[FIRST FEDERAL BANCORPORATION LOGO]
ANNUAL REPORT FOR
THE YEAR ENDED
SEPTEMBER 30, 2000
<PAGE>
[FIRST FEDERAL BANCORPORATION LETTER]
December 18, 2000
To Our Stockholders:
It gives me great pleasure to give you our progress and profitability report for
First Federal Bancorporation and its principal subsidiary, First Federal Bank.
This report represents an exciting and productive year at First Federal.
Total consolidated net earnings for the year ended September 30, 2000 was
$889,642. Net income increased 15.48% over 1999 levels primarily due to an
increase in net interest income and increased reliance on fee income.
Consolidated stockholders' equity was $12,813,341 at September 30, 2000 which
represents 9.14% of total assets.
We are pleased to report the following positive changes during the new
millennium:
o Our banking subsidiary, First Federal Bank, completed the change to the
year 2000 without any problems.
o In late 1999, First Federal Bank introduced our new website, customer
Internet banking products and transactional website.
o First Federal Bank announced its agreement with WalMart to open a banking
office in Bemidji at the WalMart Supercenter in late 2001.
o First Federal Bancorporation completed its previously announced repurchase
of its common stock with 1,280,152 shares outstanding.
Thank you for your support and we pledge our continuing effort toward enhancing
shareholder value.
Sincerely,
/s/ William R. Belford
William R. Belford
President
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AT SEPTEMBER 30, CHANGE
-------------------------- --------------------
2000 1999 AMOUNT PERCENT
-------- -------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL POSITION:
Total assets......................................... $ 140,218 $ 132,290 $ 7,928 5.99%
Loans receivable, net................................ 70,754 57,257 13,497 23.57
Securities available for sale........................ 25,211 31,272 (6,061) (19.38)
Securities held to maturity.......................... 33,735 33,809 (74) (0.22)
Deposits............................................. 88,900 88,111 789 0.90
Stockholders' equity................................. 12,813 13,061 (248) (1.90)
Number of common shares issued....................... 1,280,152 1,431,069 (150,917) (10.55)
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
AT SEPTEMBER 30, CHANGE
-------------------------- --------------------
2000 1999 AMOUNT PERCENT
-------- -------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Interest income...................................... $ 9,575 $ 8,756 $ 819 9.35%
Interest expense..................................... 5,816 5,133 683 13.31
Net interest income.................................. 3,759 3,623 136 3.75
Provision for loan losses............................ 45 98 (53) (54.08)
Net interest income after provision
for loan losses.................................... 3,714 3,525 189 5.36
Non-interest income.................................. 782 567 215 37.92
Non-interest expense................................. 3,067 2,849 218 7.65
Earnings before income taxes......................... 1,429 1,243 186 14.96
Net earnings......................................... 890 770 120 15.58
</TABLE>
1
<PAGE>
SELECTED FINANCIAL INFORMATION
SUMMARY OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------------------------
2000 1999 1998 1997 1996
----- ------ ------ ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets..................................... $ 140,218 $ 132,290 $125,251 $111,492 $ 107,256
Loans receivable, net...................... 70,754 57,257 56,064 53,589 51,003
Investment securities:
Available for sale......................... 13,633 16,071 19,732 28,757 25,750
Held to maturity........................... 33,576 33,574 22,992 -- --
Mortgage-backed and related securities:
Available for sale......................... 11,578 15,201 17,101 18,834 19,903
Held to maturity........................... 159 234 307 530 846
Deposit accounts............................. 88,900 88,111 85,866 83,003 81,047
Advances from FHLB........................... 31,363 24,957 20,457 9,534 6,943
Other borrowings............................. 5,562 4,701 4,435 4,697 4,955
Stockholders' equity......................... 12,813 13,061 13,082 11,941 12,323
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
----- ------ ------ ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income.............................. $ 9,575 $ 8,756 $ 8,520 $ 7,891 $ 7,429
Interest expense............................. 5,816 5,133 4,906 4,457 4,016
---------- --------- -------- -------- ---------
Net interest income before
provision for loan losses.................. 3,759 3,623 3,614 3,434 3,413
Provision for loan losses.................... 45 98 153 -- --
Non-interest income.......................... 782 567 651 571 533
Non-interest expense......................... 3,067 2,849 2,811 2,805 3,414
---------- --------- -------- -------- ---------
Income before income tax expense............. 1,429 1,243 1,301 1,200 532
Income tax expense........................... 539 473 487 492 216
---------- --------- -------- -------- ---------
Net income................................... $ 890 $ 770 $ 814 $ 708 $ 316
========== ========= ======== ======== =========
Per Share Data:
Basic earnings per share.................. $ .83 $ .66 $ .70 $ .58 $ .20
Diluted earnings per share................ .82 .64 .65 .56 .19
Book value................................... 12.10 10.56 10.09 9.05 8.25
</TABLE>
2
<PAGE>
KEY OPERATING RATIOS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
----- ------ ------ ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Return on assets (net earnings divided
by average total assets)................... .65% 0.60% 0.69% 0.65% 0.31%
Return on equity (net earnings
divided by average equity)................. 6.95 5.85 6.60 5.87 2.31
Tangible-equity-to-assets ratio
(average equity divided by
average total assets)...................... 9.42 10.22 10.44 11.10 13.25
Interest rate spread......................... 2.47 2.61 2.87 2.94 3.02
Net interest margin (1)...................... 2.90 2.94 3.23 3.32 3.51
Non-performing loans to total loans (2)...... .56 0.75 0.90 0.17 0.41
Non-performing assets to total assets (3).... .48 0.53 0.53 0.32 0.38
Allowance for loan losses to total loans..... .72 0.95 0.86 0.78 0.87
Allowance for loan losses to
non-performing loans....................... 128.78 126.14 96.14 464.13 214.93
Net charge-offs to average loans............. .13 0.07 0.15 0.05 0.08
Non-interest expense to average assets....... 2.26 2.21 2.38 2.58 3.30
Average interest-earning assets to
average interest-bearing
liabilities................................ 109.57 107.83 108.32 108.73 111.96
<FN>
____________
(1) Net interest income/average interest earning assets.
(2) Includes non-accruing loans and loans delinquent 90 days or more.
(3) Includes non-performing loans and real estate owned.
</FN>
</TABLE>
Note: The following discussion is provided to assist readers in their
understanding of the consolidated financial statements of First Federal
Bancorporation. This discussion should be read in conjunction with the
consolidated financial statements and other financial information presented
elsewhere in this report.
3
<PAGE>
BUSINESS OF THE COMPANY AND THE BANK
FIRST FEDERAL BANCORPORATION
First Federal Bancorporation (the "Company") was incorporated under the
laws of the State of Minnesota in September 1994 at the direction of the Board
of Directors of First Federal Banking & Savings, FSB ("First Federal" or the
"Bank") for the purpose of serving as a savings and loan holding company of the
Bank upon the acquisition of all of the capital stock issued by the Bank upon
its conversion from the mutual to the stock form of ownership (the
"Conversion"). On April 3, 1995, the Bank completed the Conversion and the
Company completed its offering of Common Stock through the sale and issuance of
1,940,625 shares of Common Stock at a price of $4.44 per share realizing gross
proceeds of $8.63 million and net proceeds of $7.96 million. Since the
Conversion, the Company has repurchased 660,473 shares of its Common Stock, and
as of September 30, 2000, there were 1,280,152 shares of Common Stock issued and
959,814 shares of Common Stock outstanding. Prior to the Conversion, the Company
did not engage in any material operations. Currently, the Company's principal
business is the business of the Bank. The Company has no significant assets
other than the outstanding capital stock of the Bank, $366,000 of cash and cash
equivalents and $998,000 in securities available for sale, and $181,000 in other
assets.
FIRST FEDERAL BANK
First Federal was originally chartered in 1910 as Beltrami County
Savings and Building Association, a state-chartered savings institution, and
commenced operations in that same year. First Federal has been a member of the
Federal Home Loan Bank ("FHLB") of Des Moines since 1933, and its deposits have
been federally insured since 1938. In August 1997, the Bank changed its name to
"First Federal Bank." First Federal currently operates as a federally chartered
savings bank through its main office located in Bemidji, Minnesota and four
branch offices, which are located in Bemidji, Bagley, Baudette and Walker,
Minnesota. The Bank's market area is located approximately 200 miles north of
Minneapolis, Minnesota.
First Federal is primarily engaged in the business of attracting
deposits from the general public and originating loans secured by first
mortgages on owner occupied one- to four-family residences in First Federal's
market area. First Federal also originates loans on commercial real estate,
multi-family real estate, home equity lines of credit and other consumer loans,
and commercial business loans. Due to limited loan demand in its market area,
First Federal has increased its consumer lending activities in recent years
(primarily automobile and home equity loans) and has invested excess funds in
mortgage-backed and related securities and in other investment securities, and
during fiscal 2000 continued to be active in originating and purchasing
participation interests in commercial real estate loans.
The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS"), and the Bank's savings deposits are
insured up to applicable limits by the Savings Association Insurance Fund
("SAIF"), which is administered by the Federal Deposit Insurance Corporation
("FDIC"). The Bank is a member of, and owns capital stock in the FHLB of Des
Moines, which is one of 12 regional banks in the FHLB System. The Bank is
further subject to regulations of the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") governing reserves to be maintained and
certain other matters.
The Company's and the Bank's executive offices are located at 214 5th
Street, Bemidji, Minnesota 56601, and the main telephone number is (218)
751-5120.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL:
The Bank is primarily engaged in the business of attracting deposits from
the general public and originating loans secured by mortgages on owner occupied
one- to four-family residences in the Bank's market area. First Federal also
originates loans on commercial real estate, multi-family real estate, home
equity lines of credit and other consumer loans. In recent years, due to limited
loan demand in the Bank's market area, First Federal has significantly increased
its origination of consumer loans, including automobile and home equity loans,
and has invested excess funds in mortgage-backed and related securities and in
other investment securities.
The Bank's net income is dependent primarily on its net interest income,
which is the difference between interest earned on loans and investments, and
the interest paid on interest-bearing liabilities, primarily deposits. Net
interest income is determined by (i) the difference between the yield earned on
interest earning assets and rates paid on interest-bearing liabilities
("interest rate spread") and (ii) the relative amounts of interest earning
assets and interest-bearing liabilities. The Bank's interest rate spread is also
affected by regulatory, economic and competitive factors that influence interest
rates, loan demand and deposit flows. The Bank's net income is also affected by
the generation of non-interest income, which primarily consists of fees and
service charges. In addition, net income is affected by the level of operating
expenses and provisions for loan losses.
The operations of financial institutions, including the Bank, are
significantly affected by prevailing economic conditions, competition,
regulatory policies, and the monetary and fiscal policies of the U.S. Government
and government agencies. Lending activities are influenced by the demand for,
and supply of housing, competition among lenders, the level of interest rates
and the availability of funds. Deposit flows and costs of funds are influenced
by prevailing market rates of interest primarily on competing investments,
account maturities and the levels of personal income and savings in the market
area of the Bank.
ASSET AND LIABILITY MANAGEMENT:
General. The interest rate sensitivity of assets and liabilities may be
analyzed by examining the extent to which such assets and liabilities will
mature or reprice within the same period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or 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 within a particular period when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities and is
considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. Generally, during a period
of rising interest rates, a negative gap would adversely affect net interest
income while a positive gap would result in an increase in net interest income.
Conversely, during a period of falling interest rates, a negative gap would
result in an increase in net interest income and a positive gap would adversely
affect net interest income.
Interest Rate Risk. The Bank seeks to maximize its net interest margin
within an acceptable level of interest rate risk. Interest rate risk can be
defined as the change in the Bank's net portfolio value resulting from favorable
or unfavorable movements in interest rates. Interest rate risk, or sensitivity,
arises when the maturity or repricing characteristics of assets differ
significantly from the maturity or repricing characteristics of liabilities.
5
<PAGE>
The following table sets forth the Bank's interest rate repricing gaps for
selected maturity periods at September 30, 2000 (in thousands):
<TABLE>
<CAPTION>
RATE SENSITIVE PERIOD
------------------------------------------------------------------------
1-180 181-365 1-2 OVER 2
DAYS DAYS YEARS YEARS TOTAL
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earning assets:
Loans
Fixed-rate.......................... $ 3,089 $ 2,856 $ 5,971 $ 19,910 $ 31,826
Variable-rate....................... 19,602 7,003 2,718 9,605 38,928
Securities
Fixed-rate (1)...................... 669 368 805 11,915 13,757
Variable-rate....................... 46,839 232 -- -- 47,071
-------- -------- --------- -------- --------
Total earning assets................ 70,199 10,459 9,494 41,430 131,582
-------- -------- --------- -------- --------
Interest-bearing liabilities:
Time deposits......................... 20,885 14,375 9,094 10,477 54,831
NOW and money market deposits (2)..... 2,399 2,383 -- 17,152 21,934
Savings deposits (2).................. 552 552 -- 7,314 8,418
Borrowings............................ 36,087 638 -- 200 36,925
-------- -------- --------- -------- --------
Total interest-bearing liabilities.. 59,923 17,948 9,094 35,143 122,108
-------- -------- --------- -------- --------
Incremental asset (liability) gap..... 10,276 (7,489) 400 6,287 9,474
-------- -------- --------- -------- --------
Cumulative asset (liability) gap...... 10,276 2,787 3,187 9,474 9,474
-------- -------- --------- -------- --------
<FN>
--------------
(1) Maturity of mortgage-backed and asset-backed securities are presented based
on the current estimated cash flows.
(2) Historically the Bank's NOW accounts and savings deposits have been
relatively insensitive to interest rate changes. However, the Bank
considers a portion of savings deposits to be rate sensitive based on
historical growth trends and management's expectations.
</FN>
</TABLE>
While the gap analysis provides an indication of interest rate sensitivity,
experience has shown that it does not fully capture the true dynamics of
interest rate changes. Essentially, the analysis presents only a static
measurement of asset and liability volumes based on contractual maturity, cash
flow estimates or repricing opportunity. It fails to reflect the differences in
the timing and degree of repricing of assets and liabilities due to interest
rate changes. In analyzing interest rate sensitivity, management considers these
differences and incorporates other assumptions and factors, such as balance
sheet growth and prepayments, to better measure interest rate risk.
A principal objective of the Bank's asset/liability management effort is to
balance the various factors that generate interest rate risk, thereby
maintaining the interest rate sensitivity of the Bank within acceptable risk
levels. To manage interest rate risk, the Bank assesses its current risk
position in light of interest rate forecasts and develops and implements
specific lending, funding and investment strategies. The Bank may also use
derivative financial instruments, including interest rate swaps, caps, floors,
futures and options, to manage interest rate risk. To date such instruments have
not been utilized.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition. The Company's total assets increased by $7.93 million,
or 5.99%, from $132.29 million at September 30, 1999 to $140.22 million at
September 30, 2000. The increase in total assets resulted primarily from an
increase in loans receivable, net, of $13.50 million, which was partially offset
by a decrease in investment securities of $6.14 million.
Investment securities and mortgage-backed and related securities totaling
$58.95 million at September 30, 2000, consisted of $25.21 million in securities
classified as available for sale and $33.74 million in securities classified as
held to maturity. Loans receivable, net increased $13.50 million as a result of
an excess of new loan originations and purchases over repayments and refinances.
6
<PAGE>
The Company experienced an increase in deposits during fiscal 2000 of
$789,000, or 0.90%, from $88.11 million at September 30, 1999 to $88.90 million
at September 30, 2000. Repurchase agreements increased $860,000, or 18.31%, from
$4.70 million at September 30, 1999 to $5.56 million at September 30, 2000.
The Company has made extensive use of the Federal Home Loan Bank Advance
program during the twelve months ended September 30, 2000. Federal Home Loan
Bank advances have increased from $24.96 million at September 30, 1999 to $31.36
million at September 30, 2000. These borrowings have been used to generate
income on the spread between the yield on the loans originated and purchased
with the borrowings and the rate on the borrowings.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND
SEPTEMBER 30, 1999.
Net Earnings. The Company had net earnings of $890,000 for the year ended
September 30, 2000, as compared to $770,000 for the year ended September 30,
1999. As discussed below, the increase in net earnings of $119,000 was primarily
the result of a $215,000 increase in non-interest income, a $135,000 increase in
net interest income, and a $53,000 decrease in the provision for loan losses,
partially offset by a $218,000 increase in non-interest expense.
Net Interest Income. Net interest income increased by $135,000, or 3.74%,
from $3.62 million for the year ended September 30, 1999 to $3.76 million for
the year ended September 30, 2000. Average interest-earning assets increased
$6.40 million, or 5.19%, while average interest-bearing liabilities increased
$4.03 million, or 3.52%. During this same period, the interest rate spread
decreased from 2.61% for the year ended September 30, 1999 to 2.47% for the year
ended September 30, 2000.
Interest Income. Interest income increased by $819,000, or 9.36%, from
$8.76 million for the year ended September 30, 1999 to $9.58 million for the
year ended September 30, 2000. This increase was due primarily to an increase in
the average outstanding balance of interest-earning assets. Total average
interest-earning assets increased $6.40 million during the year ended September
30, 2000. At the same time the overall yield on interest-earning assets
increased 28 basis points from 7.10% for the year ended September 30, 1999 to
7.38% for the year ended September 30, 2,000.
Interest Expense. Interest expense increased by $684,000, or 13.33%, from
$5.13 million for the year ended September 30, 1999 to $5.82 million for the
year ended September 30, 2000. The increase was primarily the result of a $3.91
million increase in the average outstanding balances of Federal Home Loan Bank
advances and a $2.58 million increase in the average outstanding balances of
repurchase agreements. At the same time, the average cost of the Federal Home
Loan Bank Advances increased 94 basis points, from 5.16% for the year ended
September 30, 1999 to 6.10% for the year ended September 30, 2000.
Provision for Losses on Loans. The Bank decreased its provision for loan
losses by $53,000 during the year ended September 30, 2000, from $98,000 for the
year ended September 30, 1999 to $45,000 for the year ended September 30, 2000.
The Bank continues to monitor and modify its allowance for losses as conditions
dictate. Although the Bank maintains its allowance for losses at a level it
considers adequate to provide for probable losses, there can be no assurance
that such losses will not exceed the estimated amounts or that additional
provisions for loan losses will not be required in future periods.
Non-interest Income. Total non-interest income increased by $215,000, or
37.97%, from $567,000 for the year ended September 30, 1999 to $782,000 for the
year ended September 30, 2000. This increase was primarily due to a $67,000
increase in fees and service charges, and a $83,000 increase in deposit related
fees, partially offset by an $18,000 decrease in loan related fees; and a
$23,000 increase in income on non-deposit related services. In addition, the
gain on the sales of securities and foreclosed real estate increased $56,000,
from a loss of $4,000 for the year ended September 30, 1999 to gains of $52,000
for the year ended September 30, 2000. There was also a $70,000 decrease in the
provision for loss on securities, from $83,000 for the year ended September 30,
1999 to $13,000 for the year ended September 30, 2000.
Non-interest Expense. Non-interest expense increased $218,000, or 7.65%
from $2.85 million for the year ended September 30, 1999 to $3.07 million for
the year ended September 30, 2000. This increase was primarily due
7
<PAGE>
to a $78,000 increase in compensation and employee benefits; a $60,000 increase
in occupancy expense; a $41,000 increase in advertising expense to promote the
internet banking product; and a $63,000 increase in other non-interest expense,
primarily due to a decrease in income on the sale of foreign currency, and
professional services. These increases were partially offset by a $24,000
decrease in federal deposit insurance.
Income Tax Expense. Income tax expense increased by $66,000, or 14.09%,
from $473,000 for the year ended September 30, 1999 to $539,000 for the year
ended September 30, 2000.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND
SEPTEMBER 30, 1998.
Net Earnings. The Company had net earnings of $770,000 for the year ended
September 30, 1999, as compared to $814,000 for the year ended September 30,
1998. As discussed below, the decrease in net earnings of $44,000 was primarily
the result of a decrease in non-interest income of $84,000 and an increase in
non-interest expenses of $38,000, partially offset by a $9,000 increase in net
interest income and a $55,000 decrease in the provision for loan losses.
Net Interest Income. Net interest income increased by $9,000, or 0.26%,
from $3.61 million for the year ended September 30, 1998 to $3.62 million for
the year ended September 30, 1999. Average interest-earning assets increased
$11.37 million, or 10.15%, while average interest-bearing liabilities increased
$11.01 million, or 10.65%. During this same period, the interest rate spread
decreased from 2.86% for the year ended September 30, 1998 to 2.61% for the year
ended September 30, 1999.
Interest Income. Interest income increased by $236,000, or 2.77%, from
$8.52 million for the year ended September 30, 1998 to $8.76 million for the
year ended September 30, 1999. This increase was due primarily to an increase in
the average outstanding balance of interest-earning assets. Total average
interest-earning assets increased 10.15% during the year ended September 30,
1999. At the same time the overall yield on interest-earning assets decreased 51
basis points from 7.61% for the year ended September 30, 1998 to 7.10% for the
year ended September 30, 1999.
Interest Expense. Interest expense increased by $226,000, or 4.61%, from
$4.91 million for the year ended September 30, 1998 to $5.13 million for the
year ended September 30, 1999. The increase was primarily the result of a $6.88
million increase in the average outstanding balances of Federal Home Loan Bank
advances, a $2.60 million increase in average outstanding balances of money
market deposit accounts and a $1.42 million increase in average outstanding
balances of repurchase agreements.
Provision for Losses on Loans. The Bank decreased its provision for loan
losses by $55,000 during the year ended September 30, 1999, from $153,000 for
the year ended September 30, 1998 to $98,000 for the year ended September 30,
1999. The Bank continues to monitor and modify its allowance for losses as
conditions dictate. Although the Bank maintains its allowance for losses at a
level it considers adequate to provide for probable losses, there can be no
assurance that such losses will not exceed the estimated amounts or that
additional provisions for loan losses will not be required in future periods.
Non-interest Income. Total non-interest income decreased by $84,000, or
12.90%, from $651,000 for the year ended September 30, 1998 to $567,000 for the
year ended September 30, 1999. This decrease was primarily due to an $83,000
provision for loss on investment securities, a $21,000 decrease in fees and
service charges, primarily loan processing fees, individual retirement account
fees and ATM access fees, and a $5,000 decrease in other non-interest income.
These decreases were offset by a $25,000 decrease in the loss on the sales of
foreclosed real estate.
Non-interest Expense. Non-interest expense increased $38,000, or 1.36%,
from $2.81 million for the year ended September 30, 1998 to $2.85 million for
the year ended September 30, 1999. This increase was primarily due to a $27,000
increase in occupancy expense, an $8,000 increase in advertising expense and a
$3,000 increase in other non-interest expenses.
Income Tax Expense. Income tax expense decreased $14,000, or 2.86%, from
$487,000 for the year ended September 30, 1998 to $473,000 for the year ended
September 30, 1999.
8
<PAGE>
ALLOWANCE FOR LOAN LOSSES
In originating loans, the Company recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. It is management's policy to maintain an
adequate allowance for loan losses based on, among other things, the Company's
historical loan loss experience, evaluation of economic conditions, regular
reviews of delinquencies and loan portfolio quality. The Company increases its
allowance for loan losses by charging provisions for loan losses against the
Company's income. Management will continue to actively monitor the Company's
asset quality and allowance for loan losses. Management will charge off loans
and properties acquired in settlement of loans against the allowance for losses
on such loans and such properties when appropriate and will provide specific
loss allowances when necessary. Although management believes it uses the best
information available to make determinations with respect to the allowance for
losses, future adjustments may be necessary if economic conditions differ
substantially from the economic conditions in the assumptions used in making the
initial determination.
The following table reflects the activity in the allowance for loan losses.
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED SEPTEMBER 30,
-------------------------------
2000 1999
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of the year............................ $ 555 $ 498
Provision for losses........................................ 45 98
Charge-offs................................................. (106) (51)
Recoveries.................................................. 25 10
--------- ---------
Net charge-offs........................................ (81) (41)
--------- ---------
Balance at end of the year.................................. $ 519 $ 555
Ratio of net charge-offs to average loans
outstanding during the period............................ 0.13% 0.07%
--------- ----------
Ratio of allowance for loan losses to total loans........... 0.72% 0.95%
--------- ----------
</TABLE>
NON-PERFORMING ASSETS
Non-performing assets totaled $611,000 at September 30, 2000 compared
to $628,000 at September 30, 1999.
Non-performing assets are summarized in the following table.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------
2000 1999
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-performing loans........................................ $ 403 $ 440
Foreclosed assets........................................... 208 188
--------- ---------
Total non-performing assets............................ $ 611 $ 628
Non-performing assets to total assets....................... 0.48% 0.53%
-------- ---------
Non-performing assets to total loans........................ 0.86% 1.10%
-------- ---------
Allowance for loan losses to non-performing loans........... 128.78% 126.14%
-------- ---------
</TABLE>
The non-performing loans reflected above consist of non-accruing loans
and accruing loans 90 days or more past due.
9
<PAGE>
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth certain information relating to the
Company's average interest-earning assets and interest-bearing liabilities and
reflects the average yield on assets and average cost of liabilities for the
periods indicated. 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 derived from daily balances.
The table also presents information for the periods indicated with
respect to the difference between the weighted average yield earned on
interest-earning assets and weighted average rate paid on interest-bearing
liabilities, or "interest rate spread," which savings institutions have
traditionally used as an indicator of profitability. Another indicator of an
institution's net interest income is its "net yield on interest-earning assets,"
which is its net interest income divided by the average balance of
interest-earning assets or "net interest margin." Net interest income is
affected by the interest rate spread and by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------
AT SEPTEMBER 30, 2000 2000 1999
--------------------- ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST
------- ------- ------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable (1).................. $ 70,754 8.26% $ 62,045 $ 5,386 8.68% $ 55,216 $ 4,637 8.40%
Marketable securities (2)............. 47,209 6.50 48,044 3,119 6.49 46,237 2,978 6.44
MBS and related securities............ 11,736 6.55 13,433 860 6.40 16,541 1,021 6.17
Other................................. 4,606 6.56 6,255 210 3.36 5,385 120 2.23
---------- ----- --------- --------- ----- -------- --------- -----
Total interest-earning assets..... 134,305 7.43 129,777 9,575 7.38 123,379 8,756 7.10
--------- ---------
Non-interest-earning assets............... 5,913 6,164 5,527
---------- --------- --------
Total assets...................... $ 140,218 $ 135,941 $128,906
========== ========= ========
INTEREST-BEARING LIABILITIES:
Deposits:
NOW accounts.......................... $ 8,672 1.68 $ 9,116 150 1.65 $ 11,809 131 1.11
Passbook accounts..................... 8,418 2.09 8,238 155 1.88 7,877 130 1.65
Money market accounts................. 13,261 4.01 13,463 510 3.79 11,588 378 3.26
Certificate accounts.................. 54,831 5.91 53,745 2,959 5.51 55,757 3,081 5.53
Borrowings:
FHLB advances......................... 31,363 6.66 26,466 1,615 6.10 22,554 1,163 5.16
Other borrowed money.................. 5,562 6.34 7,415 427 5.76 4,831 249 5.15
---------- ----- --------- --------- ----- -------- --------- ------
Total interest-bearing
liabilities..................... 122,107 5.35 118,443 5,816 4.91 114,416 5,132 4.49
========= =========
Non-interest-bearing liabilities.......... 5,298 4,699 1,319
---------- --------- --------
Total liabilities................. 127,405 123,142 115,735
Stockholders' equity...................... 12,813 12,799 13,171
---------- --------- --------
Total liabilities and stockholders'
equity....................... $ 140,218 $ 135,941 $128,906
========== ========= ========
Net interest income....................... $ 3,759 $ 3,624
========= =========
Interest rate spread...................... 2.08% 2.47% 2.61%
====== ====== ======
Net interest margin....................... 2.57% 2.90% 2.94%
====== ====== ======
Ratio of average interest-earning
assets to average interest-bearing
liabilities............................ 109.99% 109.57% 107.83%
====== ====== ======
<FN>
__________
(1) Average balance of non-accruing loans are included in the average balance
of loans receivable. Loan fees included in interest income is not material.
(2) Interest on tax exempt investments is not presented at the tax equivalent
yield.
</FN>
</TABLE>
10
<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 asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(change in volume multiplied by the old rate); and (ii) changes in rates (change
in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume which cannot be segregated have been
allocated proportionately to the change due to volume and change due to rate.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
----------------------------- -----------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------- -----------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable............... $ 590 $ 159 $ 749 $ 4 $ (285) $ (281)
Marketable securities.......... 118 23 141 850 (169) 681
MBS and related securities..... (198) 37 (161) (143) (22) (165)
Other.......................... 21 69 90 13 (12) 1
------- --------- ----- -------- ------ -------
Total interest-earning
assets.................. 531 288 819 724 (488) 236
Interest expense:
Deposits:
NOW accounts................. (35) 54 19 8 (46) (38)
Passbook accounts............ 6 19 25 -- (27) (27)
Money market accounts........ 66 66 132 83 27 110
Certificate accounts......... (111) (11) (122) (26) (147) (173)
Borrowings:
FHLB advances................ 221 231 452 359 (74) 285
Other borrowed money......... 146 32 178 76 (7) 69
------- --------- ----- -------- ------ -------
Total interest-bearing
liabilities.............. 293 391 684 500 (274) 226
------- --------- ----- -------- ------ -------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds for operations are deposits from its
market area; principal and interest payments on loans, securities available for
sale and securities held to maturity; proceeds from the sale or maturation of
securities and advances from the FHLB of Des Moines. While maturities and
scheduled amortization of loans and securities are predictable sources of funds,
deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions, and competition.
The primary lending activities of the Company are the origination of one-
to four-family loans, the origination of consumer loans and the purchase of
securities. During the years ended September 30, 2000 and 1999, the Bank's loan
originations totaled $26.34 million and $19.82 million, respectively. The
Company purchased investment securities and mortgage-backed and related
securities during the years ended September 30, 2000, and 1999 of $13.01 million
and $47.85 million, respectively.
11
<PAGE>
The primary financing activity of the Company is the attraction of
deposits. During the year ended September 30, 2000, the Bank experienced a net
increase in deposits of $789,000. During the year ended September 30, 1999, the
Bank experienced a net increase in deposits of $2.24 million.
During the year ended September 30, 2000, the Bank continued to be active
in the area of repurchase agreements. Repurchase agreements at September 30,
2000 totaled $5.56 million compared to a total of $4.70 million at September 30,
1999.
At September 30, 2000, the FHLB advances are secured by the FHLB stock and
a blanket pledge of residential loans, and government agency securities. Under
the agreement, the Bank must maintain eligible collateral in amounts exceeding
130 percent of the outstanding advances. At September 30, 2000, the Bank had
$31.36 million in advances outstanding with the FHLB.
The Bank is required to maintain levels of liquid assets as defined by OTS
regulations. This requirement, which may be varied by the OTS depending upon
economic conditions and deposit flows, is based upon a percentage of deposits
and short-term borrowings. The required minimum liquidity ratio is currently
4.0%. The Bank's average daily liquidity ratio for the month of September 2000
was 15.36%.
The Company's most liquid assets are cash and cash equivalents, which
consist of short-term highly liquid investments with original maturities of less
than three months that are readily convertible to known amounts of cash and
interest-bearing deposits. The level of these assets is dependent on the
Company's operating, financing and investing activities during any given period.
At September 30, 2000 and 1999, cash and cash equivalents totaled $4.53 million
and $4.54 million, respectively.
The Bank anticipates that it will have sufficient funds available to meet
its current commitments. At September 30, 2000, the Bank had commitments to
originate/purchase loans of $161,000. Certificates of deposits which are
scheduled to mature in one year or less at September 30, 2000, totaled $34.38
million. Management believes that a significant portion of such deposits will
remain with the Bank.
At September 30, 2000, the Bank exceeded each of the three regulatory
capital requirements.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented 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 Bank'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.
12
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
PAGE
Independent Auditors' Report.................................................14
Consolidated Statements of Financial Condition
September 30, 2000 and 1999................................................15
Consolidated Statements of Income for the years ended
September 30, 2000 and 1999................................................16
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 2000 and 1999................................................17
Consolidated Statements of Cash Flows for the years ended
September 30, 2000 and 1999................................................19
Notes to Consolidated Financial Statements .................................21
13
<PAGE>
[LETTERHEAD OF MCGLADREY & PULLEN, LLP]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First Federal Bancorporation
Bemidji, Minnesota
We have audited the accompanying consolidated statements of financial condition
of First Federal Bancorporation and subsidiaries (the Company) as of September
30, 2000 and 1999, and the related consolidated statements of income,
stockholders' equity, and cash flows for the years then ended. 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 generally accepted auditing
standards. 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
Bancorporation and subsidiaries as of September 30, 2000 and 1999, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
McGLADREY & PULLEN, LLP
Duluth, Minnesota
October 27, 2000
14
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 1,495,072 $ 2,194,436
Interest-Bearing Deposits with Banks 3,037,224 2,344,936
----------------------------------
CASH AND CASH EQUIVALENTS 4,532,296 4,539,372
----------------------------------
Available-for-Sale Securities 25,210,541 31,272,121
----------------------------------
Held-to-Maturity Securities 33,734,853 33,808,632
----------------------------------
Loans Receivable, less allowance for loan losses
$519,083 in 2000 and $555,388 in 1999 70,753,934 57,256,941
Federal Home Loan Bank Stock, at cost 1,568,400 1,248,000
Foreclosed Real Estate, net 207,781 188,300
Accrued Interest Receivable 1,112,226 1,075,399
Premises and Equipment, net 2,165,511 2,123,863
Other Assets 932,955 777,687
----------------------------------
$ 140,218,497 $132,290,315
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits 88,899,733 88,110,758
Borrowings 36,925,367 29,658,337
Advance Payments by Borrowers for Taxes and Insurance 201,624 186,123
Accrued Interest Payable 629,902 577,585
Accrued Expenses and Other Liabilities 748,529 696,151
----------------------------------
TOTAL LIABILITIES 127,405,155 119,228,954
----------------------------------
Commitments and Contingencies
Stockholders' Equity
Common stock ($.01 par value); authorized 4,000,000 shares;
issued 1,280,152 and 1,431,069 shares in 2000 and 1999 12,802 14,311
Additional paid-in capital 5,342,404 5,971,251
Retained earnings, subject to certain restrictions 9,677,265 9,260,477
Accumulated other comprehensive income (loss) (335,392) (335,848)
Unearned employee stock ownership plan shares (276,000) (345,000)
Unearned management recognition plan shares - (94,444)
Treasury stock, at cost, 320,338 and 289,605 shares in
2000 and 1999 (2,213,893) (1,989,226)
Deferred compensation payable in common stock 606,156 579,840
----------------------------------
TOTAL STOCKHOLDERS' EQUITY 12,813,342 13,061,361
----------------------------------
$ 140,218,497 $132,290,315
==================================
</TABLE>
See Notes to Consolidated Financial Statements.
15
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest Income
Loans receivable $ 5,385,699 $ 4,637,348
Mortgage-backed and related securities 861,290 1,020,602
Other marketable securities 3,117,598 2,978,192
Interest-bearing deposits with banks 114,184 42,991
Dividends 96,397 76,594
--------------------------------
9,575,168 8,755,727
--------------------------------
Interest Expense
Deposits 3,774,510 3,720,298
Borrowings 2,041,827 1,412,073
--------------------------------
5,816,337 5,132,371
--------------------------------
NET INTEREST INCOME 3,758,831 3,623,356
Provision for Loan Losses 44,804 97,970
--------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 3,714,027 3,525,386
--------------------------------
Noninterest Income
Fees and service charges 652,738 585,923
Provision for loss on securities available-for-sale (13,167) (83,129)
Gain on sales of securities 9,453 -
Gain (loss) on sales of foreclosed real estate 42,421 (4,004)
Other income 90,784 68,176
--------------------------------
782,229 566,966
--------------------------------
Noninterest Expense
Compensation and employee benefits 1,660,662 1,583,406
Occupancy 575,561 515,309
Federal deposit insurance premiums 26,720 51,246
Data processing 77,152 77,094
Advertising 162,979 121,517
Other expenses 564,249 500,670
--------------------------------
3,067,323 2,849,242
--------------------------------
INCOME BEFORE INCOME TAX EXPENSE 1,428,933 1,243,110
Income Tax Expense 539,291 472,704
--------------------------------
NET INCOME $ 889,642 $ 770,406
================================
Earnings per Common Share
Basic $ 0.83 $ 0.66
================================
Diluted $ 0.82 $ 0.64
================================
</TABLE>
See Notes to Consolidated Financial Statements.
16
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
Additional
Comprehensive Common Paid-In
Income Stock Capital
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, September 30, 1998 $ 9,933 $ 6,173,130
Comprehensive income:
Net income $ 770,406 - -
Change in net unrealized gain (loss) on
securities available for sale, net of
tax effect (556,414) - -
---------
Comprehensive income $ 213,992
=========
Increase in deferred compensation payable
in common stock - -
Stock split 4,835 (5,633)
Settlement of deferred compensation
payable in common stock - 4,500
Purchase and retirement of common stock (457) (260,934)
Amortization of management recognition plan - 23,500
Earned employee stock ownership plan shares - 36,688
---------------------------
Balance, September 30, 1999 14,311 5,971,251
Comprehensive income:
Net income $ 889,642 - -
Change in net unrealized gain (loss) on
securities available for sale, net of
tax effect 456 - -
---------
Comprehensive income $ 890,098
=========
Increase in deferred compensation
payable in common stock - -
Settlement of deferred compensation
payable in common stock - -
Purchase of treasury stock - -
Purchase and retirement of common stock (1,509) (668,561)
Amortization of management recognition plan - 3,000
Earned employee stock ownership plan shares - 36,714
---------------------------
Balance, September 30, 2000 $ 12,802 $ 5,342,404
===========================
</TABLE>
See Notes to Consolidated Financial Statements.
17
<PAGE>
<TABLE>
<CAPTION>
Unearned Deferred
Accumulated Employee Unearned Comp
Other Stock Management Payable in
Retained Comprehensive Ownership Recognition Treasury Common
Earnings Income (Loss) Plan Shares Plan Shares Stock Stock Total
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 8,691,092 $ 220,566 $(414,000) $ (188,887) $ (1,939,384) $ 529,998 $ 13,082,448
770,406 - - - - - 770,406
- (556,414) - - - - (556,414)
- - - - (78,500) 78,500 -
- - - - - - (798)
- - - - 28,658 (28,658) 4,500
(201,021) - - - - - (462,412)
- - - 94,443 - - 117,943
- - 69,000 - - - 105,688
--------------------------------------------------------------------------------------------------------------------------
9,260,477 (335,848) (345,000) (94,444) (1,989,226) 579,840 13,061,361
889,642 - - - - - 889,642
- 456 - - - - 456
- - - - (76,546) 76,546 -
- - - - 50,230 (50,230) -
- - - - (198,351) - (198,351)
(472,854) - - - - - (1,142,924)
- - - 94,444 - - 97,444
- - 69,000 - - - 105,714
--------------------------------------------------------------------------------------------------------------------------
$ 9,677,265 $ (335,392) $(276,000) $ - $ (2,213,893) $ 606,156 $ 12,813,342
==========================================================================================================================
</TABLE>
18
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 889,642 $ 770,406
Adjustments to reconcile net income to net cash
provided by operating activities:
Provisions for loan losses 44,804 97,970
Gain (loss) on sale of foreclosed real estate (42,421) 4,004
Depreciation and amortization 291,745 270,677
Amortization of premium and discount, net (72,069) (73,254)
Increase in accrued interest receivable (36,827) (83,892)
Increase in accrued interest payable 52,317 33,699
(Gain) loss on sale of securities and provisions
for loss on securites available-for-sale 3,714 83,129
Increase in other assets (155,268) (18,097)
Increase (decrease) in accrued expenses and other liabilities 52,378 (6,184)
Increase in deferred compensation payable in common stock 76,546 78,500
Earned ESOP shares priced above original cost 39,714 64,688
Decrease in unearned ESOP shares 69,000 69,000
Decrease in unamortized restricted stock 94,444 94,443
-------------------------------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 1,307,719 1,385,089
-------------------------------
Cash Flows from Investing Activities
Net increase in loans receivable (13,541,797) (1,290,960)
Purchase of securities available for sale (16,152,350) (23,855,750)
Purchase of securities held to maturity - (24,081,719)
Purchase of Federal Home Loan Bank stock (320,400) (100,000)
Purchase of premises and equipment (333,393) (296,009)
Proceeds from maturities/sales of securities available-for-sale 18,626,823 20,387,235
Proceeds from maturities of securities held to maturity - 13,500,011
Principal payments on mortgage-backed and related
securities available for sale 3,655,919 8,077,004
Principal payments on mortgage-backed and related
securities held to maturity 73,779 72,284
Net (increase) decrease in foreclosed real estate 22,939 (39,550)
-------------------------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (7,968,480) (7,627,454)
-------------------------------
Cash Flows from Financing Activities
Net increase in deposits 788,975 2,244,494
Increase in advance payments by borrowers for taxes and insurance 15,501 23,101
Net increase in repurchase agreements 860,677 1,566,004
FHLB long-term advances - 22,069,000
Repayment of long-term FHLB advances (24,036,845) (18,489,340)
Net increase in short-term FHLB advances 30,443,198 920,000
Decrease in Federal funds purchased - (1,300,000)
Purchase of treasury stock (274,897) (78,500)
Purchase of fractional shares on stock split - (798)
Purchase and retirement of common stock (1,142,924) (462,412)
-------------------------------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 6,653,685 6,491,549
-------------------------------
</TABLE>
(Continued)
19
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ (7,076) $ 249,184
Cash and Cash Equivalents
Beginning of year 4,539,372 4,290,188
--------------------------------
End of year $ 4,532,296 $ 4,539,372
================================
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $ 5,764,020 $ 5,098,672
================================
Income taxes $ 585,000 $ 677,750
================================
Supplemental Schedule of Noncash Investing and
Financing Activities
Net change in unrealized gain (loss) on securities
available for sale $ 456 $ (556,414)
================================
Real estate acquired in settlement of loan $ 198,981 $ 261,196
================================
Stock issued in settlement of deferred compensation obligation $ 50,230 $ 28,658
================================
</TABLE>
See Notes to Consolidated Financial Statements.
20
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1. DESCRIPTION OF THE BUSINESS
First Federal Bancorporation (the Company) is the unitary thrift holding company
for First Federal Bank (the Bank) with its main office in Bemidji, Minnesota and
four branch offices located in Bemidji, Bagley, Baudette and Walker, Minnesota.
The Bank provides retail and commercial loan and deposit services principally to
customers within a 30-mile radius of the Bank's locations.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING ESTIMATES: The
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the statement of
financial condition and revenues and expenses for the period. Actual results
could differ significantly from those estimates. A material estimate that is
particularly susceptible to significant change in the near-term relates to the
determination of the allowance for loan losses.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements included
herein are for the Company, the Bank, and the Bank's wholly-owned subsidiary,
First Federal Service Corporation. All significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH EQUIVALENTS AND CASH FLOWS: Cash equivalents primarily represent amounts on
deposit at other financial institutions and highly liquid financial instruments
with original maturities at the date of purchase of three months or less. Cash
flows from loans, deposits, short-term borrowings and FHLB advances are reported
net.
AVAILABLE-FOR-SALE SECURITIES: Securities classified as available-for-sale (AFS)
are debt and marketable equity securities that the Company intends to hold for
an indefinite period of time, but not necessarily to maturity. Any decision to
sell an AFS security would be based on factors including movements in interest
rates, changes in the maturity mix of the Company's assets and liabilities,
liquidity needs, regulatory capital considerations, and similar factors. AFS
securities are carried at fair value. Unrealized gains or losses, net of the
related deferred tax effect, are reported as increases or decreases in
stockholders' equity. Realized gains or losses, determined on the basis of the
cost of specific securities sold, and provisions for impairment of AFS
securities are included in earnings.
HELD-TO-MATURITY SECURITIES: Securities classified as held to maturity are those
debt securities the Company has both the intent and ability to hold to maturity
regardless of changes in market conditions, liquidity needs, or changes in
general economic conditions. These securities are carried at cost adjusted for
amortization of premiums and discounts, computed by the interest method over
contractual lives. The sale of a security within three months of its maturity
date or after at least 85 percent of the principal outstanding has been
collected is considered a maturity for purposes of classification and
disclosure.
LOANS, ALLOWANCE FOR LOAN LOSSES: Loans are stated at the amount of unpaid
principal, reduced by an allowance for loan losses.
Discounts and premiums on loans purchased are amortized to income using the
interest method over the estimated average loan life. Loan origination and
commitment fees and certain direct loan origination costs are deferred and
amortized over the life of the related loans using the interest method.
21
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The allowance for loan losses is maintained at an amount considered adequate to
provide for probable losses. The allowance for loan losses is based on periodic
analysis of the loan portfolio by management. In this analysis, management
considers factors including, but not limited to, specific occurrences, general
economic conditions, loan portfolio composition, and historical experience.
Loans are charged against the allowance for loan losses when management believes
that collectibility of the principal is unlikely. Management believes that the
allowance for loan losses is adequate. While management used available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the allowance for loan losses. Such agencies may require
additions to the allowance based on their judgment about information available
to them at the time of their examination.
The Company defines a loan as impaired when it is probable it will be unable to
collect principal and interest payments due in accordance with the terms of the
loan agreement. Impaired loans that have been separately identified for
evaluation are measured based on the present value of expected future cash flows
or, alternatively, the observable market price of the loans or the fair value of
the collateral. However, for those loans that are collateral dependent (that is,
if repayment of those loans is expected to be provided solely by the underlying
collateral) and for which management has determined foreclosure is probable, the
measure of impairment of those loans is to be based on the fair value of the
collateral.
Interest on loans is recognized over the terms of the loans and is calculated
using the simple interest method on principal amounts outstanding. For impaired
loans, accrual of interest is generally stopped when a loan is greater than
three months past due. Interest on these loans is recognized only when actually
paid by the borrower if collection of the principal is likely to occur. Accrual
of interest is generally resumed when the customer is current on all principal
and interest payments and has been paying on a timely basis for a period of
time.
FORECLOSED REAL ESTATE: Real estate acquired in the settlement of loans is
carried at the lower of the unpaid loan balance plus settlement costs or
estimated fair market value less selling costs at the time of foreclosure. The
carrying value of individual properties is periodically evaluated and reduced to
the extent cost exceeds estimated fair value less selling costs. Costs of
developing and improving such properties are capitalized. Expenses related to
holding such real estate, net of rental and other income, are charged against
income as incurred.
PREMISES AND EQUIPMENT: Land is carried at cost. Bank premises, improvements,
furniture, and equipment are carried at cost less accumulated depreciation.
Depreciation is computed on a straight-line basis over the estimated useful
lives of 20 to 40 years for bank premises and improvements and 3 to 10 years for
furniture and equipment.
INCOME TAXES: Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible temporary differences,
operating loss or tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets are reduced
by a valuation allowance when management determines that it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax rates on the date of enactment.
22
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE: Earnings per common share data has been computed on
the basis of the weighted-average number of common shares outstanding during
each period presented. Following is information about the computation of the
earnings per share data for the years ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------------------------
2000 1999
---------------------------------------- ----------------------------------------
Net Income Net Income
Numerator Denominator Per Share Numerator Denominator Per Share
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings
per share,
income available
to common
stockholders $889,642 1,067,526 $ 0.83 $770,406 1,159,547 $ 0.66
Effect of dilutive
securities:
Stock options - 19,866 0.01 - 39,602 0.02
Management
recognition plan - 2,359 - - 8,898 -
--------------------------------------------------------------------------------------
Diluted earnings
per share,
income available
to common
stockholders $889,642 1,089,751 $ 0.82 $770,406 1,208,047 $ 0.64
=====================================================================================
</TABLE>
OTHER ACCOUNTING POLICIES: The Company's accounting policies for employee
benefit plans, retirement plans and the methods and assumptions used to estimate
fair values of financial instruments are disclosed in Notes 15, 16 and 19,
respectively.
NEW ACCOUNTING STANDARDS: In June 1998, the Financial Accounting Standards Board
issued Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, which as amended by Statement No. 137 is required to be adopted in
years beginning after June 15, 2000. The statement permits early adoption as of
the beginning of any fiscal quarter after its issuance. The Company has
determined not to adopt the new statement early. The statement will require the
Company to recognize all derivatives on the consolidated balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending in the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings.
Because of the Company's minimal use of derivatives, management does not
anticipate that the adoption of the new statement will have a significant effect
on the Company's earnings or financial position.
23
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3. SECURITIES AVAILABLE FOR SALE
Summaries of securities available for sale at September 30, 2000 and 1999 are
presented below:
<TABLE>
<CAPTION>
2000
-----------------------------------------------------------------------
Gross Gross
Amoritized Unrealized Unrealized
Cost Gains Losses Fair Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities $ 8,116,003 $ 9,649 $ 157,666 $ 7,967,986
Collateralized Mortgage
Obligations and REMICS 3,714,407 - 104,652 3,609,755
--------------------------------------------------------------------
Total mortgage-backed
and related securities 11,830,410 9,649 262,318 11,577,741
--------------------------------------------------------------------
Other Marketable Securities
U.S. government and agency
securities 8,888,243 - 248,508 8,639,735
Corporate bonds and notes 3,815,806 4,692 19,988 3,800,510
Municipal bonds 244,543 3,569 - 248,112
Mutual funds 1,000,000 - 55,557 944,443
--------------------------------------------------------------------
Total other marketable
securities 13,948,592 8,261 324,053 13,632,800
--------------------------------------------------------------------
$25,779,002 $ 17,910 $ 586,371 $25,210,541
====================================================================
1999
--------------------------------------------------------------------
Mortgage-Backed Securities $ 9,819,412 $ 14,377 $ 199,183 $ 9,634,606
Collateralized Mortgage
Obligations and REMICS 5,666,265 1,572 101,398 5,566,439
--------------------------------------------------------------------
Total mortgage-backed
and related securities 15,485,677 15,949 300,581 15,201,045
--------------------------------------------------------------------
Other Marketable Securities
U.S. government and agency
securities 9,670,238 5,706 213,704 9,462,240
Corporate bonds and notes 5,178,836 11,391 48,314 5,141,913
Municipal bonds 498,791 5,984 - 504,775
Mutual funds 1,007,812 6,125 51,789 962,148
--------------------------------------------------------------------
Total other marketable
securities 16,355,677 29,206 313,807 16,071,076
--------------------------------------------------------------------
$31,841,354 $ 45,155 $ 614,388 $31,272,121
====================================================================
</TABLE>
24
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The amortized cost and fair value of other marketable securities available for
sale at September 30, 2000 by contractual maturity is shown below. Expected
maturities may differ from contractual maturities because obligors may have the
right to call or prepay obligations with or without call or prepayment
penalties:
<TABLE>
<CAPTION>
2000
---------------------------------
Amortized
Cost Fair Value
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 1,215,893 $ 1,215,931
Due after one year through five years 4,696,366 4,658,225
Due after five years through ten years 6,751,790 6,526,425
Due after ten years 284,543 287,776
Mortgage-backed securities 11,830,410 11,577,741
Mutual funds with no stated maturity 1,000,000 944,443
---------------------------------
$ 25,779,002 $ 25,210,541
=================================
</TABLE>
Anticipated maturities on mortgage-backed securities are not readily
determinable since they may be prepaid without penalty and mutual funds do not
have stated maturity dates.
Proceeds from maturities of securities available for sale during 2000 and 1999
were $18,110,858 and $20,387,235, respectively. Proceeds from sales of
securities available for sale during 2000 were $515,965. There were no available
for sale securities sold 1999.
Securities are pledged under various borrowing arrangements as discussed in Note
12.
Changes in the unrealized gain (loss) on available-for-sale securities:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------
2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning $ (335,848) $ 220,566
Unrealized gain (loss) during the year 772 (943,074)
Deferred tax effect related to unrealized gain (loss) (316) 386,660
--------------------------------
Balance, ending $ (335,392) $ (335,848)
================================
</TABLE>
25
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4. SECURITIES HELD TO MATURITY
Summaries of securities held to maturity at September 30, 2000 and 1999 are
presented below:
<TABLE>
<CAPTION>
2000
-------------------------------------------------------------------
Gross Gross
Amoritized Unrealized Unrealized
Cost Gains Losses Fair Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities $ 90,654 $ 986 $ 390 $ 91,250
Collateralized Mortgage
Obligations and REMICS 68,126 - 2,854 65,272
--------------------------------------------------------------------
Total mortgage-backed
and related securities 158,780 986 3,244 156,522
Other Marketable Securities
U.S. government and agency
securities 33,576,073 - 1,876,888 31,699,185
--------------------------------------------------------------------
Total securities held to
maturity $33,734,853 $ 986 $ 1,880,132 $31,855,707
====================================================================
1999
------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities $ 166,161 $ 1,905 $ 1,092 $ 166,974
Collateralized Mortgage
Obligations and REMICS 68,136 - 2,982 65,154
--------------------------------------------------------------------
Total mortgage-backed
and related securities 234,297 1,905 4,074 232,128
Other Marketable Securities
U.S. government and agency
securities 33,574,335 - 1,634,025 31,940,310
--------------------------------------------------------------------
Total securities held to
maturity $33,808,632 $ 1,905 $ 1,638,099 $32,172,438
====================================================================
</TABLE>
All of the securities held to maturity that are not mortgage-backed are due in
five to ten years. The securities may be subject to call before their scheduled
maturity.
Securities are pledged under various borrowing arrangements as discussed in Note
12.
26
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 5. LOANS RECEIVABLE
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
September 30,
--------------------------------
2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
One-to-four family residential loans $29,660,113 $26,432,098
Commercial real estate and multifamily residential loans 14,187,997 12,349,043
Consumer loans 26,619,062 17,524,276
Construction loans 619,750 1,130,083
Commercial business loans 609,932 935,795
--------------------------------
71,696,854 58,371,295
Less:
Loans in process (488,873) (630,548)
Unamortized loan origination fees/costs and
iscounts/premiums, net 65,036 71,582
Allowance for loan losses (519,083) (555,388)
--------------------------------
$70,753,934 $57,256,941
================================
</TABLE>
Nonaccrual loans, totaling $307,487 and $361,189 at September 30, 2000 and 1999,
respectively are considered by management as impaired. The related allowance for
credit losses was $46,123 at September 30, 2000 and $54,178 at September 30,
1999. The average investment in impaired loans during fiscal 2000 and 1999 was
$394,755 and $153,903, respectively.
The aggregate amount of loans to directors, executive officers and their related
interests was $1,339,536 and $1,143,358 at September 30, 2000 and 1999,
respectively. Activity with respect to these loans during fiscal 2000 included
net decreases of $196,178. Activity with respect to these loans during fiscal
1999 included net decreases of $16,836. In the opinion of management, such loans
were made in the ordinary course of business on normal credit terms, including
interest rate and collateralization, and do not represent more than normal risk
of collection.
The Bank grants residential and commercial real estate loans and consumer loans
primarily to customers in northern Minnesota. Although the Bank has a
diversified loan portfolio, a substantial portion of its debtors' abilities to
honor their loans is dependent upon the local economy in northern Minnesota.
At September 30, 2000 and 1999 the Bank was servicing real estate loans for
others with aggregate unpaid principal balances of approximately $351,717 and
$370,110, respectively.
Certain loans are pledged under various borrowing arrangements as discussed in
Note 12.
27
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6. ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
September 30,
------------------------------
2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning $ 555,388 $ 498,340
Provision for losses 44,804 97,970
Charge-offs (106,375) (50,925)
Recoveries 25,266 10,003
-----------------------------
Balance, ending $ 519,083 $ 555,388
=============================
</TABLE>
NOTE 7. FORECLOSED REAL ESTATE
Foreclosed real estate consisted of the following:
<TABLE>
<CAPTION>
September 30,
------------------------------
2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Real estate acquired through foreclosure
or deed in lieu of foreclosure $ -- $ 21,914
Real estate in judgment (subject to redemption) 207,781 166,386
----------------------------
$207,781 $188,300
============================
</TABLE>
NOTE 8. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
September 30,
------------------------------
2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Mortgage-backed and related securities $ 52,513 $ 66,774
Other marketable securities 658,717 673,120
Loans receivable 400,996 335,505
-----------------------------
$ 1,112,226 $ 1,075,399
=============================
</TABLE>
NOTE 9. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
September 30,
------------------------------
2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Land and improvements $ 235,172 $ 235,172
Office buildings 1,673,495 1,581,285
Furniture and equipment 2,171,318 2,101,605
Leasehold improvements 187,930 187,930
Automobile 26,153 26,153
--------------------------
4,294,068 4,132,145
Less accumulated depreciation and amortization 2,128,557 2,008,282
--------------------------
$2,165,511 $2,123,863
==========================
</TABLE>
28
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10. DEPOSITS
Deposits consisted of the following:
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------------------
2000 1999
-------------------------------------- -----------------------------------------
Weighted Weighted
Average Percent Average Percent
Rate Amount of Total Rate Amount of Total
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest NOW - % $ 3,717,596 4.18 % - % $3,538,689 4.02%
NOW 1.68 8,671,599 9.75 1.61 9,267,299 10.52
Passbook 2.09 8,417,654 9.47 1.80 8,264,464 9.38
Money Market 4.01 13,261,495 14.92 3.56 12,701,780 14.42
--------------------------------------------------------------------------------------
2.51 34,068,344 38.32 2.22 33,772,232 38.33
--------------------------------------------------------------------------------------
Certificates
4-4.99% 4.73 5,509,312 6.20 4.65 21,775,975 24.71
5-5.99% 5.58 21,737,609 24.45 5.50 19,679,859 22.34
6-6.99% 6.35 25,534,209 28.72 6.30 11,365,181 12.90
7-7.99% 7.07 2,050,259 2.31 7.19 1,517,511 1.72
--------------------------------------------------------------------------------------
5.91 54,831,389 61.68 5.37 54,338,526 61.67
--------------------------------------------------------------------------------------
4.60 % 88,899,733 100.00 % 4.16 % $88,110,758 100.00%
======================================================================================
</TABLE>
At September 30, 2000 and 1999, the Bank had $13,945,514 and $12,449,947,
respectively, of deposit accounts with balances of $100,000 or more. The Bank
did not have any brokered deposits at September 30, 2000 or 1999.
Certificates had the following remaining maturities:
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------
2000 1999
--------------------------- ---------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
0-6 months $ 18,396,089 5.71 % $ 21,194,931 5.32%
7-12 months 15,984,357 5.99 13,461,902 5.29
13-36 months 14,893,941 5.96 15,244,041 5.48
Over 36 months 5,557,002 6.19 4,437,652 5.52
---------------------------------------------------------------
$ 54,831,389 5.91 % $ 54,338,526 5.37%
================================================================
</TABLE>
Mortgage-backed securities with a fair value of $2,453,184 and $3,032,124 at
September 30, 2000 and 1999, respectively, were pledged as collateral for
certain deposits.
29
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------
2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
NOW $ 150,284 $ 131,393
Passbook 155,329 130,441
Money Market 509,980 377,711
Certificates 2,958,917 3,080,753
--------------------------------
$3,774,510 $3,720,298
================================
</TABLE>
NOTE 11. INCOME TAXES
Federal and state income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------
2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Current
Federal $ 428,637 $ 366,080
State 138,144 118,090
---------------------------------
566,781 484,170
---------------------------------
Deferred
Federal (20,833) (8,689)
State (6,657) (2,777)
---------------------------------
(27,490) (11,466)
---------------------------------
$ 539,291 $ 472,704
=================================
</TABLE>
The actual effective tax rate differs from the "expected" income tax rate,
computed at the statutory federal corporate tax rate, as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------
2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Statutory federal rate 34.0% 34.0%
State tax, net of federal benefit 6.5 6.5
Other (2.8) (2.5)
-------------------------------
37.7% 38.0%
===============================
</TABLE>
30
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------
2000 1999
----------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets
Allowance for loan losses $ 173,778 $ 159,851
Deferred compensation 316,886 298,622
Deferred loan fees -- 6,301
Unrealized loss on securities available for sale 233,069 233,385
Other 46,742 9,860
-----------------------
Total gross deferred tax assets 770,475 708,019
-----------------------
Deferred Tax Liabilities
Premises and equipment 85,487 55,345
FHLB stock 102,627 102,627
Accrued real estate taxes 25,345 22,599
Prepaid insurance 706 (1,690)
-----------------------
Total deferred tax liabilities 214,165 178,881
-----------------------
Net deferred tax assets $ 556,310 $ 529,138
=======================
</TABLE>
No valuation allowance was required as of September 30, 2000 or 1999.
In prior years the Company was permitted to deduct an annual addition to a
reserve for bad debts. Bad debt deductions for income tax purposes are included
in taxable income of later years only if the bad debt reserves are used for
purposes other than to absorb bad debt losses. Because the Bank does not intend
to use the reserve for purposes other than to absorb losses, no deferred income
taxes have been provided. Retained earnings at September 30, 2000 include
approximately $2,860,000 for which no deferred taxes have been provided.
NOTE 12. BORROWINGS
<TABLE>
<CAPTION>
September 30,
-----------------------
2000 1999
----------------------------------------------------------------------------
<S> <C> <C>
Repurchase agreements $ 5,562,169 $ 4,701,492
Borrowing from the Federal Home Loan Bank 31,363,198 24,956,845
-------------------------
$36,925,367 $29,658,337
=========================
</TABLE>
Repurchase agreements consist of sales of securities under agreements to
repurchase the identical securities. The agreements generally mature within 180
days and bear a weighted average interest rate of approximately 6.34 percent and
5.10 percent at September 30, 2000 and 1999, respectively. The agreements are
treated as financings with the obligations to repurchase securities reflected as
a liability and the dollar amount of the securities collateralizing the
agreements remaining in the asset accounts. The securities collateralizing the
agreements are in safekeeping at the Federal Home Loan Bank of Des Moines in the
Bank's account. At September 30, 2000, the agreements were collateralized by
securities totaling approximately $7,525,291.
31
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Advances from the Federal Home Loan Bank (FHLB) of Des Moines as of September
30, 2000 mature within one year and bear interest rates of 6.24 percent to 6.78
percent with an average of approximately 6.66 percent.
At September 30, 2000, the FHLB advances are secured by the FHLB stock and a
blanket pledge of residential mortgage loans, and government agency securities.
Under the agreement, the Bank must maintain eligible collateral in amounts
exceeding 125 percent of the outstanding advances.
NOTE 13. CAPITAL STOCK
On May 20, 1999 the Company issued additional shares necessary to affect a
3-for-2 common stock split in the form of a 50 percent stock dividend to
shareholders of record on May 5, 1999. The share and per share amounts,
including shares held in treasury and shares to be issued under the various
stock-based compensation plans, have been retroactively restated.
NOTE 14. RETAINED EARNINGS AND REGULATORY CAPITAL
The Bank, as a member of the Federal Home Loan Bank System, is required to hold
a specified number of shares of capital stock in the Federal Home Loan Bank of
Des Moines which is carried at cost. In addition, the Bank is required to
maintain cash and other liquid assets in an amount equal to 5 percent of its
deposit accounts and other obligations due within one year. Management believes
the Bank has met these requirements.
The Company's Subsidiary Bank is subject to various regulatory capital
requirements administered by the Bank's primary federal regulatory agency.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of assets and certain off-balance sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company's Subsidiary Bank to maintain minimum ratios (set forth in
the following table) of total and Tier I capital and of Tier I capital to
average assets (as defined in the regulations). Management believes, as of
September 30, 2000, that the Company's Subsidiary Bank meets all capital
adequacy requirements to which it is subject.
As of September 30, 2000, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table below. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
32
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The Bank's actual capital amounts and ratios are also presented in the table:
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt
For Capital Adequacy Corrective Action
Actual Purposes Provisions
------------------- -------------------- -----------------------
Amount Amount Amount
(000's) Ratio (000's) Ratio (000's) Ratio
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 2000:
Total capital (to risk-
weighted assets) $ 12,108 16.7% $ 5,811 => 8.0% $7,264 => 10.0%
Tier I capital (to risk-
weighted assets) 11,632 16.0% 2,906 => 4.0% 4,359 => 6.0%
Tier I capital (to
average assets) 11,632 8.3% 5,584 => 4.0% 6,980 => 5.0%
As of September 30, 1999:
Total capital (to risk-
weighted assets) 11,302 18.0% 5,011 => 8.0% 6,264 => 10.0%
Tier I capital (to risk-
weighted assets) 10,790 17.2% 2,506 => 4.0% 3,758 => 6.0%
Tier I capital (to
average assets) 10,790 8.5% 5,084 => 4.0% 6,356 => 5.0%
</TABLE>
NOTE 15. EMPLOYEE BENEFITS
EMPLOYEE STOCK OWNERSHIP PLAN: The Company adopted an Employee Stock Ownership
Plan (the ESOP), which meets the requirements of Section 4975(e)(7) of the
Internal Revenue Code and Section 407(d)(6) of the Employee Retirement Income
Security Act of 1974, as amended (ERISA), and, as such, the ESOP is empowered to
borrow in order to finance purchases of the common stock of the Company. The
ESOP borrowed $690,000 from the Company to purchase 155,250 shares of common
stock of the Company on the date of the Conversion. The Bank has committed to
make annual contributions to the ESOP necessary to repay the loan, including
interest.
As the debt is repaid, ESOP shares that were initially pledged as collateral for
its debt are released from collateral and allocated to active employees based on
the proportion of debt service paid in the year. The Company accounts for its
ESOP in accordance with Statement of Position 93-6, Employers' Accounting for
Employee Stock Ownership Plans. Accordingly, the shares pledged as collateral
are reported as unearned ESOP shares in stockholders' equity. As shares are
determined to be ratably released from collateral, the Company reports
compensation expense equal to the current market price of the shares, and the
shares become outstanding for earnings per share computations. ESOP compensation
benefit expense was $108,714 and $133,688 for 2000 and 1999, respectively.
33
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
All employees of the Company are eligible to participate in the ESOP after they
attain age 21 and complete one year of service during which they worked at least
1,000 hours. In 2000 and 1999, the Company committed to release 15,525 (adjusted
for a 3-for-2 stock split) shares of common stock each year which were allocated
to eligible participants subject to the restrictions of the ESOP.
Amount
--------------------------------------------------------------------------------
Shares Released and Allocated 93,150
Unreleased Shares 62,100
--------
Total ESOP shares 155,250
========
Fair Value of Unreleased Shares at September 30, 2000 $481,275
========
MANAGEMENT RECOGNITION PLAN: The Management Recognition Plan (MRP) provides for
the grant of shares of stock to eligible directors and employees in the form of
restricted stock, which vest over a five-year period at the rate of 20 percent
per year. Under the MRP, 77,625 shares of restricted stock were granted. MRP
expense was $94,444 and $94,443 in 2000 and 1999, respectively.
STOCK OPTION PLANS: The stock option plans provide for granting of 344,063
options for the purpose of attracting and retaining key personnel and to
facilitate their purchase of a stock interest in the Company. The options become
exercisable over a five-year period at the rate of 20 percent per year except
for the 1998 plan which vests 50 percent at the grant date and 50 percent one
year from the grant date. If unused, the options expire in October 2005 and
January 2009 for 1998 plan. A summary of the status of the Company's stock
option plans as of September 30, 2000 and 1999, and changes during the years
ending on those dates is presented below:
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year 312,008 $ 7.84 158,512 $ 6.49
Granted - - 157,125 8.58
Exercised - - - -
Forfeited (5,315) 8.53 (3,629) 6.87
---------------------------------------------------------------------
Outstanding at end of year 306,693 $ 7.52 312,008 $ 7.84
---------------------------------------------------------------------
Exercisable at end of year 297,315 191,851
======== ========
Weighted-average fair value
per option of options
granted during the year $ - $ 4.32
====== ======
</TABLE>
34
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
At September 30, 2000, the options outstanding under the stock option plan have
exercise prices from $6.083 to $12.50 and a weighted-average remaining
contractual life of 6.2 years. The shares and prices were 128,092.50 at $6.083,
1,379.25 at $6.778, 18,154.50 at $7.778, 3,066 at $12.50 and 156,000 at $8.5833.
All of the nonvested options are expected to eventually vest.
As permitted under generally accepted accounting principles, grants under the
plan are accounted for following the provisions of APB Opinion No. 25 and its
related interpretations. Accordingly, no compensation cost has been recognized
for grants made to date. Had compensation cost been determined based on the fair
value method prescribed in the FASB Statement No. 123, reported net income and
earnings per share would have been reduced to the proforma amounts shown below:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------
2000 1999
----------------------------------------------------------------------------------
<S> <C> <C>
Net income:
As reported $ 889,642 $ 770,406
Proforma 541,480 483,275
Basic earnings per share:
As reported 0.83 0.66
Proforma 0.51 0.42
Diluted earnings per share:
As reported 0.82 0.64
Proforma 0.50 0.40
</TABLE>
In determining the pro forma amounts above, the fair value of each grant is
estimated at the grant date using the Black-Scholes option-pricing model, with
the following weighted-average assumptions for grants in 1999: No dividends;
risk-free interest rate of 6.0 percent, expected life of 10 years and price
volatility of 34.48 percent.
NOTE 16. RETIREMENT PLANS
The Company has a 401(k) plan that covers all full-time employees meeting
certain minimum employment service requirements. The Company's expense for the
years ended September 30, 2000 and 1999 was $54,215 and $53,547, respectively.
The Company has individual deferred compensation and supplemental retirement
agreements with certain directors and officers. The cost of such individual
agreements is being accrued over the period of actual service from the date of
the respective agreement. The cost of such agreements was $72,099 and $72,083
for the years ended September 30, 2000 and 1999, respectively. The agreements
are funded through a grantor trust with assets which match the investment
options selected by the directors and officers.
Under the stock investment option, funds are invested in common stock of the
Company. Investment elections are irrevocable. In accordance with the provisions
of the FASB Emerging Issues Task Force Issue No. 97-14 the cost of common stock
held in the grantor trust is classified as treasury stock and the deferred
compensation obligation payable in common stock is classified as a component of
stockholders' equity.
35
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 17. STOCKHOLDERS' EQUITY
The Company was incorporated for the purpose of becoming the savings and loan
holding company of the Bank in connection with the Bank's conversion from a
federally chartered mutual savings bank to a federally chartered stock savings
bank.
In order to grant a priority to eligible account holders in the event of future
liquidation, the Bank, at the time of conversion, established a liquidation
account equal to its regulatory capital as of December 31, 1994. In the event of
future liquidation of the Bank, eligible account holders who continue to
maintain their deposit accounts shall be entitled to receive a distribution from
the liquidation account. The total amount of the liquidation account will be
decreased as the balance of eligible account holders is reduced subsequent to
the conversion, based on an annual determination of such balance.
The Bank may not declare or pay a cash dividend to the Company in excess of 100%
of its net income to date during the current calendar year plus the amount that
would reduce by one-half the Bank's surplus capital ratio at the beginning of
the calendar year without prior notice to the Office of Thrift Supervision
(OTS). Additional limitations on dividends declared or paid on, or repurchases
of, the Bank's capital stock are tied to the Bank's level of compliance with its
regulatory capital requirements.
NOTE 18. COMMITMENT
The Company has entered into an agreement with Wal-Mart Stores, Inc., subject to
regulatory approval, for an in-store banking facility. A full service in-store
banking facility will be located in the new Wal-Mart Supercenter in Bemidji
located at the current Beltrami Electric Cooperative site. Operations are
scheduled to begin in late 2001 when the Wal-Mart Supercenter opens. The terms
of the agreement call for a five-year lease term with monthly rental payments
starting at $2,000.
NOTE 19. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the balance sheet. The contractual
amount of these instruments reflects the extent of involvement by the Company.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of these commitments. The Company uses the
same credit policies in making commitments as it does for on-balance-sheet
instruments.
The contractual amount of these financial instruments at September 30, 2000 and
1999 is as follows (in 000's):
<TABLE>
<CAPTION>
2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Unused lines of credit $1,358 $1,425
Commitments to originate and purchase loans 161 1,172
-------------------
$1,519 $2,597
===================
</TABLE>
36
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Commitments to extend credit are agreements to lend to a customer provided there
is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since a portion of the commitments may expire without
being drawn upon, the total commitment amount does 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 the loan type and on
management's credit evaluation of the borrower. Collateral consists primarily of
residential real estate and personal property.
NOTE 20. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Values of Financial Instruments, requires
disclosures of estimated fair values of the Company's financial instruments,
including assets, liabilities, and off-balance sheet items for which it is
practicable to estimate fair value. The fair value estimates are made as of
September 30, 2000 and 1999 based upon relevant market information, if
available, and upon the characteristics of the financial instruments themselves.
Because no market exists for a significant portion of the Company's financial
instruments, fair value estimates are based upon judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. The 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 the estimates.
Fair value estimates are based only on existing financial instruments without
attempting to estimate the value of anticipated future business or the value of
assets and liabilities that are not considered financial instruments. In
addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on the fair value estimates and
have not been considered in any of the estimates.
The estimated fair value of the Company's financial instruments as of September
30, 2000 and 1999 are shown below. Following the table, there is an explanation
of the methods and assumptions used to estimate the fair value of each class of
financial instruments.
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $ 4,532,296 $ 4,532,296 $ 4,539,372 $ 4,539,372
Securities available for sale 25,210,541 25,210,541 31,272,121 31,272,121
Securities held to maturity 33,734,853 31,855,707 33,808,632 32,172,438
Loans receivable 70,753,934 70,420,000 57,256,941 57,416,000
Federal Home Loan
Bank stock 1,568,400 1,568,400 1,248,000 1,248,000
Accrued interest receivable 1,112,226 1,112,226 1,075,399 1,075,399
Financial Liabilities
Deposits 88,899,733 88,649,000 88,110,758 87,837,000
Borrowings 36,925,367 36,920,000 29,658,337 29,609,000
Accrued interest payable 629,902 629,902 577,585 577,585
</TABLE>
37
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS: The carrying amount of cash and cash equivalents
approximates their fair value.
SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY: The fair value of
securities is based upon quoted market prices.
LOANS RECEIVABLE: The fair values of loans receivable were estimated for groups
of loans with similar characteristics. The fair value of the loan portfolio was
calculated by discounting the scheduled cash flows through the estimated
maturity using anticipated prepayment speeds and using discount rates that
reflect the credit and interest rate risk inherent in each loan portfolio. The
fair value of the adjustable loan portfolio was estimated by grouping the loans
with similar characteristics and comparing the characteristics of each group to
the prices quoted for similar types of loans in the secondary market.
FEDERAL HOME LOAN BANK STOCK: The carrying amount of FHLB stock approximates its
fair value.
ACCRUED INTEREST RECEIVABLE: The carrying amount of accrued interest receivable
approximates its fair value since it is short-term in nature and does not
present unanticipated credit concerns.
DEPOSITS: Under SFAS No. 107, the fair value of deposits with no stated
maturity, such as checking, savings, and money market 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 using as discount rates the rates
that were offered by the Company as of September 30, 2000 and 1999 for deposits
with maturities similar to the remaining maturities of the existing certificates
of deposit.
The fair value estimate for deposits does not include the benefit that results
from the low cost funding provided by the Company's existing deposits and
long-term customer relationships compared to the cost of obtaining different
sources of funding. This benefit is commonly referred to as the core deposit
intangible.
BORROWINGS: The fair value of borrowings is based on the discounted value of
contractual cash flows using as discount rates the rates that were available to
the Company as of September 30, 2000 and 1999 for borrowings with maturities
similar to the remaining maturities of the existing borrowings.
ACCRUED INTEREST PAYABLE: The carrying amount of accrued interest payable
approximates its fair value since it is short-term in nature.
38
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 21. FIRST FEDERAL BANCORPORATION FINANCIAL INFORMATION (PARENT COMPANY
ONLY)
The following are the condensed financial statements for the parent company only
as of September 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
--------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<S> <C> <C>
Assets
Cash and cash equivalents $ 365,850 $ 280,598
Securities available for sale 997,562 2,095,688
Investment in subsidiary 11,293,820 10,472,719
Other assets 181,263 235,503
---------------------------------
Total assets $ 12,838,495 $ 13,084,508
=================================
Liabilities and Stockholders' Equity
Accrued expenses $ 25,153 $ 23,147
Stockholders' equity 12,813,342 13,061,361
---------------------------------
Total liabilities and stockholders' equity $ 12,838,495 $ 13,084,508
=================================
CONDENSED STATEMENTS OF INCOME
Interest Income $ 161,462 $ 160,264
Gain on Sale of Investments 9,688 -
Equity in Earnings of Subsidiary 843,127 738,442
Noninterest Expense (92,311) (106,090)
---------------------------------
Income before income tax expense 921,966 792,616
Income Tax Expense 32,324 22,210
---------------------------------
Net income $ 889,642 $ 770,406
=================================
</TABLE>
39
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
--------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
<S> <C> <C>
Operating Activities
Net income $ 889,642 $ 770,406
Decrease in other assets 54,240 402,693
Increase in accrued expenses 2,006 12,775
Equity in earnings of subsidiary (843,127) (738,442)
Cash dividend from subsidiary - 1,000,000
Increase in deferred compensation payable in common stock 76,546 78,500
Earned ESOP shares priced above original cost 39,714 64,688
Decrease in unamortized restricted stock 94,444 94,443
Decrease in unearned ESOP shares 69,000 69,000
Amortization of premium and discount, net (55,324) (50,831)
---------------------------------
Net cash provided by operating activities 327,141 1,703,232
---------------------------------
Investing Activities
Purchase of securities available for sale (11,514,111) (10,096,514)
Proceeds from sales of securities available for sale 12,690,043 8,549,000
---------------------------------
Net cash provided by (used in) investing activities 1,175,932 (1,547,514)
---------------------------------
Financing Activities
Purchase and retirement of common stock (1,142,924) (462,412)
Purchase of treasury stock (274,897) (78,500)
Purchase of fractional shares - (798)
---------------------------------
Net cash used in financing activities (1,417,821) (541,710)
---------------------------------
Increase (decrease) in cash and cash equivalents 85,252 (385,992)
Cash and cash equivalents:
Beginning of period 280,598 666,590
---------------------------------
End of period $ 365,850 $ 280,598
================================
</TABLE>
40
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 22. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly selected operations data for fiscal 2000 and 1999 are as
follows:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------
September 30, June 30, March 31, December 31,
2000 2000 2000 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 2,547,993 $ 2,389,302 $ 2,347,638 $ 2,290,235
Interest expense 1,599,649 1,467,513 1,406,812 1,342,363
--------------------------------------------------------------------
Net interest income 948,344 921,789 940,826 947,872
Provision for loan losses 40,404 1,565 - 2,835
Noninterest income 184,204 194,707 179,209 224,108
Noninterest expense 746,048 750,141 853,031 718,102
Income tax expense 130,176 137,814 98,123 173,178
--------------------------------------------------------------------
Net income $ 215,920 $ 226,976 $ 168,881 $ 277,865
====================================================================
Earnings per common share
Basic $ 0.21 $ 0.23 $ 0.15 $ 0.24
====================================================================
Diluted $ 0.21 $ 0.22 $ 0.15 $ 0.24
====================================================================
<CAPTION>
Three Months Ended
----------------------------------------------------------------------
September 30, June 30, March 31, December 31,
1999 1999 1999 1998
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 2,225,755 $ 2,206,990 $ 2,144,083 $ 2,178,899
Interest expense 1,279,061 1,281,637 1,276,968 1,294,705
--------------------------------------------------------------------
Net interest income 946,694 925,353 867,115 884,194
Provision for loan losses 78,627 13,549 47,086 (41,292)
Noninterest income 192,098 83,497 137,962 153,409
Noninterest expense 724,040 700,853 737,051 687,298
Income tax expense 126,061 108,974 78,903 158,766
--------------------------------------------------------------------
Net income $ 210,064 $ 185,474 $ 142,037 $ 232,831
====================================================================
Earnings per common share
Basic $ 0.18 $ 0.16 $ 0.12 $ 0.20
====================================================================
Diluted $ 0.18 $ 0.16 $ 0.12 $ 0.19
====================================================================
</TABLE>
41
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
SELECTED FINANCIAL CONDITION DATA
<TABLE>
<CAPTION>
September 30, June 30, March 31, December 31,
2000 2000 2000 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Assets $140,218,497 $137,313,013 $136,591,018 $134,600,290
Securities 58,945,394 59,278,497 62,075,167 61,999,162
Net Loans 70,753,934 66,601,900 60,518,847 57,950,950
Deposits 88,899,733 87,952,619 88,650,099 86,650,388
Stockholders' Equity 12,813,342 12,516,127 13,142,271 13,165,367
<CAPTION>
September 30, June 30, March 31, December 31,
1999 1999 1999 1998
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Assets $132,290,315 $130,498,858 $129,823,204 $129,488,405
Securities 65,080,753 64,451,261 65,492,661 62,487,070
Net Loans 57,256,941 55,130,832 54,340,918 55,028,329
Deposits 88,110,758 87,743,805 85,873,776 88,106,321
Stockholders' Equity 13,061,361 13,065,266 13,178,073 13,222,040
</TABLE>
42
<PAGE>
MARKET AND DIVIDEND INFORMATION
TRADING IN THE COMMON STOCK
The Company's Common Stock is traded on the Nasdaq SmallCap Market.
There were, as of September 30, 2000, 1,280,152 shares of the Common Stock
outstanding, and approximately 220 holders of record of the Common Stock (not
including shares held in "street name") as of December 1, 2000. The December 6,
2000 closing sale price of the Common Stock as traded on the SmallCap Market was
$7.50 per share.
The following table sets forth certain information as to the range of
the high and low bid prices for the Company's Common Stock for the calendar
quarters indicated during the most recent two fiscal years.
<TABLE>
<CAPTION>
HIGH (1) LOW (1) DIVIDENDS PAID
-------- ------- --------------
<S> <C> <C> <C>
FISCAL 1999:
First Quarter 10.166 9.000 --
Second Quarter 9.167 7.833 --
Third Quarter 10.500 7.833 --
Fourth Quarter 8.500 7.250 --
FISCAL 2000:
First Quarter 7.750 5.000 --
Second Quarter 7.750 6.125 --
Third Quarter 8.000 7.063 --
Fourth Quarter 8.000 7.063 --
<FN>
____________
(1) Quotations reflect inter-dealer price, without retail mark-up,
mark-down or commissions, and may not represent actual transactions.
</FN>
</TABLE>
DIVIDEND RESTRICTIONS
Under OTS regulations, First Federal may not pay dividends on its
capital stock if its regulatory capital would thereby be reduced below the
amount then required for the liquidation account established for the benefit of
certain depositors of First Federal at the time of the Conversion. In addition,
savings institution subsidiaries of savings and loan holding companies are
required to give the OTS 30 days' prior notice of any proposed declaration of
dividends to the holding company.
OTS regulations impose additional limitations on the payment of
dividends and other capital distributions (including stock repurchases and cash
mergers) by First Federal. Under these regulations, a savings institution that,
immediately prior to, and on a pro forma basis after giving effect to, a
proposed capital distribution, has total capital (as defined by OTS regulation)
that is equal to or greater than the amount of its capital requirements (a "Tier
1 Association") is generally permitted, without OTS approval, to make capital
distributions during a calendar year in the amount equal to the greater of: (i)
75% of its net income for the previous four quarters; or (ii) up to 100% of its
net income to date during the calendar year plus an amount that would reduce by
one-half the amount by which its capital-to-assets ratio exceeded regulatory
requirements at the beginning of the calendar year. A savings institution with
total capital in excess of current minimum capital ratio requirements (a "Tier 2
Association") is permitted to make capital distributions without OTS approval of
up to 75% of its net income for the previous four quarters, less dividends
already paid for such period. A savings institution that fails to meet current
minimum capital requirements (a "Tier 3 Association") is prohibited from making
any capital distributions without the prior approval of the OTS. A Tier 1
Association that has been notified by the OTS that it is in need of more than
normal supervision will be treated as either a Tier 2 or Tier 3 Association.
First Federal is a Tier 1 Association. Under the OTS' prompt corrective action
regulations, First Federal is also prohibited from making any capital
distribution if after making the distribution, First Federal would have: (i) a
total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based
capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%.
The OTS, after consultation with the FDIC, however, may permit an otherwise
prohibited stock repurchase if made in connection with the issuance of
additional shares
43
<PAGE>
in an equivalent amount and the repurchase will reduce the institution's
financial obligations or otherwise improve the institution's financial
condition.
Furthermore, earnings of the Bank appropriated to bad debt reserves for
federal income tax purposes are not available for payment of cash dividends or
other distributions to the Company without payment of taxes at the then current
tax rate by First Federal on the amount of earnings removed from the reserves
for such distributions. The Company intends to make full use of this favorable
tax treatment afforded to First Federal and the Company and does not contemplate
use of any post-Conversion earnings of First Federal in a manner which would
limit either the Bank's bad debt deduction or create federal tax liabilities.
44
<PAGE>
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
<S> <C> <C>
RALPH T. SMITH WILLIAM R. BELFORD WALTER R. FANKHANEL
Chairman of the Board of the Company and the President and Chief Executive Director of the Company and the
Bank Officer of the Company and the Bank Bank
MARTIN R. SATHRE JAMES R. SHARP DEAN J. THOMPSON
Vice Chairman and Director of the Company and Director of Company and the Bank Director of the Company and the
the Bank Bank
EXECUTIVE OFFICERS
RALPH T. SMITH MARTIN R. SATHRE WILLIAM R. BELFORD
Chairman of the Board of the Company and the Vice Chairman and Director of the President and Chief Executive
Bank Company and the Bank Officer of the Company and the Bank
DENNIS M. VORGERT KAREN JACOBSON WARREN MEISSNER
Treasurer of the Company and the Bank Secretary of the Company and the Bank Vice President of the Bank
MIKE SHERWOOD
Vice President of the Bank
OFFICE LOCATIONS
MAIN OFFICE: BRANCH OFFICES:
214 5th Street 22 First Street, N.E. 109 Main Street West
Bemidji, Minnesota 56601 Bagley, Minnesota 56621 Baudette, Minnesota 56623
550 Paul Bunyan Drive, N.W. 527 Minnesota Avenue
Bemidji, Minnesota 56601 Walker, Minnesota 56484
GENERAL INFORMATION
INDEPENDENT PUBLIC ACCOUNTANTS ANNUAL MEETING ANNUAL REPORT ON FORM 10-KSB
McGladrey & Pullen LLP The 2001 Annual Meeting of A copy of the Company's Annual
Certified Public Accountants Stockholders will be held on January Report on Form 10-KSB for the
Duluth, Minnesota 16, 2001 at 2:30 p.m. at the main fiscal year ended September 30,
office, 214 5th Street, Bemidji, 2000 as filed with the Securities
GENERAL COUNSEL Minnesota 56601. and Exchange Commission will be
Smith Law Firm furnished without charge to
Bemidji, Minnesota 56601 TRANSFER AGENT AND REGISTRAR stockholders as of the record date
Stock Transfer Department for the 2000 Annual Meeting upon
SPECIAL COUNSEL Norwest Bank, N.A. written request to Karen Jacobson,
Stradley Ronon Housley Kantarian P.O. Box 119 214 5th Street, Bemidji, Minnesota
& Bronstein, LLP So. St. Paul, Minnesota 55075-9988 56601
1220 19th Street, N.W. Suite 700
Washington, D.C. 20036
</TABLE>
