax income in 2003 and 2002.

LIQUIDITY

The Company must maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund loan originations and deposit withdrawals, to satisfy other financial commitments, and to take advantage of investment opportunities. The Company invests excess funds in overnight deposits and other short-term interest-bearing assets to provide liquidity to meet these needs. At September 30, 2003, cash and cash equivalents totaled $18.6 million. At September 30, 2003, the Company had commitments to fund loans of $1.5 million. At the same time, certificates of deposit which are scheduled to mature in one year or less totaled $103.1 million. Management believes, based on past experience, that a significant portion of those deposits will remain with the Company. Based on the foregoing, in addition to the Company’s high level of core deposits and capital, the Company considers its liquidity and capital resources sufficient to meet its outstanding short-term and long-term needs.

NEW ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) recently issued two new accounting standards, Statement 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, and Statement 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities, both of which generally become effective in the quarter beginning July 1, 2003. Management determined that, upon adopting the new standards, they will not materially affect the Company’s operating results or financial condition because the Company does not have these instruments or engage in these activities.

In November 2002, the FASB issued FASB Interpretation (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, an interpretation of SFAS No. 5, 57, and 107 and Rescission of FIN 34. This Interpretation clarifies the requirements of SFAS No. 5, “Accounting for Contingencies,” relating to the guarantor’s accounting for and disclosure of the issuance of certain types of guarantees. The disclosure provisions of the Interpretation are effective for financial statements in interim or annual reports for periods that end after December 15, 2002. However, the provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of the guarantor’s year-end. The application of this Interpretation did not have a material impact on the Company’s consolidated statement of financial condition or consolidated statement of income.

In January 2003, FASB issued FIN 46, “Consolidation of Variable Interest Entities.” FIN 46 requires a company to consolidate a variable interest entity (“VIE”) if the company has variable interests that give it a majority of the expected losses or a majority of the expected residual returns of the entity. FIN 46 is effective immediately for VIEs created after January 31, 2003. For VIEs created prior to February 1, 2003, FIN 46 will apply in the first interim period or fiscal year beginning after December 15, 2003. The implementation of FIN 46 did not have an impact on the Company’s consolidated statement of financial condition or consolidated statement of income.

CAPITAL RESOURCES

The Bank is subject to capital-to-asset requirements in accordance with bank regulations. The following table summarizes the Bank’s regulatory capital requirements versus actual capital as of September 30, 2003:

12

On August 20, 2003, the Board of Directors approved a stock repurchase plan to repurchase an additional 150,000 shares of the Company’s common stock. 149,489 shares have been repurchased through September 30, 2003 as part of this plan. An additional 90,461 shares were repurchased during 2003 under the prior repurchase program. On October 15, 2003, the Board of Directors approved a stock repurchase plan to repurchase 12% of outstanding shares, or 222,024 shares. No shares have been repurchased under this plan.

SUBSEQUENT EVENTS

During the quarter ended December 31, 2001, the Company recorded an impairment loss of $596,000 related to certificates of deposit purchased through a broker who was charged by the SEC with securities fraud in relationship to these certificates of deposit. The Company received a check in the amount of $355,000 during April 2003 as an initial distribution of receivership assets. This distribution represented 59.6% of the allowed claim. During September 2003, the Company received a letter indicating that a second distribution of receivership of assets is in progress. The Company expects to recover an additional $97,000 through this second distribution however, due to the uncertainty of the ultimate distribution, no additional amounts have been recorded in income.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Qualitative Aspects of Market Risk. The Company’s most significant form of market risk is interest rate risk. The principal objectives of the Company’s interest rate risk management are to evaluate the interest rate risk inherent in certain balance sheet accounts, determine the level of risk appropriate given the Company’s business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with the Board of Director’s approved guidelines. The Company has an Asset/Liability Committee, responsible for reviewing its asset/liability policies and interest rate risk position, which meets monthly and reports trends and interest rate risk position to the Board of Directors quarterly. The extent of the movement of interest rates is uncertainty that could have a negative impact on the earnings of the Company.

The Company has used the following strategies to manage interest rate risk: (1) emphasizing the origination of adjustable-rate and balloon loans and not originating long-term, fixed-rate loans for retention in its portfolio; (2) emphasizing shorter term consumer loans; (3) introducing floating-rate commercial business loans tied to the prime rate; (4) maintaining a high quality securities portfolio that provides adequate liquidity and flexibility to take advantage of opportunities that may arise from fluctuations in market interest rates, the overall maturity of which is monitored in relation to the repricing of its loan portfolio; and (5) using Federal Home Loan Bank advances to better structure maturities of its interest rate sensitive liabilities. The Company currently does not participate in hedging programs, interest rate swaps or other activities involving the use of off-balance sheet derivative financial instruments.

Quantitative Aspects of Market Risk. The Company primarily utilizes an interest sensitivity analysis prepared by the Office of Thrift Supervision to review the level of interest rate risk of the Bank. This analysis measures interest rate risk by computing changes in the net portfolio value of the Bank’s cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. Net portfolio value represents the market value of portfolio equity and is equal to the market value of

13

assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 300 basis point increase or decrease in market interest rates with no effect given to any steps that management might take to counter the effect of that interest rate movement. The following table, which is based on information provided to the Bank by the Office of Thrift Supervision, presents the change in the Bank’s net portfolio value at June 30, 2003, the latest date for which information is available, that would occur upon an immediate change in interest rates based on Office of Thrift Supervision assumptions, but without giving effect to any steps that management might take to counteract that change. The Company expects September’s net portfolio value to be similar to that of June 30, 2003 as shown below. All model outputs associated with the –300 and –200 bp scenarios are not applicable because of the abnormally low prevailing interest rate environment.

The Office of Thrift Supervision uses certain assumptions in assessing the interest rate risk of savings associations. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, if interest rates change, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table.

ITEM 4: CONTROLS AND PROCEDURES

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended September 30, 2003 that has materially affected, or is reasonably likely to

14

materially affect, the Company’s internal control over financial reporting.

15

PART II - - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

ITEM 2. CHANGES IN SECURITIES.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.

ITEM 5. OTHER INFORMATION.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

16

17

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.

18