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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, 1999
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
--- ---
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, 1999, there
were issued and outstanding 4,197,762 shares of the Registrant's Common Stock,
par value $.01 per share.
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FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
As of June 30, 1999 (unaudited) and December 31, 1998 1
Consolidated Statements of Income and Comprehensive Income
for the three and six months ended June 30, 1999
(unaudited) and 1998 (unaudited) 2
Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 1999 (unaudited) 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 (unaudited) and 1998 (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 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands)
June 30, December 31,
1999 1998
ASSETS (Unaudited)
----------------- ------------------
Cash and cash equivalents $ 8,594 $ 26,163
Investment securities - held to maturity 166,428 127,175
Federal Home Loan Bank stock 4,017 3,912
Loans receivable, net of allowance 443,493 442,486
Accrued interest receivable 5,346 4,755
Real estate acquired in settlement of loans, net 4,042 4,270
Office properties and equipment, net 6,700 6,055
Prepaid expenses and other assets 599 239
-------- --------
TOTAL ASSETS $639,219 $615,055
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $502,724 $481,093
Federal Home Loan Bank advances 52,979 48,985
Advance payments by borrowers for
taxes and insurance 484 1,006
Other liabilities 2,308 1,990
-------- --------
Total liabilities 558,495 533,074
-------- --------
MINORITY INTEREST 944 958
-------- --------
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, 4,277,997 and
4,512,760 shares outstanding at June 30, 1999
and December 31, 1998, respectively 52 52
Additional paid-in capital 50,639 50,487
Employee stock benefit plans (4,452) (5,037)
Retained earnings-substantially restricted 50,080 47,678
-------- --------
96,319 93,180
Treasury stock, at cost, 875,754 and
640,991 shares at June 30, 1999 and
December 31, 1998, respectively (16,539) (12,157)
-------- --------
Total stockholders' equity 79,780 81,023
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $639,219 $615,055
======== ========
See notes to unaudited consolidated financial statements.
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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,
------------------------------- -------------------------------
1999 1998 1999 1998
---------- ---------- ---------- -----------
INTEREST INCOME:
Loans receivable $8,772 $8,917 $17,582 $17,760
Investment securities 2,634 1,911 4,878 3,646
Other 121 36 390 86
------ ------ ------ ------
Total interest income 11,527 10,864 22,850 21,492
------ ------ ------ ------
INTEREST EXPENSE:
Deposits 6,090 6,022 12,072 11,929
Other borrowings 599 353 1,263 624
------ ------ ------ ------
Total interest expense 6,689 6,375 13,335 12,553
------ ------ ------ ------
NET INTEREST INCOME 4,838 4,489 9,515 8,939
PROVISION FOR LOAN LOSSES -- 10 20 25
------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,838 4,479 9,495 8,914
------ ------ ------ ------
NONINTEREST INCOME:
Deposit fee income 239 222 459 420
Other 274 216 447 476
------ ------ ------ ------
Total noninterest income 513 438 906 896
------ ------ ------ ------
NONINTEREST EXPENSES:
Salaries and employee benefits 1,722 1,667 3,473 3,314
Net occupancy expense 219 218 436 424
Federal insurance premiums 70 69 140 140
Provision for real estate losses 310 7 312 7
Data processing 214 217 417 445
Postage and supplies 101 112 215 209
Other 406 381 778 795
------ ------ ------ ------
Total noninterest expenses 3,042 2,671 5,771 5,334
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 2,309 2,246 4,630 4,476
INCOME TAX PROVISION 727 784 1,530 1,594
------ ------ ------ ------
NET INCOME AND COMPREHENSIVE INCOME $1,582 $1,462 $3,100 $2,882
===== ===== ===== =====
EARNINGS PER SHARE:
Basic $ 0.39 $ 0.32 $ 0.75 $ 0.63
===== ====== ===== =====
Diluted $ 0.39 $ 0.31 $ 0.75 $ 0.61
===== ====== ===== =====
Cash Dividends Declared $ 0.08 $ 0.07 $ 0.16 $ 0.14
===== ===== ===== =====
See notes to unaudited consolidated financial statements.
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FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(In Thousands)
(Unaudited)
Employee
Additional Stock
Common Paid-In Benefit Retained Treasury
Stock Capital Plans Earnings Stock Total
---------- -------------- ------------ ------------ ------------- ------------
Balance, December 31, 1998 $52 $50,487 $(5,037) $47,678 $(12,157) $81,023
Net income 3,100 3,100
Release of ESOP shares 152 208 360
Stock compensation expense 377 377
Purchase of treasury stock, at cost (4,382) (4,382)
Dividends paid (698) (698)
--- ------ ------ ------ ------- ------
Balance, June 30, 1999 $52 $50,639 $(4,452) $50,080 $(16,539) $79,780
=== ====== ====== ====== ======= ======
See notes to unaudited consolidated financial statements.
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FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended June 30,
----------------------------------
1999 1998
--------------- --------------
OPERATING ACTIVITIES:
Net income $ 3,100 $ 2,882
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 20 25
Provision for real estate losses 312 7
Deferred tax provision (benefit) (183) 235
Loss on sale of real estate owned 9 54
Gain on sale of mortgage loans
originated to sell (147) (104)
Depreciation 256 252
Real estate owned depreciation 64 --
Accretion of deferred loan fees, net (439) (390)
Release of ESOP shares 360 549
Stock compensation expense 377 377
Other (46) --
Changes in operating assets & liabilities:
Accrued interest receivable (591) (368)
Prepaid expenses & other assets (360) (17)
Other liabilities 502 31
-------- -------
Net cash provided by operating activities 3,234 3,533
-------- -------
INVESTING ACTIVITIES:
Purchases of investment securities-held to
maturity (65,798) (51,287)
Proceeds from maturities of investment
securities-held to maturity 26,432 34,755
Loan originations, net of repayments (12,504) (18,636)
Proceeds from sales of mortgage loans
originated to sell 11,821 7,986
Proceeds from sales of real estate owned 125 131
Purchases of office properties and equipment (902) (138)
-------- -------
Net cash used by investing activities (40,826) (27,189)
-------- -------
(Continued)
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FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended June 30,
----------------------------------
1999 1998
--------------- --------------
FINANCING ACTIVITIES:
Net increase in deposits 21,631 11,644
Advances from FHLB 14,450 43,975
Repayment of advances from FHLB (10,456) (27,631)
Net decrease in advance payments
by borrowers for taxes & insurance (522) (364)
Purchase of treasury stock (4,382) (661)
Common stock acquired for employee stock
benefit plan -- (1,817)
Dividends paid (698) (686)
------- ------
Net cash provided by financing activities 20,023 24,460
------- ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (17,569) 804
CASH AND CASH EQUIVALENTS:
Beginning of period 26,163 6,627
------- ------
End of period $ 8,594 $ 7,431
======= ======
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for:
Interest $ 13,229 $12,540
======= ======
Income taxes 1,634 $ 1,194
$======= ======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Real estate acquired in settlement of loans $ 343 $ 3,453
======= ======
Loans to facilitate sales of real estate owned $ 102 --
======= ======
(Concluded)
See notes to unaudited consolidated financial statements.
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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 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, 1999 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1999. 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, 1998, contained in the
Corporation's 1998 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 - 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, as amended by SFAS 137, is effective for
fiscal years beginning after June 15, 2000. Management has not yet made a
determination as to the effect, if any, the adoption of SFAS 133 will have on
the Corporation's financial position or results of operations.
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In October 1998, the FASB issued Statement No. 134, Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise ("SFAS 134"). This statement
amends SFAS 65 to require that after the securitization of mortgage loans held
for sale, an entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities or other retained interests based on its
ability and intent to sell or hold those investments. This statement conforms
the subsequent accounting for securities retained after the securitization of
mortgage loans by a mortgage banking enterprise with the subsequent accounting
for securities retained after the securitization of other types of assets by a
nonmortgage banking enterprise. The adoption of SFAS No. 134 is not expected to
have a material effect on the Corporation's financial position or results of
operations.
NOTE 4 - EARNINGS PER SHARE
The weighted average number of common shares used to calculate earnings per
share for the three and six months ended June 30, 1999 and 1998 were as follows:
Three months ended Six months ended
June 30, June 30,
------------------------------------ -------------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
Basic weighted - average shares 4,092,848 4,560,765 4,118,953 4,556,878
Effect of dilutive securities -- 149,598 -- 134,560
---------- ---------- ---------- ----------
Diluted weighted - average shares 4,092,848 4,710,363 4,118,953 4,691,438
NOTE 5 - DECLARATION OF DIVIDENDS
At their meeting on May 26, 1999, the Board of Directors declared an $.08 (eight
cent) per share cash dividend on the common stock of the Corporation. The cash
dividend was paid on June 24, 1999 to the stockholders of record at the close of
business on June 10, 1999.
NOTE 6 - INVESTMENT SECURITIES
Investment securities consisted of the following (in thousands):
June 30, 1999
----------------------------------
Amortized Fair
HELD TO MATURITY Cost Value
--------------- --------------
U. S. Government and
Agency obligations $166,408 $158,613
Mortgage-backed securities
-FHLMC 20 19
------- -------
Total $166,428 $158,632
======= =======
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NOTE 7 - LOANS RECEIVABLE
Loans receivable consisted of the following (in thousands):
June 30, 1999
----------------------------------
First mortgage loans:
One- to four- family residences $363,948
Other properties 26,335
Construction 21,079
Less:
Unearned discounts (257)
Undisbursed loan funds (8,955)
Deferred loan fees, net (2,983)
---------
Total first mortgage loans 399,167
---------
Consumer and other loans:
Commercial 11,052
Automobile 12,071
Consumer 4,222
Home equity and second mortgage 13,802
Savings 1,697
Other 2,081
Add deferred loan costs 181
---------
Total consumer and other loans 45,106
---------
Allowance for loan losses (780)
---------
Loans receivable, net $443,493
=========
Non-accrual loans at June 30, 1999 were $1.5 million. All loans 90 days or more
past due or exhibiting characteristics indicating that it is unlikely that
interest will be collected 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, 1998 $771
Provisions for estimated losses 20
Recoveries 14
Losses charged off (25)
---
Balance at June 30, 1999 $780
===
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
At June 30, 1999, the Corporation's assets amounted to $639.2 million as
compared to $615.1 million at December 31, 1998. The $24.1 million or 3.9%
increase was primarily due to an increase of $39.3 million or 30.9% in
investment securities - held to maturity. Such increase in assets was partially
offset by a $17.6 million decrease in cash and cash equivalents. Loan
originations for the six month period ended June 30, 1999 consisted of $53.6
million in one- to four-family residential loans, $1.8 million in multi-family
residential loans, $7.2 million in commercial loans, $13.8 million in
construction loans and $15.7 million in consumer installment loans, of which
$5.6 million consisted of home equity loans and $6.0 million consisted of
automobile loans. At June 30, 1999, the Bank had outstanding loan commitments of
$5.0 million, unused lines of credit of $5.5 million, and the undisbursed
portion of construction loans of $9.0 million. Liabilities increased $25.4
million or 4.8% to $558.5 million at June 30, 1999 compared to $533.1 million at
December 31, 1998. The increase in liabilities was primarily due to an increase
of $21.6 million or 4.5% in deposits and an increase of $4.0 million or 8.2% in
FHLB of Dallas advances. The increases in deposits and FHLB of Dallas advances
were used to purchase additional investment securities. Stockholders' equity
amounted to $79.8 million or 12.5% of total assets at June 30, 1999 compared to
$81.0 million or 13.2% of total assets at December 31, 1998. The decrease in
stockholders' equity was primarily due to the purchase of treasury stock
totaling $4.4 million and to a lesser extent due to the payment of cash
dividends aggregating $698,000. Such decrease during the six months ended June
30, 1999 was partially offset by net income of $3.1 million due to continued
profitable operations.
Non-performing assets, consisting of non-accruing loans and repossessed
assets, amounted to $5.5 million or .86% of total assets at June 30, 1999,
compared to $5.8 million or .94% of total assets at December 31, 1998. The
majority ownership of a partnership, which owns and operates a commercial real
estate property that was acquired in the settlement of a loan, was consolidated
with the Bank's financial position and operations during the quarter ended
September 30, 1998. Such property had a carrying value at June 30, 1999 of $3.7
million. A contract to sell this property was finalized in June 1999. The terms
of the contract include a 45 day inspection period during which time the buyer
may rescind their offer. The buyer then subsequently has 60 days to close. As a
result of this agreement the property was written down by a charge of $310,000
with an after-tax effect of approximately $205,000 against the current quarter
and year-to-date income. The property is currently operated by a management
company.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
GENERAL. The Corporation reported net income of $1.6 million during the
three months ended June 30, 1999 compared to net income of $1.5 million for the
same period in 1998. The increase of $120,000 in net income in the 1999 period
compared to the same period in 1998 was primarily due to an increase in net
interest income partially offset by an increase in noninterest expenses. Net
interest income rose from $4.5 million for the three months ended June 30, 1998
to $4.8 million for
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the same period in 1999. 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 increased to 2.66% for the
1999 three month period compared to 2.56% for the 1998 three month period. The
Corporation's net interest margin decreased to 3.17% for the 1999 three month
period compared to 3.23% for the 1998 three month period. The ratio of
interest-earning assets to interest-bearing liabilities was 111.7% for the 1999
three month period compared to 114.6% for the 1998 three month period. These and
other significant fluctuations in operations are discussed below.
INTEREST INCOME. Interest income amounted to $11.5 million for the three
months ended June 30, 1999 compared to $10.9 million for the same period in
1998. The increase of $663,000 or 6.1% was primarily due to an increase in the
average balance of investment securities. The increase in the average balance of
investment securities was due to additional purchases of investment securities.
Such increase was partially offset by a decline in the average yield earned on
loans due primarily to the origination of loans at market interest rates which
are currently lower than the average yield of the Bank's loan portfolio.
INTEREST EXPENSE. Interest expense increased $314,000 or 4.9% to $6.7
million for the three months ended June 30, 1999 compared to $6.4 million for
the same period in 1998. Such increase was primarily due to an increase in the
average balance of deposits as well as an increase in the average balance of
FHLB of Dallas advances. Such increase was offset by a decline in the average
rate paid for deposits.
NONINTEREST INCOME. Noninterest income increased $75,000 or 17.1% to
$513,000 for the three months ended June 30, 1999 compared to $438,000 for the
three months ended June 30, 1998. Deposit fee income increased $17,000 or 7.7%
between the 1998 and 1999 three month periods. For the three months ended June
30, 1999, net income from operations of real estate owned of $16,000 was
recognized compared to none for the 1998 comparable period. Gain on the sale of
mortgage loans in the secondary mortgage market increased $12,000 from $62,000
to $74,000 for the three month comparable periods.
NONINTEREST EXPENSE. Noninterest expenses increased $371,000 or 13.9%
between the 1998 and 1999 three month periods. Such increase was due primarily
to an increase in the provision for loss on real estate owned. Provision for
loss on real estate owned amounted to $310,000 compared to $7,000 for the three
month periods ended June 30, 1999 and 1998, respectively. Such increase was a
result of the write-down of a commercial real estate property as previously
mentioned under the caption "Financial Condition."
INCOME TAXES. Income taxes amounted to $727,000 and $784,000 for the
three months ended June 30, 1999 and 1998, respectively, resulting in effective
tax rates of 31.5% and 34.9%, respectively.
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RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
GENERAL. The Corporation reported net income of $3.1 million during the
six months ended June 30, 1999 compared to $2.9 million for the same period in
1998. The increase of $218,000 or 7.6% in net income in the 1999 period compared
to the same period in 1998 was due to an increase in net interest income which
was partially offset by an increase in noninterest expenses. Net interest income
increased by $576,000 or 6.4% from $8.9 million to $9.5 million for the six
month periods ended June 30, 1998 and 1999, respectively. The Corporation's net
interest margin and interest rate spread was 3.15% and 2.62%, respectively, for
the six months ended June 30, 1999 compared to 3.25% and 2.56%, respectively,
for the same period in 1998.
INTEREST INCOME. Interest income amounted to $22.9 million for the six
months ended June 30, 1999 compared to $21.5 million for the same period in
1998. The increase of $1.4 million or 6.3% was primarily due to an increase in
the average balance of investment securities. The increase in the average
balance of investment securities was due to additional purchases of investment
securities. In addition, the average balance of other interest earning assets,
primarily overnight funds, increased during the comparable periods. Such
increase was partially offset by a decline in the average yield earned on loans
receivable due primarily to the origination of loans at market interest rates
which are currently lower than the average yield of the Bank's loan portfolio.
INTEREST EXPENSE. Interest expense increased $782,000 or 6.2% to $13.3
million for the six months ended June 30, 1999 compared to $12.6 million for the
same period in 1998. Such increase was primarily due to an increase in the
average balance of deposits as well as an increase in the average balance of
FHLB of Dallas advances. Such increase was offset by a decline in the average
rate paid for deposits.
NONINTEREST INCOME. Noninterest income increased $10,000 or 1.1% to
$906,000 for the six months ended June 30, 1999 compared to $896,000 for the
same period in 1998. Deposit fee income increased $39,000 or 9.3% between the
1998 and 1999 six month periods. The increase in noninterest income for the six
months ended June 30, 1999 compared to the six months ended June 30, 1998 was
also due to an increase of $44,000 from $103,000 to $147,000 in gain on the sale
of mortgage loans in the secondary market. These increases were partially offset
by a net loss from operations of real estate owned of $43,000 during the six
months ended June 30, 1999 compared to net income of $77,000 for the same period
in 1998.
NONINTEREST EXPENSE. Noninterest expenses increased $437,000 or 8.2%
between the 1998 and 1999 six month periods. The increase was primarily due to
increases in the provision for loss on real estate owned and salaries and
employee benefits. Provision for loss on real estate owned amounted to $312,000
compared to $7,000 for the six month periods ended June 30, 1999 and 1998,
respectively. Such increase was a result of the write-down of a Commercial real
estate property as previously mentioned in the discussion under the caption
"Financial Condition." Salaries and employee benefits increased by $159,000 or
4.8% from $3.3 million to $3.5 million for the six month periods ended June 30,
1998 and 1999, respectively. Salaries and employee benefits
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increased due to normal salary and merit increases as well as an increase in
personnel resulting from expansion of the Bank's operations. The recognition of
costs related to the release of unallocated shares from the ESOP ("Employee
Stock Ownership Plan") decreased by $178,000 from $501,000 to $323,000 for the
six month periods ended June 30, 1998 and 1999, respectively, due to the
decrease in the Corporation's stock price. Compensation expenses associated with
the ESOP are based on the number of shares released from the ESOP Trust and the
current period average price of the Corporation's common stock.
INCOME TAXES. Income taxes amounted to $1.5 million and $1.6 million for
the six months ended June 30, 1999 and June 30, 1998, respectively, resulting in
effective tax rates of 33.0% and 35.6%, 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 and
other short-term investments and funds provided from operations. While scheduled
loan amortization, 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 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 has borrowed from the FHLB of Dallas. At
June 30, 1999, the Bank had outstanding advances from the FHLB of Dallas in the
amount of $53.0 million. Such advances were used in the Bank's normal operations
and investing activities.
As of June 30, 1999, the Bank's regulatory capital was in excess of all
applicable regulatory capital adequacy requirements. At June 30, 1999, the
Bank's tangible, core and risk-based capital ratios amounted to 11.7%, 11.7% and
22.6%, respectively, compared to regulatory requirements of 1.5%, 3.0% and 8.0%,
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.
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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.
THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. Computer
programs that have time-sensitive coding may recognize a date using "00" as the
year 1900 rather than the Year 2000. Systems that do not properly recognize such
information could result in a system failure or generation of erroneous data.
The Federal Financial Institutions Examination Council ("FFIEC"), through
bank regulatory agencies including the OTS and the FDIC, issued mandatory
guidelines requiring all financial institutions to develop and implement plans
for addressing Year 2000 issues as they relate to the operations of financial
institutions. The Bank developed a Year 2000 Project plan, required by these
guidelines, that is intended to ensure that its computer systems and software
will function properly with respect to dates in the Year 2000 and thereafter.
The Year 2000 Project consists of various phases including an awareness phase,
assessment phase, renovation phase, testing phase and implementation phase. In
the assessment phase, hardware, software, third-party vendors, customers, and
non-technological systems that could be affected by the century rollover were
identified. In this assessment, various systems were identified as
mission-critical. The primary focus of the renovation and testing phases was on
these mission-critical systems. The testing phase for mission-critical systems
has been successfully completed.
The majority of the Bank's data processing is performed by a third party
service bureau. Processing by the servicer includes account processing for all
deposit and loan accounts. The servicer has completed the remediation of its
host deposit and loan systems. The Bank has completed testing of the servicer's
system. Dates tested on the servicer's system included the century date rollover
from December 31, 1999 through January 3, 2000, leap year 2000, year-end 2000
and 2001 rollover. This testing was performed by Bank personnel.
The Bank utilizes various third party software systems that interface
with the servicer's system that are deemed to be mission-critical. These systems
have been upgraded or replaced for Year 2000 as well as upgraded to a Windows
operating system. The wide area network installation to support the Windows
operating environment has been completed. These systems were successfully tested
for Year 2000 compliance.
The majority of the Bank's computer equipment was replaced to upgrade to
a Windows operating environment. This scheduled plan to upgrade provided for
Year 2000 compliant hardware as well. The majority of the software and hardware
replaced was fully depreciated. Therefore, the Bank did not accelerate the
replacement due to Year 2000 issues and all costs associated with the
replacement of systems were considered costs incurred in the ordinary course of
business. To date the Bank has committed approximately $20,000 in costs directly
related to Year 2000. These costs were primarily related to customer
communications regarding the century date rollover and services
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to support business continuity and customer assurance needs during century date
rollover. Any additional costs related to Year 2000 are not expected to be
material to the on-going operating costs of the Corporation.
The failure to correct a Year 2000 problem of a mission-critical system
could result in an interruption in, or a failure of, certain normal business
activities or operations. Such failures could materially and adversely affect
the Corporation's results of operations, liquidity, and financial condition. Due
to the general uncertainty inherent in the Year 2000 problem, resulting in part
from the uncertainty of third-party suppliers, including power companies and
telephone companies, the Corporation is unable to determine at this time whether
the consequences of Year 2000 failures will have a material impact on the
Corporation's result of operations, liquidity or financial condition. The Bank's
Year 2000 Project is anticipated to significantly reduce the uncertainty about
the Year 2000 problem and, in particular, about the Year 2000 readiness of the
Bank's data processing servicer. The Corporation believes that, based on the
data processing servicer's Year 2000 efforts, the Bank's testing of the
servicer's system, and the completion of the Year 2000 Project by the Bank, the
likelihood of significant interruptions of normal operations should be reduced.
However, a "worst case scenario" would be one in which the servicer's system was
not available for an extended period of time. Non-availability of the servicer's
system would most likely be the result of a power or telecommunications failure.
In this "worst case scenario" the Bank could experience material disruptions in
its ability to process customer accounts and otherwise conduct its business.
Contingency plans for Year 2000 issues relating to mission-critical
systems have been developed by the Bank. The Bank has a business resumption
recovery plan that addresses various contingencies within the Bank including the
servicer's computer system being inoperable as well as other mission-critical
systems. Contingency planning for a "worst case scenario", such as a power
failure, has been addressed as well. Due to the possibility of a power outage
occurring at any given time, even outages unrelated to Year 2000, the Bank has
installed a generator powered by natural gas at the corporate office of the Bank
to provide power to mission critical network equipment. Contingency planning for
Year 2000 is a dynamic process due to changes taking place. As additional
information becomes available regarding Year 2000 issues, contingency plans for
Year 2000 will be revised as circumstances dictate.
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 very from
those described herein
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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 1998 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, 1998.
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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 and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On April 21, 1999, 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, 1999.
The results of the voting are set forth below:
Proposal One (Election of Directors):
AGAINST/
NAME FOR WITHHELD
David Heuer 3,943,892 26,323
W. Floyd Smith 3,945,292 24,923
Proposal Two (Ratification of Auditors):
FOR AGAINST ABSTAIN
3,940,095 1,503 28,617
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Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
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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 12, 1999 By: /s/Larry J. Brandt
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Larry J. Brandt
President
Date: August 12, 1999 By: /s/Tommy W. Richardson
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Tommy W. Richardson
Chief Financial Officer
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