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 March 31, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to __________
Commission File Number: 0-25509
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 incorporation or organization) (I.R.S. Employer Identification Number)
329 Pierce Street, Sioux City, Iowa 51101
------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
712-277-0200
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(Registrant's telephone number, including area code)
------------------------------------------------------------
(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.
|X| Yes |_| No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
|X| Yes |_| 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 May 6, 2005
----- --------------------------
(Common Stock, $.01 par value) 3,623,703
FIRST FEDERAL BANKSHARES, INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements of First Federal Bankshares, Inc.
and Subsidiaries 1
Condensed Consolidated Balance Sheets at
March 31, 2005 and June 30, 2004 1
Condensed Consolidated Statements of Operations
for the three- and nine-month periods ended
March 31, 2005 and 2004 2
Condensed Consolidated Statements of Changes in
Stockholders' Equity for the nine-month periods
ended March 31, 2005 and 2004 3
Condensed Consolidated Statements of Comprehensive
Income for the three- and nine-month periods ended
March 31, 2005 and 2004 4
Condensed Consolidated Statements of Cash Flows for the
nine-month periods ended March 31, 2005 and 2004 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
Part II. Other Information 20
Item 1. Legal Proceedings 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits 20
Signatures 21
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, June 30,
2005 2004
------------- -------------
Assets
- ------
Cash and due from banks $ 9,148,562 $ 16,574,986
Interest-bearing deposits in other financial institutions 4,711,217 2,282,875
------------- -------------
Cash and cash equivalents 13,859,779 18,857,861
------------- -------------
Securities available-for-sale, at fair value (amortized cost
of $52,506,458 and $85,217,975, respectively) 52,477,309 84,693,332
Securities held-to-maturity, at amortized cost (fair value
of $18,903,370 and $23,762,072, respectively) 18,528,183 23,185,899
Loans receivable 437,923,153 436,173,780
Less allowance for loan losses 4,927,329 4,316,286
------------- -------------
Net loans 432,995,824 431,857,494
------------- -------------
Office property and equipment, net 13,154,718 13,276,834
Federal Home Loan Bank ("FHLB") stock, at cost 5,762,400 6,096,100
Accrued interest receivable 2,458,904 2,230,053
Goodwill 18,417,040 18,523,607
Other assets (note 5) 20,983,193 16,800,929
------------- -------------
Total assets $ 578,637,350 $ 615,522,109
============= =============
Liabilities
- -----------
Deposits $ 398,638,328 $ 429,208,928
Advances from FHLB and other borrowings 104,095,494 109,886,261
Advance payments by borrowers for taxes and insurance 294,640 1,119,486
Accrued taxes on income 433,930 --
Accrued interest payable 1,268,837 1,206,994
Accrued expenses and other liabilities 2,151,517 2,642,718
------------- -------------
Total liabilities 506,882,746 544,064,387
------------- -------------
Stockholders' equity
- --------------------
Common stock, $.01 par value, 12,000,000 shares authorized;
4,976,529 and 4,939,262 shares issued at March 31, 2005
and June 30, 2004, respectively 49,765 49,393
Additional paid-in capital 37,720,235 37,086,235
Retained earnings, substantially restricted 55,208,827 52,240,273
Treasury stock, at cost, 1,352,826 and 1,198,990 shares at
March 31, 2005 and June 30, 2004, respectively (20,165,423) (16,519,093)
Accumulated other comprehensive income (loss) (19,149) (329,644)
Unearned Employee Stock Ownership Plan ("ESOP") (946,580) (1,044,710)
Unearned Recognition and Retention Plan ("RRP") (93,071) (24,732)
------------- -------------
Total stockholders' equity 71,754,604 71,457,722
------------- -------------
Total liabilities and stockholders' equity $ 578,637,350 $ 615,522,109
============= =============
See notes to condensed consolidated financial statements.
1
FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months Nine months
ended March 31, ended March 31,
-------------------------- -------------------------------
2005 2004 2005 2004
---------- ---------- ------------ ------------
Interest income:
Loans receivable $6,572,591 $6,737,451 $ 19,132,474 $ 20,362,291
Investment securities 745,924 877,833 2,473,208 2,968,493
Other interest-earning assets 12,797 13,628 32,675 24,275
---------- ---------- ------------ ------------
Total interest income 7,331,312 7,628,912 21,638,357 23,355,059
---------- ---------- ------------ ------------
Interest expense:
Deposits 1,785,235 1,885,296 5,120,517 5,922,077
Advances from FHLB and other borrowings 1,146,222 1,220,862 3,480,409 3,766,105
---------- ---------- ------------ ------------
Total interest expense 2,931,457 3,106,158 8,600,926 9,688,182
---------- ---------- ------------ ------------
Net interest income 4,399,855 4,522,754 13,037,431 13,666,877
Provision for losses on loans 130,000 450,000 995,000 1,075,000
---------- ---------- ------------ ------------
Net interest income after provision for
losses on loans 4,269,855 4,072,754 12,042,431 12,591,877
---------- ---------- ------------ ------------
Noninterest income:
Service charges on deposit accounts 792,805 903,931 2,724,082 2,962,692
Service charges on loans 73,845 141,479 356,328 490,212
Gain on sale of branch deposits -- -- 2,185,284 --
Net gain (loss) on sale of securities -- -- (121,209) (64,797)
Gain (loss) on sale of loans 121,982 917,059 547,042 1,406,169
Real estate-related activities 168,294 318,848 511,559 1,007,512
Other income 438,641 478,231 1,285,301 1,355,933
---------- ---------- ------------ ------------
Total noninterest income 1,595,567 2,759,548 7,488,387 7,157,721
---------- ---------- ------------ ------------
Noninterest expense:
Compensation and benefits (note 7) 2,659,542 2,744,260 7,855,469 7,639,316
Office property and equipment 655,544 667,527 1,893,473 1,902,608
Data processing expense 126,813 122,836 360,343 320,223
Advertising 135,547 55,129 316,670 255,131
Other expense 992,708 978,439 3,099,972 2,955,950
---------- ---------- ------------ ------------
Total noninterest expense 4,570,154 4,568,191 13,525,927 13,073,228
---------- ---------- ------------ ------------
Income before income taxes 1,295,268 2,264,111 6,004,891 6,676,370
Income taxes 397,000 751,000 1,964,000 2,211,000
---------- ---------- ------------ ------------
Net income $ 898,268 $1,513,111 $ 4,040,891 $ 4,465,370
========== ========== ============ ============
Earnings per share: (note 4)
Basic earnings per share $ 0.25 $ 0.41 $ 1.13 $ 1.23
========== ========== ============ ============
Diluted earnings per share $ 0.25 $ 0.40 $ 1.11 $ 1.19
========== ========== ============ ============
Dividends declared per share $ 0.10 $ 0.09 $ 0.30 $ 0.26
========== ========== ============ ============
See notes to condensed consolidated financial statements.
2
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
Nine months ended March 31,
2005 2004
-----------------------------
Capital Stock
Beginning of year balance $ 49,393 $ 48,969
Stock options exercised: 37,267 and 37,405 shares for the nine
months ended March 31, 2005 and 2004, respectively 372 374
- ----------------------------------------------------------------------------------------------------
End of period balance 49,765 49,343
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Additional paid-in capital
Beginning of year balance 37,086,235 36,537,133
Stock options exercised 386,047 345,854
RRP awarded (forfeited), net 124,530 (7,000)
Stock appreciation of allocated ESOP shares 123,423 127,728
- ----------------------------------------------------------------------------------------------------
End of period balance 37,720,235 37,003,715
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Retained earnings, substantially restricted
Beginning of year balance 52,240,273 47,900,781
Net earnings 4,040,891 4,465,370
Dividends paid on common stock (1,072,337) (950,587)
- ----------------------------------------------------------------------------------------------------
End of period balance 55,208,827 51,415,564
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Treasury stock, at cost
Beginning of year balance (16,519,093) (14,264,674)
RRP awarded (forfeited), net 77,508 (25,200)
Treasury stock purchased (3,723,838) (1,159,594)
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End of period balance (20,165,423) (15,449,468)
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Accumulated other comprehensive income (loss)
Beginning of year balance (329,644) 710,378
Net change in unrealized gains on securities available-for-sale,
net of tax expense 234,497 (331,437)
Less: reclassification adjustment for net realized losses
included in net income, net of tax expense (75,998) (40,628)
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End of period balance (19,149) 419,569
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Unearned ESOP shares
Beginning of year balance (1,044,710) (1,185,700)
ESOP shares allocated 98,130 104,710
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End of period balance (946,580) (1,080,990)
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Unearned recognition and retention plan shares
Beginning of year balance (24,732) (85,522)
RRP forfeited (awarded), net (202,037) 14,981
Amortization of RRP expense 133,698 37,514
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End of period balance (93,071) (33,027)
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Total stockholders' equity $ 71,754,604 $ 72,324,706
====================================================================================================
See notes to condensed consolidated financial statements.
3
FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended Nine months ended
March 31, March 31,
------------------------ ---------------------------
2005 2004 2005 2004
--------- ---------- ----------- -----------
Net earnings $ 898,268 $1,513,111 $ 4,040,891 $ 4,465,370
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during
the period, net of tax (160,039) 179,564 234,497 (331,437)
Less: reclassification adjustment for net realized
losses included in net income, net of tax expense -- -- (75,998) (40,628)
--------- ---------- ----------- -----------
Other comprehensive income (loss), net of tax (160,039) 179,564 310,495 (290,809)
--------- ---------- ----------- -----------
Comprehensive income $ 738,229 $1,692,675 $ 4,351,386 $ 4,174,561
========= ========== =========== ===========
See notes to condensed consolidated financial statements.
4
FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended March 31,
Cash flows from operating activities: 2005 2004
------------ ------------
Net earnings $ 4,040,891 $ 4,465,370
Adjustments to reconcile net earnings to net cash provided by operating activities:
Loans originated for sale to investors (25,867,000) (28,950,060)
Proceeds from sale of loans originated for sale 25,263,560 30,188,546
Provision for loan losses 995,000 1,075,000
Depreciation and amortization 1,230,002 1,060,752
Net gain on sale of loans (547,042) (1,406,169)
Net (gain) loss on sale of securities available-for-sale 121,209 64,797
Net gain on sale of real estate held for development (60,000) (60,000)
Net (gain) loss on sale of office property and equipment 16,459 (69,917)
Net (gain) loss on sale of branch deposits (2,185,284) --
Net loan fees deferred (68,791) 45,993
Amortization of premiums and discounts on loans and securities 158,370 219,489
(Increase) decrease in accrued interest receivable (254,007) (39,795)
(Increase) decrease in other assets (633,022) (334,493)
Increase (decrease) in accrued interest payable 186,759 (143,623)
Increase (decrease) in accrued expenses and other liabilities (458,600) 107,678
Increase (decrease) in accrued taxes on income 451,802 (313,387)
------------ ------------
Net cash provided by (used in) operating activities 2,390,306 5,910,181
------------ ------------
Cash flows from investing activities:
Proceeds from maturities of securities held-to-maturity 4,632,196 18,856,176
Proceeds from sale of securities available-for-sale 30,226,184 13,585,515
Purchase of securities available-for-sale (5,389,323) (8,209,971)
Proceeds from maturities of securities available-for-sale 7,416,127 12,610,800
Purchase of bank owned life insurance -- (2,555,755)
Redemption (purchase) of Federal Home Loan Bank Stock 333,700 (522,300)
Loans purchased (26,071,000) (23,661,000)
Proceeds from sale of loans -- 37,370,941
Cash effect of branch office sales (9,753,387) --
(Increase) decrease in loans receivable 7,599,838 (25,306,388)
Proceeds from sale of office property and equipment 4,125 108,912
Purchase of office property and equipment (1,191,416) (1,084,819)
Proceeds from sale of foreclosed real estate 1,124,562 144,555
Proceeds from sale of real estate held for development 994,258 702,302
Net expenditures on real estate held for development (992,006) (1,274,983)
------------ ------------
Net cash provided by (used in) investing activities 8,933,858 20,763,985
------------ ------------
Cash flows from financing activities:
Decrease in deposits (5,296,878) (6,802,231)
Proceeds from FHLB advances and other borrowings 6,209,233 25,249,015
Repayment of FHLB advances and other borrowings (12,000,000) (14,386,888)
Net decrease in advances from borrowers for taxes and insurance (824,846) (969,515)
Issuance of common stock, net 386,420 346,227
Repurchase of common stock (3,723,838) (1,159,594)
Cash dividends paid (1,072,337) (950,587)
------------ ------------
Net cash provided by (used in) financing activities (16,322,246) 1,326,427
------------ ------------
Net increase (decrease) in cash and cash equivalents (4,998,082) 28,000,593
Cash and cash equivalents at beginning of period 18,857,861 34,286,953
------------ ------------
Cash and cash equivalents at end of period $ 13,859,779 $ 62,287,546
============ ============
Supplemental disclosures:
Cash paid during the period for interest $ 8,539,083 $ 9,831,805
============ ============
Cash paid during the period for income taxes $ 1,501,198 $ 2,651,039
============ ============
See notes to condensed consolidated financial statements.
5
FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of presentation
---------------------
The condensed consolidated balance sheet information for June 30, 2004 was
derived from the audited Consolidated Balance Sheets of First Federal
Bankshares, Inc. (the "Company") at June 30, 2004. The condensed consolidated
financial statements as of and for the three months and nine months ended March
31, 2005 and 2004 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 year-end financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been omitted.
Certain amounts previously reported have been reclassified to conform to the
presentation in these condensed consolidated financial statements. These
reclassifications did not affect previously reported net income or retained
earnings.
The Company's critical accounting policies relate to the allowance for loan
losses and accounting for goodwill and other intangible assets. 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 collectability 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.
With regard to the Company's critical accounting policy relating to goodwill,
goodwill is evaluated by management for impairment at least annually and
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable.
A summary of significant accounting policies followed by the Company is set
forth in Note 1 of the Company's 2004 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.
6
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.
3. Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles 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 Nine months ended
March 31, March 31,
2005 2004 2005 2004
--------------------------------------------------
Basic EPS computation:
Net earnings $ 898,268 $1,513,111 $4,040,891 $4,465,370
Weighted average common shares outstanding 3,526,364 3,654,457 3,567,590 3,643,980
--------------------------------------------------
Basic EPS $ 0.25 $ 0.41 $ 1.13 $ 1.23
=================================================
Diluted EPS computation:
Net earnings $ 898,268 $1,513,111 $4,040,891 $4,465,370
--------------------------------------------------
Weighted average common shares outstanding 3,526,364 3,654,457 3,567,590 3,643,980
Incremental option and RRP shares using
treasury stock method 63,635 105,589 74,025 112,190
--------------------------------------------------
Diluted shares outstanding 3,589,999 3,760,046 3,641,615 3,756,170
=================================================
Diluted EPS $ 0.25 $ 0.40 $ 1.11 $ 1.19
=================================================
5. Intangible assets
-----------------
The gross carrying amount of intangible assets subject to amortization and the
associated accumulated amortization at March 31, 2005, is presented in the table
below. Intangible assets' balances are included in the line item `Other assets'
in the Condensed Consolidated Balance Sheets. Amortization expense for
intangible assets was $22,110 and $11,547, respectively, for the three months
ended March 31, 2005 and 2004 and $59,145 and $40,827, respectively for the nine
months ended March 31, 2005 and 2004.
7
March 31, 2005
--------------------------------------------
Gross Unamortized
Carrying Accumulated Intangible
Amount Amortization Assets
--------------------------------------------
Intangible assets:
Core deposit premium $ 690,140 $ 510,289 $ 179,851
Mortgage servicing rights 268,379 33,008 235,371
--------------------------------------------
$ 958,519 $ 543,297 $ 415,222
============================================
June 30, 2004
--------------------------------------------
Gross Unamortized
Carrying Accumulated Intangible
Amount Amortization Assets
--------------------------------------------
Intangible assets:
Core deposit premium $ 690,140 $ 476,044 $ 214,096
Mortgage servicing rights 268,379 8,108 260,271
--------------------------------------------
$ 958,519 $ 484,152 $ 474,367
============================================
Projections of amortization expense are based on existing asset balances and the
existing interest rate environment as of March 31, 2005. 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 for the
periods indicated:
Core Deposit Mortgage
Premium Servicing Rights Total
--------------------------------------------
Three months ended June 30, 2005 $ 11,151 $ 9,931 $ 21,082
Year ended June 30, 2006 44,604 40,361 84,965
Year ended June 30, 2007 44,604 35,983 80,587
Year ended June 30, 2008 44,604 30,536 75,140
Year ended June 30, 2009 34,888 25,611 60,499
Year ended June 30, 2010 -- 21,129 21,129
Thereafter -- 71,820 71,820
------------------------------------------
Total estimated amortization expense $179,851 $235,371 $415,222
==========================================
6. Dividends
On January 20, 2005 the Company declared a cash dividend on its common stock,
payable on February 28, 2005 to stockholders of record as of February 14, 2005,
equal to $0.10 per share. Excluding dividends on unallocated Employee Stock
Ownership Plan ("ESOP") shares, dividends totaling $352,446 were paid to
stockholders on February 28, 2005.
On April 21, 2005 the Company declared a cash dividend on its common stock,
payable on May 31, 2005 to stockholders of record as of May 17, 2005 equal to
$0.10 per share. Excluding dividends on unallocated ESOP shares, the Company
expects to pay dividends totaling approximately $352,000 to stockholders on May
31, 2005.
8
7. Stock Options
-------------
At March 31, 2005, the Company had two stock-based employee compensation plans,
which are described more fully in Note 11 of the Company's 2004 Annual Report to
Stockholders.
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 Nine months ended
March 31, March 31,
2005 2004 2005 2004
-------------------------------------------------
Basic EPS computation:
Net earnings $ 898,268 $1,513,111 $4,040,891 $4,465,370
Pro forma 881,258 1,484,405 3,996,099 4,399,584
Basic earnings per share:
Net earnings 0.25 0.41 1.13 1.23
Pro forma 0.25 0.41 1.12 1.21
Diluted earnings per share:
Net earnings 0.25 0.40 1.11 1.19
Pro forma 0.25 0.39 1.10 1.17
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 for the three months and nine months ended March 31, 2005 and 2004,
respectively: dividend yield of 2.44% and 3.32%; expected volatility of 24.26%
and 22.96%; risk free interest rate of 4.54% and 6.09%; and expected life of 7.5
years for all periods presented.
8. Effect of New Accounting Standards
----------------------------------
The Accounting Standards Executive Committee has issued Statement of Position
03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer.
This Statement applies to all loans acquired in a transfer, including those
acquired in the acquisition of a bank or a branch, and provides that such loans
be accounted for at fair value with no allowance for loan losses, or other
valuation allowance, permitted at the time of acquisition. The difference
between cash flows expected at the acquisition date and the investment in the
loan should be recognized as interest income over the life of the loan. If
contractually required payments for principal and interest are more than
expected cash flows, this amount should not be recognized as a yield adjustment,
a loss accrual, or a valuation allowance. For the Company, this Statement is
effective for fiscal year 2006 and, early adoption, although permitted, is not
planned. No material impact is expected on the Company's consolidated financial
statements at the time of adoption.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123 (Revised 2004), Share-Based Payment ("SFAS123R") which
replaces SFAS No. 123, Accounting for Stock-Based Compensation and supersedes
APB Opinion No. 25, Accounting for Stock Issued to
9
Employees. SFAS123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements
based on their fair values. The pro forma disclosures previously permitted under
SFAS No. 123 will no longer be an alternative to financial statement
recognition. In accordance with a recently-issued Securities and Exchange
Commission rule, companies will be allowed to implement SFAS123R as of the
beginning of the first interim or annual period that begins after June 15, 2005.
The Company will adopt SFAS123R effective July 1, 2005. Under SFAS123R, the
Company must determine the appropriate fair value model to be used for valuing
share-based payments, the amortization method for compensation cost and the
transition method to be used at date of adoption. The permitted transition
methods include either retrospective or prospective adoption. The prospective
method requires that compensation expense be recorded for all unvested stock
options at the beginning of the first quarter after adoption of SFAS123R, while
the retrospective method records compensation expense for all unvested stock
options beginning with the first period presented. The Company has not yet
determined the method of adoption or whether the adoption will result in amounts
that are similar to the current pro forma disclosures under SFAS No. 123. The
Company is currently assessing the impact that SFAS123R will have on its
consolidated financial statements at the time of adoption.
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 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.
Overview
- --------
Effective September 20, 2004 the Company sold two branch offices located in
Sheldon, Iowa and Orange City, Iowa to another local financial institution. The
purchaser assumed deposits of $27.1 million and acquired loans totaling $17.0
million in addition to the branch office buildings and certain furniture and
equipment. A pre-tax gain of $2.2 million was recorded as a result of the branch
sale. The branch offices sold are located in relatively rural areas. The
Company's business plan targets expansion in the metro Des Moines market area
rather than in rural communities. On March 28, 2005 the Bank opened a new
full-service branch office in Johnston, Iowa which is close to metro Des Moines.
Management expects this office to offer increased opportunities for expansion of
its retail and commercial services in the central Iowa market.
Recent increases in the market interest rate environment after seven 25 basis
point increases by the Federal Reserve Board since June 2004 contributed to an
increase in the Company's net yield on interest-earning assets to 3.42% for the
three months ended March 31, 2005 from 3.28% for the three months ended March
31, 2004. In addition, the net yield on interest-earning assets increased to
3.35% for the
10
nine months ended March 31, 2005 from 3.30% for the nine months
ended March 31, 2004. However, the increase in the market interest rate
environment also resulted in upward pressure on the cost of interest-bearing
liabilities which increased to 2.57% for the three months ended March 31, 2005
from 2.43% for the three months ended March 31, 2004. During the three months
ended March 31, 2005, the Company increased rates on certain deposit products
and offered premium-rate certificates of deposit in order to attract and retain
deposit relationships.
Financial condition
- -------------------
Total assets decreased by $36.9 million, or 6.0%, to $578.6 million at March 31,
2005 from $615.5 million at June 30, 2004 primarily due to the branch office
sales. Proceeds from maturities and sales of investment securities, net of
purchases, totaled $36.9 million for the nine months ended March 31, 2005 and
were used primarily to fund the transfer of the net liabilities of the branch
offices sold and an additional $3.5 million decrease in deposits. Loans
receivable increased to $437.9 million at March 31, 2005 from $436.2 million at
June 30, 2004 as loan purchases and originations more than offset the $17.1
million in loan balances sold in the branch sale transaction in addition to
principal payments received during the nine months ended March 31, 2005.
Deposits decreased by $30.6 million, or 7.1%, to $398.6 million at March 31,
2005 from $429.2 million at June 30, 2004 primarily due to the transfer of $27.1
million of deposit liabilities as part of the branch sale. In response to the
recent increase in the market interest rate environment, the Company increased
rates on certain deposit products and offered premium-rate certificates of
deposit in order to generate and retain deposits, to maintain adequate liquidity
and to meet certain asset/liability management objectives.
Total stockholders' equity increased by $297,000, or 0.4%, to $71.8 million at
March 31, 2005 from $71.5 million at June 30, 2004. The change in stockholders'
equity was primarily due to earnings for the nine months ended March 31, 2005
net of stock repurchases and dividend payments. Excluding dividends on
unallocated Employee Stock Ownership Plan ("ESOP") shares, dividends declared
during the nine months ended March 31, 2005 totaled $1.1 million. The Company
purchased 162,448 shares of its common stock during the nine months ended March
31, 2005 at a cost of $3.7 million. A repurchase program announced in August
2003 provided for the repurchase of up to 377,000 shares, or approximately 10%
of the then outstanding shares, in open market purchases. As of March 31, 2005
up to 157,000 shares may yet be purchased under this program that expires on
September 23, 2005. The Company's management believes that stock repurchases are
an appropriate deployment of a portion of the Company's capital that enhances
shareholder value when the Company's common stock is repurchased at an
appropriate price. With capital levels in excess of regulatory requirements, as
demonstrated in the capital table included later in this report, and a basic
core surplus of liquid assets in excess of short term liabilities that totaled
$24.7 million, or 3.8%, at March 31, 2005, 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 volatility and enhance the liquidity of the Company's
common stock, which is generally advantageous for shareholders. Also
contributing to the increase in stockholders' equity was a change in accumulated
other comprehensive income. The Company reported accumulated other comprehensive
losses of $19,000 at March 31, 2005 compared to accumulated other comprehensive
losses of $330,000 at June 30, 2004 due to increases in the market value of its
available-for-sale securities during the current year period.
Asset quality
- -------------
Non-performing assets totaled $3.0 million, or 0.52% of total assets, and $5.0
million, or 0.81% of total assets, at March 31, 2005 and June 30, 2004,
respectively. Non-performing loans decreased to $2.8 million at March 31, 2005
from $4.3 million at June 30, 2004. Additionally, net charge-offs decreased by
$359,000, or 48.3%, to $384,000 for the nine months ended March 31, 2005, from
$743,000 for the nine
11
months ended March 31, 2004. Provision for losses on loans totaled $1.0 million
and $1.1 million, respectively, for the nine months ended March 31, 2005 and
2004. The allowance for loan losses totaled $4.9 million, or 1.13% of total
loans, at March 31, 2005 and $4.3 million, or 0.99% of total loans, at June 30,
2004.
The allowance for loan losses is increased by the provision for loan losses
charged to operations and reduced by 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 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 are tables
presenting (a) a summary of the allowance for loan losses and (b) non-performing
asset balances for or at the periods or dates indicated.
(a) Summary of the allowance for loan losses
----------------------------------------
Three months ended Nine months ended
March 31, March 31,
2005 2004 2005 2004
--------------------------------------------------------
Balance at beginning of period $ 4,924,711 $ 4,862,531 $ 4,316,286 $ 4,615,285
Provision for losses 130,000 450,000 995,000 1,075,000
Charge-offs (159,425) (395,285) (459,608) (808,698)
Recoveries 32,043 30,321 75,651 65,980
--------------------------------------------------------
Balance at end of period $ 4,927,329 $ 4,947,567 $ 4,927,329 $ 4,947,567
========================================================
12
(b) Non-performing assets.
----------------------
March 31, 2005 June 30, 2004
------------------------------
(Dollars in Thousands)
Loans accounted for on a non-accrual basis:
One-to four family residential $ 441 $ 966
Commercial real estate 1,191 1,645
Commercial business 140 113
Consumer 430 267
---------------------------
Total 2,202 2,991
---------------------------
Loans accounted for on an accrual basis (1)(2):
One-to four family residential 489 1,332
Multi-family residential -- --
Commercial real estate -- --
Consumer 86 --
---------------------------
Total 575 1,332
---------------------------
Total non-performing loans 2,777 4,323
---------------------------
Other non-performing assets (3) (4) 220 693
---------------------------
Total non-performing assets $2,997 $5,016
===========================
Restructured loans not included in
other non-performing categories above $2,068 $3,691
===========================
Non-performing loans as a percentage of total loans 0.63% 0.99%
Non-performing loans as a percentage of total assets 0.48% 0.70%
Total non-performing assets as a percentage of total loans
and other non-performing assets 0.69% 1.16%
Non-performing assets as a percentage of total assets 0.52% 0.81%
- ----------------------------
(1) Includes loans 90 days or more contractually delinquent.
(2) 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 status.
(3) Represents the net book value of real property acquired by the Company
through foreclosure or deed in lieu of foreclosure. Upon acquisition, this
property is carried at the lower of cost or fair market value less
estimated costs of disposition. The total carrying amount was $69,000 and
$542,000, respectively, at March 31, 2005 and June 30, 2004.
(4) Includes repossessed automobiles, boats and trailers carried at the lower
of cost or fair market value less estimated disposal costs. The total
carrying amount was $151,000 at both March 31, 2005 and June 30, 2004.
13
Capital
- -------
The Office of Thrift Supervision (the "OTS") requires that the Bank meet minimum
tangible, leverage (core) and risk-based capital requirements. As of March 31,
2005 the Bank was in compliance with all regulatory capital requirements. The
Bank's actual and required capital amounts and ratios as of March 31, 2005 were
as follows:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------
Dollars in Thousands
Tangible capital $51,133 9.15% $ 8,382 1.50% $ -- --%
Tier 1 leverage (core) 51,133 9.15 16,763 3.00 27,938 5.00
Tier 1 risk-based capital 51,133 12.02 17,020 4.00 25,530 6.00
Risk-based capital 56,060 13.18 34,040 8.00 42,550 10.00
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. The Company's liquidity position is sufficient to
enable the Company to deploy a portion of such 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,
loan commitments and capital strategies. The Company also adjusts liquidity as
appropriate to meet its asset/liability objectives.
Comparison of the results of operations for the three months ended March 31,
- ----------------------------------------------------------------------------
2005 and 2004
- -------------
General. Net earnings for the three months ended March 31, 2005 totaled
$898,000, or basic and diluted earnings per share of $0.25 each. Net earnings
for the three months ended March 31, 2004 totaled $1.5 million, or basic and
diluted earnings per share of $0.41 and $0.40, respectively. The 2005 quarterly
earnings were lower than 2004 primarily due to a non-recurring gain of $496,000,
net of tax effect, on the sale of loans recorded in March 2004.
Interest Income. Interest income decreased by $298,000, or 3.9%, to $7.3 million
for the three months ended March 31, 2005 from $7.6 million for the three months
ended March 31, 2004 primarily due to a decrease in the average balance of
interest-earning assets. The average balance of interest-earning assets
decreased by $37.8 million, or 6.8%, to $521.8 million for the three months
ended March 31, 2005 from $559.5 million for the three months ended March 31,
2004 primarily due to the Company's sale of two branch offices in September 2004
in which the purchaser assumed deposit liabilities of $27.1 million and acquired
loans totaling $17.0 million. Proceeds from maturities and sales of investment
securities funded the transfer of the deposit liabilities. Primarily due to the
increasing market interest rate environment during 2005 the average yield on
interest-earning assets increased by 22 basis points to 5.75% for the three
months ended March 31, 2005 from 5.53% for the three months ended March 31,
2004.
Interest income on loans decreased by $165,000, or 2.5%, to $6.6 million for the
three months ended March 31, 2005 from $6.7 million for the three months ended
March 31, 2004. The decrease in interest income on loans was primarily due to a
decrease in the average balance of loans. The average balance of loans decreased
by $18.4 million, or 4.0%, to $440.6 million for the three months ended March
31, 2005 from $459.0 million or the three months ended March 31, 2004 primarily
due to the branch office sale in which loans totaling $17.0 million were sold.
The average yield on loans increased by 15 basis points to
14
6.05% for the three months ended March 31, 2005 from 5.90% for the three months
ended March 31, 2004 primarily due to new loan production and the repricing of
adjustable rate loans in the higher market interest rate environment in 2005 as
compared to 2004.
Interest income on investment securities decreased by $132,000, or 15.0%, to
$746,000 for the three months ended March 31, 2005 from $878,000 for the three
months ended March 31, 2004. The decrease in interest income on investment
securities was primarily due to a decrease in the average balance of such
securities. The average balance of investment securities decreased by $14.9
million, or 15.8%, to $79.0 million for the three months ended March 31, 2005
from $93.9 million for the three months ended March 31, 2004 as the Company
funded the decrease in deposit liabilities with maturities, sales and principal
payments from its investment securities portfolio. The investment securities
liquidated to fund the transfer of branch office deposits in September 2004 were
primarily shorter-term lower-yielding securities. The average tax-equivalent
yield on investment securities increased to 4.17% for the three months ended
March 31, 2005 from 4.01% for the three months ended March 31, 2004 primarily
due to a the mix of security types. For the three months ended March 31, 2005
higher-yielding investment securities comprised a more significant portion of
the investment securities portfolio than was the case for the three months ended
March 31, 2004.
Interest Expense. Interest expense decreased by $175,000, or 5.6%, to $2.9
million for the three months ended March 31, 2005 from $3.1 million for the
three months ended March 31, 2004 primarily due to a decrease in the average
balance of interest-bearing liabilities. The average balance of interest-bearing
liabilities decreased by $52.1 million, or 10.1%, to $461.8 million for the
three months ended March 31, 2005 from $513.9 million for the three months ended
March 31, 2004 primarily due to a decrease in the average balance of
interest-bearing deposits.
Interest on deposits decreased by $100,000, or 5.3%, to $1.8 million for the
three months ended March 31, 2005 from $1.9 million for the three months ended
March 31, 2004 primarily due to a decrease in the average balance of such
deposits. The average balance of interest-bearing deposits decreased by $45.4
million, or 11.4%, to $352.9 million for the three months ended March 31, 2005
from $398.4 million for the three months ended March 31, 2004 partly due to the
branch office sale in which deposits totaling $27.1 million were assumed. The
decrease in the average balance of interest-bearing deposits was primarily due
to a decrease in the average balance of generally higher-rate fixed-term time
deposits which decreased by $45.3 million for the three months ended March 31,
2005 when compared to the three months ended March 31, 2004 as customers sought
higher returns in the historically low market interest rate environment during
calendar year 2004 or withdrew funds from matured deposits and transferred those
funds to more liquid accounts. The Company is generally not a market rate leader
for fixed-term deposits and chose not to aggressively compete for these
higher-cost deposit balances. Partially offsetting the decrease in interest
expense on deposits due to decreases in the average balance of interest-bearing
deposits was an increase in the average cost of such deposits. The average cost
of deposits increased by 15 basis points to 2.05% for the three months ended
March 31, 2005 from 1.90% for the three months ended March 31, 2004 as the
Company increased rates on certain deposit products and offered premium-rate
certificates of deposit in order to attract and retain deposits in the
increasing market interest rate environment.
Interest on FHLB advances and other borrowings totaled $1.1 million and $1.2
million, respectively, for the three months ended March 31, 2005 and 2004
primarily due to a decrease in the average balance of borrowings. The average
balance of borrowings decreased by $6.7 million, or 5.8%, to $108.8 million for
the three months ended March 31, 2005 from $115.5 million for the three months
ended March 31, 2004. The average cost of borrowings was 4.27% and 4.25%,
respectively, for the three months ended March 31, 2005 and 2004.
Net Interest Income. Net interest income before provision for losses on loans
decreased by $123,000, or 2.7%, to $4.4 million for the three months ended March
31, 2005 from $4.5 million for the three months
15
ended March 31, 2004 primarily due to the decrease in the average balance of
interest-earning assets that was offset by even larger decreases in the average
balance of interest-bearing liabilities. The Company's average net yield on
interest-earning assets increased by 14 basis points to 3.42% for the three
months ended March 31, 2005 from 3.28% for the three months ended March 31, 2004
as the relationship of interest-earning assets to interest-bearing liabilities
increased to 113.0% for the three months ended March 31, 2005 from 108.9% for
the three months ended March 31, 2004.
Provision for Losses on Loans. Provision for losses on loans decreased by
$320,000 to $130,000 for the three months ended March 31, 2005 from $450,000 for
the three months ended March 31, 2004 primarily due to a reduction in
charge-offs. During the three months ended March 31, 2005 and 2004 net
charge-offs decreased by $238,000 to $127,000 for the three months ended March
31, 2005 from $365,000 for the three months ended March 31, 2004. For more
information on asset quality see "Asset Quality" in Management's Discussion and
Analysis of Financial Condition.
Noninterest Income. Noninterest income decreased by $1.2 million, or 42.2%, to
$1.6 million for the three months ended March 31, 2005 from $2.8 million for the
three months ended March 31, 2004. The decrease in noninterest income was
primarily due to a decrease of $795,000 in gain on sale of loans. During the
three months ended March 31, 2004 the Company sold $37.1 million of fixed-rate
residential mortgages with 15-year terms in order to mitigate future interest
rate risk in a potential rising market interest rate environment. The net
pre-tax gain on the sale of these loans totaled $791,000. The decrease in
noninterest income was also due to a slowdown in mortgage refinancing activity
in the current year period after an extended period of historically low market
interest rates. This slowdown impacted the Company's income from real
estate-related activities such as abstracting and escrow services. Income from
real estate-related activities decreased by $151,000, or 47.2%, to $168,000 for
the three months ended March 31, 2005 from $319,000 for the three months ended
March 31, 2004. The slowdown in mortgage refinancing activity also resulted in a
decrease in service charges on loans. Service charges on loans decreased by
$68,000, or 47.8%, to $74,000 for the three months ended March 31, 2005 from
$141,000 for the three months ended March 31, 2004 primarily due to a decrease
of $71,000 in prepayment penalties for the three months ended March 31, 2005 as
compared to the three months ended March 31, 2004. Additionally, service charges
on deposit accounts decreased by $111,000, or 12.3%, for the three months ended
March 31, 2005 as compared to the three months ended March 31, 2004 largely due
to a reduction in the number of transaction accounts subject to such service
charges. Approximately 2,500 transaction accounts were transferred in the
September 2004 sale of two branch offices.
Noninterest expense. Noninterest expense totaled $4.6 million for each of the
three months ended March 31, 2005 and 2004. An increase of $80,000 in
advertising expense for the three months ended March 31, 2005 as compared to the
three months ended March 31, 2004 was offset by a decrease in compensation and
benefits expense as the number of full-time-equivalent employees decreased to
207 at March 31, 2005 from 224 at March 31, 2004.
Net earnings and income tax expense. Net earnings before income taxes decreased
by $969,000, or 42.8%, to $1.3 million for the three months ended March 31, 2005
from $2.3 million for the three months ended March 31, 2004. Income tax expense
totaled $397,000, or an effective tax rate of 30.7%, and $751,000, or an
effective tax rate of 33.2%, respectively, for the three months ended March 31,
2005 and 2004. The effective tax rate decreased for the three months ended March
31, 2005 largely because tax-exempt income comprised a larger percentage of
pre-tax income for that period than for the three months ended March 31, 2004.
Comparison of the results of operations for the nine months ended March 31, 2005
and 2004
General. Net earnings for the nine months ended March 31, 2005 totaled $4.0
million, or basic and diluted earnings per share of $1.13 and $1.11,
respectively. Net earnings for the nine months ended
16
March 31, 2004 totaled $4.5 million, or basic and diluted earnings per share of
$1.23 and $1.19, respectively.
Interest Income. Interest income decreased by $1.7 million, or 7.4%, to $21.6
million for the nine months ended March 31, 2005 from $23.3 million for the nine
months ended March 31, 2004 due to a decrease in both the average balance of
interest-earning assets and the average yield on interest-earning assets. The
average balance of interest-earning assets decreased by $34.0 million, or 6.1%,
to $526.3 million for the nine months ended March 31, 2005 from $560.3 million
for the nine months ended March 31, 2004 primarily due to a decrease in the
average balance of loans and investment securities. In addition, the average
yield on interest-earning assets decreased by 6 basis points to 5.53% for the
nine months ended March 31, 2005 from 5.59% for the nine months ended March 31,
2004.
Interest income on loans decreased by $1.3 million, or 6.0%, to $19.1 million
for the nine months ended March 31, 2005 from $20.4 million for the nine months
ended March 31, 2004. The decrease in interest income on loans was primarily due
to a decrease in the average balance of loans. The average balance of loans
decreased by $17.6 million, or 3.9%, to $432.6 million for the nine months ended
March 31, 2005 from $450.2 million or the nine months ended March 31, 2004
primarily due to the branch office sale in which loans totaling $17.0 million
were sold. The average yield on loans decreased by 13 basis points to 5.89% for
the nine months ended March 31, 2005 from 6.02% for the nine months ended March
31, 2004.
Interest income on investment securities decreased by $495,000, or 16.7%, to
$2.5 million for the nine months ended March 31, 2005 from $3.0 million for the
nine months ended March 31, 2004. The decrease in interest income on investment
securities was primarily due to a decrease in the average balance of such
securities. The average balance of investment securities decreased by $14.7
million, or 13.9%, to $91.0 million for the nine months ended March 31, 2005
from $105.7 million for the nine months ended March 31, 2004 as the Company
funded the decrease in deposit liabilities with maturities, sales and principal
payments from its investment securities portfolio. In addition, the average
tax-equivalent yield on investment securities was 3.91% and 3.98%, respectively,
for the nine months ended March 31, 2005 and 2004.
Interest Expense. Interest expense decreased by $1.1 million, or 11.2%, to $8.6
million for the nine months ended March 31, 2005 from $9.7 million for the nine
months ended March 31, 2004 primarily due to a decrease in the average balance
of interest-bearing liabilities. The average balance of interest-bearing
liabilities decreased by $52.9 million, or 10.1%, to $468.9 million for the nine
months ended March 31, 2005 from $521.8 million for the nine months ended March
31, 2004.
Interest on deposits decreased by $802,000, or 13.5%, to $5.1 million for the
nine months ended March 31, 2005 from $5.9 million for the nine months ended
March 31, 2004 primarily due to a decrease in the average balance of such
deposits. The average balance of interest-bearing deposits decreased by $42.6
million, or 10.6%, to $360.7 million for the nine months ended March 31, 2005
from $403.3 million for the nine months ended March 31, 2004 partly due to the
branch office sale in which deposits totaling $27.1 million were assumed. A
significant portion of the decrease in the average balance of interest-bearing
deposits was due to a decrease in the average balance of generally higher-rate
fixed-term time deposits which decreased by $31.5 million for the nine months
ended March 31, 2005 when compared to the nine months ended March 31, 2004 as
customers sought higher returns in the historically low market interest rate
environment or withdrew funds from matured deposits and transferred those funds
to more liquid accounts. The Company is generally not a market rate leader for
fixed-term deposits and chose not to aggressively compete for the higher-cost
deposit balances. The average cost of deposits decreased by 6 basis points to
1.89% for the nine months ended March 31, 2005 from 1.95% for the nine months
ended March 31, 2004. The average cost of fixed-rate fixed-term deposits, which
comprise over half of the Company's interest-bearing deposit balances, decreased
by 26 basis points to 2.80% for the nine months ended March 31, 2005 from 3.06%
for the nine months ended March 31, 2004 as new deposits added
17
during the extended low market interest rate environment carried rates lower
than the average rate of that deposit type.
Interest on FHLB advances and other borrowings decreased by $286,000, or 7.6%,
to $3.5 million for the nine months ended March 31, 2005 from $3.8 million for
the nine months ended March 31, 2004 primarily due to a decrease in the average
balance of borrowings. The average balance of borrowings decreased by $10.2
million, or 8.6%, to $108.3 million for the nine months ended March 31, 2005
from $118.5 million for the nine months ended March 31, 2004. The average cost
of borrowings was 4.28% and 4.23%, respectively, for the nine months ended March
31, 2005 and 2004.
Net Interest Income. Net interest income before provision for losses on loans
decreased by $629,000, or 4.6%, to $13.0 million for the nine months ended March
31, 2005 from $13.7 million for the nine months ended March 31, 2004 primarily
due to the decrease in the average balance of interest-earning assets that was
partly offset by decreases in the average balances of interest-bearing
liabilities. The Company's average net yield on interest-earning assets was
3.35% and 3.30%, respectively, for the nine months ended March 31, 2005 and
2004.
Provision for Losses on Loans. Provision for losses on loans totaled $1.0
million and $1.1 million, respectively, for the nine months ended March 31, 2005
and 2004. During the nine months ended March 31, 2005 and 2004 the Company
recorded net charge-offs totaling $384,000 and $743,000, respectively. For more
information on asset quality see "Asset Quality" in Management's Discussion and
Analysis of Financial Condition.
Noninterest Income. Noninterest income increased by $331,000, or 4.6%, to $7.5
million for the nine months ended March 31, 2005 from $7.2 million for the nine
months ended March 31, 2004. The increase in noninterest income was primarily
due to a pre-tax gain of $2.2 million on the sale of two northwest Iowa branch
offices to a local financial institution that was completed on September 20,
2004. The purchaser assumed deposit liabilities of $27.1 million and acquired
loans totaling $17.0 million in addition to the buildings and certain equipment.
Largely offsetting the gain on the transfer of the branch deposit liabilities
were decreases in other types of noninterest income. Gain on sale of loans
decreased by $859,000 for the nine months ended March 31, 2005 as compared to
the nine months ended March 31, 2004 primarily due to the sale of $37.1 million
of fixed-rate residential mortgage loans to a government sponsored agency in
March 2004. The net pre-tax gain on the sale of these loans totaled $791,000 in
the prior year period. Income from real estate-related activities such as
abstracting and escrow services decreased by $496,000, or 49.2%, to $512,000 for
the nine months ended March 31, 2005 from $1.0 million for the nine months ended
March 31, 2004 due to a slowdown in mortgage refinancing activity. This slowdown
also resulted in a decrease in service charges on loans. Service charges on
loans decreased by $134,000, or 27.3%, to $356,000 for the nine months ended
March 31, 2005 from $490,000 for the nine months ended March 31, 2004 primarily
due to a decrease of $102,000 in prepayment penalties for the nine months ended
March 31, 2005 as compared to the nine months ended March 31, 2004. In addition,
service charge income on deposit accounts decreased by $239,000, or 8.1%, for
the nine months ended March 31, 2005 as compared to the nine months ended March
31, 2004 largely due to a reduction in the number of transaction accounts
subject to such service charges. Approximately 2,500 transaction accounts were
sold in the September 2004 sale of two branch offices. The Company recorded a
loss on sale of securities of $121,000 for the nine months ended March 31, 2005
compared to a loss on sale of securities of $65,000 for the nine months ended
March 31, 2004.
Noninterest expense. Noninterest expense increased by $453,000, or 3.5%, to
$13.5 million for the nine months ended March 31, 2005 from $13.1 million for
the nine months ended March 31, 2004. The increase in noninterest expense was
primarily due to an increase of $216,000, or 2.8%, in compensation and benefits
expenses to $7.8 million for the nine months ended March 31, 2005 from $7.6
million for the nine months ended March 31, 2004. The increase in compensation
and benefits expense was partly due to annual salary increase and to increases
in the Company's pension plan funding requirements and the cost
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of the employer-paid portion of group insurance premiums. In addition, the
slowdown in mortgage origination activity in the current-year period resulted in
a decrease of $232,000 in contra-expense for payroll-related direct origination
costs that was partially offset by a $69,000 decrease in commissions paid to
loan originators for the nine months ended March 31, 2005 as compared to the
nine months ended March 31, 2004.
Net earnings and income tax expense. Net earnings before income taxes decreased
by $671,000, or 10.1%, to $6.0 million for the nine months ended March 31, 2005
from $6.7 million for the nine months ended March 31, 2004. Income tax expense
totaled $2.0 million, or an effective tax rate of 32.7%, and $2.2 million , or
an effective tax rate of 33.1%, respectively, for the nine months ended March
31, 2005 and 2004. The effective tax rate decreased for the nine months ended
March 31, 2005 largely because tax-exempt income comprised a larger percentage
of pre-tax income for that period than for the nine months ended March 31, 2004.
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, 2004. The Company's NPV ratio after a 200 basis point rate-shock was 7.96%
and 9.58%, respectively, at June 30, 2004 and December 31, 2004, as measured by
the Model. As of both dates, the Company's interest rate risk, as measured by
the Model, was within the Company's Asset Liability Policy guidelines and the
OTS "level of risk" was reported as "minimal". Management does not believe that
the Company's primary market risk exposures and how those exposures were managed
during the three months ended March 31, 2005 have changed significantly when
compared to the immediately preceding quarter ended December 31, 2004. However,
the Company's primary market risk exposure has not yet been quantified at March
31, 2005, and the complexity of the Model makes it difficult to accurately
predict results.
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.
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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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
There are various claims and lawsuits in which the Company is periodically
involved incidental to the Company's business. In the opinion of management, no
material loss is expected from any of such pending claims or lawsuits.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
- -------------------------------------------------------------------
There were no sales of unregistered securities during the three months
ended March 31, 2005.
The following table presents a summary of the Company's share repurchases
during the quarter ended March 31, 2005.
- ---------------------------------------------------------------------------------------------------------
Total Number of
Shares Purchased Maximum
as Part of Number of Shares
Total Number Average Publicly that May Yet be
of Shares Price Paid Announced Purchased Under
Period Purchased Per Share Program (1) the Program (1)
- ---------------------------------------------------------------------------------------------------------
January 1 through January 31, 2005 none -- none 192,000
February 1 through February 28, 2005 35,000 $ 21.76 35,000 157,000
March 1 through March 31, 2005 none -- none 157,000
- ---------------------------------------------------------------------------------------------------------
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
- ----------------
(a) Exhibits
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
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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: May 10, 2005 BY: /s/ Barry E. Backhaus
-------------------------
Barry E. Backhaus
President and Chief Executive Officer
DATE: May 10, 2005 BY: /s/ Katherine A. Bousquet
-------------------------
Katherine A. Bousquet
Vice President, Treasurer and
Interim Chief Financial Officer
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