UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ___________
Commission File Number 0-28312
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 71-0785261
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 West Stephenson
Harrison, Arkansas 72601
- ------------------------------------------ --------------------
(Address of principal executive office) (Zip Code)
(870) 741-7641
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: As of August 10,
2000, there were issued and outstanding 3,658,481 shares of the Registrant's
Common Stock, par value $.01 per share.
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
As of June 30, 2000 (unaudited) and December 31, 1999 1
Consolidated Statements of Income and Comprehensive Income for
the three and six months ended June 30, 2000 (unaudited) and 1999 (unaudited) 2
Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 2000 (unaudited) 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 (unaudited) and 1999 (unaudited) 4
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands)
June 30, December 31,
ASSETS 2000 1999
(Unaudited)
--------- ---------
Cash and cash equivalents $ 9,621 $ 9,983
Investment securities - held to maturity 191,806 189,263
Federal Home Loan Bank stock 4,556 4,258
Loans receivable, net of allowance 483,574 459,978
Accrued interest receivable 6,463 5,977
Real estate acquired in settlement of loans, net 372 3,940
Office properties and equipment, net 7,297 6,809
Prepaid expenses and other assets 486 511
--------- ---------
TOTAL ASSETS $ 704,175 $ 680,719
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 535,849 $ 507,875
Federal Home Loan Bank advances 88,866 83,972
Advance payments by borrowers for
taxes and insurance 538 1,089
Other liabilities 2,427 8,146
--------- ---------
Total liabilities 627,680 601,082
--------- ---------
MINORITY INTEREST 14 822
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 5,000,000 shares
authorized, none issued
Common stock, $.01 par value, 20,000,000 shares
authorized, 5,153,751 shares issued, 3,693,481 and
4,039,374 shares outstanding at June 30, 2000
and December 31, 1999, respectively 52 52
Additional paid-in capital 50,886 50,793
Employee stock benefit plans (3,246) (3,867)
Retained earnings-substantially restricted 54,839 52,598
--------- ---------
102,531 99,576
Treasury stock, at cost, 1,460,270 and
1,114,377 shares at June 30, 2000 and
December 31, 1999, respectively (26,050) (20,761)
--------- ---------
Total stockholders' equity 76,481 78,815
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 704,175 $ 680,719
========= =========
See notes to unaudited consolidated financial statements.
1
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except earnings per share)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
INTEREST INCOME:
Loans receivable $ 9,434 $ 8,772 $18,581 $17,582
Investment securities 3,458 2,634 6,812 4,878
Other 17 121 50 390
------- ------- ------- -------
Total interest income 12,909 11,527 25,443 22,850
------- ------- ------- -------
INTEREST EXPENSE:
Deposits 6,727 6,090 13,147 12,072
Other borrowings 1,280 599 2,505 1,263
------- ------- ------- -------
Total interest expense 8,007 6,689 15,652 13,335
------- ------- ------- -------
NET INTEREST INCOME 4,902 4,838 9,791 9,515
PROVISION FOR LOAN LOSSES -- -- -- 20
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,902 4,838 9,791 9,495
------- ------- ------- -------
NONINTEREST INCOME:
Deposit fee income 268 239 495 459
Other 183 274 341 447
------- ------- ------- -------
Total noninterest income 451 513 836 906
------- ------- ------- -------
NONINTEREST EXPENSES:
Salaries and employee benefits 1,860 1,722 3,857 3,473
Net occupancy expense 276 219 531 436
Federal insurance premiums 26 70 53 140
Provision for real estate losses 9 310 9 312
Data processing 254 214 460 417
Postage and supplies 101 101 242 215
Other 483 406 989 778
------- ------- ------- -------
Total noninterest expenses 3,009 3,042 6,141 5,771
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 2,344 2,309 4,486 4,630
INCOME TAX PROVISION 772 727 1,484 1,530
------- ------- ------- -------
NET INCOME AND COMPREHENSIVE INCOME $ 1,572 $ 1,582 $ 3,002 $ 3,100
======= ======= ======= =======
EARNINGS PER SHARE:
Basic $ 0.44 $ 0.39 $ 0.82 $ 0.75
======= ======= ======= =======
Diluted $ 0.44 $ 0.39 $ 0.82 $ 0.75
======= ======= ======= =======
Cash Dividends Declared $ 0.10 $ 0.08 $ 0.20 $ 0.16
======= ======= ======= =======
See notes to unaudited consolidated financial statements.
2
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(In Thousands)
(Unaudited)
Issued Employee
Common Stock Additional Stock Treasury Stock Total
------------------ Paid-In Benefit Retained ------------------- Stockholders'
Shares Amount Capital Plans Earnings Shares Amount Equity
------ ------ ---------- --------- --------- ------ ----- -------------
Balance, December 31, 1999 5,153,751 $52 $50,793 $(3,867) $52,598 1,114,377 $(20,761) $78,815
Net income 3,002 3,002
Release of ESOP shares 160 208 368
Stock compensation expense 413 413
Shares released from restricted
stock trust (67) (67)
Purchase of treasury stock, at cost 345,893 (5,289) (5,289)
Dividends paid (761) (761)
--------- ---- ------- ------- ------- --------- -------- -------
Balance, June 30, 2000 5,153,751 $ 52 $50,886 $(3,246) $54,839 1,460,270 $(26,050) $76,481
========= ==== ======= ======= ======= ========= ======== =======
See notes to unaudited consolidated financial statements.
3
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended June 30,
-----------------------
2000 1999
-------- --------
OPERATING ACTIVITIES:
Net income $ 3,002 $ 3,100
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses -- 20
Provision for real estate losses 9 312
Deferred tax provision (benefit) 348 (183)
Federal Home Loan Bank stock dividends (207) (105)
Loss (gain) on sale of repossessed assets, net (2) 9
Originations of loans held for sale (2,298) (11,125)
Proceeds from sales of loans 2,714 11,821
Gain on sale of mortgage loans originated to sell (28) (147)
Depreciation 328 256
Depreciation on real estate owned 32 64
Accretion of deferred loan fees, net (250) (439)
Release of ESOP shares 312 360
Stock compensation expense 413 377
Changes in operating assets & liabilities:
Accrued interest receivable (486) (591)
Prepaid expenses & other assets 22 (360)
Other liabilities (150) 456
-------- --------
Net cash provided by operating activities 3,759 3,825
-------- --------
INVESTING ACTIVITIES:
Purchases of investment securities-held to
maturity (10,633) (65,693)
Proceeds from maturities of investment
securities-held to maturity 2,000 26,432
Loan originations, net of repayments (23,027) (1,379)
Proceeds from sales of real estate owned 2,885 125
Purchases of office properties and equipment (830) (902)
-------- --------
Net cash used by investing activities (29,605) (41,417)
-------- --------
(Continued)
4
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended June 30,
-----------------------
2000 1999
-------- --------
FINANCING ACTIVITIES:
Net increase in deposits 27,974 21,631
Advances from FHLB 85,375 14,450
Repayment of advances from FHLB (80,481) (10,456)
Net decrease in advance payments
by borrowers for taxes & insurance (551) (522)
Purchase of treasury stock (5,289) (4,382)
Dividends paid (761) (698)
Distributions related to minority interest (783) --
-------- --------
Net cash provided by financing activities 25,484 20,023
-------- --------
Net decrease in cash and cash equivalents (362) (17,569)
CASH AND CASH EQUIVALENTS:
Beginning of period 9,983 26,163
-------- --------
End of period $ 9,621 $ 8,594
======== ========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for:
Interest $ 15,579 $ 13,229
======== ========
Income taxes $ 1,245 $ 1,634
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Real estate acquired in settlement of loans $ 240 $ 343
======== ========
Loans to facilitate sales of real estate owned $ 948 $ 102
======== ========
(Concluded)
See notes to unaudited consolidated financial statements.
5
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
First Federal Bancshares of Arkansas, Inc. (the "Corporation") is a unitary
holding company which owns all of the stock of First Federal Bank of Arkansas,
FA (the "Bank"). The Bank provides a broad line of financial products to
individuals and small to medium-sized businesses. The consolidated financial
statements also include the accounts of the Bank's wholly-owned subsidiary,
First Harrison Service Corporation ("FHSC"), whose activities are limited to
owning an interest in a repossessed commercial property. During the first
quarter of 1998, in settlement of a loan, FHSC obtained 75% ownership of a
partnership that owned and operated a 202 room hotel in Oklahoma. The financial
position and results of operations of this hotel property have been consolidated
in the financial statements. The remaining 25% ownership is reflected in the
consolidated statements of financial condition as minority interest. Such
property was sold in the second quarter of 2000.
The accompanying unaudited consolidated financial statements of the Corporation
have been prepared in accordance with instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. However, such
information reflects all adjustments which are, in the opinion of management,
necessary for a fair statement of results for the interim periods.
The accompanying consolidated financial statements include the accounts of the
Corporation and the Bank. All material intercompany transactions have been
eliminated in consolidation.
The results of operations for the six months ended June 30, 2000 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2000. The unaudited consolidated financial statements and notes
thereto should be read in conjunction with the audited financial statements and
notes thereto for the year ended December 31, 1999, contained in the
Corporation's 1999 Annual Report to Stockholders.
NOTE 2 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as "derivatives"), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure those
instruments at fair value. SFAS 133 was originally effective for fiscal years
beginning after June 15, 1999. However, in June 1999 FASB issued Statement No.
137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF
THE EFFECTIVE DATE OF FASB STATEMENT NO. 133 ("SFAS 137"). SFAS 137 deferred the
effective date of SFAS 133 for all fiscal quarters of all fiscal years beginning
after June 15, 2000.
6
Management has not yet made a determination as to the effect, if any, the
adoption of SFAS 133 will have on the Company's financial position or results of
operations.
NOTE 3 - EARNINGS PER SHARE
The weighted average number of common shares used to calculate earnings per
share for the periods ended June 30, 2000 and 1999 were as follows:
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Basic weighted - average shares 3,569,403 4,092,848 3,640,909 4,118,953
Effect of dilutive securities -- -- -- --
--------- --------- --------- ---------
Diluted weighted - average shares 3,569,403 4,092,848 3,640,909 4,118,953
NOTE 4 - DECLARATION OF DIVIDENDS
At their meeting on May 23, 2000, the Board of Directors declared a $.10 (ten
cent) per share cash dividend on the common stock of the Corporation. The cash
dividend was paid on June 23, 2000 to the stockholders of record at the close of
business on June 9, 2000.
NOTE 5 - INVESTMENT SECURITIES
Investment securities consisted of the following (in thousands):
June 30, 2000
----------------------
Amortized Fair
HELD TO MATURITY Cost Value
-------- --------
U. S. Government and
Agency obligations $191,806 $181,183
======== ========
7
NOTE 6 - LOANS RECEIVABLE
Loans receivable consisted of the following (in thousands):
June 30, 2000 December 31, 1999
------------- -----------------
First mortgage loans:
One- to four- family residences $ 375,917 $ 368,589
Other properties 33,292 28,830
Construction 30,317 25,797
Less:
Unearned discounts (212) (233)
Undisbursed loan funds (13,370) (10,437)
Deferred loan fees, net (2,850) (2,972)
--------- ---------
Total first mortgage loans 423,094 409,574
--------- ---------
Consumer and other loans:
Commercial 19,325 14,171
Automobile 14,598 13,205
Consumer 4,901 4,285
Home equity and second mortgage 17,499 15,009
Savings 2,170 1,887
Other 2,490 2,405
Add deferred loan costs 224 194
--------- ---------
Total consumer and other loans 61,207 51,156
--------- ---------
Allowance for loan losses (727) (752)
--------- ---------
Loans receivable, net $ 483,574 $ 459,978
========= =========
Non-accrual loans at June 30, 2000 were $953,000. All loans 90 days or more past
due are recorded as non-accrual.
A summary of the activity in the allowance for loan losses is as follows (in
thousands):
Balance at December 31, 1999 $752
Provisions for estimated losses --
Recoveries 16
Losses charged off (41)
----
Balance at June 30, 2000 $727
====
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
At June 30, 2000, the Corporation's assets amounted to $704.2 million
as compared to $680.7 million at December 31, 1999. The $23.5 million or 3.5%
increase was primarily due to an increase of $23.6 million or 5.1% in net loans
receivable. The effect of these increases on total assets was partially offset
by a $3.6 million or 90.6% decrease in real estate acquired in settlement of
loans, net. Loan originations for the six month period ended June 30, 2000
consisted of $42.1 million in one-to four- family residential loans, $800,000 in
multi-family residential, $13.3 million in commercial loans, $18.4 million in
construction loans and $19.4 million in consumer installment loans, of which
$6.9 million consisted of home equity loans and $7.1 million consisted of
automobile loans. At June 30, 2000, the Bank had outstanding loan commitments of
$2.4 million, unused lines of credit of $6.8 million, and the undisbursed
portion of construction loans of $13.4 million. Liabilities increased $26.6
million or 4.4% to $627.7 million at June 30, 2000 compared to $601.1 million at
December 31, 1999. The increase in liabilities was primarily due to an increase
of $28.0 million or 5.5% in deposits and an increase of $4.9 million or 5.8% in
advances from the Federal Home Loan Bank of Dallas ("FHLB of Dallas"). Such
increase was primarily used to fund the increase in net loans receivable.
Stockholders' equity amounted to $76.5 million or 10.9% of total assets at June
30, 2000 compared to $78.8 million or 11.6% of total assets at December 31,
1999. The decrease in stockholders' equity was primarily due to the purchase of
345,893 shares of treasury stock totaling $5.3 million in connection with the
Corporation's stock repurchase plan and to a lesser extent due to the payment of
cash dividends aggregating $761,000. Such decrease during the six months ended
June 30, 2000 was partially offset by net income of $3.0 million resulting from
continued profitable operations.
Non-performing assets, consisting of non-accruing loans and
repossessed assets, amounted to $1.3 million or .19% of total assets at June 30,
2000, compared to $5.3 million or .78% of total assets at December 31, 1999.
Such decrease in non-performing assets was primarily due to a sale of a
commercial real estate property in the second quarter of 2000.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
GENERAL. The Corporation reported net income of $1.6 million during
the three months ended June 30, 2000 compared to net income of $1.6 million for
the same period in 1999. The decrease of $10,000 in net income in the 2000
period compared to the same period in 1999 was primarily due to an increase in
income tax expense and a decrease in noninterest income which was offset by an
increase in net interest income and a decrease in noninterest expenses. Net
interest income rose from $4.8 million for the three months ended June 30, 1999
to $4.9 million for the same period in 2000. Net interest income is determined
by the Corporation's interest rate spread (i.e., the difference between the
yields earned on its interest-earning assets and the rates paid on its
interest-bearing liabilities) and the relative amounts of interest-earning
assets and interest-bearing liabilities. The Corporation's interest rate spread
and net interest margin decreased to 2.46% and 2.92%,
9
respectively, for the 2000 three month period compared to 2.66% and 3.17%,
respectively, for the 1999 three month period. These and other significant
fluctuations in operations are discussed below.
INTEREST INCOME. Interest income amounted to $12.9 million for the
three months ended June 30, 2000 compared to $11.5 million for the same period
in 1999. The increase of $1.4 million or 12.0% was primarily due to an increase
in the average balances of investment securities and net loans receivable and in
the average yield earned on investment securities. The increase in the average
balance of investment securities was due to additional purchases of investment
securities. The increase in the average balance of net loans receivable was due
to the continued origination of loans. Such increase was partially offset by a
decline in the average balance of other interest-earning assets, primarily
interest-bearing deposits with banks.
INTEREST EXPENSE. Interest expense increased $1.3 million or 19.7% to
$8.0 million for the three months ended June 30, 2000 compared to $6.7 million
for the same period in 1999. Such increase was primarily due to an increase in
the average balance of FHLB of Dallas advances, an increase in interest rates
paid on advances replacing maturing advances, an increase in the average balance
of deposits and an increase in interest rates paid on such deposits.
NONINTEREST INCOME. Noninterest income decreased $62,000 or 12.1% to
$451,000 for the three months ended June 30, 2000 compared to $513,000 for the
three months ended June 30, 1999. The decrease for the three month comparable
periods was primarily due to decreases in gain on the sale of mortgage loans in
the secondary mortgage market and loan fees related to the origination of such
loans as well as a decline from a net profit to a net loss recognized from the
operations of real estate owned. The gain on the sale of mortgage loans in the
secondary mortgage market decreased $58,000 from $74,000 to $16,000 and loan
fees related to the origination of such loans decreased $14,000 from $22,000 to
$8,000. The decrease in noninterest income for the three months ended June 30,
2000 compared to the three months ended June 30, 1999 was also due to a decline
from a net profit to a net loss recognized from the operations of real estate
owned in the amount of $80,000 to a net loss of $64,000 from a net profit of
$16,000. The property primarily incurring such losses was disposed of in June
2000. The decrease in noninterest income for the three month comparable periods
ended June 30 was partially offset by an increase of $29,000 or 12.0% from
$239,000 to $268,000 in deposit fee income and an increase of $43,000 from
$11,000 to $54,000 in gross revenue from full service brokerage operations.
NONINTEREST EXPENSE. Noninterest expenses decreased $33,000 or 1.1%
between the 2000 and 1999 three month periods ended June 30. The decrease in
noninterest expenses during the three month period in 2000 compared to 1999 was
primarily due to a decrease in provision for real estate losses. Provision for
loss on real estate owned amounted to $9,000 compared to $310,000 for the three
month periods ended June 30, 2000 and 1999, respectively. The provision provided
for in 1999 was due to a write-down of a commercial real estate property. Such
property was disposed of in June 2000. Such decrease in noninterest expenses was
also due to a decrease of $44,000 from $70,000 to $26,000 in Federal Deposit
Insurance Corporation insurance premiums as a result of a decline in the deposit
assessment rate. The decrease in noninterest expense was minimized due to an
increase
10
in salaries and employee benefits, net occupancy expense, data processing
expense and advertising expense. Salaries and employee benefits amounted to $1.9
million compared to $1.7 million resulting in an increase of $138,000 or 8.0%
for the three month periods ended June 30, 2000 and 1999, respectively. Such
increase in salaries and employee benefits was primarily due to an increase in
personnel as well as salary and merit increases. Net occupancy expense for the
three months ended June 30, 2000 was $276,000 compared to $219,000 for the same
period in 1999 resulting in an increase of $57,000 or 26.0%. Data processing
expense increased $40,000 or 18.7% to $254,000 for the three months ended June
30, 2000 compared to $214,000 for the same period in 1999. Such increases were
primarily due to growth and additional product offerings. The increase of
$23,000 or 37.5% from $62,000 to $85,000 in advertising costs for the three
month comparable periods was due to promotion of new locations and product
offerings.
INCOME TAXES. Income taxes amounted to $772,000 and $727,000 for the
three months ended June 30, 2000 and 1999, respectively, resulting in effective
tax rates of 32.9% and 31.5%, respectively.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
GENERAL. The Corporation reported net income of $3.0 million during
the six months ended June 30, 2000 compared to $3.1 million for the same period
in 1999. The decrease of $98,000 in net income in the 2000 period compared to
the same period in 1999 was due to an increase in noninterest expenses which was
partially offset by an increase in net interest income. Net interest income
increased by $296,000 or 3.1% from $9.5 million to $9.8 million for the six
month periods ended June 30, 1999 and 2000, respectively. The Corporation's net
interest margin and interest rate spread was 2.94% and 2.48%, respectively, for
the six months ended June 30, 2000 compared to 3.15% and 2.62%, respectively,
for the same period in 1999.
INTEREST INCOME. Interest income amounted to $25.4 million for the
six months ended June 30, 2000 compared to $22.9 million for the same period
in 1999. The increase of $2.6 million or 11.4% was primarily due to increases
in the average balance of investment securities and net loans receivable and
in the average yield earned on investment securities. The increase in the
average balance of investment securities was due to additional purchases of
investment securities. The increase in the average balance of net loans
receivable was due to the continued origination of loans. Such increase was
partially offset by a decline in the average yield earned on loans
receivable. In addition, the average balance of other interest earning
assets, primarily overnight funds, decreased during the comparable periods.
INTEREST EXPENSE. Interest expense increased $2.3 million or 17.4% to
$15.7 million for the six months ended June 30, 2000 compared to $13.3 million
for the same period in 1999. Such increase was primarily due to an increase in
the average balance of FHLB of Dallas advances, an increase in interest rates
paid on advances replacing maturing advances, an increase in the average balance
of deposits and an increase in interest rates paid on such deposits.
11
NONINTEREST INCOME. Noninterest income decreased $70,000 or 7.7% to
$836,000 for the six months ended June 30, 2000 compared to $906,000 for the six
months ended June 30, 1999. The decrease for the six month comparable periods
was primarily due to decreases in gain on the sale of mortgage loans in the
secondary mortgage market and loan fees related to the origination of such loans
as well as an increase in the net loss recognized from the operations of real
estate owned. The gain on the sale of mortgage loans in the secondary mortgage
market decreased $119,000 from $147,000 to $28,000 and loan fees related to the
origination of such loans decreased $33,000 from $44,000 to $11,000. The
decrease in noninterest income for the six months ended June 30, 2000 compared
to the six months ended June 30, 1999 was also due to an increase of $68,000
from $43,000 to $111,000 in the net loss recognized from the operations of real
estate owned. The property primarily incurring such losses was disposed of in
June 2000. The decrease in noninterest income for the six month comparable
periods ended June 30 was partially offset by an increase of $36,000 or 7.9%
from $459,000 to $495,000 in deposit fee income and an increase of $78,000 from
$14,000 to $92,000 in gross revenue from full service brokerage operations.
NONINTEREST EXPENSE. Noninterest expenses increased $370,000 or 6.4%
between the 2000 and 1999 six month periods ended June 30. Noninterest expense
increased primarily due to an increase in salaries and employee benefits, net
occupancy expense, data processing expense and advertising expense. Salaries and
employee benefits amounted to $3.9 million compared to $3.5 million resulting in
an increase of $384,000 or 11.1% for the six month periods ended June 30, 2000
and 1999, respectively. Such increase in salaries and employee benefits was
primarily due to an increase in personnel as well as salary and merit increases.
Net occupancy expense for the six months ended June 30, 2000 was $531,000
compared to $436,000 for the same period in 1999 resulting in an increase of
$95,000 or 21.7%. Data processing expense increased $43,000 or 10.3% to $460,000
for the six months ended June 30, 2000 compared to $417,000 for the same period
in 1999. Such increase was primarily due to growth and additional product
offerings. The increase of $59,000 or 52.6% from $112,000 to $171,000 in
advertising costs for the six month comparable periods was due to promotion of
new locations and product offerings. The increase in noninterest expenses during
the six month period in 2000 compared to 1999 was partially offset by a decrease
in provision for real estate losses. Provision for loss on real estate owned
amounted to $9,000 compared to $312,000 for the six month periods ended June 30,
2000 and 1999, respectively. The provision provided for in 1999 was due to a
write-down of a commercial real estate property. Such property was disposed of
in June 2000. The increase in noninterest expenses was also partially offset by
a decrease of $87,000 from $140,000 to $53,000 in Federal Deposit Insurance
Corporation insurance premiums as a result of a decline in the deposit
assessment rate.
INCOME TAXES. Income taxes amounted to $1.5 million and $1.5 million
for the six months ended June 30, 2000 and June 30, 1999, respectively,
resulting in effective tax rates of 33.1% and 33.0%, respectively.
12
LIQUIDITY AND CAPITAL RESOURCES
The Bank's liquidity, represented by cash and cash equivalents and
eligible investment securities, is a product of its operating, investing and
financing activities. The Bank's primary source of funds are deposits,
collections on outstanding loans, maturities and calls of investment securities
and other short-term investments and funds provided from operations. While
scheduled loan amortization and maturing investment securities and short-term
investments are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions and competition. The Bank manages the pricing of its deposits to
maintain a steady deposit balance. In addition, the Bank invests excess funds in
overnight deposits and other short-term interest-earning assets which provide
liquidity to meet lending requirements. The Bank has generally been able to
generate enough cash through the retail deposit market, its traditional funding
source, to offset the cash utilized in investing activities. As an additional
source of funds, the Bank has borrowed from the FHLB of Dallas. At June 30,
2000, the Bank had outstanding advances from the FHLB of Dallas of $88.9
million. Such advances were used in the Bank's normal operating and investing
activities.
As of June 30, 2000, the Bank's regulatory capital was well in excess
of all applicable regulatory requirements. At June 30, 2000, the Bank's
tangible, core and risk-based capital ratios amounted to 10.6%, 10.6% and 20.5%,
respectively.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein
have been prepared in accordance with instructions to Form 10-Q, which require
the measurement of financial position and operating results in terms of
historical dollars, without considering changes in relative purchasing power
over time due to inflation.
Unlike most industrial companies, virtually all of the Bank's assets
and liabilities are monetary in nature. As a result, interest rates generally
have a more significant impact on a financial institution's performance than
does the effect of inflation.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements and
information relating to the Corporation that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. In addition, in those and other portions of this document, the words
"anticipate," "believe," "estimate," "except," "intend," "should" and similar
expressions, or the negative thereof, as they relate to the Corporation or the
Corporation's management, are intended to identify forward-looking statements.
Such statements reflect the current views of the Corporation with respect to
future looking events and are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize or
should underlying assumptions prove incorrect, actual results may vary from
those described herein
13
as anticipated, believed, estimated, expected or intended. The Corporation does
not intend to update these forward-looking statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
For a discussion of the Corporation's asset and liability management
policies as well as the potential impact of interest rate changes upon the
market value of the Bank's portfolio equity, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Corporation's
1999 Annual Report to Stockholders. There has been no material change in the
Corporation's asset and liability position or the market value of the Bank's
portfolio equity since December 31, 1999.
14
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
PART II
Item 1. LEGAL PROCEEDINGS
Neither the Corporation nor the Bank is involved
in any pending legal proceedings other than
non-material legal proceedings occurring in the
ordinary course of business.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 27, 2000, the Corporation held an annual
meeting of stockholders for the following
purposes:
(1) To elect two directors for a term of three
years; and
(2) To ratify the appointment by the Board of
Directors of Deloitte and Touche LLP as the
Corporation's independent auditors for the
year ending December 31, 2000.
The results of the voting are set forth below:
Proposal One (Election of Directors):
AGAINST/
NAME FOR WITHHELD
Frank L. Coffman, Jr. 3,247,454 126,359
John Paul Hammerschmidt 3,247,854 125,959
Proposal Two (Ratification of Auditors):
FOR AGAINST ABSTAIN
3,286,736 78,177 8,900
15
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
16
SIGNATURES
Pursuant to the requirements 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 BANCSHARES OF ARKANSAS, INC.
Date: August 14, 2000 By: /s/ LARRY J. BRANDT
-------------------------
Larry J. Brandt
President
Date: August 14, 2000
By: /s/ TOMMY W. RICHARDSON
-------------------------
Tommy W. Richardson
Chief Financial Officer
17