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 September 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 (I.R.S. Employer
incorporation or organization) Identification Number)
200 West Stephenson
Harrison, Arkansas 72601
- ------------------------------------------- ------------------------------
(Address of principal executive office) (Zip Code)
(870) 741-7641
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: As of
November 14, 2001, there were issued and outstanding 3,171,699 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 September 30, 2001 (unaudited) and December 31, 2000 1
Consolidated Statements of Income for the three months and
nine months ended September 30, 2001 (unaudited) and 2000
(unaudited) 2
Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 2001 (unaudited) 3
Consolidated Statements of Cash Flows for the nine months
ended September 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 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)
September 30, December 31,
ASSETS 2001 2000
------------- -----------
(Unaudited)
Cash and cash equivalents $ 49,268 $ 11,564
Investment securities - held to maturity 133,039 184,310
Federal Home Loan Bank stock 4,881 5,098
Loans receivable, net of allowance 482,337 498,305
Accrued interest receivable 5,261 6,910
Real estate acquired in settlement of loans, net 299 261
Office properties and equipment, net 7,000 7,170
Prepaid expenses and other assets 15,580 284
-------- --------
TOTAL ASSETS $697,665 $713,902
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $552,079 $540,327
Federal Home Loan Bank advances 55,848 93,359
Advance payments by borrowers for
taxes and insurance 823 1,006
Other liabilities 16,466 2,588
-------- --------
Total liabilities 625,216 637,280
-------- --------
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, 3,181,667
and
3,553,981 shares outstanding at September 30,
2001 and December 31, 2000, respectively 52 52
Additional paid-in capital 51,331 51,045
Employee stock benefit plans (2,071) (2,680)
Retained earnings-substantially restricted 59,436 56,713
-------- --------
108,748 105,130
Treasury stock, at cost, 1,972,084 and
1,599,770 shares at September 30, 2001 and
December 31, 2000, respectively (36,299) (28,508)
-------- --------
Total stockholders' equity 72,449 76,622
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $697,665 $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 Nine Months Ended
September 30, September 30,
------------------------ -----------------------
2001 2000 2001 2000
------------------------ -----------------------
INTEREST INCOME:
Loans receivable $ 9,856 $ 9,811 $29,956 $28,391
Investment securities 2,323 3,383 7,777 10,196
Other 233 24 638 74
------- ------- ------- -------
Total interest income 12,412 13,218 38,371 38,661
------- ------- ------- -------
INTEREST EXPENSE:
Deposits 6,801 7,105 21,232 20,252
Other borrowings 946 1,521 3,506 4,026
------- ------- ------- -------
Total interest expense 7,747 8,626 24,738 24,278
------- ------- ------- -------
NET INTEREST INCOME 4,665 4,592 13,633 14,383
PROVISION FOR LOAN LOSSES 102 -- 163 --
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,563 4,592 13,470 14,383
------- ------- ------- -------
NONINTEREST INCOME:
Deposit fee income 312 280 955 775
Other 615 284 1,502 625
------- ------- ------- -------
Total noninterest income 927 564 2,457 1,400
------- ------- ------- -------
NONINTEREST EXPENSES:
Salaries and employee benefits 1,899 2,006 6,548 5,864
Net occupancy expense 284 285 843 816
Federal insurance premiums 25 27 76 79
Provision for real estate losses 2 6 8 14
Data processing 276 217 807 677
Postage and supplies 118 108 399 350
Other 542 443 1,595 1,432
------- ------- ------- -------
Total noninterest expenses 3,146 3,092 10,276 9,232
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 2,344 2,064 5,651 6,551
INCOME TAX PROVISION 727 678 1,828 2,163
------- ------- ------- -------
NET INCOME $ 1,617 $ 1,386 $ 3,823 $ 4,388
======= ======= ======= =======
EARNINGS PER SHARE:
Basic $ 0.53 $ 0.41 $ 1.21 $ 1.23
======= ======= ======= =======
Diluted $ 0.52 $ 0.41 $ 1.20 $ 1.23
======= ======= ======= =======
Cash Dividends Declared $ 0.11 $ 0.10 $ 0.33 $ 0.30
======= ======= ======= =======
See notes to unaudited consolidated financial statements.
2
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(In Thousands)
(Unaudited)
Issued Empoyee
Common Stock Additional Stock Treasury Stock Total
------------------ Paid-In Benefit Retained ----------------------- Stockholders'
Shares Amount Capital Plans Earnings Shares Amount Equity
--------- ------ ---------- -------- -------- --------- --------- -------------
Balance, December 31, 2000 5,153,751 $52 $51,045 $(2,680) $56,713 1,599,770 $(28,508) $76,622
Net income 3,823 3,823
Release of ESOP shares 286 312 598
Stock compensation expense 297 297
Purchase of treasury
stock, at cost 372,314 (7,791) (7,791)
Dividends paid (1,100) (1,100)
--------- ---- ------- -------- ------- --------- --------- -------
Balance, September 30, 2001 5,153,751 $ 52 $51,331 $(2,071) $59,436 1,972,084 $(36,299) $72,449
========= ==== ======= ======== ======= ========= ========= =======
See notes to unaudited consolidated financial statements.
3
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended September 30,
---------------------------
2001 2000
---------------------------
OPERATING ACTIVITIES:
Net income $3,823 $4,388
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 163 --
Provision for real estate losses 8 14
Deferred tax provision 91 293
Federal Home Loan Bank stock dividends (169) (284)
Federal Home Loan Bank stock redeemed 385 --
Loss (gain) on sale of repossessed assets, net 13 (5)
Originations of loans held for sale (38,664) (4,468)
Proceeds from sales of loans 37,565 4,368
Gain on sale of mortgage loans originated to sell (437) (47)
Depreciation 528 498
Depreciation on real estate owned -- 32
Accretion of deferred loan fees, net (433) (358)
Release of ESOP shares 628 487
Stock compensation expense 297 592
Changes in operating assets & liabilities:
Accrued interest receivable 1,649 187
Prepaid expenses & other assets (271) 196
Other liabilities 353 280
-------- --------
Net cash provided by operating activities 5,529 6,173
-------- --------
INVESTING ACTIVITIES:
Purchases of investment securities-held to
maturity (30,404) (11,017)
Proceeds from maturities/calls of investment
securities-held to maturity 95,080 6,000
Purchase of bank owned life insurance (15,000) --
Loan (originations), net of repayments 17,337 (31,745)
Proceeds from sales of repossessed assets 354 2,898
Purchases of office properties and equipment (359) (901)
-------- --------
Net cash provided (used) by investing activities 67,008 (34,765)
-------- --------
(Continued)
4
FINANCING ACTIVITIES:
Net increase in deposits 11,752 28,163
Advances from FHLB 2,450 116,575
Repayment of advances from FHLB (39,961) (105,785)
Net decrease in advance payments
by borrowers for taxes & insurance (183) (264)
Purchase of treasury stock (7,791) (7,332)
Dividends paid (1,100) (1,121)
Distributions related to minority interest -- (793)
-------- --------
Net cash provided (used) by financing activities (34,833) 29,443
-------- --------
Net increase in cash and cash equivalents 37,704 851
CASH AND CASH EQUIVALENTS:
Beginning of period 11,564 9,983
-------- --------
End of period $ 49,268 $ 10,834
======== ========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for:
Interest $ 25,117 $ 23,967
======== ========
Income taxes $ 1,687 $ 1,765
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
ACTIVITIES:
Real estate acquired in settlement of loans $ 357 $ 347
======== ========
Loans to facilitate sales of real estate owned -- $ 1,170
======== ========
Investment securities traded, recorded in
investments, not yet settled in cash $ 13,405 $ --
======== ========
(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 nine months ended September 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 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, was
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 September 30, 2001 and 2000 were as follows:
Three months ended Nine months ended
September 30, September 30,
---------------------------- --------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Basic weighted - average shares 3,066,123 3,407,258 3,154,966 3,562,457
Effect of dilutive securities 44,165 125 22,179 42
--------- --------- --------- ---------
Diluted weighted - average shares 3,110,288 3,407,383 3,177,145 3,562,499
Note 4 - Declaration of Dividends
At their meeting on August 29, 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 September 25, 2001 to the stockholders of record
at the close of business on September 11, 2001.
Note 5 - Investment Securities
Investment securities consisted of the following (in thousands):
September 30, 2001
--------------------
Amortized Fair
Held to Maturity Cost Value
--------- -------
U.S. Government and
Agency obligations $ 133,039 $ 134,414
======= =======
8
Note 6 - Loans Receivable
Loans receivable consisted of the following (in thousands):
September 30, December 31,
2001 2000
--------- ------------
First mortgage loans:
One- to four- family residences $348,266 $377,341
Other properties 45,939 41,751
Construction 25,072 24,937
Less:
Unearned discounts (199) (191)
Undisbursed loan funds (10,817) (9,126)
Deferred loan fees, net (2,410) (2,747)
-------- --------
Total first mortgage loans 405,851 431,965
-------- --------
Consumer and other loans:
Commercial 23,039 20,239
Automobile 18,120 16,051
Consumer 6,706 5,893
Home equity and second mortgage 24,435 19,797
Savings 1,556 2,042
Other 3,052 2,768
Add deferred loan costs 258 241
-------- --------
Total consumer and other loans 77,166 67,031
-------- --------
Allowance for loan losses (680) (691)
-------- --------
Loans receivable, net $482,337 $498,305
======== ========
Non-accrual loans at September 30, 2001 were $2.3 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 163
Recoveries 13
Losses charged off (187)
----
Balance at September 30, 2001 $680
====
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
At September 30, 2001, the Corporation's assets amounted to
$697.7 million as compared to $713.9 million at December 31, 2000.
The $16.2 million or 2.3% decrease was primarily due to a decrease
of $51.3 million or 27.8% in investment securities-held to maturity
and to a decrease of $16.0 million or 3.2% in net loans receivable.
Such decreases were partially offset by a $37.7 million or 326.1%
increase in cash and cash equivalents and a $15.3 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 which has a cash surrender
value at September 30, 2001, of $15.2 million. Loan originations
for the nine month period ended September 30, 2001 consisted of
$82.5 million in one- to four- family residential loans, $2.1
million in multi-family residential loans, $16.8 million in
commercial loans, $22.7 million in construction loans and $36.6
million in consumer installment loans, of which $16.1 million
consisted of home equity loans and $12.1 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 September 30, 2001, the Bank had outstanding
loan commitments of $6.8 million, unused lines of credit of $8.6
million, and the undisbursed portion of construction loans of $10.8
million. Liabilities decreased $12.1 million or 1.9% to $625.2
million at September 30, 2001 compared to $637.3 million at
December 31, 2000. The decrease in liabilities was primarily due
to a decrease of $37.5 million or 40.2% in advances from the
Federal Home Loan Bank of Dallas ("FHLB of Dallas"). Such decrease
was partially offset by a $11.8 million or 2.2% increase in
deposits and a $13.9 million increase in other liabilities
primarily due to $13.4 million in commitments to purchase
investment securities not yet settled in cash. Stockholders'
equity amounted to $72.4 million or 10.4% of total assets at
September 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 372,314 shares of treasury
stock totaling $7.8 million in connection with the Corporation's
stock repurchase plan and to a lesser extent due to the payment of
cash dividends aggregating $1.1 million. Such decrease during the
nine months ended September 30, 2001 was partially offset by net
income of $3.8 million resulting from continued profitable
operations.
Non-performing assets, consisting of non-accruing loans and
repossessed assets, amounted to $2.7 million or .38% of total
assets at September 30, 2001, compared to $1.9 million or .27% of
total assets at December 31, 2000. Such increase was primarily
due to an increase in non-accruing loans collateralized by one-to-
four family mortgage loans and consumer loans. The allowance for
loan losses amounted to $680,000 at September 30, 2001.
Results of Operations for the Three Months Ended September 30, 2001
and 2000
General. The Corporation reported net income of $1.6 million
during the three months ended September 30, 2001 compared to net
income of $1.4 million for the same period in 2000. The
10
increase of $231,000 in net income in the 2001 period compared to
the same period in 2000 was primarily due to an increase in noninterest
income. Net interest income rose slightly from $4.6 million for
the three months ended September 30, 2000 to $4.7 million for the
same period in 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
increased to 2.48% and 2.86%, respectively, for the 2001 three
month period compared to 2.19% and 2.67%, respectively, for the
2000 three month period. These and other significant fluctuations
in operations are discussed below.
Interest Income. Interest income amounted to $12.4 million
for the three months ended September 30, 2001 compared to $13.2
million for the same period in 2000. The decrease of $806,000 or
6.1% 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 other interest earning assets, primarily
overnight funds.
Interest Expense. Interest expense decreased $879,000 or
10.2% to $7.7 million for the three months ended September 30, 2001
compared to $8.6 million for the same period in 2000. Such
decrease was primarily due to a decline in the average balance of
advances and a decrease in interest rates paid on deposits. Such
decrease was partially offset by an increase in the average balance
of deposits.
Noninterest Income. Noninterest income increased $363,000 or
64.4% to $927,000 for the three months ended September 30, 2001
compared to $564,000 for the three months ended September 30, 2000.
The increase in noninterest income for the three month comparable
periods ended September 30 was primarily due to an increase of
$32,000 or 11.2% from $280,000 to $312,000 in deposit fee income,
an increase of $23,000 from $23,000 to $46,000 in loan related
insurance commissions, an increase of $158,000 from $19,000 to
$177,000 in the gain on the sale of mortgage loans in the secondary
mortgage market, an increase of $27,000 from $8,000 to $35,000 in
additional loan fees related to loan sales and an increase of
$149,000 in earnings from bank owned life insurance purchased in
2001.
Noninterest Expense. Noninterest expenses increased $54,000
or 1.7% between the 2001 and 2000 three month periods ended
September 30. Such increase was primarily due to an increase in
data processing expenses. Data processing expense increased
$59,000 or 27.2% to $276,000 for the three months ended September
30, 2001 compared to $217,000 for the same period in 2000.
Salaries and employee benefits amounted to $1.9 million compared to
$2.0 million resulting in a decrease of $107,000 or 5.3% for the
three month periods ended September 30, 2001 and 2000,
respectively.
Income Taxes. Income taxes amounted to $727,000 and $678,000
for the three months ended September 30, 2001 and 2000,
respectively, resulting in effective tax rates of 31.02% and 32.8%,
respectively.
11
Results of Operations for the Nine Months Ended September 30, 2001
and 2000
General. The Corporation reported net income of $3.8 million
during the nine months ended September 30, 2001 compared to net
income of $4.4 million for the same period in 2000. The decrease
of $565,000 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 were offset
by an increase in noninterest income and a decrease in income tax
expense. Net interest income declined from $14.4 million for the
nine months ended September 30, 2000 to $13.6 million for the same
period in 2001. The Corporation's interest rate spread and net
interest margin decreased to 2.27% and 2.72%, respectively, for the
2001 nine month period compared to 2.38% and 2.85%, respectively,
for the 2000 nine month period.
Interest Income. Interest income amounted to $38.7 million
for the nine months ended September 30, 2000 compared to $38.4
million for the same period in 2001. The decrease of $290,000 was
primarily due to a decrease in the average balance of and average
yield earned on investment securities which were partially offset
by an increase in the average balance of and average yield earned
on net loans receivable and an increase in the average balance of
other interest earning assets, primarily overnight funds.
Interest Expense. Interest expense increased $460,000 or 1.9%
to $24.7 million for the nine months ended September 30, 2001
compared to $24.3 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 $1.1 million
or 75.5% to $2.5 million for the nine months ended September 30,
2001 compared to $1.4 million for the nine months ended
September 30, 2000. The increase in noninterest income for the
nine month comparable periods ended September 30 was primarily due
to an increase of $180,000 or 23.2% from $775,000 to $955,000 in
deposit fee income, an increase of $93,000 from $49,000 to $142,000
in loan related insurance commissions, an increase of $390,000 from
$47,000 to $437,000 in the gain on the sale of mortgage loans in
the secondary mortgage market, an increase of $77,000 from $20,000
to $97,000 in additional loan fees related to loan sales, and an
increase of $154,000 in earnings from bank owned life insurance
purchased in 2001. 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 sold in June 2000.
Noninterest Expense. Noninterest expenses increased $1.0
million or 11.3% between the 2001 and 2000 nine month periods ended
September 30. The increase in noninterest expenses during the nine
month period in 2001 compared to the same period in 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 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 $6.2 million compared to $5.9 million
resulting in an
12
increase of $332,000 or 5.7% for the nine month periods ended
September 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 corporation's stock price. Such
increase was partially offset by a decline in management
recognition and retention expense for the nine month comparable
periods as a result of all shares previously granted becoming
fully vested in May 2001.
Income Taxes. Income taxes amounted to $1.8 million and $2.2
million for the nine months ended September 30, 2001 and 2000,
respectively, resulting in effective tax rates of 32.3% and 33.0%,
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 September
30, 2001, the Bank had outstanding advances from the FHLB of Dallas
of $55.8 million. Such advances were used in the Bank's normal
operating and investing activities.
As of September 30, 2001, the Bank's regulatory capital was in
excess of all applicable regulatory requirements. At September 30,
2001, the Bank's tangible, core and risk-based capital ratios
amounted to 9.8%, 9.8% 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
Not applicable.
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: November 14, 2001 By: /s/Larry J. Brandt
-----------------------
Larry J. Brandt
President/CEO
Date: November 14, 2001 By: /s/Tommy W. Richardson
-----------------------
Tommy W. Richardson
Chief Financial Officer
16