EXHIBIT 13
ANNUAL REPORT TO SECURITY HOLDERS
<PAGE>
Selected Consolidated Financial and Other Data
The following table sets forth certain selected consolidated financial and other
data of First Federal Bankshares, Inc. (the Company) at the dates and for the
periods indicated. For additional information about the Company, reference is
made to "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements of the Company and
related notes included elsewhere herein.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except per share amounts
-----------------------------------------------------------------------------------------------------------------------
Financial Condition at June 30 2000 1999 1998 1997 1996
----------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total assets $723,382 680,672 551,450 468,568 443,516
Securities available-for-sale 117,326 122,047 65,195 64,098 74,498
Securities held-to-maturity 23,737 32,006 32,023 29,758 22,459
Loans receivable, net 505,090 457,058 404,800 341,254 320,408
Office property and equipment, net 15,315 15,412 10,845 9,638 8,697
Federal Home Loan Bank (FHLB) stock, at cost 8,929 8,094 5,671 5,000 4,769
Excess of cost over fair value of assets acquired 19,900 20,946 8,158 318 355
Deposits 471,626 464,169 392,425 326,734 335,223
FHLB advances 174,020 138,617 107,901 96,500 66,000
Stockholders' equity 68,113 68,273 42,020 38,865 36,857
Operations Data for Year Ended June 30
Total interest income 47,973 41,136 35,364 33,691 31,686
Total interest expense 29,814 24,864 21,377 20,328 19,645
----------- ---------- --------- --------- ---------
Net interest income 18,159 16,272 13,987 13,363 12,041
Provision for losses on loans 554 365 345 258 233
----------- ---------- --------- --------- ---------
Net interest income after provision for
losses on loans 17,605 15,907 13,642 13,105 11,808
----------- ---------- --------- --------- ---------
Noninterest income:
Fees and service charges 2,901 2,146 1,392 1,143 1,092
Gain on sale of branch deposits - 1,088 - - -
Real estate related activities 1,464 950 719 595 596
Other income 2,145 1,350 1,067 691 784
----------- ---------- --------- --------- ---------
Total noninterest income 6,510 5,534 3,178 2,429 2,472
----------- ---------- --------- --------- ---------
Noninterest expense:
Compensation and benefits 8,992 7,674 6,702 5,655 5,150
Office property and equipment 2,282 1,901 1,500 1,293 1,159
Special deposit insurance assessment - - - 2,233 -
Amortization of excess of cost over fair
value of assets acquired 980 479 108 26 20
Other noninterest expense 4,344 4,124 3,218 3,364 3,356
----------- ---------- --------- --------- ---------
Total noninterest expense 16,598 14,178 11,528 12,571 9,685
----------- ---------- --------- --------- ---------
Earnings before income taxes 7,517 7,263 5,292 2,963 4,595
Income taxes 2,641 2,700 1,874 1,024 1,543
----------- ---------- --------- --------- ---------
Net earnings $4,876 4,563 3,418 1,939 3,052
=========== ========== ========= ========= =========
Earnings per share (1):
Basic earnings per share $1.07 .97 .73 .42 .66
=========== ========== ========= ========= =========
Diluted earnings per share $1.07 .96 .72 .41 .64
=========== ========== ========= ========= =========
Cash earnings per share (1)(2):
Basic earnings per share $1.29 1.07 .76 .42 .66
=========== ========== ========= ========= =========
Diluted earnings per share $1.28 1.06 .74 .41 .65
=========== ========== ========= ========= =========
Cash dividends declared per common share $0.30 .29 .29 .28 .27
=========== ========== ========= ========= =========
</TABLE>
---------------------------
(1) Adjusted for stock distributions and April 1999 stock conversion.
(2) Cash earnings exclude amortization of excess of cost over fair value of
assets acquired.
1
<PAGE>
Selected Consolidated Financial and Other Data (Continued)
Key Financial Ratios and Other Data at or for the Years Ended June 30
<TABLE>
<CAPTION>
2000 1999 (9) 1998 (8) 1997 1996
-------------- ------------- ------------- ------------- -------------
Performance Ratios:
<S> <C> <C> <C> <C> <C>
Return on assets (net income divided
by average total assets) (1) .70 % .78 % .71 % .43 % .70 %
Cash basis return on assets (2) .84 .86 .73 .43 .71
Return on equity (net income divided
by average equity) (1) 7.22 9.48 8.39 5.20 8.44
Cash basis return on equity (2) 8.67 10.47 8.65 5.27 8.49
Average net interest rate spread (3) 2.50 2.72 2.74 2.71 2.52
Net yield on average interest-earning
assets (4) 2.81 2.99 3.07 3.07 2.88
Net interest income after provision
for loan losses to total other
expenses (1) 104.99 112.11 118.34 103.25 121.50
Asset Quality Ratios:
Nonperforming loans to total loans .42 .54 .33 .15 .22
Nonperforming loans to total assets .29 .36 .24 .11 .16
Nonperforming assets as a percentage
of total assets (5) .30 .37 .34 .11 .17
Nonperforming loans and real estate
owned to total loans and real
estate owned .43 .54 .47 .15 .24
Average interest-earning assets to
average interest-bearing liabilities 106.64 105.83 107.14 107.69 107.74
Capital, Equity and Dividend Ratios:
Tangible capital (6) 6.71 6.52 6.20 8.24 8.37
Core capital (6) 6.71 6.52 6.20 8.24 8.37
Risk-based capital (6) 12.46 13.20 12.51 17.00 18.45
Average equity to average assets ratio 9.68 8.24 8.46 8.20 8.32
Dividend payout ratio 28.04 30.10 39.67 68.12 40.74
Other Data:
Book value per common share (7) $14.52 $14.17 8.99 8.34 7.94
Number of full-service offices 18 19 15 13 13
</TABLE>
---------------
(1) Excluding the SAIF assessment, the Bank's return on assets, return on
equity, and net interest income after provision for loan losses to total
other expenses would have been .73%, 8.95%, and 125.29%, respectively, for
the year ended June 30, 1997.
(2) Cash basis return on assets is calculated by dividing cash earnings by
average total assets and cash basis return on equity is calculated by
dividing cash earnings by average stockholders' equity. Cash earnings
exclude amortization of excess of cost over fair value of assets acquired.
(3) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
(4) Represents net interest income as a percentage of average interest-earning
assets.
(5) Non-performing assets include non-accruing loans, accruing loans delinquent
90 days or more, and foreclosed assets, but do not include restructured
loans.
(6) End of period ratio
(7) Adjusted for stock distributions and April 1999 stock conversion.
(8) Operating data includes effect of First Federal's acquisition of GFS
Bancorp, Inc. for periods subsequent to March 31, 1998.
(9) Operating data includes effect of the acquisition of Mid-Iowa Financial
Corp. for periods subsequent to April 13, 1999.
2
<PAGE>
Selected Consolidated Financial and Other Data (Continued)
Quarterly Financial Data:
<TABLE>
<CAPTION>
June 30 March 31 December 31 September 30
Three Months Ended 2000 2000 1999 1999
------------------ ------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Interest income $12,486 12,181 11,765 11,541
Interest expense 7,923 7,654 7,214 7,023
------------- ------------- ------------- ---------------
Net interest income 4,563 4,527 4,551 4,518
Provision for losses on loans 155 159 135 105
------------- ------------- ------------- ---------------
Net interest income after provision 4,408 4,368 4,416 4,413
Noninterest income 1,648 1,500 1,618 1,744
Noninterest expense 4,129 4,060 4,190 4,219
------------- ------------- ------------- ---------------
Earnings before income taxes 1,927 1,808 1,844 1,938
Income taxes 679 644 578 740
------------- ------------- ------------- ---------------
Net earnings $1,248 1,164 1,266 1,198
============= ============= ============= ===============
Earnings per share:
Basic $0.28 0.26 0.27 0.26
Diluted $0.28 0.26 0.27 0.26
============= ============= ============= ===============
</TABLE>
<TABLE>
<CAPTION>
June 30 March 31 December 31 September 30
Three Months Ended 1999 1999 1998 1998
------------------ ------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Interest income $11,412 9,595 10,073 10,056
Interest expense 6,796 5,673 6,112 6,283
------------- ------------- ------------- ---------------
Net interest income 4,616 3,922 3,961 3,773
Provision for losses on loans 110 105 75 75
------------- ------------- ------------- ---------------
Net interest income after provision 4,506 3,817 3,886 3,698
Noninterest income 1,493 1,016 2,123 902
Noninterest expense 4,176 3,281 3,759 2,962
------------- ------------- ------------- ---------------
Earnings before income taxes 1,823 1,552 2,250 1,638
Income taxes 718 563 799 620
------------- ------------- ------------- ---------------
Net earnings $1,105 989 1,451 1,018
============= ============= ============= ===============
Earnings per share:
Basic $0.23 0.21 0.31 0.22
Diluted $0.23 0.21 0.31 0.21
============= ============= ============= ===============
</TABLE>
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
This report contains certain "forward-looking statements."The Company desires to
take advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 and is including this statement for the express
purpose of availing itself of the protections of the safe harbor with respect to
all such forward-looking statements. These forward-looking statements, which are
included in Management's Discussion and Analysis, describe future plans or
strategies and include the Company's expectations of future financial results.
The words "believe," "expect," "anticipate," "project," and similar expressions
identify forward-looking statements. The Company's ability to predict results or
the effect of future plans or strategies or qualitative or quantitative changes
based on market risk exposure is inherently uncertain. Factors which could
affect actual results include but are not limited to (a) changes in general
market interest rates, (b) general economic conditions, (c) legislative and
regulatory changes, (d) monetary and fiscal policies of the U. S. Treasury and
the Federal Reserve, (e) changes in the quality or composition of the Company's
loan and investment portfolios, (f) deposit flows, (g) competition, and (h)
demand for financial services in the Company's market area. These factors should
be considered in evaluating the forward-looking statements, and undue reliance
should not be placed on such statements, since results in future periods may
differ materially from those currently expected because of various risks and
uncertainties.
General
First Federal Bankshares, Inc. (the "Company") was organized under Delaware law
in December 1998 by First Federal Bank (the "Bank") to be the savings and loan
holding company of the Bank in connection with the Bank's April 13, 1999
conversion from mutual holding company form to the stock form of ownership (the
"Conversion"). The Company's principal activity consists of ownership of all of
the stock in the Bank. Consequently, the net income of the Company is primarily
derived from the Bank. In addition to the Bank, the Company owns Equity
Services, Inc., a real estate development company and Mid-Iowa Security
Corporation, which generates revenues primarily by providing real estate
brokerage services. The Bank is a federally chartered stock savings bank
headquartered in Sioux City, Iowa. The Bank is the successor of First Federal
Savings and Loan Association of Sioux City, which was founded in 1923.
The Company's results of operations are primarily dependent on its net interest
income. Net interest income is the difference between interest income earned on
loans, mortgage-backed securities and investment securities and interest expense
paid on deposits and borrowings. The Company's net income also is affected by
its provision for loan losses, as well as the amount of noninterest income,
including loan fees and service charges, and noninterest expense, such as
salaries and employee benefits, deposit insurance premiums, occupancy and
equipment costs and income taxes. Earnings of the Company also are affected
significantly by general economic and competitive conditions, particularly
changes in market interest rates, government policies and actions of regulatory
authorities.
Business Strategy
The Company's current business strategy is to operate as a well-capitalized,
profitable and independent community savings bank dedicated to providing quality
banking services to its customers. The Company has sought to implement this
strategy in recent years by: (1) closely monitoring the needs of customers; (2)
emphasizing family financial services such as residential mortgage loans,
consumer loans and various checking and savings products; (3) offering
commercial real estate loans and small business lending services; (4)
monitoring, with the intention of reducing, interest rate risk exposure; (5)
controlling operating expenses; and (6) maintaining strong asset quality.
4
<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are daily averages.
<TABLE>
<CAPTION>
Years Ended June 30
2000 1999 1998
---------------------------------------------------------------------------------------
Rate at
June 30, Average Average Average Average Average Average
2000 Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
---- ------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (1) 8.00% $480,377 37,145 7.73% $416,631 32,736 7.86% 358,209 28,797 8.04%
Mortgage-backed
securities 6.69% 34,528 2,235 6.47% 34,824 2,361 6.78% 40,501 2,713 6.70%
Investment securities (2) 6.65% 129,135 8,441 6.54% 87,677 5,764 6.57% 53,720 3,694 6.88%
Short-term invest-
ments and other
interest-earning
assets (3) 6.40% 2,805 151 5.38% 4,864 275 5.64% 2,959 160 5.41%
----- ----- --- ----- ----- --- ----- ----- --- -----
Total interest-earning
assets 7.69% 646,845 47,973 7.42% 543,996 41,136 7.56% 455,389 35,364 7.77%
----- ------ ----- ------ ----- ------ -----
Noninterest-earning assets 50,944 40,590 26,303
-------- ------- --------
TOTAL ASSETS $697,789 $584,586 481,692
========= ======== ========
Interest-bearing liabilities:
Deposits 4.81% $450,272 20,520 4.56% $394,722 17,884 4.53% 333,196 15,827 4.75%
Borrowings 6.13% 156,271 9,293 5.95% 119,329 6,980 5.85% 91,863 5,550 6.04%
----- ------- ----- ----- ------- ----- ----- ------ ----- -----
Total interest-bearing
liabilities 5.17% $606,543 29,814 4.92% $514,051 24,864 4.84% 425,059 21,377 5.03%
----- ------ ----- ------ ----- ------ -----
Noninterest-bearing:
Deposits 13,584 11,031 8,527
Liabilities 10,099 11,352 7,356
--------- -------- -------
TOTAL LIABILITIES 630,226 536,434 440,942
Stockholders' equity 67,563 48,152 40,750
--------- -------- -------
TOTAL LIABILITIES
AND STOCK-
HOLDERS' EQUITY 697,789 $584,586 481,692
========= ======== =======
Net interest income 18,159 16,272 13,987
====== ====== ======
Interest rate spread (4) 2.52% 2.50% 2.72% 2.74%
====== ===== ===== =====
Net yield on interest-
earning assets (5) 2.80% 2.81% 2.99% 3.07%
====== ===== ===== =====
Ratio of average interest-
earning assets to
average interest-
bearing liabilities 106.64% 105.83% 107.14%
======= ======= =======
</TABLE>
----------------
(1) Average balances include nonaccrual loans.
(2) Yields on investment securities are not tax-effected.
(3) Includes interest-bearing deposits in other financial institutions.
(4) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
5
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume); and (iv) the net
change.
<TABLE>
<CAPTION>
Years Ended June 30
2000 vs. 1999 1999 vs. 1998
------------------------------------------------ ------------------------------------------------
Increase (Decrease) Due To TOTAL Increase (Decrease) Due To TOTAL
RATE/ INCREASE RATE/ INCREASE
VOLUME RATE VOLUME (DECREASE) VOLUME RATE VOLUME (DECREASE)
--------- -------- ---------- ------------- --------- -------- ---------- -------------
(In thousands)
Interest Income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable $5,009 (542) (58) 4,409 $4,696 (645) (111) 3,940
Mortgage-backed
securities (20) (108) 2 (126) (380) 32 (4) (352)
Investments 2,726 (26) (23) 2,677 2,335 (167) (98) 2,070
Other interest-earning
assets (115) (13) 4 (124) 103 7 4 114
---------- -------- ---------- ------------- ---------- -------- ---------- ------------
Total interest-earning
assets $7,600 (689) (75) 6,836 $6,754 (773) (209) 5,772
---------- -------- ---------- -------------- ---------- -------- ---------- ------------
Interest Expense:
Savings deposits $2,517 118 1 2,636 $2,923 (733) (133) 2,057
Borrowings 2,161 119 33 2,313 1,659 (175) (54) 1,430
--------- -------- ---------- ------------- --------- -------- ---------- -------------
Total interest-bearing
liabilities $4,678 237 34 4,949 $4,582 (908) (187) 3,487
--------- -------- ---------- ------------- --------- -------- ---------- -------------
Net change in net interest
Income $2,922 (926) (109) 1,887 $2,172 135 (22) 2,285
========= ======== ========== ============= ========= ======== ========== =============
</TABLE>
Financial Condition
Total assets increased by $42.7 million, or 6.3%, to $723.4 million at June 30,
2000 from $680.7 million at June 30, 1999. The increase in total assets was
primarily due to an increase in loans receivable. Loans receivable increased by
$48.0 million, or 10.5%, to $505.1 million at June 30, 2000 from $457.1 million
at June 30, 1999. The increase in loans receivable was primarily due to an
increase of $36.9 million, or 51.2%, during fiscal 2000 in commercial
multi-family and nonresidential real estate loans and to an increase of $10.1
million, or 17.8%, in consumer and home equity loans. Partially offsetting the
increase in assets due to loan growth was a decrease in the balance of
investment securities. The balance of securities available-for-sale decreased by
$4.7 million, or 3.9%, to $117.3 million at June 30, 2000 from $122.0 million at
June 30, 1999. In addition, the balance of securities held-to-maturity decreased
by $8.3 million, or 25.8%, to $23.7 million at June 30, 2000 from $32.0 million
at June 30, 1999. The increase in total assets was primarily funded by increases
in the balances of deposits and advances from the Federal Home Loan Bank (the
"FHLB"). Deposits increased by $7.5 million, or 1.6%, to $471.6 million at June
30, 2000 from $464.1 million at June 30, 1999 and advances from the FHLB
increased by $35.4 million, or 25.5%, to $174.0 million from $138.6 million at
June 30, 1999.
Stockholders' equity totaled $68.1 million and $68.3 million, respectively, at
June 30, 2000 and 1999. Fiscal year earnings totaling $4.9 million were
partially offset by a decrease of $2.1 million in other comprehensive income.
The decrease in other comprehensive income was the result of increased
unrealized losses in the Company's available-for-sale securities portfolio due
to lower valuations for such securities in the generally higher market interest
rate environment. In addition, in December 1999, the Company commenced a share
repurchase program to acquire approximately 241,000 shares, or 5%, of its
outstanding common stock. During fiscal 2000, the Company repurchased 138,000
shares of its common stock at an average cost of $8.83 per share. The Company
also purchased 79,050 common shares at $9.00 per share for the First Federal
Bankshares, Inc. 1999 Recognition and Retention Plan (the "RRP"). On October 21,
1999, 73,000 shares were awarded to certain officers and directors of the
Company under the 1999 RRP. The remaining 6,050 RRP shares are held as treasury
stock pending award. Dividends paid to stockholders of the Company totaled $1.4
million, or 28.2%, of earnings for the fiscal year.
6
<PAGE>
Comparison of Operating Results for Fiscal Years Ended June 30, 2000 and 1999
General. Net earnings totaled $4.9 million, or $1.07 per diluted share, for the
year ended June 30, 2000 as compared to net earnings totaling $4.6 million, or
$.96 per diluted share, for the year ended June 30, 1999. The acquisition of
Mid-Iowa Financial Corp. ("Mid-Iowa") effective on April 13, 1999 was accounted
for using the purchase method of accounting; therefore, the results of
operations for the fiscal year ended June 30, 1999 included Mid-Iowa's results
of operations from April 14, 1999 through June 30, 1999. In addition, the
average balances of assets and liabilities for fiscal 1999 included Mid-Iowa's
asset and liability balances from April 14, 1999 through June 30, 1999 only.
Interest Income. Interest income increased by $6.9 million, or 16.6%, to $48.0
million in fiscal 2000 from $41.1 million in fiscal 1999. The increase in
interest income was due to an increase of $102.8 million, or 18.9%, in the
average balance of interest-earning assets to $646.8 million in fiscal 2000 from
$544.0 million in fiscal 1999. The increase in the average balance of
interest-earning assets was primarily due to the acquisition of Mid-Iowa in
April 1999. The average yield on interest-earning assets decreased to 7.42% in
fiscal 2000 from 7.56% in fiscal 1999. The increase in interest income resulted
primarily from a $4.4 million, or 13.5%, increase in interest income on loans to
$37.1 million in fiscal 2000 from $32.7 million in fiscal 1999. Interest income
on mortgage-backed securities ("MBS") decreased by $126,000, or 5.3%, to $2.2
million in fiscal 2000 from $2.4 million in fiscal 1999. During the same period,
interest income on investment securities increased by $2.7 million, or 46.4%, to
$8.4 million from $5.8 million.
The increase in interest income on loans resulted from an increase of $63.8
million, or 15.3%, in the average balance of loans receivable to $480.4 million
for the year ended June 30, 2000, from $416.6 million for the year ended June
30, 1999. The average yield on loans receivable decreased by 13 basis points to
7.73% for fiscal 2000 from 7.86% for fiscal 1999. The Company's large portfolio
of residential mortgage loans reacts much less quickly to increases in market
interest rates than, for example, shorter-term commercial and consumer loans.
During the generally lower interest rate environment in fiscal 1999, prepayments
increased and fixed-rate mortgage loans and adjustable-rate mortgage loans with
lower interest rates were originated. Adjustable-rate loans include various
embedded options that limit the timing and extent of future interest rate
changes. Prepayments slowed as market rates generally increased in fiscal 2000
and the relatively low-rate mortgage loans originated in fiscal 1999 contributed
to the decrease in the average yield earned on loans receivable. The decrease in
interest income on MBS was primarily due to a decrease of 31 basis points in the
average yield on MBS to 6.47% in fiscal 2000 from 6.78% in fiscal 1999. The
increase in interest income on investment securities was primarily due to an
increase of $41.5 million in the average balance of investment securities to
$129.1 million in fiscal 2000 from $87.6 million in fiscal 1999. The yield on
investment securities decreased slightly to 6.54% in fiscal 2000 from 6.57% in
fiscal 1999.
Interest Expense. Interest expense totaled $29.8 million in fiscal 2000,
representing a $4.9 million, or 19.9%, increase from $24.9 million in fiscal
1999. The increase was due to an increase of $92.4 million, or 18.0%, in the
average balance of interest-bearing liabilities to $606.5 million in fiscal 2000
from $514.1 million in fiscal 1999. The increase in the average balance of
interest-bearing liabilities was largely due to the Mid-Iowa acquisition. The
average cost of interest-bearing liabilities increased by 8 basis points to
4.92% in fiscal 2000 from 4.84% in fiscal 1999. Interest expense on deposits
increased by $2.6 million, or 14.7%, to $20.5 million in fiscal 2000 from $17.9
million in fiscal 1999 and interest paid on borrowings increased by $2.3
million, or 33.1%, to $9.3 million in fiscal 2000 from $7.0 million in fiscal
1999. The increase in interest expense on deposits was primarily due to an
increase of $55.6 million, or 14.1%, in the average balance of deposits to
$450.3 million for fiscal 2000 from $394.7 million for fiscal 1999. The average
rate paid on deposits increased slightly to 4.56% in fiscal 2000 from 4.53% in
fiscal 1999. The increase in interest expense on borrowings resulted from a
$37.0 million increase in the average balance of borrowings to $156.3 million in
fiscal 2000 from $119.3 million in fiscal 1999. The average rate paid on
borrowings increased to 5.95% in fiscal 2000 from 5.85% in fiscal 1999 in the
generally higher interest rate environment during fiscal 2000.
Net Interest Income. Net interest income before provision for loan losses
increased by $1.9 million, or 11.6%, to $18.2 million for fiscal 2000 from $16.3
million for fiscal 1999. The increase in net interest income in fiscal 2000
7
<PAGE>
was primarily due to volume increases resulting from the Mid-Iowa acquisition.
Volume increases in the average balance of interest-earning assets in fiscal
2000 resulted in an increase in interest income of $7.6 million, while volume
increases in the average balance of interest-bearing liabilities resulted in an
increase in interest expense of $4.7 million. The Company's interest rate spread
was 2.50% and 2.72%, respectively, and the net yield on interest-earning assets
was 2.81% and 2.99%, respectively, for fiscal 2000 and 1999. The decrease in the
interest rate spread and in the net yield on interest-earning assets occurred
because the Company's interest-bearing liabilities repriced more quickly than
its interest-earning assets in the generally higher market interest rate
environment.
Provision for Loan Losses. Provision for loan loss expense increased by
$189,000, or 51.8%, to $554,000 for fiscal 2000 from $365,000 for fiscal 1999.
Provision for loan losses was increased due to increased loan volume resulting
from the Mid-Iowa acquisition and growth related to commercial and consumer loan
products, which generally involve a greater degree of risk than residential
mortgage loans. 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 current portfolio. Net
charge-offs as a percentage of average loans outstanding were .06% and .04%,
respectively, for fiscal years 2000 and 1999. 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 probable credit losses.
Noninterest Income. Noninterest income increased by $1.0 million, or 17.6%, to
$6.5 million for fiscal 2000 from $5.5 million for fiscal 1999. During fiscal
1999 the Company recorded a $1.1 million pre-tax gain on the sale of branch
deposits. Excluding this gain, noninterest income increased by $2.1 million, or
46.4%, to $6.5 million for fiscal 2000 from $4.4 million for fiscal 1999. The
increase in noninterest income in fiscal 2000 was largely due to growth related
to the Mid-Iowa acquisition. Service charges and other fees increased by
$755,000, or 35.2%, to $2.9 million for the year ended June 30, 2000 from $2.1
million for the year ended June 30, 1999. Additionally, gain on sale of fixed
assets totaled $108,000 for fiscal 2000 while a loss of $33,000 was recorded in
fiscal 1999 and gain on the sale of real estate owned and held for development
increased by $422,000, or 235.1%, to $602,000 for fiscal 2000 from $180,000 for
fiscal 1999. Income from other real estate-related activities increased by
$514,000, or 54.1%, to $1.5 million for fiscal 2000 from $1.0 million for fiscal
1999. The increase in real estate-related income was primarily due to income
from the real estate brokerage company acquired in the acquisition of Mid-Iowa.
Other income increased by $505,000, or 55.0%, to $1.4 million for fiscal 2000
from $919,000 for fiscal 1999, largely due to increased revenues in the
Company's non-bank subsidiaries. Partially offsetting the increases in
noninterest income for fiscal 2000 when compared to fiscal 1999 was a decrease
of $116,000 in gain on sale of loans held for sale, reflecting the slowdown in
mortgage activity due to generally higher mortgage interest rates in fiscal
2000. In addition, loss on sale of securities totaled $170,000 for fiscal 2000
due to sales of investment securities at a loss. Proceeds of approximately $8.4
million from the securities' sales were used to fund loans with higher yields.
Noninterest Expense. Noninterest expense increased by $2.4 million, or 17.1%, to
$16.6 million in fiscal 2000 from $14.2 million in fiscal 1999. The increase in
noninterest expense in fiscal 2000 was also largely due to growth related to the
Mid-Iowa acquisition. The principal component of the Company's noninterest
expense is salaries and employee benefits. Compensation and benefit expense
increased by $1.3 million, or 17.2%, to $9.0 million in fiscal 2000 from $7.7
million in fiscal 1999 primarily due to the addition of the Mid-Iowa staff.
Office property and equipment expense increased by $382,000, or 20.1%. Deposit
insurance premium expense decreased by $57,000, or 23.3%, to $189,000 in fiscal
2000 from $246,000 in fiscal 1999. Deposits totaling approximately $105.6
million were added with the Mid-Iowa acquisition; however, the deposit premium
rate decreased to .04% of the deposit assessment base for fiscal 2000 from .06%
of the deposit assessment base for fiscal 1999. Data processing expense and
advertising expense decreased by $19,000, or 4.0%, and by $110,000, or 18.8%,
respectively, in fiscal 2000 as compared to fiscal 1999. Amortization of
intangibles increased by $500,000, to $979,000 in fiscal 2000, from $479,000 in
fiscal 1999 due to the Mid-Iowa acquisition. The excess of cost over fair value
of assets related to the Mid-Iowa acquisition is being amortized over a period
of 25 years. Other general and administrative expense increased by $407,000, or
14.4%, to $3.2 million for fiscal 2000 from $2.8 million for fiscal 1999.
Income tax expense. Net earnings before income taxes increased by $253,000, or
3.5%, to $7.5 million for fiscal 2000 from $7.3 million for fiscal 1999. Income
tax expense decreased by $59,000, or 2.2%, to $2.6 million for
8
<PAGE>
fiscal 2000 from $2.7 million for fiscal 1999. The Company's effective tax rate
decreased to 35.1% for fiscal 2000 from 37.2% for fiscal 1999, partially due to
increased balances in the Company's tax-exempt investment portfolio.
Comparison of Operating Results for Fiscal Years Ended June 30, 1999 and 1998
General. Net earnings for the year ended June 30, 1999 increased by $1.2
million, or 33.5%, to $4.6 million from $3.4 million for the year ended June 30,
1998. Diluted earnings per share totaled $.96 and $.72, respectively, for fiscal
1999 and 1998. The acquisition of Mid-Iowa effective on April 13, 1999 was
accounted for as a purchase; therefore, Mid-Iowa's results of operations were
included in the Company's operating results for fiscal 2000 from April 14, 1999
through June 30, 1999.
Interest Income. Interest income increased by $5.7 million, or 16.3%, to $41.1
million in fiscal 1999 from $35.4 million in fiscal 1998. The increase in
interest income was primarily due to an increase of $88.6 million, or 19.5%, in
the average balance of interest-earning assets to $544.0 million in fiscal 1999
from $455.4 million in fiscal 1998. The increase in the average balance of
interest-earning assets was primarily due to the acquisitions of GFS Bancorp,
Inc. and Mid-Iowa in March 1998, and April 1999, respectively. The average yield
on interest-earning assets decreased to 7.56% in fiscal 2000 from 7.77% in
fiscal 1998. The increase in interest income resulted primarily from a $3.9
million, or 13.7%, increase in interest income on loans to $32.7 million in
fiscal 1999 from $28.8 million in fiscal 1998. Interest income on MBS decreased
by $352,000, or 13.0%, to $2.4 million in fiscal 1999 from $2.7 million in
fiscal 1998. During the same period, interest income on investment securities
increased by $2.1 million, or 56.1%, to $5.8 million from $3.7 million. The
increase in interest income on loans resulted from an increase of $58.4 million,
or 16.3%, in the average balance of loans receivable to $416.6 million at June
30, 1999, from $358.2 million at June 30, 1998. The average yield on loans
receivable decreased by 18 basis points to 7.86% for fiscal 1999 from 8.04% for
fiscal 1998. The decrease in interest income on MBS was primarily due to a
decrease of $5.7 million in the average balance of MBS to $34.8 million in
fiscal 1999 from $40.5 million in fiscal 1998. Partially offsetting the decrease
in MBS balances was an increase of 8 basis points in the average yield on MBS to
6.78% in fiscal 1999 from 6.70% in fiscal 1998. The increase in interest income
on investment securities was primarily due to an increase of $34.0 million in
the average balance of investment securities to $87.7 million in fiscal 1999
from $53.7 million in fiscal 1998. Investments totaling $46.1 million were added
with the acquisition of Mid-Iowa in April 1999. The yield on investment
securities decreased to 6.57% in fiscal 1999 from 6.88% in fiscal 1998,
partially offsetting the increase in average balances. The generally lower
interest rate environment during fiscal 1999 resulted in declining yields on
investment securities as higher yielding, callable securities were redeemed in
the first three quarters of fiscal 1999.
Interest Expense. Interest expense totaled $24.9 million in fiscal 1999,
representing a $3.5 million, or 16.3%, increase from $21.4 million in fiscal
1998. The increase was due to an increase of $89.0 million, or 20.9%, in the
average balance of interest-bearing liabilities to $514.1 million in fiscal 1999
from $425.1 million in fiscal 1998. The increase in the average balance of
interest-bearing liabilities was primarily due to the GFS Bancorp, Inc. and
Mid-Iowa acquisitions. The average cost of interest-bearing liabilities
decreased by 19 basis points to 4.84% in fiscal 1999 from 5.03% in fiscal 1998.
Interest expense on deposits increased by $2.1 million, or 13.0%, to $17.9
million in fiscal 1999 from $15.8 million in fiscal 1998 and interest paid on
borrowings increased by $1.4 million, or 25.8%, to $7.0 million in fiscal 1999
from $5.6 million in fiscal 1998. The increase in interest expense on deposits
was primarily due to an increase of $61.5 million, or 18.5%, in the average
balance of deposits to $394.7 million for fiscal 1999 from $333.2 million for
fiscal 1998. The average rate paid on deposits declined to 4.53% in fiscal 1999
from 4.75% in fiscal 1998. The increase in interest expense on borrowings
resulted from a $27.5 million increase in the average balance of borrowings to
$119.3 million in fiscal 1999 from $91.9 million in fiscal 1998. The average
rate paid on borrowings decreased to 5.85% in fiscal 1999 from 6.04% in fiscal
1998 in the generally lower interest rate environment during fiscal 1999.
Net Interest Income. Net interest income before provision for loan losses
increased by $2.3 million, or 16.3%, to $16.3 million for fiscal 1999 from $14.0
million for fiscal 1998. The increase in net interest income in fiscal 1999 was
primarily due to volume increases resulting from acquisitions. Volume increases
in the average balance of interest-earning assets in fiscal 1999 resulted in an
increase in interest income of $6.8 million, while volume
9
<PAGE>
increases in the average balance of interest-bearing liabilities resulted in an
increase in interest expense of $4.5 million. The Company's interest rate spread
was 2.72% and 2.74%, respectively, and the net yield on interest-earning assets
was 2.99% and 3.07%, respectively, for fiscal 1999 and 1998.
Provision for Loan Losses. During fiscal 1999 and 1998 the Company provided
$365,000 and $345,000, respectively, for loan losses. Net charge-offs as a
percentage of average loans outstanding were .04% and .09%, respectively, for
fiscal years 1999 and 1998.
Noninterest Income. Noninterest income increased by $2.3 million, or 74.5%, to
$5.5 million for fiscal 1999 from $3.2 million for fiscal 1998. The increase in
noninterest income was largely due to the recognition of a $1.1 million gain on
the sale of the deposits of three branch offices. Deposits totaling $19.4
million were sold to local financial institutions. Over 80% of the deposits sold
were fixed-rate, fixed-maturity certificates of deposit with average interest
rates higher than the Company's weighted average rate paid on total deposits.
The sale of these deposits reduced the average interest rate paid on the
Company's total deposits by approximately 10 basis points. A gain on the sale of
real estate owned totaling $137,000 was recorded in fiscal 1999, primarily due
to the sale of a commercial property located in Grinnell, Iowa. Sales of lots by
the Company's real estate development subsidiary generated a gain totaling
$43,000. The increase in noninterest income was also due to growth related to
the acquisitions of GFS Bancorp, Inc. in March, 1998 and Mid-Iowa in April,
1999. Income from fees and service charges, real estate related income and other
noninterest income increased by $754,000, $231,000 and $199,000, respectively,
in fiscal 1999 when compared to fiscal 1998. The increase in fees and service
charges was partially due to increases in transaction accounts that typically
generate more service charge income than fixed maturity deposits and also to the
addition of the GFS Bancorp, Inc. and Mid-Iowa deposit accounts. Gain on sale of
loans held for sale increased by $54,000 over the prior year and a loss on sale
of fixed assets totaling $33,000 was recorded in fiscal 1999 compared to a gain
on sale of fixed assets totaling $104,000 in fiscal 1998. The increase in other
income was primarily due to increased activity in the Company's non-bank
subsidiaries.
Noninterest Expense. Noninterest expense increased by $2.7 million, or 23.1%, to
$14.2 million in fiscal 1999 from $11.5 million in fiscal 1998. The principal
component of the Company's noninterest expense has been and continues to be
salaries and employee benefits. Compensation and benefit expense increased by
$972,000, or 14.5%, to $7.7 million in fiscal 1999 from $6.7 million in fiscal
1998. During fiscal 1998 the Bank recognized the liability for an early
retirement incentive program that totaled approximately $277,000. Office
property and equipment expense increased by $400,000, or 26.7%. Deposit
insurance premium expense increased by $30,000, or 13.9%, to $246,000 in fiscal
1999 from $216,000 in fiscal 1998. Deposits totaling approximately $62.3 million
and $105.6 million, respectively, were added with the GFS Bancorp, Inc. and
Mid-Iowa acquisitions. Data processing expense and advertising expense increased
by $108,000, or 30.3%, and by $176,000, or 43.1%, respectively, in fiscal 1999
as compared to fiscal 1998. Amortization of intangibles increased by $371,000,
to $479,000 in fiscal 1999, from $108,000 in fiscal 1998 primarily due to the
excess of cost over fair value of assets totaling $7.9 million and $12.6
million, respectively, for the GFS Bancorp, Inc. and Mid-Iowa acquisitions. The
excess of cost over fair value of assets related to these acquisitions is being
amortized over a period of 25 years. Other general and administrative expense
increased by $592,000, or 26.5%, to $2.8 million for fiscal 1999 from $2.2
million for fiscal 1998. The increase in other general and administrative
expense in fiscal 1999 was partially due to acquisition-related expenses.
Income tax expense. Net earnings before income taxes increased by $2.0 million,
or 37.3%, to $7.3 million for fiscal 1999 from $5.3 million for fiscal 1998.
Income tax expense increased by $827,000, or 44.1%, to $2.7 million for fiscal
1999 from $1.9 million for fiscal 1998. The federal and state effective tax rate
on earnings was 37.2% and 35.4%, respectively, for fiscal years 1999 and 1998.
Asset and Liability Management - Interest Rate Sensitivity Analysis
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or
10
<PAGE>
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities. A gap is considered negative when the
amount of interest rate sensitive liabilities exceeds the amount of interest
rate sensitive assets. Interest rate sensitivity is based on numerous
assumptions, such as prepayment estimates, which are revised annually to reflect
the anticipated interest rate environment.
During a period of rising interest rates, a negative gap would tend to adversely
affect net interest income while a positive gap would tend to positively affect
net interest income. During a period of falling interest rates a negative gap
would tend to positively affect net interest income while a positive gap would
tend to negatively affect net interest income.
The Company has utilized the following strategies in recent years in an effort
to reduce interest rate risk: (a) the Company seeks to originate and hold in
portfolio adjustable rate loans which have annual interest rate adjustments; (b)
the Company seeks to originate shorter-term commercial and consumer loans; (c)
the Company seeks to lengthen the maturity of deposits, when cost effective,
through the pricing and promotion of certificates of deposit; (d) the Company
seeks to attract low cost checking and transaction accounts which tend to be
less interest rate sensitive when interest rates rise; and (e) the Company has
used long term Federal Home Loan Bank advances to fund the origination of fixed
rate loans. The Company does not solicit negotiated high-rate jumbo certificates
of deposit or brokered deposits, which are extremely rate sensitive.
At June 30, 2000, total interest-bearing liabilities maturing or repricing
within one year exceeded total interest-earning assets maturing or repricing in
the same period by $152.8 million, representing a cumulative negative one-year
gap ratio of 21.2%. The Company has an asset/liability committee (the "ALCO"),
which includes the Company's president and senior Company officers. The ALCO
meets weekly to review loan and deposit pricing and production volumes, interest
rate risk analysis, liquidity and borrowing needs, and other asset and liability
management topics. The ALCO reports quarterly to the Board of Directors on
interest rate risk and trends, as well as liquidity and capital ratios and
requirements.
Market Risk Management
Market risk is the risk of loss arising from adverse changes in market prices
and rates. The Company's market risk is comprised primarily 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. Management
does not believe that the Company's primary market risk exposures and how those
exposures were managed in fiscal 2000 have changed significantly when compared
to fiscal 1999. However, after six interest rate hikes by the Federal Reserve
Board between June 29, 1999 and June 30, 2000, the net portfolio value of the
Company, assuming no change in interest rates (the "Base Case Scenario"), has
declined by $10.7 million, or 16.9%, to $52.8 million at June 30, 2000 from
$63.5 million at June 30, 1999. The net portfolio value ratio in the Base Case
Scenario was 7.51% and 9.39%, respectively, at June 30, 2000 and 1999. The Board
of Directors has established market risk limits based on the Company's tolerance
for risk. At June 30, 2000, the net portfolio value ratio was outside the board
limit of 6.50% in the +100bp, +200bp, and +300bp scenarios. The Board of
Directors adopted a plan (the "IRR Plan") in March 2000 that is intended to
bring the net portfolio value ratio back within board limits by June 30, 2001
for all interest rate change scenarios measured. In addition to re-emphasizing
the strategies listed in the prior section heading, Asset and Liability
Management - Interest Rate Sensitivity Analysis, the IRR Plan calls for a
reduction in the Company's investment securities portfolio and the redeployment
of those funds into generally shorter-term, higher-yielding commercial and
consumer loans. The Company primarily relies on the Office of Thrift Supervision
(the "OTS") Net Portfolio Value Model (the "Model") to measure its
susceptibility to interest rate changes. Net portfolio value ("NPV") is defined
as 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 net expected cash flows from existing off-balance-sheet
contracts. The Model estimates the current economic value of each type of asset,
liability, and off-balance sheet contract after various assumed instantaneous,
parallel shifts in the Treasury yield curve both upward and downward.
11
<PAGE>
The Model uses an option-based pricing approach to value one-to-four family
mortgages, mortgages serviced by or for others, and firm commitments to buy,
sell, or originate mortgages. This approach makes use of an interest rate
simulation program to generate numerous random interest rate paths that, in
conjunction with a prepayment model, are used to estimate mortgage cash flows.
Prepayment options and interest rate caps and floors contained in mortgages and
mortgage-related securities introduce significant uncertainty in estimating the
timing of cash flows for these instruments that warrants the use of this
sophisticated methodology. All other financial instruments are valued using a
static discounted cash flow method. Under this approach, the present value is
determined by discounting the cash flows the instrument is expected to generate
by the yields currently available to investors from an instrument of comparable
risk and duration.
The following table sets forth the present value estimates for major categories
of financial instruments of the Company at June 30, 2000, as calculated by the
Model. The table shows the present value of the instruments under rate shock
scenarios of -300 basis points to +300 basis points in increments of 100 basis
points. As illustrated in the table, the Company's NPV is more sensitive in a
rising rate scenario than in a falling rate scenario. As market rates increase,
the market value of the Company's portfolio of mortgage loans and securities
declines significantly and prepayments slow. As interest rates decrease, the
market value of mortgage loans and mortgage-backed securities increase less
dramatically due to prepayment risk, periodic rate caps, and other embedded
options.
Actual changes in market value will differ from estimated changes set forth in
this table due to various risks and uncertainties.
<TABLE>
<CAPTION>
Present Value Estimates by Interest Rate Scenario
Calculated at June 30, 2000
------------------------------------------------------ Base --------------------------------------
-300 bp -200 bp -100 bp 0 bp +100 bp +200 bp +300 bp
------------ ---------- ---------- ---------- ---------- ---------- ------------
Financial Instrument:
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans and securities $516,411 509,872 501,587 490,804 478,874 466,451 453,969
Non-mortgage loans 38,956 38,204 37,482 36,786 36,117 35,472 34,851
Cash, deposits and securities 137,110 136,031 132,879 127,620 121,887 116,256 110,923
Other assets 36,747 39,573 43,426 47,263 50,848 54,245 57,487
------------ ---------- ---------- ---------- ---------- ---------- ------------
Total assets 729,224 723,680 715,374 702,473 687,726 672,424 657,230
Deposits 478,146 474,801 471,534 468,336 465,210 462,156 459,174
Borrowings 177,231 175,179 173,184 171,247 169,363 167,531 165,750
Other liabilities 10,155 10,148 10,143 10,136 10,132 10,127 10,122
------------ ---------- ---------- ---------- ---------- ---------- ------------
Total liabilities 665,532 660,128 654,861 649,719 644,705 639,814 635,046
------------ ---------- ---------- ---------- ---------- ---------- ------------
Commitments 615 406 211 (3) (267) (596) (961)
------------ ---------- ---------- ---------- ---------- ---------- ------------
Net portfolio value $64,307 63,958 60,724 52,751 42,754 32,014 21,223
============ ========== ========== ========== ========== ========== ============
Net portfolio value ratio 8.82% 8.84% 8.49% 7.51% 6.22% 4.76% 3.23%
============ ========== ========== ========== ========== ========== ============
NPV minimum: board limit 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50%
============ ========== ========== ========== ========== ========== ============
</TABLE>
Liquidity and Capital Resources
The Company is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which varies from time to time, is
currently 4% of deposits and short-term borrowings. The Company historically has
maintained a level of liquid assets in excess of regulatory requirements, and
the Company's liquidity ratio averaged 26.5% during the quarter ended June 30,
2000. The Company adjusts its liquidity levels in order to meet funding needs
for deposit outflows, payment of real estate taxes from escrowed funds, when
applicable, and loan commitments. The Company also adjusts liquidity as
appropriate to meet its asset/liability objectives.
12
<PAGE>
The Company's primary sources of funds are deposits, amortization and prepayment
of loans and mortgage-backed securities, FHLB advances, maturities of investment
securities and other short-term investments, and funds provided from operations.
While scheduled loan and mortgage-backed securities repayments are a relatively
predictable source of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Company manages the pricing of its deposits to maintain a steady deposit
balance. In addition, the Company invests excess funds in interest-bearing
deposits in other financial institutions, investment securities and other
short-term interest-earning assets that provide liquidity to meet lending
requirements.
Investments and other assets qualifying for liquidity, outstanding at June 30,
2000, 1999, and 1998, totaled $142.7 million, $150.1 million, and $96.4 million,
respectively.
Deposits are the Company's primary source of externally generated funds. The
level of deposit inflows during any given period is heavily influenced by
factors outside of management's control, such as the general level of short-term
and long-term interest rates in the economy, as well as higher alternative
yields that investors may obtain on competing investment instruments such as
money market mutual funds. The Company's net deposits before interest credited
decreased by $12.6 million during fiscal 2000. Net deposits before interest
credited increased by $53.5 million for fiscal 1999, due primarily to the
Mid-Iowa acquisition, net of branch deposit sales that totaled approximately
$19.4 million. The Company's net deposits before interest credited increased by
$49.1 million for fiscal 1998, due primarily to the GFS Bancorp, Inc.
acquisition.
Similarly, the general level of interest rates in the economy heavily influences
the amount of principal repayments on loans and mortgage securities. Funds
received from principal repayments on mortgage-backed securities for fiscal
2000, 1999 and 1998, totaled $8.4 million, $12.1 million, and $11.0 million,
respectively. Principal repayments on loans for fiscal 2000 totaled $156.9
million as compared to $163.1 million in fiscal 1999 and $123.3 million in
fiscal 1998. The deceleration of loan and mortgage-backed securities principal
repayments during fiscal 2000 over the prior year period reflects the slowdown
in refinancing activity of homeowners during fiscal 2000 due to generally higher
mortgage interest rates.
Liquidity management is both a daily and long-term function of business
management. If the Company requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB, which provide an
additional source of funds. At June 30, 2000, the Company had $174.0 million in
outstanding advances from the FHLB.
At June 30, 2000, the Company had outstanding loan commitments and consumer and
commercial approved, but unused, lines of credit totaling $42.1 million.
Certificates of deposit scheduled to mature or reprice in one year or less at
June 30, 2000 totaled $179.1 million. Management believes that a significant
portion of such deposits will remain with the Company.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Company are monetary. As a result, interest rates
have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
13
<PAGE>
Effect of New Accounting Standards
The Company adopted the provisions of SFAS No. 130, Reporting Comprehensive
Income, effective July 1, 1998. SFAS No. 130 establishes the standards for the
reporting and display of comprehensive income in the financial statements.
Comprehensive income represents net earnings and certain amounts reported
directly in stockholders' equity, such as the net unrealized gain or loss on
available-for-sale securities. The statement requires additional disclosures in
the consolidated financial statements; it does not affect the Company's
financial position or results of operations.
The Company adopted the provisions of SFAS No. 131, Disclosure about Segments of
an Enterprise and Related Information, effective July 1, 1998. SFAS No. 131
establishes disclosure requirements for segment operations. The adoption had no
effect on the Company's financial statement disclosures because the Company
operates as a single business segment.
SFAS 133, Accounting for Derivative Instruments and Hedging Activities, and its
related amendment SFAS No. 137, Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,
will be effective for the Company for the year beginning July 1, 2000. The
Company expects to adopt SFAS No. 133 when required and does not expect such
adoption to have a material effect on its financial statements.
14
<PAGE>
Independent Auditors' Report
The Board of Directors
First Federal Bankshares, Inc.
and Subsidiaries
Sioux City, Iowa:
We have audited the accompanying consolidated balance sheets of First
Federal Bankshares, Inc. and subsidiaries (the Company) as of June 30, 2000
and 1999, and the related consolidated statements of operations,
stockholders' equity and comprehensive income, and cash flows for each of
the years in the three-year period ended June 30, 2000. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Federal Bankshares, Inc. and subsidiaries as of June 30, 2000 and 1999, and
the consolidated results of their operations and their cash flows for each
of the years in the three-year period ended June 30, 2000, in conformity
with accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
Des Moines, Iowa
August 3, 2000
<PAGE>
<TABLE>
<CAPTION>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2000 and 1999
Assets 2000 1999
------------------ ----------------
<S> <C> <C>
Cash and due from banks $ 16,611,443 13,220,130
Interest-bearing deposits in other financial institutions 3,555,263 1,847,826
------------------ ----------------
Cash and cash equivalents 20,166,706 15,067,956
------------------ ----------------
Securities available-for-sale (note 2) 117,326,062 122,047,213
Securities held-to-maturity (fair value of $23,067,005 in 2000
and $31,756,870 in 1999) (note 2) 23,737,311 32,006,095
Loans receivable, net (notes 3 and 4) 505,089,564 457,058,054
Office property and equipment, net (note 5) 15,314,905 15,411,818
Federal Home Loan Bank (FHLB) stock, at cost 8,928,900 8,094,300
Accrued interest receivable (note 6) 4,800,415 4,602,258
Deferred tax asset (note 9) 2,362,000 1,197,000
Excess of cost over fair value of assets acquired 19,900,409 20,946,396
Other assets 5,755,245 4,240,648
------------------ ----------------
Total assets $ 723,381,517 680,671,738
================== ================
Liabilities
Deposits (note 7) $ 471,625,531 464,169,478
Advances from FHLB (note 8) 174,020,499 138,617,385
Advance payments by borrowers for taxes and insurance 2,828,275 2,557,118
Accrued taxes on income (note 9) 292,740 419,106
Accrued interest payable (notes 7 and 8) 4,297,514 4,172,328
Accrued expenses and other liabilities 2,204,039 2,463,316
------------------ ----------------
Total liabilities 655,268,598 612,398,731
------------------ ----------------
Stockholders' Equity
Preferred stock, $.01 par value; authorized;
1,000,000 shares, none issued -- --
Common stock, $.01 par value, 12,000,000 shares authorized;
4,833,608 and 4,817,807 shares issued
at June 30, 2000 and 1999, respectively 48,336 48,178
Additional paid-in capital 36,002,723 35,957,560
Retained earnings, substantially restricted (note 11) 39,782,321 36,283,211
Treasury stock, at cost, 144,050 shares at June 30, 2000 (1,273,138) --
Accumulated other comprehensive income - Net
unrealized (loss) gain on securities available-for-sale (4,343,049) (2,202,184)
Unearned ESOP (note 10) (1,634,600) (1,813,758)
Unearned RRP (note 10) (469,674) --
------------------ ----------------
Total stockholders' equity 68,112,919 68,273,007
Contingencies (note 14) -- --
------------------ ----------------
Total liabilities and stockholders' equity $ 723,381,517 680,671,738
================== ================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended June 30, 2000, 1999, and 1998
<TABLE>
<CAPTION>
2000 1999 1998
--------------- --------------- ----------------
<S> <C> <C> <C>
Interest income:
Loans receivable $ 37,145,258 32,736,304 28,796,484
Mortgage-backed securities 2,235,090 2,361,176 2,713,326
Investment securities 8,441,174 5,764,481 3,694,024
Other interest-earning assets 151,037 274,191 160,432
--------------- --------------- ----------------
Total interest income 47,972,559 41,136,152 35,364,266
--------------- --------------- ----------------
Interest expense:
Deposits (note 7) 20,520,340 17,884,113 15,826,758
Advances from FHLB and other borrowings 9,293,181 6,980,013 5,550,478
--------------- --------------- ----------------
Total interest expense 29,813,521 24,864,126 21,377,236
--------------- --------------- ----------------
Net interest income 18,159,038 16,272,026 13,987,030
Provision for losses on loans (note 4) 554,000 365,000 345,000
--------------- --------------- ----------------
Net interest income after provision for losses on loans 17,605,038 15,907,026 13,642,030
--------------- --------------- ----------------
Noninterest income:
Fees and service charges 2,901,004 2,146,078 1,392,400
Gain on sale of branch deposits -- 1,087,884 --
Gain on sale of real estate owned and held for development 602,134 179,695 --
Net loss on sale of securities (169,856) (12,141) --
Gain on sale of loans 180,240 295,812 241,690
Gain (loss) on sale of office property and equipment 108,462 (32,689) 103,936
Real estate related activities 1,463,766 950,131 719,239
Other income, net 1,423,966 918,895 720,213
--------------- --------------- ----------------
Total noninterest income 6,509,716 5,533,665 3,177,478
--------------- --------------- ----------------
Noninterest expense:
Compensation and benefits (note 10) 8,991,983 7,673,781 6,701,960
Office property and equipment 2,282,175 1,900,655 1,500,265
Deposit insurance premiums 189,022 246,462 216,405
Data processing 444,582 463,220 355,508
Advertising 475,256 585,348 409,102
Amortization of excess of cost over fair value of assets acquired 979,554 479,200 108,244
Other expense, net 3,235,531 2,828,560 2,236,111
--------------- --------------- ----------------
Total noninterest expense 16,598,103 14,177,226 11,527,595
--------------- --------------- ----------------
Earnings before income taxes 7,516,651 7,263,465 5,291,913
Income taxes (note 9) 2,641,000 2,700,000 1,874,000
--------------- --------------- ----------------
Net earnings $ 4,875,651 4,563,465 3,417,913
=============== =============== ================
Earnings per share:
Basic earnings per share $ 1.07 0.97 0.73
Diluted earnings per share 1.07 0.96 0.72
=============== =============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended June 30, 2000, 1999, and 1998
<TABLE>
<CAPTION>
Additional
Common paid-in Retained Treasury
stock capital earnings stock
------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
Balance at June 30, 1997 $ 46,581 11,001,204 27,890,096 --
------------- ---------------- --------------- --------------
Net earnings -- -- 3,417,913 --
Net change in unrealized gains on securities
available-for-sale -- -- -- --
------------- ---------------- --------------- --------------
Total comprehensive income -- -- 3,417,913 --
------------- ---------------- --------------- --------------
Stock options exercised 192 58,762 -- --
Dividends on common stock
at $.2914 per share (note 11) -- -- (629,018) --
------------- ---------------- --------------- --------------
Balance at June 30, 1998 46,773 11,059,966 30,678,991 --
------------- ---------------- --------------- --------------
Net earnings -- -- 4,563,465 --
Net change in unrealized losses on
securities available-for-sale -- -- -- --
Less: reclassification adjustment for net
realized gains included in net income
(net of tax expense) -- -- -- --
------------- ---------------- --------------- --------------
Total comprehensive income -- -- 4,563,465 --
------------- ---------------- --------------- --------------
Reorganization of MHC -- -- 1,675,313 --
Proceeds of stock offering, net 1,238 24,842,903 -- --
Stock options exercised 167 54,691 -- --
Employee stock ownership plan
(ESOP) borrowing -- -- -- --
ESOP shares allocated -- -- -- --
Dividends on common stock
at $.2914 per share (note 11) -- -- (634,558) --
------------- ---------------- --------------- --------------
Balance at June 30, 1999 48,178 35,957,560 36,283,211 --
------------- ---------------- --------------- --------------
Net earnings -- -- 4,875,651 --
Net change in unrealized losses on
securities available-for-sale -- -- -- --
Less: reclassification adjustment for net
realized gains included in net income
(net of tax expense) -- -- -- --
------------- ---------------- --------------- --------------
Total comprehensive income -- -- 4,875,651 --
------------- ---------------- --------------- --------------
Stock options exercised 158 48,398 -- --
Treasury stock acquired -- -- -- (1,930,138)
Recognition and retention plan (RRP) awarded -- 18,250 -- 657,000
Amortization of RRP -- -- -- --
ESOP shares allocated -- -- -- --
Stock depreciation of allocated ESOP shares -- (21,485) -- --
Dividends on common stock
at $.30 per share (note 11) -- -- (1,376,541) --
------------- ---------------- --------------- --------------
Balance at June 30, 2000 $ 48,336 36,002,723 39,782,321 (1,273,138)
============= ================ =============== ==============
<CAPTION>
Accumulated
other
comprehensive Unearned Unearned
income ESOP RRP Total
---------------- ----------------- ------------------- --------------
<S> <C> <C> <C> <C>
Balance at June 30, 1997 $ (72,615) -- -- 38,865,266
---------------- ----------------- ------------------- --------------
Net earnings -- -- -- 3,417,913
Net change in unrealized gains on securities
available-for-sale 306,968 -- -- 306,968
---------------- ----------------- ------------------- --------------
Total comprehensive income 306,968 -- -- 3,724,881
---------------- ----------------- ------------------- --------------
Stock options exercised -- -- -- 58,954
Dividends on common stock
at $.2914 per share (note 11) -- -- -- (629,018)
---------------- ----------------- ------------------- --------------
Balance at June 30, 1998 234,353 -- -- 42,020,083
---------------- ----------------- ------------------- --------------
Net earnings -- -- -- 4,563,465
Net change in unrealized losses on
securities available-for-sale (2,432,261) -- -- (2,432,261)
Less: reclassification adjustment for net
realized gains included in net income
(net of tax expense) (4,276) -- -- (4,276)
---------------- ----------------- ------------------- --------------
Total comprehensive income (2,436,537) -- -- 2,126,928
---------------- ----------------- ------------------- --------------
Reorganization of MHC -- -- -- 1,675,313
Proceeds of stock offering, net -- -- -- 24,844,141
Stock options exercised -- -- -- 54,858
Employee stock ownership plan
(ESOP) borrowing -- (1,844,500) -- (1,844,500)
ESOP shares allocated -- 30,742 -- 30,742
Dividends on common stock
at $.2914 per share (note 11) -- -- -- (634,558)
---------------- ----------------- ------------------- --------------
Balance at June 30, 1999 (2,202,184) (1,813,758) -- 68,273,007
---------------- ----------------- ------------------- --------------
Net earnings -- -- -- 4,875,651
Net change in unrealized losses on
securities available-for-sale (2,112,605) -- -- (2,112,605)
Less: reclassification adjustment for net
realized gains included in net income
(net of tax expense) (28,260) -- -- (28,260)
---------------- ----------------- ------------------- --------------
Total comprehensive income (2,140,865) -- -- 2,734,786
---------------- ----------------- ------------------- --------------
Stock options exercised -- -- -- 48,556
Treasury stock acquired -- -- -- (1,930,138)
Recognition and retention plan (RRP) awarded -- -- (675,250) --
Amortization of RRP -- -- 205,576 205,576
ESOP shares allocated -- 179,158 -- 179,158
Stock depreciation of allocated ESOP shares -- -- -- (21,485)
Dividends on common stock
at $.30 per share (note 11) -- -- -- (1,376,541)
---------------- ----------------- ------------------- --------------
Balance at June 30, 2000 $ (4,343,049) (1,634,600) (469,674) 68,112,919
================ ================= =================== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 2000, 1999, and 1998
<TABLE>
<CAPTION>
2000 1999 1998
---------------- --------------- ---------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $ 4,875,651 4,563,465 3,417,913
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Loans originated for sale to investors (24,583,322) (39,229,306) (24,816,168)
Proceeds from sale of loans originated for sale 24,441,563 39,397,920 24,282,687
Provision for losses on loans and other assets 554,000 365,000 345,000
Depreciation and amortization 2,602,628 1,420,630 814,703
Provision for deferred taxes 61,000 (166,000) 354,000
Net gain on sale of loans (180,240) (295,812) (241,690)
Net loss on sale of securities available-for-sale 169,856 12,141 --
Net gain on sale of branch deposits -- (1,087,884) --
Net (gain) loss on sale of office property
and equipment (108,462) 32,689 (103,936)
Net gain on sale of real estate owned
and held for development (602,134) (179,695) --
Net loan fees deferred 85,339 88,902 230,147
Amortization of premiums and discounts on loans,
mortgage-backed securities, and investment
securities 974,710 102,264 (61,505)
(Increase) decrease in accrued interest receivable (198,157) (220,578) 381,057
Increase in other assets (1,475,968) (368,112) (70,700)
Increase (decrease) in accrued interest payable 125,186 (389,503) 920,719
Decrease in accrued expenses
and other liabilities (212,777) (1,203,050) (370,743)
(Decrease) increase in taxes payable (126,366) 1,153,878 (607,177)
---------------- --------------- ---------------
Net cash provided by operating activities 6,402,507 3,996,949 4,474,307
---------------- --------------- ---------------
Cash flows from investing activities:
Purchase of securities held-to-maturity (519,205) (10,656,182) (21,986,639)
Proceeds from maturities of securities held-to-maturity 6,562,213 20,603,333 24,771,834
Proceeds from sale of securities available-for-sale 8,367,496 4,864,324 --
Purchase of securities available-for-sale (11,060,185) (82,741,656) (43,965,468)
Proceeds from maturities of securities available-for-sale 6,132,470 54,168,500 43,875,540
(Purchase) redemption of FHLB stock (834,600) (623,700) 488,400
Loans purchased (20,861,000) (4,870,000) (13,769,000)
(Increase) decrease in loans receivable (30,475,278) 19,095,423 28,961,591
Proceeds from sale of office property and equipment 182,214 9,147 293,303
Purchase of office property and equipment (1,186,425) (2,922,414) (1,880,935)
Proceeds from sale of foreclosed real estate 2,069,491 975,396 --
Proceeds from sale of real estate held for development 1,316,500 140,987 --
Net expenditures on real estate held for development (821,410) -- --
MHC Reorganization -- 292,474 --
Net cash and cash equivalents of acquisitions -- 7,097,244 (8,195,352)
---------------- --------------- ---------------
Net cash (used in) provided by investing activities (41,127,719) 5,432,876 8,593,274
---------------- --------------- ---------------
</TABLE>
(Continued)
5
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Years ended June 30, 2000, 1999, and 1998
<TABLE>
<CAPTION>
2000 1999 1998
---------------- --------------- ---------------
Cash flows from financing activities:
<S> <C> <C> <C>
Increase (decrease) in deposits $ 7,456,053 (32,750,620) 899,482
Proceeds from advances from FHLB 76,155,665 16,000,000 62,000,000
Repayment of advances from FHLB and other borrowings (40,800,790) (19,176,065) (71,015,544)
Net increase in advances from
borrowers for taxes and insurance 271,157 75,368 365,385
Issuance of common stock, net 48,556 24,898,999 58,954
Purchase of treasury stock (1,930,138) -- --
Cash dividends paid (1,376,541) (634,558) (629,018)
---------------- --------------- ---------------
Net cash provided by (used in) financing activities 39,823,962 (11,586,876) (8,320,741)
---------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents 5,098,750 (2,157,051) 4,746,840
Cash and cash equivalents at beginning of year 15,067,956 17,225,007 12,478,167
---------------- --------------- ---------------
Cash and cash equivalents at end of year $ 20,166,706 15,067,956 17,225,007
================ =============== ===============
Supplemental disclosures:
Cash paid during the year for:
Interest $ 29,688,335 25,253,629 20,455,443
================ =============== ===============
Income taxes $ 2,678,647 1,797,480 1,700,105
================ =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(1) Summary of Significant Accounting Policies and Practices
Organization
First Federal Bankshares, Inc. (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.
Consequently, its net income is derived primarily from the Bank. The
Bank is organized as a federally chartered stock savings bank engaging
in retail and commercial banking and related financial services,
primarily in the Sioux City metropolitan area, adjacent counties,
including parts of Nebraska and South Dakota, and in central Iowa. The
Bank provides traditional products and services of banking, such as
deposits and mortgage, consumer, and commercial loans.
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 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) (2,635,000 common shares at $10.00 resulting in net cash
proceeds after costs and funding the ESOP (note 10) of approximately $23
million), (3) previous public shareholders of the Bank had their shares
exchanged into 2,182,807 common shares of the Company (exchange ratio of
1.64696 to 1) (the Exchange) and (4) the Mutual Holding Company ceased
to exist. The total number of shares of common stock outstanding
following the Offering and Exchange was 4,817,807. The reorganization
was accounted for in a manner similar to a pooling of interests and did
not result in any significant accounting adjustments. 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. and its wholly owned subsidiary, Mid-Iowa Savings Bank,
FSB (note 1: Acquisitions).
Principles of Presentation
The accompanying consolidated financial statements include the accounts
of First Federal Bankshares, Inc., its wholly owned subsidiaries, a real
estate brokerage company, a real estate development company, and the
Bank and the Bank's wholly owned subsidiaries. In consolidation, all
significant intercompany accounts and transactions have been eliminated.
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
and 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.
7
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
Acquisitions
On March 31, 1998, the Company acquired GFS Bancorp, Inc, Grinnell, Iowa
(GFS), parent company of Grinnell Federal Savings Bank. The shareholders
of GFS received $18.1 million cash for all outstanding shares. The
acquisition was accounted for as a purchase; accordingly, GFS's results
of operations were included in the financial statements from the
acquisition date. The excess of the cost over the fair value of the net
identifiable assets of $7.9 million is being amortized on a
straight-line basis over 25 years.
On April 13, 1999, the Company acquired Mid-Iowa Financial Corp.,
Newton, Iowa (Mid-Iowa), parent company of Mid-Iowa Savings Bank. The
shareholders of Mid-Iowa received $28.3 million cash for all outstanding
shares. The acquisition was accounted for as a purchase; accordingly,
Mid-Iowa's results of operations were included in the financial
statements from the acquisition date. The excess of the cost over the
fair value of the net identifiable assets of $12.6 million is being
amortized on a straight-line basis over 25 years.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company includes cash and due
from other financial institutions and interest-bearing deposits with
original maturities of three months or less in cash and cash
equivalents.
Earnings Per Share
Basic earnings per share computations for the years ended June 30, 2000,
1999, and 1998, were determined by dividing net earnings by the
weighted-average number of common shares outstanding during the years
then ended. Diluted net earnings per common share amounts are computed
by dividing net income by the weighted-average number of common shares
and all dilutive potential common shares outstanding during the year.
The average number of common shares have been restated for the stock
conversion in 1999.
8
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
The following information was used in the computation of net income per
common share on both a basic and diluted basis for the years ended June
30, 2000, 1999, and 1998.
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------ ------------
Basic EPS computation:
<S> <C> <C> <C>
Net earnings $ 4,875,651 4,563,465 3,417,913
Weighted-average common shares outstanding 4,552,159 4,714,720 4,668,646
------------- ------------ ------------
Basic EPS $ 1.07 0.97 0.73
============= ============ ============
Diluted EPS computation:
Net earnings $ 4,875,651 4,563,465 3,417,913
------------- ------------ ------------
Weighted-average common shares outstanding 4,552,159 4,714,720 4,668,646
Incremental option shares using
treasury stock method 22,088 32,772 80,798
------------- ------------ ------------
Diluted shares outstanding 4,574,247 4,747,492 4,749,444
------------- ------------ ------------
Diluted EPS $ 1.07 0.96 0.72
============= ============ ============
</TABLE>
Securities
Securities which the Company has the positive intent and ability to hold
to maturity are classified as held to maturity. Such securities are
carried at cost, adjusted for unamortized premiums and unearned
discounts. Premiums are amortized and discounts are accreted using the
interest method over the remaining period to contractual maturity,
adjusted in the case of mortgage-backed securities for actual
prepayments. Original issue discounts on short-term securities are
accreted as accrued interest receivable over the lives of such
securities.
Securities classified as available for sale are carried at estimated
fair value. Unrealized gains and losses on such securities are reported
as a separate component of stockholders' equity, net of deferred taxes.
Realized gains and losses from the sale of securities are recognized
using the specific identification method.
Unrealized losses on securities judged to be other than temporary are
charged to operations.
Loans Receivable
Loans receivable are stated at unpaid principal balances less the
allowances for loan losses and net of deferred loan origination fees and
discounts. Discounts on first mortgage loans are amortized to income
using the interest method over the remaining period to contractual
maturity, adjusted for anticipated prepayments.
9
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
Allowances for Losses on Loans and Real Estate
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 probable credit losses.
Under the Company's credit policies, all loans with interest more than
90 days in arrears and restructured loans are considered impaired loans.
Loan impairment is measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate
except, where more practical, at the observable market price of the loan
or the fair value of the collateral if the loan is collateral dependent.
Real estate acquired is carried at the lower of cost or fair value less
estimated costs of disposition. When a property is acquired through
foreclosure or a loan is considered impaired, any excess of the loan
balance over fair value of the property is charged to the allowance for
losses on loans. When circumstances indicate additional loss on the
property, a direct charge to the provision for losses on real estate is
made, and the real estate is recorded net of such provision.
Accrued interest receivable in arrears which management believes is
doubtful of collection (generally when a loan becomes 90 days
delinquent) is charged to income. Subsequent interest income is not
recognized on such loans until collected or until determined by
management to be collectible.
Financial Instruments with Off Balance Sheet Risk
In the normal course of business to meet the financing needs of its
customers, the Company is a party to financial instruments with off
balance sheet risk, which include commitments to extend credit. The
Company's exposure to credit loss in the event of nonperformance by the
other party to the commitments to extend credit is represented by the
contractual amount of those instruments. The Company uses the same
credit policies in making commitments as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there are no violations of any conditions established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since certain of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company, upon extension of credit is based on
management's credit evaluation of the counterparty.
Unearned Loan Fees and Discounts
Certain fees and direct expenses incurred in the loan origination
process are deferred, with recognition thereof over the contractual life
of the related loan as a yield adjustment using the interest method of
amortization. Any unamortized fees on loans sold are credited to income
in the year such loans are sold.
10
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
Premiums and discounts in connection with mortgage loans purchased are
amortized over the terms of the loans using the interest method.
Office Property and Equipment
Office property and equipment are recorded at cost, and depreciation is
provided primarily on a straight-line basis over the estimated useful
lives of the related assets, which range from 15 to 40 years for office
buildings and from 3 to 10 years for automobiles and equipment.
Maintenance and repairs are charged against income. Betterments are
capitalized and subsequently depreciated. The cost and accumulated
depreciation of properties retired or otherwise disposed of are
eliminated from the asset and accumulated depreciation accounts. Related
profit or loss from such transactions is credited or charged to income.
Excess of Cost Over Fair Value of Assets Acquired
Excess of cost over fair value of assets acquired is being amortized on
a straight-line basis over its estimated useful life of 25 years. The
asset is evaluated by management for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset
may not be recoverable based on facts and circumstances related to the
value of net assets acquired that gave rise to the asset.
Taxes on Income
The Company files a consolidated federal income tax return. Federal
income taxes are allocated based on taxable income or loss included on
the consolidated return. For state tax purposes, the Bank files a
franchise tax return. The Company, its other subsidiaries and the Bank's
subsidiaries file corporate income tax returns.
The Company utilizes the asset and liability method for taxes on income,
and deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes the
enactment date.
Stock Option Plan
The Company provides pro forma net income and pro forma earnings per
share disclosures for material employee stock option grants made as if
the fair-value-based method, which recognizes as expense over the
vesting period the fair value of stock-based awards at the date of
grant, had been applied.
11
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
Reclassifications
Certain amounts previously reported have been reclassified to conform with the
presentation in these consolidated financial statements. These reclassifications
did not affect previously reported net income or retained earnings.
Fair Value of Financial Instruments
The Company's fair value estimates, methods, and assumptions for its financial
instruments are set forth below:
Cash and Cash Equivalents
The recorded amount of cash and cash equivalents approximates fair value.
Securities
The fair value of securities is estimated based on bid prices published
in financial newspapers, bid quotations received from securities dealers,
or quoted market prices of similar instruments, adjusted for differences
between the quoted instruments and the instruments being valued. The fair
value of mortgage-backed and related securities is estimated based on bid
prices published in financial newspapers and bid quotations received from
securities dealers.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as real estate,
consumer, and commercial.
The fair value of loans is calculated by discounting scheduled cash flows
through the estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the loan. The
estimate of maturity is based on the Company's historical experience with
repayments for each loan classification, modified, as required, by an
estimate of the effect of current economic and lending conditions. The
effect of nonperforming loans is considered in assessing the credit risk
inherent in the fair value estimate.
Federal Home Loan Bank Stock
The value of FHLB stock is equivalent to its carrying value because it is
redeemable at par value.
Deposits
The fair value of deposits with no stated maturity, such as
passbook; money market; noninterest bearing checking; and checking
accounts, is equal to the amount payable on demand. The fair value
of certificates of deposit is based on the discounted value of
contractual cash flows. The discount rate is estimated using the
rates currently offered for deposits of similar remaining
maturities. The fair value estimates do not include the benefit
that results from the low-cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the market.
12
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
Advances from Federal Home Loan Bank
The fair value of advances from FHLB is based on the discounted
value of contractual cash flows.
Limitations
Fair value estimates are made at a specific point in time, based
on relevant market information and information about the financial
instrument. Because no market exists for a significant portion of
the Company's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect these
estimates.
Effect of New Accounting Standards
The Company adopted the provisions of SFAS No. 130, Reporting
Comprehensive Income, effective July 1, 1998. SFAS No. 130 establishes
the standards for the reporting and display of comprehensive income in
the financial statements. Comprehensive income represents net income and
certain amounts reported directly in shareholders' equity, such as the
net unrealized gain or loss on available-for-sale securities. The
statement requires additional disclosures in the consolidated financial
statements; it does not affect the Company's financial position or
results of operations.
The Company adopted the provisions of SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information, effective July 1,
1998. SFAS No. 131 establishes disclosure requirements for segment
operations. The adoption had no effect on the Company's financial
statement disclosures because the Company operates as a single business
segment.
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, and its related amendment SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, will be effective for the
Company for the year beginning July 1, 2000. The Company expects to
adopt SFAS No. 133 when required and does not expect such adoption to
have a material effect on the financial statements.
13
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(2) Securities
Following is a schedule of amortized costs and estimated fair values as
of June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Fair
2000 cost gains losses value
------------------------------------------- ---------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Available-for-sale:
Mortgage-backed securities:
Government National Mortgage
Association (GNMA) $ 9,802,075 28,156 69,045 9,761,186
Federal Home Loan Mortgage
Corporation (FHLMC) 2,937,010 -- 60,193 2,876,817
Federal National Mortgage
Association (FNMA) 3,601,857 198 55,057 3,546,998
United States government agency
securities 95,450,189 -- 6,285,497 89,164,692
Other investment securities 12,460,981 99,585 584,197 11,976,369
---------------- ------------- -------------- -------------
$ 124,252,112 127,939 7,053,989 117,326,062
================ ============= ============== =============
Held-to-maturity:
Mortgage-backed securities:
GNMA $ 2,039,098 10,578 44,823 2,004,853
FHLMC 2,293,716 -- 92,555 2,201,161
FNMA 8,770,015 -- 253,220 8,516,795
United Stated government agency
securities 1,109,252 -- 28,780 1,080,472
United States treasury securities 2,009,184 -- 26,137 1,983,047
Local government securities 7,516,046 837 236,206 7,280,677
---------------- ------------- -------------- -------------
$ 23,737,311 11,415 681,721 23,067,005
================ ============= ============== =============
</TABLE>
14
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Fair
1999 cost gains losses value
------------------------------------------- ---------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Available-for-sale:
Mortgage-backed securities:
GNMA $ 15,349,580 92,145 -- 15,441,725
FHLMC 3,864,950 27,604 24,212 3,868,342
FNMA 4,698,895 45,349 26,417 4,717,827
United States government agency
securities 95,373,105 -- 3,681,120 91,691,985
Other investment securities 6,271,867 126,956 71,489 6,327,334
---------------- ------------- -------------- -------------
$ 125,558,397 292,054 3,803,238 122,047,213
================ ============= ============== =============
Held-to-maturity:
Mortgage-backed securities:
GNMA $ 2,637,183 33,031 16,207 2,654,007
FHLMC 3,358,887 -- 38,900 3,319,987
FNMA 11,240,714 37,088 101,274 11,176,528
United Stated government agency
securities 1,174,963 -- 18,987 1,155,976
United States treasury securities 4,015,127 4,580 5,646 4,014,061
Local government securities
and commercial paper 9,579,221 25,574 168,484 9,436,311
---------------- ------------- -------------- -------------
$ 32,006,095 100,273 349,498 31,756,870
================ ============= ============== =============
</TABLE>
15
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
The amortized cost and fair value at June 30, 2000, are shown below by
contractual maturity. Expected maturities will differ from contractual
maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available-for-sale Held-to-maturity
----------------------------------- -----------------------------------
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Due in 1 year or less $ -- -- 673,071 673,306
Due after 1 year through 5 years 7,967,083 7,716,013 4,700,890 4,621,166
Due after 5 years through 10 years 52,105,107 48,941,879 1,584,864 1,540,863
Due after 10 years 47,838,980 44,483,169 3,675,657 3,508,861
----------------- ---------------- ---------------- ----------------
107,911,170 101,141,061 10,634,482 10,344,196
Mortgage-backed securities 16,340,942 16,185,001 13,102,829 12,722,809
----------------- ---------------- ---------------- ----------------
$ 124,252,112 117,326,062 23,737,311 23,067,005
================= ================ ================ ================
</TABLE>
Proceeds from the sale of securities available for sale were $8,367,496,
$4,864,324, and $0 during 2000, 1999, and 1998, respectively. Gross
realized gains on these sales were $3,784, $16,392, and $0 and gross
realized losses on these sales were $173,640, $28,533, and $0 in 2000,
1999, and 1998, respectively.
Securities with an amortized cost of $6,201,129 and a market value of
approximately $5,900,000 at June 30, 2000, were pledged to various
entities.
16
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(3) Loans Receivable
Loans receivable at June 30, 2000 and 1999, are summarized as follows:
2000 1999
-------------- --------------
First mortgage loans:
Secured by one to four family residences $ 325,057,383 326,125,446
Secured by other properties 109,049,175 72,132,208
Home equity and second mortgage loans 35,695,170 32,314,769
Automobile loans 13,801,203 13,602,920
Commercial loans 8,532,865 6,193,496
Other nonmortgage loans 17,545,098 11,016,005
-------------- --------------
509,680,894 461,384,844
Less:
Allowance for loan losses 3,394,448 3,134,664
Undisbursed portion of loans in process 550,160 941,862
Net unearned premiums on loans (1,683,824) (1,994,943)
Deferred loan fees 2,330,546 2,245,207
-------------- --------------
$ 505,089,564 457,058,054
============== ==============
Troubled Debt Restructurings
At June 30, 2000, 1999, and 1998, the Company had nonaccrual loans of
$25,000, $2,064,000, and $1,120,000, respectively, and restructured
loans of $65,000, $32,000, and $694,000, respectively. Interest income
recorded during 2000, 1999, and 1998 on restructured loans was not
materially different than interest income which would have been recorded
if these loans had been current in accordance with their original terms.
Interest forgone on nonaccrual loans was $1,250 in 2000; $50,259 in
1999; and $48,293 in 1998.
Loan Servicing
The Company originates mortgage loans for portfolio investment or sale
in the secondary market. During the period of origination, mortgage
loans are designated as held either for sale or for investment purposes.
Mortgage loans held for sale are carried at the lower of cost or market
value, determined on an aggregate basis.
17
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal
balance of these loans was $42,865,542, $46,079,709, and $54,669,613 at
June 30, 2000, 1999, and 1998, respectively. Servicing loans for others
generally consists of collecting mortgage payments, maintaining escrow
accounts, disbursing payments to investors and foreclosure processing.
Loan servicing income is recorded on the accrual basis and includes
servicing fees from investors and certain charges collected from
borrowers, such as late payment fees. In connection with these loans
serviced for others, the Company held borrowers' escrow balances of
$110,483, $142,002, and $158,660, at June 30, 2000, 1999, and 1998,
respectively.
Concentrations of Credit Risk
The Company conducts the majority of its loan origination activities in
its market area, which includes Northwest and Central Iowa and portions
of Nebraska and South Dakota. In addition to loan origination, the
Company has purchased loans outside of its primary lending area.
Although the Company has a diversified loan portfolio, a substantial
portion of its borrowers' ability to repay their loans is dependent upon
economic conditions in the Company's market area.
Loans purchased outside of the Company's primary lending area totaled
approximately $108.0 million at June 30, 2000, and included
approximately $90.2 million in loans that are geographically distributed
in the Midwestern United States. The remaining loans are distributed
throughout the United States, with the largest geographic concentrations
including Colorado with $10.4 million; Connecticut with $2.3 million;
Arizona with $1.1 million; and Georgia with $1.0 million.
Included in the totals of loans purchased outside of the Company's
primary lending area are loans purchased from a mortgage banking firm
headquartered in Madison, Wisconsin. The Company has an exclusive
agreement with this firm, which gives the Company first right of refusal
on any real estate loans generated, including one-to-four family,
multi-family, commercial real estate and land development loans secured
by properties located primarily in the Madison, Wisconsin metropolitan
area. The Company has sold, and anticipates that it will continue to
sell, participation interests in these loans to other financial
institutions located in Iowa and contiguous states. At June 30, 2000 the
outstanding principal balance of loans purchased under the above
agreement was approximately $89.0 million and partial interests in these
balances sold to other financial institutions totaled approximately
$26.7 million.
(4) Allowance for Loan Losses
A summary of the allowance for loan losses follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------------- ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year $ 3,134,664 2,607,167 1,795,791
Additions related to acquisitions - 325,143 801,486
Provision for losses 554,000 365,000 345,000
Charge-offs (380,133) (247,118) (422,140)
Recoveries 85,917 84,472 87,030
-------------- ------------ ------------
Balance at end of year $ 3,394,448 3,134,664 2,607,167
============== ============ ============
</TABLE>
18
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(5) Office Property and Equipment
At June 30, 2000 and 1999, the cost and accumulated depreciation of
office property and equipment were as follows:
2000 1999
------------ ------------
Office property and equipment:
Land and improvements $ 3,260,070 3,291,997
Building and improvements 13,304,698 12,884,351
Furniture, fixtures, equipment, and
automobiles 5,693,880 5,406,179
Deposits on assets not in service and not
depreciated 10,658 106,994
------------ ------------
Total cost - office properties 22,269,306 21,689,521
Less accumulated depreciation 6,954,401 6,277,703
------------ ------------
Office property and equipment, net $15,314,905 15,411,818
============ ============
(6) Accrued Interest Receivable
Accrued interest receivable is summarized as follows:
2000 1999
------------ ------------
Loans receivable $ 2,891,828 2,674,732
Securities 1,908,587 1,927,526
------------ ------------
$ 4,800,415 4,602,258
============ ============
19
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(7) Deposits
At June 30, 2000 and 1999, deposits are summarized as follows:
2000 1999
---------------- ----------------
Noninterest-bearing checking $ 12,779,090 14,211,299
Savings accounts 28,839,342 35,109,373
Demand and NOW accounts 59,685,156 45,881,367
Money market accounts 77,364,537 81,952,541
Certificates of deposit 292,957,406 287,014,898
---------------- ----------------
$ 471,625,531 464,169,478
================ ================
The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was approximately $28,200,000 and 28,153,000 at
June 30, 2000 and 1999, respectively.
At June 30, 2000, the scheduled maturities of certificates of deposit
were as follows:
2001 $ 179,085,393
2002 60,105,539
2003 42,822,219
2004 8,644,250
2005 and thereafter 2,300,005
-------------
$ 292,957,406
=============
Interest expense on deposits is summarized as follows:
2000 1999 1998
--------------- -------------- ---------------
Savings $ 474,073 505,205 656,199
Money market and checking 4,350,896 3,614,159 2,301,888
Certificates of deposit 15,695,371 13,764,749 12,868,671
--------------- -------------- ---------------
$ 20,520,340 17,884,113 15,826,758
=============== ============== ===============
At June 30, 2000 and 1999, accrued interest payable on deposits totaled
$4,230,016 and $4,155,544, respectively.
20
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(8) Advances from FHLB
A summary at June 30, 2000 and 1999, follows:
<TABLE>
<CAPTION>
Weighted- Weighted-
average average
interest rate 2000 interest rate 1999
----------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
FHLB of Des Moines (A)
Stated maturity in fiscal year
ending June 30:
2000 - % $ - 5.88 % $ 18,500,000
2001 (B) 6.46 52,458,483 6.06 27,450,000
2002 6.54 13,007,397 6.17 14,000,000
2003 6.24 13,000,000 5.90 21,000,000
2004 5.91 3,000,000 5.91 3,000,000
2005 and thereafter (C) 5.54 50,580,596 5.35 45,892,573
--------------- ---------------
132,046,476 129,842,573
Amortizing advances 5.36 5,474,023 5.36 5,774,812
Fed Funds advance with FHLB (D) Variable 23,500,000 2,000,000
LIBOR advances with FHLB (E) Variable 13,000,000 1,000,000
--------------- ---------------
$ 174,020,499 $ 138,617,385
=============== ===============
</TABLE>
(A) Advances from the FHLB are secured by stock in the FHLB. In
addition, the Company has agreed to maintain unencumbered
additional security in the form of certain residential mortgage
loans aggregating no less than 130% of outstanding balances.
(B) Includes one FHLB short-term Repo Advance for year 2000 that
matures on July 11, 2000 in the amount of $25,000,000. The
interest on this advance is due at maturity at a rate of 6.71%;
and, the term is 14 days.
21
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(C) Consists of FHLB Convertible advances. Convertible advances are
advances that the FHLB may terminate and require the Company to
repay prior to the stated maturity date of the advance. Usage of
this type of advance is limited to 15% of the Company's total
assets by the FHLB. At June 30, 2000 the advances included in this
maturity range are callable after an initial lock-out period
according to the following schedule:
<TABLE>
<CAPTION>
Weighted- Weighted-
average average
interest rate 2000 interest rate 1999
-------------- --------------- -------------- ---------------
Callable in fiscal year
ending June 30:
<S> <C> <C> <C> <C>
2000 -- % $ -- 4.79 % $ 3,000,000
2001 5.31 6,000,000 5.13 3,000,000
2002 5.04 6,000,000 5.04 6,000,000
2003 5.45 20,961,107 5.45 20,975,123
2004 5.89 17,619,489 5.50 12,917,450
--------------- ---------------
$ 50,580,596 $ 45,892,573
=============== ===============
</TABLE>
(D) The Fed Funds Advance does not require the Company to establish a
committed line to obtain an advance. The Fed Funds Advance rate on
new borrowings is based on the Fed Funds Market rate at the time
of borrowing. There are no minimum advance amounts, no commitment
fees and no prepayment penalties. Outstanding Fed Funds Advances
automatically renew each day and are repriced based on the FHLB's
return on overnight investments. Fed Funds Advances have no stated
maturity and may be prepaid at will. During 2000, the interest
rate at which these advances repriced ranged from 4.23% to 7.41%
and at June 30, 2000 was 7.41%. Fed Funds Advances are
collateralized as described in (A) above.
(E) London Interbank Offered Rate (LIBOR) advances from the FHLB are
collateralized as described in (A) above. Four advances totaling
$12 million mature in the fiscal year ending June 30, 2001 and
accrue interest at rates ranging from .045% below to .03% above
the published LIBOR rate, adjusted monthly. The remaining $1
million LIBOR advance matures July 2, 2012; is callable
semi-annually by the FHLB; and accrues interest at a rate of .04%
below the published LIBOR rate, adjusted monthly. LIBOR advances
are prepayable at any time; however, the Company is required to
reimburse the FHLB for any actual open market transaction costs
that the FHLB sustains because of the prepayment.
At June 30, 2000 and 1999, accrued interest payable on advances
from FHLB totaled $67,498 and $16,784, respectively.
22
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(9) Taxes on Income
Taxes on income for the years ended June 30, 2000, 1999, and 1998, were
comprised as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------------------------- --------------------------------------------
Federal State Total Federal State Total
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Current $ 2,234,000 346,000 2,580,000 2,482,000 384,000 2,866,000
Deferred 53,000 8,000 61,000 (144,000) (22,000) (166,000)
------------- ------------- ------------- ------------- ------------- -------------
$ 2,287,000 354,000 2,641,000 2,338,000 362,000 2,700,000
============= ============= ============= ============= ============= =============
<CAPTION>
1998
-----------------------------------------
Federal State Total
------------- ----------- -------------
<S> <C> <C> <C>
Current $ 1,315,000 205,000 1,520,000
Deferred 308,000 46,000 354,000
------------- ----------- -------------
$ 1,623,000 251,000 1,874,000
============= =========== =============
</TABLE>
Taxes on income differ from the amounts computed by applying the federal
income tax rate of 34% to earnings from continuing operations before
taxes on income for the following reasons:
2000 1999 1998
-------------- -------------- -------------
Computed "expected" tax expense $ 2,555,661 2,469,578 1,799,250
Purchase accounting adjustments 278,000 144,000 (14,000)
Nontaxable interest income (131,000) (66,000) --
State income taxes 233,640 287,100 165,660
Other, net (295,301) (134,678) (76,910)
-------------- -------------- -------------
$ 2,641,000 2,700,000 1,874,000
============== ============== =============
23
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June
30, 2000 and 1999, are presented below:
<TABLE>
<CAPTION>
2000 1999
--------------- ---------------
Deferred tax assets:
<S> <C> <C>
Deferred loan fees $ 123,000 185,000
Allowance for loan losses 1,072,000 1,058,000
Unrealized loss on securities available-for-sale 2,583,000 1,357,000
Deferred compensation 153,000 493,000
Accrued vacation pay 104,000 92,000
Deferred directors fees 95,000 78,000
Accrued expenses 1,000 79,000
Other 24,000 43,000
--------------- ---------------
Total gross deferred tax assets 4,155,000 3,385,000
--------------- ---------------
Deferred tax liabilities:
FHLB stock dividends (725,000) (725,000)
Bad debt reserves in excess of base year (307,000) (403,000)
Fixed assets (235,000) (190,000)
Purchase accounting adjustments (526,000) (870,000)
--------------- ---------------
Total gross deferred tax liabilities (1,793,000) (2,188,000)
--------------- ---------------
Net deferred tax asset $ 2,362,000 1,197,000
=============== ===============
</TABLE>
Based upon the Company's level of historical taxable income and
anticipated future taxable income over the periods which the deferred
tax assets are deductible, management believes it is more likely than
not the Company will realize the benefits of these deductible
differences.
(10) Employee Benefit Plans
Pension Plan
The Bank is a participant in the Financial Institutions Retirement Fund
(FIRF), and substantially all of its officers and employees are covered
by the plan. FIRF does not segregate the assets, liabilities, or costs
by participating employer. According to FIRF's administrators, as of
June 30, 1999, the date of the latest actuarial valuation, the book and
market values of the fund assets exceeded the value of vested benefits
in the aggregate. In accordance with FIRF's instructions, there was no
pension contribution in 2000, 1999, and 1998 because the plan was fully
funded.
24
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
Profit Sharing Plan
Bank employees participate in the First Federal Bank Employees' Savings
& Profit Sharing Plan and Trust (the Profit Sharing Plan). Employees who
are at least 21 years of age become eligible for participation after 12
months of continuous employment (during which at least 1,000 hours of
service are completed). The Bank matches an amount equal to 25% of the
first 4% of the employee's contributions. Profit Sharing Plan expense
for the years ended June 30, 2000, 1999, and 1998 was $42,619. $40,895,
and $29,213, respectively.
ESOP
In July, 1992, as part of the reorganization to the stock form of
ownership, the Bank's Employee Stock Ownership Plan (ESOP) purchased
143,809 shares of the Company's common stock at $3.066 per share, or
$441,000, which was funded by a loan from an unaffiliated lender. This
loan was paid off in December, 1996, and the shares were fully allocated
to participants at June 30,1998. In April, 1999, as part of the
reorganization and conversion of First Federal Bankshares, M.H.C., the
Bank's ESOP purchased 184,450 shares of the Company's common stock at
$10 per share, which was funded by a 15-year, 7% loan from the Company.
Quarterly principal payments of $30,742 commenced on June 30, 1999. All
employees meeting the age and service requirements are eligible to
participate in the ESOP. Contributions made by the Bank to the Plan are
allocated to participants by using a formula based on compensation.
Participant benefits become 100% vested after five years of service. The
ESOP is accounted for under "Employers' Accounting for Employee Stock
Ownership Plans" (SOP 93-6). Dividends paid on unallocated shares reduce
the Company's cash contributions to the ESOP. The ESOP's borrowing from
the Company is eliminated in consolidation.
At June 30, 2000 and 1999, allocated shares were 125,945 and 121,999,
respectively. Shares committed to be released were 8,075 and 3,827,
respectively. The fair value of the 163,460 and 180,623 unallocated
shares was approximately $1.3 million and $1.7 million, respectively.
Plan expense was $157,403, $58,822, and $96,000 for the years ending
June 30, 2000, 1999, and 1998, respectively. Interest expense was
$123,359, $27,592, and $0 on the Plan's borrowing for the years ending
June 30, 2000, 1999, and 1998.
Stock Appreciation Rights
In connection with the acquisition of GFS certain GFS stock options were
exchanged for Company stock appreciation rights (SAR). The SAR entitled
the holder to receive a cash payment equal to the appreciation in value
of the SAR over a base amount. At June 30, 1998, the Company's liability
for SAR was approximately $947,000 and SAR expense for the three months
then ended was approximately $23,000. The Company received a benefit to
earnings of approximately $82,000 regarding the SAR before they were
extinguished with a cash payment to the holders of $864,500 during the
year ended June 30, 1999.
Stock Options
The Company's 1992 stock option plan permitted the board of directors to
grant options to purchase up to 124,510 shares of the Company's $.01 par
value common stock. The options may be granted to directors and officers
of the Company. The price at which options may be exercised cannot be
less than the fair value of the shares at the date the options are
granted. The options are subject to certain vesting requirements and
maximum exercise periods, as established by the board of directors. At
June 30, 2000, the Company had 15,420 options yet to be granted under
this plan.
25
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
In October 1999, the Company established the 1999 stock option plan
(1999 Plan). The Company's 1999 Plan permits the board of directors to
grant options to purchase up to 263,500 shares of the Company's $.01 par
value common stock. The options may be granted to directors and officers
of the Company. The price at which options may be exercised cannot be
less than the fair value of the shares at the date the options are
granted. The options are subject to certain vesting requirements and
maximum exercise periods, as established by the board of directors.
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its stock options in the
financial statements. Had compensation cost for the Company's stock
option plans been determined consistent with SFAS 123, the Company's net
income and earnings per share for options granted in 2000 would have
been reduced to the pro forma amounts indicated below:
2000
----------------
Net income:
As reported $ 4,875,651
Pro forma 4,828,003
Basic earnings per share:
As reported $ 1.07
Pro forma 1.06
Diluted earnings per share:
As reported $ 1.07
Pro forma 1.06
The fair value of each option grant has been estimated using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2000: dividend yield of 3.41%; expected
volatility of 22.76%; risk free interest rate of 6.29%; and expected
life of 7.5 years. There were no options granted in 1999.
26
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
Changes in options outstanding and exercisable during 2000, 1999, and
1998, as restated for stock distributions and the stock conversion, were
as follows:
Exercisable Outstanding Option price
options options per share
------------------- ------------------ ------------------
June 30, 1997 55,791 80,478 $ 3.066 - 5.213
Granted -- 9,058 20.341
Vested 28,805 -- 3.066 - 20.341
Exercised (19,227) (19,227) 3.066
------------------- ------------------
June 30, 1998 65,369 70,309 3.066 - 20.341
Vested 1,647 -- 20.341
Exercised (16,750) (16,750) 3.066 - 5.213
------------------- ------------------
June 30, 1999 50,266 53,559 3.066 - 20.341
Granted -- 240,000 9.250
Forfeited -- (1,000) 9.250
Vested 6,647 -- 9.250 - 20.341
Exercised (15,837) (15,837) 3.066
------------------- ------------------
June 30, 2000 41,076 276,722 3.066 - 20.341
=================== ==================
Recognition and Retention Plan
In October 1999, the Company established the 1999 Recognition and
Retention Plan (RRP) for certain executive officers. The Company
contributed funds to the RRP to acquire 79,050 or 3% of the shares of
common stock sold in the Offering in April 1999. On October 21, 1999,
the Company awarded 73,000 shares of RRP stock to certain officers and
directors. The shares of stock vest over a five year period. RRP expense
for the year ended June 30, 2000 was $205,576.
(11) Stockholders' Equity
Regulatory Capital Requirements
The Financial Institution Reform, Recovery, and Enforcement Act of 1989
(FIRREA) and the capital regulations of the OTS promulgated thereunder
require institutions to have minimum regulatory tangible capital equal
to 1.5% of total assets, a minimum 3% leverage capital ratio, and a
minimum 8% risk-based capital ratio. These capital standards set forth
in the capital regulations must generally be no less stringent than the
capital standards applicable to national banks. FIRREA also specifies
the required ratio of housing-related assets in order to qualify as a
savings institution.
27
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) established additional capital requirements which require
regulatory action against depository institutions in one of the
undercapitalized categories defined in implementing regulations.
Institutions such as the Bank, which are defined as well capitalized,
must generally have a leverage capital (core) ratio of at least 5%, a
tier risk-based capital ratio of at least 6%, and a total risk-based
capital ratio of at least 10%. FDICIA also provides for increased
supervision by federal regulatory agencies, increased reporting
requirements for insured depository institutions, and other changes in
the legal and regulatory environment for such institutions.
The Bank met all regulatory capital requirements at June 30, 2000 and
1999.
The Bank's actual and required capital amounts and ratios as of June 30,
2000, are presented in the following table:
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
--------------------------- --------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------- ---------- --------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $ 47,147,000 6.7% $ 10,551,000 1.5% $ -- --%
Tier 1 leverage (core) capital 47,147,000 6.7 21,102,000 3.0 35,170,000 5.0
Risk-based capital 50,541,000 12.5 32,438,000 8.0 40,548,000 10.0
Tier 1 risk-based capital 47,147,000 11.6 -- -- 24,125,000 6.0
=============== ========== =============== ========== ============== ==========
</TABLE>
Retained earnings at June 30, 2000 and 1999, included approximately
$9,165,000 in each year, which constitute allocations to bad debt
reserves for federal income tax purposes and for which no provision for
taxes on income has been made. If such allocations are charged for other
than bad debt losses, taxable income is created to the extent of the
charges.
Dividends and Restrictions Thereon
On July 19, 2000, the board of directors of the Company declared a
dividend of 8(cent) per share, payable on August 31, 2000, to
shareholders of record as of August 17, 2000.
The Plan of Conversion (note 1) provided for the establishment of a
special "liquidation account" for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders in an amount equal to
the greater of:
1. the sum of the Mutual Holding Company's ownership interests in
the surplus and reserves of the Bank as of the date of its latest
balance sheet contained in the final offering circular, and the
amount of any dividends waived by the Mutual Holding Company; or
2. the retained earnings of the Bank at the time that the Bank
reorganized into the Mutual Holding Company in July 1992.
28
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
Each eligible Account Holder and Supplemental Eligible Account Holder,
if such person were to continue to maintain such person's deposit
account at the Bank, would be entitled, upon a complete liquidation of
the Bank after the conversion, to an interest in the liquidation account
prior to any payment to the Company as the sole stockholder of the Bank.
Federal regulations impose certain limitations on the payment of
dividends and other capital distributions by the Bank. Under these
regulations, a savings institution, such as the Bank, that will meet the
fully phased-in capital requirements (as defined by OTS regulations)
subsequent to a capital distribution is generally permitted to make such
a capital distribution without OTS approval, subject to certain
limitations and restrictions as described in the regulations. A savings
institution with total capital in excess of current minimum capital
requirements but not in excess of the fully phased-in requirements is
permitted by the new regulations to make, without OTS approval, capital
distributions of between 25% and 75% of its net earnings for the
previous four quarters less dividends already paid for such period. A
savings institution that fails to meet current minimum capital
requirements is prohibited from making any capital distributions without
prior approval from the OTS. The Bank's current compliance with fully
phased-in capital requirements would permit payment of dividends upon
notice to the OTS.
(12) Financial Instruments with Off Balance Sheet Risk
The Company is a party to various transactions with off balance sheet
risk in the normal course of business. These transactions are primarily
commitments to originate loans. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the
amount recorded in the consolidated financial statements.
At June 30, 2000 and 1999, the Company had commitments to originate and
purchase loans approximating $22,691,000 and $18,432,000, respectively,
excluding undisbursed portions of loans in process. Commitments, which
are disbursed subject to certain limitations, extend over various
periods of time. Generally, unused commitments are canceled upon
expiration of the commitment term as outlined in each individual
contract. Because the credit worthiness of each customer is reviewed
prior to extension of the commitment, the Company adequately controls
its credit risk on these commitments, as it does for loans recorded on
the statement of financial condition.
The Company had approved, but unused, consumer lines of credit of
approximately $13,798,000 and $13,273,000 at June 30, 2000 and 1999,
respectively. At both dates, approximately 58% of the consumer lines
outstanding were for the Company's credit card program. The Company had
approved, but unused, commercial lines of credit of approximately
$5,637,000 and $1,906,000 at June 30, 2000 and 1999, respectively.
At June 30, 2000 and 1999, the Company had commitments to sell loans
approximating $1,707,000 and $4,091,000, respectively.
29
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(13) Fair Value of Financial Instruments
The estimated fair values of Company's financial instruments (as
described in note 1) were as follows:
<TABLE>
<CAPTION>
2000 1999
-------------------------------------- ------------------------------------
Carrying Fair Carrying Fair
amount value amount value
------------------- ----------------- ----------------- -----------------
Financial assets:
<S> <C> <C> <C> <C>
Cash and due from banks $ 16,611,443 16,611,443 13,220,130 13,220,130
Interest-bearing deposits in other
financial institutions 3,555,263 3,555,263 1,847,826 1,847,826
Investment securities available-for-sale 117,326,062 117,326,062 122,047,213 122,047,213
Investment securities held-to-maturity 23,737,311 23,067,005 32,006,095 31,756,870
Loans receivable, net 505,089,564 498,682,000 457,058,054 459,470,000
FHLB stock 8,928,900 8,928,900 8,094,300 8,094,300
Financial liabilities:
Deposits 471,625,531 471,625,531 464,169,478 464,169,478
Other borrowings 174,020,499 171,247,000 138,617,385 139,136,000
=================== ================= ================= =================
Notional Unrealized Notional Unrealized
Amount gain (loss) Amount gain (loss)
------------------- ----------------- ----------------- -----------------
Off balance sheet assets (liabilities):
Commitments to extend credit $ 22,691,000 -- 18,432,000 --
Consumer lines of credit 13,798,000 -- 13,273,000 --
Commercial lines of credit 5,637,000 -- 1,906,000 --
Commitments to sell loans (1,707,000) -- (4,091,000) --
=================== ================= ================= =================
</TABLE>
(14) Contingencies
The Company is involved with various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's financial position or results of its operations.
(15) Parent Company Financial Information
Condensed Statements of Financial Condition at June 30, 2000 and 1999,
and Condensed Statements of Operations and Cash Flows for the year ended
June 30, 2000 and for the period April 13, 1999 through June 30, 1999
are shown below for First Federal Bankshares, Inc. which was formed on
April 13, 1999 in a reorganization accounted for in a manner similar to
a pooling of interest.
30
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
<TABLE>
<CAPTION>
Assets 2000 1999
-------------- ---------------
<S> <C> <C>
Cash deposited at First Federal Bank $ 154,567 271,460
Interest-bearing deposits in other financial institutions 1,555,263 1,847,826
Investment securities available-for-sale
at fair value 2,645,614 1,857,571
Loans receivable, net 1,676,958 2,013,758
Investment in subsidiaries 61,962,455 62,340,692
Accrued interest receivable 36,844 6,508
Other assets 87,840 7,790
-------------- ---------------
Total assets $ 68,119,541 68,345,605
============== ===============
Liabilities and Stockholders' Equity
Liabilities:
Accrued taxes on income $ (9,378) 22,000
Accrued expenses and other liabilities 16,000 50,598
-------------- ---------------
Total liabilities 6,622 72,598
-------------- ---------------
Stockholders' Equity:
Preferred stock; $.01 par value:
authorized 1,000,000 shares; none issued -- --
Common stock; $.01 par value; 12,000,000 shares
authorized ; 4,833,608 and 4,817,807 shares issued
and outstanding at June 30, 2000 and 1999, respectively 48,336 48,178
Additional paid in capital 36,002,723 35,957,560
Retained earnings 39,782,321 36,283,211
Treasury stock (1,273,138) --
Accumulated other comprehensive income -
net unrealized loss on securities
available-for-sale (4,343,049) (2,202,184)
Unearned ESOP (1,634,600) (1,813,758)
Unearned RRP (469,674) --
-------------- ---------------
Total stockholders' equity 68,112,919 68,273,007
-------------- ---------------
Total liabilities and stockholders' equity $ 68,119,541 68,345,605
============== ===============
</TABLE>
31
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
Condensed Statements of Operations
Year ended June 30, 2000 and for the period April 13, 1999 through June 30, 1999
<TABLE>
<CAPTION>
For the period
April 13, 1999
Year ended through
June 30, 2000 June 30, 1999
------------------- --------------------
Interest income:
<S> <C> <C>
Loans receivable $ 129,710 31,581
Investment securities 113,829 6,044
Other interest-earning assets 127,267 33,415
Other general and administrative expense (211,928) (9,702)
------------------- --------------------
Earnings before income taxes 158,878 61,338
Taxes on income 54,000 22,000
------------------- --------------------
Earnings before subsidiary income 104,878 39,338
Equity in undistributed earnings of subsidiaries 4,770,773 1,065,412
------------------- --------------------
Net income $ 4,875,651 1,104,750
=================== ====================
</TABLE>
32
(Continued)
<PAGE>
FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
For the period
April 13, 1999
Year ended through
June 30, 2000 June 30, 1999
------------------- --------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 4,875,651 1,104,750
Adjustments to net income:
Equity in undistributed earnings of subsidiaries (4,770,773) (1,065,412)
(Decrease) increase in income tax payable (31,378) 22,000
(Decrease) increase in payable to First Federal Bank (2,598) 2,598
Increase in other assets (43,050) (7,790)
Amortization of premiums and discounts 10,699 200
Increase in accrued interest receivable (30,336) (6,508)
Increase in accrued expense and other liabilities 16,000 --
------------------- --------------------
Net cash provided by operating activities 24,215 49,838
------------------- --------------------
Cash flows from investing activities:
Purchase of investment securities
available-for-sale (1,025,000) (1,113,875)
Decrease (increase) in loans receivable 336,800 (1,813,758)
------------------- --------------------
Net cash used by investing activities (688,200) (2,927,633)
------------------- --------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 48,556 24,844,141
Purchase of treasury stock (1,930,138) --
Cash dividends paid (1,376,541) --
Dividends received from (investment in) subsidiaries 3,512,652 (19,847,060)
------------------- --------------------
Net cash provided by financing activities 254,529 4,997,081
------------------- --------------------
Net (decrease) increase in cash and cash equivalents (409,456) 2,119,286
Cash and cash equivalents - beginning of period 2,119,286 --
------------------- --------------------
Cash and cash equivalents - end of period $ 1,709,830 2,119,286
=================== ====================
</TABLE>
33
(Continued)
