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, 2003
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)
1401 Highway 62-65 North
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 by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
___ ___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of October 31, 2003,
there were issued and outstanding 2,663,943 shares of the Registrant's Common
Stock, par value $.01 per share.
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
TABLE OF CONTENTS
Part I. Financial Information Page
_______ _____________________ ____
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition as of
September 30, 2003 and December 31, 2002 (unaudited) 1
Consolidated Statements of Income for the three months
and nine months ended September 30, 2003 and 2002 (unaudited) 2
Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 2003 (unaudited) 3
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 and 2002 (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 22
Item 4. Controls and Procedures 23
Part II. Other Information
________ _________________
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
(Unaudited)
September 30, December 31,
2003 2002
_______________ ______________
ASSETS
Cash and cash equivalents $ 73,449 $ 44,493
Investment securities held to maturity 89,473 114,471
Federal Home Loan Bank stock 5,153 5,064
Loans receivable, net 490,828 483,468
Accrued interest receivable 3,918 4,380
Real estate acquired in settlement of loans, net 924 320
Office properties and equipment, net 14,492 10,690
Prepaid expenses and other assets 17,573 17,010
------- -------
TOTAL ASSETS $695,810 $679,896
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $572,897 $568,762
Federal Home Loan Bank advances 43,522 38,610
Advance payments by borrowers for
taxes and insurance 513 760
Other liabilities 5,319 2,498
------- -------
Total liabilities $622,251 $610,630
------- -------
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, 2,663,943 and
2,687,359 shares outstanding at September 30, 2003
and December 31, 2002, respectively 52 52
Additional paid-in capital 52,688 52,040
Employee stock benefit plans (1,136) (1,551)
Retained earnings-substantially restricted 71,452 67,043
------- -------
123,056 117,584
Treasury stock, at cost, 2,489,808 and
2,466,392 shares at September 30, 2003 and
December 31, 2002, respectively (49,497) (48,318)
------- -------
Total stockholders' equity 73,559 69,266
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $695,810 $679,896
======= =======
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,
_________________________________________
2003 2002 2003 2002
________ _________ _________ _________
INTEREST INCOME:
Loans receivable $8,450 $ 9,267 $25,842 $27,756
Investment securities:
Taxable 702 1,571 2,579 4,771
Nontaxable 143 72 362 212
Other 180 160 498 676
----- ------ ------ ------
Total interest income 9,475 11,070 29,281 33,415
----- ------ ------ ------
INTEREST EXPENSE:
Deposits 3,459 4,679 11,247 15,065
Other borrowings 340 443 1,058 1,810
----- ------ ------ ------
Total interest expense 3,799 5,122 12,305 16,875
----- ------ ------ ------
NET INTEREST INCOME 5,676 5,948 16,976 16,540
PROVISION FOR LOAN LOSSES 204 247 619 983
----- ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,472 5,701 16,357 15,557
----- ------ ------ ------
NONINTEREST INCOME:
Deposit fee income 667 611 1,869 1,747
Earnings on life insurance policies 211 224 637 662
Gain on sale of loans 600 181 1,512 555
Appreciation of contributed assets -- -- 414 --
Other 383 307 1,117 906
----- ------ ------ ------
Total noninterest income 1,861 1,323 5,549 3,870
----- ------ ------ ------
NONINTEREST EXPENSES:
Salaries and employee benefits 2,639 2,142 7,642 6,329
Net occupancy expense 484 337 1,371 945
Data processing 433 322 1,225 978
Professional fees 67 102 261 279
Advertising and public relations 170 130 513 373
Postage and supplies 165 141 468 392
Contributions 4 41 523 113
Other 585 402 1,571 1,194
----- ------ ------ ------
Total noninterest expenses 4,547 3,617 13,574 10,603
----- ------ ------ ------
INCOME BEFORE INCOME TAXES 2,786 3,407 8,332 8,824
INCOME TAX PROVISION 914 1,183 2,589 3,010
----- ------ ------ ------
NET INCOME $1,872 $ 2,224 $ 5,743 $ 5,814
===== ====== ====== ======
EARNINGS PER SHARE:
Basic $ 0.73 $ 0.84 $ 2.26 $ 2.11
===== ====== ====== ======
Diluted $ 0.69 $ 0.81 $ 2.15 $ 2.03
===== ====== ====== ======
Cash Dividends Declared $ 0.18 $ 0.14 $ 0.50 $ 0.38
===== ====== ====== ======
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, 2003
(In thousands, except share data)
(Unaudited)
Issued
Common Stock Employee Treasury Stock
___________________ Additional Stock ________________________ Total
Paid-In Benefit Retained Stockholders'
Shares Amount Capital Plans Earnings Shares Amount Equity
__________ ________ __________ __________ ___________ ____________ ___________ _____________
Balance, December 31, 2002 5,153,751 $52 $52,040 $(1,551) $67,043 2,466,392 $(48,318) $69,266
Net income 5,743 5,743
Release of ESOP shares 609 312 921
Tax effect of stock
compensation plan 28 28
Treasury shares reissued due to
exercise of stock options (24) (55,284) 1,089 1,065
Purchase of treasury stock,
at cost 83,700 (2,367) (2,367)
MRP shares 35 103 (5,000) 99 237
Dividends paid (1,334) (1,334)
--------- ---- ------ ------ ------- --------- ------- ------
Balance, September 30, 2003 5,153,751 $ 52 $52,688 $(1,136) $71,452 2,489,808 $(49,497) $73,559
========= ==== ====== ====== ====== ========= ======= ======
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,
______________________________
2003 2002
______ _______
OPERATING ACTIVITIES:
Net income $5,743 $5,814
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 619 983
Provision for real estate losses 34 16
Deferred tax (benefit) provision (29) 1
Federal Home Loan Bank stock dividends (89) (111)
Loss on disposition of office properties and equipment 90 --
Loss (gain) on sale of repossessed assets, net 5 (4)
Originations of loans held for sale (107,100) (41,710)
Proceeds from sales of loans 113,441 43,027
Gain on sale of loans originated to sell (1,512) (555)
Depreciation 842 578
Accretion of deferred loan fees, net (350) (464)
Release of ESOP shares 921 757
MRP compensation expense 38 --
Bank owned life insurance earnings (637) (662)
Changes in operating assets and liabilities:
Accrued interest receivable 462 (152)
Prepaid expenses and other assets 79 (156)
Other liabilities 77 (454)
------ ------
Net cash provided by operating activities 12,634 6,908
------ ------
INVESTING ACTIVITIES:
Purchases of investment securities held to maturity (245,963) (93,057)
Proceeds from maturities/calls of investment
securities held to maturity 273,961 87,585
Loan originations, net of repayments (13,705) (12,789)
Proceeds from sales of repossessed assets 599 650
Proceeds from sales of office properties
and equipment 38 --
Purchases of office properties and equipment (4,772) (2,119)
------- -------
Net cash provided by (used in) investing activities 10,158 (19,730)
------- -------
(Continued)
4
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended September 30,
_______________________________
2003 2002
_________ _________
FINANCING ACTIVITIES:
Net increase in deposits 4,135 13,305
Advances from FHLB 20,000 14,000
Repayment of advances from FHLB (15,088) (30,020)
Net decrease in advance payments
by borrowers for taxes & insurance (247) (266)
Purchase of treasury stock (2,367) (8,411)
Reissued treasury stock 1,065 277
Dividends paid (1,334) (1,094)
------- -------
Net cash provided by (used in) financing activities 6,164 (12,209)
------- -------
Net increase (decrease) in cash and cash equivalents 28,956 (25,031)
CASH AND CASH EQUIVALENTS:
Beginning of period 44,493 72,311
------ ------
End of period $73,449 $47,280
====== ======
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for:
Interest $12,379 $17,203
====== ======
Income taxes $ 2,489 $ 2,936
====== ======
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Real estate and other assets acquired in settlement of
loans $ 1,714 $ 756
====== ======
Loans to facilitate sales of real estate owned $ 456 $ 272
====== ======
Investment securities traded, recorded in
investments not yet settled in cash $ 3,000 $ 1,970
====== ======
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"), which is inactive.
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 unaudited 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, 2003, are not
necessarily indicative of the results to be expected for the year ending
December 31, 2003. 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, 2002, contained in the
Corporation's 2002 Annual Report to Stockholders.
Certain amounts in the September 30, 2002, unaudited consolidated financial
statements have been reclassified to conform to the classifications adopted
for reporting in 2003.
Note 2 - Recently Issued Accounting Standards
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123
("SFAS 148"). SFAS 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements
of Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
transition provisions are effective for fiscal years ending after December 15,
2002. The provisions of the statement related to interim disclosures are
effective for interim periods beginning after December 31, 2002. The
Corporation has adopted the disclosure provisions of SFAS 148 beginning in the
quarter ended March 31, 2003, and has included the required disclosures in
Note 7 to the unaudited consolidated financial statements.
6
FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others
("FIN 45") elaborates on the disclosures to be made by a guarantor in its
financial statements about its obligations under certain guarantees that it
has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The disclosure requirements in FIN 45 are
effective for financial statements of annual periods ending after December 15,
2002. The adoption of FIN 45 did not have a material effect on the financial
statements of the Corporation.
In April 2003, the FASB issued SFAS No. 149, Amendments of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 149 requires that contracts with
comparable characteristics be accounted for similarly. In particular,
SFAS 149 (1) clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative discussed in paragraph 6(b)
of Statement 133, (2) clarifies when a derivative contains a financing
component, (3) amends the definition of an underlying to conform it to language
used in FIN 45, and (4) amends certain other existing pronouncements. SFAS 149
is effective for contracts entered into or modified after June 30, 2003, with
certain exceptions. The adoption of SFAS 149 did not have a material effect
on the financial statements of the Corporation.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003, with certain
exceptions. The adoption of SFAS 150 did not 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, 2003 and 2002 were as follows:
Three months ended Nine months ended
September 30, September 30,
____________________________________________
2003 2002 2003 2002
_________ _________ _________ _________
Basic weighted - average shares 2,552,917 2,635,219 2,546,581 2,756,135
Effect of dilutive securities 153,486 110,849 128,019 101,569
--------- --------- --------- ---------
Diluted weighted - average shares 2,706,403 2,746,068 2,674,600 2,857,704
========= ========= ========= =========
7
Note 4 - Declaration of Dividends
At their meeting on August 25, 2003, the Board of Directors declared an $0.18
(eighteen cent) per share cash dividend on the common stock of the Corporation.
The cash dividend was paid on September 24, 2003 to the stockholders of record
at the close of business on September 9, 2003.
Note 5 - Investment Securities
Investment securities consisted of the following (in thousands):
September 30, 2003
_________________________
Amortized Fair
Cost Value
Held-to-Maturity __________ ____________
Municipal securities $12,938 $13,175
U.S. Government and Agency obligations 56,535 56,599
Certificates of deposit 20,000 20,000
------ ------
$89,473 $89,774
====== ======
Note 6 - Loans Receivable
Loans receivable consisted of the following (in thousands):
September 30, 2003 December 31, 2002
_____________________ ___________________
First mortgage loans:
One-to four-family residences $257,986 $289,106
Commercial 73,185 64,888
Multifamily 10,479 5,821
Other properties 1,940 1,735
Construction 74,044 49,144
Less:
Unearned discounts (140) (178)
Undisbursed loan funds (29,522) (20,618)
Deferred loan fees, net (878) (1,414)
------- -------
Total first mortgage loans 387,094 388,484
Consumer and other loans:
Commercial 32,301 28,213
Automobile 22,751 22,570
Consumer 9,654 7,741
Home equity and second mortgage 33,971 31,670
Savings 2,328 2,158
Other 4,216 3,907
Deferred loan costs, net 254 254
------- -------
Total consumer and other loans 105,475 96,513
------- -------
Allowance for loan losses (1,741) (1,529)
------- -------
Loans receivable, net $490,828 $483,468
======= =======
8
Nonaccrual loans at September 30, 2003 were $4.5 million. All loans 90 days or
more past due and certain restructured loans are recorded as nonaccrual.
A summary of the activity in the allowance for loan losses is as follows
(in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
______________________ _____________________
2003 2002 2003 2002
____________ _________ ___________ _________
Balance at beginning of period $1,717 $1,458 $1,529 $923
Provisions for estimated losses 204 247 619 983
Recoveries 13 25 54 63
Other -- -- -- 35
Losses charged off (193) (648) (461) (922)
----- ----- ----- -----
Balance at end of period $1,741 $1,082 $1,741 $1,082
===== ===== ===== =====
Losses charged off in the three months ended September 30, 2003 decreased
$455,000 from $648,000 for the three months ended September 30, 2002, to
$193,000 for the same period in 2003. Losses charged off in the nine months
ended September 30, 2003 decreased $461,000 from $922,000 for the nine months
ended September 30, 2002 to $461,000 for the same period in 2003. The decrease
in the level of charge-offs for the three and nine month periods was primarily
the result of a $450,000 charge-off on a single commercial real estate loan in
2002.
Note 7 - Stock Option Plan
At September 30, 2003, the Corporation had one stock option plan in effect
covering key employees and directors. The plan is more fully described in the
Notes to Consolidated Financial Statements included in the Corporation's 2002
Annual Report to Stockholders. The Corporation accounts for this plan under
the recognition and measurement principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. No stock-based
employee or director compensation cost is recognized in net income, as all
options granted under the plan had an exercise price equal to the market
value of the underlying stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Corporation
had applied the fair value recognition provisions of FASB Statement 123,
Accounting for Stock-Based Compensation, to stock-based employee and director
compensation:
Three Months Ended Nine Months Ended
September 30, September 30,
_____________________ ____________________
2003 2002 2003 2002
__________ __________ ________ ___________
Net income (in thousands):
As reported $1,872 $2,224 $5,743 $5,814
Proforma 1,865 2,217 5,727 5,791
Earnings per share:
Basic, as reported $0.73 $0.84 $2.26 $2.11
Basic, proforma 0.73 0.84 2.25 2.10
Diluted, as reported 0.69 0.81 2.15 2.03
Diluted, proforma 0.69 0.81 2.14 2.03
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies
Various elements of our accounting policies, by their
nature, are inherently subject to estimation techniques,
valuation assumptions and other subjective assessments. In
particular, the methodology for the determination of our
allowance for loan losses, due to the judgments, estimates
and assumptions inherent in that policy, is critical to
preparation of our financial statements. This policy and
the judgments, estimates and assumptions are described in
greater detail in subsequent sections of Management's
Discussion and Analysis and in the notes to the unaudited
financial statements included herein. We believe that the
judgments, estimates and assumptions used in the preparation
of our financial statements are appropriate given the
factual circumstances at the time. However, given the
sensitivity of our financial statements to this critical
accounting policy, the use of other judgments, estimates and
assumptions could result in material differences in our
financial condition or results of operations.
General. At September 30, 2003, the Corporation's
assets amounted to $695.8 million as compared to $679.9
million at December 31, 2002. The $15.9 million or 2.3%
increase was primarily due to an increase of $29.0 million
or 65.1% in cash and cash equivalents, an increase of $7.4
million or 1.5% in net loans receivable, and an increase of
$3.8 million or 35.6% in office properties and equipment.
The increase in office properties and equipment was
primarily due to the new corporate headquarters building and
furnishings in north Harrison, Arkansas. The building was
under construction at December 31, 2002 and was completed in
June 2003. Such increases were partially offset by a $25.0
million or 21.8% decrease in investment securities held to
maturity. The funds available from the proceeds of matured
or called investment securities held to maturity and the
increase in deposits and FHLB advances were temporarily
invested in cash and cash equivalents and used to fund loan
growth. Liabilities increased $11.6 million or 1.9% to
$622.2 million at September 30, 2003 compared to $610.6
million at December 31, 2002. The increase in liabilities
was primarily due to an increase of $4.1 million or 0.7% in
deposits and an increase of $4.9 million or 12.7% in
advances from the Federal Home Loan Bank of Dallas ("FHLB of
Dallas"). Stockholders' equity amounted to $73.6 million or
10.6% of total assets at September 30, 2003 compared to
$69.3 million or 10.2% of total assets at December 31, 2002.
Loans Receivable. Net loans receivable increased by
$7.4 million, or 1.5%, to $490.8 million at September 30,
2003 from $483.5 million at December 31, 2002. The increase
in net loans receivable was comprised mainly of increases in
commercial real estate loans of $8.3 million, multifamily
real estate loans of $4.7 million, construction loans, net
of undisbursed funds, of $16.0 million, consumer loans of
$4.9 million, and commercial loans of $4.1 million. Such
increases were partially offset by a decrease in one- to
four- family residential loans of $31.1 million. In recent
years, the Bank has placed an increased emphasis on
commercial real estate lending, construction lending,
commercial lending and consumer lending to diversify its
loan portfolio, increase the average yield on its loan
portfolio, expand its operations and provide greater
opportunities to cross-sell its products. Such lending
generally carries a higher degree of risk of uncollectibility.
10
Loan originations for the nine month period ended September 30, 2003
consisted of $164.2 million in one- to four- family residential loans, $103.6
million of which were originated for sale in the secondary market, $6.0 million
in multifamily residential loans, $30.3 million in commercial real estate
loans, $17.4 million in commercial loans, $66.5 million in construction loans
and $43.3 million in consumer installment loans, of which $19.3 million
consisted of home equity loans and $12.3 million consisted of automobile loans.
Of the $66.5 million in construction loan originations, $60.5 million was
advanced for residential construction and $6.0 million was advanced for
non-residential construction.
Asset Quality. The following table sets forth the amounts and categories
of the Bank's nonperforming assets at dates indicated.
September 30, 2003 December 31, 2002
____________________ ___________________
(Dollars in Thousands)
Nonaccrual loans:
One- to four-family residential $2,763 $2,184
Multi-family residential -- --
Construction loans -- --
Commercial real estate 592 124
Commercial loans 663 245
Consumer loans 511 175
----- -----
Total nonaccrual loans 4,529 2,728
----- -----
Restructured loans 3,845 4,219
Repossessed assets 46 41
Real estate owned 924 320
----- -----
Nonperforming assets $9,344 $7,308
===== =====
Total nonaccrual and restructured
loans as a percentage of total loans
receivable 1.60% 1.37%
==== ====
Total nonperforming assets as a
percentage of total assets 1.34% 1.07%
==== ====
The increase in nonaccrual loans is attributable to two unrelated borrowers
with loan balances totaling approximately $1.8 million. The Bank does not
expect to incur losses on these loans based on the estimated value of the
collateral properties. As a result, no specific valuation allowance has been
recorded for these loans.
Allowance for Loan Losses. The allowance for loan losses was $1.7 million
or 0.33% of total loans at September 30, 2003, compared to $1.5 million or .30%
of total loans at December 31, 2002. Nonperforming assets, consisting of
nonaccrual and restructured loans and repossessed assets, amounted to $9.3
million or 1.34% of total assets at September 30, 2003, compared to $7.3 million
or 1.07% of total assets at December 31, 2002. The allowance for loan losses
includes $232,000
11
and $625,000 in allowances allocated to specific loans as of
September 30, 2003 and December 31, 2002, respectively.
The allowance for loan losses is evaluated on a regular
basis by management and is based upon management's periodic
review of the collectibility of the loans in light of
historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's
ability to repay, estimated value of any underlying
collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as conditions
change and more information becomes available.
The Bank reviews its non-homogeneous loans for
impairment on a quarterly basis. The Bank considers
commercial real estate, non-one- to four- family
construction, multifamily, other non-residential real
estate, and commercial loans to be non-homogeneous loans. A
loan is considered impaired when, based on current
information and events, it is probable that the Bank will be
unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the
loan agreement. Factors considered by management in
determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal
and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management
determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan
and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record,
and the amount of the shortfall in relation to the principal
and interest owed. Impairment is measured on a loan by loan
basis by either the present value of expected future cash
flows discounted at the loan's effective interest rate, the
loan's obtainable market price, or the fair value of the
collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are
collectively evaluated for impairment. Accordingly, the
Bank does not separately identify individual consumer and
residential loans for impairment disclosures. Homogeneous
loans are those that are considered to have common
characteristics that provide for evaluation on an aggregate
or pool basis. The Bank considers the characteristics of
(1) one- to four- family residential first mortgage loans;
(2) unsecured consumer loans; and (3) collateralized
consumer loans to permit consideration of the
appropriateness of the allowance for losses of each group of
loans on a pool basis. The primary methodology used to
determine the appropriateness of the allowance for losses
includes segregating certain specific, poorly performing
loans based on their performance characteristics from the
pools of loans as to type, grading these loans, and then
applying a loss factor to the remaining pool balance based
on several factors including past loss experience, inherent
risks, economic conditions in the primary market areas, and
other factors which usually are beyond the control of the
Bank.
In estimating the amount of credit losses inherent in
our loan portfolio, various judgments and assumptions are
made. For example, when assessing the condition of the
overall economic environment, assumptions are made regarding
future market conditions and their impact on the loan
portfolio. In the event the local or national economy were
to sustain a prolonged downturn, the loss factors applied to
our portfolios may need to be revised, which may
significantly impact the measurement of the allowance for
loan losses. For impaired loans that are collateral-
dependent, the
12
estimated fair value of the collateral may deviate significantly
from the proceeds received when the collateral is sold.
Although we consider the allowance for loan losses of
$1.7 million adequate to cover losses inherent in our loan
portfolio at September 30, 2003, no assurance can be given
that we will not sustain loan losses that are significantly
different from the amount reserved, or that subsequent
evaluations of the loan portfolio, in light of factors then
prevailing, would not result in a significant change in the
allowance for loan losses.
Investment Securities. Investment securities, all of
which were classified as held to maturity, amounted to $89.5
million as of September 30, 2003, compared to $114.5 million
as of December 31, 2002. During the first nine months of
2003, investment securities totaling $249.0 million were
purchased and $274.0 million matured or were called,
resulting in a net decrease of $25.0 million or 21.8%. The
composition of the change in investment securities held to
maturity from December 31, 2002 to September 30, 2003 was a
decrease in U.S. government agency securities of $8.9
million, a decrease in certificates of deposit of $20.3
million, and an increase in municipal securities of $4.2
million.
Deposits. Deposits at September 30, 2003 amounted to
$572.9 million, an increase of $4.1 million or 0.7% from the
December 31, 2002 balance of $568.8 million. The Bank does
not advertise for deposits outside of its primary market
area of Northcentral and Northwest Arkansas. The Bank
continued to experience a change in the mix of deposits due
to the current low interest rate environment. The primary
components of the change in deposits during the first nine
months of 2003 were increases in money market accounts of
$27.2 million and checking accounts of $10.6 million and a
decrease in certificates of deposit of $34.9 million.
Borrowed Funds. Borrowed funds, which consist entirely
of FHLB of Dallas advances, increased by $4.9 million or
12.7% to $43.5 million at September 30, 2003 from $38.6
million at December 31, 2002. The Bank is continuing to
obtain advances to take advantage of the current low
interest rate environment and extend the maturity of the
portfolio.
Stockholders' Equity. Stockholders' equity increased
$4.3 million to $73.6 million at September 30, 2003 from
$69.3 million at December 31, 2002. The increase in
stockholders' equity was primarily due to net income of $5.7
million resulting from continued profitable operations and
the issuance of 55,284 shares of treasury stock totaling
$1.1 million as a result of the exercise of stock options.
Such increase was partially offset by the purchase of 83,700
shares of treasury stock totaling $2.4 million in connection
with the Corporation's stock repurchase plan and, to a
lesser extent, the payment of cash dividends aggregating
$1.3 million.
13
Average Balance Sheets
The following table sets forth certain information relating to the
Corporation's average balance sheets and reflects the average yield on
assets and average cost of liabilities for the periods indicated and the
yields earned and rates paid at September 30, 2003. Such yields and costs
are derived by dividing income or expense by the average balance of assets
or liabilities, respectively, for the periods presented and outstanding balances
at September 30, 2003. Average balances are based on daily balances during
the period.
September
30, Three Months Ended September 30, Nine Months Ended September 30,
________________________________________________ __________________________________________________
2003 2003 2002 2003 2002
_________ _______________________ ________________________ _________________________ _______________________
Average Average Average Average
Average Yield/ Average Yield/ Average Yield/ Average Yield/
Yield/Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
__________ _______ ________ _____ _______ ________ ______ _______ ________ ______ _______ ________ ______
(Dollars in Thousands) (Dollars in Thousands)
Interest-earning assets:
Loans receivable(1) 6.80% $492,229 $8,450 6.87% $486,747 $9,267 7.62% $489,302 $25,842 7.04% $479,655 $27,756 7.72%
Investment
securities(2) 4.33 77,684 845 4.35 111,848 1,643 5.87 94,037 2,941 4.17 109,033 4,983 6.09
Other interest-
earning assets .89 78,404 180 .92 38,778 160 1.65 63,425 498 1.05 54,686 676 1.65
------- ----- ------- ------ ------- ------ ------- ------
Total interest-
earning assets 5.89 648,317 9,475 5.85 637,373 11,070 6.95 646,764 29,281 6.04 643,374 33,415 6.92
Noninterest-earning
assets 47,225 38,337 44,834 37,818
------- ------- ------- -------
Total assets $695,542 $675,710 $691,598 $681,192
======= ======= ======= =======
Interest-bearing
liabilities:
Deposits 2.37 573,593 3,549 2.41 $570,145 4,679 3.28 571,403 11,247 2.62 $565,682 15,065 3.55
Other borrowings 3.04 44,886 340 3.04 31,801 443 5.57 44,280 1,058 3.19 39,762 1,810 6.07
------- ----- ------- ------ ------- ------- ------- ------
Total interest-
bearing liabilities 2.42 618,479 3,799 2.46 601,946 5,122 3.40 615,683 12,305 2.66 605,444 16,875 3.72
Noninterest-bearing
liabilities 3,560 4,165 3,896 4,661
------- ------- ------- -------
Total liabilities 622,039 606,111 619,579 610,105
Stockholders' equity 73,503 65,599 72,019 71,087
------- ------- ------- -------
Total liabilities and
stockholders'equity $695,542 $675,710 $691,598 $681,192
======= ======= ======= =======
----- ----- ------ ------
Net interest income $5,676 $5,948 $16,976 $16,540
===== ===== ====== ======
Net earning assets $ 29,838 $35,427 $31,081 $37,930
====== ====== ====== ======
Interest rate spread 3.47% 3.39% 3.55% 3.38% 3.20%
==== ==== ==== ==== ====
Net interest margin 3.50% 3.73% 3.50% 3.43%
==== ==== ==== ====
Ratio of interest-earning
assets to interest-
bearing liabilities 104.82% 105.89% 105.05% 106.26%
====== ====== ====== ======
________________
(1) Includes nonaccrual loans.
(2) Includes FHLB of Dallas stock.
14
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Corporation for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by prior rate); (ii) changes in rate
(change in rate multiplied by prior average volume); (iii) changes in
rate-volume (changes in rate multiplied by the change in average volume);
and (iv) the net change.
Three Months Ended September 30, Nine Months Ended September 30,
2003 vs. 2002 2003 vs. 2002
____________________________________________ ________________________________________________
Increase (Decrease) Increase (Decrease)
Due to Due to
________________________________ __________________________________
Total Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
__________ ___________ _________ _____________ ___________ ___________ _________ ____________
(In Thousands) (In Thousands)
Interest income:
Loans receivable.............. $104 $(911) $(10) $(817) $558 $(2,424) $(48) $(1,914)
Investment securities......... (502) (426) 130 (798) (685) (1,573) 216 (2,042)
Other interest-earning assets. 164 (71) (73) 20 108 (246) (40) (178)
Total interest-earning ---- ------ --- ------ --- ------ --- ------
assets.................... (234) (1,408) 47 (1,595) (19) (4,243) 128 (4,134)
Interest expense:
Deposits...................... 28 (1,241) (7) (1,220) 152 (3,930) (40) (3,818)
Other borrowings.............. 182 (201) (84) (103) 206 (861) (97) (752)
---- ------ --- ------ ---- ------ ---- ------
Total interest-bearing
liabilities............... 210 (1,442) (91) (1,323) 358 (4,791) (137) (4,570)
---- ------ --- ------ ---- ------ ---- ------
Net change in net interest income $(444) $ 34 $138 $ (272) $(377) $ 548 $ 265 $ 436
==== ====== === ====== ==== ====== ===== ======
15
Results of Operations for the Three Months Ended September
30, 2003 and 2002
General. The Corporation reported net income of $1.9
million during the three months ended September 30, 2003
compared to net income of $2.2 million for the same period
in 2002. The decrease of $352,000 in net income in the 2003
period compared to the same period in 2002 was primarily due
an increase in noninterest expense and a decrease in net
interest income, which were offset by an increase in
noninterest income and decreases in the provisions for loan
losses and income taxes. Net interest income decreased from
$5.9 million for the three months ended September 30, 2002
to $5.7 million for the same period in 2003. 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 3.39% and 3.50%, respectively, for the
2003 three month period compared to 3.55% and 3.73%,
respectively, for the 2002 three month period. The
decreases in the interest rate spread and net interest
margin were primarily the result of declining interest rates
and an increase in the Bank's position in lower-yielding
short-term investments resulting from proceeds of called
bonds. The decline in interest rates resulted in a 110
basis point reduction in the yield on interest-earning
assets and a 94 basis point reduction in the cost of
interest-bearing liabilities from the three month period
ended September 30, 2002 to the three month period ended
September 30, 2003. These and other significant
fluctuations in operations are discussed below.
Interest Income. Interest income amounted to $9.5
million for the three months ended September 30, 2003
compared to $11.1 million for the same period in 2002. The
decrease of $1.6 million or 14.4% was primarily due to
decreases in the average yields earned on net loans
receivable, investment securities, and other interest
earning assets, primarily overnight funds, and a decrease in
the average balance of investment securities. The average
yield on interest earning assets decreased 110 basis points
from 6.95% for the three months ended September 30, 2002 to
5.85% for the three months ended September 30, 2003,
primarily as a result of the declining level of interest
rates.
Interest Expense. Interest expense decreased $1.3
million or 25.8% to $3.8 million for the three months ended
September 30, 2003 compared to $5.1 million for the same
period in 2002. Such decrease was primarily due to a
decrease in the interest rates paid on deposits and FHLB of
Dallas advances. 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 87 basis points from 3.28% for the three months
ended September 30, 2002 to 2.41% for the three months ended
September 30, 2003, primarily as a result of the declining
level of interest rates.
Provision for Loan Losses. The provision for loan
losses amounted to $204,000 for the three months ended
September 30, 2003 compared to $247,000 for the same period in 2002.
Provisions for loan losses include charges to reduce
the recorded balance of loans to their estimated fair value.
Such provision and the adequacy of the allowance for loan
losses is evaluated quarterly by management of the Bank
based on the Bank's past loan loss experience, known and
16
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
$538,000 or 40.7% to $1.9 million for the three months ended
September 30, 2003 compared to $1.3 million for the three
months ended September 30, 2002. The increase in
noninterest income for the three month comparable periods
ended September 30 was primarily due to an increase of
$419,000 in gain on sale of mortgage loans. Gain on sale of
mortgage loans increased due to increased secondary market
activity compared to last year due to continued low mortgage
loan interest rates. Originations of loans for sale in the
secondary market amounted to $42.1 million for the quarter
ended September 30, 2003, compared to $19.9 million for the
quarter ended September 30, 2002. Proceeds from loan sales
increased from $16.0 million for the quarter ended September
30, 2002 to $44.3 million for the quarter ended September
30, 2003.
Noninterest Expense. Noninterest expense increased
$930,000 or 25.7% between the 2002 and 2003 three month
periods ended September 30. Such increase was primarily due
to increases in salaries and employee benefits, net
occupancy expense, data processing expense and other
noninterest expenses.
The increase of $497,000 in salaries and employee
benefits was primarily composed of a $279,000 increase in
compensation expense due to an increase in personnel as well
as salary and merit increases, a $19,000 increase in related
payroll taxes, a $94,000 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 a
$147,000 increase in the required contribution to the
multiemployer pension plan.
The $147,000 increase in net occupancy expense was
primarily due to a general increase in office properties and
equipment related to the overall growth of the Bank.
Depreciation expense increased $103,000, repairs and
maintenance increased $18,000, and utilities expense
increased $16,000. New locations were opened during 2003,
including the new corporate headquarters in June and the new
Bentonville office in August.
Data processing expense increased $111,000 between the
three month periods ended September 30 due to growth and
additional product and service offerings.
Other noninterest expense increased $149,000, the
largest component of which was an increase in fees paid to
consultants of $115,000. The increase is mainly
attributable to fees paid to the overdraft program
consultant resulting from increased fee income and fees paid
to a consulting firm related to preparation for internal
control assertion and attestation under the new requirements
of the Sarbanes-Oxley Act of 2002.
Income Taxes. Income taxes amounted to $914,000 and
$1,183,000 for the three months ended September 30, 2003 and
2002, respectively, resulting in effective tax rates of
32.8% and 34.7%, respectively. The decrease in the income
tax provision was due primarily to a decrease in
17
taxable income. The decrease in the effective tax rate resulted
primarily from the tax benefit resulting from employees'
exercise of stock options.
Results of Operations for the Nine Months Ended September
30, 2003 and 2002
General. The Corporation reported net income of $5.7
million during the nine months ended September 30, 2003
compared to net income of $5.8 million for the same period
in 2002. The decrease of $71,000 in net income in the 2003
period compared to the same period in 2002 was primarily due
to an increase in noninterest expenses, which were offset by
increases in net interest income and noninterest income and
decreases in the provision for loan losses and income taxes.
Net interest income increased $436,000 from $16.5 million
for the nine months ended September 30, 2002 to $17.0
million for the same period in 2003. The Corporation's
interest rate spread and net interest margin increased to
3.38% and 3.50%, respectively, for the 2003 nine month
period compared to 3.20% and 3.43%, respectively, for the
2002 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 106
basis point reduction in the cost of interest-bearing
liabilities to 2.66% for nine months ended September 30,
2003 compared to 3.72% for the nine months ended September
30, 2002.
Interest Income. Interest income amounted to $29.3
million for the nine months ended September 30, 2003
compared to $33.4 million for the same period in 2002. The
decrease of $4.1 million was primarily due to a decrease in
the average yield earned on net loans receivable, investment
securities and other interest earning assets, primarily
overnight funds, and a decrease in the average balance of
investment securities, which were partially offset by an
increase in the average balance of net loans receivable.
The average yield on interest earning assets decreased 88
basis points from 6.92% for the nine months ended September
30, 2002 to 6.04% for the nine months ended September 30,
2003, primarily as a result of the declining level of
interest rates.
Interest Expense. Interest expense decreased $4.6
million or 27.1% to $12.3 million for the nine months ended
September 30, 2003 compared to $16.9 million for the same
period in 2002. Such decrease was primarily due to a
decrease in the interest rates paid on deposits and FHLB of
Dallas advances. 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 93 basis points from 3.55% for the nine months
ended September 30, 2002 to 2.62% for the nine months ended
September 30, 2003, primarily as a result of the declining
level of interest rates.
Provision for Loan Losses. Provision for loan losses
amounted to $619,000 for the nine months ended September 30,
2003 compared to $983,000 for the same period in 2002. The
decrease in the provision for loan losses was due to an
estimated loss on a single commercial real estate loan of
approximately $415,000 recorded in the nine months ended
September 30, 2002.
Provisions for loan losses include charges to reduce
the recorded balance of loans to their estimated fair value.
Such provision and the adequacy of the allowance for loan
losses is evaluated quarterly by management of the Bank
based on the Bank's past loan loss experience, known and
18
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 $1.7
million or 43.4% to $5.5 million for the nine months ended
September 30, 2003 compared to $3.9 million for the nine
months ended September 30, 2002. The increase in
noninterest income for the nine month comparable periods
ended September 30 was primarily due to an increase of
$957,000 in gain on sale of mortgage loans and the
appreciation of contributed assets of $414,000.
Gain on sale of mortgage loans increased due to
increased secondary market activity compared to last year
due to continued low mortgage loan interest rates.
Originations of loans for sale in the secondary market
amounted to $41.7 million for the nine months ended
September 30, 2002, compared to $107.1 million for the nine
months ended September 30, 2003. Proceeds from loan sales
increased from $43.0 million for the nine months ended
September 30, 2002 to $113.4 million for the nine months
ended September 30, 2003.
The appreciation of contributed assets was recorded in
connection with an adjustment of the carrying value of
donated real estate to estimated fair value. A
corresponding expense in the amount of $414,000 was also
recorded and is included in the balance of contributions
expense. The effect of this contribution is further
described below.
Noninterest Expense. Noninterest expense increased $3.0
million or 28.0% between the 2002 and 2003 nine month
periods ended September 30. Such increase was primarily due
to increases in salaries and employee benefits, net
occupancy expense, data processing expense, contributions
expense, and other noninterest expenses.
The increase of $1.3 million in salaries and employee
benefits was primarily composed of a $816,000 increase in
compensation expense due to an increase in personnel as well
as salary and merit increases, an $80,000 increase in
related payroll taxes, a $164,000 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, a
$38,000 increase in the Corporation's management recognition
and retention plan ("MRP") compensation expense due to the
awarding of 5,000 shares on April 30, 2003, and a $255,000
increase in the required contribution to the multiemployer
pension plan. At September 30, 2003, total unearned
compensation related to the MRP amounted to $96,000. This
amount will be recognized ratably over the period ending
April 30, 2007.
The $426,000 increase in net occupancy expense was due
in part to the purchase of furniture and accessories for the
new corporate office that opened June 2, 2003. Furniture
and accessories totaling $120,000 were expensed in the nine
months ended September 30, 2003. In addition, depreciation
expense increased $253,000 from the nine months ended
September 30, 2002 to the same period in 2003 due to a
general increase in office properties and equipment related
to the overall growth of the Bank.
Data processing expense increased $247,000 between the
nine month periods ended September 30 due to growth and
additional product and service offerings.
19
Contributions expense increased $410,000, mainly due to
the contribution of real estate discussed above, offset by a
decrease of $90,000 in other contributions. The $523,000
balance of contributions expense for the nine months ended
September 30, 2003, includes the fair value of the donated
real estate of $500,000.
Other noninterest expense increased $377,000, the
largest component of which was an increase in fees paid to
consultants of $190,000. The increase is mainly
attributable to payments to the project manager for
furniture and accessory acquisitions related to the new
corporate office, fees paid to the overdraft program
consultant resulting from increased fee income and fees paid
to a consulting firm related to preparation for internal
control assertion and attestation under the new requirements
of the Sarbanes-Oxley Act of 2002.
Income Taxes. Income taxes amounted to $2.6 million and
$3.0 million for the nine months ended September 30, 2003
and 2002, respectively, resulting in effective tax rates of
31.1% and 34.1%, respectively. The decrease in the income
tax provision was due primarily to a decrease in taxable
income. The decrease in the effective tax rate resulted
primarily from the tax benefit resulting from employees'
exercise of stock options.
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,
2003, the Bank had outstanding advances from the FHLB of
Dallas of $43.5 million. Such advances were used in the
Bank's normal operating and investing activities.
As of September 30, 2003, the Bank's regulatory capital
was in excess of all applicable regulatory requirements. At
September 30, 2003, the Bank's tangible, core and risk-based
capital ratios amounted to 9.94%, 9.94% and 16.47%,
respectively, compared to applicable requirements of 1.5%,
4.0% and 8.0%, respectively.
20
Off-Balance Sheet Arrangements and Commitments
The Corporation, in the normal course of business, makes
commitments to buy or sell assets or to incur or fund
liabilities. Commitments include, but are not limited to:
* the origination, purchase or sale of loans,
* the purchase of investment securities,
* the fulfillment of commitments under letters-of-credit,
extensions of credit on home equity lines of credit and
construction loans, and
* the commitment to fund withdrawals of savings accounts
at maturity.
At September 30, 2003, the Bank's off-balance sheet
arrangements principally included lending commitments, which
are described below. At September 30, 2003, the Corporation
had no interests in non-consolidated special purpose
entities.
At September 30, 2003, commitments included:
* total approved loan origination commitments outstanding
amounting to $16.7 million, including $2.9 million of loans
committed to sell;
* rate lock agreements with customers of $3.9 million,
all of which have been locked with an investor;
* unadvanced portion of construction loans of $29.5 million;
* unused lines of credit of $18.8 million;
* outstanding standby letters of credit of $1.7 million; and
* certificates of deposit scheduled to mature in one year
or less totaling $188.5 million.
Based on historical experience, management believes that a
significant portion of maturing deposits will remain with
the Bank. We anticipate that we will continue to have
sufficient funds, through repayments, deposits and
borrowings, to meet our current commitments.
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.
21
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 2002 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, 2002.
22
CONTROLS AND PROCEDURES
Our management evaluated, with the participation of our
Chief Executive Officer and Chief Financial Officer, the
effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period
covered by this report. Based on such evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures are designed to
ensure that information required to be disclosed by us in
the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's
rules and regulations and are operating in an effective
manner.
No change in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15(d)-15(f)
under the Securities Exchange Act of 1934) occurred during
the most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, our internal
control over financial reporting.
23
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
________________________________
Exhibit 31.1 - Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350)
Exhibit 31.2 - Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350)
Exhibit 32.1 - Certification of Chief Executive Officer,
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350)
Exhibit 32.2 - Certification of Chief Financial Officer,
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350)
Reports on Form 8-K
___________________
On July 30, 2003, a Form 8-K was filed for the
Corporation's July 30, 2003 press release that
announced results of operations for the quarter
ended June 30, 2003.
On September 26, 2003, a Form 8-K was filed for
the Corporation's September 26, 2003 press
release that announced the election of a director.
24
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 3, 2003 By: /s/Larry J. Brandt
________________________________
Larry J. Brandt
President/CEO
Date: November 3, 2003 By: /s/Sherri R. Billings
________________________________
Sherri R. Billings
EVP/CFO
25