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, 2002
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 November
12, 2002, there were issued and outstanding 2,700,859 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, 2002 (unaudited) and December 31, 2001 1
Consolidated Statements of Income for the three months
and nine months ended September 30, 2002 (unaudited) and 2001
(unaudited) 2
Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 2002 (unaudited) 3
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2002 (unaudited) and 2001 (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 16
Item 4. Controls and Procedures 16
Part II. Other Information
- -------- -----------------
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Section 302 Certification of the Chief Executive Officer 19
Section 302 Certification of the Chief Financial Officer 20
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
September 30, December 31,
2002 2001
------------- ------------
ASSETS (Unaudited)
Cash and cash equivalents $ 47,340 $ 72,326
Investment securities held-to-maturity 108,320 100,878
Federal Home Loan Bank stock 5,029 4,918
Loans receivable, net 485,409 474,494
Accrued interest receivable 4,572 4,420
Real estate acquired in settlement of loans, net 364 455
Office properties and equipment, net 8,546 7,006
Prepaid expenses and other assets 16,517 15,758
------- -------
TOTAL ASSETS $676,097 $680,255
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $569,238 $555,933
Federal Home Loan Bank advances 31,824 47,844
Advance payments by borrowers for
taxes and insurance 663 929
Other liabilities 5,998 4,484
------- -------
Total liabilities 607,723 609,190
------- -------
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,
2,724,859 and 3,050,959 shares outstanding at
September 30, 2002 and December 31, 2001,
respectively 52 52
Additional paid-in capital 51,849 51,434
Employee stock benefit plans (1,655) (1,967)
Retained earnings-substantially restricted 65,456 60,736
------- -------
115,702 110,255
Treasury stock, at cost, 2,428,892 and
2,102,792 shares at September 30, 2002 and
December 31, 2001, respectively (47,328) (39,190)
------- -------
Total stockholders' equity 68,374 71,065
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $676,097 $680,255
======= =======
See notes to unaudited consolidated financial statements.
1
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
------ ------ ------ ------
INTEREST INCOME:
Loans receivable $ 9,267 $ 9,856 $27,756 $29,956
Investment securities 1,643 2,323 4,983 7,777
Other 160 233 676 638
------ ------ ------ ------
Total interest income 11,070 12,412 33,415 38,371
------ ------ ------ ------
INTEREST EXPENSE:
Deposits 4,679 6,801 15,065 21,232
Other borrowings 443 946 1,810 3,506
------ ------ ------ ------
Total interest expense 5,122 7,747 16,875 24,738
------ ------ ------ ------
NET INTEREST INCOME 5,948 4,665 16,540 13,633
PROVISION FOR LOAN LOSSES 247 102 983 163
------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,701 4,563 15,557 13,470
------ ------ ------ ------
NONINTEREST INCOME:
Deposit fee income 611 312 1,747 955
Other 712 615 2,123 1,502
------ ------ ------ ------
Total noninterest income 1,323 927 3,870 2,457
------ ------ ------ ------
NONINTEREST EXPENSES:
Salaries and employee benefits 2,142 1,899 6,329 6,548
Net occupancy expense 337 284 945 843
Federal insurance premiums 24 25 73 76
Provision for real estate losses - 2 16 8
Data processing 322 276 978 807
Postage and supplies 130 118 373 399
Other 662 542 1,889 1,595
------ ------ ------ ------
Total noninterest expenses 3,617 3,146 10,603 10,276
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 3,407 2,344 8,824 5,651
INCOME TAX PROVISION 1,183 727 3,010 1,828
------ ------ ------ ------
NET INCOME $2,224 $1,617 $5,814 $3,823
===== ===== ===== =====
EARNINGS PER SHARE:
Basic $0.84 $0.53 $2.11 $1.21
===== ===== ===== =====
Diluted $0.81 $0.52 $2.03 $1.20
===== ===== ===== =====
Cash Dividends Declared $0.14 $0.11 $0.38 $0.33
===== ===== ===== =====
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, 2002
(In thousands, except share data)
(Unaudited)
Issued Employee
Common Stock Additional Stock Treasury 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, 2001 5,153,751 $52 $51,434 $(1,967) $60,736 2,102,792 $(39,190) $71,065
Net income 5,814 5,814
Release of ESOP shares 445 312 757
Tax effect of stock
compensation plan (34) (34)
Treasury shares reissued
due to exercise of stock
options 4 (14,400) 273 277
Purchase of treasury
stock, at cost 340,500 (8,411) (8,411)
Dividends paid (1,094) (1,094)
------ ------ ---------- -------- -------- ------ ------ -------------
Balance, September 30, 2002 5,153,751 $ 52 $51,849 $(1,655) $65,456 2,428,892 $(47,328) $68,374
========= ====== ====== ===== ====== ========= ====== ======
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,
-------------------------------
2002 2001
---- ----
OPERATING ACTIVITIES:
Net income $5,814 $3,823
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 983 163
Provision for real estate losses 16 8
Deferred tax provision 1 91
Federal Home Loan Bank stock dividends (111) (169)
Federal Home Loan Bank stock redeemed -- 385
Loss (gain) on sale of repossessed assets, net (4) 13
Originations of loans held for sale (41,710) (38,664)
Proceeds from sales of loans 43,027 37,565
Gain on sale of loans originated to sell (555) (437)
Depreciation 578 528
Accretion of deferred loan fees, net (464) (433)
Release of ESOP shares 757 628
Bank owned life insurance earnings (662) (154)
Stock compensation expense -- 297
Changes in operating assets & liabilities:
Accrued interest receivable (152) 1,649
Prepaid expenses & other assets (111) (117)
Other liabilities (2,454) 353
----- -----
Net cash provided by operating activities 4,953 5,529
----- -----
INVESTING ACTIVITIES:
Purchases of investment securities held-to-maturity (91,057) (30,404)
Proceeds from maturities/calls of investment
securities held-to-maturity 87,585 95,080
Purchase of bank owned life insurance -- (15,000)
Loan originations, net of repayments (12,789) 17,337
Proceeds from sales of repossessed assets 650 354
Purchases of office properties and equipment (2,119) (359)
------ ------
Net cash provided (used) by investing activities (17,730) 67,008
------ ------
4
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2002 2001
---- ----
FINANCING ACTIVITIES:
Net increase in deposits 13,305 11,752
Advances from FHLB 14,000 2,450
Repayment of advances from FHLB (30,020) (39,961)
Net decrease in advance payments
by borrowers for taxes & insurance (266) (183)
Purchase of treasury stock (8,411) (7,791)
Reissued treasury stock 277 --
Dividends paid (1,094) (1,100)
------ ------
Net cash used by financing activities (12,209) (34,833)
------ ------
Net increase (decrease) in cash and cash equivalents (24,986) 37,704
CASH AND CASH EQUIVALENTS:
Beginning of period 72,326 11,564
------ ------
End of period $47,340 $ 49,268
====== ======
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for:
Interest $17,203 $ 25,117
====== ======
Income taxes $ 2,936 $ 1,687
====== ======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
ACTIVITIES:
Real estate acquired in settlement of loans $ 756 $ 357
====== ======
Loans to facilitate sales of real estate owned $ 272 $ --
====== ======
Investment securities traded, recorded in
investments not yet settled in cash $ 3,970 $ 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, 2002 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2002. 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, 2001, contained in the
Corporation's 2001 Annual Report to Stockholders.
Note 2 - Recently Issued Accounting Standards
In April 2002 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections ("SFAS 145"). SFAS 145 rescinds FASB Statement No.4,
Reporting Gains and Losses From Extinguishment of Debt, and an amendment of
that statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. SFAS 145 also rescinds FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers and amends FASB Statement
No. 13, Accounting for Leases, to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and accounting for certain
lease modifications which are similar to sale-leaseback transactions. The
requirements of SFAS 145 related to FASB Statement 4 shall be applied in
fiscal years beginning after May 15, 2002. The provisions in certain
paragraphs of SFAS 145 related to FASB Statement 13 are effective for
transactions occurring after May 15, 2002. All other provisions of SFAS 145
were effective for financial statements issued on or after May 15, 2002.
In June 2002 the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("SFAS 146"). SFAS 146 addresses financial
accounting and reporting for costs
6
associated with exit or disposal activities and nullifies Emerging Issues Task
Force issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS 146 will be effective for exit or disposal
activities initiated after December 31, 2002.
The adoption of the required provisions of SFAS 145 did not have a material
effect on the financial positions, results of operations, or cash flows of the
Corporation. Management does not believe that the adoption of the remaining
provisions of SFAS 145 and of SFAS 146 will have a material effect on the
financial statements of the Corporation.
In October, 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions ("SFAS 147"). SFAS 147 provides guidance on the
accounting for goodwill, requiring that the accounting under SFAS No. 72,
Accounting for Certain Acquisitions of Banking or Thrift Institutions, not
apply after September 30, 2002. Financial institutions meeting conditions
outlined in SFAS 147 will be required to restate previously issued financials
statements. Additionally, the scope of SFAS 144, Accounting for the
Impairment of Disposal of Long-Lived Assets, is amended by SFAS 147 to include
long-term customer-relationship intangible assets such as depositor- and
borrower-relationship intangible assets and credit cardholder intangible
assets. Management does not believe that the adoption of SFAS 147 will have a
material effect on the financial statements of the Corporation.
Note 3 - Earnings per Share
The weighted average number of common shares used to calculate earnings per
share for the periods ended September 30, 2002 and 2001 were as follows:
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
-------- -------- -------- -------
Basic weighted - average shares 2,635,219 3,066,123 2,756,135 3,154,966
Effect of dilutive securities 110,849 44,165 101,569 22,179
--------- --------- --------- ---------
Diluted weighted - average shares 2,746,068 3,110,288 2,857,704 3,177,145
Note 4 - Declaration of Dividends
At their meeting on August 23, 2002, the Board of Directors declared a $.14
(fourteen cent) per share cash dividend on the common stock of the
Corporation. The cash dividend was paid on September 25, 2002 to the
stockholders of record at the close of business on September 10, 2002.
7
Note 5 - Investment Securities
Investment securities consisted of the following (in thousands):
September 30, 2002
------------------
Amortized Fair
Cost Value
--------- ------
Held-to-Maturity
Municipal Securities $ 7,587 $ 7,858
U. S. Government and Agency obligations 87,259 89,671
Certificates of Deposit 13,474 13,508
------ ------
$108,320 $111,037
======= =======
Note 6 - Loans Receivable
Loans receivable consisted of the following (in thousands):
September 30, 2002 December 31, 2001
------------------ -----------------
First mortgage loans:
One- to four- family residences $300,402 $330,844
Other properties 67,808 51,282
Construction 44,907 24,842
Less:
Unearned discounts (175) (216)
Undisbursed loan funds (21,179) (10,144)
Deferred loan fees, net (1,601) (2,127)
------- -------
Total first mortgage loans 390,162 394,481
------- -------
Consumer and other loans:
Commercial 27,179 23,451
Automobile 21,746 20,506
Consumer 8,580 7,083
Home equity and second mortgage 32,840 24,933
Savings 2,064 1,464
Other 3,666 3,234
Deferred loan costs 254 265
------- -------
Total consumer and other loans 96,329 80,936
------- -------
Allowance for loan losses (1,082) (923)
------- -------
Loans receivable, net $485,409 $474,494
======= =======
Non-accrual loans at September 30, 2002 were $2.8 million. All loans 90 days
or more past due are recorded as non-accrual.
8
A summary of the activity in the allowance for loan losses is as follows (in
thousands):
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
--------------- ---------------
2002 2001 2002 2001
----- ----- ---- ----
Balance at beginning of period $1,458 $622 $923 $691
Provisions for estimated losses 247 102 983 163
Recoveries 25 3 63 13
Other - - 35 -
Losses charged off (648) (47) (922) (187)
----- --- ----- ---
Balance at end of period $1,082 $680 $1,082 $680
===== === ===== ===
Losses charged off in the three months ended September 30, 2002 increased
$601,000 from $47,000 for the three months ended September 30, 2001 to
$648,000 for the same period in 2002. Losses charged off in the nine months
ended September 30, 2002 increased $735,000 from $187,000 for the nine months
ended September 30, 2001 to $922,000 for the same period in 2002. The
increase in the level of charge- offs in the 2002 three month and nine month
periods over the same periods in 2001 was primarily the result of a $450,000
charge-off on a single commercial real estate loan and increases in the level
of charge-offs on automobile loans and account balances related to the Bank's
overdraft protection program introduced in the fourth quarter of 2001.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
At September 30, 2002, the Corporation's assets amounted to $676.1
million as compared to $680.3 million at December 31, 2001. The $4.2 million
or .61% decrease was primarily due to a decrease of $25.0 million or 34.6% in
cash and cash equivalents. Such decrease was partially offset by a $10.9
million or 2.3% increase in net loans receivable and to an increase of $7.4
million or 7.4% in investment securities held-to-maturity. Loan originations
for the nine month period ended September 30, 2002 consisted of $94.9 million
in one- to four- family residential loans, $2.4 million in multi-family
residential loans, $38.4 million in commercial loans, $42.1 million in
construction loans and $44.4 million in consumer installment loans, of which
$20.9 million consisted of home equity loans and $12.5 million consisted of
automobile loans. At September 30, 2002, the Bank had outstanding loan
commitments of $6.2 million, unused lines of credit of $11.8 million, and the
undisbursed portion of construction loans of $21.2 million. Liabilities
decreased $1.5 million or .24% to $607.7 million at September 30, 2002
compared to $609.2 million at December 31, 2001. The decrease in liabilities
was primarily due to a decrease of $16.0 million or 33.5% in advances from the
Federal Home Loan Bank of Dallas ("FHLB of Dallas"), which was partially
offset by an increase of $13.3 million or 2.4% in deposits. The funds
available from the increase in deposits and available in cash and cash
equivalents were used to pay down FHLB of Dallas advances, to invest in
investment securities held-to-maturity, to fund loan growth, and to purchase
treasury stock. Stockholders' equity amounted to $68.4 million or 10.1% of
total assets at September 30, 2002 compared to $71.1 million or 10.4% of total
assets at December 31, 2001. The decrease in stockholders' equity was
primarily due to the purchase of 340,500 shares of treasury stock totaling
$8.4 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, 2002 was
partially offset by net income of $5.8 million resulting from continued
profitable operations.
Non-performing assets, consisting of non-accruing loans and repossessed
assets, amounted to $3.2 million or .47% of total assets at September 30,
2002, compared to $3.6 million or .53% of total assets at December 31, 2001.
The allowance for loan losses amounted to $1.1 million at September 30, 2002
or 38.8% of nonperforming loans and .21% of total loans. The allowance for
loan losses amounted to $923,000 at December 31, 2001 or 29.7% of
nonperforming loans and .19% of total loans. The allowance for loan losses
includes $132,000 and $184,000 in allowances allocated to specific loans as of
September 30, 2002 and December 31, 2001, respectively.
Results of Operations for the Three Months Ended September 30, 2002 and 2001
General. The Corporation reported net income of $2.2 million during the
three months ended September 30, 2002 compared to net income of $1.6 million
for the same period in 2001. The increase of $607,000 in net income in the
2002 period compared to the same period in 2001 was primarily due to an
increase in net interest income and an increase in noninterest income, which
were offset by an increase in the provision for loan losses, an increase in
noninterest expenses, and an
10
increase in income tax expense. Net interest income increased from $4.7
million for the three months ended September 30, 2001 to $5.9 million for the
same period in 2002. 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 3.54% and 3.73%, respectively, for the 2002 three
month period compared to 2.48% and 2.86%, respectively, for the 2001 three
month period. The increases in the interest rate spread and net interest
margin were primarily the result of declining interest rates and the Bank's
liability-sensitive position. The decline in interest rates resulted in a
173 basis point reduction in the cost of interest-bearing liabilities to 3.40%
for the three months ended September 30, 2002 compared to 5.13% for the three
months ended September 30, 2001. These and other significant fluctuations in
operations are discussed below.
Interest Income. Interest income amounted to $11.1 million for the
three months ended September 30, 2002 compared to $12.4 million for the same
period in 2001. The decrease of $1.3 million or 10.8% was primarily due to a
decrease in the average balance of investment securities and a decrease in the
average yield earned on investment securities, net loans receivable, and other
interest earning assets, primarily overnight funds, which were partially
offset by an increase in the average balance of net loans receivable and other
interest earning assets, primarily overnight funds. The decrease in the
average balance of investment securities held-to-maturity was primarily the
result of the call of government agency bonds. The average yield on interest
earning assets decreased 65 basis points from 7.60% for the three months ended
September 30, 2001 to 6.95% for the three months ended September 30, 2002,
primarily as a result of the declining level of interest rates in 2002. The
increase in the average balance of loans was primarily due to an increase in
the volume of loan originations. The increase in the average balance of
overnight funds was primarily due to the proceeds from callable government
agency securities being placed in overnight funds.
Interest Expense. Interest expense decreased $2.6 million or 33.9% to
$5.1 million for the three months ended September 30, 2002 compared to $7.7
million for the same period in 2001. Such decrease was primarily due to a
decrease in the interest rates paid on deposits and a decrease in the average
balance of FHLB of Dallas advances. Such decreases were partially offset by
an increase in the average balance of deposits. The decrease in the interest
rates paid on deposits was primarily the result of maturing certificates and
variable interest bearing accounts being repriced to lower interest rates.
The average cost of deposits decreased 170 basis points from 4.98% for the
three months ended September 30, 2001 to 3.28% for the three months ended
September 30, 2002, primarily as a result of the declining level of interest
rates in 2002. The decrease in the average balance of advances was the result
of the level of repayment of maturing advances exceeding the level of new
advances.
Provision for Loan Losses. The provision for loan losses amounted to
$247,000 for the three months ended September 30, 2002 compared to $102,000
for the same period in 2001. The increase in the 2002 three month period
compared to the same period in 2001 was primarily due to economic conditions,
an increase in the losses charged off on consumer loans and an increase in the
commercial and consumer loan portfolios which are typically considered to
involve a higher degree of risk than one- to four-family loans.
11
Provisions for loan losses include charges to reduce the recorded
balance of loans to their estimated fair value. Such provision and the
adequacy of allowance for loan losses is evaluated quarterly by management of
the Bank based on the Bank's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral and current
economic conditions.
Noninterest Income. Noninterest income increased $396,000 or 42.7% to
$1.3 million for the three months ended September 30, 2002 compared to
$927,000 for the three months ended September 30, 2001. The increase in
noninterest income for the three-month comparable periods ended September 30
was primarily due to an increase of $299,000 or 95.8% from $312,000 to
$611,000 in deposit fee income resulting from service charge income from the
overdraft protection program that was introduced by the Bank in the fourth
quarter of 2001, and an increase of $75,000 from $149,000 to $224,000 in
earnings from bank owned life insurance purchased in the second and third
quarters of 2001.
Noninterest Expense. Noninterest expense increased $471,000 or 15.0%
between the 2002 and 2001 three month periods ended September 30. Such
increase was primarily due to an increase in salaries and employee benefits,
data processing expense, and occupancy expense. Salaries and employee
benefits increased $243,000 or 12.8% to $2.1 million for the three month
period ended September 30, 2002 compared to $1.9 million for the same period
in 2001. Such increase was primarily due to an increase in compensation
expense due to an increase in personnel as well as salary and merit increases,
an increase in the employee stock ownership plan expense as a result of the
increase in the average stock price of the Corporation's common stock and an
increase in health insurance costs. Data processing expense increased $46,000
or 16.7% to $322,000 for the three month period ended September 30, 2002
compared to $276,000 for the same period in 2001. Such increase in data
processing expense was due to growth and additional product and service
offerings. Occupancy expense increased $53,000 or 18.7% to $337,000 for the
three month period ended September 30, 2002 compared to $284,000 for the same
period of 2001. Such increase in occupancy expense was primarily due to the
addition of a loan processing center in Fayetteville that opened in June 2002.
Income Taxes. Income taxes amounted to $1.2 million and $727,000 for
the three months ended September 30, 2002 and 2001, respectively, resulting in
effective tax rates of 34.7% and 31.0%, respectively. The increase in income
taxes was due primarily to an increase in pre-tax income.
Results of Operations for the Nine Months Ended September 30, 2002 and 2001
General. The Corporation reported net income of $5.8 million for the
nine months ended September 30, 2002 compared to net income of $3.8 million
for the same period in 2001. The increase of $2.0 million in net income in
the 2002 period compared to the same period in 2001 was primarily due to an
increase in net interest income and an increase in noninterest income, which
were offset by an increase in the provision for loan losses, an increase in
noninterest expense and an increase in income tax expense. Net interest
income increased $2.9 million from $13.6 million for
12
the nine months ended September 30, 2001 to $16.5 million for the same period
in 2002. The Corporation's interest rate spread and net interest margin
increased to 3.21% and 3.43%, respectively, for the 2002 nine month period
compared to 2.27% and 2.72%, respectively, for the 2001 nine month period.
The increases in the interest rate spread and net interest margin were
primarily the result of declining interest rates and the Bank's
liability-sensitive position. The decline in interest rates resulted in a
167 basis point reduction in the cost of interest-bearing liabilities to
3.72% for nine months ended September 30, 2002 compared to 5.39% for the nine
months ended September 30, 2001.
Interest Income. Interest income amounted to $33.4 million for the nine
months ended September 30, 2002 compared to $38.4 million for the same period
in 2001. The decrease of $5.0 million was primarily due to a decrease in the
average balances of net loans receivable and investment securities, and a
decrease in the average yield earned on net loans receivable, investment
securities and other interest earning assets, primarily overnight funds, which
were partially offset by an increase in the average balance of other interest
earning assets, primarily overnight funds. The decrease in the average
balance of net loans receivable was primarily due to a portion of one- to
four-family mortgage originations being sold on the secondary market. The
decrease in the average balance of investment securities held-to-maturity was
primarily the result of the call of government agency bonds. The average
yield on interest earning assets decreased 74 basis points from 7.66% for the
nine months ended September 30, 2001 to 6.92% for the nine months ended
September 30, 2002, primarily as a result of the declining level of interest
rates in 2002. The increase in the average balance of overnight funds was
primarily due to the proceeds from callable government agency securities being
placed in overnight funds.
Interest Expense. Interest expense decreased $7.8 million or 31.8% to
$16.9 million for the nine months ended September 30, 2002 compared to $24.7
million for the same period in 2001. Such decrease was primarily due to a
decrease in the interest rates paid on deposits and FHLB of Dallas advances,
and a decrease in the average balance of such advances. Such decrease was
partially offset by an increase in the average balance of deposits. The
decrease in the interest rates paid on deposits was primarily the result of
maturing certificates and variable interest bearing accounts being repriced to
lower interest rates. The average cost of deposits decreased 168 basis points
from 5.23% for the nine months ended September 30, 2001 to 3.55% for the nine
months ended September 30, 2002, primarily as a result of the declining level
of interest rates in 2002. The decrease in the average balance of advances
was the result of the level of repayment of $30.0 million of maturing
advances exceeding the $14.0 million of new advances.
Provision for Loan Losses. The provision for loan losses amounted to
$983,000 for the nine months ended September 30, 2002 compared to $163,000 for
the same period in 2001. The increase in the 2002 nine month period compared
to the same period in 2001 was primarily due to economic conditions, an
increase in the losses charged off on consumer loans, an increase in the
commercial and consumer loan portfolios which are typically considered to
involve a higher degree of risk than one- to four-family loans, and the
recognition of a loss of $415,000 on a single commercial real estate loan.
13
Provisions for loan losses include charges to reduce the recorded
balance of loans to their estimated fair value. Such provision and the
adequacy of allowance for loan losses is evaluated quarterly by management of
the Bank based on the Bank's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral and current
economic conditions.
Noninterest Income. Noninterest income increased $1.4 million or 57.5%
to $3.9 million for the nine months ended September 30, 2002 compared to $2.5
million for the nine months ended September 30, 2001. The increase in
noninterest income for the nine month comparable periods ended September 30
was primarily due to an increase of $792,000 or 82.9% from $955,000 to $1.7
million in deposit fee income resulting from service charge income from the
overdraft protection program that was introduced by the Bank in the fourth
quarter of 2001, an increase of $508,000 from $154,000 to $662,000 in earnings
from bank owned life insurance purchased in the second and third quarters of
2001, and an increase of $119,000 from $437,000 to $556,000 in the gain on the
sale of mortgage loans in the secondary mortgage market. Such increases were
partially offset by a decrease of $72,000 from $142,000 to $70,000 in loan
related insurance commissions. The decrease in loan related insurance
commissions was primarily due to a decrease in the number of loan customers
buying credit life insurance in conjunction with their loans.
Noninterest Expense. Noninterest expense increased $327,000 or 3.2%
between the 2002 and 2001 nine month periods ended September 30. Such
increase was primarily due to increases in data processing expense, occupancy
expense, and contributions which was partially offset by a decrease in
salaries and employee benefits. Salaries and employee benefits decreased
$219,000 or 3.3% to $6.3 million for the nine month period ended September 30,
2002 compared to $6.5 million for the same period in 2001. Such decrease was
primarily due to a nonrecurring expense of $352,000 for a death benefit
payable in the second quarter of 2001 pursuant to the employment contract of
the Bank's Chief Executive Officer and Chairman of the Board and to a decline
of $298,000 in the management recognition and retention plan expense as a
result of the awarded shares being fully vested in May 2001. Such decrease in
salaries and employee benefits was partially offset by increases in
compensation expense due to an increase in personnel as well as salary and
merit increases, an increase in the employee stock ownership plan expense as a
result of the increase in the average stock price of the Corporation's common
stock, and an increase in health insurance costs. Data processing expenses
increased $171,000 or 21.2% to $978,000 for the nine month period ended
September 30, 2002 compared to $807,000 for the same period in 2001. Such
increase in data processing expense was due to growth and additional product
and service offerings. Occupancy expense increased $102,000 or 12.1% to
$945,000 from $843,000 for the nine month period ended September 30, 2002 and
2001, respectively. Such increase in occupancy expense was primarily due to
the addition of a loan processing center in Fayetteville that opened in June
2002. Contribution expense increased $86,000 to $113,000 from $27,000 for the
nine month period ended September 30, 2002 and 2001, respectively. The
increase in contributions was primarily due to a one-time $50,000 endowed
chair awarded to a state college in Arkansas.
Income Taxes. Income taxes amounted to $3.0 million and $1.8 million
for the nine months ended September 30, 2002 and 2001, respectively, resulting
in effective tax rates of 34.1% and
14
32.3%, respectively. The increase in income taxes was due primarily to an
increase in pre-tax income.
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, 2002, the Bank had outstanding
advances from the FHLB of Dallas of $31.8 million. Such advances were used in
the Bank's normal operating and investing activities.
The Bank began construction in May 2002 of a new corporate and full-
service branch office in north Harrison. Construction is
expected be completed in the spring of 2003. Capital expenditures are
estimated to be $6.4 million with disbursements occurring throughout the
period of construction. As of September 30, 2002, $835,000 had been disbursed
for the construction of the new office.
As of September 30, 2002, the Bank's regulatory capital was in excess of
all applicable regulatory requirements. At September 30, 2002, the Bank's
tangible, core and risk-based capital ratios amounted to 10.0%, 10.0% and
16.6%, 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.
15
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 2001 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, 2001.
CONTROLS AND PROCEDURES
Within 90 days prior to the date of this Quarterly Report on Form 10-Q,
the Corporation carried out an evaluation, under the supervision and with the
participation of the Corporation's management, including the Corporation's
Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of the Corporation's disclosure controls and
procedures. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Corporation's disclosure controls and
procedures are effective. There were no significant changes in the
Corporation's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.
Disclosure controls and procedures are the controls and other procedures
of the Corporation that are designed to ensure that the information required
to be disclosed by the Corporation in its reports filed or submitted under the
Securities Exchange Act of 1934, as amended ("Exchange Act") is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by the Corporation in its
reports filed under the Exchange Act is accumulated and communicated to the
Corporation's management, including the principal executive officer and
principal financial officer, as appropriate to allow timely decisions
regarding required disclosure.
16
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
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 99.1 - Certification of Chief Executive Officer,
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350)
Exhibit 99.2 - Certification of Chief Financial Officer,
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350)
17
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, 2002 By: /s/Larry J. Brandt
---------------------
Larry J. Brandt
President/CEO
Date: November 14, 2002 By: /s/Sherri R. Billings
---------------------
Sherri R. Billings
EVP/CFO
18
SECTION 302 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
I, Larry J. Brandt, the Chief Executive Officer of First Federal Bancshares of
Arkansas, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Federal
Bancshares of Arkansas, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Larry J. Brandt
-------------------------
Larry J. Brandt
Chief Executive Officer
19
SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Sherri R. Billings, the Chief Financial Officer of First Federal Bancshares
of Arkansas, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Federal
Bancshares of Arkansas, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Sherri R. Billings
---------------------------
Sherri R. Billings
Chief Financial Officer
20