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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-28312
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FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
Texas 71-0785261
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification Number)
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<S> <C>
200 West Stephenson
Harrison, Arkansas 72601
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(Address of principal executive office) (Zip Code)
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(501) 741-7641
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(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 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 May 10,
1996, there were issued and outstanding 5,153,751 shares of the Registrant's
Common Stock, par value $.01 per share.
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FIRST FEDERAL BANK OF ARKANSAS, FA
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
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Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
(As of March 31, 1996 (unaudited) and December 31, 1995) 1
Consolidated Statements of Income for the three months
ended March 31, 1996 (unaudited) and 1995 (unaudited) 2
Consolidated Statements of Cash Flows for the three
months ended March 31, 1996 (unaudited) and 1995 (unaudited) 3
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES
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FIRST FEDERAL BANK OF ARKANSAS, FA
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
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March 31, December 31,
ASSETS 1996 1995
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(Unaudited)
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Cash and cash equivalents $ 12,897,316 $ 8,845,462
Investment securities:
Available for sale 262,911 257,514
Held to maturity 93,998,411 96,053,665
Federal Home Loan Bank stock 2,895,900 2,821,100
Loans receivable, net of allowances 348,391,268 339,504,977
Accrued interest receivable 3,538,843 3,477,252
Real estate acquired in settlement of loans, net 150,604 233,572
Office properties and equipment, net 3,214,507 2,993,414
Prepaid expenses and other assets 751,394 292,237
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TOTAL ASSETS $466,101,154 $454,479,193
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LIABILITIES AND EQUITY
LIABILITIES:
Deposits $427,384,145 $417,228,610
Advance payments by borrowers for
taxes and insurance 752,359 746,190
Other liabilities 1,709,815 1,195,807
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TOTAL LIABILITIES 429,846,319 419,170,607
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EQUITY:
Retained earnings-substantially restricted 36,100,072 35,157,153
Unrealized gain-investment securities
available for sale, net of income taxes 154,763 151,433
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Total equity 36,254,835 35,308,586
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TOTAL LIABILITIES AND EQUITY $466,101,154 $454,479,193
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The accompanying notes are an integral part of this statement.
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FIRST FEDERAL BANK OF ARKANSAS, FA
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three Months Ended
March 31,
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1996 1995
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Interest income:
Loans receivable $7,244,938 $5,893,382
Investment securities 1,367,561 1,690,240
Mortgage-backed securities 6,259 228,499
Other 85,555 72,114
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Total interest income 8,704,313 7,884,235
Interest expense - Deposits 5,702,246 4,862,604
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Net interest income before provision 3,002,067 3,021,631
for loan losses
Provision for loan losses 0 6,000
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Net interest income after provision
for loan losses 3,002,067 3,015,631
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Noninterest income:
Gain on sales of investment securities 845 447
Deposit fee income 178,379 173,105
Other 111,506 90,309
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Total other income 290,730 263,861
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Noninterest expenses:
Salaries and employee benefits 971,355 889,286
Net occupancy expense 161,637 154,008
Federal insurance premiums 236,043 225,554
Provision for real estate losses 0 0
Data processing 178,827 151,042
Postage and supplies 80,723 70,761
Other 240,879 218,880
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Total other expenses 1,869,464 1,709,531
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Income before income taxes 1,423,333 1,569,961
Provision for income taxes 480,414 477,397
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Net income $ 942,919 $1,092,564
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The accompanying notes are an integral part of this statement.
2
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FIRST FEDERAL BANK OF ARKANSAS, FA
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended March 31,
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1996 1995
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OPERATING ACTIVITIES
Net income $ 942,919 $ 1,092,564
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 0 6,000
Deferred tax provision (benefit) 59,954 7,936
Gain on sale of real estate owned (1,315) (5,822)
Depreciation 96,190 100,625
Accretion of deferred loan fees (197,785) (94,976)
Changes in operating assets & liabilities:
Accrued interest receivable (61,591) 377,504
Prepaid expenses & other assets (459,157) (115,686)
Other liabilities 451,987 541,527
Net cash provided by operating activities: 831,202 1,909,672
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INVESTING ACTIVITIES
Purchases of investment securities (13,064,800) (1,066,000)
Proceeds from maturities of investment
securities 15,045,254 7,146,047
Loan originations, net of repayments (8,688,506) (9,893,772)
Proceeds from sales of real estate owned 84,283 117,000
Purchases of office properties & equipment (317,283) (112,927)
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Net cash used by investing activities (6,941,052) (3,809,652)
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FINANCING ACTIVITIES
Net increase in deposits 10,155,535 5,452,837
Increase in advance payments by borrowers
for taxes & insurance 6,169 116,202
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Net cash provided by financing activities 10,161,704 5,569,039
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Net increase (decrease) in cash and
cash equivalents 4,051,854 3,669,059
Cash and cash equivalents:
Beginning of year 8,845,462 8,279,513
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End of year $ 12,897,316 $11,948,572
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(Continued)
3
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FIRST FEDERAL BANK OF ARKANSAS, FA
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended March 31,
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1996 1995
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Supplemental disclosures of cash flow
information:
Cash paid for:
Interest on deposits $5,699,009 $4,826,260
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Income taxes $ 0 $ 0
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Supplemental schedule of noncash investing
activities:
Real estate acquired in settlement of loans $ 0 $ 70,848
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Loans to facilitate sales of real estate owned $ 54,000 $ 108,200
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Change in unrealized gains $ 3,330 $ 19,028
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(Concluded)
The accompanying notes are an integral part of this statement.
4
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FIRST FEDERAL BANK OF ARKANSAS, FA
Notes to Unaudited Consolidated Financial Statements
Note 1 - Basis of Presentation
First Federal Bancshares of Arkansas, Inc. (the "Corporation") was incorporated
under Texas law in January 1996 by First Federal Bank of Arkansas, FA (the
"Association") in connection with the conversion of the Association from a
federally chartered mutual savings and loan association to a federally
chartered stock savings and loan association, the issuance of the Association's
stock to the Corporation, and the offer and sale of the Corporation's common
stock by the Corporation (the "Conversion"). Upon consummation of the
Conversion on May 3, 1996, the Corporation became the unitary holding company
for the Association. For purposes of this Form 10-Q, the financial statements
and management's discussion and analysis of financial condition and results of
operations are presented for the Association since the Corporation was not
active during any of the periods presented. No pro forma effect has been given
to the sale of the Corporation's common stock in the Conversion.
The accompanying unaudited consolidated financial statements of the Association
have been prepared in accordance with instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. However,
such information reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair statement of results for the interim periods.
The results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1996. 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, 1995, contained in the
Corporation's prospectus dated March 22, 1996.
5
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
At March 31, 1996, the Association's assets amounted to $466.1 million
as compared to $454.5 million at December 31, 1995. The $11.6 million or 2.6%
increase was primarily due to an increase of $8.9 million in loans receivable,
net. Liabilities increased $10.7 million or 2.5% to $429.8 million at March
31, 1996 compared to $419.2 million at December 31, 1995 primarily as a result
of a $10.2 million increase in deposits. The funds from the deposit inflow
were primarily used to originate loans. Retained earnings amounted to $36.3
million or 7.8% of total assets at March 31, 1996 compared to $35.3 million or
7.8% of total assets at December 31, 1995. The increase in retained earnings
during the three month period was due to the continued profitable operations of
the Association.
RESULTS OF OPERATIONS
GENERAL. The Association reported net income of $943,000 during the
three months ended March 31, 1996 compared to $1.1 million for the same period
in 1995. The decrease in net income of $150,000 or 13.7% was primarily due to
an increase in total other expenses.
NET INTEREST INCOME. Net interest income remained stable during the
three months ended March 31, 1996 compared to the same period in 1995 as the
decrease in the interest rate spread to 2.38% from 2.62% was substantially
offset by an increase in the ratio of interest-earning assets to
interest-bearing liabilities to 106.2% from 105.7%.
INTEREST INCOME. Interest income increased $820,000 or 10.4% to $8.7
million for the three months ended March 31, 1996 compared to the same period
in 1995. Such increase was due primarily to an increase in the average
outstanding balance of loans receivable which was partially offset by a
decrease in the average outstanding balance of investment and mortgage-backed
securities. The increase in the average outstanding balance of loans was
primarily due to increased loan demand. The decrease in the average
outstanding balance of mortgage-backed and investment securities was due to
sales and maturities of such assets and payments and prepayments of the
mortgages underlying mortgage-backed securities.
INTEREST EXPENSE. Interest expense increased $840,000 or 17.3% to
$5.7 million for the three months ended March 31, 1996 compared to the same
period in 1995. Such increase was due to an increase in the average rate paid
on deposits to 5.43% for the same period compared to 4.91% for the 1995 period.
To a lesser extent, such increase was also due to an increase in the average
outstanding balance of deposits.
6
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NONINTEREST INCOME. Noninterest income increased $27,000 or 10.2%
during the three months ended March 31, 1996 compared to the same period
in 1995 primarily as a result of an increase in other miscellaneous income.
NONINTEREST EXPENSES. Noninterest expenses increased $160,000 or 9.4%
to $1.9 million for the three months ended March 31, 1996 compared to the same
period in 1995 primarily as a result of an increase in salaries and employee
benefits. The increase in salaries and employee benefits was due to normal
merit increases as well as increases in personnel.
INCOME TAXES. The provision for income taxes amounted to $480,000 and
$477,000 for the three months ended March 31, 1996 and 1995, respectively,
resulting in effective tax rates of 33.8% and 30.4%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Association's liquidity, represented by cash and cash equivalents,
is a product of its operating, investing and financing activities. The
Association's primary sources of funds are deposits, amortization, prepayments
and maturities of outstanding loans, maturities of investment securities,
mortgage-backed securities and other short-term investments and funds provided
from operations. While scheduled loan amortization and maturing investment
securities, mortgage-backed 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 Association manages the pricing of its deposits to maintain a
steady deposit balance. In addition, the Association invests excess funds in
overnight deposits and other short-term interest-earning assets which provide
liquidity to meet lending requirements. The Association 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 Association may borrow from the FHLB of Dallas.
At March 31, 1996, the Association did not have any outstanding advances from
the FHLB of Dallas.
As of March 31, 1996, the Association's regulatory capital was well in
excess of all applicable regulatory requirements. At March 31, 1996, the
Association's tangible, core and risk-based capital ratios amounted to 7.75%,
7.75% and 15.59%, respectively, compared to regulatory requirements of 1.5%,
3.0% and 8.0%, respectively.
PROPOSED DEPOSIT INSURANCE PREMIUMS
The deposits of the Association are insured by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
Both the SAIF and the Bank Insurance Fund ("BIF"), the federal deposit
insurance fund that covers commercial bank deposits, are required by law to
attain and thereafter maintain a reserve ratio of 1.25% of insured deposits.
The BIF has achieved a fully funded status in contrast to the SAIF and
7
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the FDIC recently reduced the average deposit insurance premium paid by
BIF-insured commercial banks to a level substantially below the average premium
paid by SAIF-insured institutions.
In late 1995, the FDIC approved a final rule regarding deposit
insurance premiums which, effective with the semiannual premium assessment on
January 1, 1996, reduced deposit insurance premiums for BIF member institutions
to zero (subject to an annual minimum of $2,000) for institutions in the lowest
risk category. Deposit insurance premiums for SAIF members were maintained at
their existing levels (23 basis points for institutions in the lowest risk
category). Accordingly, in the absence of further legislative action, until
the SAIF attains a reserve ratio of 1.25% of insured deposits, SAIF members
such as the Association will be competitively disadvantaged as compared to
commercial banks due to this premium differential. It is anticipated that,
under present conditions, it will be at least several years before the SAIF
reaches a reserve ratio of 1.25% of insured deposits.
The U.S. House of Representatives and Senate had actively considered
legislation which would have eliminated the premium differential between
SAIF-insured institutions and BIF-insured institutions by recapitalizing the
SAIF's reserves to the required ratio. The legislation had been, for some
time, included as part of a fiscal 1996 federal budget bill, but was eliminated
prior to the bill being enacted on April 26, 1996. In light of the
legislation's elimination and the uncertainty of the legislative process
generally, management cannot predict whether legislation reducing SAIF premiums
and/or imposing a special one-time assessment will be adopted, or, if adopted,
the amount of the assessment, if any, that would be imposed on the Association.
8
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FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
PART II
Item 1. Legal Proceedings
Neither the Corporation nor the Association is involved in any
pending legal proceedings other than non-material legal
proceedings occurring in the ordinary course of business.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
9
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
Date: May 14, 1996 By: /s/Larry J. Brandt
-------------------------------------
Larry J. Brandt
President
Date: May 14, 1996 By: /s/Tommy W. Richardson
-------------------------------------
Tommy W. Richardson
Chief Financial Officer
10
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION (AS OF MARCH 31, 1996 AND DECEMBER 31, 1995)
AND CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH MARCH 31, 1996 AND 1995 FORM 10-Q
QUARTER ENDED MARCH 31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 8,246,657
<INT-BEARING-DEPOSITS> 4,650,659
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 262,911
<INVESTMENTS-CARRYING> 93,998,411
<INVESTMENTS-MARKET> 93,268,972
<LOANS> 349,620,559
<ALLOWANCE> 1,229,291
<TOTAL-ASSETS> 466,101,154
<DEPOSITS> 427,384,145
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,462,174
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 466,101,154
<INTEREST-LOAN> 7,244,938
<INTEREST-INVEST> 1,373,820
<INTEREST-OTHER> 85,555
<INTEREST-TOTAL> 8,704,313
<INTEREST-DEPOSIT> 5,702,246
<INTEREST-EXPENSE> 5,702,246
<INTEREST-INCOME-NET> 3,002,067
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 845
<EXPENSE-OTHER> 1,869,464
<INCOME-PRETAX> 1,423,333
<INCOME-PRE-EXTRAORDINARY> 1,423,333
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,423,333
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.81
<LOANS-NON> 289,805
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 222,757
<ALLOWANCE-OPEN> 1,228,325
<CHARGE-OFFS> 324
<RECOVERIES> 1,290
<ALLOWANCE-CLOSE> 1,229,291
<ALLOWANCE-DOMESTIC> 404,291
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 825,000
</TABLE>
