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UNITED STATES
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, 2003
|_| 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
(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 by check mark whether the Registrant is an accelerated filer.
Yes |_| No |X|
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 10, 2003
(Common Stock, $.01 par value) 3,771,994
FIRST FEDERAL BANKSHARES, INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements of First Federal
Bankshares, Inc. and Subsidiaries (Unaudited) 1
Condensed Consolidated Balance Sheets
at September 30, 2003 and June 30, 2003 1
Condensed Consolidated Statements of Operations
for the three-month periods ended
September 30, 2003 and 2002 2
Condensed Consolidated Statements of Changes in
Stockholders' Equity for the three-month periods
ended September 30, 2003 and 2002 3
Condensed Consolidated Statements of Comprehensive
Income for the three-month periods ended
September 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows
for the three-month periods ended
September 30, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
Item 4. Controls and Procedures 17
Part II. Other Information 18
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST FEDERAL BANKSHARES, INC and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, June 30,
2003 2003
------------- -------------
Assets
Cash and due from banks $ 30,655,622 $ 34,006,405
Interest-bearing deposits in other financial institutions 281,138 280,548
------------- -------------
Cash and cash equivalents 30,936,760 34,286,953
------------- -------------
Securities available-for-sale, at fair value (amortized
cost of $72,347,098 and $77,392,727, respectively) 72,803,943 78,526,104
Securities held-to-maturity, at amortized cost
(fair value of $30,079,626 and $45,659,510, respectively) 29,211,161 44,505,464
Loans receivable 455,317,353 419,882,438
Less: Allowance for loan losses 4,908,453 4,615,285
------------- -------------
Net loans 450,408,900 415,267,153
------------- -------------
Office property and equipment, net 13,525,339 13,165,804
Federal Home Loan Bank ("FHLB") stock, at cost 7,574,200 5,707,300
Accrued interest receivable 2,729,752 2,488,460
Deferred tax asset 766,000 514,000
Goodwill (note 5) 18,523,607 18,523,607
Other assets 15,235,915 14,894,532
------------- -------------
Total assets $ 641,715,577 $ 627,879,377
============= =============
Liabilities
Deposits $ 442,852,161 $ 448,944,039
Advances from FHLB and other borrowings 122,598,714 102,386,888
Advance payments by borrowers for taxes and insurance 724,168 1,458,955
Accrued taxes on income 993,629 346,167
Accrued interest payable 1,912,229 1,795,348
Accrued expenses and other liabilities 2,847,343 3,286,615
------------- -------------
Total liabilities 571,928,244 558,218,012
------------- -------------
Stockholders' equity
Common stock, $.01 par value, 12,000,000 shares authorized;
4,907,357 and 4,896,857 shares issued at
September 30, 2003 and June 30, 2003, respectively 49,074 48,969
Additional paid-in capital 36,663,177 36,537,133
Retained earnings, substantially restricted 49,146,977 47,900,781
Treasury stock, at cost, 1,135,766 and 1,088,466 shares at
September 30, 2003 and June 30, 2003, respectively (15,154,539) (14,264,674)
Accumulated other comprehensive income 285,845 710,378
Unearned Employee Stock Ownership Plan ("ESOP") shares (1,150,390) (1,185,700)
Unearned Recognition and Retention Plan ("RRP") shares (52,811) (85,522)
------------- -------------
Total stockholders' equity 69,787,333 69,661,365
------------- -------------
Total liabilities and stockholders' equity $ 641,715,577 $ 627,879,377
============= =============
See notes to condensed consolidated financial statements.
-1-
FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months
ended September 30,
2003 2002
---------------------------
Interest income:
Loans receivable $ 6,866,306 $7,748,162
Investment securities 1,090,766 1,734,459
Other interest-earning assets 4,921 4,230
---------------------------
Total interest income 7,961,993 9,486,851
---------------------------
Interest expense:
Deposits 2,072,981 3,280,926
Advances from FHLB and other borrowings 1,281,938 1,310,150
---------------------------
Total interest expense 3,354,919 4,591,076
---------------------------
Net interest income 4,607,074 4,895,775
Provision for losses on loans 525,000 830,000
---------------------------
Net interest income after provision for losses on loans 4,082,074 4,065,775
---------------------------
Noninterest income:
Fees and service charges 1,392,525 1,170,828
Gain on sale of loans held for sale 166,355 156,544
Gain on sale of real estate owned and held for development -- 22,388
Net loss on sale of securities (32,264) --
Real estate-related activities 361,675 327,438
Other income 459,108 409,878
---------------------------
Total noninterest income 2,347,399 2,087,076
---------------------------
Noninterest expense:
Compensation and benefits (note 7) 2,323,059 2,388,760
Office property and equipment 605,263 639,299
Deposit insurance premiums 18,041 20,785
Data processing expense 94,467 74,961
Advertising 112,245 89,589
Other expense 951,114 1,161,708
---------------------------
Total noninterest expense 4,104,189 4,375,102
---------------------------
Earnings before income taxes 2,325,284 1,777,749
Income taxes 787,000 590,000
---------------------------
Net earnings $ 1,538,284 $1,187,749
===========================
Earnings per share:
Basic earnings per share $ 0.42 $ 0.30
===========================
Diluted earnings per share $ 0.41 $ 0.29
===========================
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 (Unaudited)
Three months ended September 30,
2003 2002
--------------------------------
Capital Stock
Beginning of year balance $ 48,969 $ 48,711
Stock options exercised 105 73
- -------------------------------------------------------------------------------------------------------
End of period balance 49,074 48,784
- -------------------------------------------------------------------------------------------------------
Additional paid-in capital
Beginning of year balance 36,537,133 36,247,480
Stock options exercised 97,020 36,490
RRP forfeited (7,000) --
Stock appreciation of allocated ESOP shares 36,024 12,339
- -------------------------------------------------------------------------------------------------------
End of period balance 36,663,177 36,296,309
- -------------------------------------------------------------------------------------------------------
Retained earnings, substantially restricted
Beginning of year balance 47,900,781 43,542,299
Net earnings 1,538,284 1,187,749
Dividends paid on common stock (292,088) (322,521)
- -------------------------------------------------------------------------------------------------------
End of period balance 49,146,977 44,407,527
- -------------------------------------------------------------------------------------------------------
Treasury stock, at cost
Beginning of year balance (14,264,674) (7,577,646)
RRP forfeited (25,200) --
Treasury stock purchased (864,665) (1,218,950)
- -------------------------------------------------------------------------------------------------------
End of period balance (15,154,539) (8,796,596)
- -------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
Beginning of year balance 710,378 490,458
Net change in unrealized gains on securities available-for-sale,
net of tax expense (444,763) 285,666
Less: reclassification adjustment for net realized gains (losses)
included in net income, net of tax expense (20,230) --
- -------------------------------------------------------------------------------------------------------
End of period balance 285,845 776,124
- -------------------------------------------------------------------------------------------------------
Unearned ESOP shares
Beginning of year balance (1,185,700) (1,330,000)
ESOP shares allocated 35,310 36,740
- -------------------------------------------------------------------------------------------------------
End of period balance (1,150,390) (1,293,260)
- -------------------------------------------------------------------------------------------------------
Unearned recognition and retention plan shares
Beginning of year balance (85,522) (158,507)
RRP forfeited 14,981 --
Amortization of RRP expense 17,730 30,564
- -------------------------------------------------------------------------------------------------------
End of period balance (52,811) (127,943)
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Total stockholders' equity $ 69,787,333 $ 71,310,945
=======================================================================================================
See notes to condensed consolidated financial statements.
-3-
FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME (Unaudited)
Three months ended
September 30,
2003 2002
----------- ----------
Net earnings $ 1,538,284 $1,187,749
Other comprehensive income (loss):
Unrealized holding (losses) gains arising during
the period, net of tax (444,763) 285,666
Less: reclassification adjustment for net realized
losses included in net income, net of tax expense (20,230) --
---------------------------
Other comprehensive income (loss), net of tax (424,533) 285,666
---------------------------
Comprehensive income $ 1,113,751 $1,473,415
===========================
See notes to condensed consolidated financial statements.
-4-
FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended September 30,
Cash flows from operating activities: 2003 2002
--------------------------------
Net earnings $ 1,538,284 $ 1,187,749
Adjustments to reconcile net earnings to net cash provided by operating activities:
Loans originated for sale to investors (14,235,000) (16,886,013)
Proceeds from sale of loans originated for sale 15,451,300 15,452,632
Provision for loan losses 525,000 830,000
Depreciation and amortization 336,808 505,384
Net gain on sale of loans (166,355) (156,544)
Net loss on sale of securities available-for-sale 32,264 --
Net gain on sale of real estate owned and held for development -- (22,388)
Net loan fees deferred 161,317 8,392
Amortization of premiums and discounts on loans and securities 182,430 94,630
Increase in accrued interest receivable (241,292) (10,723)
Decrease (increase) in other assets 236,038 (2,435,512)
Increase (decrease) in accrued interest payable 116,881 (92,888)
(Decrease) increase in accrued expenses and other liabilities (439,273) 64,545
Increase in accrued taxes on income 647,462 287,283
------------------------------
Net cash provided by operating activities 4,145,864 (1,173,453)
------------------------------
Cash flows from investing activities:
Proceeds from maturities of securities held-to-maturity 15,255,008 3,415,362
Proceeds from sale of securities available-for-sale 6,766,712 9,050,000
Purchase of securities available-for-sale (8,198,971) (3,508,315)
Proceeds from maturities of securities available-for-sale 6,349,607 3,373,064
(Purchase) redemption of Federal Home Loan Bank Stock (1,866,900) (669,500)
Loans purchased (6,705,000) (3,338,000)
(Increase) decrease in loans receivable (30,440,128) 5,790,814
Purchase of office property and equipment (610,764) (92,682)
Proceeds from sale of foreclosed real estate -- 119,719
Proceeds from sale of real estate held for development -- 27,000
Net expenditures on real estate held for development (371,154) (24,441)
------------------------------
Net cash provided by (used in) investing activities (19,821,590) 14,143,021
------------------------------
Cash flows from financing activities:
Decrease in deposits (6,091,878) (18,412,028)
Proceeds from FHLB advances and other borrowings 20,281,697 22,569,000
Repayment of FHLB advances and other borrowings (69,871) (14,238,305)
Net decrease in advances from borrowers for taxes and insurance (734,787) (520,793)
Issuance of common stock, net 97,125 36,563
Repurchase of common stock (864,665) (1,218,950)
Cash dividends paid (292,088) (322,521)
------------------------------
Net cash used in financing activities 12,325,533 (12,107,034)
------------------------------
Net increase (decrease) in cash and cash equivalents (3,350,193) 862,534
Cash and cash equivalents at beginning of period 34,286,953 23,217,221
------------------------------
Cash and cash equivalents at end of period $ 30,936,760 $ 24,079,755
==============================
Supplemental disclosures:
Cash paid for interest $ 3,238,038 $ 4,683,964
==============================
Cash paid for income taxes 139,539 302,717
==============================
See notes to condensed consolidated financial statements.
-5-
FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Basis of presentation
The condensed consolidated balance sheet information for June 30, 2003 was
derived from the audited Consolidated Balance Sheets of First Federal
Bankshares, Inc. (the "Company") at June 30, 2003. The condensed consolidated
financial statements as of and for the three months ended September 30, 2003 and
2002 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 policies relate to the allowance for loan
losses and accounting for intangible assets. A description of the Company's
critical accounting policy related to intangible assets is summarized in Note 5
of these interim financial statements. With regard to the Company's critical
accounting policy related to the allowance for loan losses, the Company has
established a systematic method of periodically reviewing the credit quality of
the loan portfolio in order to establish an 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. This evaluation involves a high
degree of complexity and requires management to make subjective judgments that
often require assumptions or estimates about uncertain matters.
A summary of significant accounting policies followed by the Company is set
forth in Note 1 of the Company's 2003 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. Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
4. 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,
2003 2002
-------------------------
Basic earnings per share computation:
Net earnings $1,538,284 $1,187,749
Weighted average common shares
outstanding 3,640,117 4,009,213
---------- ----------
Basic earnings per share $ 0.42 $ 0.30
========== ==========
Diluted earnings per share computation:
Net earnings $1,538,284 $1,187,749
Weighted average common
shares outstanding - basic 3,640,117 4,009,213
Incremental option shares using
treasury stock method 114,913 87,554
---------- ----------
Weighted average diluted
shares outstanding 3,755,030 4,096,767
---------- ----------
Diluted earnings per share $ 0.41 $ 0.29
========== ==========
5. 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, 2003, management reviewed
the assessment performed on adoption of SFAS 142 and determined that no material
events or circumstances had 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
7
impairment. Consequently, the outstanding balance of goodwill has not changed
since the adoption of SFAS 142.
The gross carrying amount of intangible assets subject to amortization and the
associated accumulated amortization at September 30, 2003, is presented in the
table below. Amortization expense for intangible assets was $14,640 and
$108,618, respectively, for the three months ended September 30, 2003 and 2002.
September 30, 2003
------------------------------
Gross
carrying accumulated
amount amortization
---------- ------------
Intangible assets:
Core deposit premium $ 690,140 $ 438,310
Mortgage servicing rights 700,250 700,250
---------- ----------
Total $1,390,390 $1,138,560
========== ==========
Unamortized intangible assets $ 251,830
==========
Projections of amortization expense are based on existing asset balances and the
existing interest rate environment as of September 30, 2003. What the Company
actually experiences may be significantly different depending upon changes in
market interest rates and market conditions. The following table shows the
estimated future amortization expense for amortizing intangible assets:
Core deposit
premium
------------
Nine months ended
June 30, 2004 $ 37,734
Years ended June 30,
2005 45,396
2006 44,604
2007 44,604
2008 44,604
2009 34,888
6. Dividends
On July 17, 2003 the Company declared a cash dividend on its common stock,
payable on August 29, 2003 to stockholders of record as of August 15, 2003,
equal to $.08 per share. Dividends totaling $292,088 were paid to stockholders
on August 29, 2003.
On October 30, 2003 the Company declared a cash dividend on its common stock,
payable on November 28, 2003 to stockholders of record as of November 14, 2003
equal to $.09 per share. The Company expects to pay approximately $329,000 to
stockholders on November 28, 2003.
7. Stock Options
At September 30, 2003, the Company had two stock-based employee compensation
plans, which are described more fully in Note 11 of the Company's 2003 Annual
Report to Stockholders.
8
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for these
plans. Accordingly, no compensation cost has been recognized for its stock
options in the condensed consolidated financial statements. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS 123, Accounting for
Stock-based Compensation, to stock-based employee compensation.
Three months ended
September 30,
2003 2002
--------------------------------
Net income, as reported $ 1,538,284 $ 1,187,749
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (18,382) (16,135)
------------- -------------
Pro forma net income $ 1,519,902 $ 1,171,614
============= =============
Earnings per share:
Basic - as reported $ 0.42 $ 0.30
Basic - pro forma $ 0.42 $ 0.29
============= =============
Diluted - as reported $ 0.41 $ 0.29
Diluted - pro forma $ 0.40 $ 0.29
============= =============
The fair value of each option grant has been estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in all periods presented: dividend yield of 3.41%; expected volatility of
22.76%; risk free interest rate of 6.29%; and expected life of 7.5 years.
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 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
9
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 increased by $13.8 million, or 2.2%, to $641.7 million at September
30, 2003 from $627.9 million at June 30, 2003. Cash and cash equivalents
decreased by $3.4 million, or 9.8%, to $30.9 million at September 30, 2003 from
$34.3 million at June 30, 2003. Proceeds from maturities and sales of investment
securities totaled $28.4 million for the three months ended September 30, 2003
while purchases of investment securities for the same period totaled $8.2
million. Securities available-for-sale decreased by $5.7 million, or 7.3%, to
$72.8 million at September 30, 2003 from $78.5 million at June 30, 2003.
Securities held-to-maturity decreased by $15.3 million, or 34.4%, to $29.2
million at September 30, 2003 from $44.5 million at June 30, 2003. The net
proceeds of $20.2 million from investment securities activities largely funded
an increase in loans receivable. Loans receivable increased by $35.4 million, or
8.4%, to $455.3 million from $419.9 million at June 30, 2003. FHLB Stock
increased by $1.9 million, or 32.7%, to $7.6 million at September 30, 2003 from
$5.7 million at June 30, 2003 due to FHLB stock purchase requirements related to
outstanding advance balances.
Deposits decreased by $6.1 million, or 1.4%, to $442.8 million at September 30,
2003 from $448.9 million at June 30, 2003. The Company is generally not a market
rate leader for term deposits. In response to historically low market interest
rates, deposit customers have withdrawn funds from matured time deposits and
transferred those funds to more liquid accounts. The Company offers premium
rates to customers with multiple relationships in order to retain existing
deposits and attract new customers. During the three months ended September 30,
2003, the Company partially funded the increase in loans receivable by offering
a premium-rate certificate of deposit that attracted or retained $12.4 million
in deposits. Offsetting the decrease in the balance of deposits was an increase
in FHLB advances as the Company took down fixed-rate fixed-term advances at
generally lower rates than comparable-term retail certificates of deposit. FHLB
advances and other borrowings increased by $20.2 million, or 19.7%, to $122.6
million at September 30, 2003 from $102.4 million at June 30, 2003.
Total stockholders' equity was $69.8 million and $69.7 million, respectively, at
September 30, 2003 and June 30, 2003. The Company purchased 44,500 shares of its
common stock during the three months ended September 30, 2003 at a cost of
$865,000. A new repurchase program was announced in August 2003, pursuant to
which the Company expects to acquire up to 377,000 additional shares of its
common stock, subject to market conditions and other factors. The Company's
management believes that the Company's common stock is an attractive value at
current trading prices and that stock repurchases are an appropriate deployment
of a portion of the Company's capital that enhances shareholder value. With
capital levels in excess of regulatory requirements, as demonstrated in the
capital table included later in this report, and an average liquidity position
of $122.3 million for the quarter ended September 30, 2003, the Company believes
it can implement these repurchase programs without adversely affecting its
capital or liquidity positions or its ability to pay future dividends. In
addition, stock repurchase programs may reduce price
10
volatility and enhance the liquidity of the Company's common stock, which is
generally advantageous for shareholders.
Earnings totaled $1.5 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, 2003
totaled $292,088.
Asset quality
Management believes that asset quality is generally strong. Non-performing
assets totaled $5.9 million at September 30, 2003 and $5.1 million at June 30,
2003. The September 30, 2003 balance was 0.91% of total assets, as compared to
0.81% of total assets at June 30, 2003.
The increase in non-performing assets was primarily due to an increase in the
balance of non-performing loans. Non-performing loans increased to $5.2 million
at September 30, 2003 from $4.7 million at June 30, 2003, representing 1.15% and
1.13%, respectively, of total loans at those dates.
The allowance for loan losses is increased by the provision for loan losses
charged to operations and reduced by reversals and net charge-offs. Management
establishes the allowance for loan losses through a process that begins with
estimates of probable loss inherent in the portfolio based on various
statistical analyses. These analyses consider historical and projected default
rates and loss severities; internal risk ratings; and geographic, industry and
other environmental factors. In establishing the allowance for loan losses,
management also considers the Company's current business strategy and credit
processes, including compliance with established guidelines for credit limits,
credit approvals, loan underwriting criteria and loan workout procedures.
The policy of the Company is to segment the allowance to correspond to the
various types of loans in the loan portfolio according to the underlying
collateral, which corresponds to the respective levels of quantified and
inherent risk. The initial assessment takes into consideration non-performing
loans and the valuation of the collateral supporting each loan. Non-performing
loans are risk-rated generally on a case-by-case basis based on qualitative and
quantitative factors that include, but are not limited to, collateral type and
estimated value, financial statement analysis, specific economic factors, cash
flow analysis, delinquency history and loan workout situations and progress.
Based upon this analysis, a quantified risk factor is assigned to each
non-performing loan. This results in an allocation to the overall allowance for
the corresponding type and severity of each non-performing loan.
Performing loans are also reviewed by collateral type, with similar risk factors
being assigned. These risk factors take into consideration, among other matters,
the borrower's ability to pay and the Company's past loan loss experience with
each type of loan. The assigned risk factors result in allocations to the
allowance corresponding to the risk-rated portfolio of performing loans.
In order to determine its overall adequacy, the allowance for loan losses is
reviewed by management on a monthly basis. While management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary, based on changes in economic and local market conditions
11
beyond management's control. In addition, various regulatory agencies
periodically review the Company's loan loss allowance as an integral part of the
examination process. Accordingly, the Company may be required to take certain
charge-offs and/or recognize additions to the allowance based on the judgment of
regulators as determined by information provided to them during their
examinations.
Based on relevant and presently available information, management believes that
the current allowance for loan losses is adequate. Following is (a) Summary of
the allowance for loan losses and (b) Non-performing assets table.
(a) Summary of the allowance for loan losses
Three months ended
September 30,
2003 2002
-------------------------------
Balance at beginning of period $ 4,615,285 $ 4,583,897
Provision for losses 525,000 830,000
Charge-offs (253,534) (967,234)
Recoveries 21,702 56,830
----------- -----------
Balance at end of period $ 4,908,453 $ 4,503,493
=========== ===========
(b) Non-performing assets
September 30, 2003 June 30, 2003
------------------ -------------
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
One-to-four family $ 890 $ 335
Multi-family residential 2,132 2,426
Commercial real estate 544 628
Commercial business 156 --
Consumer 331 302
------ ------
Total $4,053 $3,691
------ ------
Loans 90 days past due and still accruing (1):
One-to-four family $1,178 $ 997
Multi-family residential -- --
Commercial real estate -- --
Commercial business -- --
Consumer 7 --
------ ------
Total $1,185 $ 997
------ ------
Total non-performing loans $5,238 $4,688
------ ------
Other non-performing assets (2) $ 629 $ 412
------ ------
Total non-performing assets $5,867 $5,100
====== ======
Restructured loans not included in other
non-performing categories above (3) $3,762 $3,005
====== ======
Non-performing loans as a % of total loans 1.15% 1.13%
Non-performing loans as a % of total assets 0.82% 0.75%
Non-performing assets as a % of total assets 0.91% 0.81%
12
- --------------------------------------------------------------------------------
(1) Delinquent FHA/VA guaranteed loans and delinquent loans with past due
interest that, in the opinion of management, is collectible, are not
placed on non- accrual.
(2) Represents the net book value of real property acquired through
foreclosure or deed in lieu of foreclosure and the net book value of
repossessed automobiles, boats and trailers. Other non-performing assets
are carried at the lower of cost or fair market value less estimated
disposal costs.
(3) Restructured loans have had amounts added to the principal balance and/or
the terms of the debt modified. Modification terms include payment
extensions, interest only payments and longer amortization periods, among
other possible concessions that would not normally be considered.
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, 2003 the Bank was in compliance with all regulatory capital requirements.
Capital levels in excess of regulatory requirements enabled the Bank to pay
dividends to the Company in order to fund common stock repurchases. The Bank's
required, actual and excess capital levels as of September 30, 2003 were as
follows:
Excess of
Actual Over
Required % of Actual % of Regulatory
Amount Assets Amount Assets Requirement
------ ------ ------ ------ -----------
(Dollars in thousands)
Tangible Capital $ 9,308 1.5% $46,471 7.49% $37,163
Core Capital 18,616 3.0% 46,471 7.49% 27,855
Risk-based Capital 34,031 8.0% 51,379 12.08% 17,348
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, 2003 the
Company's average liquidity position was $122.3 million, which enabled the
Company to deploy a portion of that liquidity for stock repurchases. The Company
adjusts its liquid assets 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 standards
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities,
an interpretation of Accounting Research Bulletin No. 51. FIN 46 establishes
accounting guidance for consolidation by business enterprises of variable
interest entities ("VIE") that function to support the activities of the primary
beneficiary. Prior to the implementation of FIN 46, VIE were generally
consolidated by an enterprise when the enterprise had a controlling
13
financial interest through ownership of a majority of voting interest in the
entity. The provisions of FIN 46 were effective immediately for all arrangements
entered into after January 31, 2003. For existing VIE, the implementation date
of FIN 46 is the first fiscal year or interim period beginning after June 15,
2003. The Company's adoption of FIN 46 in connection with its consolidated
financial statements beginning July 1, 2003 was not material as the Company does
not presently have any VIE.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, ("SFAS 149"). SFAS 149 amends
Statement 133 for certain items. The Company adopted SFAS 149 on July 1, 2003
and such adoption did not have a material effect on its financial position or
results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("SFAS 150").
SFAS 150 established standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or asset in some circumstances). The Company adopted SFAS 150 on
July 1, 2003 and such adoption did not have a material effect on its financial
position or results of operations.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
September 30, 2003 and 2002
General. Net earnings for the three months ended September 30, 2003 increased by
$351,000, or 29.5%, to $1.5 million, or $0.41 per diluted share, from $1.2
million, or $0.29 per diluted share, for the three months ended September 30,
2002.
Interest Income. Interest income decreased by $1.5 million, or 16.1%, to $8.0
million for the three months ended September 30, 2003 from $9.5 million for the
three months ended September 30, 2002, primarily due to a decrease in the
average yield on interest-earning assets. The average yield on interest-earning
assets decreased by 87 basis points to 5.71% for the three months ended
September 30, 2003 from 6.58% for the three months ended September 30, 2002, 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 $18.6 million, or 3.2%, to $558.2 million for the three months
ended September 30, 2003 from $576.8 million for the three months ended
September 30, 2002.
Interest income on loans receivable decreased by $882,000, or 11.4%, to $6.9
million for the three months ended September 30, 2003 from $7.7 million for the
three months ended September 30, 2002. 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 105 basis points to 6.35% for the three months
ended September 30, 2003 from 7.40% for the three months ended September 30,
2002. 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. Partially
offsetting the decrease in interest income due to lower yields was an increase
in the average balance of loans receivable. The average balance of loans
receivable increased by $13.6
14
million, or 3.3%, to $432.7 million for the three months ended September 30,
2003 from $419.1 million for the three months ended September 30, 2002.
Interest income on investment securities decreased by $644,000, or 37.1%, to
$1.1 million for the three months ended September 30, 2003 from $1.7 million for
the three months ended September 30, 2002. The average yield on investment
securities decreased by 86 basis points to 3.57% for the three months ended
September 30, 2003 from 4.43% for the three months ended September 30, 2002 in
the generally lower market interest rate environment. In addition, the average
balance of investment securities decreased by $34.5 million, or 22.0% to $122.3
million for the three months ended September 30, 2003 from $156.8 million for
the three months ended September 30, 2002.
Interest Expense. Interest expense decreased by $1.2 million, or 36.8%, to $3.4
million for the three months ended September 30, 2003 from $4.6 million for the
three months ended September 30, 2002 primarily due to a decrease in interest on
deposits. Interest on deposits decreased by $1.2 million, or 36.8%, to $2.1
million for the three months ended September 30, 2003 from $3.3 million for the
three months ended September 30, 2002. The average cost of deposits decreased by
98 basis points to 2.02% for the three months ended September 30, 2003 from
3.00% for the three months ended September 30, 2002. 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, 2003. 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 $27.7 million, or 6.3%, to $409.7 million for the three
months ended September 30, 2003 from $437.4 million for the three months ended
September 30, 2002. In addition, the Company lowered rates on deposit products
and increased its use of wholesale funding from the FHLB with generally lower
interest costs than term deposits.
Interest on FHLB advances and other borrowings totaled $1.3 million for each of
the three month periods ended September 30, 2003 and 2002. The average cost of
borrowings decreased by 82 basis points to 4.12% for the three months ended
September 30, 2003 from 4.94% for the three months ended September 30, 2002.
Offsetting the decrease in the average cost of borrowings was an increase in the
average balance of borrowings. The average balance of borrowings increased by
$18.3 million, or 17.3%, to $124.3 million for the three months ended September
30, 2003 from $106.0 million for the three months ended September 30, 2002.
Net Interest Income. The decrease in interest income was largely offset by the
decrease in interest expense. Net interest income before provision for losses on
loans decreased by $289,000, or 5.9%, to $4.6 million for the three months ended
September 30, 2003 from $4.9 million for the three months ended September 30,
2002. The Company's net yield on interest-earning assets decreased to 3.30% for
the three months ended September 30, 2003 from 3.40% for the three months ended
September 30, 2002.
Provision for Losses on Loans. Provision for losses on loans totaled $525,000
for the three months ended September 30, 2003 and $830,000 for the three months
ended September 30, 2002. During the three months ended September 30, 2003 and
2002 the Company recorded net charge-offs totaling $254,000 and $967,000,
respectively. For more information on asset quality see "Asset Quality" in
Management's Discussion and Analysis of Financial Condition.
15
Noninterest Income. Noninterest income increased by $260,000, or 12.5%, to $2.3
million for the three months ended September 30, 2003 from $2.1 million for the
three months ended September 30, 2002. The increase in noninterest income was
largely due to increases in fees and service charges. Income from fees and
service charges increased by $222,000, or 18.9%, to $1.4 million for the three
months ended September 30, 2003 from $1.2 million for the three months ended
September 30, 2002. The increase in fees and service charges was largely due to
an increase in overdraft fees related to increases in overdraft activity during
the three months ended September 30, 2003. During the three months ended
September 30, 2003 the Company recorded a loss on the sale of investment
securities totaling $32,000. No losses on the sale of securities were recorded
for the three months ended September 30, 2002. Income from real estate-related
activities of the Company's subsidiaries increased by $34,000, or 10.5%, to
$361,000 for the three months ended September 30, 2003 from $327,000 for the
three months ended September 30, 2002 due to continued strong mortgage
origination and refinancing activity.
Noninterest expense. Noninterest expense decreased by $271,000, or 6.2%, to $4.1
million for the three months ended September 30, 2003 from $4.4 million, for the
three months ended September 30, 2002. Compensation and benefits expense
decreased by $66,000, or 2.8% to $2.3 million for the three months ended
September 30, 2003 from $2.4 million for the three months ended September 30,
2002. The decrease in compensation and benefits expense was largely due to a
decrease in incentives and commissions for the three months ended September 30,
2003 when compared to the three months ended September 30, 2002. The decrease in
noninterest expense was also due to a decrease of $211,000, or 18.1%, in other
expense. The decrease in other expense was partly due to the completion of the
amortization of mortgage servicing rights in the prior fiscal year ended June
30, 2003. Amortization of mortgage servicing rights for the three months ended
September 30, 2002 totaled $90,000. In addition, losses on the disposal of
repossessed autos and recreational vehicles decreased by $60,000 for the three
months ended September 30, 2003 when compared to the three months ended
September 30, 2002. Data processing expense and advertising expense increased by
$20,000 and $23,000, respectively, for the three months ended September 30, 2003
as compared to the three months ended September 30, 2002, partly offsetting the
decreases in other noninterest expense categories.
Net earnings and income tax expense. Net earnings before income taxes increased
by $548,000, or 30.8%, to $2.3 million for the three months ended September 30,
2003 from $1.8 million for the three months ended September 30, 2002. Income tax
expense totaled $787,000, or an effective tax rate of 33.8%, and $590,000, or an
effective tax rate of 33.2%, respectively, for the three months ended September
30, 2003 and 2002.
16
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 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, 2003. Management does not believe that the Company has experienced any
material changes in its market risk position from that disclosed in the
Company's 2003 Form 10-K Annual Report as of June 30, 2003 or that the Company's
primary market risk exposures and how those exposures were managed during the
three months ended September 30, 2003 changed significantly when compared to
June 30, 2003. The Company's NPV ratio after a 200 basis point rate-shock was
6.79% and 7.62%, respectively, at June 30, 2003 and March 31, 2003 as measured
by the OTS Model.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
including its Chief Executive Officer and Chief Financial Officer, the Company
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rules 13a-15(e)and 15d-15(e)under the
Exchange Act) as of the end of the period covered by this 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 report, the
Company's 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.
There has been no change in the Company's internal control over financial
reporting in connection with the quarterly evaluation that occurred during the
Company's last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
17
PART II. OTHER INFORMATION
Item 1.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.
Item 4.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.
Item 6.Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 First Federal Bankshares, Inc. Amended and Restated
1999 Stock Option Plan
Exhibit 10.2 First Federal Bankshares, Inc. Amended and Restated
1999 Recognition and Retention Plan
Exhibit 31.1 Certification of Chief Executive Officer
Pursuant to Section 302
Exhibit 31.2 Certification of Chief Financial Officer
Pursuant to Section 302
Exhibit 32 Statement Pursuant to Section 906
(b) Reports on Form 8-K
A report on Form 8-K was filed on July 28, 2003. The event reported was the
Company's announcement of quarterly results for the period ended June 30, 2003,
a dividend declaration and the date and time of the Company's 2003 Annual
Meeting of Stockholders' in a press release dated July 25, 2003.
A report on Form 8-K was filed on August 22, 2003. The event reported was the
Company's announcement of the commencement of a share repurchase program in a
press release dated August 21, 2003.
18
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, 2003 BY: /s/ Barry E. Backhaus
-----------------------------
Barry E. Backhaus
President and
Chief Executive Officer
DATE: November 13, 2003 BY: /s/ Colin D. Anderson
-----------------------------
Colin D. Anderson
Senior Vice President and
Chief Financial Officer
19