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, 2001
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 (I.R.S. Employer
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 7, 2001,
there were issued and outstanding 3,281,667 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, 2001 (unaudited) and December 31, 2000 1
Consolidated Statements of Income for the three months
and six months ended June 30, 2001 (unaudited) and
2000 (unaudited) 2
Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 2001 (unaudited) 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 2001 (unaudited) and 2000 (unaudited) 4
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
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 2001 2000
----------- ------------
(Unaudited)
Cash and cash equivalents $ 25,214 $ 11,564
Investment securities - held to maturity 145,899 184,310
Federal Home Loan Bank stock 4,837 5,098
Loans receivable, net of allowance 486,912 498,305
Accrued interest receivable 5,692 6,910
Real estate acquired in settlement of loans, net 255 261
Office properties and equipment, net 7,040 7,170
Prepaid expenses and other assets 10,383 284
_______ _______
TOTAL ASSETS $686,232 $713,902
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $548,370 $540,327
Federal Home Loan Bank advances 59,852 93,359
Advance payments by borrowers for
taxes and insurance 740 1,006
Other liabilities 3,475 2,588
_______ _______
Total liabilities 612,437 637,280
======= =======
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, 3,305,867 and
3,553,981 shares outstanding at June 30, 2001
and December 31, 2000, respectively 52 52
Additional paid-in capital 51,230 51,045
Employee stock benefit plans (2,175) (2,680)
Retained earnings-substantially restricted 58,179 56,713
_______ _______
107,286 105,130
Treasury stock, at cost, 1,847,884 and
1,599,770 shares at June 30, 2001 and
December 31, 2000, respectively (33,491) (28,508)
________ _______
Total stockholders' equity 73,795 76,622
________ _______
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $686,232 $713,902
======= =======
See notes to unaudited consolidated financial statements.
1
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except earnings per share)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
______________________ _________________
2001 2000 2001 2000
_______ ______ _______ _______
INTEREST INCOME:
Loans receivable $10,031 $9,434 $20,099 $18,581
Investment securities 2,515 3,458 5,454 6,812
Other 280 17 406 50
______ ______ ______ ______
Total interest income 12,826 12,909 25,959 25,443
______ ______ ______ ______
INTEREST EXPENSE:
Deposits 7,153 6,727 14,431 13,147
Other borrowings 1,151 1,280 2,560 2,505
_____ _____ ______ ______
Total interest expense 8,304 8,007 16,991 15,652
_____ _____ ______ ______
NET INTEREST INCOME 4,522 4,902 8,968 9,791
PROVISION FOR LOAN LOSSES 52 -- 61 --
_____ _____ ______ ______
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,470 4,902 8,907 9,791
_____ _____ _____ _____
NONINTEREST INCOME:
Deposit fee income 335 268 643 495
Other 521 183 888 341
___ ___ _____ ___
Total noninterest income 856 451 1,531 836
___ ___ _____ ___
NONINTEREST EXPENSES:
Salaries and employee benefits 2,430 1,860 4,649 3,857
Net occupancy expense 285 276 559 531
Federal insurance premiums 25 26 51 53
Provision for real estate losses -- 9 7 9
Data processing 275 254 532 460
Postage and supplies 140 101 280 242
Other 580 483 1,053 989
_____ _____ _____ _____
Total noninterest expenses 3,735 3,009 7,131 6,141
_____ _____ _____ _____
INCOME BEFORE INCOME TAXES 1,591 2,344 3,307 4,486
INCOME TAX PROVISION 529 772 1,101 1,484
_____ _____ _____ _____
NET INCOME $1,062 $1,572 $2,206 $3,002
===== ===== ===== =====
EARNINGS PER SHARE:
Basic $ 0.34 $ 0.44 $ 0.69 $ 0.82
==== ==== ==== ====
Diluted $ 0.34 $ 0.44 $ 0.69 $ 0.82
==== ==== ==== ====
Cash Dividends Declared $ 0.11 $ 0.10 $ 0.22 $ 0.20
==== ==== ==== ====
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, 2001
(In Thousands)
(Unaudited)
Issued
Common Stock Employee Treasury Stock
_______________ Additional Stock __________________ Total
Paid-In Benefit Retained Stockholders'
Shares Amount Capital Plans Earnings Shares Amount Equity
______ ______ __________ ________ ________ _______ ______ _____________
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Balance, December 31, 2000 5,153,751 $52 $51,045 $(2,680) $56,713 1,599,770 $(28,508) $76,622
Net income 2,206 2,206
Release of ESOP shares 185 208 393
Stock compensation expense 297 297
Purchase of treasury stock, at
cost 248,114 (4,983) (4,983)
Dividends paid (740) (740)
________ __ ______ _____ ______ _________ ______ ______
Balance, June 30, 2001 5,153,751 $ 52 $51,230 $(2,175) $58,179 1,847,884 $(33,491) $73,795
========= == ====== ===== ====== ========= ====== ======
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,
_________________________
2001 2000
_____ _____
OPERATING ACTIVITIES:
Net income $2,206 $3,002
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 61 --
Provision for real estate losses 7 9
Deferred tax provision 115 348
Federal Home Loan Bank stock dividends (125) (207)
Federal Home Loan Bank stock redeemed 386
Loss (gain) on sale of repossessed assets, net 6 (2)
Originations of loans held for sale (25,989) (2,298)
Proceeds from sales of loans 23,285 2,714
Gain on sale of mortgage loans originated to sell (260) (28)
Depreciation 349 328
Depreciation on real estate owned -- 32
Accretion of deferred loan fees, net (280) (250)
Release of ESOP shares 409 312
Stock compensation expense 297 413
Changes in operating assets & liabilities:
Accrued interest receivable 1,218 (486)
Prepaid expenses & other assets (89) 22
Other liabilities 757 (150)
_____ _____
Net cash provided by operating activities 2,353 3,759
_____ _____
INVESTING ACTIVITIES:
Purchases of investment securities-held to
Maturity (8,289) (10,633)
Proceeds from maturities/calls of investment
securities-held to maturity 46,700 2,000
Purchase of bank owned life insurance (10,000) --
Loan originations, net of repayments 14,392 (23,027)
Proceeds from sales of repossessed assets 166 2,885
Purchases of office properties and equipment (219) (830)
______ ______
Net cash provided (used) by investing activities 42,750 (29,605)
______ ______
4
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended June 30,
_________________________
2001 2000
_____ _____
(Continued)
FINANCING ACTIVITIES:
Net increase in deposits 8,043 27,974
Advances from FHLB 2,450 85,375
Repayment of advances from FHLB (35,957) (80,481)
Net decrease in advance payments
by borrowers for taxes & insurance (266) (551)
Purchase of treasury stock (4,983) (5,289)
Dividends paid (740) (761)
Distributions related to minority interest -- (783)
______ ______
Net cash provided (used) by financing activities (31,453) 25,484
______ ______
Net increase (decrease) in cash and cash equivalents 13,650 (362)
CASH AND CASH EQUIVALENTS:
Beginning of period 11,564 9,983
______ _____
End of period $25,214 $ 9,621
====== =====
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for:
Interest $17,404 $ 15,579
====== ======
Income taxes $ 912 $ 1,245
====== ======
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Real estate acquired in settlement of loans $ 144 $ 240
====== ======
Loans to facilitate sales of real estate owned $ -- $ 948
====== ======
(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.
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, 2001 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2001. 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, 2000, contained in the
Corporation's 2000 Annual Report to Stockholders.
Note 2 - Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations. This Statement addresses financial accounting and reporting for
business combinations and supersedes APB Opinion No. 16, Business Combinations,
and FASB Statement No. 38, Accounting for Preacquisition Contingencies of
Purchased Enterprises. All business combinations in the scope of this
Statement are to be accounted for using one method, the purchase method. This
Statement does not change many of the provisions of Opinion 16 and Statement
38 related to the application of the purchase method. The provisions of this
Statement apply to all business combinations initiated after June 30, 2001.
This Statement also applies to all business combinations accounted for using
the purchase method for which the date of acquisition is July 1, 2001, or
later.
In June 2001, the FASB also issued SFAS No. 142, Goodwill and Other Intangible
Assets. This Statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No. 17,
Intangible Assets. It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business
6
combination) should be accounted for in financial statements upon their
acquisition. This Statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in
the financial statements. The provisions of this Statement are required to
be applied starting with fiscal years beginning after December 15, 2001. This
Statement is required to be applied at the beginning of an entity's fiscal year
and to be applied to all goodwill and other intangible assets recognized in
its financial statements at that date. Impairment losses for goodwill and
indefinite-lived intangible assets that arise due to the initial application
of this Statement (resulting from a transitional impairment test) are to be
reported as resulting from a change in accounting principle. Goodwill and
intangible assets acquired after June 30, 2001, will be subject immediately
to the nonamortization and amortization provisions of this Statement.
Based on its current activities, management does not expect these statements
to have a material effect on the financial position, results of operations,
or cash flows of the Corporation.
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, is effective for all fiscal
years beginning after June 15, 2000. SFAS 133, as amended, establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities. Under SFAS 133, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. The
Corporation adopted SFAS 133 effective January 1, 2001. The effect of such
adoption did not impact the financial position, results of operations, or
cash flows of the Corporation.
7
Note 3 - Earnings per Share
The weighted average number of common shares used to calculate earnings per
share for the periods ended June 30, 2001 and 2000 were as follows:
Three months ended Six months ended
March 31, June 30,
__________________ ________________
2001 2000 2001 2000
_________ _________ _________ _________
Basic weighted-average shares 3,146,277 3,569,403 3,200,124 3,640,909
Effect of dilutive securities 11,383 -- 10,633 --
_________ _________ _________ _________
Diluted weighted-average shares 3,157,660 3,569,403 3,210,757 3,640,909
Note 4 - Declaration of Dividends
At their meeting on May 22, 2001, the Board of Directors declared an $.11
(eleven cent) per share cash dividend on the common stock of the Corporation.
The cash dividend was paid on June 22, 2001 to the stockholders of record at
the close of business on June 7, 2001.
Note 5 - Investment Securities
Investment securities consisted of the following (in thousands):
June 30, 2001
______________________
Amortized Fair
Held to Maturity Cost Value
_________ ________
U. S. Government and
Agency obligations $145,899 $144,046
======= =======
8
Note 6 - Loans Receivable
Loans receivable consisted of the following (in thousands):
June 30, 2001 December 31, 2000
_______________ ___________________
First mortgage loans:
One- to four- family residences $359,698 $377,341
Other properties 43,981 41,751
Construction 24,957 24,937
Less:
Unearned discounts (217) (191)
Undisbursed loan funds (10,683) (9,126)
Deferred loan fees, net (2,520) (2,747)
_______ _______
Total first mortgage loans 415,216 431,965
_______ _______
Consumer and other loans:
Commercial 21,744 20,239
Automobile 16,712 16,051
Consumer 6,471 5,893
Home equity and second mortgage 22,530 19,797
Savings 1,720 2,042
Other 2,897 2,768
Add deferred loan costs 244 241
______ ______
Total consumer and other loans 72,318 67,031
______ ______
Allowance for loan losses (622) (691)
______ ______
Loans receivable, net $486,912 $498,305
======= =======
Non-accrual loans at June 30, 2001 were $2.4 million. 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, 2000 $691
Provisions for estimated losses 61
Recoveries 10
Losses charged off (140)
___
Balance at June 30, 2001 $ 622
===
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
At June 30, 2001, the Corporation's assets amounted to $686.2 million as
compared to $713.9 million at December 31, 2000. The $27.7 million or 3.9%
decrease was primarily due to a decrease of $38.4 million or 20.8% in
investment securities-held to maturity and to a decrease of $11.4 million or
2.3% in net loans receivable. Such decreases were partially offset by a
$13.7 million or 118.0% increase in cash and cash equivalents and a $10.1
million increase in prepaid expenses and other assets. The increase in
prepaid expenses and other assets was primarily due to the Bank's investment
in bank owned life insurance. Loan originations for the six month period
ended June 30, 2001 consisted of $53.1 million in one- to four- family
residential loans, $1.0 million in multi-family residential loans, $8.9
million in commercial loans, $15.3 million in construction loans and $22.6
million in consumer installment loans, of which $9.6 million consisted of
home equity loans and $7.4 million consisted of automobile loans. The
decrease in net loans receivable was primarily due to customer refinancings
in the lower rate environment and the sale by the Bank of such loans in the
secondary mortgage market. At June 30, 2001, the Bank had outstanding loan
commitments of $4.9 million, unused lines of credit of $7.6 million, and the
undisbursed portion of construction loans of $10.6 million. Liabilities
decreased $24.8 million or 3.9% to $612.4 million at June 30, 2001 compared
to $637.3 million at December 31, 2000. The decrease in liabilities was
primarily due to a decrease of $33.5 million or 35.9% in advances from the
Federal Home Loan Bank of Dallas ("FHLB of Dallas"). Stockholders' equity
amounted to $73.8 million or 10.8% of total assets at June 30, 2001 compared
to $76.6 million or 10.7% of total assets at December 31, 2000. The decrease
in stockholders' equity was primarily due to the purchase of 248,114 shares
of treasury stock totaling $5.0 million in connection with the Corporation's
stock repurchase plan and to a lesser extent due to the payment of cash
dividends aggregating $740,000. Such decrease during the six months ended
June 30, 2001 was partially offset by net income of $2.2 million resulting
from continued profitable operations.
Non-performing assets, consisting of non-accruing loans and repossessed
assets, amounted to $2.7 million or .39% of total assets at June 30, 2001,
compared to $1.9 million or .27% of total assets at December 31, 2000. Such
increase was primarily due to non-accruing loans collateralized by one-to-four
family mortgage loans. The allowance for loan losses amounted to $622,000 at
June 30, 2001.
Results of Operations for the Three Months Ended June 30, 2001 and 2000
General. The Corporation reported net income of $1.1 million during the
three months ended June 30, 2001 compared to net income of $1.6 million for
the same period in 2000. The decrease of $510,000 in net income in the 2001
period compared to the same period in 2000 was primarily due to a decrease in
net interest income and an increase in noninterest expenses which was offset
by an increase in noninterest income and a decrease in income tax expense.
Net interest income declined from $4.9 million for the three months ended June
30, 2000 to $4.5 million for the same period in
10
2001. 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
2.22% and 2.70%, respectively, for the 2001 three month period compared to
2.46% and 2.92%, respectively, for the 2000 three month period. These and
other significant fluctuations in operations are discussed below.
Interest Income. Interest income amounted to $12.8 million for the three
months ended June 30, 2001 compared to $12.9 million for the same period in
2000. The decrease of $83,000 or .6% was primarily due to a decrease in the
average balance of investment securities and a decrease in the average yield
earned on investment securities which was partially offset by an increase in
the average balance of net loans receivable, an increase in the average yield
earned on loans receivable and an increase in the average balance of other
interest earning assets, primarily overnight funds.
Interest Expense. Interest expense increased $297,000 or 3.7% to $8.3
million for the three months ended June 30, 2001 compared to $8.0 million for
the same period in 2000. Such increase was primarily due to an increase in
the average balance of deposits, an increase in interest rates paid on such
deposits, and an increase in the average interest rate paid on advances. Such
increase was partially offset by a decline in the average balance of advances.
Noninterest Income. Noninterest income increased $405,000 or 89.8% to
$856,000 for the three months ended June 30, 2001 compared to $451,000 for
the three months ended June 30, 2000. The increase in noninterest income for
the three month comparable periods ended June 30 was primarily due to an
increase of $67,000 or 25.0% from $268,000 to $335,000 in deposit fee income,
an increase of $45,000 from $13,000 to $58,000 in loan related insurance
commissions, an increase of $174,000 from $16,000 to $190,000 in the gain on
the sale of mortgage loans in the secondary mortgage market and an increase
of $37,000 from $8,000 to $45,000 in additional loan fees related to loan
sales. The increase in noninterest income was also due to a decline in the
net loss recognized from the operations of real estate owned in the amount of
$64,000. The property primarily incurring such losses was disposed of in
June 2000.
Noninterest Expense. Noninterest expenses increased $726,000 or 24.1%
between the 2001 and 2000 three month periods ended June 30. Such increase
was primarily due to an increase in salaries and employee benefits and to a
nonrecurring expense of $352,000 for a death benefit payable pursuant to the
employment contract of the Bank's Chief Executive Officer and Chairman of the
Board at his death. Salaries and employee benefits, excluding the
nonrecurring death benefit of $352,000, amounted to $2.1 million compared to
$1.9 million resulting in an increase of $218,000 or 11.7% for the three
month periods ended June 30, 2001 and 2000, respectively. Such increase in
salaries and employee benefits was primarily due to an increase in personnel
as well as salary and merit increases and an increase in the employee stock
ownership plan expense as a result of the increase in the average stock price.
11
Income Taxes. Income taxes amounted to $529,000 and $772,000 for the
three months ended June 30, 2001 and 2000, respectively, resulting in
effective tax rates of 33.2% and 32.9%, respectively.
Results of Operations for the Six Months Ended June 30, 2001 and 2000
General. The Corporation reported net income of $2.2 million during the
six months ended June 30, 2001 compared to net income of $3.0 million for the
same period in 2000. The decrease of $796,000 in net income in the 2001
period compared to the same period in 2000 was primarily due to a decrease in
net interest income and an increase in noninterest expenses which was offset
by an increase in noninterest income and a decrease in income tax expense.
Net interest income declined from $9.8 million for the six months ended June
30, 2000 to $9.0 million for the same period in 2001. The Corporation's
interest rate spread and net interest margin decreased to 2.17% and 2.66%,
respectively, for the 2001 six month period compared to 2.48% and 2.94%,
respectively, for the 2000 six month period.
Interest Income. Interest income amounted to $26.0 million for the six
months ended June 30, 2001 compared to $25.5 million for the same period in
2000. The increase of $516,000 was primarily due to an increase in the
average balance of net loans receivable, an increase in the average yield
earned on loans receivable and an increase in the average balance of other
interest earning assets, primarily overnight funds which was partially
offset by a decrease in the average balance of investment securities and a
decrease in the average yield earned on investment securities.
Interest Expense. Interest expense increased $1.3 million or 8.6% to
$17.0 million for the six months ended June 30, 2001 compared to $15.7 million
for the same period in 2000. Such increase was primarily due to an increase
in the average balance of deposits, an increase in interest rates paid on
such deposits, and an increase in the average interest rate paid on advances.
Such increase was partially offset by a decline in the average balance of
advances.
Noninterest Income. Noninterest income increased $695,000 or 83.1% to
$1.5 million for the six months ended June 30, 2001 compared to $836,000 for
the six months ended June 30, 2000. The increase in noninterest income for
the six month comparable periods ended June 30 was primarily due to an
increase of $148,000 or 29.9% from $495,000 to $643,000 in deposit fee income,
an increase of $71,000 from $26,000 to $97,000 in loan related insurance
commissions, an increase of $232,000 from $28,000 to $260,000 in the gain on
the sale of mortgage loans in the secondary mortgage market and an increase of
$50,000 from $11,000 to $61,000 in additional loan fees related to loan sales.
The increase in noninterest income was also due to a decline in the net loss
recognized from the operations of real estate owned in the amount of $111,000.
The property primarily incurring such losses was disposed of in June 2000.
Noninterest Expense. Noninterest expenses increased $990,000 or 16.1%
between the 2001 and 2000 six month periods ended June 30. The increase in
noninterest expenses during the six month period in 2001 compared to 2000 was
primarily due to an increase in salaries and employee benefits and to a
nonrecurring expense of $352,000 for a death benefit payable pursuant
to the
12
employment contract of the Bank's Chief Executive Officer and Chairman of the
Board at his death. Salaries and employee benefits, excluding the nonrecurring
death benefit of $352,000, amounted to $4.3 million compared to $3.9 million
resulting in an increase of $439,000 or 11.4% for the six month periods ended
June 30, 2001 and 2000, respectively. Such increase in salaries and employee
benefits was primarily due to an increase in personnel as well as salary and
merit increases and an increase in the employee stock ownership plan expense
as a result of the increase in the average stock price.
Income Taxes. Income taxes amounted to $1.1 million and $1.5 million for the
six months ended June 30, 2001 and 2000, respectively, resulting in effective
tax rates of 33.3% and 33.1%, respectively.
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 sources 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, 2001, the Bank had outstanding advances from the FHLB of Dallas of
$60.0 million. Such advances were used in the Bank's normal operating and
investing activities.
As of June 30, 2001, the Bank's regulatory capital was in excess of all
applicable regulatory requirements. At June 30, 2001, the Bank's tangible,
core and risk-based capital ratios amounted to 9.7%, 9.7% and 17.7%,
respectively compared to applicable requirements of 1.5%, 4.0% 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.
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.
13
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 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
2000 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, 2000.
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 26, 2001, the Corporation held an annual meeting of
stockholders for the following purposes:
(1) To elect one director 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, 2001.
The results of the voting are set forth below:
Proposal One (Election of Director):
AGAINST/
NAME FOR WITHHELD
Larry J. Brandt 2,884,913 20,561
Proposal Two (Ratification of Auditors):
FOR AGAINST ABSTAIN
2,893,209 2,765 9,500
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, 2001 By: /s/Larry J. Brandt
------------------
Larry J. Brandt
President/CEO
Date: August 14, 2001 By: /s/Tommy W. Richardson
----------------------
Tommy W. Richardson
Chief Financial Officer
17