SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________
FORM 10-Q
[Mark One]
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission File Number: 0-25509
First Federal Bankshares,Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 42-1485449
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
329 Pierce Street, Sioux City, Iowa 51101
-----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code 712-277-0200
________________________________________________________________
Former name, former address and former fiscal year, if changed
since last report
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 8, 2002
----- -------------------------------
(Common Stock, $.01 par value) 4,118,869
FIRST FEDERAL BANKSHARES, INC.
INDEX
Page
Part I. Financial Information
Item I. Financial Statements of First Federal
Bankshares, Inc. and Subsidiaries 1
Condensed Consolidated Balance Sheets
at September 30, 2002 and June 30, 2002 1
Condensed Consolidated Statements of Operations
for the three-month periods ended
September 30, 2002 and 2001 2
Condensed Consolidated Statements of Changes in
Stockholders' Equity for the three-month periods
ended September 30, 2002 and 2001 3
Condensed Consolidated Statements of Comprehensive
Income for the three-month periods ended
September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows
for the three-month periods ended
September 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About 14
Market Risk
Item 4. Controls and Procedures 14
Part II. Other Information 15
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST FEDERAL BANKSHARES, INC and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, June 30,
2002 2002
------------- -------------
Assets (Unaudited)
Cash and due from banks $ 23,971,973 $ 23,114,024
Interest-bearing deposits in other financial institutions 107,782 103,197
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Cash and cash equivalents 24,079,755 23,217,221
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Securities available-for-sale, at fair value (amortized
cost of $82,591,184 and $91,529,014, respectively) 83,832,308 92,313,472
Securities held-to-maturity, at amortized cost
(fair value of $61,471,630 and $64,009,952, respectively) 59,856,984 63,294,694
Loans receivable, net 416,421,356 418,381,872
Office property and equipment, net 13,581,247 13,770,198
Federal Home Loan Bank stock, at cost 5,707,300 5,037,800
Accrued interest receivable 2,814,386 2,803,663
Refundable income taxes -- 146,741
Goodwill 18,523,607 18,523,607
Other assets 15,702,851 13,267,904
------------- -------------
Total assets $ 640,519,794 $ 650,757,172
============= =============
Liabilities
Deposits $ 454,236,308 $ 472,648,336
Advances from Federal Home Loan Bank 107,429,114 99,064,679
Advance payments by borrowers for
taxes and insurance 961,950 1,482,743
Deferred tax liability 274,000 103,000
Accrued taxes on income 140,542 --
Accrued interest payable 3,547,151 3,640,039
Accrued expenses and other liabilities 2,619,784 2,555,580
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Total liabilities 569,208,849 579,494,377
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Stockholders' equity
Common stock, $.01 par value, 12,000,000 shares authorized;
4,878,433 and 4,871,112 shares issued at
September 30, 2002 and June 30, 2002, respectively 48,784 48,711
Additional paid-in capital 36,296,309 36,247,480
Retained earnings, substantially restricted 44,407,527 43,542,299
Treasury stock, at cost, 753,764 and 665,764 shares at
September 30, 2002 and June 30, 2002, respectively (8,796,596) (7,577,646)
Accumulated other comprehensive income 776,124 490,458
Unearned ESOP (1,293,260) (1,330,000)
Unearned RRP (127,943) (158,507)
------------- -------------
Total stockholders' equity 71,310,945 71,262,795
------------- -------------
Total liabilities and stockholders' equity $ 640,519,794 $ 650,757,172
============= =============
See notes to condensed consolidated financial statements.
1
FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months
ended September 30,
2002 2001
------------ ------------
Interest income:
Loans receivable $7,748,162 $ 8,716,631
Mortgage-backed securities 943,454 349,157
Investment securities 791,005 1,386,943
Other interest-earning assets 4,230 420,084
------------ ------------
Total interest income 9,486,851 10,872,815
------------ ------------
Interest expense:
Deposits 3,280,926 5,348,542
Advances from FHLB and other borrowings 1,310,150 1,239,847
------------ ------------
Total interest expense 4,591,076 6,588,389
------------ ------------
Net interest income 4,895,775 4,284,426
Provision for losses on loans 830,000 880,000
------------ ------------
Net interest income after provision for losses on loans 4,065,775 3,404,426
------------ ------------
Noninterest income:
Fees and service charges 1,170,828 1,123,361
Gain on sale of loans held for sale 156,544 127,380
Gain on sale of branch deposits -- 164,730
Gain on sale of real estate owned and held for development 22,388 66,407
Net loss on sale of securities -- (25,332)
Gain on sale of office property and equipment -- 246,685
Real estate-related activities 327,438 405,905
Other income 409,878 275,418
------------ ------------
Total noninterest income 2,087,076 2,384,554
------------ ------------
Noninterest expense:
Compensation and benefits 2,388,760 2,233,103
Office property and equipment 639,299 611,287
Deposit insurance premiums 20,785 22,976
Data processing expense 74,961 85,712
Advertising 89,589 93,403
Other expense 1,161,708 1,073,655
------------ ------------
Total noninterest expense 4,375,102 4,120,136
------------ ------------
Earnings before taxes on income 1,777,749 1,668,844
Taxes on income 590,000 596,000
------------ ------------
Net earnings $1,187,749 $ 1,072,844
============ ============
Earnings per share:
Basic earnings per share $ 0.30 $ 0.25
============ ============
Diluted earnings per share $ 0.29 $ 0.25
============ ============
Dividends declared per share $ 0.08 $ 0.08
============ ============
See notes to condensed consolidated financial statements.
2
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Three months ended September 30,
2002 2001
------------------------------------
(Unaudited)
Capital Stock
Beginning of year balance $ 48,711 $ 48,495
Stock options exercised 73 1
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End of period balance 48,784 48,496
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Additional paid-in capital
Beginning of year balance 36,247,480 36,053,892
Stock options exercised 36,490 924
Stock appreciation of allocated ESOP shares 12,339 9,066
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End of period balance 36,296,309 36,063,882
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Retained earnings, substantially restricted
Beginning of year balance 43,542,299 41,357,535
Net earnings 1,187,749 1,072,844
Dividends paid on common stock (322,521) (338,173)
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End of period balance 44,407,527 42,092,206
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Treasury stock, at cost
Beginning of year balance (7,577,646) (2,803,832)
Treasury stock purchased (1,218,950) (3,374,110)
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End of period balance (8,796,596) (6,177,942)
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Accumulated other comprehensive income (loss)
Beginning of year balance 490,458 (343,831)
Net change in unrealized gains on securities available-for-sale 285,666 580,218
Less: reclassification adjustment for net realized losses
included in net income, net of tax expense -- (15,883)
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End of period balance 776,124 252,270
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Unearned ESOP shares
Beginning of year balance (1,330,000) (1,473,470)
ESOP shares allocated 36,740 39,990
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End of period balance (1,293,260) (1,433,480)
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Unearned recognition and retention plan shares
Beginning of year balance (158,507) (251,342)
Amortization of RRP expense 30,564 43,329
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End of period balance (127,943) (208,013)
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Total stockholders' equity $ 71,310,945 $ 70,637,419
===================================================================================================================
See notes to condensed consolidated financial statements.
3
FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended
September 30,
-------------------------------
2002 2001
---- ----
(Unaudited)
Net earnings $1,187,749 $1,072,844
Other comprehensive income:
Unrealized holding gains arising during the period, net of tax 285,666 580,218
Less: reclassification adjustment for net realized (losses)
included in net income, net of tax expense -- (15,883)
--------------- ---------------
Other comprehensive income, net of tax 285,666 596,101
--------------- ---------------
Comprehensive income $1,473,415 $1,668,945
=============== ===============
See notes to condensed consolidated financial statements.
4
FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended September 30,
2002 2001
-------------------------------------
(Unaudited)
Cash flows from operating activities:
Net earnings $ 1,187,749 $ 1,072,844
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Loans originated for sale to investors (16,886,013) (17,473,000)
Proceeds from sale of loans originated for sale 15,452,632 17,333,230
Provision for loan losses 830,000 880,000
Depreciation and amortization 505,384 463,338
Net gain on sale of loans (156,544) (127,380)
Net loss (gain) on sale of securities available-for-sale -- 25,332
Net gain on sale of branch deposits -- (164,730)
Net (gain) loss on sale of office property and equipment -- (246,685)
Net gain on sale of real estate owned and held for development (22,388) (66,407)
Net loan fees deferred 8,392 (33,247)
Amortization of premiums and discounts on loans and securities 94,630 239,954
(Increase) decrease in accrued interest receivable (10,723) 366,022
Increase in other assets (2,435,512) (952,393)
(Increase) decrease in accrued interest payable (92,888) 639,891
Increase in accrued expenses and other liabilities 64,545 152,861
Increase in accrued taxes on income 287,283 193,538
------------ ------------
Net cash (used in) provided by operating activities (1,173,453) 2,303,168
------------ ------------
Cash flows from investing activities:
Purchase of securities held-to-maturity -- (3,540,454)
Proceeds from maturities of securities held-to-maturity 3,415,362 743,222
Proceeds from sale of securities available-for-sale 9,050,000 2,320,168
Purchase of securities available-for-sale (3,508,315) (24,683,362)
Proceeds from maturities of securities available-for-sale 3,373,064 45,489,833
(Purchase) redemption of Federal Home Loan Bank Stock (669,500) 4,938,300
Loans purchased (3,338,000) (7,221,000)
Decrease in loans receivable 5,790,814 494,494
Proceeds from sale of office property and equipment -- 493,977
Purchase of office property and equipment (92,682) (139,573)
Proceeds from sale of foreclosed real estate 27,000 130,043
Proceeds from sale of real estate held for development 95,278 220,703
------------ ------------
Net cash provided by investing activities 14,143,021 19,246,351
------------ ------------
Cash flows from financing activities:
Decrease in deposits (18,412,028) (8,238,331)
Proceeds from advances from FHLB 22,569,000 --
Repayment of advances from FHLB (14,238,305) (7,062,921)
Net decrease in advances from borrowers for taxes and insurance (520,793) (424,462)
Issuance of common stock, net 36,563 925
Repurchase of common stock (1,218,950) (3,374,110)
Cash dividends paid (322,521) (338,173)
------------
Net cash used in financing activities (12,107,034) (19,437,072)
------------
Net increase in cash and cash equivalents 862,534 2,112,447
Cash and cash equivalents at beginning of period 23,217,221 77,949,553
------------
Cash and cash equivalents at end of period $ 24,079,755 $ 80,062,000
============ ============
Supplemental disclosures:
Cash paid for interest $ 4,683,964 $ 5,948,498
Cash paid for income taxes 302,717 402,462
============ ============
See notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES
1. Basis of presentation
- ------------------------
The condensed consolidated balance sheet information for June 30, 2002 was
derived from the audited Consolidated Balance Sheets of First Federal
Bankshares, Inc. (the "Company") at June 30, 2002. The condensed consolidated
financial statements at and for the three months ended September 30, 2002 and
2001 are unaudited.
In the opinion of management of the Company these financial statements reflect
all adjustments, consisting only of normal recurring accruals necessary to
present fairly these condensed consolidated financial statements. The results of
operations for the interim periods are not necessarily indicative of results
that may be expected for an entire year. Certain information and footnote
disclosure normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been omitted.
The Company's critical accounting policy relates to the allowance for losses on
loans. The Company has established a systematic method of periodically reviewing
the credit quality of the loan portfolio in order to establish a sufficient
allowance for losses on loans. The allowance for losses on loans is based on
management's current judgments about the credit quality of individual loans and
segments of the loan portfolio. The allowance for losses on loans is established
through a provision for loan losses based on management's evaluation of the risk
inherent in the loan portfolio, and considers all known internal and external
factors that affect loan collectibility as of the reporting date. Such
evaluation, which includes a review of all loans on which full collectability
may not be reasonably assured, considers among other matters, the estimated net
realizable value or the fair value of the underlying collateral, economic
conditions, historical loan loss experience, management's knowledge of inherent
risks in the portfolio that are probable and reasonably estimable and other
factors that warrant recognition in providing an appropriate loan loss
allowance.
A summary of significant accounting policies followed by the Company is set
forth in Note 1 of the Company's 2002 Annual Report to Stockholders and is
incorporated herein by reference. The Company's critical accounting policies and
their application are periodically reviewed by the Audit Committee and the full
Board of Directors.
2. Organization
- ---------------
The Company is the holding company for First Federal Bank (the "Bank"). The
Company owns 100% of the Bank's common stock. Currently, the Company engages in
no other significant activities beyond its ownership of the Bank's common stock.
6
3. Earnings per share
- ---------------------
The following information was used in the computation of net earnings per common
share on both a basic and diluted basis for the periods presented.
Three months ended
September 30,
2002 2001
---- ----
Basic earnings per share computation:
Net earnings $1,187,749 $1,072,844
Weighted average common shares
outstanding 4,009,213 4,211,662
Basic earnings per share $ 0.30 $ 0.25
========== ==========
Diluted earnings per share computation:
Net earnings $1,187,749 $1,072,844
Weighted average common
shares outstanding - basic 4,009,213 4,211,662
Incremental option shares using
treasury stock method 87,554 102,227
__________ __________
Weighted average diluted
shares outstanding 4,096,767 4,313,889
Diluted earnings per share $ 0.29 $ 0.25
========== ==========
4. Goodwill and other intangible assets
- ----------------------------------------
In July 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 142 (SFAS 142), Goodwill and Other Intangible Assets. SFAS 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS 142. SFAS 142 also requires that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment. The Company adopted the provisions of SFAS 142 effective July 1,
2001. In connection with SFAS 142's transitional goodwill impairment evaluation,
the Company performed an assessment and determined that goodwill was not
impaired as of the adoption date. As of the adoption date, the Company had
unamortized goodwill in the amount of $18,523,607. Effective July 1, 2001, the
amortization of goodwill was discontinued.
Additionally, during the quarter ended September 30, 2002, management reviewed
the assessment performed on adoption of SFAS 142 and determined that no material
events or circumstances have occurred since the original valuation which would
result in a significantly different conclusion if the valuation were updated for
the purpose of determining any potential goodwill impairment.
Consequently, the outstanding balance of goodwill has not changed since adoption
of SFAS 142.
The gross carrying amount of intangible assets subject to amortization and the
associated accumulated amortization at September 30, 2002, is presented in the
table below. Amortization expense for intangible assets was $18,618 and $23,745,
respectively, for the three months ended September 30, 2002 and 2001.
7
September 30, 2002
----------------------------
Gross
carrying accumulated
amount amortization
------ ------------
Intangible assets:
Core deposit premium $ 690,140 $ 375,769
Mortgage servicing rights 700,250 458,000
Total $ 1,390,390 $ 833,769
=========== =========
Unamortized intangible assets $ 556,621
=========
Projections of amortization expense are based on existing asset balances and the
existing interest rate environment as of September 30, 2002. What the Company
actually experiences may be significantly different depending upon changes in
mortgage interest rates and market conditions. The following table shows the
estimated future amortization expense for amortizing intangible assets:
Core deposit Mortgage servicing Total
premium rights Nine months ended
------------ ------------- -----------------
June 30, 2003 $47,898 $242,250 $290,148
Year ended June 30,
2004 52,374 -- 52,374
2005 45,396 -- 45,396
2006 44,604 -- 44,604
2007 44,604 -- 44,604
2008 44,604 -- 44,604
5. Dividends
- ------------
On July 18, 2002 the Company declared a cash dividend on its common stock,
payable on August 30, 2002 to stockholders of record as of August 16, 2002,
equal to $.08 per share. Dividends totaling $322,521 were paid to stockholders
on August 30, 2002.
On October 24, 2002 the Company declared a cash dividend on its common stock,
payable on November 29, 2002 to stockholders of record as of November 15, 2002
equal to $.08 per share. Approximately $318,000 will be paid to stockholders on
November 29, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-looking statements
- --------------------------
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for the 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
8
identifiable by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project" or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on the Company's
future activities and operating results include, but are not limited to, changes
in: interest rates, general economic conditions, legislative and regulatory
changes, U.S. monetary and fiscal policies, demand for products and services,
deposit flows, competition and accounting policies, principles and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Financial condition
- -------------------
Total assets decreased by $10.2 million, or 1.6%, to $640.5 million at September
30, 2002 from $650.8 million at June 30, 2002. Cash and cash equivalents
increased by $863,000, or 3.7%, to $24.1 million at September 30, 2002. Proceeds
from maturities and sales of investment securities totaled $6.8 million and $9.0
million, respectively for the three months ended September 30, 2002. Securities
available-for-sale decreased by $8.5 million, or 9.2%, to $83.8 million at
September 30, 2002 from $92.3 million at June 30, 2002. Securities
held-to-maturity decreased by $3.4 million, or 5.4%, to $59.9 million at
September 30, 2002 from $63.3 million at June 30, 2002. Other assets increased
by $2.4 million, or 18.4%, to $15.7 million at September 30, 2002 from $13.3
million at June 30, 2002 largely due to an increase in receivables for mortgage
loans sold to other investors. Mortgage refinance activity was strong during the
three months ended September 30, 2002 due to the continued low market interest
rate environment. FHLB Stock increased by $670,000, or 13.3%, to $5.7 million at
September 30, 2002 from $5.0 million at June 30, 2002 due to FHLB stock purchase
requirements related to outstanding advance balances.
Deposits decreased by $18.4 million, or 3.9%, to $454.2 million at September 30,
2002 from $472.6 million at June 30, 2002 primarily due to the end of a special
Money Market promotion that offered a 3% rate for three months. Partially
offsetting the decrease in the balance of deposits was an increase in FHLB
advances. FHLB advances increased by $8.4 million, or 8.4%, to $107.4 million at
September 30, 2002 from $99.1 million at June 30, 2002.
Total stockholders' equity was $71.3 million at both September 30, 2002 and June
30, 2002. The Company purchased 88,000 shares of its common stock during the
three months ended September 30, 2002 at a cost of $1.2 million. The purchase of
40,500 shares of common stock completed a repurchase program commenced in
December 2000 and the remaining 47,500 shares were purchased under a new
repurchase program announced in August 2002. Under this new stock repurchase
program the Company expects to acquire up to 378,500 additional shares of its
common stock, subject to market conditions and other factors.
Earnings totaled $1.2 million for the first three months of the fiscal year.
Excluding dividends on unallocated Employee Stock Ownership Plan ("ESOP")
shares, dividends declared during the three months ended September 30, 2002
totaled $323,000.
9
Capital
- -------
The Office of Thrift Supervision (the "OTS") requires that the Bank meet minimum
tangible, leverage (core) and risk-based capital requirements. As of September
30, 2002 the Bank was in compliance with all regulatory capital requirements.
The Bank's required, actual and excess capital levels as of September 30, 2002
are as follows:
Excess of
Actual Over
Required % of Actual % of Regulatory
Amount Assets Amount Assets Requirement
------ ------ ------ ------ -----------
(Dollars in thousands)
Tangible Capital $ 9,267 1.5% $48,667 7.88% $39,400
Core Capital 18,534 3.0% 48,667 7.88% 30,133
Risk-based Capital 33,176 8.0% 53,229 12.84% 20,053
Liquidity
- ---------
The Company is required by OTS regulation to maintain sufficient liquidity to
assure its safe and sound operation. Liquid assets include cash, certain time
deposits, banker's acceptances and specified United States government, state or
federal agency obligations. For the quarter ended September 30, 2002 the
Company's average liquidity position was $153.4 million, or 30.9% of its
liquidity base for the preceding quarter. The Company adjusts its liquidity
levels in order to meet funding needs for deposit outflows, payment of real
estate taxes from escrowed funds, when applicable, and loan commitments. The
Company also adjusts liquidity as appropriate to meet its asset/liability
objectives.
Effect of new accounting standard
- ---------------------------------
In October 2002, the FASB issued Statement No. 147 (SFAS 147), Acquisitions of
Certain Financial Institutions, which no longer requires the separate
recognition and subsequent amortization of goodwill that was originally required
by Statement No. 72 (SFAS 72), Accounting for Certain Acquisitions of Banking or
Thrift Institutions. Instead, SFAS 72 goodwill would be accounted for in
accordance with Statement No. 142 (SFAS 142), Goodwill and Other Intangible
Assets and would be subject to an annual impairment test. SFAS 147 also amends
Statement No. 144 (SFAS 144), Accounting for the Impairment or Disposal of
Long-Lived Assets, to include in its scope core deposit intangibles. Those
intangible assets are now subject to the same recoverability and impairment loss
recognition provisions that SFAS 144 requires for other long-lived assets. SFAS
147 is effective October 1, 2002. The Company does not expect the adoption of
SFAS 147 to have a material effect on the financial statements.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
- ------------------------------------------------------------------
September 30, 2002 and 2001
- ---------------------------
General. Net earnings for the three months ended September 30, 2002 totaled $1.2
million, or $0.29 per diluted share, compared to $1.1 million, or $0.25 per
diluted share, for the three months ended September 30, 2001.
Interest Income. Interest income decreased by $1.4 million, or 12.8%, to $9.5
million for the three months ended September 30, 2002 from $10.9 million for the
three months ended September 30, 2001, primarily due to a decrease in the
average yield on interest-earning
10
assets. The average yield on interest-earning assets decreased by 79 basis
points to 6.58% for the three months ended September 30, 2002 from 7.37% for the
three months ended September 30, 2001, due to changes in the mix of
interest-earning assets and lower yields on all categories of interest-earning
assets in the continued low market interest rate environment. In addition, the
average balance of interest-earning assets decreased by $13.5 million, or 2.3%,
to $576.8 million for the three months ended September 30, 2002 from $590.3
million for the three months ended September 30, 2001.
Interest income on loans receivable decreased by $968,000 or 11.1%, to $7.7
million for the three months ended September 30, 2002 from $8.7 million for the
three months ended September 30, 2001. The decrease in interest income on loans
was primarily due to a decrease in the average yield on loans. The average yield
on loans receivable decreased by 81 basis points to 7.40% for the three months
ended September 30, 2002 from 8.21% for the three months ended September 30,
2001. The decrease in the average yield on loans was due to refinancing activity
and to interest rate reductions for adjustable-rate loans in the generally lower
market interest rate environment during the current year period. In addition,
the average balance of loans receivable decreased by $5.5 million, or 1.3%, to
$419.1 million for the three months ended September 30, 2002 from $424.6 million
for the three months ended September 30, 2001.
Interest income on mortgage-backed securities ("MBS") for the three months ended
September 30, 2002 increased by $594,000, or 170.2%, to $943,000 from $349,000
for the three months ended September 30, 2001 primarily due to an increase in
the average balance of such securities. The average balance of MBS increased by
$50.7 million, or 233.4%, to $72.4 million for the three months ended September
30, 2002 from $21.7 million for the three months ended September 30, 2001.
During the period between September 30, 2001 and September 30, 2002 the Company
re-invested most of the interest bearing deposits held at other financial
institutions into higher-yielding MBS. The average yield on MBS decreased by 122
basis points to 5.21% for the three months ended September 30, 2002 from 6.43%
for the three months ended September 30, 2001. The decrease in the average yield
on MBS was primarily due to purchases yielding relatively lower rates since the
prior year period. In addition, adjustable-rate MBS repriced at lower rates in
the generally lower market interest rate environment.
Interest income on investment securities decreased by $596,000, or 43.0%, to
$791,000 for the three months ended September 30, 2002 from $1.4 million for the
three months ended September 30, 2001. The average balance of investment
securities decreased by $9.8 million, or 10.4%, to $84.3 million for the three
months ended September 30, 2002 from $94.1 million for the three months ended
September 30, 2001. In addition, the average yield on investment securities
decreased by 215 basis points to 3.75% for the three months ended September 30,
2002 from 5.90% for the three months ended September 30, 2001 in the generally
lower market interest rate environment. For the three months ended September 30,
2002 the Company increased its average investment in short-term mutual funds by
$30.3 million to $41.6 million from $11.3 million for the three months ended
September 30, 2001 rather than commit to longer-term investments in the
historically low market interest rate environment during the period. The average
yield on these funds for the three months ended September 30, 2002 was 3.13%.
Interest Expense. Interest expense decreased by $2.0 million, or 30.3%, to $4.6
million for the three months ended September 30, 2002 from $6.6 million for the
three months ended September 30, 2001. Interest on deposits decreased by $2.1
million, or 38.7%, to $3.3 million for the three months ended September 30, 2002
from $5.4 million for the three months ended September
11
30, 2001. The average cost of deposits decreased by 164 basis points to 3.00%
for the three months ended September 30, 2002 from 4.64% for the three months
ended September 30, 2001. The decrease in the average cost of deposits was due
to changes in the mix of deposit types and to the generally lower market
interest rate environment during the three months ended September 30, 2002.
During the quarter ended September 30, 2002 the percentage of balances in
transaction accounts increased to 45% of total deposits compared to 38% of total
deposits during the same period of the prior year. Transaction accounts
generally carry a lower interest cost than certificates of deposit. Also
contributing to the decrease in interest on deposits was a decrease in the
average balance of deposits. The average balance of deposits decreased by $23.4
million, or 5.1%, to $437.4 million for the three months ended September 30,
2002 from $460.8 million for the three months ended September 30, 2001 as
depositors realigned their savings patterns in the generally low market interest
rate environment. In addition, the Company lowered rates on deposit products and
increased its use of wholesale funding from the FHLB.
Interest on FHLB advances increased by $70,000, or 5.7%, to $1.3 million for the
three months ended September 30, 2002 from $1.2 million for the three months
ended September 30, 2001. The increase in interest on borrowings was primarily
due to an increase in the average balance of advances. The average balance of
advances increased by $21.9 million, or 26.1%, to $106.0 million for the three
months ended September 30, 2002 from $84.1 million for the three months ended
September 30, 2001. Partly offsetting the increase in the average balance of
borrowings was a decrease in the average cost of borrowings. The average cost of
borrowings decreased by 96 basis points to 4.94% for the three months ended
September 30, 2002 from 5.90% for the three months ended September 30, 2001.
Net Interest Income. The decrease in interest income was more than offset by the
decrease in interest expense. As a result, net interest income before provision
for losses on loans increased by $611,000, or 14.3%, to $4.9 million for the
three months ended September 30, 2002 from $4.3 million for the three months
ended September 30, 2001. The Company's interest rate spread for the three
months ended September 30, 2002 increased to 3.20% from 2.53% for the three
months ended September 30, 2001. In addition, the Company's net yield on
interest-earning assets increased to 3.40% for the three months ended September
30, 2002 from 2.90% for the three months ended September 30, 2001.
Provision for Losses on Loans. Provision for losses on loans totaled $830,000
and $880,000, respectively, for the three months ended September 30, 2002 and
2001. Non-performing loans increased to $6.8 million, or 1.6% of total loans, at
September 30, 2002 from $6.2 million, or 1.5% of total loans, at June 30, 2002.
At September 30, 2001 non-performing loans totaled $6.0 million, or 1.4% of
total loans. During the three months ended September 30, 2002 the Company
recorded net charge-offs totaling $910,000. As of September 30, 2002, the
Company was not accruing interest on a total of $4.2 million in non-performing
loan balances.
Noninterest Income. Noninterest income decreased by $297,000, or 12.5%, to $2.1
million for the three months ended September 30, 2002 from $2.4 million for the
three months ended September 30, 2001. During the three months ended September
30, 2001, the Company recorded a pretax gain of $456,000 on the sale of a branch
office to another financial institution. The gain was related to the sale of
deposits, loans and the building and fixtures of the branch office. Income from
fees and service charges increased by $47,000 to $1.2 million for the three
12
months ended September 30, 2002 from $1.1 million for the three months ended
September 30, 2001. The increase in fees and service charges resulted partly
from increases in service fees on deposit accounts. In addition, other income
increased by $134,000, or 48.8%, to $410,000 for the three months ended
September 30, 2002 from $275,000 for the three months ended September 30, 2001
primarily due to income related to the increase in the cash surrender value of
bank owned life insurance ("BOLI") purchased by the Company in November and
December 2001.
Noninterest expense. Noninterest expense increased by $255,000, or 6.2%, to $4.4
million for the three months ended September 30, 2002 from $4.1 million, for the
three months ended September 30, 2001. The increase in noninterest expense was
largely due to an increase of $156,000, or 7.0%, in compensation and benefits
expense to $2.4 million for the three months ended September 30, 2002 from $2.2
million for the three months ended September 30, 2001. The increase in
compensation and benefits expense was due to pension contribution expense in
addition to annual salary increases. The Company is a participant in the
Financial Institutions Retirement Fund (the "FIRF"). FIRF has notified the
Company that a contribution will be required for fiscal 2003. During the three
months ended September 30, 2002 the Company recorded a $90,000 expense for
pension contributions. The FIRF had been in fully-funded status since July 1987;
therefore, no pension contribution expense was recorded for fiscal 1988 through
fiscal 2002. Noninterest expense also increased due to an increase in other
expense. Other expense increased by $88,000, or 8.2%, to $1.2 million for the
three months ended September 30, 2002 from $1.1 million for the three months
ended September 30, 2001 largely due to accelerated amortization of the mortgage
servicing asset due to refinancing activity in the current low market interest
rate environment.
Net earnings and income tax expense. Net earnings before income taxes increased
by $109,000, or 6.5%, to $1.8 million for the three months ended September 30,
2002 from $1.7 million for the three months ended September 30, 2001. Income tax
expense totaled $590,000 and $596,000, respectively, for the three months ended
September 30, 2002 and 2001. The Company's effective tax rate was 33.2% and
35.7%, respectively, for the three months ended September 30, 2002 and 2001. The
lower effective tax rate for the three months ended September 30, 2002 resulted
from an increase in tax-exempt investments such as BOLI.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market prices
and interest rates. The Company's market risk is primarily comprised of interest
rate risk resulting from its core banking activities of lending and deposit
taking. Interest rate risk is the risk that changes in market interest rates
might adversely affect the Company's net interest income or the economic value
of its portfolio of assets, liabilities and off-balance-sheet contracts.
Management continually develops and applies strategies to mitigate this risk.
The Company has not experienced any material changes in its market risk position
from that disclosed in the Company's 2002 Form 10-K Annual Report as of June 30,
2002. Management does not believe that the Company's primary market risk
exposures and how those exposures were managed in the first quarter of fiscal
2003 changed significantly when compared to the immediately preceding quarter
ended June 30, 2002. The Company primarily relies on the OTS Net Portfolio Value
Model (the "Model") to measure its susceptibility to interest rate changes. For
various assumed hypothetical changes in market interest rates, the Model
estimates the current economic value of each type of asset, liability and
off-balance-sheet contract. The present value of expected net cash flows from
existing assets minus the present value of expected net cash flows from existing
liabilities plus or minus the present value of expected net cash flows from
existing off-balance-sheet contracts results in a net portfolio value ("NPV")
estimate. An analysis of the changes in NPV in the event of hypothetical changes
in interest rates is presented in the Form 10-K filed by the Company for the
fiscal year ended June 30, 2002.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation within 90 days prior to the filing date of
this report, that the Company's disclosure controls and procedures (as defined
in Securities Exchange Act Rules 13a-14(c) and 15d-14(c)) are effective to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls subsequent to the date of the
foregoing evaluation.
14
PART II. OTHER INFORMATION
Legal Proceedings
- -----------------
There are various claims and lawsuits in which the Registrant is
periodically involved incidental to the Registrant's business. In the opinion of
management, no material loss is expected from any of such pending claims or
lawsuits.
Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------
No matters were submitted to a vote of security holders during the period
covered by this report.
Exhibits and Reports on Form 8-K
- --------------------------------
(a) Exhibits
Exhibit No.
-----------
99.1 Written Statement of Chief Executive Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
99.2 Written statement of Chief Financial Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
(b) Reports on Form 8-K
A report on Form 8-K was filed on August 23, 2002. The event reported was the
Company's announcement that it had commenced a share repurchase program pursuant
to which up to 426,000 shares, or approximately 10% of common stock outstanding,
would be purchased in open market transactions and held as treasury stock. A
press release dated August 14, 2002 announcing the stock repurchase program was
included as an exhibit in the 8-K filing.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
FIRST FEDERAL BANKSHARES, INC.
DATE: November 13, 2002 BY: /s/ Barry E. Backhaus
----------------------------
Barry E. Backhaus
President and
Chief Executive Officer
DATE: November 13, 2002 BY: /s/ Colin Anderson
----------------------------
Colin Anderson
Senior Vice President and
Chief Financial Officer
16
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Barry E. Backhaus, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Federal
Bankshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 13, 2002 /s/ Barry E. Backhaus
- ------------------ -------------------------------------
Date Barry E. Backhaus
President and Chief Executive Officer
17
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Colin D. Anderson, Senior Vice President and Chief Financial Officer, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of First Federal
Bankshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 13, 2002 /s/ Colin D. Anderson
- ------------------ ------------------------------------------
Date Colin D. Anderson
Senior Vice President and Chief Financial
Officer
18