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, 1997
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 incorporation or (I.R.S. Employer
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
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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 6, 1997, there
were issued and outstanding 4,896,063 shares of the Registrant's Common Stock,
par value $.01 per share.
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
(As of June 30, 1997 (unaudited) and December 31, 1996).......... 1
Consolidated Statements of Income for the three and six months
ended June 30, 1997 (unaudited) and 1996 (unaudited)............. 2
Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 1997 (unaudited)........................... 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 (unaudited) and 1996 (unaudited)............. 4
Notes to Unaudited Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 9
Part II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 14
Item 2. Changes in Securities............................................ 14
Item 3. Defaults Upon Senior Securities.................................. 14
Item 4. Submission of Matters to a Vote of Security Holders.............. 14
Item 5. Other Information................................................ 15
Item 6. Exhibits and Reports on Form 8-K................................. 15
SIGNATURES................................................................. 16
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands)
JUNE 30, DECEMBER 31,
ASSETS 1997 1996
--------------- -----------------
(UNAUDITED)
Cash and cash equivalents.................................................... $ 16,198 $ 6,819
Investment securities:
Available for sale, at fair value.......................................... -- 340
Held to maturity, at amortized cost........................................ 91,019 90,982
Federal Home Loan Bank stock................................................. 3,496 3,026
Loans receivable, net........................................................ 415,000 396,508
Accrued interest receivable.................................................. 3,830 3,620
Real estate acquired in settlement of loans, net............................. 194 154
Office properties and equipment, net......................................... 5,134 3,565
Prepaid expenses and other assets............................................ 333 725
--------------- -----------
TOTAL ASSETS............................................................. $ 535,204 $ 505,739
--------------- -----------
--------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits..................................................................... $ 444,151 $ 422,858
Federal Home Loan Bank advances.............................................. 6,000 --
Advance payments by borrowers for taxes and insurance........................ 467 806
Other liabilities............................................................ 4,467 1,317
--------------- -----------
Total Liabilities........................................................ 455,085 424,981
--------------- -----------
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, 4,896,063 shares outstanding................................ 52 52
Additional paid-in capital................................................... 50,141 49,975
Common stock acquired by or committed to be acquired by employee stock
benefit plans.............................................................. (6,791) (3,848)
Unrealized gain on investment securities available for sale, net of income
taxes...................................................................... -- 202
Retained earnings-substantially restricted................................... 40,897 38,557
--------------- -----------
84,299 84,938
Treasury stock, at cost, 257,688 shares...................................... (4,180) (4,180)
--------------- -----------
Total stockholders' equity............................................... 80,119 80,758
--------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................... $ 535,204 $ 505,739
--------------- -----------
--------------- -----------
See notes to unaudited consolidated financial statements.
1
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
INTEREST INCOME:
Loans receivable...................................................... $ 8,411 $ 7,427 $ 16,631 $ 14,673
Investment securities................................................. 1,541 1,589 2,988 2,956
Mortgage-backed securities............................................ 5 6 10 12
Other................................................................. 91 210 134 296
--------- --------- --------- ---------
Total interest income............................................... 10,048 9,232 19,763 17,937
--------- --------- --------- ---------
INTEREST EXPENSE:
Deposits.............................................................. 5,754 5,557 11,313 11,260
Other borrowings...................................................... 78 35 91 35
--------- --------- --------- ---------
Total interest expense.............................................. 5,832 5,592 11,404 11,295
--------- --------- --------- ---------
NET INTEREST INCOME..................................................... 4,216 3,640 8,359 6,642
PROVISION FOR LOAN LOSSES............................................... -- -- -- --
--------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES..................... 4216 3,640 8,359 6,642
--------- --------- --------- ---------
NONINTEREST INCOME:
Gain on sales of investment securities................................ 394 -- 394 --
Deposit fee income.................................................... 203 197 393 375
Other................................................................. 275 114 403 226
--------- --------- --------- ---------
Total noninterest income.......................................... 872 311 1,190 601
--------- --------- --------- ---------
NONINTEREST EXPENSES:
Salaries and employee benefits........................................ 2,105 1,029 3,371 2,000
Net occupancy expense................................................. 201 163 389 326
Federal insurance premiums............................................ 68 238 135 473
Provision for real estate losses...................................... 10 -- 10 --
Data processing....................................................... 206 189 411 368
Postage and supplies.................................................. 100 73 189 153
Other................................................................. 339 259 637 500
--------- --------- --------- ---------
Total noninterest expenses.......................................... 3,029 1,951 5,142 3,820
--------- --------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES................................ 2,059 2,000 4,407 3,423
PROVISION FOR INCOME TAXES.............................................. 739 692 1,577 1,172
--------- --------- --------- ---------
NET INCOME.............................................................. $ 1,320 $ 1,308 $ 2,830 $ 2,251
--------- --------- --------- ---------
--------- --------- --------- ---------
EARNINGS PER SHARE...................................................... $ 0.29 $ 0.28* $ 0.63 $ 0.47*
--------- --------- --------- ---------
--------- --------- --------- ---------
DIVIDENDS DECLARED PER SHARE............................................ $ 0.05 $ 0.00 $ 0.10 $ 0.00
--------- --------- --------- ---------
--------- --------- --------- ---------
* Earnings per share assumes the Corporation was a public company since
January 1, 1996.
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, 1997
(In Thousands)
(Unaudited)
UNREALIZED
GAIN ON
EMPLOYEE SECURITIES
ADDITIONAL STOCK AVAILABLE
COMMON PAID-IN BENEFIT FOR SALE, RETAINED TREASURY
STOCK CAPITAL PLANS NET EARNINGS STOCK TOTAL
------------- ----------- ----------- ----------- --------- --------- ---------
Balance, December 31, 1996................. $ 52 $ 49,975 $ (3,848) $ 202 $ 38,557 $ (4,180) $ 80,758
Net income................................. 2,830 2,830
Repayment of ESOP loan and related increase
in share value........................... 174 208 382
Common Stock acquired or committed to be
acquired for MRR Plan.................... (8) (3,968) (3,976)
Recognition of MRR Plan costs.............. 817 817
Net change in unrealized gain on securities
available for sale....................... (202) (202)
Dividends Paid............................. (490) (490)
--------- ----------- ----------- ----------- --------- --------- --------
Balance, June 30, 1997..................... $ 52 $ 50,141 $ (6,791) $ -- $ 40,897 $ (4,180) $ 80,119
--------- ----------- ----------- ----------- --------- --------- --------
--------- ----------- ----------- ----------- --------- --------- --------
See notes to unaudited consolidated financial statements.
3
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
-------------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income............................................................................. $ 2,830 $ 2,251
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for real estate losses..................................................... 10 --
Deferred tax provision............................................................... 75 134
Gain on sale of investment securities................................................ (394) --
Gain on sale of real estate owned.................................................... (150) (3)
Gain on sale of mortgage loans originated to sell.................................... (3) --
Depreciation......................................................................... 230 195
Accretion of deferred loan fees...................................................... (301) (360)
Repayment of ESOP loan and related increase in share value........................... 382 91
Recognition of MRR Plan costs........................................................ 817 --
Changes in operating assets & liabilities:
Accrued interest receivable........................................................ (210) (362)
Prepaid expenses & other assets.................................................... 392 (277)
Other liabilities.................................................................. 342 155
------- ---------
Net cash provided by operating activities........................................ 4,020 1,824
------- ---------
INVESTING ACTIVITIES:
Purchases of investment securities--held to maturity................................. (14,516) (38,085)
Proceeds from sale of investment securities--available for sale...................... 406 --
Proceeds from maturities of investment securities-held to maturity................... 14,008 23,048
Loan originations, net of repayments................................................. (18,590) (29,296)
Proceeds from sales of mortgage loans originated to sell............................. 294 --
Proceeds from sales of real estate owned............................................. 63 86
Purchases of office properties & equipment........................................... (1,799) (421)
------- ---------
Net cash used by investing activities............................................ (20,134) (44,668)
------- ---------
(Continued)
4
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
FINANCING ACTIVITIES:
Net increase in deposits.................................................................. 21,293 2,382
Advances from FHLB........................................................................ 6,000 --
Decrease in advance payments by borrowers for taxes & insurance........................... (339) (336)
Increase from issuance of common stock, net of related expenses........................... -- 45,777
Common stock acquired for MRR Plan........................................................ (971) --
Dividends paid............................................................................ (490) --
Net cash provided by financing activities............................................... 25,493 47,823
--------- ---------
Net increase in cash and cash equivalents................................................... 9,379 4,979
CASH AND CASH EQUIVALENTS:
Beginning of period....................................................................... 6,819 8,845
--------- ---------
End of period............................................................................. $ 16,198 $ 13,824
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest................................................................................ $ 11,291 $ 11,322
--------- ---------
--------- ---------
Income taxes............................................................................ $ 1,408 $ 874
--------- ---------
--------- ---------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Real estate acquired in settlement of loans............................................... $ 110 $ --
--------- ---------
--------- ---------
Loans to facilitate sales of real estate owned............................................ $ -- $ 54
--------- ---------
--------- ---------
Change in unrealized gains................................................................ $ (202) $ 4
--------- ---------
--------- ---------
Obligation assumed to acquire common stock for the MRR Plan............................... $ 3,005 $ --
--------- ---------
--------- ---------
(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
First Federal Bancshares of Arkansas, Inc. (the "Corporation") was
incorporated under Texas law in January 1996 by First Federal Bank of
Arkansas, FA (the "Bank") in connection with the conversion of the Bank from
a federally chartered mutual savings and loan association to a federally
chartered stock savings and loan association, the issuance of the Bank's
stock to the Corporation, and the offer and sale of the Corporation's common
stock by the Corporation (the "Conversion"). Upon consummation of the
Conversion on May 3, 1996, the Corporation became the unitary holding company
for the Bank. The financial statements presented herein that include periods
prior to May 3, 1996 include the activities of the Bank prior to the
Conversion.
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 (consisting
solely of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the interim periods.
The results of operations for the six months ended June 30, 1997 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1997. 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, 1996, contained in the
Corporation's 1996 Annual Report to Stockholders.
NOTE 2--PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Corporation and the Bank. All significant intercompany items have been
eliminated.
NOTE 3--EARNINGS PER SHARE
The average number of common shares used to calculate earnings per share for
the three months ended June 30, 1997 and June 30, 1996 was 4,521,744 and
4,741,524, respectively and for the six months ended June 30, 1997 and June
30, 1996 was 4,516,572 and 4,741,487, respectively. In addition, such
calculations for the 1996 periods assume that the Corporation was a public
company as of January 1, 1996.
6
NOTE 4--DECLARATION OF DIVIDENDS
At their meeting on May 21, 1997, the Board of Directors declared a $.05
(five cent) per share cash dividend on the common stock of the Corporation.
The cash dividend was paid on June 25, 1997 to the stockholders of record at
the close of business on June 11, 1997.
NOTE 5--INVESTMENT SECURITIES
Investment securities consisted of the following (in thousands):
JUNE 30, 1997
----------------------
AMORTIZED FAIR
HELD TO MATURITY COST VALUE
- ------------------------------------------------------------------------------------------- ----------- ---------
U. S. Government and Agency obligations.................................................... $ 90,809 $ 90,292
Mortgage-backed securities--FHLMC.......................................................... 210 219
----------- ---------
Total...................................................................................... $ 91,019 $ 90,511
----------- ---------
----------- ---------
7
NOTE 6--LOANS RECEIVABLE
Loans receivable consisted of the following (in thousands):
JUNE 30, 1997
-------------
First mortgage loans:
One- to four- family residences.................................................................. $ 354,460
Other properties................................................................................. 20,805
Construction..................................................................................... 19,373
Less:
Unearned discounts............................................................................. (1,214)
Undisbursed loan funds......................................................................... (7,391)
Deferred loan fees, net........................................................................ (3,360)
-------------
Total first mortgage loans................................................................... 382,673
-------------
Consumer and other loans:
Commercial....................................................................................... 5,804
Automobile....................................................................................... 7,648
Consumer......................................................................................... 3,984
Home equity and second mortgage.................................................................. 12,901
Savings.......................................................................................... 1,438
Other............................................................................................ 1,659
Add deferred loan costs.......................................................................... 131
-------------
Total consumer and other loans............................................................... 33,565
-------------
Allowance for loan losses.......................................................................... (1,238)
-------------
Loans receivable, net........................................................................ $ 415,000
-------------
-------------
Non-accrual loans at June 30, 1997 (in thousands) were $839. All loans 90
days or more past due are recorded as non-accrual. The Bank subsequent to
June 30 has classified a $4.4 million commercial real estate loan as
non-accrual. The loan payment for July, 1997 was not made due to
deteriorating cash flow from business operations. While the Bank is working
with counsel to pursue a positive resolution to this matter, the nature and
extent of a loss, if any, is not determinable at this time. To the extent
that the borrowers are not able to make timely loan payments, the Bank
intends to pursue various options, including the appointment of a receiver or
foreclosure of the property.
A summary of the activity in the allowances for loan and real estate losses
is as follows (in thousands):
REAL
LOANS ESTATE
--------- -----------
Balance at December 31, 1996.................................................................... $ 1,251 $ --
Provisions for estimated losses............................................................... -- 10
Recoveries.................................................................................... 8 --
Losses charged off............................................................................ (21) (10)
--------- --------
Balance at June 30, 1997........................................................................ $ 1,238 $ --
--------- --------
--------- --------
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
At June 30, 1997, the Corporation's assets amounted to $535.2 million as
compared to $505.7 million at December 31, 1996. The $29.5 million or 5.8%
increase was primarily due to an increase of $18.5 million or 4.7% in loans
receivable, net, a $9.4 million or 137.5% increase in cash and cash equivalents,
and a $1.6 million or 44.0% increase in office properties and equipment, net.
The loans receivable increase resulted from the continued origination of loans
during the six months ended June 30, 1997. Originations for the six month period
ended June 30, 1997 consisted of $43.0 million in one- to four- family
residential loans, $3.9 million in commercial loans, $9.4 million in
construction loans and $11.0 million in consumer installment loans, of which
$4.5 million consisted of home equity loans. At June 30, 1997, the Bank had
outstanding loan commitments of $2.5 million, unused lines of credit of $3.1
million, and the undisbursed portion of construction loans of $7.4 million. The
increase in office properties and equipment primarily consisted of a land
acquisition for future construction of a North Harrison, Arkansas full service
branch facility and the purchase of an existing full service branch at Crossover
Road in Fayetteville, Arkansas. Liabilities increased $30.1 million or 7.1% to
$455.1 million at June 30, 1997 compared to $425.0 million at December 31, 1996.
The increase in liabilities was primarily due to an increase of $21.3 million or
5.0% in deposits, a $6.0 million increase in advances from the Federal Home Loan
Bank ("FHLB") of Dallas and a $3.0 million outstanding commitment by the
Corporation to purchase stock to fund the management recognition and retention
plan ("MRR Plan"). The increases in deposits and advances from the FHLB of
Dallas were used to fund the net loan increase and to increase cash and cash
equivalents. Stockholders' equity amounted to $80.1 million or 14.97% of total
assets at June 30, 1997 compared to $80.8 million or 15.97% of total assets at
December 31, 1996. The primary reason for the decrease in stockholders' equity
was the cost of $4.0 million for the management recognition and retention plan
shares which was partially reduced by the shares of stock vested and accrued for
in the current quarter of $817,000. In addition, during the six months ended
June 30, 1997 cash dividends aggregating $490,000 were paid. The decline in
stockholders' equity was offset by $2.8 million of net income for the six months
ended June 30, 1997.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
GENERAL. The Corporation reported net income of $1.3 million during the
three months ended June 30, 1997 compared to net income of $1.3 million for the
same period in 1996. The conversion from a mutual association to a stock company
was not completed until May 3, 1996, therefore the three month period earnings
in 1996 do not reflect a complete quarter's utilization of the stock conversion
net proceeds. The net income for the three month comparative period remained
relatively unchanged even though the components of earnings changed. Net
interest income increased $576,000 or 15.8% due to an increase in the ratio of
interest-earning assets to interest-bearing liabilities to 116.5% for the 1997
period compared to 111.1% for the 1996
9
period. In addition, the Corporation's interest rate spread and net interest
margin increased to 2.54% and 3.29%, respectively, for the 1997 period
compared to 2.51% and 3.03%, respectively, for the 1996 period. 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 increase in
noninterest expense exceeded the increase in noninterest income. These and
other significant fluctuations in operations are discussed below.
INTEREST INCOME. Interest income amounted to $10.0 million for the three
months ended June 30, 1997 compared to $9.2 million for the same period in 1996.
The increase of $800,000 or 8.8% was primarily due to an increase in the average
balance of loans receivable. The increase in the average balance of loans
receivable was due to continued loan demand and portfolio growth.
INTEREST EXPENSE. Interest expense increased $200,000 or 4.3% to $5.8
million for the three months ended June 30, 1997 compared to $5.6 million for
the same period in 1996. Such increase was primarily due to an increase in the
average balance of deposits as well as an increase in the average rate paid on
other borrowings.
NONINTEREST INCOME. Noninterest income amounted to $872,000 for the three
months ended June 30, 1997 compared to $311,000 for the same period in 1996. The
increase of $561,000 or 180.4% was primarily due to a gain of $394,000 on the
sale of Federal Home Loan Mortgage Corporation ("FHLMC") stock, which was
previously classified as an available for sale investment, and to the current
recognition of $145,000 on previously deferred profit on the sale of real estate
owned.
NONINTEREST EXPENSE. Noninterest expenses increased $1.1 million or
55.3% between the 1997 and 1996 three month periods. Such increase was due
primarily to increases in salaries and employee benefits, including costs
associated with the adoption and implementation of the Corporation's employee
stock ownership plan and the Corporation's management recognition and
retention plan, additional costs attributable to being a public company,
advertising costs related to targeting special promotions and branch openings
and occupancy costs due to branch expansions. Such increases were partially
offset by a decline in the quarterly deposit insurance premiums in the amount
of $170,000 or 71.4% from $238,000 to $68,000 for the three month period June
30, 1996 and 1997, respectively. The increase in salaries and employee
benefits consisted primarily of a $754,000 expense related to the grant and
immediate vesting of 20% of the shares of stock awarded to the Bank's
executive officers and directors pursuant to the management recognition and
retention plan adopted by the Corporation's shareholders at the annual
meeting on May 7, 1997. In addition, in accordance with a 20% per year
vesting schedule, the quarter ended June 30, 1997 also included $63,000 in
accrued costs for the shares that will vest in May 1998. The future
management recognition and retention plan expense for currently awarded
shares should be significantly reduced to approximately $190,000 per quarter
as compared to $817,000 for the current quarter. However, such expense can be
affected by certain acceleration clauses contained in the plan which are
outside of the Corporation's control.
10
Salary and benefit costs also increased by $85,000 for the current quarter
over the previous year comparable period due to accounting recognition of
costs associated with the release of unallocated shares from the employee
stock ownership plan. The increase in salaries and employee benefits was also
due to normal salary and merit increases as well as an increase in personnel
resulting from expansion of the Bank's operations.
INCOME TAXES. Income taxes amounted to $739,000 and $692,000 for the three
months ended June 30, 1997 and 1996, respectively. The higher provision in the
1997 period was due to increased pre-tax income and to a higher effective tax
rate of 35.9% for the 1997 period compared to 34.6% for the 1996 period.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
GENERAL. The Corporation reported net income of $2.8 million during the six
months ended June 30, 1997 compared to $2.2 million for the same period in 1996.
The increase of $600,000 or 25.7% in net income in the 1997 period compared to
the same period in 1996 was due to an increase in net interest income, the sale
of an investment held as available for sale, the current recognition of a
previously deferred profit on the sale of real estate owned and a decline in the
deposit insurance premiums. Such increases were partially offset by an increase
in noninterest expenses primarily due to an increase in salaries and employee
benefits and income taxes. The increase in net interest income of $1.7 million
or 25.9% was due to an increase in the ratio of interest-earning assets to
interest bearing liabilities to 116.6% for the 1997 period compared to 109.2%
for the 1996 period. In addition, the Corporation's interest rate spread and net
interest margin increased to 2.56% and 3.31%, respectively, for the 1997 period
compared to 2.41% and 2.86%, respectively, for the 1996 period.
INTEREST INCOME. Interest income amounted to $19.8 million for the six
months ended June 30, 1997 compared to $17.9 million for the same period in
1996. The increase of $1.9 million or 10.2% was primarily due to an increase in
the average balance of loans receivable which was due to continued loan demand
and portfolio growth. Such increase was partially offset by a decline in the
average balance of investment securities, due to maturities and calls of such
investments, and overnight deposits. Such increase was also affected by a slight
decline in the average rate earned on loans receivable and a slight increase in
the average rate earned on investment securities.
INTEREST EXPENSE. Interest expense increased $100,000 or 1.0% to $11.4
million for the six months ended June 30, 1997 compared to $11.3 million for the
same period in 1996. Such increase was due to an increase in the average balance
of deposits which was substantially offset by a decrease in the rate paid on
such liabilities from 5.36% during the six months ended June 30, 1996 to 5.26%
for the same period in 1997. Also, interest expense increased due to an increase
in the average balance of FHLB of Dallas advances.
NONINTEREST INCOME. Noninterest income amounted to $1.2 million for the six
months ended June 30, 1997 compared to $600,000 for the same period in 1996. The
increase of
11
$600,000 or 98.0% was primarily due to a gain of $394,000 on the sale of
FHLMC stock, which was previously classified as an available for sale
investment, and to the current recognition of $145,000 on previously deferred
profit on the sale of real estate owned.
NONINTEREST EXPENSE. Noninterest expenses increased $1.3 million or 34.6%
between the 1997 and 1996 six month periods. Such increase was due primarily to
increases in salaries and employee benefits, including costs associated with the
adoption and implementation of the Corporation's employee stock ownership plan
and the Corporation's management recognition and retention plan, additional
costs attributable to being a public company, advertising costs related to
targeting special promotions and branch openings and occupancy costs due to
branch expansions. Such increases were partially offset by a decline in the
deposit insurance premiums in the amount of $338,000 or 71.4% from $473,000 to
$135,000 for the six month period June 30, 1996 and 1997, respectively. The
increase in salaries and employee benefits consisted primarily of a $754,000
expense related to the grant and immediate vesting of 20% of the shares of stock
awarded to the Bank's executive officers and directors pursuant to the
management recognition and retention plan. In addition, in accordance with a 20%
per year vesting schedule, the period ended June 30, 1997 also included $63,000
in accrued costs for the shares that will vest in May 1998. Salary and benefit
costs also increased by $253,000 for the six month period over the previous year
comparable period due to accounting recognition of costs associated with the
release of unallocated shares from the employee stock ownership plan. The
increase in salaries and employee benefits was also due to normal salary and
merit increases as well as an increase in personnel resulting from expansion of
the Bank's operations.
INCOME TAXES. Income taxes amounted to $1.6 million and $1.2 million for
the six months ended June 30, 1997 and 1996, respectively, resulting in
effective tax rates of 35.8% and 34.2%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Corporation's
primary sources of funds are deposits, amortization, prepayments and maturities
of outstanding loans, maturities of investment securities, mortgage-backed
securities and other short-term investments and funds provided from operations.
While scheduled loan amortization and maturing investment securities,
mortgage-backed 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 Corporation
manages the pricing of its deposits to maintain a steady deposit balance. In
addition, the Corporation invests excess funds in overnight deposits and other
short-term interest-earning assets which provide liquidity to meet lending
requirements. The Corporation 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 may borrow from the FHLB of Dallas. At June 30, 1997, the Bank had
outstanding advances from the FHLB of Dallas in the amount of $6.0 million. Such
advances were used in the Bank's normal operations and investing activities.
12
As of June 30, 1997, the Bank's regulatory capital was in excess of all
applicable regulatory requirements. At June 30, 1997, the Bank's tangible, core
and risk-based capital ratios amounted to 12.0%, 12.0% and 23.1%, respectively,
compared to regulatory requirements of 1.5%, 3.0% and 8.0%, respectively.
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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 May 7, 1997, the Corporation held an
annual meeting of stockholders for the
following purposes:
(1) To elect Larry J. Brandt as a director for a term of one year, James D.
Heuer and William F. Smith as directors for terms of two years and Frank L.
Coffman, Jr. and John P. Hammerschmidt as directors for terms of three
years;
(2) To adopt the Corporation's 1997 Stock Option Plan;
(3) To adopt the Corporation's Recognition and Retention Plan and Trust; and
(4) To ratify the appointment by the Board of Directors of Deloitte & Touche LLP
as the Corporation's independent auditors for the year ending December 31,
1997.
14
The results of the voting are as set forth below:
Proposal One (Election of Directors):
AGAINST/
NAME FOR WITHHELD
- ---- ---------- ------------
Larry J. Brandt................................... 4,579,754 42,730
James D. Heuer.................................... 4,566,630 55,854
William F. Smith.................................. 4,568,155 54,329
Frank L. Coffman, Jr.............................. 4,568,854 53,630
John P. Hammerschmidt............................. 4,560,230 62,254
Proposal Two (Adoption of the Corporation's 1997 Stock Option Plan):
FOR AGAINST ABSTAIN NOT VOTED
--------------- ----------- ----------- ------------
2,973,629 388,792 46,969 1,213,094
Proposal Three (Adoption of the Corporation's Recognition and Retention Plan
and Trust):
FOR AGAINST ABSTAIN NOT VOTED
--------------- ----------- ----------- ------------
2,621,324 782,330 48,159 1,170,671
Proposal Four (Ratification of Auditors):
FOR AGAINST ABSTAIN
--------------- ----------- -----------
4,561,634 33,925 26,925
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
None.
15
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 6, 1997 By: /s/Larry J. Brandt
--------------------------------------
Larry J. Brandt
President
Date: August 6, 1997 By: /s/Tommy W. Richardson
--------------------------------------
Tommy W. Richardson
Chief Financial Officer
16