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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 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 _______________
Commission File No.: 0-28312
First Federal Bancshares of Arkansas, Inc.
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(Exact name of registrant as specified in its charter)
Texas 71-0785261
--------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
200 West Stephenson
Harrison, Arkansas 72601
-------------------------------- -----------------------
(Address) (Zip Code)
Registrant's telephone number, including area code: (501) 741-7641
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act
Common Stock (par value $.01 per share)
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
As of March 18, 1997, the aggregate value of the 4,722,310 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
173,753 shares held by all directors and officers of the Registrant as a
group, was approximately $89.7 million. This figure is based on the last
sales price of $19.00 per share of the Registrant's Common Stock on March 19,
1997.
Number of shares of Common Stock outstanding as of March 19, 1997: 4,896,063
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of the Form 10-K into which the document is incorporated.
(1) Portions of the Annual Report to Stockholders for the year ended
December 31, 1996 are incorporated into Part II, Items 5 through 8 of this
Form 10-K.
(2) Portions of the definitive proxy statement for the 1997 Annual Meeting
of Stockholders are incorporated into Part III, Items 9 through 13 of this
Form 10-K.
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PART I.
Item 1. Business
General
First Federal Bancshares of Arkansas, Inc. First Federal Bancshares of
Arkansas, Inc. (the "Company") is a Texas corporation organized in January
1996 by First Federal Bank of Arkansas, FA ("First Federal" or the "Bank")
for the purpose of becoming a unitary holding company of the Bank. The only
significant assets of the Company are the capital stock of the Bank, the
Company's loan to the Employee Stock Ownership Plan ("ESOP"), and the portion
of the net proceeds retained by the Company in connection with the Bank's
conversion to stock form and the concurrent offering of the Company's common
stock (the "Conversion"). The business and management of the Company
consists of the business and management of the Bank. The Company does not
presently own or lease any property, but instead uses the premises, equipment
and furniture of the Bank. At the present time, the Company does not employ
any persons other than officers of the Bank, and the Company utilizes the
support staff of the Bank from time to time. Additional employees will be
hired as appropriate to the extent the Company expands or changes its
business in the future. At December 31, 1996, the Company had $505.7 million
in total assets, $425.0 million in total liabilities and $80.8 million in
stockholders' equity.
The Company's executive office is located at the home office of the Bank
at 200 West Stephenson Avenue, Harrison, Arkansas 72601, and its telephone
number is (501) 741-7641.
First Federal Bank of Arkansas, FA. The Bank is a federally chartered
stock savings and loan association which was formed in 1934. First Federal
conducts business from its main office and nine full service branch offices,
all of which are located in a six county area in Northcentral and Northwest
Arkansas comprised of Benton, Marion, Washington, Carroll, Baxter and Boone
counties. First Federal's deposits are insured by the Savings Association
Insurance Fund ("SAIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC"), to the maximum extent permitted by law.
The Bank is a community oriented savings institution which has
traditionally offered a wide variety of savings products to its retail
customers while concentrating its lending activities on the origination of
loans collateralized by one- to four-family residential dwellings. To a
significantly lesser extent, the Bank's activities have also included
origination of multi-family residential loans, commercial real estate loans,
construction loans, commercial loans and consumer loans. In addition, the
Bank maintains a significant portfolio of investment securities, a majority
of which have maturities of under five years. In addition to interest and
dividend income on loans and investments, the Bank receives other income from
loan fees and various service charges. The Bank's goal is to continue to
serve its market area as an independent community oriented financial
institution dedicated primarily to financing home ownership while providing
financial services to its customers in an efficient manner.
The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS"), which is the Bank's chartering
authority and primary regulator. The Bank is also regulated by the FDIC, the
administrator of the SAIF. The Bank is also subject to certain reserve
requirements established by the Board of Governors of the Federal Reserve
System ("FRB") and is a member of the Federal Home Loan Bank ("FHLB") of
Dallas, which is one of the 12 regional banks comprising the FHLB System.
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BUSINESS
Lending Activities
General. At December 31, 1996, the Bank's total portfolio of loans
receivable ("total loan portfolio"), amounted to $410.8 million or 81.2% of
the Company's $505.7 million of total assets at such time. The Bank has
traditionally concentrated its lending activities on conventional first
mortgage loans collateralized by single-family (one- to four-family)
residential property. Consistent with such approach, $338.3 million or
82.36% of the Bank's total loan portfolio consisted of one- to four-family
residential loans at December 31, 1996. To a significantly lesser extent,
the Bank also originates multi-family residential loans, commercial real
estate loans, construction loans, commercial loans and consumer loans. At
December 31, 1996, such loan categories amounted to $1.6 million, $19.1
million, $20.1 million, $4.3 million and $27.4 million, respectively, or
.38%, 4.66%, 4.88%, 1.06% and 6.66% of the total loan portfolio,
respectively. The Bank currently does not offer loans which are insured by
the Federal Housing Administration ("FHA") nor partially guaranteed by the
Office of Veterans Affairs ("VA").
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Loan Composition. The following table sets forth certain data relating
to the composition of the Bank's loan portfolio by type of loan at the dates
indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- -------------------- ------------------- -------------------- ----------------------
Percentage Percentage Percentage Percentage Percentage
Amount of Loans Amount of Loans Amount of Loans Amount of Loans Amount of Loans
--------- ---------- -------- ---------- -------- ---------- -------- ---------- --------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate
loans:
Single-family
residential $338,349 82.36% $287,872 82.54% $237,724 82.96% $197,833 81.11% $179,777 80.90%
Multi-family
residential 1,555 .38 1,060 .30 800 0.28 1,622 0.66 1,690 0.76
Commercial
real estate 19,136 4.66 19,723 5.66 17,529 6.12 18,645 7.64 18,885 8.50
Construction 20,053 4.88 11,603 3.33 7,468 2.61 7,098 2.91 6,023 2.71
-------- ------ -------- ------ -------- ------ -------- ------ -------- -------
Total real
estate
loans 379,093 92.28 320,258 91.83 263,521 91.97 225,198 92.32 206,375 92.87
-------- ------ -------- ------ -------- ------ -------- ------ -------- -------
Commercial
loans 4,348 1.06 4,014 1.15 3,192 1.11 2,052 0.84 1,946 0.88
-------- ------ -------- ------ -------- ------ -------- ------ -------- -------
Consumer loans:
Home equity
and second
mortgage
loans 12,549 3.06 10,466 3.00 8,752 3.05 6,089 2.50 5,143 2.31
Automobile 7,556 1.84 6,993 2.01 5,154 1.80 4,771 1.96 3,911 1.76
Other 7,244 1.76 7,021 2.01 5,938 2.07 5,805 2.38 4,837 2.18
-------- ------ -------- ------ -------- ------ -------- ------ -------- -------
Total
consumer
loans 27,349 6.66 24,480 7.02 19,844 6.92 16,665 6.84 13,891 6.25
-------- ------ -------- ------- -------- ------ -------- ------ -------- ------
Total
loans
receivable 410,790 100.00% 348,752 100.00% 286,557 100.00% 243,915 100.00% 222,212 100.00%
-------- ------ -------- ------ -------- ------ -------- ------ -------- -------
------ ------ ------ ------ -------
Less:
Undisbursed
loan funds (8,670) (4,298) (3,318) (3,798) (3,682)
Unearned
discounts
and net
deferred
loan fees (4,361) (3,721) (2,322) (2,011) (1,685)
Allowance for
loan losses (1,251) (1,228) (1,134) (1,447) (991)
--------- -------- -------- -------- --------
Total loans
receivable,
net $396,508 $339,505 $279,783 $236,659 $215,854
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
</TABLE>
3
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Loan Maturity and Interest Rates. The following table sets forth certain
information at December 31, 1996 regarding the dollar amount of loans
maturing in the Bank's loan portfolio based on their contractual terms to
maturity. Demand loans and loans having no stated schedule of repayments and
no stated maturity are reported as due in one year or less. All other loans
are included in the period in which the final contractual repayment is due.
<TABLE>
<CAPTION>
After Three After Five After Ten
One Year Years Years Years Beyond
Within Through Through Through Through Twenty
One Year Three Years Five Years Ten Years Twenty Years Years Total
-------- ----------- ----------- ---------- ------------ ------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family residential $ 453 $ 573 $ 3,211 $27,303 $149,276 $157,533 $338,349
Multi-family residential 249 - 115 312 879 - 1,555
Commercial real estate 1,949 7,491 3,118 5,637 941 - 19,136
Construction 6,277 - - - 4,224 9,552 20,053
Commercial loans 1,656 700 969 1,023 - - 4,348
Consumer loans 9,262 7,175 9,631 1,159 122 - 27,349
------- ------- ------- ------- -------- -------- --------
Total(1) $19,846 $15,939 $17,044 $35,434 $155,442 $167,085 $410,790
------- ------- ------- ------- -------- -------- --------
------- ------- ------- ------- -------- -------- --------
</TABLE>
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(1) Gross of undisbursed loan funds, unearned discounts and net deferred loan
fees and the allowance for loan losses.
The following table sets forth the dollar amount of the Bank's loans at
December 31, 1996 due after one year from such date which have fixed interest
rates or which have floating or adjustable interest rates.
Floating or
Fixed-Rates Adjustable-Rates Total
----------- ---------------- ---------
(In Thousands)
Real estate loans:
Single-family residential $131,999 $205,897 $337,896
Multi-family residential 843 463 1,306
Commercial real estate 17,187 - 17,187
Construction 3,739 10,037 13,776
Commercial loans 2,692 - 2,692
Consumer loans 18,087 - 18,087
-------- -------- --------
Total $174,547 $216,397 $390,944
-------- -------- --------
-------- -------- --------
Scheduled contractual maturities of loans do not necessarily reflect the
actual term of the Bank's portfolio. The average life of mortgage loans is
substantially less than their average contractual terms because of loan
prepayments and refinancing. The average life of mortgage loans tends to
increase, however, when current mortgage loan rates substantially exceed
rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgage loans substantially exceed current mortgage loan rates.
Origination, Purchase and Sale of Loans. The lending activities of the
Bank are subject to the written, non-discriminatory, underwriting standards
and loan origination procedures established by the Bank's Board of Directors
and management. Loan originations are obtained by a variety of sources,
including realtors, walk-in customers, branch managers and radio, television
and newspaper advertising. In its marketing, the Bank emphasizes its
community ties and an efficient underwriting and approval process. The Bank
believes it can provide its personalized service to its customers in a more
efficient manner due in part to the use of in-house
4
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appraisal and underwriting staff. The Bank requires hazard, title and, to
the extent applicable, flood insurance on all security property.
Loan applications are initially processed by branch managers or loan
officers and all real estate loans up to $600,000 must be approved by two
members of the Bank's Loan Committee, one of which must be a member of senior
management. Real estate loans in excess of $600,000 must be approved by the
Bank's Board of Directors. Consumer loans are initially processed by consumer
loan officers and are required to be approved by designated officers of the
Bank depending on the amount of the loan. All loans are ratified by the Board
of Directors.
Historically, the Bank has not been an active purchaser or seller of
loans due to consistent loan demand and the Bank's desire and ability to
originate loans for retention in its portfolio. During 1995 and 1994, the
Bank only purchased $3.2 million and $720,000 of loans, respectively. No
loans were purchased during 1996. In 1996, the Bank's loan sales were
$73,000. The Bank did not engage in any loan sales in 1995 or 1994.
Set forth below is a table showing the Bank's originations, purchases,
sales and repayments of loans during the periods indicated.
Year Ended December 31,
-----------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
Loans receivable at beginning
of period $348,752 $286,557 $243,915
-------- -------- --------
Loan originations:
Real estate:
Single-family residential 102,214 90,014 76,191
Multi-family residential 556 135 116
Commercial real estate 4,866 2,542 2,701
Construction 25,537 15,167 12,782
Commercial loans 3,060 2,361 2,719
Consumer:
Home equity and second
mortgage loans 10,400 8,575 7,474
Automobile 7,235 6,633 5,364
Other 7,225 7,578 5,865
-------- -------- --------
Total loan originations 161,093 133,005 113,212
Purchases -- 3,235 720
-------- -------- --------
Total loan originations and
purchases 161,093 136,240 113,932
Repayments (98,540) (73,739) (70,810)
Loan sales (73) -- --
Other (442) (306) (480)
-------- -------- --------
Net loan activity 62,038 62,195 42,642
-------- -------- --------
Loans receivable
at end of period $410,790 $348,752 $286,557
-------- -------- --------
-------- -------- --------
5
<PAGE>
Loans to One Borrower. A savings institution generally may not make
loans to one borrower and related entities in an amount which exceeds 15% of
its unimpaired capital and surplus, although loans in an amount equal to an
additional 10% of unimpaired capital and surplus may be made to a borrower if
the loans are fully secured by readily marketable securities. At December
31, 1996, the Bank's limit on loans-to-one borrower was approximately $9.3
million. At December 31, 1996, the Bank's largest loans or groups of
loans-to-one borrower, including persons or entities related to the borrower,
amounted to $4.5 million. Such amount consists of 19 loans, primarily
commercial real estate loans, all of which were current at December 31,
1996. The Bank's ten largest loans or groups of loans to one borrower,
including persons or entities related to the borrower, amounted to $15.7
million at December 31, 1996. In addition, the Bank's wholly owned subsidiary
has extended a $4.4 million loan collateralized by a hotel in Oklahoma City,
Oklahoma. See "-Subsidiaries."
One- to Four-Family Residential Real Estate Loans. The Bank has
historically concentrated its lending activities on the origination of loans
collateralized by first mortgage liens on existing one- to four-family
residences. At December 31, 1996, $338.3 million or 82.4% of the Bank's
total loan portfolio consisted of one- to four-family residential real estate
loans. The Bank originated $102.2 million, $90.0 million and $76.2 million
of one- to four-family residential loans in 1996, 1995 and 1994,
respectively, and intends to continue to emphasize the origination of
permanent loans collateralized by first mortgage liens on one- to four-family
residential properties in the future. Of the $338.3 million of such loans at
December 31, 1996, $205.9 million or 60.9% had adjustable-rates of interest
and $132.4 million or 39.1% had fixed-rates of interest.
The Bank currently originates both fixed-rate and adjustable-rate one- to
four-family residential mortgage loans. The Bank's fixed-rate loans for
portfolio are presently originated with maximum terms of 15 years and are
fully amortizing with monthly payments sufficient to repay the total amount
of the loan with interest by the end of the loan term. The Bank does offer
fixed-rate loans with terms of 30 years although such loans are typically
sold in the secondary market. The Bank's one- to four-family loans are
typically originated under terms, conditions and documentation which permit
them to be sold to U.S. Government sponsored agencies such as the Federal
Home Loan Mortgage Corporation ("FHLMC") and the Federal National Mortgage
Association ("FNMA"). However, as stated above, such loans with terms of 15
years or less are originated for portfolio while substantially all of such
loans over 15 years are sold in the secondary market. The Bank's fixed-rate
loans typically include "due on sale" clauses.
The Bank's adjustable-rate mortgage loans typically provide for an
interest rate which adjusts every one-, three- or seven-years in accordance
with a designated index plus a margin. Such loans are typically based on a
25- or 30-year amortization schedule. The Bank does not offer below market
rates, and generally, the amount of any increase or decrease in the interest
rate per one or three year period is limited to 2%, with a limit of 6% over
the life of the loan. The Bank's seven-year adjustable rate loans provide
that any increase or decrease in the interest rate per period is limited to
5% with a limit of 5% over the life of the loan. The Bank's adjustable-rate
loans are assumable (generally without release of the initial borrower), do
not contain prepayment penalties and do not provide for negative
amortization. Such loans may be converted to a fixed-rate loan at the
discretion of the Bank. The Bank generally underwrites its one- and
three-year adjustable-rate loans on the basis of the borrowers ability to pay
at the rate after the first adjustment. Adjustable-rate loans decrease the
risks associated with changes in interest rates but involve other risks,
primarily because as interest rates rise, the payment by the borrower rises
to the extent permitted by the terms of the loan, thereby increasing the
potential for default. At the same time, the marketability of the underlying
property may be adversely affected by higher interest rates.
The Bank's residential mortgage loans typically do not exceed 90% of the
appraised value of the security property. However, pursuant to underwriting
guidelines adopted by the Board of Directors, the Bank can lend up to 97% of
the appraised value of the property securing a one- to four-family
residential loan, and requires borrowers to obtain private mortgage insurance
on the portion of the principal amount of the loan that exceeds 90% of the
appraised value of the security property. At December 31, 1996, the Bank had
$493,000 of nonperforming single-family residential loans. See "- Asset
Quality."
6
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Multi-Family Residential Real Estate Loans. Although the Bank does not
emphasize multi-family residential loans and has not been active in this
area, the Bank offers mortgage loans for the acquisition and refinancing of
existing multi-family residential properties. At December 31, 1996, $1.6
million or .4% of the Bank's total loan portfolio consisted of loans
collateralized by existing multi-family residential real estate properties.
Multi-family loans are generally made on terms up to ten years with fixed
rates although the Bank will originate such loans with call provisions up to
five years. Loan to value ratios on the Bank's multi-family real estate loans
are currently limited to 80%. It is also the Bank's general policy to obtain
corporate or personal guarantees, as applicable, on its multi-family
residential real estate loans from the principals of the borrower.
Multi-family real estate lending entails significant additional risks as
compared with one- to four-family residential property lending. Such loans
typically involve large loan balances to single borrowers or groups of
related borrowers. The payment experience on such loans is typically
dependent on the successful operation of the real estate project. The
success of such projects is sensitive to changes in supply and demand
conditions in the market for multi-family real estate as well as economic
conditions generally. At December 31, 1996, the Bank did not have any
nonperforming multi-family real estate loans. See "- Asset Quality."
Commercial Real Estate Loans. The Bank originates mortgage loans for the
acquisition and refinancing of commercial real estate properties. At
December 31, 1996, $19.1 million or 4.7% of the Bank's total loan portfolio
consisted of loans collateralized by existing commercial real estate
properties. The Bank does not actively market its commercial real estate
loan products and offers such loans primarily as an accommodation to its
present customers. Management does not expect the Bank's portfolio of
commercial real estate loans to significantly increase in the future.
The majority of the Bank's commercial real estate loans are
collateralized by office buildings, convenience stores, service stations,
mini-storage facilities, hotels, churches and small shopping malls. The
majority of the Bank's commercial real estate loans are collateralized by
property located in the Bank's market area.
At December 31, 1996, the Bank had approximately $7.2 million of loans
which are either for the construction of service station and convenience
store facilities or are collateralized by such facilities. The Bank requires
that construction loans for such facilities meet present standards
established by the Environmental Protection Agency. With respect to existing
facilities, the Bank requires an environmental study of the property. To
date, the Bank has not experienced any material credit or environmental
problems with such loans.
The Bank requires appraisals of all properties securing commercial real
estate loans. The Bank considers the quality and location of the real
estate, the credit of the borrower, cash flow of the project and the quality
of management involved with the property. The Bank's commercial real estate
loans are originated with fixed interest rates based on a ten or fifteen year
amortization schedule and loan to value ratios on such loans are generally
limited to 80%. As part of the criteria for underwriting multi-family and
commercial real estate loans, the Bank generally imposes a debt coverage
ratio (the ratio of net cash from operations before payment of debt service
to debt service) of not less than 1.2. It is also the Bank's policy to
typically obtain corporate or personal guarantees, as applicable, on its
commercial real estate loans from the principals of the borrower.
Commercial real estate lending entails significant additional risks as
compared with single-family residential property lending. Such loans
typically involve large loan balances to single borrowers or groups of
related borrowers. The payment experience on such loans is typically
dependent on the successful operation of the real estate project. The
success of such projects is sensitive to changes in supply and demand
conditions in the market for commercial real estate as well as regional and
economic conditions generally. At December 31, 1996, the Bank did not have
any nonperforming commercial real estate loans.
7
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Construction Loans. The Bank also originates primarily residential
construction loans, although the Bank has originated commercial real estate
and multi-family residential construction loans to a limited degree. The
Bank's construction lending activities are limited to the Bank's primary
market area. At December 31, 1996, construction loans amounted to $20.1
million or 4.9% of the Bank's total loan portfolio, of which $15.4 million
consisted of single-family residential construction loans and $4.7 million
consisted of commercial real estate and multi-family residential construction
loans. The Bank's construction loans generally have fixed interest rates for
a term of six months to nine months. However, the Bank is permitted to
originate construction loans with terms of up to two years under its loan
policy. Commercial real estate and multi-family residential construction
loans are made with a maximum loan to value ratio of 80%. Construction loans
to individuals are typically made with a loan to value ratio of up to 90% and
non-owner occupied construction loans are limited to 80%.
With limited exceptions, the Bank's construction loans are made to
individual homeowners and a limited number of local real estate builders and
developers for the purpose of constructing one- to four-family residential
homes. Construction loans to individuals are typically made in connection
with the granting of the permanent financing on the property. Such loans
convert to a fully amortizing adjustable or fixed-rate loan at the end of the
construction term. The Bank typically requires that permanent financing with
the Bank or some other lender be in place prior to closing any construction
loan to an individual. Interest on construction/permanent loans is due upon
completion of the construction phase of the loan. At such time, the loan
automatically converts to a permanent loan with an interest rate which is
determined upon the closing of the construction/permanent loan.
Upon application, credit review and analysis of personal and, if
applicable, corporate financial statements, the Bank makes construction loans
to local builders for the purpose of construction of speculative (or unsold)
residential properties and for the construction of pre-sold single-family
homes. The Bank generally limits the number of unsold homes under
construction to each builder to one. Prior to making a commitment to fund a
construction loan, the Bank requires an appraisal of the property by the
Bank's appraisal staff. The Bank's appraisal staff also reviews and inspects
each project at the commencement of construction and prior to every
disbursement of funds during the term of the construction loan. Loan
proceeds are disbursed after inspections of the project based on a percentage
of completion. Interest on construction loans is due upon maturity.
Construction lending is generally considered to involve a higher level of
risk as compared to one- to four-family residential lending, due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on developers and builders. Moreover,
a construction loan can involve additional risks because of the inherent
difficulty in estimating both a property's value at completion of the project
and the estimated cost (including interest) of the project. The nature of
these loans is such that they are generally more difficult to evaluate and
monitor. In addition, speculative construction loans to a builder are not
pre-sold and thus pose a greater potential risk to the Bank than construction
loans to individuals on their personal residences.
The Bank has attempted to minimize the foregoing risks by, among other
things, limiting the extent of its construction lending generally and by
limiting its construction lending to primarily residential properties. In
addition, the Bank has adopted underwriting guidelines which impose stringent
loan to value, debt service and other requirements for loans which are
believed to involve higher elements of credit risk, by limiting the
geographic area in which the Bank will do business and by working with
builders with whom it has established relationships. At December 31, 1996,
the Bank did not have any nonperforming construction loans. See "- Asset
Quality."
8
<PAGE>
Commercial Loans. To a limited extent, the Bank offers commercial loans
which primarily consist of equipment and inventory loans which are typically
cross-collateralized by commercial real estate. The Bank does not actively
market such loans and offers such loans primarily as an accommodation to its
present customers. At December 31, 1996, such loans amounted to $4.3 million
or 1.1% of the total loan portfolio. At December 31, 1996, the Bank did not
have any nonperforming commercial loans. See "- Asset Quality."
The Bank's commercial loans are originated with fixed interest rates with
call provisions between one and five years. Such loans are typically based
on a ten year amortization schedule.
Consumer Loans. The Bank offers consumer loans in order to provide a
full range of financial services to its customers. The consumer loans
offered by the Bank include primarily home equity and second mortgage loans,
automobile loans, deposit account secured loans and unsecured loans.
Consumer loans amounted to $27.3 million or 6.7% of the total loan portfolio
at December 31, 1996, of which $12.5 million, $7.6 million and $7.2 million
consisted of home equity and second mortgage loans, automobile loans and
other consumer loans, respectively. The Bank intends to continue its
emphasis on consumer loans in furtherance of its role as a community oriented
financial institution. Consumer loans are subject to Arkansas usury law
which limits the interest rate that may be charged to 5% over the Federal
Reserve discount rate, which was 5.00% at December 31, 1996. A change in the
usury rate does not affect loans already in portfolio.
The Bank's home equity and second mortgage loans are typically fixed-rate
loans with terms of up to 15 years. Although the Bank does not require that
it hold the first mortgage on the secured property, the Bank does hold the
first mortgage on a significant majority of its home equity and second
mortgage loans. The Bank limits the mortgages on the secured property to 85%
of the value of the secured property.
The Bank's automobile loans are typically originated for the purchase of
new and used cars and trucks. Such loans are generally originated with a
maximum term of five years.
Other consumer loans consist primarily of deposit account loans and
unsecured loans. Loans secured by deposit accounts are originated for up to
90% of the account balance, with a hold placed on the account restricting the
withdrawal of the account balance.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts
against the borrower beyond obtaining a deficiency judgment. In addition,
consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application
of various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
At December 31, 1996, the Bank had $228,000 of non-performing consumer loans.
Asset Quality
When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the deficiency by contacting the borrower and seeking the
payment. Depending upon the type of loan, late notices are sent and/or
personal contacts are made. In most cases, deficiencies are cured promptly.
While the Bank generally prefers to work with borrowers to resolve such
problems, when a mortgage loan becomes 90 days delinquent, the Bank generally
institutes foreclosure or other proceedings, as necessary, to minimize any
potential loss.
9
<PAGE>
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on
non-accrual status, previously accrued but unpaid interest is deducted from
interest income. The Bank does not accrue interest on loans past due 90 days
or more. Loans may be reinstated to accrual status when payments are made to
bring the loan under 90 days past due and, in the opinion of management,
collection of the remaining balance can be reasonably expected.
Real estate properties acquired through, or in lieu of, loan foreclosure
are initially recorded at fair value at the date of foreclosure. After
foreclosure, valuations are periodically performed by management and the real
estate is carried at the lower of carrying amount or fair value less cost to
sell. Revenue and expenses from operations are included in the current
period income. Additions to the valuation allowance are included in the
provision for real estate losses.
Delinquent Loans. The following table sets forth information concerning
delinquent loans at December 31, 1996, in dollar amounts and as a percentage
of the Bank's total loan portfolio. The amounts presented represent the
total outstanding principal balances of the related loans, rather than the
actual payment amounts which are past due. At December 31, 1996, the Bank
did not have any delinquent multi-family residential loans or construction
loans.
<TABLE>
<CAPTION>
Single-family Commercial
Residential Real Estate Commercial Consumer
-------------------- ------------------- -------------------- ------------------
Percentage Percentage Percentage Percentage
of Total of Total of Total of Total
Amount Loans Amount Loans Amount Loans Amount Loans
------- ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans
delinquent:
30-59 days $1,607 .39% $690 .17% $ - - % 264 .06%
60-89 days 432 .11 - - 37 .01 197 .05
90 days and over 493 .12 - - - - 228 .06
------ ---- --- ----
Total $2,532 $690 $37 $689
------ ---- --- ----
------ ---- --- ----
</TABLE>
10
<PAGE>
The following table sets forth the amounts and categories of the Bank's
nonperforming assets at the dates indicated.
December 31,
-------------------------------------------
1996 1995 1994 1993 1992
---- ----- ---- ------ ------
(Dollars in Thousands)
Nonperforming loans:
Single-family residential $493 $223 $159 $ 146 $ 188
Multi-family residential -- -- -- -- --
Commercial real estate -- -- -- 1,215 99
Construction loans -- -- 78 -- --
Commercial loans -- -- -- -- --
Consumer loans 228 127 33 97 102
---- ---- ---- ------ ------
Total nonperforming loans 721 350 270 1,458 389
---- ---- ---- ------ ------
Real estate owned 154 234 250 491 1,171
---- ---- ---- ------ ------
Total nonperforming assets $875 $584 $520 $1,949 $1,560
---- ---- ---- ------ ------
---- ---- ---- ------ ------
Total nonperforming loans as
a percentage of total loans
receivable 0.18% 0.10% 0.09% 0.60% 0.18%
---- ---- ---- ------ ------
---- ---- ---- ------ ------
Total nonperforming assets as
a percentage of total assets 0.17% 0.13% 0.12% 0.48% 0.40%
---- ---- ---- ------ ------
---- ---- ---- ------ ------
Interest income that would have been recorded under the original terms of
the Bank's non-accruing loans for the year ended December 31, 1996 amounted
to $65,000, and the interest recognized during this period amounted to
$33,000.
Classified Assets. Federal regulations require that each insured savings
association classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them.
There are three classifications for problem assets: "substandard," "doubtful"
and "loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that
the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable, and there is a
high possibility of loss. An asset classified loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. At December 31, 1996, the Bank had $983,000 of
classified assets, $796,000 of which were classified as substandard, $40,000
of which were classified as doubtful, and $147,000 of which were classified
as loss. In addition, at such date, the Bank had $58,000 of assets
designated as special mention.
Allowance for Loan Losses. It is management's policy to maintain an
allowance for estimated losses based on the perceived risk of loss in the
loan portfolio and the adequacy of the allowance. Management's periodic
evaluation of the adequacy of the allowance is 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. The
allowance is increased by
11
<PAGE>
provisions for loan losses which are charged against income. When consumer
loans become 120 days or more past due, the Bank reserves for the full amount
of the loan.
Although management uses the best information available to make
determinations with respect to the provisions for loan losses, additional
provisions for loan losses may be required to be established in the future
should economic or other conditions change substantially. In addition, the
OTS and the FDIC, as an integral part of their examination process,
periodically review the Bank's allowance for possible loan losses. Such
agencies may require the Bank to recognize additions to such allowance based
on their judgments about information available to them at the time of their
examination.
The following table summarizes changes in the allowance for loan losses
and other selected statistics for the periods presented.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding at
end of period $410,790 $348,752 $286,557 $243,915 $222,212
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Average loans outstanding $369,185 $306,175 $257,261 $228,460 $201,467
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Allowance at beginning of period $ 1,228 $ 1,134 $ 1,447 $ 991 $ 676
-------- -------- -------- -------- --------
Charge-offs:
Single-family residential -- (2) (24) -- (14)
Multi-family residential -- -- -- -- --
Commercial real estate -- (8) (335) (9) (34)
Commercial loans -- -- -- (17) (15)
Consumer loans (40) (30) (9) (36) (20)
-------- -------- -------- -------- --------
Total charge-offs (40) (40) (368) (62) (83)
-------- -------- -------- -------- --------
Recoveries:
Single-family residential -- -- -- -- 4
Multi-family residential -- -- -- -- --
Commercial real estate 1 -- -- -- --
Commercial loans -- -- -- -- --
Consumer loans 2 1 1 7 1
-------- -------- -------- -------- --------
Total recoveries 3 1 1 7 5
-------- -------- -------- -------- --------
Net charge-offs (37) (39) (367) (55) (78)
-------- -------- -------- -------- --------
Total provisions for losses 60 133 54 511 393
-------- -------- -------- -------- --------
Allowance at end of period $ 1,251 $ 1,228 $ 1,134 $ 1,447 $ 991
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Allowance for loan losses as a
percentage of total loans
outstanding at end of period 0.30% 0.35% 0.40% 0.59% 0.45%
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Net loans charged-off as a
percentage of average loans
outstanding 0.01% 0.01% 0.14% 0.02% 0.04%
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
12
<PAGE>
The following table presents the allocation of the Bank's allowance for
loan losses by the type of loan at each of the dates indicated. The
significant portion of the allowance which is unallocated is due to
historically low levels of nonperforming single-family residential loans,
multi-family residential loans, commercial real estate loans, construction
loans, commercial loans and consumer loans, which would otherwise require a
larger allocation of the allowance, balanced with management's desire to
provide for an adequate allowance in light of the size of the Bank's loan
portfolio.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------- -------------------- -------------------- ------------------- --------------------
Percent of Percent of Percent of Percent of Percent of
Total Loans Total Loans Total Loans Total Loans Total Loans
Amount by Category Amount by Category Amount by Category Amount by Category Amount by Category
------- ------------ ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family
residential $ 11 82.36% $ 11 82.54% $ 16 82.96% $ 37 81.11% $ 47 80.90%
Multi-family
residential -- .38 -- .30 -- 0.28 -- 0.66 -- 0.76
Commercial
real estate 117 4.66 124 5.66 117 6.12 439 7.64 121 8.50
Construction
loans -- 4.88 -- 3.33 -- 2.61 -- 2.91 -- 2.71
Commercial
loans 19 1.06 27 1.15 21 1.11 14 0.84 11 0.88
Consumer loans 270 6.66 241 7.02 143 6.92 123 6.84 85 6.25
Unallocated 834 -- 825 -- 837 -- 834 -- 727 --
------ ------- ------ ------ ------ ------ ------ ------ ---- ------
Total $1,251 100.00% $1,228 100.00% $1,134 100.00% $1,447 100.00% $991 100.00%
------ ------- ------ ------ ------ ------ ------ ------ ---- ------
------ ------- ------ ------ ------ ------ ------ ------ ---- ------
</TABLE>
13
<PAGE>
Investment Activities
Mortgage-Backed Securities. Mortgage-backed securities (which also are
known as mortgage participation certificates or pass-through certificates)
typically represent a participation interest in a pool of single-family or
multi-family mortgages, the principal and interest payments on which are
passed from the mortgage originators, through intermediaries (generally U.S.
Government agencies and government sponsored enterprises) that pool and
repackage the participation interests in the form of securities, to investors
such as the Bank. Such U.S. Government agencies and government sponsored
enterprises, which guarantee the payment of principal and interest to
investors, primarily include the FHLMC, the FNMA and the Government National
Mortgage Association ("GNMA").
The FHLMC is a public corporation chartered by the U.S. Government and
guarantees the timely payment of interest and the ultimate return of
principal within one year. The FHLMC mortgage-backed securities are not
backed by the full faith and credit of the United States, but because the
FHLMC is a U.S. Government sponsored enterprise, these securities are
considered high quality investments with minimal credit risks. The GNMA is a
government agency within the Department of Housing and Urban Development
which is intended to help finance government assisted housing programs. The
GNMA guarantees the timely payment of principal and interest, and GNMA
securities are backed by the full faith and credit of the U.S. Government.
The FNMA guarantees the timely payment of principal and interest, and FNMA
securities are indirect obligations of the U.S. Government.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well as
the prepayment risk, are passed on to the certificate holder. Accordingly,
the life of a mortgage-backed pass-through security approximates the life of
the underlying mortgages. It has been the Bank's practice to invest only in
fixed-rate mortgage-backed securities. Mortgage-backed securities that
management has the positive intent and ability to hold to maturity are
classified as held to maturity and are reported at amortized cost.
Mortgage-backed securities classified as available for sale are reported at
fair value, with unrealized gains and losses excluded from earnings, net of
taxes, and reported as a separate component of equity.
The following table sets forth certain information relating to the
composition of the Bank's mortgage-backed securities at the dates indicated.
The Bank adopted SFAS No. 115 effective January 1, 1994. As a result, the
Company categorizes mortgage-backed securities on its consolidated balance
sheet as investment securities.
December 31,
----------------------------------
1996 1995 1994
------- ------- -------
(In Thousands)
Mortgage-backed securities
held to maturity:
GNMA $ -- $ -- $11,112
FHLMC 227 323 410
---- ---- -------
Total mortgage-backed
securities $227 $323 $11,522
---- ---- -------
---- ---- -------
14
<PAGE>
Mortgage-backed securities are generally backed by insurance or
guarantees, are more liquid than individual mortgage loans and may be used to
collateralize borrowings or other obligations of the Bank. At December 31,
1996, no mortgage-backed securities were pledged to secure obligations of the
Bank.
Of the $227,000 of mortgage-backed securities at December 31, 1996,
$52,000 was scheduled to mature between five and ten years and the remaining
$175,000 was scheduled to mature after ten years. The $52,000 of
mortgage-backed securities had a weighted average yield of 8.23% and the
$175,000 of such securities had a weighted average yield of 9.00%. At such
date, all of the Bank's mortgage-backed securities were fixed-rate and are
disclosed above in the periods in which they are scheduled to mature. The
actual maturity of a mortgage-backed security may be less than its stated
maturity due to prepayments of the underlying mortgages. Prepayments that
are faster than anticipated will shorten the life of the security and
adversely affect its yield to maturity. The yield is based upon the interest
income and the amortization of any premium or discount related to the
mortgage-backed security. In accordance with generally accepted accounting
principles, premiums and discounts are amortized over the estimated lives of
the securities, which decrease and increase interest income, respectively.
The prepayment assumptions used to determine the amortization period for
premiums and discounts can significantly affect the yield of the
mortgage-backed security, and these assumptions are reviewed periodically to
reflect actual prepayments. Although prepayments of underlying mortgages
depend on many factors, including the type of mortgages, the coupon rate, the
age of mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates,
the difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant
determinant of the rate of prepayments. During periods of falling mortgage
interest rates, if the coupon rate of the underlying mortgages exceeds the
prevailing market interest rates offered for mortgage loans, refinancing
generally increases and accelerates the prepayment of the underlying
mortgages and the related security. Under such circumstances, the Bank may
be subject to reinvestment risk because to the extent that the Bank's
mortgage-backed securities amortize or prepay faster than anticipated, the
Bank may not be able to reinvest the proceeds of such repayments and
prepayments at a comparable interest rate.
Investment Securities. The investment policy of the Bank, as established
by the Board of Directors, is designed primarily to provide and maintain
liquidity and to generate a favorable return on investments without incurring
undue interest rate risk, credit risk, and investment portfolio asset
concentrations. The Bank's investment policy is currently implemented by the
Bank's President within the parameters set by the Board of Directors. The
Bank is authorized to invest in obligations issued or fully guaranteed by the
U.S. Government, certain federal agency obligations, certain time deposits,
negotiable certificates of deposit issued by commercial banks and other
insured financial institutions, investment grade corporate debt securities
and other specified investments.
Investment securities that management has the positive intent and ability
to hold to maturity are classified as held to maturity and are reported at
amortized cost. Investment securities classified as available for sale are
reported at fair value, with unrealized gains and losses excluded from
earnings, net of taxes, and reported as a separate component of equity. At
December 31, 1996, approximately $13 million of the Bank's investment
securities were pledged to secure obligations of the Bank. At December 31,
1996, investments in the debt and/or equity securities of any one issuer,
other than those issued by U.S. Government agencies, did not exceed more than
10% of the Company's stockholders' equity.
At December 31, 1996, the Bank's investment securities included
structured notes of $14.0 million, of which $5.0 million were FHLB step-up
and multi-step notes and $9.0 million were adjustable-rate FHLB notes. The
interest rate on the step-up and multi-step FHLB notes is scheduled to
increase to a pre-determined rate on pre-determined dates, and the notes are
callable at par on a pre-determined date and every six months subsequent to
such date which coincide with interest payment dates. If the step-up or
multi-step interest rate exceeds the then current market rate for notes with
similar terms to the next adjustment date or maturity date, the note would
generally be called and the Bank would have to re-invest the proceeds in the
lower interest rate environment. If the step-up or multi-step interest rate
is less than the then current market rate, the note would
15
<PAGE>
generally not be called and the Bank would continue to hold the note with a
below market interest rate. The step-up or multi-step FHLB notes do not have
caps or floors and have remaining maturities from less than one year up to
six years. At December 31, 1996, $7.0 million of the adjustable-rate FHLB
notes adjust monthly based on the five-year and ten-year constant maturity
treasury ("CMT") index minus 170 to 210 basis points with no caps or floors
and $2.0 million of the adjustable-rate notes adjust semi-annually based on a
multiple of the ten-year CMT index plus 160 basis points with a floor of
4.50% and a cap of 24.0%. The adjustable-rate FHLB notes are non-callable
with remaining maturity dates up to four years. The CMT index could result
in the interest rate on these notes being less than market rates of interest.
The following table sets forth the amount of investment securities which
mature during each of the periods indicated and the weighted average yields
for each range of maturities at December 31, 1996.
<TABLE>
<CAPTION>
Less Than One to Five Five to Ten After Ten
One Year Years Years Years Total
--------------- ---------------- ---------------- ----------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Bonds and other debt
securities held to maturity:
U.S. Government and
agency obligations $17,017 5.45% $44,775 5.88% $25,963 7.08% $3,000 7.45% $90,755 6.19%
Equity securities available
for sale:
FHLMC preferred stock(1) 340 -- -- -- 340
------- ------- ------- ------ -------
Total investment securities $17,357 $44,775 $25,963 $3,000 $91,095
------- ------- ------- ------ -------
------- ------- ------- ------ -------
</TABLE>
_________________
(1) FHLMC preferred stock has no stated maturity and is assumed to mature in
less than one year.
The following table sets forth the carrying value of the Company's
investment securities classified as held to maturity and available for sale
at the dates indicated.
December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
Investment securities held
to maturity:
U.S. Government and agency
obligations $90,755 $95,731 $118,849
Equity securities available
for sale:
FHLMC preferred stock(1) 340 258 156
------- ------- --------
Total investment securities $91,095 $95,989 $119,005
------- ------- --------
------- ------- --------
_________________
(1) Reflects carrying value at fair market value. At December 31, 1996, the
Company's FHLMC preferred stock had $202,000 of unrealized gains, net of
taxes, which were included in stockholders' equity at such date.
16
<PAGE>
As a member of the FHLB of Dallas, the Bank is required to maintain an
investment in FHLB stock. At December 31, 1996, the Bank's investment in
FHLB stock amounted to $3.0 million. No ready market exists for such stock
and it has no quoted market value.
Sources of Funds
General. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives
funds from loan principal repayments and prepayments and interest payments
and maturities of investment securities. Loan repayments are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions. Borrowings
may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources. They may also be used on a longer
term basis for general business purposes. The Bank has not generally
utilized borrowings as a source of funds.
Deposits. The Bank's deposit products include a broad selection of
deposit instruments, including negotiable order of withdrawal ("NOW")
accounts, demand deposit accounts ("DDA"), money market accounts, regular
savings accounts and term certificate accounts. Deposit account terms vary,
with the principal differences being the minimum balance required, the time
periods the funds must remain on deposit, early withdrawal penalties and the
interest rate.
The Bank considers its primary market area to be Northcentral and
Northwest Arkansas. The Bank utilizes traditional marketing methods to
attract new customers and savings deposits. The Bank does not advertise for
deposits outside of its primary market area or utilize the services of
deposit brokers, and management believes that an insignificant number of
deposit accounts were held by non-residents of Arkansas at December 31, 1996.
The Bank has been competitive in the types of accounts and in interest
rates it has offered on its deposit products but does not necessarily seek to
match the highest rates paid by competing institutions. Although market
demand generally dictates which deposit maturities and rates will be accepted
by the public, the Bank intends to continue to promote longer term deposits
to the extent possible and consistent with its asset and liability management
goals.
The following table shows the distribution of, and certain other
information relating to, the Bank's deposits by type of deposit, as of the
dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1996 1995 1994
------------------ ---------------- ----------------
Amount % Amount % Amount %
-------- ----- -------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
3.00% - 3.99% $ 607 .2% $ -- --% $ 15,298 3.9%
4.00% - 5.99% 205,912 48.7 157,718 37.8 189,188 47.9
6.00% - 7.99% 90,568 21.4 127,456 30.6 50,292 12.6
8.00% and over 36,408 8.6 42,323 10.1 42,812 10.8
-------- ----- -------- ----- -------- -----
Total certificate accounts 333,495 78.9 327,497 78.5 297,590 75.2
-------- ----- -------- ----- -------- -----
Transaction accounts:
Passbook and statement savings 26,451 6.2 27,480 6.6 31,516 8.0
Money market accounts 17,214 4.1 19,920 4.8 25,202 6.4
NOW accounts/DDA 45,698 10.8 42,332 10.1 41,175 10.4
-------- ----- -------- ----- -------- -----
Total transaction accounts 89,363 21.1 89,732 21.5 97,893 24.8
-------- ----- -------- ----- -------- -----
Total deposits $422,858 100.0% $417,229 100.0% $395,483 100.0%
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
</TABLE>
17
<PAGE>
The following table presents the average balance of each type of deposit
and the average rate paid on each type of deposit and/or total deposits for
the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1996 1995 1994
------------------ ------------------- ------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid(1) Balance Paid(1)
-------- ------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook and statement savings
accounts $ 27,149 2.72% $ 29,145 $ 33,849
Money market accounts and
NOW accounts 54,748 2.42 55,269 61,281
Demand deposit accounts 9,244 -- 7,590 5,739
Certificates of deposit 328,921 6.19 312,926 286,887
-------- ---- -------- --------
Total deposits $420,062 5.33% $404,930 5.32% $387,756 4.56%
-------- ---- -------- ---- -------- ----
-------- ---- -------- ---- -------- ----
</TABLE>
- ---------------
(1) The average rate paid for each type of deposit was not available in 1995
and 1994.
The following table presents, by various interest rate categories, the
amount of certificates of deposit at December 31, 1996 and 1995 and the
amounts at December 31, 1996 which mature during the periods indicated.
<TABLE>
<CAPTION>
Balance at December 31, 1996
December 31, Maturing in the 12 Months Ending
-------------------- ------------------------------------------------
1996 1995 1997 1998 1999 Thereafter
--------- -------- --------- -------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificates of Deposit
3.00% - 3.99% $ 607 $ -- $ 607 $ -- $ -- $ --
4.00% - 5.99% 205,912 157,718 169,367 30,068 4,915 1,562
6.00% - 7.99% 90,568 127,456 10,991 7,833 18,501 53,243
8.00% and over 36,408 42,323 16,441 11,542 3,260 5,165
-------- -------- -------- ------- ------- -------
Total certificate accounts $333,495 $327,497 $197,406 $49,443 $26,676 $59,970
-------- -------- -------- ------- ------- -------
-------- -------- -------- ------- ------- -------
</TABLE>
The following table sets forth the savings flows of the Bank during the
periods indicated.
Year Ended December 31,
------------------------------------
1996 1995 1994
--------- -------- ---------
(In Thousands)
Increase (decrease) before
interest credited $(10,731) $ 6,118 $ 7,815
Interest credited 16,360 5,628 12,760
-------- ------- -------
Net increase in deposits $ 5,629 $21,746 $20,575
-------- ------- -------
-------- ------- -------
The decrease in deposits before interest credited in 1996 was primarily
due to the use of such funds to purchase shares of the Company's common stock
in the Conversion.
The following table sets forth maturities of the Bank's certificates of
deposit of $100,000 or more at December 31, 1996 by time remaining to
maturity.
Amounts
-------------
(In Thousands)
Period Ending:
March 31, 1997 $17,471
June 30, 1997 16,445
December 31, 1997 3,842
After December 31, 1997 16,997
-------
Total certificates of deposit with
balances of $100,000 or more $54,755
-------
-------
18
<PAGE>
Employees
The Bank had 131 full-time employees and 10 part-time employees at
December 31, 1996. None of these employees is represented by a collective
bargaining agent, and the Bank believes that it enjoys good relations with
its personnel.
Subsidiaries
The Bank is permitted to invest up to 2% of its assets in the capital
stock of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. The Bank's only
subsidiary, First Harrison Service Corporation (the "Service Corporation"),
was formed in 1971. At December 31, 1996, the Service Corporation's only
significant asset was a $4.4 million loan collateralized by a hotel in
Oklahoma City, Oklahoma. Such loan was current at December 31, 1996. The
Service Corporation generated net income of approximately $280,000 during
1996.
Competition
The Bank faces strong competition both in attracting deposits and making
real estate loans. Its most direct competition for deposits has historically
come from other savings associations, credit unions and commercial banks,
including many large financial institutions which have greater financial and
marketing resources available to them. In addition, during times of high
interest rates, the Bank has faced additional significant competition for
investors' funds from short-term money market securities, mutual funds and
other corporate and government securities. The ability of the Bank to
attract and retain savings deposits depends on its ability to generally
provide a rate of return, liquidity and risk comparable to that offered by
competing investment opportunities.
The Bank experiences strong competition for real estate loans principally
from savings associations, commercial banks and mortgage companies. The Bank
competes for loans principally through the interest rates and loan fees it
charges and the efficiency and quality of services it provides borrowers.
Competition may increase as a result of the continuing reduction of
restrictions on the interstate operations of financial institutions.
19
<PAGE>
REGULATION
Set forth below is a brief description of those laws and regulations
which, together with the descriptions of laws and regulations contained
elsewhere herein, are deemed material to an investor's understanding of the
extent to which the Company and the Bank are regulated. The description of
the laws and regulations hereunder, as well as descriptions of laws and
regulations contained elsewhere herein, does not purport to be complete and
is qualified in its entirety by reference to applicable laws and regulations.
The Company
General. The Company, as a savings and loan holding company within the
meaning of the Home Owners Loan Act ("HOLA"), has registered with the OTS and
is subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, the
Bank is subject to certain restrictions in its dealings with the Company and
affiliates thereof.
Activities Restrictions. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one
subsidiary savings institution. However, if the Director of the OTS
determines that there is reasonable cause to believe that the continuation by
a savings and loan holding company of an activity constitutes a serious risk
to the financial safety, soundness or stability of its subsidiary savings
institution, the Director may impose such restrictions as deemed necessary to
address such risk, including limiting (i) payment of dividends by the savings
institution; (ii) transactions between the savings institution and its
affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution. Notwithstanding the
above rules as to permissible business activities of unitary savings and loan
holding companies, if the savings institution subsidiary of such a holding
company fails to meet the qualified thrift lender ("QTL") test, as discussed
under "- The Bank - Qualified Thrift Lender Test," then such unitary holding
company also shall become subject to the activities restrictions applicable
to multiple savings and loan holding companies and, unless the savings
institution requalifies as a QTL within one year thereafter, shall register
as, and become subject to the restrictions applicable to, a bank holding
company. See "- The Bank - Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve
emergency thrift acquisitions and where each subsidiary savings institution
meets the QTL test, as set forth below, the activities of the Company and any
of its subsidiaries (other than the Bank or other subsidiary savings
institutions) would thereafter be subject to further restrictions. Among
other things, no multiple savings and loan holding company or subsidiary
thereof which is not a savings institution shall commence or continue for a
limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof any business activity, upon prior notice to,
and no objection by the OTS, other than: (i) furnishing or performing
management services for a subsidiary savings institution; (ii) conducting an
insurance agency or escrow business; (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution; (iv)
holding or managing properties used or occupied by a subsidiary savings
institution; (v) acting as trustee under deeds of trust; (vi) those
activities authorized by regulation as of March 5, 1987 to be engaged in by
multiple savings and loan holding companies; or (vii) unless the Director of
the OTS by regulation prohibits or limits such activities for savings and
loan holding companies, those activities authorized by the Federal Reserve
Board ("FRB") as permissible for bank holding companies. Those activities
described in (vii) above also must be approved by the Director of the OTS
prior to being engaged in by a multiple savings and loan holding company.
Limitations on Transactions with Affiliates. Transactions between
savings institutions and any affiliate are governed by Sections 23A and 23B
of the Federal Reserve Act. An affiliate of a savings institution is any
company or entity which controls, is controlled by or is under common control
with the savings institution. In
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a holding company context, the parent holding company of a savings
institution (such as the Company) and any companies which are controlled by
such parent holding company are affiliates of the savings institution.
Generally, Sections 23A and 23B (i) limit the extent to which the savings
institution or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock
and surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same,
or at least as favorable, to the institution or subsidiary as those provided
to a non-affiliate. The term "covered transaction" includes the making of
loans, purchase of assets, issuance of a guarantee and other similar
transactions. In addition to the restrictions imposed by Sections 23A and
23B, no savings institution may (i) loan or otherwise extend credit to an
affiliate, except for any affiliate which engages only in activities which
are permissible for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes or similar obligations of any affiliate,
except for affiliates which are subsidiaries of the savings institution.
In addition, Sections 22(h) and (g) of the Federal Reserve Act places
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer
and to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) permits loans to
directors, executive officers and principal stockholders made pursuant to a
benefit or compensation program that is widely available to employees of a
subject savings association provided that no preference is given to any
officer, director or principal shareholder or related interest thereto over
any other employee. In addition, the aggregate amount of extensions of
credit by a savings institution to all insiders cannot exceed the
institution's unimpaired capital and surplus. Furthermore, Section 22(g)
places additional restrictions on loans to executive officers. At December
31, 1996, the Bank was in compliance with the above restrictions.
Restrictions on Acquisitions. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without
prior approval of the Director of the OTS, (i) control of any other savings
institution or savings and loan holding company or substantially all the
assets thereof or (ii) more than 5% of the voting shares of a savings
institution or holding company thereof which is not a subsidiary. Except
with the prior approval of the Director of the OTS, no director or officer of
a savings and loan holding company or person owning or controlling by proxy
or otherwise more than 25% of such company's stock, may acquire control of
any savings institution, other than a subsidiary savings institution, or of
any other savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls
savings institutions in more than one state if (i) the multiple savings and
loan holding company involved controls a savings institution which operated a
home or branch office located in the state of the institution to be acquired
as of March 5, 1987; (ii) the acquiror is authorized to acquire control of
the savings institution pursuant to the emergency acquisition provisions of
the Federal Deposit Insurance Act ("FDIA"); or (iii) the statutes of the
state in which the institution to be acquired is located specifically permit
institutions to be acquired by the state-chartered institutions or savings
and loan holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-chartered savings
institutions).
Under the Bank Holding Company Act of 1956, the FRB is authorized to
approve an application by a bank holding company to acquire control of a
savings institution. In addition, a bank holding company that controls a
savings institution may merge or consolidate the assets and liabilities of
the savings institution with, or transfer assets and liabilities to, any
subsidiary bank which is a member of the BIF with the approval of the
appropriate federal banking agency and the FRB. As a result of these
provisions, there have been a number of acquisitions of savings institutions
by bank holding companies in recent years.
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The Bank
General. The OTS has extensive authority over the operations of
federally chartered savings institutions. As part of this authority, savings
institutions are required to file periodic reports with the OTS and are
subject to periodic examinations by the OTS and the FDIC. The last
regulatory examination of the Bank by the OTS was completed in November 1996.
The Bank was not required to make any material changes to its operations as
a result of such examination. The investment and lending authority of
savings institutions are prescribed by federal laws and regulations, and such
institutions are prohibited from engaging in any activities not permitted by
such laws and regulations. Those laws and regulations generally are
applicable to all federally chartered savings institutions and may also apply
to state-chartered savings institutions. Such regulation and supervision is
primarily intended for the protection of depositors.
The OTS' enforcement authority over all savings institutions and their
holding companies includes, among other things, the ability to assess civil
money penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated
for violations of laws and regulations and unsafe or unsound practices.
Other actions or inactions may provide the basis for enforcement action,
including misleading or untimely reports filed with the OTS.
Insurance of Accounts. The deposits of the Bank are insured to the
maximum extent permitted by the SAIF, which is administered by the FDIC, and
are backed by the full faith and credit of the U.S. Government. As insurer,
the FDIC is authorized to conduct examinations of, and to require reporting
by, FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation
or order to pose a serious threat to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings institutions, after
giving the OTS an opportunity to take such action.
The deposits of the Bank are currently insured by the SAIF. Both the
SAIF and the 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 had achieved a fully
funded status in contrast to the SAIF and, therefore, the FDIC substantially
reduced the average deposit insurance premium paid by commercial banks to a
level approximately 75% below the average premium paid by savings
institutions.
The underfunded status of the SAIF had resulted in the introduction of
federal legislation intended to, among other things, recapitalize the SAIF
and address the resulting premium disparity. On September 30, 1996, the
Omnibus Appropriations Act was signed into law. The legislation authorized a
one-time charge on SAIF insured deposits at a rate of $.657 per $100.00 of
March 31, 1995 deposits. As a result, the Bank's assessment amounted to $2.6
million ($1.7 million net of tax). Additional provisions of the Act include
new BIF and SAIF premiums and the merger of BIF and SAIF. The new BIF and
SAIF premiums will include a premium of repayment of the Financing
Corporation ("FICO") bonds plus and regular insurance assessment, currently
nothing for the lowest risk category institutions. Until full pro-rate FICO
sharing is in effect, the FICO premiums for BIF and SAIF will be 1.3 and
approximately 6.5 basis points, respectively, beginning January 1, 1997.
Full pro-rata FICO sharing is to begin no later than January 1, 2000. BIF
and SAIF are to be merged on January 1, 1999, provided the bank and savings
association charters are merged by that date. While the one-time special
assessment had a significant impact on 1996 earnings, the resulting lower
annual premiums will benefit future earnings.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement
with the FDIC. It also may suspend deposit insurance temporarily during the
hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If insurance of accounts is terminated,
the accounts at the institution at the time of the termination, less
subsequent withdrawals, shall continue to be insured for a period of six
months to two years, as determined by
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the FDIC. Management is aware of no existing circumstances which would
result in termination of the Bank's deposit insurance.
Regulatory Capital Requirements. Federally insured savings institutions
are required to maintain minimum levels of regulatory capital. The OTS has
established capital standards applicable to all savings institutions. These
standards generally must be as stringent as the comparable capital
requirements imposed on national banks. The OTS also is authorized to impose
capital requirements in excess of these standards on individual institutions
on a case-by-case basis.
Current OTS capital standards require savings institutions to satisfy
three different capital requirements. Under these standards, savings
institutions must maintain "tangible" capital equal to at least 1.5% of
adjusted total assets, "core" capital equal to at least 3.0% of adjusted
total assets and "total" capital (a combination of core and "supplementary"
capital) equal to at least 8.0% of "risk-weighted" assets. For purposes of
the regulation, core capital generally consists of common stockholders'
equity (including retained earnings), noncumulative perpetual preferred stock
and related surplus, minority interests in the equity accounts of fully
consolidated subsidiaries, certain nonwithdrawable accounts and pledged
deposits and "qualifying supervisory goodwill." Tangible capital is given
the same definition as core capital but does not include qualifying
supervisory goodwill and is reduced by the amount of all the savings
institution's intangible assets, with only a limited exception for purchased
mortgage servicing rights. The Bank had no goodwill or other intangible
assets at December 31, 1996. Both core and tangible capital are further
reduced by an amount equal to a savings institution's debt and equity
investments in subsidiaries engaged in activities not permissible to national
banks (other than subsidiaries engaged in activities undertaken as agent for
customers or in mortgage banking activities and subsidiary depository
institutions or their holding companies). These adjustments do not
materially affect the Bank's regulatory capital. At December 31, 1996, the
Bank exceeded its tangible, core and risk-based capital requirements.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include both core capital and supplementary
capital in its total capital, provided that the amount of supplementary
capital included does not exceed the savings institution's core capital.
Supplementary capital generally consists of hybrid capital instruments;
perpetual preferred stock which is not eligible to be included as core
capital; subordinated debt and intermediate-term preferred stock; and general
allowances for loan losses up to a maximum of 1.25% of risk-weighted assets.
In determining the required amount of risk-based capital, total assets,
including certain off-balance sheet items, are multiplied by a risk weight
based on the risks inherent in the type of assets. The risk weights assigned
by the OTS for principal categories of assets are (i) 0% for cash and
securities issued by the U.S. Government or unconditionally backed by the
full faith and credit of the U.S. Government; (ii) 20% for securities (other
than equity securities) issued by U.S. Government-sponsored agencies and
mortgage-backed securities issued by, or fully guaranteed as to principal and
interest by, the FNMA or the FHLMC, except for those classes with residual
characteristics or stripped mortgage-related securities; (iii) 50% for
prudently underwritten permanent one- to four-family first lien mortgage
loans not more than 90 days delinquent and having a loan-to-value ratio of
not more than 80% at origination unless insured to such ratio by an insurer
approved by the FNMA or the FHLMC, qualifying residential bridge loans made
directly for the construction of one- to four-family residences and
qualifying multi-family residential loans; and (iv) 100% for all other loans
and investments, including consumer loans, commercial loans, and one- to
four-family residential real estate loans more than 90 days delinquent, and
for repossessed assets.
Liquidity Requirements. All savings institutions are required to
maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. The liquidity
requirement may vary from time to time (between 4% and 10%) depending upon
economic conditions and savings flows of all savings institutions. At the
present time, the required minimum liquid asset ratio is 5%. At December 31,
1996, the Bank's liquidity ratio was 12.3%.
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Capital Distributions. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible debt
and other transactions charged to the capital account of a savings
institution to make capital distributions. Generally, the regulation creates
a safe harbor for specified levels of capital distributions from institutions
meeting at least their minimum capital requirements, so long as such
institutions notify the OTS and receive no objection to the distribution from
the OTS. Savings institutions and distributions that do not qualify for the
safe harbor are required to obtain prior OTS approval before making any
capital distributions.
Generally, a savings institution that before and after the proposed
distribution meets or exceeds its fully phased-in capital requirements (Tier
1 institutions) may make capital distributions during any calendar year equal
to the higher of (i) 100% of net income for the calendar year-to-date plus
50% of its "surplus capital ratio" at the beginning of the calendar year or
(ii) 75% of net income over the most recent four-quarter period. The
"surplus capital ratio" is defined to mean the percentage by which the
institution's ratio of total capital to assets exceeds the ratio of its fully
phased-in capital requirement to assets. "Fully phased-in capital
requirement" is defined to mean an institution's capital requirement under
the statutory and regulatory standards applicable on December 31, 1994, as
modified to reflect any applicable individual minimum capital requirement
imposed upon the institution. Failure to meet fully phased-in or minimum
capital requirements will result in further restrictions on capital
distributions, including possible prohibition without explicit OTS approval.
Tier 2 institutions, which are institutions that before and after the
proposed distribution meet or exceed their minimum capital requirements, may
make capital distributions up to a specified percentage of their net income
during the most recent four quarter period, depending on how close the
institution is to meeting its fully phased-in capital requirements. Tier 3
institutions, which are institutions that do not meet current minimum capital
requirements, or which have been otherwise notified by the OTS that it will
be treated as a Tier 3 institution because they are in need of more than
normal supervision, cannot make any capital distribution without obtaining
OTS approval prior to making such distributions.
In order to make distributions under these safe harbors, Tier 1 and Tier
2 institutions must submit 30 days written notice to the OTS prior to making
the distribution. The OTS may object to the distribution during that 30-day
period based on safety and soundness concerns. At December 31, 1996, the
Bank was a Tier 1 institution for purposes of this regulation.
Branching by Federal Savings Institutions. OTS policy permits interstate
branching to the full extent permitted by statute (which is essentially
unlimited). Generally, federal law prohibits federal savings institutions
from establishing, retaining or operating a branch outside the state in which
the federal institution has its home office unless the institution meets the
IRS' domestic building and loan test (generally, 60% of a thrift's assets
must be housing-related) ("IRS Test"). The IRS Test requirement does not
apply if, among other things, the law of the state where the branch would be
located would permit the branch to be established if the federal savings
institution were chartered by the state in which its home office is located.
Furthermore, the OTS will evaluate a branching applicant's record of
compliance with the Community Reinvestment Act of 1977 ("CRA"). An
unsatisfactory CRA record may be the basis for denial of a branching
application.
Qualified Thrift Lender Test. All savings institutions are required to
meet a QTL test to avoid certain restrictions on their operations. A savings
institution that does not meet the QTL test must either convert to a bank
charter or comply with the following restrictions on its operations: (i) the
institution may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is permissible for
a national bank; (ii) the branching powers of the institution shall be
restricted to those of a national bank; (iii) the institution shall not be
eligible to obtain any advances from its FHLB; and (iv) payment of dividends
by the institution shall be subject to the rules regarding payment of
dividends by a national bank. Upon the expiration of three years from the
date the savings institution ceases to be a QTL, it must cease any
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activity and not retain any investment not permissible for a national bank
and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
Currently, the QTL test requires that 65% of an institution's "portfolio
assets" (as defined) consist of certain housing and consumer-related assets
on a monthly average basis in nine out of every 12 months. Assets that
qualify without limit for inclusion as part of the 65% requirement are loans
made to purchase, refinance, construct, improve or repair domestic
residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); stock issued by the FHLB of
Dallas; and direct or indirect obligations of the FDIC. In addition, the
following assets, among others, may be included in meeting the test subject
to an overall limit of 20% of the savings institution's portfolio assets: 50%
of residential mortgage loans originated and sold within 90 days of
origination; 100% of consumer and educational loans (limited to 10% of total
portfolio assets); and stock issued by the FHLMC or the FNMA. Portfolio
assets consist of total assets minus the sum of (i) goodwill and other
intangible assets, (ii) property used by the savings institution to conduct
its business, and (iii) liquid assets up to 20% of the institution's total
assets. At December 31, 1996, the qualified thrift investments of the Bank
were approximately 86.7% of its portfolio assets.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Dallas, which is one of 12 regional FHLBs that administers the home financing
credit function of savings institutions. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of
the FHLB System. It makes loans to members (i.e., advances) in accordance
with policies and procedures established by the Board of Directors of the
FHLB. At December 31, 1996, the Bank had no outstanding FHLB advances.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Dallas in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At December 31, 1996, the Bank had $3.0 million
in FHLB stock, which was in compliance with this requirement. No ready
market exists for such stock and it has no quoted market value.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community
investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of FHLB dividends paid in the
past and could continue to do so in the future. These contributions also
could have an adverse effect on the value of FHLB stock in the future.
Federal Reserve System. The FRB requires all depository institutions to
maintain reserves against their transaction accounts and non-personal time
deposits. As of December 31, 1996, no reserves were required to be maintained
on the first $4.3 million of transaction accounts, reserves of 3% were
required to be maintained against the next $52.0 million of net transaction
accounts (with such dollar amounts subject to adjustment by the FRB), and a
reserve of 10% (which is subject to adjustment by the FRB to a level between
8% and 14%) against all remaining net transaction accounts. Because required
reserves must be maintained in the form of vault cash or a
noninterest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce an institution's earning assets.
TAXATION
Federal Taxation
General. The Company and Bank are subject to the generally applicable
corporate tax provisions of the Internal Revenue Code of 1986, as amended
("Code"), and Bank is subject to certain additional provisions of the Code
which apply to thrift and other types of financial institutions. The
following discussion of federal taxation is intended only to summarize
certain pertinent federal income tax matters material to the taxation of the
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Company and the Bank and is not a comprehensive discussion of the tax rules
applicable to the Company and Bank.
Year. The Bank files a federal income tax return on the basis of a
fiscal year ending on December 31. The Company filed a consolidated federal
income tax return with both the Bank and the Service Corporation.
Bad Debt Reserves. Prior to the enactment of the Small Business Jobs
Protection Act (the "Act"), which was signed into law on August 21, 1996,
certain thrift institutions, such as the Bank, were allowed deductions
for bad debts under methods more favorable than those granted to other
taxpayers. Qualified thrift institutions could compute deductions for bad
debts using either the specific charge off method of Section 166 of the Code
or the reserve method of Section 593 of the Code.
Under Section 593, a thrift institution annually could elect to deduct
bad debts under either (i) the "percentage of taxable income" method
applicable only to thrift institutions, or (ii) the "experience" method that
also was available to small banks. Under the "percentage of taxable income"
method, a thrift institution generally was allowed a deduction for an
addition to its bad debt reserve equal to 8% of its taxable income
(determined without regard to this deduction and with additional
adjustments). Under the experience method, a thrift institution was
generally allowed a deduction for an addition to its bad debt reserve equal
to the greater of (i) and amount based on its actual average experience for
losses in the current and five preceding taxable years, or (ii) an amount
necessary to restore the reserve to its balance as of the close of the base
year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the
experience method or the percentage of taxable income method. For tax years
1995 and 1994, the Bank used the percentage of taxable income method because
such method provided a higher bad debt deduction than the experience method.
Section 1616(a) of the Act repealed the Section 593 reserve method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that are treated as small banks
are allowed to utilize the experience method applicable to such institutions,
while thrift institutions that are treated as large banks are required to use
only the specific charge off method. The percentage of taxable income method
of accounting for bad debts is no longer available for any financial
institution.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in the method of accounting,
initiated by the taxpayer and having been made with the consent of the
Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts
to be recaptured will be determined solely with respect to the "applicable
excess reserves" of the taxpayer. The amount of the applicable excess
reserves will be taken into account ratably over a six-taxable year period,
beginning with the first taxable year beginning after 1995, subject to the
residential loan requirement described below. In the case of a thrift
institution that is treated as a large bank, the amount of the institution's
applicable excess reserves generally is the excess of (i) the balances of its
reserve for losses on qualifying real property loans (generally loans secured
by improved real estate) and its reserve for losses on nonqualifying loans
(all other types of loans) as of the close of its last taxable year beginning
before January 1, 1996, over (ii) the balances of such reserves as of the
close of its last taxable year beginning before January 1, 1988 (i.e., the
"pre-1988 reserves"). In the case of a thrift institution that is treated as
a small bank, like the Bank, the amount of the institution's applicable
excess reserves generally is the excess of (i) the balances of its reserve
for losses on qualifying real property loans and its reserve for losses on
nonqualifying loans as of the close of its last taxable year beginning before
January 1, 1996, over (ii) the greater of the balance of (a) its pre-1988
reserves or, (b) what the thrift's reserves would have been at the close of
its last year beginning before January 1, 1996, had the thrift always used
the experience method.
For taxable years that begin after December 31, 1995, and before January
1, 1998, if a thrift meets the residential loan requirement for a tax year,
the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the
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residential loan requirement if, for the tax year, the principal amount of
residential loans made by the thrift during the year is not less than its
base amount. The "base amount" generally is the average of the principal
amounts of the residential loans made by the thrift during the six most
recent tax years beginning before January 1, 1996.
A residential loan is a loan as described in Section 7701(a)(19)(C)(v)
(generally a loan secured by residential or church property and certain
mobile homes), but only to the extent that the loan is made to the owner of
the property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which requires recapture in the case
of certain excessive distributions to shareholders. The pre-1988 reserves
may not be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for
any other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first,
out of the institution's post-1951 accumulated earnings and profits; second,
out of the pre-1988 reserves; and third, out of such other accounts as may be
proper. To the extent a distribution by the Bank to the Company is deemed
paid out of its pre-1988 reserves under these rules, the pre-1988 reserves
would be reduced and the Bank's gross income for tax purposes would be
increased by the amount which, when reduced by the income tax, if any,
attributable to the inclusion of such amount in its gross income, equals the
amount deemed paid out of the pre-1988 reserves. As of December 31, 1996,
the Bank's pre-1988 reserves for tax purposes totaled approximately $4.2
million.
Minimum Tax. The Code imposes an alternative minimum tax at a rate of
20%. The alternative minimum tax generally applies to a base of regular
taxable income plus certain tax preferences ("alternative minimum taxable
income" or "AMTI") and is payable to the extent such AMTI is in excess of an
exemption amount. The Code provides that an item of tax preference is the
excess of the bad debt deduction allowable for a taxable year pursuant to the
percentage of taxable income method over the amount allowable under the
experience method. Other items of tax preference that constitute AMTI
include (a) tax-exempt interest on newly issued (generally, issued on or
after August 8, 1986) private activity bonds other than certain qualified
bonds and (b) 75% of the excess (if any) of (i) adjusted current earnings as
defined in the Code, over (ii) AMTI (determined without regard to this
preference and prior to reduction by net operating losses).
Net Operating Loss Carryovers. A financial institution may, for federal
income tax purposes, carry back net operating losses ("NOLs") to the preceding
three taxable years and forward to the succeeding 15 taxable years. This
provision applies to losses incurred in taxable years beginning after
1986. At December 31, 1996, the Bank had no NOL carryforwards for federal
income tax purposes.
Capital Gains and Corporate Dividends-Received Deduction. Corporate net
capital gains are taxed at a maximum rate of 35%. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated
tax return, and corporations which own less than 20% of the stock of a
corporation distributing a dividend may deduct only 70% of dividends received
or accrued on their behalf. However, a corporation may deduct 100% of
dividends from a member of the same affiliated group of corporations.
Other Matters. Federal legislation is introduced from time to time that
would limit the ability of individuals to deduct interest paid on mortgage
loans. Individuals are currently not permitted to deduct interest on consumer
loans. Significant increases in tax rates or further restrictions on the
deductibility of mortgage interest could adversely affect the Bank.
The Bank's federal income tax returns for the tax years ended December
31, 1993 forward are open under the statute of limitations and are subject to
review by the IRS.
27
<PAGE>
State Taxation
The Bank will continue to be subject to Arkansas corporation income tax
which is 6.5% of all taxable earnings when income exceeds $100,000.
The Company is incorporated under Texas law and, accordingly, is subject
to Texas franchise tax in an amount equal to 4.5% of net income allocated to
Texas pursuant to apportionments of gross receipts based upon where the
Company conducts business.
28
<PAGE>
Item 2. Properties.
At December 31, 1996, the Bank conducted its business from its executive
office in Harrison, Arkansas, and nine full service offices, all of which are
located in Northcentral and Northwest Arkansas.
The following table sets forth the net book value (including leasehold
improvements and equipment) and certain other information with respect to the
offices and other properties of the Bank at December 31, 1996.
Leased Net Book Value
Description/Address /Owned of Property Amount of Deposits
- ---------------------------- ------ -------------- ------------------
(In Thousands)
200 West Stephenson Owned $403 $134,068
Harrison, AR 72601
128 West Stephenson Owned 157 (1)
Harrison, AR 72601
Corner Central & Willow Owned 282 (1)
Harrison, AR 72601
Ozark Mall - Hwy. 62-65 North Leased(2) 37 27,653
Harrison, AR 72601
324 Hwy. 62-65 Bypass Owned 316 33,410
Harrison, AR 72601
210 South Main Owned 304 26,209
Berryville, AR 72616
666 Highway 62 East Owned 673 141,507
Mountain Home, AR 72653
301 Highway 62 West Owned 131 17,602
Yellville, AR 72687
307 North Walton Blvd. Owned 285 21,146
Bentonville, AR 72712
3460 North College Owned 466 20,252
Fayetteville, AR 72703
1303 West Hudson Owned 246 174
Rogers, AR 72756
201 East Henri De Tonti Blvd. Owned 265 837
Tontitown, AR 72762
- --------------
(1) Such offices do not open deposit accounts.
(2) Such property is subject to a month-to-month lease.
29
<PAGE>
Item 3. Legal Proceedings.
Neither the Company nor the Bank is involved in any pending legal
proceedings other than nonmaterial legal proceedings occurring in the
ordinary course of business.
Item 4. Submission of Matters to Vote of Security Holders.
None.
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The information required herein, to the extent applicable, is
incorporated by reference from page 40 of the Company's 1996 Annual Report to
Stockholders ("1996 Annual Report").
Item 6. Selected Financial Data.
The information required herein is incorporated by reference from pages 3
and 4 of the 1996 Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of of Operations.
The information required herein is incorporated by reference from pages 6
to 16 of the 1996 Annual Report.
Item 8. Financial Statements and Supplementary Data.
The information required herein is incorporated by reference from page 5
and pages 17 to 38 of the 1996 Annual Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not Applicable.
PART III.
Item 10. Directors and Executive Officers of the Registrant.
The information required herein is incorporated by reference from pages 3
to 5 of the definitive proxy statement of the Company for the Annual Meeting
of Stockholders to be held on May 7, 1997 ("Definitive Proxy Statement").
Item 11. Executive Compensation.
The information required herein is incorporated by reference from pages 8
to 12 of the Definitive Proxy Statement.
30
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required herein is incorporated by reference from pages 6
and 7 of the Definitive Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required herein is incorporated by reference from page 11
of the Definitive Proxy Statement.
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents Filed as Part of this Report
(1) The following financial statements are incorporated by reference from
Item 8 hereof (see Exhibit 13):
Independent Auditors' Report
Consolidated Statements of Financial Condition at December 31,
1996 and 1995
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because of the absence of
conditions under which they are required or because the required information
is included in the financial statements and related notes thereto.
(3) The following exhibits are filed as part of this Form 10-K and this
list includes the Exhibit Index.
31
<PAGE>
Exhibit Index
Page
----
2.1 Plan of Conversion *
3.1 Articles of Incorporation of First Federal Bancshares
of Arkansas, Inc. *
3.2 Bylaws of First Federal Bancshares of Arkansas, Inc. *
4.0 Stock Certificate of First Federal Bancshares of Arkansas, Inc. **
10.5 Employment Agreement between the Company, the Bank
and Frank L. Coffman *
10.6 Employment Agreement between the Company, the Bank
and Larry J. Brandt *
10.7 Employment Agreement between the Company, the Bank
and Carolyn M. Thomason *
13.0 1996 Annual Report to Stockholders E-1
22.0 Subsidiaries of the Registrant - Reference is made to
"Item 1 Business - Subsidiaries" for the required information
- ------------------
(*) Incorporated herein by reference from the Company's Registration
Statement on Form S-1 (File No. 333-612) filed with the SEC.
(**) Incorporated herein by reference from the Company's Registration
Statement on Form 8-A filed with the SEC.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Larry J. Brandt
-------------------------------------
Larry J. Brandt
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Frank L. Coffman March 21, 1997
- -------------------------------
Frank L. Coffman
Chairman of the Board and Chief
Executive Officer
/s/ Larry J. Brandt March 21, 1997
- -------------------------------
Larry J. Brandt
President and Chief
Operating Officer
/s/ John P. Hammerschmidt March 21, 1997
- -------------------------------
John P. Hammerschmidt
Director
/s/ James D. Heuer March 21, 1997
- -------------------------------
James D. Heuer
Director
/s/ William F. Smith March 21, 1997
- -------------------------------
William F. Smith
Director
/s/ Tommy W. Richardson March 21, 1997
- -------------------------------
Tommy W. Richardson
Senior Vice President and Chief
Financial Officer
<PAGE>
FIRST FEDERAL
BANCSHARES
OF ARKANSAS, INC.
- -------------------------------------------------------------------------------
1 9 9 6 A N N U A L R E P O R T
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
President's Letter to Stockholders........................... 1
Corporate Profile............................................ 2
Selected Consolidated Financial and Other Data............... 3
Selected Quarterly Operating Results......................... 5
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 6
Report of Independent Certified Public Accountants........... 17
Financial Statements......................................... 18
Directors and Executive Officers............................. 39
Banking Locations............................................ 39
Stockholder Information...................................... 40
<PAGE>
FIRST FEDERAL
BANCSHARES
of Arkansas, Inc.
Dear Stockholder:
First Federal Bancshares had a great first year as a public company! As of
December 31, 1996, our stock had increased in price over 58% since our initial
public offering at $10.00 per share on May 3, 1996.
The repurchase of 5% or 257,688 of our outstanding shares was completed in
December, 1996. In addition, our Board of Directors also declared an initial
quarterly dividend of $.05 per share payable on March 17, 1997, to stockholders
of record on March 3, 1997. Both the stock repurchase and the quarterly cash
dividend further emphasizes the commitment of both the board and management in
maximizing our shareholders' value.
The FDIC insurance premium disparity and recapitalization of the Savings
Association Insurance Fund were finally resolved in September 1996. This
resulted in a one time assessment of approximately $2.6 million before taxes but
will lower our FDIC insurance premiums by approximately $625,000 before taxes in
1997. The Company would have earned $5.1 million, excluding the SAIF special
assessment, for the year ended December 31, 1996.
We continue to grow and expand our market share in booming Northwest
Arkansas. New offices were opened in Rogers and Tontitown in Northwest Arkansas
during 1996. Additionally, in April 1997, we will open our second office in
Fayetteville located on Crossover Road.
An advanced, computerized telephone banking system called VOICELINE 24 was
also implemented in 1996. With our CIRRUS affiliated ATM network and VOICELINE
24, our customers now have virtually worldwide access to their accounts 24 hours
every day. We also established an internet home page to market our services with
the location at www.ffbh.com.
Our vision is to be the "premier family bank in Arkansas". The board,
management and all the "First Team" members will achieve this vision by
constantly staying focused on our mission of "being the best provider of family
banking services in our market areas and maximizing our shareholders' value." We
appreciate your confidence expressed by investing in First Federal Bancshares of
Arkansas.
Sincerely,
/s/ Larry J. Brandt
Larry J. Brandt
President
1
<PAGE>
CORPORATE PROFILE
First Federal Bancshares of Arkansas, Inc. (the "Company") was incorporated
in January 1996 under Texas law for the purpose of acquiring all of the capital
stock issued by First Federal Bank of Arkansas, FA ("First Federal" or the
"Bank") in connection with its conversion from a federally chartered mutual
savings and loan association to a federally chartered stock savings and loan
association (the "Conversion"). The Conversion was consummated on May 3, 1996
and, as a result, the Company became a unitary savings and loan holding company
of the Bank. The Company has no significant assets other than the shares of the
Bank's common stock acquired in the Conversion, the Company's loan to the
Employee Stock Ownership Plan and the portion of the net Conversion proceeds
retained and invested by the Company. The Company has no significant
liabilities.
The Bank is a federally chartered stock savings and loan association which
was formed in 1934. First Federal conducts business from its main office and
nine full service branch offices, all of which are located in a six county area
in Northcentral and Northwest Arkansas comprised of Benton, Marion, Washington,
Carroll, Baxter and Boone counties. First Federal's deposits are insured by the
Savings Association Insurance Fund ("SAIF"), which is administered by the
Federal Deposit Insurance Corporation ("FDIC"), to the maximum extent permitted
by law. The Bank is a community oriented savings institution which has
traditionally offered a wide variety of savings products to its retail customers
while concentrating its lending activities on the origination of loans secured
by one- to four-family residential dwellings. To a significantly lesser extent,
the Bank's activities have also included origination of multi-family residential
loans, commercial real estate loans, construction loans, commercial loans and
consumer loans. In addition, the Bank maintains a significant portfolio of
investment securities.
At December 31, 1996, the Company had total assets of $505.7 million, total
deposits of $422.9 million and stockholders' equity of $80.8 million. The
Company's and the Bank's principal executive offices are located at 200 West
Stephenson, Harrison, Arkansas 72601, and their telephone number is
(501)741-7641.
2
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated financial and other data of the Company set forth
below and on the following page does not purport to be complete and should be
read in conjunction with, and is qualified in its entirety by, the more detailed
information, including the Consolidated Financial Statements and related Notes,
appearing elsewhere herein.
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets......................................... $ 505,739 $ 454,479 $ 428,312 $ 402,649 $ 391,897
Cash and cash equivalents............................ 6,819 8,845 8,280 22,491 13,961
Investment securities................................ 91,322 96,312 130,527 134,861 152,875
Loans receivable, net................................ 396,508 339,505 279,783 236,659 215,854
Deposits............................................. 422,858 417,229 395,483 374,908 369,368
Stockholders' equity................................. 80,758 35,308 31,242 26,451 21,078
Selected Operating Data:
Interest income...................................... $ 37,192 $ 32,964 $ 29,790 $ 29,944 $ 31,099
Interest expense..................................... 22,449 21,538 17,700 17,047 19,847
---------- ---------- ---------- ---------- ----------
Net interest income.................................. 14,743 11,426 12,090 12,897 11,252
Provision for loan losses............................ 60 133 54 511 393
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan
losses............................................. 14,683 11,293 12,036 12,386 10,859
Gain on sale of mortgage-backed and investment
securities......................................... -- 311 446 1,063 853
Noninterest income................................... 1,222 1,107 1,137 1,165 1,303
Noninterest expense(1)............................... 10,749 6,836 6,667 6,132 5,863
---------- ---------- ---------- ---------- ----------
Income before income taxes........................... 5,156 5,875 6,952 8,482 7,152
Provision for income taxes........................... 1,756 1,871 2,250 3,109 2,650
---------- ---------- ---------- ---------- ----------
Net income(1)........................................ $ 3,400 $ 4,004 $ 4,702 $ 5,373 $ 4,502
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) The year ended December 31, 1996 includes a nonrecurring SAIF special
assessment of approximately $2.6 million or approximately $1.7 million net
of the income tax benefit.
3
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Selected Operating Ratios(1):
Return on average assets(2)...................................... .69% .91% 1.12% 1.35% 1.16%
Return on average equity(2)...................................... 5.22 12.03 16.22 22.56 24.12
Average equity to average assets................................. 13.23 7.55 6.91 5.99 4.80
Interest rate spread(3).......................................... 2.48 2.37 2.74 3.14 2.84
Net interest margin(3)........................................... 3.08 2.66 2.96 3.33 2.98
Net interest income after provision for loan losses to
noninterest expense............................................ 136.60 165.20 180.53 201.99 185.21
Noninterest expense to average assets............................ 2.18 1.55 1.59 1.54 1.51
Average interest-earning assets to average interest-bearing
liabilities.................................................... 112.96 105.92 105.23 104.37 102.67
Operating efficiency(4).......................................... 67.33 53.22 48.76 40.54 43.73
Asset Quality Ratios(5):
Nonperforming loans to total loans(6)............................ 0.18 0.10 0.09 0.60 0.18
Nonperforming assets to total assets(6).......................... 0.17 0.13 0.12 0.48 0.40
Allowance for loan losses to non-performing loans................ 173.51 350.86 420.00 99.25 254.76
Allowance for loan losses to total loans......................... 0.30 0.35 0.40 0.59 0.45
Capital Ratios(5):
Tangible capital to adjusted total assets........................ 12.30 7.74 7.29 6.57 5.38
Core capital to adjusted total assets............................ 12.30 7.74 7.29 6.57 5.38
Risk-based capital to risk-weighted assets....................... 23.24 15.57 16.62 16.52 14.58
Other Data:
Full service offices at end of period............................ 10 8 8 8 8
</TABLE>
- ------------------------
(1) Ratios are based on average month end balances.
(2) The year ended December 31, 1996 includes a nonrecurring SAIF special
assessment of approximately $2.6 million or approximately $1.7 million net
of the income tax benefit. For the year ended December 31, 1996, return on
average assets, without the SAIF special assessment, would have been 1.04%
and return on average equity for the same period would have been 7.83%.
(3) Interest rate spread represents the difference between the weighted average
yield on average interest-earning assets and the weighted average cost of
average interest-bearing liabilities, and net interest margin represents net
interest income as a percent of average interest-earning assets.
(4) Noninterest expense to net interest income plus noninterest income.
(5) Asset quality ratios and capital ratios are end of period ratios.
(6) Nonperforming assets consist of nonperforming loans and real estate owned
("REO"). Nonperforming loans consist of non-accrual loans while REO consists
of real estate acquired in settlement of loans.
4
<PAGE>
SELECTED QUARTERLY OPERATING RESULTS
(IN THOUSANDS EXCEPT EARNINGS PER SHARE DATA)
<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
YEAR ENDED DECEMBER 31, 1996 QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income................................................. $ 9,655 $ 9,600 $ 9,232 $ 8,705
Interest expense................................................ 5,598 5,556 5,592 5,703
----------- ----------- ----------- -----------
Net interest income............................................. 4,057 4,044 3,640 3,002
Provision for loan losses....................................... 60 -- -- --
----------- ----------- ----------- -----------
Net interest income after provision for loan losses............. 3,997 4,044 3,640 3,002
Noninterest income.............................................. 314 307 311 290
Noninterest expense(1).......................................... 2,190 4,738 1,951 1,870
----------- ----------- ----------- -----------
Income (loss) before income taxes............................... 2,121 (387) 2,000 1,422
Provision (benefit) for income taxes............................ 711 (127) 692 480
----------- ----------- ----------- -----------
Net income (loss) (1)........................................... $ 1,410 $ (260) $ 1,308 $ 942
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings (loss) per share (2)................................... $ 0.30 $ (0.05) $ 0.28 NA
Selected Ratios (Annualized):
Net interest margin............................................. 3.29% 3.29% 3.03% 2.69%
Return on average assets........................................ 1.11 (0.21) 1.06 0.82
Return on average equity........................................ 6.79 (1.24) 8.75 10.54
</TABLE>
<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
YEAR ENDED DECEMBER 31, 1995 QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income................................................. $ 8,520 $ 8,406 $ 8,154 $ 7,884
Interest expense................................................ 5,703 5,596 5,377 4,862
----------- ----------- ----------- -----------
Net interest income............................................. 2,817 2,810 2,777 3,022
Provision for loan losses....................................... 125 -- 2 6
Net interest income after provision for loan losses............. 2,692 2,810 2,775 3,016
Noninterest income.............................................. 596 279 279 264
Noninterest expense............................................. 1,810 1,648 1,668 1,710
----------- ----------- ----------- -----------
Income before income taxes...................................... 1,478 1,441 1,386 1,570
Provision for income taxes...................................... 475 461 458 477
----------- ----------- ----------- -----------
Net income...................................................... $ 1,003 $ 980 $ 928 $ 1,093
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per share.............................................. NA NA NA NA
Selected Ratios (Annualized):
Net interest margin............................................. 2.57% 2.60% 2.61% 2.89%
Return on average assets........................................ 0.89 0.88 0.85 1.01
Return on average equity........................................ 11.53 11.61 11.31 13.32
</TABLE>
- ------------------------
(1) The third quarter of 1996 includes the nonrecurring SAIF special assessment
of approximately $2.6 million or approximately $1.7 million net of the
income tax benefit.
(2) Earnings (loss) per share of common stock has been computed on the basis of
the weighted-average number of shares of common stock outstanding in each
quarter. The second quarter of 1996 assumes the Company was a public company
at the beginning of that quarter.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of results of operations is intended to
assist in understanding the consolidated financial condition and results of
operations of the Company. The information contained in this section should be
read in conjunction with the Consolidated Financial Statements and the
accompanying Notes to Consolidated Financial Statements and the other sections
contained in this Annual Report.
The Company's results of operations depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets and interest expense on interest-bearing liabilities. The Company's
results of operations also are affected by the provision for loan losses, the
level of its noninterest income and expenses, and income tax expense.
ASSET AND LIABILITY MANAGEMENT
The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities, and is considered negative when the amount of
interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap within shorter maturities would adversely affect net interest
income, while a positive gap within shorter maturities would result in an
increase in net interest income, and during a period of falling interest rates,
a negative gap within shorter maturities would result in an increase in net
interest income while a positive gap within shorter maturities would have the
opposite effect. As of December 31, 1996, the Bank estimates that the ratio of
its one-year gap to total assets was a negative 16.6% and its ratio of
interest-earning assets to interest-bearing liabilities maturing or repricing
within one year was 62.8%.
In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on the Company's results of operations,
the Company's management has implemented and continues to monitor asset and
liability management policies to better match the maturities and repricing terms
of the Bank's interest-earning assets and interest-bearing liabilities. Such
policies have consisted primarily of: (i) emphasizing the origination of
adjustable-rate mortgage loans ("ARMs"); (ii) maintaining a significant
portfolio of relatively short-term (five years or less) investment securities;
and (iii) lengthening the maturity on deposits.
The Bank focuses its lending activities on the origination of one-, three-
and seven-year adjustable-rate residential mortgage loans. Although
adjustable-rate loans involve certain risks, including increased payments and
the potential for default in an increasing interest rate environment, such loans
decrease the risks associated with changes in interest rates. As a result of the
Bank's efforts, as of December 31, 1996, $205.9 million or 60.9% of the Bank's
portfolio of one- to four-family residential mortgage loans consisted of ARMs,
including $172.5 million in seven-year ARMs.
The Company's investment securities portfolio amounted to $91.3 million or
18.1% of the Company's total assets at December 31, 1996. Of such amount, $17.0
million or 18.6% is due within one year and $44.8 million or 49.1% is due after
one year through five years. However, actual maturities are normally shorter
than contractual maturities due to the ability of borrowers to call or prepay
such obligations with or without call or prepayment penalties.
6
<PAGE>
Deposits are the Bank's primary funding source and the Bank prices its
deposit accounts based upon competitive factors and the availability of prudent
lending and investment opportunities. The Bank seeks to lengthen the maturities
of its deposits by soliciting longer term certificates of deposit when market
conditions have created opportunities to attract such deposits. However, the
Bank does not solicit high-rate jumbo certificates of deposit and does not
pursue an aggressive growth strategy which would force the Bank to focus
exclusively on competitors' rates rather than deposit affordability.
NET PORTFOLIO VALUE
Management also presently monitors and evaluates the potential impact of
interest rate changes upon the market value of the Bank's portfolio equity and
the level of net interest income on a quarterly basis. The Office of Thrift
Supervision ("OTS") adopted a final rule in August 1993 incorporating an
interest rate risk component into the risk-based capital rules. Under the rule,
an institution with a greater than "normal" level of interest rate risk will be
subject to a deduction of its interest rate component from total capital for
purposes of calculating the risk-based capital requirement. An institution with
a greater than "normal" interest rate risk is defined as an institution that
would suffer a loss of net portfolio value ("NPV") exceeding 2% of the estimated
market value of its assets in the event of a 200 basis point increase or
decrease in interest rates. NPV is the difference between incoming and outgoing
discounted cash flows from assets, liabilities, and off-balance sheet contracts.
A resulting change in NPV of more than 2% of the estimated market value of an
institution's assets will require the institution to deduct from its capital 50%
of that excess change. The rule provides that the OTS will calculate the
interest rate risk component quarterly for each institution. In October 1994,
however, the Director of the OTS waived such deductions for all institutions
until the OTS publishes the process by which institutions may appeal the capital
deductions calculated by the OTS. The OTS has recently indicated that no
institution will be required to deduct capital for interest rate risk until
further notice. However, utilizing this measurement concept, at December 31,
1996, there would be a decrease in the Bank's NPV of approximately 3.10% of the
present value of its assets, assuming a 200 basis point increase in interest
rates.
The following table presents the Bank's NPV as of December 31, 1996, as
calculated by the OTS, based on information provided to the OTS by the Bank.
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE
- ------------------------------------------------------------------------------------------
ESTIMATED NPV AS A
CHANGE IN INTEREST PERCENTAGE OF
RATES (BASIS PRESENT VALUE AMOUNT PERCENT
POINTS) ESTIMATED NPV OF ASSETS OF CHANGE OF CHANGE
- ------------------ ----------------- ------------------ ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
+400 $ 38,775 8.43% $ (32,885) (46)%
+300 47,246 10.00 (24,415) (34)
+200 55,834 11.50 (15,826) (22)
+100 64,215 12.89 (7,446) (10)
-- 71,660 14.04 -- --
- -100 76,300 14.67 4,640 6
- -200 75,893 14.46 4,233 6
- -300 75,130 14.19 3,469 5
- -400 76,380 14.24 4,719 7
</TABLE>
7
<PAGE>
CHANGES IN FINANCIAL CONDITION
GENERAL. At December 31, 1996, the Company's assets amounted to $505.7
million as compared to $454.5 million at December 31, 1995. The $51.2 million
or 11.3% increase was primarily due to an increase of $57.0 million or 16.8%
in loans receivable, net, which was partially offset by a decrease in
investment securities held to maturity of $5.1 million or 5.3%. Such increase
in assets was due to the deployment of net proceeds of $45.8 million
resulting from the sale of 5,153,751 shares of the Company's common stock at
a price of $10.00 per share. As discussed in Note 1 of the Notes to
Consolidated Financial Statements, the Conversion was consummated on May 3,
1996. Liabilities increased $5.8 million or 1.4% to $425.0 million at
December 31, 1996 compared to $419.2 million at December 31, 1995.
Stockholders' equity amounted to $80.8 million or 16.0% of total assets at
December 31, 1996 compared to $35.3 million at December 31, 1995. The
increase in stockholders' equity during the twelve month period was primarily
due to net income of $3.4 million and the receipt of net conversion proceeds
of $45.8 million reduced by the repurchase of 257,688 shares of common stock,
as treasury stock, for $4.2 million.
LOANS RECEIVABLE. Net loans receivable increased by $57.0 million, or
16.8%, to $396.5 million at December 31, 1996 from $339.5 million at December
31, 1995. Loan originations for 1996 totaled $161.1 million. The net loans
receivable increase was composed of increases in single-family residential loans
of $50.5 million or 17.5%, construction loans, net of undisbursed funds, of $4.1
million or 55.8%, commercial loans of $334,000 or 8.3%, and consumer loans of
$2.9 million or 11.7%. Loans were originated using the Bank's normal
underwriting standards, rates, and terms.
Unearned loan fee income at December 31, 1996 amounted to $4.4 million, up
from $3.7 million at December 31, 1995. These unearned fees are recognized as an
adjustment to yield over the contractual lives of the related loans. Undisbursed
amounts of loans in process related to construction loans at December 31, 1996
was $8.7 million, compared to $4.3 million at December 31, 1995.
INVESTMENT SECURITIES. Investment securities available for sale and held to
maturity amounted to $91.3 million as of December 31, 1996 compared to $96.3
million as of December 31, 1995. In 1996, approximately $41.0 million of
short-term U.S. Government and agency obligations were purchased with funds
primarily received from the Conversion. Maturities and called securities
amounted to $46.0 million in 1996, which resulted in a decrease of $5.0 million
or 5.2% in investment securities at December 31, 1996 compared to December 31,
1995.
DEPOSITS. Deposits at December 31, 1996 amounted to $422.9 million, a
increase of $5.7 million from the December 31, 1995 balance of $417.2 million.
The growth was limited due to deposits at the Bank used to purchase the
Company's stock in May 1996. The Bank does not advertise for deposits outside of
its primary market area, Northcentral and Northwest Arkansas, or utilize the
services of deposit brokers. Also, the Bank continues to promote longer term
deposits, to the extent possible, in keeping with its asset and liability
management goals. In the latter part of 1996, the Bank introduced a new
inflation protected certificate of deposit, which reflects management's desire
to offer competitive investment products to the Bank's customers.
STOCKHOLDERS' EQUITY. Stockholders' equity increased $45.5 million to $80.8
million at December 31, 1996 from $35.3 million at December 31, 1995. The
increase was primarily the result of $45.8 million of net proceeds from the
issuance of the Company's common stock in the Conversion as discussed in Note 1
of the Notes to Consolidated Financial Statements and net income of $3.4
million, which was partially offset by the repurchase of 257,688 shares of the
Company's stock, as treasury stock, for $4.2 million.
8
<PAGE>
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the yields earned
and rates paid at December 31, 1996. 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 December
31, 1996. Average balances are based on month end balances during the periods.
<TABLE>
<CAPTION>
DECEMBER 31, YEAR ENDED DECEMBER 31,
------------ -----------------------------------------------------------------------
1996 1996 1995
-------------------------------------------------------------------------------------
YIELD/ AVERAGE AVERAGE
COST AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------------- ------------ ---------- --------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) 8.22% $ 369,185 $ 30,498 8.26% $306,175 $ 25,544 8.34%
Investment securities(2) 6.22 102,398 6,258 6.11 109,267 6,343 5.81
Mortgage-backed securities 8.83 264 22 8.33 9,378 778 8.30
Other interest-earning assets 5.21 6,335 414 6.54 4,069 299 7.35
--------- --------- ---------- ---------
Total interest-earning assets 7.84 478,182 37,192 7.78 428,889 32,964 7.69
--------- ---------
Noninterest-earning assets 13,821 12,326
--------- ----------
Total assets $ 492,003 $441,215
--------- ----------
--------- ----------
Interest-bearing liabilities:
Deposits 5.32 $ 420,062 22,409 5.33 $404,930 21,538 5.32
Other borrowings -- 3,264 40 1.23 -- -- --
--------- --------- ---------- ------
Total interest-bearing
liabilities 5.32 423,326 22,449 5.30 404,930 21,538 5.32
Noninterest-bearing liabilities 3,564 2,988
--------- ----------
Total liabilities 426,890 407,918
Stockholders' equity 65,113 33,297
--------- ----------
Total liabilities and
stockholders' equity $ 492,003 $441,215
--------- ----------
--------- ----------
-------- --------
Net interest income $ 14,743 $ 11,426
-------- --------
-------- --------
Net earning assets $ 54,856 $ 23,959
--------- ----------
--------- ----------
Interest rate spread 2.52% 2.48% 2.37%
----- ----- -----
----- ----- -----
Net interest margin 3.08% 2.66%
----- -----
----- -----
Ratio of interest-earning
assets to interest-bearing
liabilities 112.96% 105.92%
------- -------
------- -------
---------------------------------
1994
---------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
--------- ---------- ---------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) $ 257,261 $ 21,200 8.24%
Investment securities(2) 117,535 6,410 5.45
Mortgage-backed securities 19,843 1,624 8.18
Other interest-earning assets 13,392 556 4.15
Total interest-earning assets ---------- ---------
Noninterest-earning assets 408,031 29,790 7.30
---------
Total assets 11,275
---------
$ 419,306
---------
---------
Interest-bearing liabilities:
Deposits $ 387,756 17,700 4.56
Other borrowings -- -- --
--------- ------
Total interest-bearing
liabilities 387,756 17,700 4.56
Noninterest-bearing liabilities 2,567
----------
Total liabilities 390,323
Stockholders' equity 28,983
----------
Total liabilities and
stockholders' equity $ 419,306
----------
----------
--------
Net interest income $ 12,090
--------
--------
Net earning assets $ 20,275
----------
----------
Interest rate spread 2.74%
------
------
Net interest margin 2.96%
------
------
Ratio of interest-earning
assets to interest-bearing
liabilities 105.23%
------
------
</TABLE>
- ------------------------
(1) Includes non-accrual loans.
(2) Includes Federal Home Loan Bank of Dallas ("FHLB") stock and Federal Home
Loan Mortgage Corporation ("FHLMC") preferred stock at cost.
9
<PAGE>
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1996 VS. 1995 1995 VS. 1994
---------------------------------------------- ---------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
--------------------------------- ---------------------------------
TOTAL
RATE/ INCREASE RATE/
VOLUME RATE VOLUME (DECREASE) VOLUME RATE VOLUME
--------- --------- ----------- ----------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable............................ $ 5,257 $ (252) $ (51) $ 4,954 $ 4,031 $ 262 $ 51
Investment securities....................... (399) 335 (21) (85) (451) 413 (29)
Mortgage-backed securities.................. (756) 9 (9) (756) (856) 22 (12)
Other interest-earning assets............... 166 (33) (18) 115 (387) 428 (298)
--------- --------- ----- ----------- --------- --------- -----
Total interest-earning assets............. 4,268 59 (99) 4,228 2,337 1,125 (288)
--------- --------- ----- ----------- --------- --------- -----
Interest expense:
Deposits.................................... 805 63 3 871 784 2,925 129
Other borrowings............................ -- -- 40 40 -- -- --
--------- --------- ----- ----------- --------- --------- -----
Total interest-bearing liabilities....... 805 63 43 911 784 2,925 129
--------- --------- ----- ----------- --------- --------- -----
Net change in interest income............... $ 3,463 $ (4) $ (142) $ 3,317 $ 1,553 $ (1,800) $ (417)
--------- --------- ----- ----------- --------- --------- -----
--------- --------- ----- ----------- --------- --------- -----
<CAPTION>
<S> <C>
TOTAL
INCREASE
(DECREASE)
-----------
<S> <C>
Interest income:
Loans receivable............................ $ 4,344
Investment securities....................... (67)
Mortgage-backed securities.................. (846)
Other interest-earning assets............... (257)
-----------
Total interest-earning assets........... 3,174
-----------
Interest expense:
Deposits.................................... 3,838
Other borrowings............................ --
-----------
Total interest-bearing liabilities.......... 3,838
-----------
Net change in interest income............... $ (664)
-----------
-----------
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996
AND 1995.
GENERAL. Net income amounted to $3.4 million for 1996 compared to $4.0
million for 1995. The decrease in net income was due primarily to an increase in
noninterest expenses as a result of the SAIF special assessment, which was
partially offset by an increase in net interest income.
NET INTEREST INCOME. Net interest income is determined by the Company'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 Company's net interest income amounted to
$14.7 million in 1996, an increase of $3.3 million or 28.9% compared to $11.4
million for 1995. The Company's interest rate spread and net interest margin
increased to 2.48% and 3.08%, respectively, for 1996 compared to 2.37% and
2.66% for 1995. Such increases in the Bank's interest rate spread and net
interest margin were due to the increased investment in higher yielding loans
receivable, relative to investment securities, and an increase in the ratio
of interest-earning assets to interest-bearing liabilities to 112.96% for
1996 compared to 105.92% for 1995, which was partially offset by an increase
in interest expense due to deposit growth.
INTEREST INCOME. Interest income increased $4.2 million or 12.7% to
$37.2 million for 1996 compared to $33.0 million for 1995. The interest
income increase resulted from an increase of $5.0 million in interest income
on loans receivable which was partially offset by decreases of $756,000 and
$85,000 in interest income on mortgage-backed securities and investment
securities, respectively. The increase in interest income on loans receivable
was due to an increase of $63.0 million or 20.6% in the average balance of
loans receivable as a result of increased loan originations. The positive
impact of the increase on the average balance of loans receivable was
partially offset by
10
<PAGE>
a decrease in the average yield earned on such assets to 8.26% for 1996 from
8.34% in 1995. Such decrease in the average yield was due to originations of
loans at lower interest rates and refinancing of higher rate loans. Interest
income on investment securities declined primarily as a result of a decrease
in the average balance of such assets due to maturities and calls of such
investments that were invested in higher-yielding loans. The decline was
partially offset by an increase in the average yield earned on investment
securities from 5.81% in 1995 to 6.11% in 1996. Such increase was primarily
due to the investment of a portion of the net proceeds from the Conversion in
longer term higher-rate investment securities, a substantial portion of which
were subsequently called in the latter part of 1996 and scheduled maturities
of lower-yielding investment securities. The decrease in interest income on
mortgage-backed securities was substantially due to a decrease of $9.1
million in the average balance of such assets resulting from sales of
mortgage-backed securities and payments and prepayments of the mortgages
underlying such securities. The sales of such securities occurred in November
1995, with no sales of such securities in 1996.
INTEREST EXPENSE. Interest expense increased $911,000 or 4.2% to $22.4
million in 1996 compared to $21.5 million in 1995. The increase was due
almost solely to an increase of $15.1 million or 3.7% in the average balance
of deposits resulting from interest credited which was partially offset by a
deposit outflow primarily related to accountholders purchasing the Company's
common stock in the Conversion.
PROVISION FOR LOAN LOSSES. Provisions for loan losses amounted to
$60,000 and $133,000 for 1996 and 1995, respectively. Provisions for losses
include charges to reduce the recorded balance of mortgage loans to their
estimated fair value. Such provision and the adequacy of the allowance for
loan losses is evaluated periodically 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.
The decrease in the provision for loan losses in 1996 compared to 1995 was
due to management's evaluation of the adequacy of the allowance for loan
losses.
NONINTEREST INCOME. Noninterest income decreased $196,000 or 13.8% to
$1.2 million in 1996 compared to $1.4 million in 1995 due primarily to a
$311,000 decrease in gain on sales of mortgage-backed and investment
securities. Such decrease was the result of no sales activity in 1996.
Deposit fee income amounted to $764,000 and $716,000 for 1996 and 1995,
respectively or a 6.7% increase.
NONINTEREST EXPENSE. Noninterest expenses increased $3.9 million or
57.2% to $10.7 million in 1996 compared to $6.8 million in 1995. The increase
was primarily due to a nonrecurring SAIF special assessment of $2.6 million,
a $870,000 increase in salaries and employee benefits, a $117,000 increase in
data processing and additional costs associated with being a public company.
The increase in salaries and employee benefits was due to normal merit
increases as well as increases in personnel and additional post retirement
costs including the employee stock ownership plan ("ESOP") adopted in
connection with the Conversion. Generally accepted accounting principles
require recognition of compensation expense for shares released from the ESOP
at the fair market value of the shares at the time they are committed to be
released. Such costs amounted to $402,000 in 1996. The increase in data
processing costs was the result of charges tied to the number of accounts
reflecting the growth of the Bank.
INCOME TAXES. Income taxes amounted to $1.8 million and $1.9 million
for 1996 and 1995, respectively, resulting in effective tax rates of 34.1%
and 31.8%, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995
AND 1994.
GENERAL. The Bank's net income amounted to $4.0 million for the year
ended December 31, 1995 compared to $4.7 million for the year ended December
31, 1994. The decrease of $698,000 or 14.8% was primarily due to decreases in
net interest income and noninterest income as well as an increase in
noninterest expenses.
11
<PAGE>
NET INTEREST INCOME. The Bank's net interest income amounted to $11.4
million for the year ended December 31, 1995, a decrease of $664,000 or 5.5%
compared to $12.1 million for the same period in 1994. The decrease was due
to an increase of $3.8 million or 21.7% in interest expense which was
partially offset by an increase of $3.2 million or 10.7% in interest income.
The Bank's interest rate spread and net interest margin decreased to 2.37%
and 2.66%, respectively, for the year ended December 31, 1995 from 2.74% and
2.96%, respectively, for the 1994 period. The ratio of interest-earning
assets to interest-bearing liabilities was 105.92% and 105.23% for the years
ended December 31, 1995 and 1994, respectively.
INTEREST INCOME. The increase in interest income during the year ended
December 31, 1995 compared to December 31, 1994 was primarily due to an
increase of $4.3 million or 20.5% in interest income on loans receivable.
Such increase was due to an increase in the average balance of such assets of
$48.9 million or 19.0% as a result of increased loan demand. In addition, to
a significantly lesser extent, the increase in interest income on loans
receivable was due to an increase in the average yield earned on such assets
of 10 basis points. Such increase in interest income on loans receivable was
partially offset by a decrease in interest income on mortgage-backed
securities of $846,000 or 52.1% due to a decrease in the average balance of
such assets. During the year ended December 31, 1995, the Bank used liquidity
from operations, including cash flow from mortgage-backed securities,
primarily to fund loan originations.
INTEREST EXPENSE. Interest expense, consisting solely of interest paid
on deposits, increased by $3.8 million or 21.7% during the year ended
December 31, 1995 compared to 1994 due primarily to an increase in the
average rate paid on deposits. The average rate paid on deposits increased 76
basis points to 5.32% for the year ended December 31, 1995 compared to 4.56%
for the year ended December 31, 1994. The increase in the average rate
reflects both an increase in general market rates of interest in 1995 and the
payment of higher rates on longer-term deposits by the Bank as part of its
asset and liability management. The increase in deposit interest expense was
also due to an increase in the average balance of deposits reflecting deposit
inflows and marketing of the Bank's deposit products.
PROVISION FOR LOAN LOSSES. Provisions for loan losses amounted to
$133,000 and $54,000 for 1995 and 1994, respectively. Provisions for losses
include charges to reduce the recorded balance of mortgage loans to their
estimated fair value. Such provision and the adequacy of the allowance for
loan losses is evaluated periodically 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 borrowers ability to repay, the
estimated value of any underlying collateral and current economic conditions.
The increase in the provision for loan losses in 1995 compared to 1994 was
primarily due to the slight increase in nonperforming assets and management's
desire to increase the allowance for loan losses in light of the increase in
the Bank's loan portfolio.
NONINTEREST INCOME. Noninterest income decreased $165,000 or 10.4% to
$1.4 million for the year ended December 31, 1995 compared to $1.6 million
for the year ended December 31, 1994. Such decrease was due primarily to a
decrease of $135,000 in gain on sales of mortgage-backed and investment
securities as a result of decreased sales activity in 1995.
NONINTEREST EXPENSES. Noninterest expenses increased $169,000 or 2.5%
between the 1995 and 1994 periods primarily due to an increase in salaries
and employee benefits. The increase in salaries and employee benefits of
$361,000 or 11.7%, due primarily to normal merit increases, as well as an
increase in personnel, was partially offset by a decrease of $91,000 in the
provision for real estate losses. The increase in personnel was due to
increased staffing requirements as a result of the growth of the Bank.
INCOME TAXES. Income taxes amounted to $1.9 million and $2.3 million,
respectively, for the years ended December 31, 1995 and 1994, resulting in
effective tax rates of 31.8% and 32.4%, respectively.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Bank's
primary sources of funds are deposits, amortization, prepayments and
maturities of outstanding loans, maturities and sales 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 may
borrow from the FHLB of Dallas but has not generally utilized this source of
funds.
All savings institutions are required to maintain an average daily
balance of liquid assets equal to a certain percentage of the sum of its
average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. The liquidity requirement may vary from time to
time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At the present time, the required minimum
liquid asset ratio is 5%. At December 31, 1996, the Bank's liquidity ratio
was 12.3%.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, the Bank maintains a
strategy of investing in various lending products. The Bank uses its sources
of funds primarily to meet its ongoing commitments, to pay maturing savings
certificates and savings withdrawals and fund loan commitments. At December
31, 1996, the total approved mortgage loan origination commitments
outstanding, excluding the undisbursed portion of construction loans,
amounted to $2.8 million. At the same date, the undisbursed portion of
construction loans approximated $8.7 million. The Bank's unused lines of
credit at December 31, 1996 were approximately $2.3 million. Certificates of
deposit scheduled to mature in one year or less at December 31, 1996 totaled
$197.4 million. Investment securities scheduled to mature in one year or less
at December 31, 1996 totaled $17.0 million. Management believes that a
significant portion of maturing deposits will remain with the Bank.
As of December 31, 1996, the Bank's regulatory capital was well in
excess of all applicable regulatory requirements. At December 31, 1996, the
Bank's tangible, core and risk-based capital ratios amounted to 12.30%,
12.30% and 23.24%, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," affecting the accounting
for investments in debt and equity securities, which are to be classified
into one of three categories. Securities which management has the positive
intent and ability to hold until maturity are to be classified as held to
maturity and reported at amortized cost. Securities that are bought and held
principally for the purpose of selling them in the near term are to be
classified as trading securities and reported at fair value, with unrealized
gains and losses included in earnings. All other securities are to be
classified as available for sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of equity until realized. The Bank adopted SFAS No. 115 as of
January 1, 1994. As a result of its adoption of SFAS No. 115, the Company
included in equity at December 31, 1996 and 1995 an unrealized gain net of
taxes of $202,000 and $151,000, respectively, on securities available for
sale. See also Note 1 of the Notes to Consolidated Financial Statements.
13
<PAGE>
In May 1993, the FASB also issued SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan." In October 1994, the FASB issued SFAS No. 118
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures," which amended income recognition methods and certain
disclosures required by SFAS No. 114. The Bank implemented SFAS No. 114, as
amended, on January 1, 1995. The statement establishes accounting
measurement, recognition and reporting standards for impaired loans. SFAS No.
114 provides that a loan is impaired when, based on current information and
events, it is probable that the creditor will be unable to collect all
amounts due according to the contractual terms of the loan agreement (both
principal and interest). SFAS No. 114 requires that when a loan is impaired,
impairment should be measured based on the present value of the expected cash
flows, discounted at the loan's effective interest rate. If the loan is
collateral dependent, as a practical expedient, impairment can be based on a
loan's observable market price or the fair value of the collateral. The value
of the loan is adjusted through a valuation allowance created through a
charge against income. Residential mortgages and consumer installment
obligations are excluded. Loans that were treated as in-substance
foreclosures under previous accounting pronouncements are considered to be
impaired loans and remain in the loan portfolio under SFAS No. 114. The
adoption of SFAS No. 114, as amended, has not had a material effect on the
Company's operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," establishing financial accounting and reporting
standards for stock-based employee compensation plans. This Statement
encourages all entities to adopt a new method of accounting to measure
compensation cost of all employee stock compensation plans based on the
estimated fair value of the award at the date it is granted. Companies are,
however, allowed to continue to measure compensation cost for those plans
using the intrinsic value based method of accounting, which generally does
not result in compensation expense recognition for most plans. Companies that
elect to remain with the existing accounting are required to disclose, in a
footnote to the financial statements, pro forma net income and, if presented,
earnings per share, as if this statement had been adopted. The accounting
requirements of this statement are effective for transactions entered into in
fiscal years that begin after December 15, 1995; however, companies are
required to disclose information for awards granted in their first fiscal
year beginning after December 15, 1994. The Company will submit to its
stockholders at the 1997 annual meeting the Company's 1997 stock option plan
(the "Plan"). Assuming the Plan is approved by the stockholders the Company
intends to use the intrinsic value based method of accounting. Accordingly,
the Company does not believe that this statement will have a material impact
on its financial condition or results of operations.
In November 1993, the AICPA issued SOP 93-6, Employers' Accounting for
Employee Stock Ownership Plans, which is effective for fiscal years beginning
after December 15, 1993. SOP 93-6 applied to the Company for its year
beginning January 1, 1996. SOP 93-6 requires the application of its guidance
for shares acquired by ESOPs after December 31, 1992 but not yet committed to
be released as of the beginning of the year SOP 93-6 is adopted. SOP 93-6
changes, among other things, the measure of compensation expense recorded by
employers for leveraged ESOPs from the cost of ESOP shares to the fair value
of ESOP shares. Under SOP 93-6, the Company recognizes compensation cost
equal to the fair value of the ESOP shares during the periods in which they
become committed to be released. To the extent that fair value of the
Company's ESOP shares differ from the cost of such shares, this differential
is charged or credited to equity. Employers with internally leveraged ESOPs
such as the Company does not report the loan receivable from the ESOP as an
asset and does not report the ESOP debt from the employer as a liability. The
application of SOP 93-6 has not had a material impact on the Company's
financial condition.
In October 1994, the FASB issued SFAS No. 119, "Disclosures about
Derivative Financial Instruments and Fair Value of Financial Instruments."
SFAS No. 119 applies to financial statements issued for fiscal years ending
after December 15, 1994. SFAS No. 119 requires entities that hold or issue
derivative financial instruments for trading purposes to disclose related
average fair value and net trading gains or losses. For entities that hold or
issue derivative financial instruments for purposes other than trading, it
requires disclosure about those purposes and about
14
<PAGE>
how the instruments are reported in financial statements. For entities that
hold or issue derivative financial instruments and account for them as hedges
of anticipated transactions, it requires disclosure about the anticipated
transactions, the classes of derivative financial instruments used to hedge
those transactions, the amounts of hedging gains and losses deferred, and the
transactions or other events that result in recognition of the deferred gains
or losses in earnings. SFAS No. 119 also encourages the disclosure of
quantitative information about market risks of derivative financial
instruments, and also of other assets and liabilities, that is consistent
with the way the entity manages or adjusts risks and that is useful for
comparing the results of applying the entity's strategies to its objectives
for holding or issuing the derivative financial instruments. Although
authorized by the Company's investment policy, the Company does not hold any
derivative financial instruments under SFAS No. 119 and does not anticipate
that the implementation of SFAS No. 119 will have a material impact on its
results of operations or financial position.
In March 1995, the FASB issued SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. The statement does not apply to
financial instruments, long-term customer relationships of a financial
institution (core deposits), mortgage and other servicing rights and deferred
tax assets. SFAS No. 121 requires the review of long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances include, for example, a significant decrease in market value of
an asset, a significant change in use of an asset, an adverse change in a
legal factor that could effect the value of an asset. If such an event occurs
and it is determined that the carrying value of the asset may not be
recoverable, an impairment loss should be recognized as measured by the
amount by which the carrying amount of the asset exceeds the fair value of
the asset. Fair value can be determined by a current transaction, quoted
market prices or present value of estimated expected future cash flows
discounted at the appropriate rate. The statement is effective for fiscal
years beginning after December 15, 1995. The Company does not anticipate
implementation of SFAS No. 121 will have a material impact on its results of
operations or financial position.
In December 1994, the AICPA issued SOP 94-6, "Disclosure of Certain
Significant Risks and Uncertainties" which requires entities to disclose
specified information, including a description of certain risks and
uncertainties. SOP 94-6 requires four new disclosures related to: (1) the
nature of an entities operations, (2) a statement about the use of estimates
in the financial statements, (3) uncertainties concerning estimates that
affect financial statement amounts if it is reasonably possible that the
estimates that will change within a year and that change could be material to
the financial statements, and (4) risks related to concentrations in volume
of business, sources of supply, revenue or market or geographic area if those
concentrations expose the entity to risk of a disruption in operations within
a year. The first two disclosures will always be necessary whereas the
disclosure about certain significant estimates and vulnerability from
concentrations apply if criteria specified in SOP 94-6 are met. SOP 94-6 is
effective for fiscal years ending after December 15, 1995.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights, an amendment of FASB Statement No. 65," which requires that
a mortgage banking enterprise record as a separate asset rights to service
mortgage loans for others, however those servicing rights are acquired. In
circumstances where mortgage loans are originated, separate asset rights to
service mortgage loans are only recorded when the enterprise intends to sell
such loans. This statement will be applied prospectively for fiscal years
beginning after December 15, 1995. Adoption of SFAS No. 122 is not expected
to have a material impact on the Company's financial position or results of
operations.
15
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein
have been prepared in accordance with generally accepted accounting
principles, 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.
16
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
First Federal Bancshares of Arkansas, Inc.:
We have audited the consolidated statements of financial condition of
First Federal Bancshares of Arkansas, Inc. and its subsidiary (the "Company")
as of December 31, 1996 and 1995, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of First Federal Bancshares of
Arkansas, Inc. and its subsidiary at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
February 15, 1997
17
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (IN THOUSANDS)
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................. $ 6,819 $ 8,845
Investment securities:
Available for sale, at fair value (amortized cost of $12 at December
31, 1996 and 1995).................................................. 340 258
Held to maturity, at amortized cost (fair value at December 31, 1996
and 1995, of $90,497 and $96,118, respectively)..................... 90,982 96,054
Federal Home Loan Bank stock.......................................... 3,026 2,821
Loans receivable, net of allowance at December 31, 1996 and 1995, of
$1,251 and $1,228, respectively..................................... 396,508 339,505
Accrued interest receivable........................................... 3,620 3,477
Real estate acquired in settlement of loans, net...................... 154 234
Office properties and equipment, net.................................. 3,565 2,993
Prepaid expenses and other assets..................................... 725 292
---------- ----------
TOTAL ASSETS.......................................................... $ 505,739 $ 454,479
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits............................................................. $ 422,858 $ 417,229
Advance payments by borrowers for taxes and insurance................ 806 746
Other liabilities.................................................... 1,317 1,196
---------- ----------
Total liabilities.................................................. 424,981 419,171
---------- ----------
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, 4,896,063 shares outstanding.............. 52 --
Additional paid-in capital........................................... 49,975 --
Unearned ESOP shares................................................. (3,848) --
Unrealized gain on investment securities available for sale, net of
tax of $126 in 1996 and $95 in 1995................................ 202 151
Retained earnings--substantially restricted.......................... 38,557 35,157
---------- ----------
84,938 35,308
Treasury stock, at cost, 257,688 shares............................... (4,180) --
---------- ----------
Total stockholders' equity......................................... 80,758 35,308
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................ $ 505,739 $ 454,479
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable................................................................ $ 30,498 $ 25,544 $ 21,200
Investment securities........................................................... 6,258 6,343 6,410
Mortgage-backed securities...................................................... 22 778 1,624
Other........................................................................... 414 299 556
--------- --------- ---------
Total interest income......................................................... 37,192 32,964 29,790
INTEREST EXPENSE:
Deposits........................................................................ 22,409 21,538 17,700
Other Borrowings................................................................ 40 -- --
--------- --------- ---------
Total interest expense........................................................ 22,449 21,538 17,700
--------- --------- ---------
NET INTEREST INCOME.............................................................. 14,743 11,426 12,090
PROVISION FOR LOAN LOSSES........................................................ 60 133 54
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.............................. 14,683 11,293 12,036
--------- --------- ---------
NONINTEREST INCOME:
Gain on sales of investment securities, primarily mortgage-backed............... -- 311 446
Deposit fee income.............................................................. 764 716 741
Other........................................................................... 458 391 396
--------- --------- ---------
Total noninterest income...................................................... 1,222 1,418 1,583
--------- --------- ---------
NONINTEREST EXPENSES:
Salaries and employee benefits.................................................. 4,325 3,455 3,094
Net occupancy expense........................................................... 672 612 649
Federal insurance premiums...................................................... 902 910 867
SAIF Special Assessment......................................................... 2,611 -- --
Provision for real estate losses................................................ 38 25 116
Data processing................................................................. 745 628 672
Postage and supplies............................................................ 309 261 235
Other........................................................................... 1,147 945 1,034
--------- --------- ---------
Total noninterest expenses.................................................... 10,749 6,836 6,667
--------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES......................................... 5,156 5,875 6,952
PROVISION FOR INCOME TAXES....................................................... 1,756 1,871 2,250
--------- --------- ---------
NET INCOME....................................................................... $ 3,400 $ 4,004 $ 4,702
--------- --------- ---------
--------- --------- ---------
EARNINGS PER SHARE............................................................... 0.72 $ N/A N/A
---------
---------
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
ISSUED UNEARNED SECURITIES
COMMON STOCK ADDITIONAL ESOP AVAILABLE FOR RETAINED
--------------------------- PAID-IN SHARES SALE, NET EARNINGS
-------------- ----------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 $ 26,451
Effect of adoption of SFAS 115....... $ 821 --
Net income........................... -- 4,702
Net change in unrealized gain
on securities available for sale.... (732) --
----------- ---------
BALANCE, DECEMBER 31, 1994............ 89 31,153
Net income........................... -- 4,004
Net change in unrealized gain on
securities available for sale....... 62 --
BALANCE, DECEMBER 31, 1995............ 151 35,157
Net income............................ 3,400
Issuance of common stock.............. 5,153,751 $ 52 $ 49,848 -- --
Loan to Employee Stock
Ownership Plan ("ESOP").............. -- -- $ (4,123) -- --
Repayment of ESOP loan and related
increase in share value.............. -- 127 275 -- --
Net change in unrealized gain
on securities available for sale..... -- -- -- 51 --
Purchase of treasury stock, at cost... -- -- -- -- --
-------------- --- --------- ----------- ----- --------
BALANCE, DECEMBER 31, 1996............. 5,153,751 $ 52 $ 49,975 $ (3,848) $202 $38,557
-------------- --- --------- ----------- ----- --------
-------------- --- --------- ----------- ----- ---------
<CAPTION>
TREASURY STOCK TOTAL
-------------------- STOCKHOLDERS'
SHARES AMOUNT EQUITY
--------- --------- ------------
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1994 $ 26,451
Effect of adoption of SFAS 115....... 821
Net income........................... 4,702
Net change in unrealized gain
on securities available for sale.... (732)
----------
BALANCE, DECEMBER 31, 1994............ 31,242
Net income........................... 4,004
Net change in unrealized gain on
securities available for sale....... 62
BALANCE, DECEMBER 31, 1995............ 35,308
Net income............................ 3,400
Issuance of common stock.............. 49,900
Loan to Employee Stock
Ownership Plan ("ESOP").............. (4,123)
Repayment of ESOP loan and related
increase in share value.............. 402
Net change in unrealized gain
on securities available for sale..... 51
Purchase of treasury stock, at cost... 257,688 $ (4,180) (4,180)
--------- --------- ------------
BALANCE, DECEMBER 31, 1996............. 257,688 $ (4,180) $ 80,758
--------- --------- ------------
--------- --------- ------------
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income....................................................................... $ 3,400 $ 4,004 $ 4,702
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses....................................................... 60 133 54
Provision for real estate losses................................................ 38 25 116
Deferred tax provision.......................................................... 111 153 109
Gain on sale of investment securities........................................... -- (311) (446)
Gain on sale of real estate owned............................................... (10) (11) (45)
Depreciation.................................................................... 403 391 427
Accretion of deferred loan fees................................................. (640) (470) (466)
Repayment of ESOP loan and related increase in share value...................... 402 -- --
Changes in operating assets and liabilities:
Accrued interest receivable.................................................... (143) 17 (610)
Prepaid expenses and other assets.............................................. (433) 29 (122)
Other liabilities.............................................................. (21) 157 196
--------- --------- ---------
Net cash provided by operating activities......................................... 3,167 4,117 3,915
--------- --------- ---------
INVESTING ACTIVITIES:
Purchases of investment securities--held to maturity.............................. (41,172) (24,395) (48,617)
Purchases of loans................................................................ -- (3,235) (720)
Proceeds from sales of investment securities -available for sale.................. -- 10,253 19,454
Proceeds from maturities of investment securities -held to maturity............... 46,040 48,594 33,791
Loan originations, net of repayments.............................................. (56,518) (56,265) (42,078)
Proceeds from sales of real estate owned.......................................... 146 117 260
Purchases of office properties and equipment...................................... (975) (373) (892)
--------- --------- ---------
Net cash used by investing activities............................................. (52,479) (25,304) (38,802)
--------- --------- ---------
FINANCING ACTIVITIES:
Net increase in deposits.......................................................... 5,629 21,746 20,575
Net increase in advance payments by borrowers for taxes and insurance............. 60 6 101
Increase from issuance of common stock, net of related expenses................... 45,777 -- --
Purchase of treasury stock........................................................ (4,180) -- --
--------- --------- ---------
Net cash provided by financing activities......................................... 47,286 21,752 20,676
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............................. (2,026) 565 (14,211)
CASH AND CASH EQUIVALENTS:
Beginning of year................................................................. 8,845 8,280 22,491
--------- --------- ---------
End of year....................................................................... $ 6,819 $ 8,845 $ 8,280
--------- --------- ---------
--------- --------- ---------
</TABLE>
(Continued)
21
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest......................................................................... $ 22,451 $ 21,417 $ 17,540
--------- --------- ---------
Income taxes..................................................................... $ 1,899 $ 1,916 $ 2,180
--------- --------- ---------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Real estate acquired in settlement of loans...................................... $ 95 $ 128 $ 98
--------- --------- ---------
Loans to facilitate sales of real estate owned................................... $ 110 $ 108
--------- --------- ---------
Transfers of investment securities to available for sale portfolio............... $ 9,946
---------
Increase (decrease) in unrealized gains, net..................................... $ 51 $ 62 $ (732)
--------- --------- ---------
</TABLE>
(Concluded)
See notes to consolidated financial statements.
22
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation--First Federal
Bancshares of Arkansas, Inc. (the "Company") was incorporated in January 1996
by First Federal Bank of Arkansas, FA (the "Bank") in connection with the
conversion of the Bank from a federally chartered mutual savings and loan
association to a federally chartered stock savings and loan association, the
issuance of the Bank's common stock to the Company, and the offer and sale of
the Company's common stock by the Company (the "Conversion"). Upon
consummation of the Conversion on May 3, 1996, the Company became a unitary
holding company for the Bank. Approximately 50% of the net proceeds from the
Conversion were used to acquire 100% of the common stock of the Bank. The
remaining net proceeds from the Conversion were retained by the Company. The
conversion was accounted for at historical cost in a manner similar to that
in pooling of interests accounting.
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 whose activities are limited to owning an interest in and
servicing a commercial loan. All material intercompany transactions have been
eliminated in consolidation. The financial statements as of December 31,
1995, and for the years ended December 31, 1994 and 1995, are those of the
Bank prior to the Conversion. Results of operations and cash flows of the
Bank for the period from January 1, 1996 to May 3, 1996, are included in the
consolidated financial statements of the Company for the year ended December
31, 1996.
Basis of Presentation--The consolidated financial statements of the
Company have been prepared in conformity with generally accepted accounting
principles ("GAAP").
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates
and such differences could be significant.
Liquidity Requirement--Regulations require the Bank to maintain an amount
equal to 5% of deposits (net of loans on deposits) plus short-term borrowings
in cash and U.S. Government and other approved securities.
Cash and Cash Equivalents--For purposes of reporting cash flows, cash
includes cash on hand and amounts due from depository institutions, which
includes interest-bearing amounts available upon demand.
Investment Securities--The Company classifies investment securities into
one of two categories: held to maturity or available for sale. Debt
securities that the Company has the positive intent and ability to hold to
maturity are classified as held to maturity and recorded at cost, adjusted
for the amortization of premiums and the accretion of discounts.
23
<PAGE>
Investment securities that the Company intends to hold for indefinite
periods of time are classified as available for sale and are recorded at fair
value. Unrealized holding gains and losses are excluded from earnings and
reported net of tax as a separate component of equity until realized.
Investment securities in the available for sale portfolio may be used as part
of the Company's asset and liability management practices and may be sold in
response to changes in interest rate risk, prepayment risk or other economic
factors.
Premiums are amortized into interest income using the interest method to
the earlier of maturity or call date. Discounts are accreted into interest
income using the interest method over the period to maturity. The specific
identification method of accounting is used to compute gains or losses on the
sales of investment securities.
The overall return or yield earned on mortgage-backed securities depends
on the amount of interest collected over the life of the security and the
amortization of any premium or accretion of any discount. Premiums and
discounts are recognized in income using a method that approximates the
level-yield method over the assets' remaining lives adjusted for anticipated
prepayments. Although the Company receives the full amount of principal if
prepaid, the interest income that would have been collected during the
remaining period to maturity, net of any discount accretion or premium
amortization is lost. Accordingly, the actual yields and maturities of
mortgage-backed securities depend on when the underlying mortgage principal
and interest are prepaid. Prepayments generally result when market interest
rates fall below a mortgage's contractual interest rate and it is to the
borrower's advantage to prepay the existing loan and obtain new, lower rate
financing. In addition to changes in interest rates, mortgage prepayments
depend on other factors such as loan types and geographic location of the
related properties.
If the fair value of an investment security declines for reasons other
than temporary market conditions, the carrying value of such a security is
written down to fair value by a charge to operations.
Loans Receivable--Loans receivable are stated at unpaid principal
balances less the allowance for loan losses and net of deferred loan fees or
costs and discounts. Deferred loan fees or costs and discounts on first
mortgage loans are amortized or accreted to income using the level-yield
method over the remaining period to contractual maturity.
The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
114, Accounting by Creditors for Impairment of a Loan and SFAS No. 118,
Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures, an amendment of SFAS No. 114, effective January 1, 1995. These
statements address the accounting by creditors for impairment of certain
loans. They apply to all creditors and to all loans, uncollateralized as well
as collateralized, except for large groups of smaller-balance homogeneous
loans that are collectively evaluated for impairment, loans measured at fair
value or at lower of cost or fair value, leases, and debt securities. The
Bank considers all one- to four- family residential mortgage loans,
construction loans, and all consumer and other loans (as presented in Note 3)
to be smaller homogeneous loans. These statements apply to all loans that are
restructured involving a modification of terms. Loans within the scope of
these statements are considered impaired when, based on current information
and events, it is probable that all principal and interest will not be
collected in accordance with the contractual terms of the loans. Management
determines the impairment of loans based on knowledge of the borrower's
ability to repay the loan according to the contractual agreement and the
borrower's repayment history. Management does not consider an insignificant
delay or insignificant shortfall to impair a loan and has determined that a
delay less than 90 days will be considered an insignificant delay and that an
amount less than $25 thousand will be considered an insignificant shortfall.
The Bank does not apply SFAS No. 114 using major risk classifications, but
applies SFAS No. 114 on a
24
<PAGE>
loan by loan basis. All nonaccrual loans on which the accrual of interest has
been discontinued are considered to be impaired. Impaired loans are
considered to be nonaccrual loans only if they are 90 days or more past due.
All loans are charged off when management determines that principal and
interest are not collectible. Impaired loans during the years ended December
31, 1996 and 1995, were insignificant.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due or when the loan becomes 90 days past due, whichever occurs first.
When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments in excess of principal due are received, until such time that in
management's opinion, the borrower will be able to meet payments as they
become due.
Any excess of the Bank's recorded investment in the loans (unpaid
principal balance, adjusted for unamortized premium or discount and net of
deferred loan origination fees or costs) over the measured value of the loans
in accordance with SFAS No. 114 are provided for in the allowance for loan
losses. The Bank reviews its loans for impairment on a quarterly basis.
Allowance for Loan Losses--The allowance for loan losses is a valuation
allowance available for losses incurred on loans. All losses are charged to
the allowance when the loss actually occurs or when a determination is made
that a loss is likely to occur. Recoveries are credited to the allowance at
the time of recovery.
Throughout the year management estimates the likely level of losses to
determine whether the allowance for loan losses is adequate to absorb losses
in the existing portfolio. Based on these estimates, an amount is charged to
the provision for loan losses and credited to the allowance for loan losses
in order to adjust the allowance to a level determined to be adequate to
absorb anticipated losses. The allowance for loan losses is increased by
charges to income (provisions) and decreased by charge-offs, net of
recoveries. Management's periodic evaluation of the adequacy of the allowance
is based on the Company'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.
Estimates of loan losses involve an exercise of judgment. While it is
reasonably possible that in the near term the Company may sustain losses
which are substantial in relation to the allowance for loan losses, it is the
judgment of management that the allowance for loan losses reflected in the
consolidated statements of financial condition is adequate to absorb
estimated losses that may exist in the current portfolio.
Real Estate--Real estate acquired in settlement of loans is initially
recorded at estimated fair value less estimated costs to sell and is
subsequently carried at the lower of depreciated cost or fair value less
estimated disposal costs. Valuations are periodically performed by
management, and an allowance for losses is established by a charge to
operations or the balance is written off if the carrying value of a property
exceeds its estimated fair value. Costs relating to the development and
improvement of the property are capitalized, whereas those relating to
holding the property are expensed.
Office Properties and Equipment--Office properties and equipment are
stated at cost less accumulated depreciation and amortization. The Company
computes depreciation of office properties and equipment using the
straight-line method over the estimated useful lives of the individual assets
which range from 3 to 30 years.
25
<PAGE>
Loan Origination Fees--Loan origination fees and certain direct loan
origination costs are deferred and the net fee or cost is recognized as an
adjustment to interest income using the level-yield method over the
contractual life of the loans. When a loan is fully repaid or sold, the
amount of unamortized fee or cost is recorded in income.
Income Taxes--The Company recognizes deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities.
Interest Rate Risk--The Bank's asset base is exposed to risk including
the risk resulting from changes in interest rates and changes in the timing
of cash flows. The Bank monitors the effect of such risks by considering the
mismatch of the maturities of its assets and liabilities in the current
interest rate environment and the sensitivity of assets and liabilities to
changes in interest rates. The Bank's management has considered the effect of
significant increases and decreases in interest rates and believes such
changes, if they occurred, would be manageable and would not affect the
ability of the Bank to hold its assets as planned. However, the Bank is
exposed to significant market risk in the event of significant and prolonged
interest rate changes.
Recently Issued Accounting Standards--In June 1996 the Financial
Accounting Standards Board ("FASB") issued SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extingquishments of
Liabilities, as amended by SFAS No. 127. This statement provides accounting
and reporting standards for transfer and servicing of financial assets and
extinguishment of liabilities. The statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996, as amended. Management believes that implementation
of this pronouncement should have no material adverse effect on the Company's
financial position or results of operations.
Earnings per Share--Earnings per share of common stock has been computed
on the basis of the weighted-average number of shares of common stock
outstanding, assuming the Company was a public company since January 1, 1996.
Reclassifications--Certain amounts in the 1995 and 1994 consolidated
financial statements have been reclassified to conform to the classifications
adopted for reporting in 1996.
2. INVESTMENT SECURITIES
Investment securities consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,1996
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE FOR SALE COST GAINS LOSSES VALUE
- ------------------------------------ ------------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
FHLMC preferred stock $12 $328 $ -- $340
------- -------- ----- -----
Total $12 $328 $ -- $340
------- -------- ----- -----
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
HELD TO MATURITY COST GAINS LOSSES VALUE
- ------------------------------------ ------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
U.S. Government and Agency
obligations $90,755 $227 $719 $90,263
Mortgage-backed securities
--FHLMC 227 7 -- 234
----------- ----- ----- ---------
Total $90,982 $234 $719 $90,497
----------- ----- ----- ---------
----------- ----- ----- ---------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE FOR SALE COST GAINS LOSSES VALUE
- ------------------------------------ ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
FHLMC preferred stock $12 $246 $ -- $258
----- ------ ------- -----
Total $12 $246 $ -- $258
----- ------ ------- -----
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
HELD TO MATURITY COST GAINS LOSSES VALUE
- ------------------------------------ ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
U.S. Government and Agency
obligations $95,731 $633 $581 $95,783
Mortgage-backed securities--FHLMC 323 12 -- 335
---------- ----- ----- ---------
Total $96,054 $645 $581 $96,118
---------- ----- ----- ---------
---------- ----- ----- ---------
</TABLE>
The Company had pledged investment securities held to maturity with carrying
values of approximately $13 million and $8 million at December 31, 1996 and
1995, respectively, as collateral for certain deposits in excess of $100
thousand.
Gross realized gains on sales of available for sale securities were
approximately $311 thousand in 1995 and $446 thousand in 1994. There were no
significant gross losses.
The scheduled maturities of debt securities at December 31, 1996, by
contractual maturity are shown below (in thousands). Expected maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------- ---------
<S> <C> <C>
Due in one year or less................................................ $17,017 $16,957
Due from one year to five years........................................ 44,775 44,515
Due from five years to ten years....................................... 25,963 25,843
Due after ten years.................................................... 3,000 2,948
Mortgage-backed securities............................................. 227 234
----------- ---------
Total.................................................................. $ 90,982 $ 90,497
----------- ---------
----------- ---------
</TABLE>
Upon adoption of SFAS 115 on January 1, 1994, the Bank classified
approximately $20 million of investment securities as available for sale and
recorded an unrealized holding gain, net of tax, of $821 thousand as an
addition to equity.
In November 1995, the FASB issued a Special Report, A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities (the "Guide"). The Guide provides that an enterprise
may, concurrent with initial adoption of the Guide but no later than December
31, 1995, reassess the appropriateness of the classification of all
securities held at that time and account for any resulting reclassification
at fair value in accordance with SFAS 115, paragraph 15. Reclassifications
from held to maturity resulting from this one-time reassessment do not call
into question the intent of an enterprise to hold other debt securities to
maturity in the future. The Bank adopted the implementation guidance on
November 15, 1995, and reclassified mortgage-backed securities with a
carrying value of $9.9 million and a fair value of $10.2 million at that date
from held to maturity to available for sale. On November 15, 1995, such
mortgage-backed securities were sold with a gain of $311 thousand. Related
income taxes due on gain were approximately $104 thousand.
27
<PAGE>
Management's intent and ability to hold investment and mortgage-backed
securities classified as held to maturity will have a significant effect on
the Company. Since management expresses a positive intent to hold such
securities to maturity and they believe the Company has the ability to do so,
the securities are classified as held to maturity and are carried in the
statements of financial condition at amortized cost. In the absence of such
positive intent or ability, the securities would be classified as available
for sale and carried at estimated fair value. The Company may transfer or
sell a security classified as held to maturity if it is near maturity or call
date (within three months) if exercise of the call is probable or if
substantially all of the principal has been collected (at least 85%) and
under certain other circumstances including the deterioration of the issuer's
creditworthiness, a change in tax law, statutory requirements, or other
regulatory requirements. If the Company sells or transfers securities from
the held to maturity portfolio not meeting one of the above exceptions, the
entire held to maturity portfolio would most likely be reclassified as
available for sale, resulting in unrealized holding gains and losses being
reported net of tax as a separate component of stockholders' equity.
3. LOANS RECEIVABLE
Loans receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER DECEMBER
31, 31,
1996 1995
---------- ----------
<S> <C> <C>
First mortgage loans:
One- to four- family residences...................................... $ 338,349 $ 287,872
Other properties..................................................... 20,691 20,783
Construction......................................................... 20,053 11,603
Less:
Unearned discounts................................................... (1,253) (1,420)
Undisbursed loan funds............................................... (8,670) (4,298)
Deferred loan fees, net.............................................. (3,232) (2,423)
---------- ----------
Total first mortgage loans......................................... 365,938 312,117
---------- ----------
Consumer and other loans:
Commercial loans...................................................... 4,348 4,014
Automobile............................................................ 7,556 6,993
Consumer loans........................................................ 4,077 4,336
Home equity and second mortgage....................................... 12,549 10,466
Savings loans......................................................... 1,526 1,174
Other................................................................. 1,641 1,511
Add--Deferred loan costs.............................................. 124 122
---------- ----------
Total consumer and other loans................................... 31,821 28,616
---------- ----------
Allowance for loan losses............................................. (1,251) (1,228)
---------- ----------
Loans receivable, net.............................................. $ 396,508 $ 339,505
---------- ----------
---------- ----------
</TABLE>
The Company originates and maintains loans receivable which are
substantially concentrated in its lending territory (primarily Northwest and
Northcentral Arkansas). The majority of the Company's loans are residential
mortgage loans and construction loans for residential property. The Company's
policy calls for collateral or other forms of repayment assurance to be
received from the borrower at the time of loan origination. Such collateral
or other form of repayment assurance is subject to changes in economic value
due to various factors beyond the control of the Company.
In the normal course of business, the Company has made loans to its
directors, officers, and their related business interests. In the opinion of
management, related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than
the normal risk of collectibility. The aggregate dollar amount of loans
outstanding to directors, officers and their related business interests
totaled approximately $2.3 million and $1.9 million at December 31, 1996 and
1995, respectively.
28
<PAGE>
4. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances
of these loans are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------- -------------
<S> <C> <C> <C>
Mortgage loans underlying FHLMC pass-through securities....... $ 440 $ 519 $ 702
Mortgage loan portfolios serviced for other investors......... 1,335 1,477 2,465
-------- ------- -------
Total.................................................... $1,775 $1,996 $3,167
-------- ------- -------
-------- ------- -------
</TABLE>
Servicing loans for others generally consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payments to investors and
foreclosure processing. Loan servicing income is recorded on the accrual
basis and includes servicing fees from investors and certain charges
collected from borrowers, such as late payment fees.
5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
Loans............................................................ $ 2,348 $ 2,046
Investment securities............................................ 1,272 1,431
------ ------
Total........................................................ $ 3,620 $ 3,477
------ ------
------ ------
</TABLE>
6. ALLOWANCES FOR LOAN AND REAL ESTATE LOSSES
A summary of the activity in the allowances for loan and real estate
losses is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------- ---------------------- -------------------------
REAL REAL REAL
LOANS ESTATE LOANS ESTATE LOANS ESTATE
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year.............. $ 1,228 $ -- $ 1,134 $ -- $ 1,447 $ --
Provisions for estimated losses......... 60 38 133 25 54 116
Recoveries.............................. 3 -- 1 -- 1 --
Losses charged off...................... (40) (38) (40) (25) (368) (116)
--------- ------ --------- ------ --------- ------
Balance, end of year.................... $ 1,251 $ -- $ 1,228 $ -- $ 1,134 $ --
--------- ------ --------- ------ --------- ------
--------- ------ --------- ------ --------- ------
</TABLE>
7. FEDERAL HOME LOAN BANK STOCK
THE BANK IS A MEMBER OF THE FEDERAL HOME LOAN BANK SYSTEM. As a member of
this system, it is required to maintain an investment in capital stock of the
Federal Home Loan Bank in an amount equal to the greater of 1% of its
outstanding home loans or .3% of its total assets. No ready market exists for
such stock and it has no quoted market value.
29
<PAGE>
8. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
Land............................................................. $ 902 $ 672
Buildings and improvements....................................... 2,797 2,526
Furniture and equipment.......................................... 2,796 2,457
Automobiles...................................................... 374 301
------ ------
Total............................................................ 6,869 5,956
Accumulated depreciation......................................... (3,304) (2,963)
------ ------
Office properties and equipment, net............................. $ 3,565 $ 2,993
------ ------
------ ------
</TABLE>
9. DEPOSITS
Deposits are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Demand and NOW accounts, including noninterest-bearing deposits
of $9,290 and $8,210 in 1996 and 1995,respectively............. $ 45,698 $ 42,332
Money market..................................................... 17,214 19,920
Regular savings.................................................. 26,451 27,480
Certificates of deposit.......................................... 333,495 327,497
------------ ------------
Total............................................................ $ 422,858 $ 417,229
------------ ------------
------------ ------------
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a
minimum denomination of $100 thousand was approximately $29 million and $23
million at December 31, 1996 and 1995, respectively.
At December 31, 1996, scheduled maturities of certificates of deposit are
as follows (in thousands):
<TABLE>
<CAPTION>
TOTAL
----------
<S> <C>
Years ending December 31:
1997 $ 197,406
1998 49,443
1999 26,676
2000 15,193
2001 10,966
Thereafter 33,811
-----------
Total $ 333,495
</TABLE>
30
<PAGE>
Interest expense on deposits consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
NOW and Money Market............................................................. $ 1,324 $ 1,359 $ 1,543
Regular savings and certificate accounts......................................... 21,178 20,395 16,256
Early withdrawal penalties....................................................... (93) (216) (99)
--------- --------- ---------
Total........................................................................ $ 22,409 $ 21,538 $ 17,700
--------- --------- ---------
--------- --------- ---------
</TABLE>
At December 31, 1996 and 1995, the Bank had pledged investment securities
of approximately $13 million and $8 million, respectively, as collateral for
certain deposits in excess of $100 thousand.
Eligible deposits of the Bank are insured up to $100 thousand 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 the law to attain and thereafter maintain a reserve ratio of
1.25% of insured deposits.
Legislation, passed by the U.S. House of Representatives and the Senate,
was signed into law by the President on September 30, 1996, to recapitalize
the SAIF. As a result of such legislation, the Bank was required to pay a
one-time special assessment of $2.6 million which had an approximate $1.7
million after-tax effect. The legislation also mandated that the deposit
insurance premiums charged SAIF-insured institutions (such as the Bank)
decline to approximately 6.5 basis points effective January 1, 1997. The
mandated decline in the premium rate is expected to reduce the Bank's annual
SAIF premiums by approximately $625 thousand (based on current deposit
levels) which would result in an approximate $400 thousand after-tax effect.
10. INCOME TAXES
The provisions for income taxes are summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Income tax provision:
Current............................................................................. $ 1,645 $ 1,718 $ 2,141
Deferred............................................................................ 111 153 109
--------- --------- ---------
Total............................................................................ $ 1,756 $ 1,871 $ 2,250
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Taxes at statutory rate.............................. $1,753 34.0% $1,997 34.0% $2,364 34.0%
Increase (decrease) resulting from:
State income tax..................................... -- -- -- -- 14 0.2%
Other, net........................................... 3 0.1% (126) (2.2)% (128) (1.8)%
----- ----- ----- ------ ------- -------
Total................................................ $1,756 34.1% $1,871 31.8% 2,250 $ 32.4%
----- ----- ----- ------ ------- --------
----- ----- ----- ------ ------- --------
</TABLE>
31
<PAGE>
During the year ended December 31, 1996, new legislation was enacted
which provides for the recapture into taxable income of certain amounts
previously deducted as additions to the bad debt reserves for income tax
purposes. The Bank will begin changing its method of determining bad debt
reserves for tax purposes following the year ended December 31, 1995. The
amounts to be recaptured for income tax reporting purposes are considered by
the Bank in the determination of the net deferred tax liability at December
31, 1996.
Payment of dividends to shareholders out of retained earnings deemed to
have been made out of earnings previously set aside as bad debt reserves may
create taxable income to the Bank. No provision has been made for income tax
on such a distribution as the Bank does not anticipate making such
distributions.
The Company's deferred tax asset (liability) account was comprised of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
Deferred tax assets--loan fees deferred.......................... $ 211 $ 283
Deferred tax liabilities:
Office properties................................................ (141) (131)
Federal Home Loan Bank stock..................................... (407) (356)
Investment securities available for sale......................... (126) (95)
Loan loss reserves............................................... (11) (32)
----- -----
Total deferred tax liabilities................................... (685) (614)
----- -----
Net deferred tax liability....................................... $(474) $(331)
----- -----
----- -----
</TABLE>
SFAS No. 109, Accounting for Income Taxes, provides for the recognition
of a deferred tax asset or liability for the future tax consequences of
differences in carrying amounts and tax bases of assets and liabilities.
Specifically exempted from this provision are bad debt reserves for tax
purposes of U.S. savings and loans in the institution's base year, as
defined. Base year reserves totaled approximately $4.2 million at December
31, 1996 and 1995. Consequently, a deferred tax liability of approximately
$1.6 million related to such reserves was not provided for in the
consolidated statements of financial condition at December 31, 1996 and 1995.
11. RETIREMENT PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN
The Bank is a participant in a trusted multi-employer retirement plan and
therefore separate information is not available. The plan is noncontributory
and covers substantially all employees. The plan provides a retirement
benefit and a death benefit. Retirement benefits are payable in monthly
installments for life and must begin not later than the first day of the
month coincident with or next following the seventieth birthday or the
participant may elect a lump-sum distribution. Death benefits are paid in a
lump-sum distribution, the amount of which depends on years of service. For
the years ended December 31, 1996 and 1995, there was a net pension cost of
approximately $100 thousand and $43 thousand, respectively. No pension cost
was incurred for the year ended December 31, 1994.
The Company established an Employee Stock Ownership Plan ("ESOP") on May
3, 1996. During 1996, the ESOP borrowed $4.1 million from the Company to
purchase shares of Company stock. The loan is collateralized by the shares
that were purchased with the proceeds of the loan. As the loan is repaid,
ESOP shares will be allocated to participants of the ESOP and are available
for release to the participants subject to the vesting provisions of the ESOP.
During the year ended December 31, 1996, ESOP expense was approximately
$402 thousand.
32
<PAGE>
12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and standby letters of credit. Those instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the
consolidated statements of financial condition. The Company does not use
financial instruments with off-balance sheet risk as part of its
asset/liability management program or for trading purposes. The Company's
exposure to credit loss in the event of nonperformance by the other party to
the financial instrument for commitments to extend credit and standby letters
of credit is represented by the contractual amounts of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Company upon extension of credit, is based on management's credit
evaluation of the counterparty. Such collateral consists primarily of
residential properties. Standby letters of credit are conditional commitments
issued by the Company to guarantee the performance of a customer to a third
party. The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loan facilities to customers.
The Company had the following outstanding commitments at December 31,
1996 (in thousands):
<TABLE>
<S> <C>
Undisbursed construction loans..................................... $ 8,670
Commitments to originate mortgage loans............................ 2,760
Letters of credit.................................................. 53
Unused lines of credit............................................. 2,297
---------
Total.............................................................. $13,780
---------
---------
</TABLE>
The funding period for construction loans is generally less than nine
months and commitments to originate mortgage loans are generally outstanding
for 60 days or less. At December 31, 1996, interest rates on commitments
ranged from 5.5% to 10.25%.
33
<PAGE>
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Company
using available market information and appropriate valuation methodologies.
However, considerable judgment is required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated
fair value amounts. The estimated fair values of financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents............................................. $ 6,819 $ 6,819 $ 8,845 $ 8,845
Investment securities:
Available for sale.................................................... 340 340 258 258
Held to maturity...................................................... 90,982 90,497 96,054 96,118
Federal Home Loan Bank stock.......................................... 3,026 3,026 2,821 2,821
Loans receivable, net................................................. 396,508 399,175 339,505 343,369
Accrued interest receivable........................................... 3,620 3,620 3,477 3,477
LIABILITIES:
Deposits:
Demand, NOW, money market and regular savings......................... 89,363 89,363 89,732 89,732
Certificates of deposit............................................... 333,495 336,303 327,497 331,262
Accrued interest payable.............................................. 434 434 436 436
Advance payments by borrowers for taxes and insurance 806............. 806 806 746 746
Commitments........................................................... -- -- -- --
</TABLE>
For cash and cash equivalents, Federal Home Loan Bank stock and accrued
interest receivable, the carrying value is a reasonable estimate of fair
value. The fair value of investment securities is based on quoted market
prices, dealer quotes and prices obtained from independent pricing services.
The fair value of loans receivable is estimated based on present values using
applicable risk-adjusted spreads to the U.S. Treasury curve to approximate
current entry-value interest rates considering anticipated prepayment speeds,
maturity and credit risks.
The fair value of demand deposit accounts, NOW accounts, savings accounts
and money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining
maturities at the reporting date. For advance payments by borrowers for taxes
and insurance and accrued interest payable the carrying value is a reasonable
estimate of fair value. Commitments are generally made at prevailing interest
rates at the time of funding and, therefore, there is no difference between
the contract amount and fair value. The fair value estimates presented herein
are based on pertinent information available to management as of December 31,
1996 and 1995. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements
since the reporting date and, therefore, current estimates of fair value may
differ significantly from the amounts presented herein.
34
<PAGE>
14. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company is a
defendant in certain claims and legal actions arising in the ordinary course
of business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have a
material adverse effect on the consolidated financial position of the Company.
15. RETAINED EARNINGS--SUBSTANTIALLY RESTRICTED
Upon conversion, the Company established a special liquidation account
for the benefit of eligible account holders and the supplemental eligible
account holders in an amount equal to the net worth of the Bank as of the
date of its latest statement of financial condition contained in the final
offering circular used in connection with the conversion. The liquidation
account will be maintained for the benefit of eligible account holders and
supplemental eligible account holders who continue to maintain their accounts
in the Bank after conversion. In the event of a complete liquidation (and
only in such event), each eligible and supplemental eligible account holder
will be entitled to receive a liquidation distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying
balances for accounts then held.
The Company may not declare or pay cash dividends on its shares of common
stock if the effect thereof would cause the Company's stockholders' equity to
be reduced below applicable regulatory capital maintenance requirements for
insured institutions or below the special liquidation account referred to
above.
16. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision ("OTS"). Failure to meet
minimum capital requirements can initiate certain mandatory--and possible
additional discretionary--actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth
in the table below) of tangible capital and core (Tier I) capital (as defined
in the regulations) to adjusted total assets (as defined), and of total
risk-based capital (as defined) to risk-weighted assets (as defined).
Prior to December 31, 1996, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be well capitalized the Bank must maintain
minimum core (Tier I) leverage, core (Tier I) risk-based, and total
risk-based ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
Bank's category.
35
<PAGE>
The Bank's actual capital amounts (in thousands) and ratios are also
presented in the table:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- --------- ----- --------- ---------
As of December 31, 1996:
Tangible Capital to Adjusted Total Assets.......... $ 60,932 12.30% $ 7,429 1.50% N/A N/A
Core (Tier I) Capital to Adjusted Total Assets..... 60,932 12.30% 14,858 3.00% $ 24,764 5.00%
Total Risk-Based Capital to Risk-Weighted Assets... 61,923 23.24% 21,315 8.00% 26,643 10.00%
Core (Tier I) Capital to Risk-Weighted Assets...... 60,932 22.87% N/A N/ A 15,986 6.00%
As of December 31, 1995:
Tangible Capital to Adjusted Total Assets.......... $ 35,157 7.74% $ 6,814 1.50% N/A N/A
Core (Tier I) Capital to Adjusted Total Assets..... 35,157 7.74% 13,627 3.00% $ 22,712 5.00%
Total Risk-Based Capital to Risk-Weighted Assets... 36,130 15.57% 18,569 8.00% 23,212 10.00%
Core (Tier I) Capital to Risk-Weighted Assets...... 35,157 15.15% N/A N/ A 13,927 6.00%
</TABLE>
17. PARENT COMPANY ONLY FINANCIAL INFORMATION
The following condensed statement of financial condition, as of December
31, 1996, and condensed statement of income and of cash flows for the period
from May 3, 1996 (date of conversion) to December 31, 1996, for First Federal
Bancshares of Arkansas, Inc. should be read in conjunction with the
consolidated financial statements and the notes herein.
36
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF FINANCIAL CONDITION (IN THOUSANDS)
DECEMBER 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents.......................................... $ 49
Investment securities, held to maturity............................ 9,987
Loan to bank subsidiary............................................ 9,268
Accrued interest receivable........................................ 210
Investment in bank subsidiary...................................... 61,134
Other assets....................................................... 178
---------
TOTAL ASSETS....................................................... $80,826
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities............................. $ 68
Stockholders' equity............................................... 80,758
---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................... $80,826
---------
---------
</TABLE>
CONDENSED STATEMENT OF INCOME (IN THOUSANDS)
FOR THE PERIOD FROM MAY 3, 1996 TO DECEMBER 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
INCOME:
Interest income--investment securities.............................. $ 537
Interest income--loan to bank subsidiary............................ 401
---------
Total income........................................................ 938
EXPENSES:
Management fees..................................................... 44
Other operating expenses............................................ 64
---------
Total expenses...................................................... 108
---------
INCOME BEFORE INCOME TAX EXPENSE AND EQUITY IN UNDISTRIBUTED
EARNINGS OF BANK SUBSIDIARY....................................... 830
INCOME TAX EXPENSE.................................................. 316
---------
INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF BANK SUBSIDARY.... 514
EQUITY OF UNDISTRIBUTED EARNINGS OF BANK SUBSIDIARY................. 2,886
---------
NET INCOME.......................................................... $ 3,400
---------
---------
</TABLE>
37
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENT OF CASH FLOWS (IN THOUSANDS)
FOR THE PERIOD FROM MAY 3, 1996 TO DECEMBER 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net income......................................................... $ 3,400
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of bank subsidiary.............. (2,886)
Repayment of ESOP loan and related increase in share value......... 402
Changes in operating assets and liabilities:
Accrued interest receivable........................................ (210)
Other assets....................................................... (178)
Accrued expenses and other liabilities............................. 68
---------
Net cash provided by operating activities.......................... 596
INVESTING ACTIVITIES:
Purchase of bank subsidiary stock.................................. (22,889)
Loan to bank subsidiary, net of repayments......................... (9,268)
Purchases of investment securities--held to maturity............... (14,987)
Proceeds from maturities of investment securities--held to
maturity......................................................... 5,000
---------
Net cash used by investing activities.............................. (42,144)
FINANCING ACTIVITIES:
Increase from issuance of common stock, net of related expenses.... 45,777
Purchase of treasury stock......................................... (4,180)
---------
Net cash provided by financing activities.......................... 41,597
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS.......................... 49
CASH AND CASH EQUIVALENTS:
Beginning of period................................................ 0
---------
End of period...................................................... $ 49
---------
---------
</TABLE>
* * * * * *
38
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
FIRST FEDERAL BANK OF ARKANSAS, FA
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<TABLE>
<S> <C>
DIRECTORS EXECUTIVE OFFICERS
Frank L. Coffman, Jr. Frank L. Coffman, Jr.
Chairman of the Board and Chairman of the Board and
Chief Executive Officer Chief Executive Officer
Larry J. Brandt Larry J. Brandt
President and Chief Operating President and Chief Operating
Officer Officer
John P. Hammerschmidt Carolyn M. Thomason
U. S. Congressman, Retired Executive Vice President and Secretary
James D. Heuer Tommy W. Richardson
Farming and Investments Senior Vice President and Chief Financial Officer
William F. Smith Sherri R. Billings
Retired Pharmacist and Investments Senior Vice President and Treasurer
</TABLE>
BANKING LOCATIONS
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MAIN OFFICE
200 West Stephenson
Harrison, Arkansas 72601
BRANCH OFFICES
128 West Stephenson 301 Highway 62 West
Harrison, Arkansas 72601 Yellville, Arkansas 72687
Corner Central & Willow 307 North Walton Blvd.
Harrison, Arkansas 72601 Bentonville, Arkansas 72712
Ozark Mall--Hwy. 62-65 North 3460 North College
Harrison, Arkansas 72601 Fayetteville, Arkansas 72703
324 Highway 62-65 Bypass 1303 West Hudson
Harrison, Arkansas 72601 Rogers, Arkansas 72756
210 South Main 201 East Henri De Tonti Blvd.
Berryville, Arkansas 72616 Tontitown, Arkansas 72762
666 Highway 62 East
Mountain Home, Arkansas 72653
39
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STOCKHOLDER INFORMATION
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First Federal Bancshares of Arkansas, Inc. is a unitary savings and loan
holding company conducting business through its wholly-owned subsidiary,
First Federal Bank of Arkansas, FA. The Bank is a federally-chartered,
SAIF-insured savings institution operating through its main office and nine
full service branch offices. The Company's and the Bank's principal executive
office is located at 200 West Stephenson, Harrison, Arkansas 72601.
TRANSFER AGENT/REGISTRAR:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
Phone: (800) 368-5948
STOCKHOLDER REQUESTS:
Request for annual reports, quarterly reports and related stockholder
literature should be directed to Investor Relations, First Federal Bancshares
of Arkansas, Inc., P. O. Box 550, Harrison, Arkansas 72602.
Stockholders needing assistance with stock records, transfers or lost
certificates, should contact the Company's transfer agent, Registrar and
Transfer Company.
COMMON STOCK INFORMATION:
Shares of the Company's common stock are traded under the symbol "FFBH"
on the Nasdaq National Market System. At March 11, 1997, the Company had
4,896,063 shares of common stock outstanding and had approximately 1,597
stockholders of record. Such holdings do not reflect the number of beneficial
owners of common stock.
The following table sets forth the reported high and low sale prices of a
share of the Company's common stock as reported by Nasdaq (the common stock
commenced trading on the Nasdaq National Market System on May 3, 1996). No
cash dividends were paid on the common stock during the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
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<S> <C> <C>
Quarter ended
June 30, 1996 $14.00 $12.88
Quarter ended
September 30, 1996 15.38 12.75
Quarter ended
December 31, 1996 16.50 14.75
</TABLE>
40
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<PAGE>
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<NAME> FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
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