ITEM 1 BUSINESS - ---------------
General
First Federal Bankshares, Inc.
First Federal Bankshares, Inc. (the "Company" or the "Registrant") is a Delaware corporation that serves as the holding company for First Federal Bank, a federally chartered stock savings bank headquartered in Sioux City, Iowa (the "Bank"). As of June 30, 2005, the Company owned 100% of the Bank's common stock, and currently the Company engages in no other significant activities beyond its ownership of such common stock. Consequently, its net income is derived primarily from the Bank's operation.
Prior to April 13, 1999, the Bank's common stock was owned approximately 53.49% by First Federal Bankshares, M.H.C. (the "Mutual Holding Company") and 46.51% by public stockholders. On April 13, 1999, pursuant to a Plan of Conversion and Reorganization, and after a series of transactions, the Company was formed to own all of the capital stock of the Bank, and the Company sold the ownership interest in the Bank previously held by the Mutual Holding Company to the public in a subscription offering that resulted in net cash proceeds of approximately $23 million. Public stockholders of the Bank had their shares exchanged into 2,182,807 shares of common stock of the Company (representing an exchange ratio of 1.64696 shares of Company common stock for each share of Bank common stock). The Mutual Holding Company ceased to exist following the reorganization. The reorganization was accounted for in a manner similar to a pooling of interests and did not result in any significant accounting adjustments. As a result of the reorganization, the consolidated financial statements for prior periods have been restated to reflect the changes in the par value of common stock from $1.00 per share (for the Bank's common stock) to $0.01 per share (for the Company's common stock). At June 30, 2005, the Company had total assets of $586.8 million, total deposits of $407.6 million and stockholders' equity of $70.3 million.
The Company's principal executive office is located at 329 Pierce Street, Sioux City, Iowa 51101 and its telephone number at that address is (712) 277-0200.
First Federal Bank
First Federal Bank ("First Federal" or the "Bank") is a federally chartered stock savings bank headquartered in Sioux City, Iowa. Founded in 1923, First Federal's deposits have been federally insured since 1935 by the Savings Association Insurance Fund and its predecessor, the Federal Savings and Loan Insurance Corporation. The Bank has been a member of the Federal Home Loan Bank System since 1935.
The Bank is a community-oriented financial institution offering traditional financial services to its local community. The Bank's primary lending area includes mid- and northwest-Iowa and contiguous portions of Nebraska and South Dakota. The Bank's primary lending activity involves the origination of fixed rate and adjustable rate mortgage ("ARM") loans secured by single-family residential, multi-family residential and non-residential real estate. Longer-term fixed rate residential mortgage loans are originated primarily for sale in the secondary market on a servicing-released basis, while fixed rate loans with terms generally less than 15 years and ARM loans are retained in the Bank's portfolio. To a lesser extent, the Bank makes second mortgage loans secured by the borrower's principal residence and other types of consumer loans such as auto loans and home improvement loans. In addition, the Bank invests in mortgage-backed securities issued or guaranteed by Fannie Mae ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC"), or the Government National Mortgage Association ("GNMA"), and in securities issued by the United States Government and agencies thereof.
The Bank conducts operations through its main office in Sioux City, Iowa, and its 14 branch offices in northwest and central Iowa and northeast Nebraska.
The Bank's principal executive office is located at 329 Pierce Street, Sioux City, Iowa 51101, and its telephone number at that address is (712) 277-0200.
Forward Looking Statements
This Annual Report on Form 10-K may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1993, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve substantial risks and uncertainties. When used in this report, or in the documents incorporated by reference herein, the words "anticipate", "believe", "estimate", "expect", "intend", "may", and similar expressions identify such forward-looking statements. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein. These forward-looking statements are based largely on the expectations of the Registrant or the Registrant's management and are subject to a number of risks and uncertainties, including but not limited to economic, competitive, regulatory, and other factors affecting the Registrant's operations, markets, products and services, as well as expansion strategies and other factors discussed elsewhere in this report filed by the Registrant with the Securities and Exchange Commission. Many of these factors are beyond the Registrant's control.
Market Area
The Registrant conducts operations through its main office in Sioux City, Iowa, which is located on the western border of Iowa, and its 14 branch offices in northwest and central Iowa and northeast Nebraska. Two northwest Iowa branches were sold to another financial institution in a transaction that was completed on September 20, 2004. Deposits totaling $27.1 million and loans totaling $17.0 million were included in the sale. The Registrant gained access to the central Iowa market as a result of the acquisition of financial institutions headquartered in Grinnell and Newton, Iowa in 1998 and 1999, respectively. These cities are located within an hour's drive of Des Moines, Iowa, the state capital and largest metropolitan area in Iowa. The Newton acquisition included a branch office located in West Des Moines, Iowa, which is a high-growth residential and commercial development area. In March 2005, the Registrant opened a branch office in Johnstown, Iowa, which is also a suburb of Des Moines. The population of Sioux City, West Des Moines, Newton and Grinnell is approximately 85,000, 42,000, 15,000 and 9,000, respectively. The total population of the Registrant's primary market area is approximately 450,000. Most employment in the Registrant's primary market area is in agriculture and agriculture-related industries, but also includes significant manufacturing and service businesses. Major employers in the northwest Iowa primary market area, which includes contiguous portions of Nebraska and South Dakota, include Tyson Foods, MCI Telemarketing, Sioux Honey Association, Wells Dairy, Interbake Foods, Gateway, Great West Casualty, the 185th Fighter Group of the Iowa Air National Guard, Mercy Medical Center and St. Luke's Regional Medical Center. Major employers in the central Iowa primary market area include Grinnell College, Principal Financial, Wells Fargo, Grinnell Mutual Insurance Company, Iowa Telecom, Grinnell Regional Medical Center, Donaldson Company, Maytag Corporation, Skiff Medical Center, Newton Manufacturing, and Vernon Company.
The Registrant's business and operating results are significantly affected by the general economic conditions prevalent in its primary market area. The Registrant's primary market area is projected to experience moderate population growth in northwest Iowa, central Iowa and Nebraska, but strong growth in the West Des Moines market.
Lending Activities
General. Historically, the principal lending activity of the Registrant has been the origination or purchase of mortgage loans secured by one- to four-family residential properties. The Registrant also originates loans secured by commercial real estate and multi-family units and purchases participation interests in multi-family loans and commercial real estate loans originated by other lenders in the Midwest. Multi-family and commercial real estate loans totaled $179.7 million, $146.5 million and $113.1 million, respectively, at June 30, 2005, 2004 and 2003. The Registrant also offers a variety of consumer loans to its customers.
The Registrant has sought to make its interest earning assets more interest rate sensitive by actively originating variable rate loans, such as ARM loans, adjustable rate second mortgage loans, shorter-term commercial real estate and commercial business loans and medium-term consumer loans. The Registrant also purchases mortgage-backed securities with adjustable rates. At June 30, 2005, approximately $234.0 million or 49.9% of the Registrant's total loan and mortgage-backed securities portfolio had variable interest rates.
The Registrant actively originates fixed rate mortgage loans, generally with 10 to 30 year terms to maturity secured by one- to four-family residential properties. One- to four-family fixed rate loans generally are originated and underwritten for resale in the secondary mortgage market. The Registrant sold $38.2 million, $75.8 million and $62.7 million, respectively, of one- to four-family fixed rate residential loans during the fiscal years ended June 30, 2005, 2004 and 2003. The Registrant also actively originates loans insured or guaranteed by the United States Government or agencies thereof, such as VA, Rural Development and FHA loans. The Registrant also originates interim construction loans on one- to four-family residential properties and construction loans on commercial real estate and multi-family units.
Analysis of Loan Portfolio. Set forth below are selected data relating to the composition of the Registrant's loan portfolio, by type of loan on the dates indicated.
- ---------------- (1) Includes construction loans on one- to four-family units. (2) Includes construction loans on multi-family dwelling units. (3) Includes construction loans on commercial real estate. (4) Includes other secured non-mortgage loans, credit card loans, education loans and unsecured personal loans.
Loan and Mortgage-Backed Securities Maturity Schedule. The following table sets forth certain information as of June 30, 2005, regarding the dollar amount of loans and the carrying value of mortgage-backed securities maturing in the Registrant's portfolio based on their contractual terms to maturity. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Adjustable and floating rate loans and mortgage-backed securities are included in the period in which interest rates are next scheduled to adjust rather than in which they mature, and fixed rate loans and mortgage-backed securities are included in the period in which the final contractual repayment is due.
The following table sets forth the dollar amount of all loans maturing or repricing after June 30, 2005 which have predetermined interest rates and have floating or adjustable interest rates.
Residential Real Estate Loans. The Registrant's primary lending activity consists of the origination of one- to four-family, owner-occupied, residential mortgage loans secured by property located in the Registrant's primary market area. The majority of the Registrant's residential mortgage loans consists of loans secured by owner-occupied, single-family residences. The Registrant generally has limited its real estate loan originations to properties within its primary market area. However, the Registrant has purchased whole loans originated by others, on a limited basis, with an emphasis on single-family ARM loans having interest rate caps generally of 2% annually and 5% over the life of the loan and with margins over various indexes ranging from 180 to 275 basis points depending on the index.
The 60- and 90-day delinquency rates on loans originated or purchased by the Registrant were 0.5% and 0.7%, respectively, at June 30, 2005.
At June 30, 2005, the Registrant had $144.2 million, or 33.3%, of its total loan portfolio invested in first mortgage loans secured by one-to four-family residences.
The Registrant currently offers residential mortgage loans for terms ranging from 10 to 30 years, and with adjustable or fixed interest rates. Origination of fixed rate mortgage loans versus ARM loans is monitored on an ongoing basis and is affected significantly by the level of market interest rates, customer preference, the Registrant's interest rate risk position and loan products offered by the Registrant's competitors. During fiscal 2005, one- to four-family residential ARM loans decreased by $1.9 million, or 3.7%, to $48.9 million from $50.8 million in fiscal 2004 as borrowers chose fixed-rate loans in the continuing historically low market interest rate environment.
The Registrant's long-term fixed rate loans generally are originated and underwritten for resale in the secondary mortgage market. Whether the Registrant can or will sell fixed rate loans to the secondary market, however, depends on a number of factors including the yield on the loan and the term of the loan, market conditions and the Registrant's current interest rate risk position. The Registrant generally sells long-term, fixed-rate loans at origination, servicing-released. Servicing release premium is determined at loan closing, thus assuring the fee at current market rates. The Registrant's fixed rate mortgage loans are amortized on a monthly basis with principal and interest due each month. Residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers may refinance or prepay loans at their option.
The Registrant's ARM loans generally adjust annually with interest rate adjustment limitations ranging from one to two percentage points per year and with a cap on total rate increases over the life of the loan. The Registrant has used different interest indexes for ARM loans, such as the one-year Treasury Constant Maturity, the Monthly National Median Cost of Funds, the National Average Contract Rate for Previously Occupied Homes and the Eleventh District Cost of Funds. The Registrant also has purchased ARM loans with various interest rate indexes. At June 30, 2005, approximately $32.3 million, or 66.1%, of the Registrant's portfolio of residential ARM loans was indexed to the one-year Treasury Constant maturity.
The Registrant's residential first mortgage loans customarily include due-on-sale clauses, which are provisions giving the Registrant the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells or otherwise disposes of the underlying real property serving as security for the loan. Due-on-sale clauses are an important means of adjusting the rates on the Registrant's fixed rate mortgage loan portfolio, and the Registrant has generally exercised its rights under these clauses.
Regulations limit the amount that a savings bank may lend relative to the appraised value of the real estate securing the loan, as determined by an appraisal at the time of loan origination. Such regulations permit a maximum loan-to-value ratio of 100% for residential property and 90% for all other real estate loans. The Registrant's lending policies, however, generally limit the maximum loan-to-value ratio on both fixed rate and ARM loans to 97% of the lesser of the appraised value or the purchase price of the property to serve as security for the loan. If the loan-to-value ratio is in excess of 80%, private mortgage insurance is generally required to limit the Registrant's exposure.
The Registrant makes real estate loans with loan-to-value ratios in excess of 80%. For real estate loans with loan-to-value ratios of between 80% and 95%, the Registrant requires the first 12% to 25% of the loan to be covered by private mortgage insurance. For real estate loans with loan-to-value ratios of between 95% and 97%, the Registrant requires private mortgage insurance to cover the first 25% to 35% of the loan amount. For real estate loans with terms to maturity of 20 years or less and loan-to-value ratios of between 80% and 85% the Registrant may require the first 6% of the loan to be covered by private mortgage insurance. The Registrant requires fire and casualty insurance, as well as title insurance or an opinion of counsel regarding good title, on all properties securing real estate loans made by the Registrant.
Construction Loans. The Registrant originates loans to finance the construction of single family residential property. However, construction lending is not a significant part of the Registrant's overall lending activities because of the low level of new home construction in the Registrant's primary market area. At June 30,
2005, the Registrant had $1.3 million, or 0.3%, of its total loan portfolio invested in interim construction loans. Loans for construction of single family residential property are made with either adjustable or fixed rate terms. A construction loan fee of $400 is charged for each loan. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant. Construction loans are structured to be converted to permanent loans originated by the Registrant at the end of the construction period, which is generally six months, not to exceed 12 months.
The Registrant's commercial loan department also originates loans for construction to contractors and entrepreneurs. These loans include loans for the construction of single-family dwellings for speculation or customized building, apartment buildings, condominiums, nonresidential structures, and loans for the renovation of existing structures. Commercial department construction loans generally have adjustable rates and proceeds are disbursed in increments as construction progresses subject to inspections. Loans for the construction of single-family spec homes are generally paid off at the maturity of the construction loan. Construction loans on commercial real estate are often structured to convert to permanent loans originated by the Registrant at the end of the construction period, which is generally 12 to 24 months. Less frequently, loans on commercial real estate projects are structured to cover the construction period only. At June 30, 2005, the Registrant had $5.4 million, or 1.2%; $10.3 million, or 2.3%; and 21.9 million, or 5.0%, respectively, of its total loan portfolio invested in loans for the construction of single-family speculation units, multi-family residential properties and nonresidential properties. These totals include participations in construction lending purchased outside the Company's primary lending area.
Multi-Family Residential Real Estate Loans. Loans secured by multi-family real estate constituted $46.1 million or 10.6% of the Registrant's total loan portfolio at June 30, 2005, compared to $45.2 million or 10.5% of the Registrant's total loan portfolio at June 30, 2004 and $35.1 million, or 8.4% of the total loan portfolio at June 30, 2003. The Registrant's multi-family real estate loans are secured by multi-family residences, such as apartment buildings. At June 30, 2005, 54.2% of the Registrant's multi-family loans were secured by properties located within the Registrant's primary market area. At June 30, 2005, the Registrant's multi-family real estate loans had an average balance of $649,000. The terms of each multi-family loan are negotiated on a case by case basis, although such loans typically have adjustable interest rates tied to a market index or fixed rates to amortize over 10 to 20 years with a three to ten year balloon or call option.
The Registrant's policy is to limit multi-family real estate loans to principal balances not exceeding its loan-to-one borrower limit. At June 30, 2005, the Registrant's largest multi-family real estate borrower had an aggregate principal outstanding balance of $5.8 million, which balance was within the Registrant's loan-to-one borrower limit.
Loans secured by multi-family real estate generally involve a greater degree of credit risk than one- to four-family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family real estate is typically dependent upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the borrower's ability to repay the loan may be impaired.
Commercial Real Estate Loans. Loans secured by commercial real estate constituted $133.6 million, or 30.8%, of the Registrant's total loan portfolio at June 30, 2005. By comparison, commercial real estate loans totaled $101.3 million, or 23.5%, and $78.1 million, or 18.8% of the total loan portfolio, at June 30, 2004 and 2003, respectively. The Registrant's commercial real estate loans are secured by improved property such as offices, small business facilities, and other non-residential buildings. Of the improved properties securing such commercial real estate loans at June 30, 2005, 70.2% were located within the Registrant's primary market area. Commercial real estate loans are offered with fixed and adjustable interest rates.
The Registrant's policy is to limit commercial real estate loans to principal balances not exceeding its loan-to-one borrower limit. At June 30, 2005, the Registrant's largest commercial real estate borrower had an aggregate principal outstanding balance of $8.1 million, which balance was within the Registrant's loan-to-one borrower limit.
Loans secured by commercial real estate generally involve a greater degree of credit risk than residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced, the borrower's ability to repay the loan may be impaired.
Commercial Loans. The Registrant makes commercial loans primarily in its market area to a variety of professionals, sole proprietorships and small- to medium-sized businesses. At June 30, 2005, commercial loans constituted $37.5 million, or 8.6%, of the Registrant's total loan portfolio, compared to $29.6 million, or 6.9%, of the Registrant's total loan portfolio at June 30, 2004, and $16.3 million, or 3.9% of the Registrant's total loan portfolio at June 30, 2003. The Registrant offers term loans for fixed assets and working capital, revolving lines of credit, letters of credit and Small Business Administration guaranteed loans. Commercial term loans are generally offered with initial fixed rates of interest for the first 1 to 3 years and with terms of up to 10 years. Business lines of credit have floating rates of interest and are payable on demand, subject to annual review and renewal. Commercial loans with variable rates of interest are generally indexed to the highest prime rate as published daily in the Wall Street Journal.
The Registrant's policy is to limit commercial loans to principal balances not exceeding its loan-to-one- borrower limit. At June 30, 2005, the Registrant's largest commercial borrower had an aggregate principal outstanding balance of $4.9 million, which balance was within the Registrant's loan-to-one borrower limit.
When making commercial loans, the Registrant considers the financial statements of the borrower, the Registrant's lending history with the borrower, the debt service capabilities of the borrower, the projected cash flows of the business and the value of the collateral, if any. Commercial loans are generally secured by a variety of collateral including accounts receivable, inventory and equipment, and are generally supported by personal guarantees.
Commercial loans also generally are considered to involve more risk than one- to four-family residential real estate loans. Because commercial loans often depend on the successful operation or management of the business, repayment of such loans may be affected by adverse conditions in the economy. Moreover, commercial loans typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business, and, therefore, depend substantially on the success of the business itself. Any collateral securing commercial loans may depreciate over time, may be difficult to appraise and to liquidate, and may fluctuate in value.
Consumer Loans. Federal savings associations are authorized to make secured and unsecured consumer loans in an aggregate amount up to 35% of their assets. In addition, the Registrant has lending authority above the 35% category for certain consumer loans, such as second mortgage, home property improvement loans, mobile home loans and loans secured by savings accounts.
As of June 30, 2005, consumer loans totaled $78.8 million, or 18.2% of the Registrant's total loan portfolio, compared to $95.9 million, or 22.1%, and $98.8 million, or 23.8%, respectively, at June 30, 2004 and 2003. The principal types of consumer loans offered by the Registrant are second mortgage loans, auto loans, home improvement loans, unsecured loans and loans secured by deposit accounts. Consumer loans are offered primarily on a fixed rate basis and at June 30, 2005 had an average maturity of 88 months. The Registrant's home equity loans, second mortgage loans, and home improvement loans, are generally secured by the borrower's principal residence. At June 30, 2005, home equity loans, second mortgage loans, and home improvement loans, totaled $32.8 million, or 40.8% of consumer loans and 7.4% of the Registrant's total loan portfolio.
The underwriting standards employed by the Registrant for consumer loans include a determination of the applicant's credit history and an assessment of ability to meet existing obligations and payments on the proposed loan. The stability of the applicant's monthly income may be determined by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income. Creditworthiness of the
applicant is of primary consideration; however, the underwriting process also includes a comparison of the value of the collateral in relation to the proposed loan amount.
Consumer loans tend to have higher interest rates than residential mortgage loans, but also tend to have a higher risk of default than one-to four-family residential mortgage loans. See "Non-Performing Assets and Asset Classification" for information regarding the Registrant's loan loss experience and reserve policy.
Mortgage-Backed Securities. The Registrant also invests in mortgage-backed securities issued or guaranteed by the United States Government or agencies thereof in order to reduce interest rate risk exposure and improve liquidity. These securities, which consist primarily of mortgage-backed securities issued or guaranteed by FNMA, FHLMC and GNMA, totaled $28.5 million at June 30, 2005. The Registrant's objective in investing in mortgage-backed securities varies from time to time depending upon market interest rates, local mortgage loan demand, and the Registrant's level of liquidity. The Registrant's fixed-rate mortgage-backed securities are primarily held for investment, and management has the intent and ability to hold such securities on a long-term basis or to maturity. Adjustable rate MBS are available for sale and are carried at estimated fair value. Mortgage-backed securities have lower credit risk than direct loans because principal and interest on the securities are either insured or guaranteed by the United States Government or agencies thereof.
Loan Solicitation and Processing. Loan originations are derived from a number of sources such as real estate broker referrals, existing customers, borrowers, builders, attorneys and walk-in customers. Upon receipt of a loan application, a credit report is obtained to verify specific information relating to the applicant's credit standing. In the case of a real estate loan, an appraisal of the real estate intended to secure the proposed loan is made by an independent appraiser approved by the Registrant. For those loans that are sold to investors, an automated underwriting system provided by either FNMA or FHLMC is used in many cases. On occasion, a private mortgage insurance contract underwriter approved by the investor may be used. Loans that are not sold or loans that are not underwritten by a contract underwriter are reviewed by an underwriter in the Registrant's loan department and/or at least one member of the Registrant's internal loan committee. One- to four-family residential mortgage loans with principal balances in excess of $500,000 and multi-family and commercial real estate loans with principal balances in excess of $2.0 million must be submitted by the loan department directly to the loan committee of the Board of Directors for approval. Approvals subsequently are ratified by the full Board of Directors. Fire and casualty insurance (and flood insurance, if applicable) are required at the time that residential and commercial real estate loans are made. Insurance coverage for commercial and multi-family properties is required and monitored throughout the term of the loan. The Registrant purchases blanket insurance coverage to protect its interests in one- to four-family residential properties and consumer collateral to the extent that the borrower lets such insurance lapse. Once the loan is approved, a loan commitment is promptly issued to the borrower.
If the loan is approved, the commitment letter specifies the terms and conditions of the proposed loan including the amount of the loan, interest rate, amortization term, a brief description of the required collateral, and required insurance coverage. The borrower must provide proof of the necessary insurance on the property serving as collateral. Title insurance or an attorney's opinion based on a title search of the property is required on all first lien loans secured by real property.
Loan Originations, Purchases and Sales. Of total loans in the Registrant's portfolio, at June 30, 2005, 84.7% were originated by the Registrant. At June 30, 2005, the Registrant had $52.4 million of loans purchased outside the Registrant's primary market area.
The following table sets forth the Registrant's gross loan originations, loans purchased and loans sold for the periods indicated.
Loan Commitments. The Registrant issues standby loan origination commitments to qualified borrowers primarily for the construction and purchase of residential and commercial real estate. Such commitments are made on specified terms and conditions and are made for periods of up to 60 days, during which time the interest rate is locked-in. The Registrant generally charges a loan fee based on a percentage of the loan amount. The Registrant also charges a commitment fee of $300 for single-family residential properties if the borrower receives the loan from the Registrant. Commitment fees are generally not charged for multi-family and commercial real estate properties. At June 30, 2005, the Registrant had commitments to originate and purchase $3.0 million of one- to four-family residential loans and $59.5 million of commercial real estate and commercial business loans. The Registrant's experience has been that few commitments for loans on one- to four-family residential properties expire without being funded by the Registrant. However, commitments to originate commercial real estate loans and commercial business loans are less likely to be funded.
Loan Origination and Other Fees. In addition to interest earned on loans, the Registrant generally receives loan origination fees. To the extent that loans are originated or acquired for the Registrant's portfolio, the Registrant defers loan origination fees and costs and amortizes such amounts as yield adjustments over the life of the loans using the interest method of amortization. Fees and costs deferred are recognized into income immediately upon the sale of the related loan. At June 30, 2005, the Registrant had $1.3 million of deferred loan fees.
In addition to loan origination fees, the Registrant also receives other fees and service charges that consist primarily of late charges and loan servicing fees on loans sold. The Registrant recognized other fees and service charges on loans that totaled $466,000, $670,000 and $940,000 for the years ended June 30, 2005, 2004 and 2003, respectively.
Loan origination and commitment fees are volatile sources of income. Such fees vary with the volume and type of loans and commitments made and purchased and with competitive conditions in the mortgage markets, which in turn respond to the demand for and availability of money.
Loans to One Borrower. Under federal law, savings associations are subject to the same limits as those applicable to national banks, which limit loans to one borrower to the greater of $500,000 or 15% of unimpaired capital and unimpaired surplus and an additional amount equal to 10% of unimpaired capital and unimpaired surplus if the loan is secured by readily marketable collateral (generally, financial instruments and bullion, but not real estate). At June 30, 2005, the Registrant's maximum loans-to-one borrower limit was $8.2 million. At June 30, 2005, the Registrant's largest borrower had aggregate loans outstanding from the Registrant of $8.1 million, or 14.9% of the Registrant's unimpaired capital and surplus.
Delinquencies and Classified Assets
Delinquencies. The Registrant's collection procedures provide that when a loan is 15 days past due, a late charge is added and the borrower is contacted by mail and payment is requested. If the delinquency continues, subsequent efforts are made to contact the delinquent borrower. Additional late charges may be added and, if the loan continues in a delinquent status for 90 days or more, the Registrant generally initiates foreclosure proceedings.
The Registrant reviews delinquency reports for single-family residential and consumer loans at least three times each month. The residential and consumer loan delinquency rates (loans 60 days or more past due as a percentage of total residential and consumer loans, respectively) were 1.2% and 0.9%, respectively, at June 30, 2005. The Registrant reviews delinquency reports for multi-family and commercial real estate and other commercial loans weekly. Delinquencies in these loan types often involve more active and timely management than delinquencies in loans secured by single-family residential properties. If these delinquencies continue, steps are taken on a case-by-case basis to bring the loan current, if possible, before foreclosure proceedings are initiated, generally after 90 days in delinquency status.
The multi-family real estate loan delinquency rate (loans 60 days or more past due as a percentage of total multi-family real estate loans) was 0.0% at June 30, 2005. The combined commercial real estate and commercial business loan delinquency rate (loans 60 days or more past due as a percentage of total commercial real estate and commercial business loans) was 0.2% at June 30, 2005. Management continues to use aggressive collection and foreclosure efforts to protect the Registrant's assets. In addition, the Registrant continues to tighten asset quality requirements in response to negative economic indicators.
Non-Performing Assets and Asset Classification. Loans are reviewed on a regular basis and are placed on a non-accrual status when, in the opinion of management, the collection of additional interest is doubtful. Residential and commercial mortgage loans are placed on non-accrual status generally when either principal or interest is 90 days or more past due and management considers the interest uncollectible or when the Registrant commences foreclosure proceedings. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income.
Real estate acquired by the Registrant as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned ("REO") until such time as it is sold. When REO is acquired, it is recorded at the lower of the unpaid principal balance of the related loan or its fair market value. Any write-down of REO is charged against income.
At June 30, 2005, the Registrant's total of real property acquired as the result of foreclosure or by deed in lieu of foreclosure was $69,000 compared to a total of $542,000 and $172,000 at June 30, 2004 and 2003, respectively.
In addition, the Company had repossessed automobiles, boats and trailers with an estimated fair value, less cost to sell, that totaled $73,000, $151,000 and $240,000 at June 30, 2005, 2004 and 2003, respectively.
Non-Performing Loans. The following table sets forth information regarding non-accrual loans, loans past due 90 days or more and still accruing and other non-performing assets at the dates indicated:
- ------------------- (1) Includes all loans 90 days or more contractually delinquent. (2) Delinquent FHA/VA guaranteed loans and delinquent loans with past due interest that, in the opinion of management, is collectible, are not placed on non-accrual status. (3) Represents the net book value of real property acquired by the Registrant through foreclosure or deed in lieu of foreclosure. Upon acquisition, this property is carried at the lower of cost or fair market value less estimated costs of disposition. (4) For fiscal 2005, 2004, 2003 and 2002, includes repossessed automobiles, boats and trailers carried at the lower of cost or fair market value less estimated costs of disposition. Total carrying amount was $73,000, $151,000, $240,000 and $325,000, respectively, at June 30, 2005, 2004, 2003 and 2002. (5) Restructured loans have had amounts added to the principal balance and/or terms of the debt modified. Modification terms include payment extensions, interest only payments and longer amortization periods, among other possible concessions that would not normally be considered.
The following table sets forth information with respect to the Registrant's delinquent loans and other problem assets at June 30, 2005.
- ------------ (1) Loans not accruing interest but not past due more than 60 days.
(2) Restructured loans have had amounts added to the principal balance and/or the terms of the debt have been modified.
Classified Assets. Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by the OTS to be of lesser quality as "substandard," "doubtful" or "loss" assets. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the savings institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets that do not expose the savings institution to risk sufficient to warrant classification in one of the aforementioned categories, but such assets possess some weaknesses, are required to be designated "special mention" by management.
When a savings institution classifies problem assets as either substandard or doubtful, it is required to establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When a savings institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the assets so classified, or to charge off such amount. A savings institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS which can order the establishment of additional general or specific loss allowances. The Registrant regularly reviews the problem loans in its portfolio to determine whether any loans require classification in accordance with applicable regulations.
At June 30, 2005, the aggregate amount of the Registrant's classified assets, and of the Registrant's general and specific loss allowances were as follows:
June 30, 2005 ------------- (In Thousands)
Substandard assets....................................... $ 5,260 Doubtful assets.......................................... 4,520 Loss assets.............................................. -- ------------- Total classified assets............................. $ 9,780 =============
A summary of the Registrant's principal classified assets is as follows.
The Registrant originated loans to a commercial subcontractor that experienced losses on several large contracts primarily due to unfavorable fluctuations in labor and material costs. The borrower experienced significant cash flow problems and its loans were classified "substandard" in September 2004. During the quarter ended June 30, 2005 the loans were downgraded to "doubtful" and additional loss reserves totaling $1.9 million were charged to operations. At June 30, 2005 loans to this borrower totaled $4.2 million and loss reserves established against the loans totaled $2.3 million.
A borrower involved in the construction of agriculture-related structures, had experienced an instance of alleged employee fraud and unfavorable weather conditions that delayed completion of construction projects. At June 30, 2005, the total loan balance was $1.2 million and the borrower was paying as agreed on the restructured loan. The loss reserve against this loan totaled $132,000 at June 30, 2005. Due to continuing cash flow problems associated with the agricultural industry, the loan was classified `substandard' at June 30, 2005.
The Registrant originated a loan to a commercial contractor in the Registrant's primary area that specializes in excavating. The borrower experienced cash flow problems due to losses incurred on a large out-of-state contract in 2001. At June 30, 2005, the total loan balance was $1.1 million, the loan was current and the contractor's work pipeline had increased. Due to continuing cash flow concerns, the loan was classified `substandard' at June 30, 2005. The loss reserve associated with this credit was increased during fiscal 2005 and totaled $649,000 at June 30, 2005 as compared to $433,000 at June 30, 2004.
Allowance for Loan Losses. The Company has established a systematic method of periodically reviewing the credit quality of the loan portfolio in order to establish an allowance for losses on loans. As part of this process, an independent loan review department was established during fiscal 2003. The allowance for losses on loans is based on management's current judgments about the credit quality of individual loans and segments of the loan portfolio. The allowance for losses on loans is established through a provision for loan losses based on management's evaluation of the risk inherent in the loan portfolio, and considers all known internal and external factors that affect loan collectibility as of the reporting date. Such evaluation, which includes a review of all loans on which full collectibility of interest and principal may not be reasonably assured, considers, among other matters, the estimated net realizable value of the underlying collateral, economic conditions, historical loan loss experience, management's knowledge of inherent risks in the portfolio that are probable and reasonably estimable and other factors that warrant recognition in providing an allowance for loan losses. Management calculates the allowance for loan losses based on asset type, as follows: 100% of portions of loan balances classified as loss, 30% to 75% of portions of loan balances classified as doubtful, 5% to 40% of portions of loan balances classified as substandard, and 0% to 15% of portions of loan balances classified as special mention. Management calculates additional allowances for loan losses, based on historical loss experience, on loans not classified in the categories delineated above, as follows: 0.25% for mortgage loans, 0.75% for multi-family and commercial real estate loans, 1.75% for commercial business loans, and 0.75% to 2.00% for consumer loans.
The financial statements of the Registrant are prepared in accordance with GAAP and, accordingly, provisions for loan losses are based on management's estimate of net realizable value or fair value of the collateral, as applicable. The Registrant regularly reviews its loan portfolio, including problem loans, to determine whether any loans require classification or the establishment of reserves.
During fiscal 2005, 2004 and 2003, the Registrant credited $3.0 million, $1.2 million and $1.7 million, respectively, to the allowance for loan losses. Management periodically reviews the entire loan portfolio to determine the extent, if any, to which further additional loan loss provisions may be deemed necessary. There can be no assurance that the allowance for loan losses will be adequate to cover losses that may in fact be realized in the future and that additional provisions for loan losses will not be required.
Analysis of the Allowance for Loan Losses. The following table sets forth information regarding the Company's allowance for loan losses at the dates indicated.
Investment Activities
The Registrant's portfolio of investment securities, excluding investments in mortgage-backed securities, totaled $39.7 million, $71.3 million and $62.4 million, respectively, at June 30, 2005, 2004 and 2003. The purpose of the Registrant's investment portfolio is to (i) improve the Registrant's interest rate sensitivity gap by reducing the average term to maturity of the Registrant's assets, (ii) improve liquidity, and (iii) effectively reinvest funds generated from amortization and prepayment on the Registrant's traditional loan portfolio.
The Registrant is required under federal regulations to maintain a sufficient amount of liquid assets that may be invested in specified short-term securities and certain other investments to assure its safe and sound operation. See "Federal Regulation of Savings Institutions--Liquidity" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" in the Company's 2005 Annual Report to Shareholders. The Registrant generally has maintained a liquidity portfolio in excess of regulatory requirements. Liquidity levels may be increased or decreased depending upon the yields on investment alternatives and upon management's judgment as to the attractiveness of the yields then available in relation to other opportunities and its expectation of the level of yield that will be available in the future, as well as management's projections as to the short term demand for funds to be used in the Registrant's loan origination and other activities.
Investment Portfolio. The following table sets forth the carrying value of the Registrant's investment securities portfolio, short-term investments and FHLB stock, at the dates indicated. For the three months ended May 31, 2005, the Registrant's FHLB stock yielded 3.80%. At June 30, 2005, the fair value of the Registrant's investment securities - held to maturity portfolio was $10.0 million.
Investment Portfolio Maturities
The table below sets forth the scheduled maturities, carrying values, and average yields for the Registrant's investment securities at June 30, 2005.
- ------------------ (1) Municipal securities are tax-effected.
Sources of Funds
General. Deposits are the major source of the Registrant's funds for lending and other investment purposes. In addition to deposits, the Registrant derives funds from the amortization and prepayment of loans and mortgage-backed securities, the sale or maturity of investment securities, operations and, if needed, advances from the Federal Home Loan Bank of Des Moines (the "FHLB"). Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources or on a longer term basis for general business purposes.
Deposits. Consumer and commercial deposits are attracted principally from within the Registrant's primary market area through the offering of a broad selection of deposit instruments including checking, regular savings, money market deposits, term certificate accounts and individual retirement accounts. On a limited basis, the Registrant will negotiate interest rates to attract jumbo certificates. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. The Registrant regularly evaluates the internal cost of funds, surveys rates offered by competing institutions, reviews the Registrant's cash flow requirements for lending and liquidity and executes rate changes when deemed appropriate.
In the unlikely event of a liquidation of the Registrant, depositors will be entitled to full payment of their deposit accounts prior to any payment being made to the stockholders of the Registrant. The majority of the Registrant's depositors are residents of Iowa, Nebraska and South Dakota.
Deposit Portfolio. Savings and other deposits in the Registrant as of June 30, 2005, are composed of the following:
- ----------------------- (1) Yield rates for fixed term, fixed rate certificates. (2) Rates and maturity terms are negotiated on these large non-personal certificates. (3) Includes various promotional certificates with features that may include rate bump-up options and restrictions with regard to balance additions. The certificates are primarily renewable in the next highest regular-term certificate. (4) Individual retirement accounts (IRAs) are offered for this term. The minimum for IRAs is $500 and the minimum for other certificates is $1,000. The minimum for additions to IRAs is $25, while the minimum for additions to other certificates is $1,000. (5) The rate on the certificate may be changed once during the term to the currently offered rate at the certificate holders' option.
The following table sets forth the change in dollar amount of deposits in the various types of deposit accounts offered by the Registrant between the dates indicated.
- --------------- (1) This certificate is a 30-month certificate, during which term the rate may be changed to a currently offered rate, once, at the customer's option. (2) This certificate is a 34-month certificate, during which term the certificate may be changed to a product with a different term and/or rate, on the first and/or second anniversary of the opening of the certificate. This product was discontinued in fiscal 2002. (3) Includes various promotional certificates with features that may include rate bump-up options and restrictions with regard to balance additions. In fiscal 2005 these certificates are primarily renewable in the next highest regular-term certificate product. In fiscal 2004 and 2003 these certificates were primarily nonrenewable.
Time Deposits by Rates
The following table sets forth the time deposits in the Registrant classified by rates as of the dates indicated.
At June 30, ---------------------------- 2005 2004 2003 -------- -------- -------- (In Thousands)
2% or less ........ $ 32,783 $ 87,303 $ 48,986 2.01% - 3.00% ..... 63,147 53,429 56,396 3.01% - 4.00% ..... 80,235 29,877 48,813 4.01% - 5.00% ..... 27,378 36,170 50,906 5.01% - 6.00% ..... 8,780 16,279 18,287 6.01% - 7.00% ..... -- 20 835 over 7.00% ........ -- -- 12,095 -------- -------- -------- $212,323 $223,078 $236,318 ======== ======== ========
Time deposit maturity schedule. The following table sets forth the amount and maturities of certificates of deposit at June 30, 2005.
Certificates of Deposit $100,000 and Over. The following table indicates the amount of the Registrant's certificates of deposit and other time deposits of $100,000 or more by time remaining until maturity as of June 30, 2005.
Deposit Activity. The following table sets forth the savings activities of the Registrant for the periods indicated:
Borrowings. Deposits are the primary source of funds for the Registrant's lending and investment activities and for its general business purposes. The Registrant may rely upon advances from the FHLB to supplement its supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB
are secured by the Registrant's stock in the FHLB and a portion of the Registrant's first mortgage loans. At June 30, 2005, 2004 and 2003, the Registrant had $102.0 million, $109.5 million and $102.4 million, respectively, of advances outstanding from the FHLB.
The FHLB functions as a central reserve bank providing credit for the Registrant and other member savings associations and financial institutions. As a member, the Registrant is required to own capital stock in the FHLB and is authorized to apply for advances on the security of such stock and certain of its home mortgages and other assets (principally, securities that are obligations of, or guaranteed by, the United States) provided certain standards related to creditworthiness have been met. Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. The FHLB requires members to pledge and maintain sufficient eligible collateral to secure total indebtedness and members must be in compliance with collateral requirements prior to the funding of any advance.
The following table sets forth certain information regarding borrowings by the Registrant at the end of and during the periods indicated.
Subsidiary Activities
The Company has two wholly owned subsidiaries: First Federal Bank and Equity Services, Inc. Since the Company engages in no other significant activities beyond its ownership of the Bank, the description of the Company's activities in this Form 10-K effectively represents a description of the activities of the Bank. Equity Services, Inc. is in the business of developing residential lots and dwellings in the Registrant's primary market area.
The Bank has one active wholly owned subsidiary. First Financial Corporation ("First Financial"), an Iowa corporation, operates a title search and abstract continuation business through its wholly owned Iowa subsidiary, Sioux Financial Corporation. First Financial is also a majority owner of United Escrow, Inc., which serves as an escrow agent in Woodbury County, Iowa.
Under federal law, SAIF-insured institutions are required to provide 30 days' advance notice to the OTS and FDIC before establishing or acquiring a subsidiary or conducting a new activity in a subsidiary. The insured institution must also provide the FDIC and the OTS such information as may be required by applicable regulations and must conduct the activity in accordance with the rules and orders of the OTS. In addition to other enforcement and supervision powers, the OTS may determine after notice and opportunity for a hearing that the continuation of a savings institution's ownership of or relation to a subsidiary (i) constitutes a serious risk to the safety, soundness or stability of the savings institution, or (ii) is inconsistent with the purposes of federal laws and regulations. Upon the making of such determination, the OTS may order the savings institution to divest the subsidiary or take other actions.
Personnel
As of June 30, 2005, the Company and its wholly owned subsidiaries had 201 full-time equivalent employees. None of the Company's employees is represented by a collective bargaining group. The Company believes its relationship with its employees to be good.
Competition
The Registrant encounters strong competition both in attracting deposits and in originating loans. Its most direct competition for deposits has come historically from commercial banks, brokerage houses, other savings associations and credit unions in its market area, and the Registrant expects continued strong competition from such financial institutions in the foreseeable future. The Registrant's market area includes branches of several commercial banks that are substantially larger than the Registrant in terms of state-wide deposits. In addition, a growing number of the Registrant's competitors are utilizing the Internet to attract deposits both locally and nationwide. The Registrant competes for savings by offering depositors a high level of personal service and expertise together with a wide range of financial services.
The competition for real estate and other loans comes principally from commercial banks, mortgage banking companies and other savings associations. This competition for loans has increased substantially in recent years as a result of the large number of institutions choosing to compete in the Registrant's market area. An increasing number of these institutions are using the Internet to originate and underwrite loans. The Registrant offers a competitive internet banking product to its retail and business customers.
Competition is likely to increase as a result of the Gramm-Leach-Bliley Act of 1999, which eases restrictions on entry into the financial services market by insurance companies and securities firms. Moreover, to the extent that these changes permit banks, securities firms and insurance companies to affiliate, the financial services industry could experience further consolidation. This could result in a growing number of larger financial institutions competing in the Registrant's primary market area that offer a wider variety of financial services than the Registrant currently offers. Competition for deposits, for the origination of loans and the provision of other financial services may limit the Registrant's growth and adversely impact its profitability in the future.
The Registrant competes for loans primarily through the interest rates and loan fees it charges and the efficiency and quality of services it provides borrowers, real estate brokers and builders. Factors that affect competition include general and local economic conditions, current interest rate levels and volatility of the mortgage markets. Management's strategy has been to offer several new product offerings in certificate and retirement accounts to help retain current deposits and reduce shrinkage. Recent product offerings have been made available in transaction accounts to increase customer base and to position the Registrant as a family financial center.
Regulation
As a federally chartered SAIF-insured savings association, the Bank is subject to examination, supervision and extensive regulation by the OTS and the FDIC. The Bank is a member of and owns stock in the FHLB of Des Moines, which is one of the twelve regional banks in the Federal Home Loan Bank System. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The Bank also is subject to regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") governing reserves to be maintained against deposits and certain other matters. The OTS examines the Bank and prepares reports for the consideration of the Bank's Board of Directors on any deficiencies that they may find in the Bank's operations. The FDIC also examines the Bank in its role as the administrator of the SAIF. The Bank's relationship with its depositors and borrowers also is regulated to a great extent by both federal and state laws especially in such matters as the ownership of savings accounts and the form and content of the Bank's mortgage documents. Any change in such regulation, whether by the FDIC, OTS, or Congress, could have a material adverse impact on the Company and the Bank and their operations.
The description of statutory provisions and regulations applicable to savings associations set forth herein does not purport to be a complete description of such statutes and regulations and their effect on the Bank.
Federal Regulation of Savings Institutions
Business Activities. The activities of savings institutions are governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the Federal Deposit Insurance Act (the "FDI Act"). The federal banking statutes, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of
("FIRREA") and Federal Deposit Insurance Corporation Improvement Act ("FDICIA") (1) restrict the solicitation of brokered deposits by savings institutions that are troubled or not well-capitalized, (2) prohibit the acquisition of any corporate debt security that is not rated in one of the four highest rating categories, (3) restrict the aggregate amount of loans secured by non-residential real estate property to 400% of capital, (4) permit savings and loan holding companies to acquire up to 5% of the voting shares of non-subsidiary savings institutions or savings and loan holding companies without prior approval, and (5) permit bank holding companies to acquire healthy savings institutions.
Qualified Thrift Lender Test. The HOLA requires savings institutions to meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings association is required to maintain at least 65% of its "portfolio assets" (total assets less (i) specified liquid assets up to 20% of total assets, (ii) intangibles, including goodwill, and (iii) the value of property used to conduct business) in certain "qualified thrift investments," primarily residential mortgages and related investments, including certain mortgage-backed and related securities on a monthly average basis in 9 out of every 12 months. A savings association that fails the QTL test must either convert to a bank charter or operate under certain restrictions. As of June 30, 2005, the Bank maintained 73.8% of its portfolio assets in qualified thrift investments and, therefore, met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations upon all capital distributions by savings institutions, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders of another institution in a cash-out merger and other distributions charged against capital. The rule establishes three tiers of institutions, which are based primarily on an institution's capital level. An institution, such as the Bank, that exceeds all capital requirements before and after a proposed capital distribution ("Tier 1 Association") and has not been advised by the OTS that it is in need of more than normal supervision, could, after prior notice but without the approval of the OTS, make capital distributions during a calendar year equal to the greater of: (i) 100% of its net earnings to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its capital requirements) at the beginning of the calendar year; or (ii) 75% of its net earnings for the previous four quarters; provided that the institution would not be undercapitalized, as that term is defined in the OTS Prompt Corrective Action regulations, following the capital distribution. Any additional capital distributions would require prior regulatory approval. In the event the Bank's capital fell below its requirement or the OTS notified it that it was in need of more than normal supervision, the Bank's ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice. As of June 30, 2005, the Bank was a "well-capitalized" institution.
Liquidity. The Bank is required to maintain sufficient liquidity to assure its safe and sound operation. The Bank's average liquidity ratio for the quarter ended June 30, 2005, was 12.9%.
Community Reinvestment Act and Fair Lending Laws. Savings associations share a responsibility under the Community Reinvestment Act ("CRA") and related regulations of the OTS to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws") prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An institution's failure to comply with the provisions of CRA could, at a minimum, result in regulatory restrictions on its activities, and failure to comply with the Fair Lending Laws could result in enforcement actions by the OTS, as well as other federal regulatory agencies and the Department of Justice. The Bank received a satisfactory CRA rating under the current CRA regulations in its most recent federal examination by the OTS.
Transactions with Related Parties. The Bank's authority to engage in transactions with related parties or "affiliates" (i.e., any company that controls or is under common control with an institution, including the Company and its non-savings institution subsidiaries) or to make loans to certain insiders, is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of transactions with any individual affiliate to 10% of the capital and surplus of the savings institution and also limits the aggregate amount of transactions with all affiliates to 20% of the savings institution's capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A and the purchase of low quality assets from affiliates is generally prohibited. Section 23B provides that certain transactions
with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and 10% stockholders, as well as entities controlled by such persons, is currently governed by Sections 22(g) and 22(h) of the FRA, and Regulation O thereunder. Among other things, these regulations generally require such loans to be made on terms substantially the same as those offered to unaffiliated individuals and do not involve more than the normal risk of repayment. However, recent regulations now permit executive officers and directors to receive the same terms through benefit or compensation plans, that are widely available to other employees, as long as the director or executive officer is not given preferential treatment compared to other participating employees. Regulation O also places individual and aggregate limits on the amount of loans the Bank may make to such persons based, in part, on the Bank's capital position, and requires certain approval procedures to be followed. At June 30, 2005, the Bank was in compliance with the regulations.
Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility over savings institutions and has the authority to bring enforcement action against all "institution-related parties," including stockholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institutions, receivership, conservatorship or the termination of deposit insurance. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. Under the FDI Act, the FDIC has the authority to recommend to the Director of OTS that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances.
Standards for Safety and Soundness. The FDI Act requires each federal banking agency to prescribe for all insured depository institutions standards relating to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and such other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to implement the safety and soundness standards required under the FDI Act. The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The Guidelines address internal controls and information systems; internal audit systems; credit underwriting; loan documentation; interest rate risk exposure; asset growth; and compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the Guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDI Act. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan.
Capital Requirements. The OTS capital regulations require savings institutions to meet three capital standards: a 1.5% tangible capital standard, a 4.0% leverage ratio if not assigned a composite CAMELS rating of "1" by the OTS (or core capital ratio) and an 8.0% risk-based capital standard. Core capital is defined as common stockholders' equity (including retained earnings), certain non-cumulative perpetual preferred stock and related surplus, minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain qualifying supervisory goodwill and certain mortgage servicing rights ("MSRs"). Tangible capital is defined as core capital less all intangible assets (including supervisory goodwill) plus a specified amount of MSRs. The OTS regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must deduct investments in and loans to subsidiaries engaged in activities not permissible for a national bank, and unrealized gains (losses) on certain available for sale securities.
The risk-based capital standard for savings institutions requires the maintenance of Tier 2 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of 4.0% and 8.0%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS believes are inherent in the type of asset. The components of Tier 1 (core) capital are equivalent to those discussed earlier under the 3.0% leverage ratio standard. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and allowance for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.
OTS regulatory capital rules also incorporate an interest rate risk component. Savings associations with "above normal" interest rate risk exposure are subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. A savings association's interest rate risk is measured by the decline in the net portfolio value of its assets (i.e., the difference between incoming and outgoing discounted cash flows from assets, liabilities and off-balance sheet contracts) that would result from a hypothetical increase or decrease in market interest rates, divided by the estimated economic value of the association's assets.
At June 30, 2005, the Bank exceeded each of the three OTS capital requirements. Set forth below is a summary of the Bank's compliance with the OTS capital standards as of June 30, 2005.
- ----------------- (1) Tangible and core capital levels are calculated on the basis of percentage of total adjusted assets; risk-based capital levels are calculated on the basis of a percentage of risk-weighted assets.
Prompt Corrective Regulatory Action
Under the OTS Prompt Corrective Action regulations, the OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of capitalization. Generally, a savings institution that has total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0% is considered to be undercapitalized. A savings institution that has the total risk-based capital less than 6.0%, a Tier 1 core risk-based capital ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered to be "significantly undercapitalized" and a savings institution that has a tangible capital to assets ratio equal to or less than 2.0% is deemed to be "critically undercapitalized." Subject to a narrow exception, the banking regulator is required to appoint a receiver or conservator for an institution that is "critically undercapitalized." The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date an institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." In addition, numerous mandatory supervisory actions become immediately applicable to the institution, including, but not limited to, restrictions on growth, investment activities, capital
distributions, and affiliate transactions. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.
Insurance of Deposit Accounts
The FDIC has adopted a risk-based deposit insurance assessment system. The FDIC assigns an institution to one of three capital categories based on the institution's financial information, as of the reporting period ending seven months before the assessment period, consisting of (1) well capitalized, (2) adequately capitalized or (3) undercapitalized, and one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information which the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. The FDIC is authorized to raise the assessment rates in certain circumstances. The FDIC has exercised this authority several times in the past and may raise insurance premiums in the future. If such action is taken by the FDIC, it could have an adverse effect on the earnings of the Bank.
Federal Home Loan Bank System
The Bank, as a federal association, is required to be a member of the FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. The Bank, as a member of the FHLB of Des Moines, is required to acquire and hold shares of capital stock in that FHLB in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is greater. As of June 30, 2005, the Bank was in compliance with this requirement. The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the FHLBs pay to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to maintain noninterest-earning reserves against their transaction accounts, such as negotiable order of withdrawal and regular checking accounts. At June 30, 2005, the Bank was in compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements imposed by the Office of Thrift Supervision.
Holding Company Regulation
General. The Company is a non-diversified savings and loan holding company within the meaning of the HOLA, as amended. As such, the Company is registered with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company and its non-savings institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. The Bank must notify the OTS 30 days before declaring any dividend to the Company.
As a unitary savings and loan holding company, the Company generally will not be restricted under existing laws as to the types of business activities in which it may engage, provided that the Bank continues to be a QTL. Upon any nonsupervisory acquisition by the Company of another savings association or savings bank that meets the QTL test and is deemed to be a savings institution by the OTS, the Company would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would be subject to extensive limitations on the types of business activities in which it could engage. The HOLA limits the activities of a multiple savings and loan holding company and its non-insured institution subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the OTS, and activities authorized by OTS regulation. The OTS is prohibited from approving any
acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions.
The HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring another savings institution or holding company thereof, without prior written approval of the OTS. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a non-subsidiary savings institution, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive factors.
Federal law generally provides that no "person," acting directly or indirectly or through or in concert with one or more other persons, may acquire "control," as that term is defined in OTS regulations, of a federally-insured savings institution without giving at least 60 days written notice to the OTS and providing the OTS an opportunity to disapprove of the proposed acquisition. Such acquisitions of control may be disapproved if it is determined, among other things, that (i) the acquisition would substantially lessen competition; (ii) the financial condition of the acquiring person might jeopardize the financial stability of the savings institution or prejudice the interests of its depositors; or (iii) the competency, experience or integrity of the acquiring person or the proposed management personnel indicates that it would not be in the interest of the depositors or the public to permit the acquisition of control by such person.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 was enacted in response to public concerns regarding corporate accountability in connection with recent accounting scandals. The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The Sarbanes-Oxley Act generally applies to all companies that file or are required to file periodic reports with the SEC, under the Securities Exchange Act of 1934.
The Sarbanes-Oxley Act includes very specific additional disclosure requirements and new corporate governance rules requiring the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules, and mandates further studies of certain issues by the SEC. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.
Although management anticipates that the Registrant will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on the Registrant's results of operations or financial condition.
The USA PATRIOT Act
The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. Certain provisions of the Act impose affirmative obligations on a broad range of financial institutions, including thrifts, like First Federal. These obligations include enhanced anti-money laundering programs, customer identification programs and regulations relating to private banking accounts or correspondence accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States).
The federal banking agencies have begun to propose and implement regulations pursuant to the USA PATRIOT Act. These proposed and interim regulations would require financial institutions to adopt the policies and procedures contemplated by the USA PATRIOT Act.
Federal Securities Law
Shares of the Company's common stock are registered with the SEC under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is also subject to the proxy rules, tender offer rules, insider trading restrictions, annual and periodic reporting, and other requirements of the Exchange Act.
FEDERAL AND STATE TAXATION
Federal Taxation. For federal income tax purposes, the Registrant and its subsidiaries file a consolidated federal income tax return on a fiscal year basis using the accrual method of accounting.
Retained earnings of the Registrant at June 30, 2005 included approximately $9.2 million, which constitute allocations to bad debt reserves for federal income tax purposes and for which no provision for taxes on income has been made. If such allocations are charged for other than bad debt losses, taxable income is created to the extent of the charges.
Deferred income taxes arise from the recognition of certain items of income and expense for tax purposes in years different from those in which they are recognized in the consolidated financial statements. The Registrant accounts for deferred income taxes by the liability method, applying the enacted statutory rates in effect at the balance sheet date to differences between the book basis and the tax basis of assets and liabilities. The resulting deferred tax liabilities and assets are adjusted to reflect changes in the tax laws.
The Registrant is subject to the corporate alternative minimum tax which is imposed to the extent it exceeds the Registrant's regular income tax for the year. The alternative minimum tax will be imposed at the rate of 20% of a specially computed tax base. Included in this base will be a number of preference items, including the following: (i) interest on certain tax-exempt bonds issued after August 7, 1986; and (ii) an "adjusted current earnings" computation which is similar to a tax earnings and profits computation. In addition, for purposes of the alternative minimum tax, the amount of alternative minimum taxable income that may be offset by net operating losses is limited to 90% of alternative minimum taxable income.
The Registrant has not been audited by the Internal Revenue Service for more than ten years. For additional information regarding taxation, see Note 10 of Notes to Consolidated Financial Statements.
Iowa Taxation. The Bank currently files an Iowa franchise tax return. The Registrant and all non-bank subsidiaries currently file a combined Iowa corporation income tax return on a fiscal-year basis. The state of Iowa imposes a tax on the Iowa franchise taxable income of savings institutions at the rate of 5%. Iowa franchise taxable income is generally similar to federal taxable income except that interest from state and municipal obligations is taxable, and no deduction is allowed for state franchise taxes. The state corporation income tax ranges from 6% to 12% depending upon Iowa corporation taxable income. Interest from federal securities is not taxable for purposes of the Iowa corporation income tax.
Delaware Taxation. Delaware franchise taxes are imposed on the Registrant. Two methods are provided for calculating the tax and the lesser tax is payable. The first method is based on authorized number of shares. The tax under this method is $112.50 for the first 10,000 authorized shares plus $62.50 for each additional 10,000 shares or part thereof. The second method is based on assumed par value capital. The tax rate under this method is $250 per $1,000,000 or portion thereof of assumed par value capital. "Assumed par" is computed by dividing total gross assets by total issued shares (including treasury shares). "Assumed par value capital" is calculated by multiplying the lesser of "assumed par" or stated par value by total authorized shares. For fiscal 2005 the Registrant recorded Delaware franchise tax expense of $47,125 and submitted payments that totaled $47,575.
ITEM 2
ITEM 2 PROPERTIES - -----------------
The Company conducts its business through its main office located in Sioux City, Iowa, and 14 branch offices located in the market area. The following table sets forth certain information concerning the main office and each branch office of the Registrant at June 30, 2005. The aggregate net book value of the Registrant's premises and equipment was $13.1 million at June 30, 2005.
(1) The lease provides for tenant's right and option to extend the term of the lease for two five-year periods.
The Registrant's accounting and record keeping activities are maintained on an in-house data processing system. The Registrant owns data processing equipment it uses for its internal processing needs. The net book value of such data processing equipment and related software at June 30, 2005, was $787,000.
ITEM 3
ITEM 3 LEGAL PROCEEDINGS - ------ -----------------
There are various claims and lawsuits in which the Registrant is periodically involved incident to the Registrant's business. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits.
ITEM 4
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------ ---------------------------------------------------
No matters were submitted during the fourth quarter of fiscal 2005 to a vote of security holders.
PART II
ITEM 5
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND - ------ ------------------------------------------------------------------------- ISSUER REPURCHASE OF EQUITY SECURITIES --------------------------------------
The Company's common stock is listed on the Nasdaq National Market under the symbol "FFSX." As of August 17, 2005, the Company had 1,925 stockholders of record (excluding the number of persons or entities holding stock in nominee or "street" name through various brokerage firms), and 3,548,703 shares outstanding. The following table sets forth market price and dividend information for the Company's common stock. Information is presented for each quarter of the previous two fiscal years.
Cash Fiscal Year Ended Dividends June 30, 2005 High Low Declared ------------------- ----------- ----------- ----------- First quarter $ 23.60 $ 20.00 $ 0.10 Second quarter 24.00 22.39 0.10 Third quarter 23.69 21.40 0.10 Fourth quarter 22.97 19.60 0.10
Cash Fiscal Year Ended Dividends June 30, 2004 High Low Declared ------------------- ----------- ----------- ----------- First quarter $ 22.60 $ 17.55 $ 0.08 Second quarter 25.24 21.57 0.09 Third quarter 25.10 20.70 0.09 Fourth quarter 24.00 20.60 0.09
Payment of dividends on the Common Stock is subject to determination and declaration by the Board of Directors and will depend upon a number of factors, including capital requirements, regulatory limitations on the payment of dividends, the Company's results of operations and financial condition, tax considerations and general economic conditions. No assurance can be given that dividends will be declared or, if declared, what the amount of dividends will be, or whether such dividends, once declared, will continue.
There were no sales of unregistered securities during fiscal 2005.
The following table presents a summary of the Registrant's share repurchases during the quarter ended June 30, 2005 under a share repurchase plan announced in August 2003 authorizing the repurchase of up to 377,000 shares (10% of the then-issued and outstanding stock).
ITEM 6
ITEM 6 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA - ------ ----------------------------------------------
Pages 1 through 3 of the Annual Report to Stockholders are herein incorporated by reference.
ITEM 7
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------ ----------------------------------------------------------------------- OF OPERATIONS -------------
Pages 4 through 18 of the Annual Report to Stockholders are herein incorporated by reference.
Contractual Obligations. The following table presents, as of June 30, 2005, the expected future payments of the Registrant's contractual obligations.
- --------------- (1) See Note 9, Advances from FHLB and other borrowings, of the Notes to Consolidated Financial Statements for additional information. (2) Includes $2.564 million in repurchase agreements which are due in less than one year. (3) 10-year lease for branch banking office. Includes rent and estimated share of tax and maintenance expense.
ITEM 7A
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK - ------- ---------------------------------------------------------
Page 16 of the Annual Report to Stockholders is herein incorporated by reference.
ITEM 8
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------ -------------------------------------------
Pages 19 through 55 of the Annual Report to Stockholders are herein incorporated by reference.
ITEM 9
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL - ------ ------------------------------------------------------------------------- DISCLOSURE -----------
Not applicable.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES - -------- -----------------------
Under the supervision and with the participation of management, including the Registrant's Chief Executive Officer and Chief Financial Officer, the Registrant evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) at the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Registrant's disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Registrant files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. There have been no significant changes in the Registrant's internal control over financial reporting during the Registrant's fourth quarter of fiscal year 2004 that have materially affected, or are reasonably likely to materially affect, the Registrant's internal control over financial reporting.
Management's Report on Internal Control over Financial Reporting as of June 30, 2005 appears on page 23 of the Company's 2005 Annual Report to Stockholders which is incorporated herein by reference.
The Attestation Report of the independent registered public accounting firm on management's assessment of the Company's internal control over financial reporting appears on pages 21 - 22 of the Company's 2005 Annual Report to Stockholders which is incorporated herein by reference.
ITEM 9B.
ITEM 9B. OTHER INFORMATION - -------- -----------------
Not applicable.
PART III
ITEM 10
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------- --------------------------------------------------
The Company has adopted a Code of Ethics that applies to the Company's principal executive officer, principal financial officer, principal accounting officer, or controller or persons performing similar functions. The Code of Ethics may be accessed on the Company's website at www.firstfederalbank.com.
Information concerning Directors and Executive Officers of the Registrant is incorporated herein by reference from the Registrant's definitive Proxy Statement dated September 22, 2005.
ITEM 11
ITEM 11 EXECUTIVE COMPENSATION - ------- ----------------------
Information concerning executive compensation is incorporated herein by reference from the Registrant's definitive Proxy Statement dated September 22, 2005.
ITEM 12
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND - ------- ------------------------------------------------------------------------ RELATED STOCKHOLDER MATTERS ---------------------------
Information concerning security ownership of certain owners and management is incorporated herein by reference from the Registrant's definitive Proxy Statement dated September 22, 2005.
The Registrant has adopted four equity-based compensation plans: the First Federal Savings Bank of Siouxland 1992 Incentive Stock Option Plan (the "1992 Stock Option Plan"), the 1992 Stock Option Plan for Outside Directors (the "Directors' Plan"), the 1999 Stock Option Plan (the "1999 Stock Option Plan") and the 1999 Recognition and Retention Plan (the "1999 Recognition Plan"). All such plans have been approved by stockholders of the Registrant. The Equity Compensation Plan Table is incorporated herein by reference from the Registrant's definitive proxy statement dated September 22, 2005.
ITEM 13
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------- ----------------------------------------------
Information concerning relationships and transactions is incorporated herein by reference from the Registrant's definitive Proxy Statement dated September 22, 2005.
ITEM 14
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES - ------- --------------------------------------
The "Proposal II - Ratification of Appointment of Independent Auditors" Section of the Registrant's definitive Proxy Statement dated September 22, 2005 is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES - -------- ---------------------------------------
(1) Financial Statements --------------------
The following information appearing in the Registrant's Annual Report to Stockholders for the year ended June 30, 2005, is incorporated by reference in this Annual Report on Form 10-K as Exhibit 13.
Annual Report Section Pages in Annual Report - --------------------- ----------------------
Selected Financial Data 1-3
Management's Discussion and Analysis of Financial Condition and Results of Operations 4-18
Reports of Independent Registered Public 19-22 Accounting Firms
Management's Report on Internal Control over Financial Reporting 23
Consolidated Balance Sheets 24
Consolidated Statements of Income 25
Consolidated Statements of Stockholders' Equity and Comprehensive Income 26
Consolidated Statements of Cash Flows 27-28
Notes to Consolidated Financial 29-55 Statements
With the exception of the afore-mentioned information, the Registrant's Annual Report to Stockholders for the year ended June 30, 2005 is not deemed filed as part of this Annual Report on Form 10-K.
(2) Financial Statement Schedules -----------------------------
All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements.
(3) Exhibits --------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST FEDERAL BANKSHARES, INC.
Date: September 13, 2005 By: /s/ Barry E. Backhaus ------------------------------------- Barry E. Backhaus President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.