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, 1999
[ ] 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.
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(Exact name of registrant as specified in its charter)
Delaware 42-1485449
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
329 Pierce Street, Sioux City, Iowa 51101
(Address of principal executive offices)
Registrant's telephone number, including area code 712-277-0200
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Former name, former address and former fiscal year, if changed
since last report
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 8, 1999
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(Common Stock, $.01 par value) 4,826,144
<PAGE>
FIRST FEDERAL BANKSHARES, INC.
INDEX
Part I. Financial Information
Item I. Financial Statements of First Federal
Bankshares, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
at September 30, 1999 and June 30, 1999
Consolidated Condensed Statements of Operations
for the three month periods ended
September 30, 1999 and 1998
Consolidated Statements of Comprehensive
Income for the three month periods ended
September 30, 1999 and 1998
Consolidated Statements of Cash Flows for the
three month periods ended
September 30, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Part II. Other Information
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FIRST FEDERAL BANKSHARES, INC and SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, June 30,
1999 1999
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Assets (Unaudited)
<S> <C> <C>
Cash and interest bearing deposits .............. $ 15,877,960 $ 15,067,956
Securities available for sale ................... 120,537,326 122,047,213
(amortized cost $125,403,864 and $125,558,397)
Securities held to maturity ..................... 31,379,425 32,006,095
(fair value of $30,934,509 and $31,756,870)
Loans receivable, net ........................... 462,997,161 457,058,054
Real estate owned and in judgement, net ......... 408,220 32,350
Real estate held for development ................ 836,966 599,311
Office property and equipment, net .............. 15,649,310 15,411,818
Federal Home Loan Bank stock, at cost ........... 8,094,300 8,094,300
Accrued interest receivable ..................... 4,408,656 4,602,258
Deferred tax asset .............................. 1,642,000 1,197,000
Excess of cost over fair value of assets acquired 20,735,458 20,946,396
Other assets .................................... 5,532,605 3,608,987
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Total assets .................................... $ 688,099,387 $ 680,671,738
============= =============
Liabilities
Deposits ........................................ $ 469,355,649 $ 464,169,478
Advances from Federal Home Loan Bank ............ 141,544,236 138,617,385
Advance payments by borrowers for
taxes and insurance ......................... 1,665,036 2,557,118
Accrued taxes on income ......................... 458,563 419,106
Accrued interest payable ........................ 4,600,939 4,172,328
Accrued expenses and other liabilities .......... 2,116,763 2,463,316
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Total liabilities ............................... 619,741,186 612,398,731
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Stockholders' equity
Common stock, $.01 par value .................... 48,248 48,178
Additional paid-in capital ...................... 35,978,991 35,957,560
Common stock purchased by ESOP .................. (1,769,183) (1,813,758)
Retained earnings, substantially restricted ..... 37,119,106 36,283,211
Accumulated other comprehensive income .......... (3,018,961) (2,202,184)
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Total stockholders' equity ...................... 68,358,201 68,273,007
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Total liabilities and stockholders' equity ...... $ 688,099,387 $ 680,671,738
============= =============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
For the three months
ended September 30,
1999 1998
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(Unaudited)
<S> <C> <C>
Interest income:
Loans receivable $8,853,615 $8,079,259
Mortgage-backed securities 637,800 613,640
Investment securities 2,008,707 1,322,356
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Other interest-earning assets 40,447 40,957
Total interest income 11,540,569 10,056,212
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Interest expense:
Deposits 4,945,158 4,574,293
Borrowings 2,077,674 1,708,410
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Total interest expense 7,022,832 6,282,703
Net interest income 4,517,737 3,773,509
Provision for loan losses 105,000 75,000
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Net interest income after provision 4,412,737 3,698,509
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Noninterest income:
Service charges and other fees 693,693 448,747
Gain on sale of loans held for sale 85,464 87,408
Gain on sale of real estate owned and held for investment 173,186 -
Real estate-related activities 428,740 180,820
Other income, net 363,247 184,682
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Total noninterest income 1,744,330 901,657
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Noninterest expense:
Compensation and employee benefits 2,181,554 1,920,509
Adjusted compensation - stock appreciation rights - (468,436)
Office property and equipment 584,215 447,122
Deposit insurance premiums 70,892 60,697
Data processing expense 115,972 96,000
Advertising 118,487 118,579
Amortization of intangibles 248,636 85,989
Other general and administrative 899,190 701,780
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Total noninterest expense 4,218,946 2,962,240
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Earnings before taxes on income 1,938,121 1,637,926
Taxes on income 740,000 619,924
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Net earnings $1,198,121 $1,018,002
========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Per share data: (1)
Basic earnings per share $0.25 $0.22
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Diluted earnings per share $0.25 $0.21
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Dividends declared per share $0.075 $0.070
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</TABLE>
(1) Adjusted for April 1999 second step offering and exchange.
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Three months ended
September 30,
----------------------------
1999 1998
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(Unaudited)
<S> <C> <C>
Net earnings .................................................. $ 1,198,121 $ 1,018,002
Other comprehensive income:
Unrealized (losses) gains on securities available for sale:
Unrealized holding (losses) gains arising
during the period, net of tax ................... (816,777) 492,198
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Other comprehensive income, net of tax ........................ (816,777) 492,198
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Comprehensive income .......................................... $ 381,344 $ 1,510,200
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</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended September 30,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net earnings ...................................................... $ 1,198,121 $ 1,018,002
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Loans originated for sale to investors ......................... (6,635,103) (7,432,410)
Proceeds from sale of loans originated for sale ................ 7,407,277 8,012,032
Provision for losses on loans and other assets ................. 105,000 75,000
Depreciation and amortization .................................. 552,833 302,257
Provision for deferred taxes ................................... 42,000 190,194
Net gain on sale of loans ...................................... (85,464) (87,408)
Net gain on sales of real estate owned and held for development (173,186) --
Net loan fees deferred ......................................... 33,862 89,456
Amortization of premiums and discounts on loans,
mortgage-backed securities, and investment securities ........ 198,495 (33,367)
Decrease (increase) in accrued interest receivable ............. 193,602 (301,982)
(Increase) decrease in other assets ............................ (1,979,070) 458,352
Increase in accrued interest payable ........................... 428,611 792,114
Decrease in accrued expenses and other liabilities ............. (346,553) (439,307)
------------ ------------
Increase in taxes payable ...................................... 39,457 205,315
Net cash provided by operating activities ......................... 979,882 2,848,248
------------ ------------
Cash flows from investing activities:
Purchase of securities held to maturity ........................ (519,205) (5,983,751)
Proceeds from maturities of securities held to maturity ........ 1,140,961 5,199,611
Purchase of securities available for sale ...................... (2,000,000) (32,461,356)
Purchase of Federal Home Loan Bank Stock ....................... -- (599,000)
Proceeds from maturities of securities available for sale ...... 2,230,391 11,372,940
Loans purchased ................................................ (1,570,000) (1,518,000)
Increase in loans receivable ................................... (7,091,040) (2,051,618)
Proceeds from sale of real estate owned and held for development 1,541,255 --
Net expenditures on real estate owned and held for development . (258,520) --
Proceeds from sale of office property and equipment ............ 49,005 --
Purchase of office property and equipment ...................... (572,474) (440,602)
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Net cash used in investing activities ............................. (7,049,627) (26,481,776)
------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Cash flows from financing activities:
Increase in deposits ........................................... 5,186,171 251,909
Proceeds from advances from FHLB ............................... 10,000,000 24,000,000
Repayment of advances from FHLB ................................ (7,073,615) (7,015,815)
Issuance of common stock ....................................... 21,501 29,341
Cash dividends paid ............................................ (362,226) (158,161)
------------ ------------
Net decrease in advances from borrowers for taxes and insurance (892,082) (779,353)
------------ ------------
Net cash provided by financing activities ......................... 6,879,749 16,327,921
Net increase (decrease) in cash and cash equivalents .............. 810,004 (7,305,607)
------------ ------------
Cash and cash equivalents at beginning of period .................. 15,067,956 17,225,007
Cash and cash equivalents at end of period ........................ $ 15,877,960 $ 9,919,400
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES
1. BASIS OF PRESENTATION
---------------------
The consolidated condensed balance sheet information for June 30, 1999 was
derived from the Company's audited Consolidated Balance Sheets for the fiscal
year ended June 30, 1999. The consolidated condensed financial statements at and
for the three months ended September 30, 1999 and 1998 are unaudited. The
financial statements at and for the three months ended September 30, 1998 are
those of First Federal Savings Bank of Siouxland (the "Bank" or "First Federal")
rather than those of First Federal Bankshares, Inc. (the "Registrant" or the
"Company"). The Registrant was formed as a holding company to own all of the
capital stock of the Bank following its "second-step" offering in April 1999, in
which each share of the Bank's common stock was exchanged for 1.64696 shares of
Company common stock.
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 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
generally accepted accounting principles have been omitted.
A summary of significant accounting policies followed by the Company is set
forth in Note 1 of the Company's 1999 Annual Report to Stockholders and is
incorporated herein by reference.
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/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.
2. REORGANIZATION, CONVERSION AND ACQUISITION
------------------------------------------
Prior to April 13, 1999, the Bank was owned approximately 53.49% by First
Federal Bankshares, M.H.C. (the "Mutual Holding Company") and 46.51% by public
shareholders. On April 13, 1999, pursuant to a plan of conversion and
reorganization, and after a series of transactions: (1) the Company was formed
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
to own all of the capital stock of the Bank, (2) the Company sold the ownership
interest in the Bank previously held by the Mutual Holding Company to the public
in a subscription offering (the Offering), (3) previous public shareholders of
the Bank had their shares exchanged (the Exchange) into common shares of the
Company (exchange ratio of 1.64696 to 1) and (4) the Mutual Holding Company
ceased to exist. As a result of the reorganization, the consolidated financial
statements for prior periods have been restated to reflect the changes in the
par value of common stock from $1.00 to $.01 per share and in the number of
authorized shares of common stock from 20,000,000 to 12,000,000.
The primary purpose of the Offering was to fund the acquisition of Mid-Iowa
Financial Corp. (Mid-Iowa) and its wholly-owned subsidiary, Mid-Iowa Savings
Bank, FSB. The shareholders of Mid-Iowa received $28.3 million cash for all
outstanding shares on April 13, 1999, the effective date. The acquisition was
accounted for as a purchase; accordingly, Mid-Iowa's results of operations are
included in the financial statements from the acquisition date forward. The
excess of purchase price over the fair value of the net identifiable assets of
$12.6 million was recorded as goodwill and is being amortized on a straight-line
basis over 25 years.
3. EARNINGS PER SHARE
------------------
The following information was used in the computation of net earnings per common
share on both a basic and diluted basis for the periods presented. Prior period
information was restated for the Offering and Exchange.
<TABLE>
<CAPTION>
Three months ended
September 30,
1999 1998
---------- ----------
<S> <C> <C>
Basic earnings per share:
Net earnings .......................... $1,198,121 $1,018,002
Weighted average shares
outstanding ..................... 4,821,309 4,681,237
Basic earnings per share .............. $ .25 $ .22
========== ==========
Diluted earnings per share:
Net earnings .......................... $1,198,121 $1,018,002
Weighted average shares
outstanding ......................... 4,821,309 4,681,237
Incremental option shares
using treasury stock method ......... 18,877 51,456
---------- ----------
Diluted shares outstanding ............ 4,840,186 4,732,693
Diluted earnings per share ............ $ .25 $ .21
========== ==========
</TABLE>
4. DIVIDENDS
---------
On July 22, 1999 the Company declared a cash dividend on its common stock,
payable on August 31, 1999 to stockholders of record as of August 16, 1999,
equal to $.075 per share. Dividends totaling $361,862 were paid to stockholders.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On October 21, 1999 the Company declared a cash dividend on its common stock,
payable on November 30, 1999 to stockholders of record as of November 15, 1999
equal to $.075 per share. Approximately $361,961 will be paid to stockholders on
November 30, 1999.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets increased by $7.4 million, or 1.1%, to $688.1 million at September
30, 1999 from $680.7 million at June 30, 1999. The increase in total assets was
largely due to an increase in loans receivable. Loans receivable increased by
$5.9 million, or 1.3%, to $463.0 million at September 30, 1999 from $457.1
million at June 30, 1999. In addition, cash and interest-bearing deposits
increased by $810,000, or 5.4%, to $15.9 million at September 30, 1999 from
$15.1 million at June 30, 1999. Partially offsetting the increase in loans were
decreases in investment securities. Securities available for sale decreased by
$1.5 million, or 1.2%, to $120.5 million at September 30, 1999 from $122.0
million at June 30, 1999. Securities held to maturity decreased by $627,000, or
2.0%, to $31.4 million at September 30, 1999 from $32.0 million at June 30,
1999. The balance of real estate owned increased by $376,000 to $408,000 at
September 30, 1999 from $32,000 at June 30, 1999. During the quarter ended
September 30, 1999 the Company took possession of one 12-unit apartment building
and four 4-unit condominium properties in Madison, Wisconsin by voluntary deed
in lieu of foreclosure. The related loan balances of the two separate borrowing
entities involved was approximately $1.6 million. The sale of the 12-unit
apartment and four of the condominium units generated proceeds totaling
approximately $1.3 million that reduced the balance in real estate owned. In
addition, the Company foreclosed on a non-residential property with a loan
balance totaling $111,000. Real estate held for development increased by
$238,000, or 39.7%, to $837,000 at September 30, 1999, from $599,000 at June 30,
1999 due to investment in a new 50-lot residential development in northwest
Iowa. The developed lots are expected to be ready for sale in the quarter ending
December 31, 1999.
Deposits increased by $5.2 million, or 1.1%, to $469.4 million at September 30,
1999 from $464.2 million at June 30, 1999. Advances from the Federal Home Loan
Bank increased by $2.9 million, or 2.1%, to $141.5 million at September 30, 1999
from $138.6 million at June 30, 1999. Advance payments by borrowers for taxes
and insurance decreased by $892,000, or 34.9%, due to payment in September 1999
of the first half of real estate taxes escrowed.
Total stockholders' equity increased by $85,000 to $68.4 million at September
30, 1999 from $68.3 million at June 30, 1999. Earnings totaled $1.2 million for
the first quarter of the fiscal year. Largely offsetting the earnings were
dividends declared totaling $362,000 and an increase of $817,000 in unrealized
losses on available for sale securities due to lower valuations in the generally
higher interest rate environment.
LIQUIDITY
- ---------
OTS regulations require that thrift institutions such as the Bank maintain an
average daily balance of liquid assets (cash, certain time deposits, banker's
acceptances and specified United States government, state or federal agency
obligations) in each calendar quarter of not less than 4% of the average daily
balance of its liquidity base (net withdrawable deposits plus short term
borrowings) during the preceding quarter. For the quarter ended September 30,
1999 the Company's average liquidity position was $163.3 million, or 33.3% of
its liquidity base for the preceding quarter.
<PAGE>
CAPITAL
- -------
The Company's total equity increased by $85,000 to $68.4 million at September
30, 1999 from $68.3 million at June 30, 1999. The OTS requires that the Company
meet minimum tangible, leverage (core) and risk-based capital requirements. As
of September 30, 1999 the Company was in compliance with all regulatory capital
requirements. The Company's required, actual and excess capital levels as of
September 30, 1999 are as follows:
<TABLE>
<CAPTION>
Excess of
Actual Over
Required % of Actual % of Regulatory
Amount Assets Amount Assets Requirement
------ ------ ------ ------ -----------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Tangible Capital $ 9,992 1.5% $43,879 6.59% $33,887
Core Capital 19,985 3.0% 43,879 6.59% 23,894
Risk-based Capital 28,675 8.0% 47,037 13.12% 18,362
</TABLE>
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
- ------------------------------------------------------------------
September 30, 1999 and 1998
- ---------------------------
General. Net earnings increased by $180,000, or 17.7%, to $1.2 million for the
three months ended September 30, 1999 from $1.0 million for the three months
ended September 30, 1998. Diluted earnings per share totaled $.25 and $.21,
respectively, for the three months ended September 30, 1999 and 1998. The
acquisition of Mid-Iowa Financial Corp. (Mid-Iowa), effective April 13, 1999,
was accounted for using the purchase method of accounting; therefore, the
results of operations for the three months ended September 30, 1998 do not
include Mid-Iowa results.
Interest Income. Interest income increased by $1.5 million, or 14.8%, to $11.5
million for the three months ended September 30, 1999 from $10.0 million for the
three months ended September 30, 1998, largely due to an increase in the average
balance of interest-earning assets. The average balance of interest-earning
assets increased by $104.5 million, or 19.8%, to $631.3 million for the three
months ended September 30, 1999 from $526.8 million for the three months ended
September 30, 1998. The increase in average balances of interest-earning assets
was primarily due to the acquisition of Mid-Iowa. The average yield on
interest-earning assets decreased to 7.31% for the three months ended September
30, 1999 from 7.64% for the three months ended September 30, 1998, primarily due
to lower yields on loans receivable and mortgage-backed securities and to
changes in the mix of interest-earning assets. Investment securities, with
generally lower yields than yields on loans receivable, made up 19.8% of
interest-earning assets for the three months ended September 30, 1999 as
compared to 15.1% of interest-earning assets for the three months ended
September 30, 1998. The change in the mix of interest-earning assets was
primarily due to the acquisition of Mid-Iowa. Mid-Iowa's investment portfolio
totaled $46.1 million, or 29.7%, of Mid-Iowa's interest-earning assets on the
effective date of the acquisition.
<PAGE>
Interest income on loans for the three months ended September 30, 1999 increased
by $774,000, or 9.6%, to $8.9 million for the three months ended September 30,
1999 from $8.1 million for the three months ended September 30, 1998. The
increase in interest income on loans was primarily due to an increase of $55.4
million, or 13.6%, in the average balance of loans receivable, to $463.1 million
for the three months ended September 30, 1999 from $407.7 million for the three
months ended September 30, 1998. The average yield on loans decreased to 7.65%
for the three months ended September 30, 1999 from 7.93% for the three months
ended September 30, 1998.
Interest income on mortgage-backed securities for the three months ended
September 30, 1999 increased by $24,000, or 3.9%, when compared to the three
months ended September 30, 1998. The increase was due to an increase of $3.5
million, or 9.6%, in the average balance of mortgage-backed securities to $40.0
million for the three months ended September 30, 1999 from $36.4 million for the
three months ended September 30, 1998. The average yield on mortgage-backed
securities decreased to 6.39% for the three months ended September 30, 1999 from
6.74% for the three months ended September 30, 1998.
Interest income on investment securities increased by $686,000, or 51.9%, as the
average balance of investment securities increased by $45.4 million, or 57.0%,
to $125.1 million at September 30, 1999 from $79.7 million at September 30,
1998. The increase in the average balance of investment securities was primarily
due to the acquisition of Mid-Iowa. The average balance of investment securities
acquired from Mid-Iowa totaled approximately $40.2 million during the three
months ended September 30, 1999. The average yield on investment securities
decreased by 21 basis points to 6.43% for the three months ended September 30,
1999 from 6.64% for the three months ended September 30, 1998. Interest income
on other interest-earning assets declined by only $1,000 to $40,000 at September
30, 1999 from $41,000 at September 30, 1998.
Interest Expense. Interest expense increased by $740,000, or 11.8%, to $7.0
million for the three months ended September 30, 1999 from $6.3 million for the
three months ended September 30, 1998. Interest on deposits increased by
$371,000, or 8.1%, to $4.9 million for the three months ended September 30, 1999
from $4.6 million for the three months ended September 30, 1998. The increase in
interest on deposits was primarily due to an increase in the average balance of
deposits as a result of the Mid-Iowa acquisition. The average balance of
deposits increased by $65.1 million, or 17.0%, to $448.7 million at September
30, 1999 from $383.6 million at September 30, 1998. The increase in interest
paid on deposits due to increased average balances was partly offset by a 36
basis point decrease in the average cost of deposits to 4.41% for the three
months ended September 30, 1999 from 4.77% for the three months ended September
30, 1998. The decrease in the average cost of deposits was primarily due to a
generally higher concentration of transaction accounts for the three months
ended September 30, 1999. Transaction accounts made up 38.2% of total deposits
during the quarter ended September 30, 1999 as compared to 35.2% of total
deposits during the quarter ended September 30, 1998.
Interest on borrowings increased by $369,000, or 21.6%, to $2.1 million for the
three months ended September 30, 1999 from $1.7 million for the three months
ended September 30, 1998. The increase in interest on borrowings was primarily
due to an increase in the average balance of advances. Average advance balances
increased by $28.9 million, or 25.6%, to $141.9 million at September 30, 1999
from $113.0 million at September 30, 1998. The increase in interest expense due
to increased advance balances was partly offset by a decrease of 18 basis points
in the average cost of borrowings to 5.86% for the three months ended September
30, 1999 from 6.04% for the three months ended September 30, 1998.
<PAGE>
Net Interest Income. Net interest income increased by $744,000, or 19.7%, to
$4.5 million for the three months ended September 30, 1999 from $3.8 million for
the three months ended September 30, 1998. The Company's interest rate spread
for the three months ended September 30, 1999 decreased slightly to 2.56% from
2.58% for the quarter ended September 30, 1998.
Provision for Loan Loss. Provision for loan loss expense totaled $105,000 and
$75,000, respectively, for the three months ended September 30, 1999 and 1998.
The allowance for losses on loans is based on management's periodic evaluation
of the loan portfolio and reflects an amount that, in management's opinion, is
adequate to absorb losses in the existing portfolio. In evaluating the
portfolio, management takes into consideration numerous factors, including
current economic conditions, prior loan loss experience, the composition of the
loan portfolio, and management's estimate of anticipated credit losses.
Noninterest Income. Noninterest income increased by $843,000, or 93.5%, to $1.7
million for the three months ended September 30, 1999 from $902,000 for the
three months ended September 30, 1998. The increase in noninterest income was
partially due to an increase of $245,000, or 54.6%, in service charges and other
fees for the three months ended September 30, 1999 as compared to the three
months ended September 30, 1998. The increase in service charges and other fees
was largely due to growth related to the Mid-Iowa acquisition. Additionally, fee
schedule changes, which included several service fee increases, went into effect
in June 1999. Gains on the sale of real estate owned and real estate held for
development totaled $118,000 and $55,000, respectively, for the three months
ended September 30, 1999. No comparable gains on real estate were recorded in
the prior year quarter. Income from other real estate-related activities
increased by $248,000, or 137.11%, to $429,000 for the three months ended
September 30, 1999 from $181,000 for the three months ended September 30, 1998.
The increase in real estate-related income was primarily due to earnings from
the real estate brokerage company acquired in the merger with Mid-Iowa. Other
income increased by $178,000, or 96.7%, to $363,000 for the three months ended
September 30, 1999 from $185,000 for the three months ended September 30, 1998
largely due to noninterest income from the Company's subsidiaries that offer
escrow services and uninsured investment products to the public.
Noninterest expense. Noninterest expense increased by $1.2 million, or 42.4%, to
$4.2 million for the three months ended September 30, 1999 from $3.0 million for
the three months ended September 30, 1998. Compensation and benefits expense
increased by $261,000, or 13.6%, to $2.2 million for the three months ended
September 30, 1999 from $1.9 million for the three months ended September 30,
1998. Staff increased by 21 full-time-equivalent employees, or 10.4%, to 222 at
September 30, 1999 from 201 at September 30, 1998. During the three months ended
September 30, 1998 the Company recorded a credit to noninterest expense totaling
$468,000. The credit related to stock appreciation rights (SAR) which were
required to be periodically re-valued due to fluctuations in the Company's
common stock price during the period. The Company eliminated the SAR and the
potential distortion resulting from stock price changes through cash payouts to
SAR holders in December 1998 and January 1999.
Office property and equipment expense increased by $137,000, or 30.7%, over the
prior year, partially due to the completion of a new office building in
Grinnell, Iowa and to the addition of the seven Mid-Iowa offices. Deposit
insurance premium expense and data processing expense increased by $10,000 and
$20,000, respectively, for the three months ended September 30, 1999 as compared
to the three months ended September 30, 1998. Amortization of intangibles
<PAGE>
increased by $163,000 to $249,000 for the three months ended September 30, 1999
from $86,000 for the three months ended September 30, 1998 due to amortization
of the goodwill related to the Mid-Iowa acquisition that commenced in April
1999. Other general and administrative expenses increased by $197,000, or 28.2%,
for the three months ended September 30, 1999 as compared to the three months
ended September 30, 1998. This increase was primarily due to noninterest
expenses of the Mid-Iowa real estate brokerage firm acquired in April 1999 that
partially offset the increase in noninterest income mentioned above.
Net earnings and income tax expense. Net earnings before income taxes totaled
$1.9 million for the three months ended September 30, 1999, compared to $1.6
million for the three months ended September 30, 1998. Income tax expense
increased by $120,000, or 19.4%, to $740,000 for the three months ended
September 30, 1999 from $620,000 for the three months ended September 30, 1998.
The Company's effective tax rate increased to 38.2% for the three months ended
September 30, 1999 from 37.8% for the three months ended September 30, 1998
partially due to the increase in non-deductible amortization of intangibles in
the current fiscal year quarter.
YEAR 2000 (Y2K)
The Company has completed the awareness and inventory phases of Year 2000 in
which potential Year 2000 risk areas and systems have been identified. The
assessment of the Company's Year 2000 exposures is complete. Programming
changes, system upgrades and replacements and other actions necessary to prepare
for Year 2000 are complete. Testing and assessing the validity of Year 2000
changes were completed during fiscal 1999 and Year 2000-ready systems have been
implemented.
The Company has identified and assessed its computer operating systems and
networking software; applications software; data processing hardware platforms
such as personal computers and automated teller machines; third party
interfaces; and environmental systems, including, but not limited to, climate
control systems, sprinklers, elevators and security systems. The Company has
identified its mission-critical systems including its "core" data processing
system for loans, deposits and the general ledger.
It is the intention of the Company to maintain normal business operations during
the Year 2000 transition and beyond. The Company has developed a Year 2000
Business Continuity and Contingency Plan as an addition to the Company's
Disaster Recovery Plan. Together, these plans are designed to ensure the
continuity of daily operations in the event of a loss of essential resources due
to Year 2000 induced failures. These plans describe individual contingency plans
concerning specific software and hardware issues, operational plans for
continuing operations, and specific policies and procedures that would be put in
place upon the occurrence of a power outage, computer interruptions,
telecommunications interruptions, natural disaster, etc. Such plans identify
participants, processes and equipment that will be necessary to permit the
Company to resume and continue operations until the problem is resolved.
In addition to expenses related to its own computer systems, the Company is
aware of potential Year 2000 risks to third parties, including vendors,
depositors and borrowers and the possible adverse impact on the Company
resulting from failures by these parties to adequately address the Year 2000
problem. The Company has contacted all mission-critical vendors and service
providers regarding their Year 2000 readiness. The potential risks posed by
<PAGE>
these entities have been analyzed and periodic updates on the Year 2000 progress
of currently non-compliant vendors are being performed. To date, the Company has
not been advised by any of these parties that they do not have plans in place to
address and correct the issues associated with the Year 2000 problem. However,
no assurance can be given as to the adequacy of such plans or to the timeliness
of their implementation.
The risk exists that some of the Company's commercial borrowers may not be
prepared for Year 2000 and may suffer financial harm as a result. This, in turn,
represents risk to the Company regarding the repayment of loans from those
commercial customers. The Company has surveyed its commercial customers with
aggregate outstanding loan balances of $250,000 or more regarding their Year
2000 preparedness. Based on the results of this survey process the overall level
of Year 2000 risk in the Company's commercial loan portfolio is believed to be
relatively low. In addition, repayment sources for the majority of loans in the
Company's commercial loan portfolio are from multi-family real estate projects
that tend to be less computer-dependent than, for example, a manufacturing
business. The Company analyzes Year 2000 risk posed by prospective commercial
loan customers prior to approving their loan requests. Commercial loan customers
are asked to sign an acknowledgement demonstrating their commitment to address
Year 2000 problems inherent in their operations and agreeing to provide the
Company with specific information regarding their Year 2000 status.
The Company has also analyzed the Year 2000 risk posed by its 20 largest
commercial depositors. The Company currently considers its commercial deposit
portfolio to contain a relatively low level of Year 2000 risk since the majority
of these depositors are small-business customers with limited computer
technology dependence in their core business functions. The Company analyzes
potential Year 2000 risk of prospective commercial deposit customers prior to
accepting their deposits.
The preceding paragraphs include forward-looking statements that involve
inherent risks and uncertainties. The actual costs of Year 2000 compliance and
the impact of Year 2000 issues could differ materially from what is currently
anticipated. Factors that might result in such differences include incomplete
inventory and assessment results, higher than anticipated costs to update
software and hardware and vendors', customers' and other third parties'
inability to effectively address the Year 2000 issue.
<PAGE>
PART II. OTHER INFORMATION
Legal Proceedings
- -----------------
There are various claims and lawsuits in which the Registrant is periodically
involved incidental to the Registrant's business. In the opinion of management,
no material loss is expected from any of such pending claims or
lawsuits.
Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------
No matters were submitted to a vote of security holders during the period
covered by this report.
Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period covered by this
report.
<PAGE>
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 12, 1999 BY: /s/Barry E. Backhaus
--------------------
Barry E. Backhaus
President and
Chief Executive Officer
DATE: November 12, 1999 BY: /s/Katherine Bousquet
---------------------
Katherine Bousquet
Chief Financial Officer
<TABLE> <S> <C>
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<PERIOD-END> SEP-30-1999
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<INT-BEARING-DEPOSITS> 3,971,504
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