<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-28312
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
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(Exact name of registrant as specified in its charter)
Texas 71-0785261
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 West Stephenson
Harrison, Arkansas 72601
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(Address of principal executive office) (Zip Code)
(870) 741-7641
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of November 6, 1997,
there were issued and outstanding 4,896,063 shares of the Registrant's Common
Stock, par value $.01 per share.
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
TABLE OF CONTENTS
PAGE
----
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition (As of
September 30, 1997 (unaudited) and December 31, 1996) 1
Consolidated Statements of Operations for the three
and nine months ended September 30, 1997 (unaudited)
and 1996 (unaudited) 2
Consolidated Statement of Stockholders' Equity for
the nine months ended September 30, 1997 (unaudited) 3
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 (unaudited) and 1996
(unaudited) 4
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996
- ------------------------------------------------------------------------------------ ------------- ------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents........................................................... $ 15,307 $ 6,819
Investment securities:
Available for sale, at fair value................................................. -- 340
Held to maturity, at amortized cost............................................... 94,560 90,982
Federal Home Loan Bank stock........................................................ 3,549 3,026
Loans receivable, net............................................................... 424,114 396,508
Accrued interest receivable......................................................... 3,957 3,620
Real estate acquired in settlement of loans, net.................................... 194 154
Office properties and equipment, net................................................ 5,137 3,565
Prepaid expenses and other assets................................................... 301 725
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TOTAL ASSETS.................................................................. $ 547,119 $ 505,739
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits............................................................................ $ 451,034 $ 422,858
Federal Home Loan Bank advances..................................................... 10,000 --
Advance payments by borrowers for taxes and insurance............................... 794 806
Other liabilities................................................................... 3,823 1,317
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Total Liabilities............................................................. 465,651 424,981
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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 52
Additional paid-in capital.......................................................... 50,180 49,975
Common stock acquired by or committed to be acquired by employee stock benefit
plans............................................................................. (6,499) (3,848)
Unrealized gain on investment securities available for sale, net of income taxes.... -- 202
Retained earnings-substantially restricted.......................................... 41,915 38,557
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85,648 84,938
Treasury stock, at cost, 257,688 shares............................................. (4,180) (4,180)
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Total stockholders' equity.................................................... 81,468 80,758
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................................... $ 547,119 $ 505,739
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</TABLE>
See notes to unaudited consolidated financial statements.
1
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable..................................................... $ 8,458 $ 7,784 $ 25,089 $ 22,456
Investment securities................................................ 1,565 1,729 4,553 4,685
Mortgage-backed securities........................................... 4 5 14 17
Other................................................................ 199 82 333 378
--------- --------- --------- ---------
Total interest income................................................ 10,226 9,600 29,989 27,536
--------- --------- --------- ---------
INTEREST EXPENSE:
Deposits............................................................. 6,009 5,556 17,322 16,815
Other borrowings..................................................... 144 -- 235 35
--------- --------- --------- ---------
Total interest expense........................................... 6,153 5,556 17,557 16,850
--------- --------- --------- ---------
NET INTEREST INCOME.................................................... 4,073 4,044 12,432 10,686
PROVISION FOR LOAN LOSSES.............................................. -- -- -- --
--------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.................... 4,073 4,044 12,432 10,686
--------- --------- --------- ---------
NONINTEREST INCOME:
Gain on sales of investment securities............................... -- -- 394 --
Deposit fee income................................................... 207 189 600 565
Other................................................................ 153 118 556 343
--------- --------- --------- ---------
Total noninterest income......................................... 360 307 1,550 908
--------- --------- --------- ---------
NONINTEREST EXPENSES:
Salaries and employee benefits....................................... 1,480 1,159 4,851 3,159
Net occupancy expense................................................ 205 170 594 495
Federal insurance premiums........................................... 67 243 203 717
SAIF special assessment.............................................. -- 2,611 -- 2,611
Provision for real estate losses..................................... -- 8 10 8
Data processing...................................................... 192 187 603 555
Postage and supplies................................................. 77 65 265 218
Other................................................................ 353 295 990 795
--------- --------- --------- ---------
Total noninterest expenses....................................... 2,374 4,738 7,516 8,558
--------- --------- --------- ---------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES........................ 2,059 (387) 6,466 3,036
PROVISION (BENEFIT) FOR INCOME TAXES................................... 748 (127) 2,325 1,045
--------- --------- --------- ---------
NET INCOME (LOSS)...................................................... $ 1,311 $ (260) $ 4,141 $ 1,991
--------- --------- --------- ---------
--------- --------- --------- ---------
EARNINGS (LOSS) PER SHARE.............................................. $ 0.29 $ (0.05)* $ 0.92 $ 0.42*
--------- --------- --------- ---------
--------- --------- --------- ---------
DIVIDENDS DECLARED PER SHARE........................................... $ 0.06 $ 0.00 $ 0.16 $ 0.00
--------- --------- --------- ---------
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</TABLE>
* Earnings per share assumes the Corporation was a public company since
January 1, 1996.
See notes to unaudited consolidated financial statements.
2
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
EMPLOYEE SECURITIES
ADDITIONAL STOCK AVAILABLE
COMMON PAID-IN BENEFIT FOR SALE, RETAINED TREASURY
STOCK CAPITAL PLANS NET EARNINGS STOCK TOTAL
------- ----------- ----------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996................... $52 $49,975 $(3,848) $ 202 $38,557 $(4,180) $80,758
Net income................................... 4,141 4,141
Repayment of ESOP loan and related increase
in share value............................. 289 312 601
Common Stock acquired or committed to be
acquired for MRR Plan...................... (84) (3,968) (4,052)
Recognition of MRR Plan costs................ 1,005 1,005
Net change in unrealized gain on securities
available for sale......................... (202) (202)
Dividends paid............................... (783) (783)
------- ----------- ----------- ------------- --------- --------- ---------
Balance, September 30, 1997.................. $52 $50,180 $(6,499) $ -- $41,915 $(4,180) $81,468
------- ----------- ----------- ------------- --------- --------- ---------
------- ----------- ----------- ------------- --------- --------- ---------
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION> NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income........................................................................... $ 4,141 $ 1,991
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for real estate losses................................................... 10 8
Deferred tax provision............................................................. 30 89
Gain on sale of investment securities.............................................. (394) --
Gain on sale of real estate owned.................................................. (150) (5)
Gain on sale of mortgage loans originated to sell.................................. (18) --
Depreciation....................................................................... 345 297
Accretion of deferred loan fees.................................................... (456) (505)
Repayment of ESOP loan and related increase in share value......................... 601 236
Recognition of MRR Plan costs...................................................... 1,005 --
Changes in operating assets & liabilities:
Accrued interest receivable...................................................... (337) (419)
Prepaid expenses & other assets.................................................. 424 (1,193)
Other liabilities................................................................ 514 2,809
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Net cash provided by operating activities...................................... 5,715 3,308
---------- ----------
INVESTING ACTIVITIES:
Purchases of investment securities-held to maturity................................ (36,152) (40,129)
Proceeds from sale of investment securities
-available for sale 406 --
Proceeds from maturities of investment securities-held to maturity................. 32,050 32,038
Loan originations, net of repayments............................................... (28,476) (45,030)
Proceeds from sales of mortgage loans originated to sell........................... 1,234 --
Proceeds from sales of real estate owned........................................... 63 88
Purchases of office properties & equipment......................................... (1,917) (868)
---------- ----------
Net cash used by investing activities.............................................. (32,792) (53,901)
---------- ----------
</TABLE>
(Continued)
4
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
FINANCING ACTIVITIES:
Net increase in deposits................................................................ 28,176 4,302
Advances from FHLB...................................................................... 10,000 --
Decrease in advance payments by borrowers for taxes & insurance......................... (12) (121)
Increase from issuance of common stock, net of related expenses......................... -- 45,777
Common stock acquired for MRR Plan...................................................... (1,816) --
Dividends paid.......................................................................... (783) --
--------- ---------
Net cash provided by financing activities............................................. 35,565 49,958
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Net increase (decrease) in cash and cash equivalents........................................ 8,488 (635)
CASH AND CASH EQUIVALENTS:
Beginning of period..................................................................... 6,819 8,845
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End of period........................................................................... $ 15,307 $ 8,210
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--------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest.............................................................................. $ 17,348 $ 16,873
--------- ---------
--------- ---------
Income taxes.......................................................................... $ 2,133 $ 1,724
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--------- ---------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Real estate acquired in settlement of loans............................................. $ 110 $ 41
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--------- ---------
Loans to facilitate sales of real estate owned.......................................... $ -- $ 54
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--------- ---------
Change in unrealized gains.............................................................. $ (202) $ 27
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--------- ---------
Obligation assumed to acquire common stock for the MRR Plan............................. $ 2,236 $ --
--------- ---------
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</TABLE>
(Concluded)
See notes to unaudited consolidated financial statements.
5
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
First Federal Bancshares of Arkansas, Inc. (the "Corporation") was
incorporated under Texas law in January 1996 by First Federal Bank of Arkansas,
FA (the "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 stock to the
Corporation, and the offer and sale of the Corporation's common stock by the
Corporation (the "Conversion"). Upon consummation of the Conversion on May 3,
1996, the Corporation became the unitary holding company for the Bank. The
financial statements presented herein that include periods prior to May 3, 1996
include the activities of the Bank prior to the Conversion.
The accompanying unaudited consolidated financial statements of the
Corporation have been prepared in accordance with instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
However, such information reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair statement of results for the interim periods.
The results of operations for the nine months ended September 30, 1997 are
not necessarily indicative of the results to be expected for the year ending
December 31, 1997. The unaudited consolidated financial statements and notes
thereto should be read in conjunction with the audited financial statements and
notes thereto for the year ended December 31, 1996, contained in the
Corporation's 1996 Annual Report to Stockholders.
NOTE 2--PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Corporation and the Bank. All significant intercompany items have been
eliminated.
NOTE 3--EARNINGS PER SHARE
The average number of common shares used to calculate earnings per share for
the three months ended September 30, 1997 and September 30, 1996 was 4,532,143
and 4,748,228, respectively, and for the nine months ended September 30, 1997
and September 30, 1996 was 4,521,820 and 4,743,751, respectively. In addition,
such calculations for the 1996 periods assume that the Corporation was a public
company as of January 1, 1996.
6
<PAGE>
NOTE 4--DECLARATION OF DIVIDENDS
At their meeting on August 27, 1997, the Board of Directors declared a $.06
(six cent) per share cash dividend on the common stock of the Corporation. The
cash dividend was paid on September 26, 1997 to the stockholders of record at
the close of business on September 12, 1997.
NOTE 5--INVESTMENT SECURITIES
Investment securities consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------
AMORTIZED FAIR
HELD TO MATURITY COST VALUE
- ------------------------------------------------------------------------------------------- ----------- ---------
<S> <C> <C>
U. S. Government and Agency obligations.................................................... $ 94,359 $ 94,378
Mortgage-backed securities--FHLMC.......................................................... 201 207
----------- ---------
Total................................................................................ $ 94,560 $ 94,585
----------- ---------
----------- ---------
</TABLE>
7
<PAGE>
NOTE 6--LOANS RECEIVABLE
Loans receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
<S> <C>
First mortgage loans:
One- to four- family residences............................................................. $ 361,917
Other properties............................................................................ 21,054
Construction................................................................................ 22,204
Less:
Unearned discounts........................................................................ (1,193)
Undisbursed loan funds.................................................................... (9,384)
Deferred loan fees, net................................................................... (3,360)
--------
Total first mortgage loans.............................................................. 391,238
--------
Consumer and other loans:
Commercial.................................................................................. 5,378
Automobile.................................................................................. 8,213
Consumer.................................................................................... 4,186
Home equity and second mortgage............................................................. 12,994
Savings..................................................................................... 1,214
Other....................................................................................... 1,973
Add deferred loan costs..................................................................... 140
--------
Total consumer and other loans.......................................................... 34,098
--------
Allowance for loan losses..................................................................... (1,222)
--------
Loans receivable, net................................................................... $ 424,114
--------
--------
</TABLE>
Non-accrual loans at September 30, 1997 were $5.0 million. All loans 90 days
or more past due are recorded as non-accrual. The Bank has classified a $4.4
million commercial real estate loan as non-accrual. While the Bank is working
with counsel to pursue a positive resolution to this matter, the nature and
extent of a loss, if any, is not determinable at this time. The borrower is
currently negotiating a sale of the property to a third party.
A summary of the activity in the allowances for loan and real estate losses
is as follows (in thousands):
<TABLE>
<CAPTION>
REAL
LOANS ESTATE
--------- ---------
<S> <C> <C>
Balance at December 31, 1996............................................... $ 1,251 $ --
Provisions for estimated losses............................................ -- 10
Recoveries................................................................. 11 --
Losses charged off......................................................... (40) (10)
--------- ---------
Balance at September 30, 1997.............................................. $ 1,222 $ --
--------- ---------
--------- ---------
</TABLE>
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
At September 30, 1997, the Corporation's assets amounted to $547.1
million as compared to $505.7 million at December 31, 1996. The $41.4 million
or 8.2% increase was primarily due to an increase of $27.6 million or 7.0% in
loans receivable, net, a $8.5 million or 124.5% increase in cash and cash
equivalents, and a $1.6 million or 44.1% increase in office properties and
equipment, net. The loans receivable increase resulted from the continued
origination of loans during the nine months ended September 30, 1997.
Originations for the nine month period ended September 30, 1997 consisted of
$66.3 million in one- to four-family residential loans, $7.0 million in
commercial loans, $17.5 million in construction loans and $17.5 million in
consumer installment loans, of which $6.7 million consisted of home equity
loans. At September 30, 1997, the Bank had outstanding loan commitments of
$5.3 million, unused lines of credit of $3.3 million, and the undisbursed
portion of construction loans of $9.4 million. The increase in office
properties and equipment primarily consisted of a land acquisition for future
construction of a North Harrison, Arkansas full service branch facility and
the purchase of an existing full service branch on Crossover Road in
Fayetteville, Arkansas. Liabilities increased $40.7 million or 9.6% to $465.7
million at September 30, 1997 compared to $425.0 million at December 31,
1996. The increase in liabilities was primarily due to an increase of $28.2
million or 6.7% in deposits, a $10.0 million increase in advances from the
Federal Home Loan Bank ("FHLB") of Dallas and a $2.2 million outstanding
commitment by the Corporation to purchase stock to fund the management
recognition and retention plan ("MRR Plan"). The increases in deposits and
advances from the FHLB of Dallas were used to fund the net loan increase and
to increase cash and cash equivalents. Stockholders' equity amounted to $81.5
million or 14.89% of total assets at September 30, 1997 compared to $80.8
million or 15.97% of total assets at December 31, 1996. The increase in
stockholders' equity was primarily due to net income in the amount of $4.1
million. The increase in stockholders' equity was offset by the cost of $4.0
million for the management recognition and retention plan shares which was
partially reduced by the shares of stock vested and accrued for in the
current fiscal year of $1.0 million. In addition, during the nine months
ended September 30, 1997 cash dividends aggregating $783,000 were paid.
Non-accrual loans at September 30, 1997 were $5.0 million. All loans 90
days or more past due are recorded as non-accrual. The Bank has classified a
$4.4 million commercial real estate loan as non-accrual. While the Bank is
working with counsel to pursue a positive resolution to this matter, the
nature and extent of a loss, if any, is not determinable at this time. The
borrower is currently negotiating a sale of the property to a third party.
9
<PAGE>
Results of Operations for the Three Months Ended September 30, 1997 and
1996
GENERAL. The Corporation reported net income of $1.3 million during the
three months ended September 30, 1997 compared to a net loss of $260,000 for
the same period in 1996. The increase of $1.6 in net income in the 1997
period compared to the same period in 1996 was due primarily to legislation
passed in 1996 by Congress to recapitalize the Savings Association Insurance
Fund ("SAIF"). As a result of such legislation, the Corporation recorded a
one-time pre-tax charge against 1996 third quarter earnings of $2.6 million
with a $1.7 million after-tax affect. Net interest income remained relatively
unchanged. Net interest income is determined by the Corporation's interest
rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing
liabilities) and the relative amounts of interest-earning assets and
interest-bearing liabilities. The Corporation's interest rate spread
decreased to 2.34% for the 1997 period compared to 2.51% for the 1996 period.
Noninterest income, noninterest expense excluding the 1996 SAIF special
assessment, and income taxes increased. These and other significant
fluctuations in operations are discussed below.
INTEREST INCOME. Interest income amounted to $10.2 million for the three
months ended September 30, 1997 compared to $9.6 million for the same period
in 1996. The increase of $600,000 or 6.5% was primarily due to an increase in
the average balance of loans receivable. The increase in the average balance
of loans receivable was due to continued loan demand and portfolio growth.
Such increase was partially offset by a decline in the average rate earned on
such assets due primarily to the origination of loans at market interest
rates which are currently lower than the average yield of the Bank's loan
portfolio. The average balance in investment securities declined due to
maturities and calls of such securities. Such proceeds were reinvested into
loans and cash equivalents.
INTEREST EXPENSE. Interest expense increased $600,000 or 10.7% to $6.2
million for the three months ended September 30, 1997 compared to $5.6
million for the same period in 1996. Such increase was primarily due to an
increase in the average balance of deposits as well as an increase in
interest paid on other borrowings.
NONINTEREST INCOME. Noninterest income amounted to $360,000 for the
three months ended September 30, 1997 compared to $307,000 for the same
period in 1996. The increase of $53,000 or 17.3% was primarily due to an
increase of $23,000 or 50.9% in loan related income and an increase of
$18,000 or 9.5% in deposit fee income.
NONINTEREST EXPENSE. Noninterest expenses, excluding the SAIF special
assessment of $2.6 million, increased $246,000 or 11.6% between the 1997 and
1996 three month periods. Such increase was due primarily to increases in
salaries and employee benefits, including costs associated with the adoption
and implementation of the Corporation's employee stock ownership plan and the
Corporation's management recognition and retention plan, advertising costs
related to targeting special promotions and branch openings and occupancy
costs due to branch expansions. Such increases were partially offset by a
decline in the quarterly deposit insurance premiums, excluding the SAIF
special assessment, in the amount of $176,000 or 72.4% from
10
<PAGE>
$243,000 to $67,000 for the three month period September 30, 1996 and 1997,
respectively. The increase in salaries and employee benefits consisted
primarily of a $190,000 expense related to the management recognition and
retention plan. The recognition of costs associated with the release of
unallocated shares from the employee stock ownership plan increased by
$50,000 or 33.9% from $147,000 to $196,000 for the three month period
September 30, 1996 and 1997 due to. The increase in salaries and employee
benefits was also due to normal salary and merit increases as well as an
increase in personnel resulting from expansion of the Bank's operations.
Advertising costs which are included as other noninterest expenses are
related to targeting special promotions and branch openings increased to
$77,000 compared to $35,000 for the previous year comparable quarter.
Occupancy expenses were $205,000 and $170,000 for the three month period
ended September 30, 1997 and 1996, respectively, resulting in a $35,000 or
20.7% increase. Such increase was primarily due to branch expansions.
The SAIF special assessment of $2.6 million, accrued in September, 1996,
was due to legislation passed by Congress that imposed on SAIF members a
one-time assessment to recapitalize the SAIF. The decline in deposit
insurance premiums is a direct result of this one-time assessment paid in
1996.
INCOME TAXES. Income taxes amounted to a tax provision of $748,000 and a
tax benefit of $127,000 for the three months ended September 30, 1997 and
1996, respectively. The tax provision in the 1997 period resulted in an
effective tax rate of 36.3%. The tax benefit of $127,000 for the 1996 period
was due to a net loss for the quarter due to the one-time SAIF special
assessment.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
GENERAL. The Corporation reported net income of $4.1 million during the
nine months ended September 30, 1997 compared to $2.0 million for the same
period in 1996. The increase of $2.1 million or 108.1% in net income in the
1997 period compared to the same period in 1996 was due to an increase in net
interest income, the sale of an investment held as available for sale, the
current recognition of a previously deferred profit on the sale of real
estate owned and a decline in the deposit insurance premiums due to the 1996
SAIF special assessment. Such changes were partially offset by an increase in
noninterest expenses primarily due to increases in salaries and employee
benefits, income taxes, advertising costs related to targeting special
promotions and branch openings, and occupancy costs due to branch expansions.
The increase in net interest income of $1.7 million or 16.3% was due to an
increase in the ratio of interest-earning assets to interest-bearing
liabilities to 116.4% for the 1997 period compared to 111.6% for the 1996
period. In addition, the Corporation's interest rate spread and net interest
margin increased to 2.48% and 3.23%, respectively, for the 1997 period
compared to 2.46% and 3.01%, respectively, for the 1996 period.
INTEREST INCOME. Interest income amounted to $30.0 million for the nine
months ended September 30, 1997 compared to $27.5 million for the same period
in 1996. The increase of $2.5 million or 8.9% was primarily due to an
increase in the average balance of loans receivable
11
<PAGE>
which was due to continued loan demand and portfolio growth. Such increase
was partially offset by a decline in the average balance of investment
securities, due to maturities and calls of such investments. Such increase
was also affected by a slight decline in the average rate earned on loans
receivable and a slight increase in the average rate earned on investment
securities.
INTEREST EXPENSE. Interest expense increased $700,000 or 4.2% to $17.6
million for the nine months ended September 30, 1997 compared to $16.9
million for the same period in 1996. Such increase was due to an increase in
the average balance of deposits which was offset by a slight decrease in the
rate paid on such liabilities from 5.34% during the nine months ended
September 30, 1996 to 5.29% for the same period in 1997. Also, interest
expense increased due to an increase in the average balance of FHLB of Dallas
advances.
NONINTEREST INCOME. Noninterest income amounted to $1.6 million for the
nine months ended September 30, 1997 compared to $900,000 for the same period
in 1996. The increase of $700,000 or 70.7% was primarily due to a gain of
$394,000 on the sale of FHLMC stock, which was previously classified as an
available for sale investment, and to the current recognition of $145,000 on
previously deferred profit on the sale of real estate owned.
NONINTEREST EXPENSE. Noninterest expenses, excluding the SAIF special
assessment of $2.6 million, increased $1.6 million or 26.4% between the 1997
and 1996 nine month periods. Such increase was due primarily to increases in
salaries and employee benefits, including costs associated with the adoption
and implementation of the Corporation's employee stock ownership plan and the
Corporation's management recognition and retention plan, additional costs
attributable to being a public company, advertising costs related to
targeting special promotions and branch openings and occupancy costs due to
branch expansions. Such increases were partially offset by a decline in the
deposit insurance premiums, excluding the SAIF special assessment, in the
amount of $514,000 or 71.7% from $717,000 to $203,000 for the nine month
period September 30, 1996 and 1997, respectively. The increase in salaries
and employee benefits consisted primarily of a $754,000 expense related to
the grant and immediate vesting of 20% of the shares of stock awarded to the
Bank's executive officers and directors pursuant to the management
recognition and retention plan. In addition, in accordance with a 20% per
year vesting schedule, the nine month period ended September 30, 1997 also
included $252,000 in accrued costs for the shares that will vest in May 1998.
Salary and benefit costs also increased by $302,000 for the 1997 nine month
period over the previous year comparable period due to recognition of costs
associated with the release of unallocated shares from the employee stock
ownership plan. Other increases in salaries and employee benefits were due to
normal salary and merit increases as well as an increase in personnel
resulting from expansion of the Bank's operations. Advertising costs amounted
to $205,000 for the nine months ended September 30, 1997 compared to $126,000
for the same period in 1996. The increase of $79,000 or 62.1% was primarily
due to costs related to targeting special promotions and to branch openings.
Occupancy costs at September 30, 1997 and 1996 were $594,000 and $495,000,
respectively. Such increase of $99,000 or 20.0% was primarily due to branch
expansions.
12
<PAGE>
The SAIF special assessment of $2.6 million, accrued in September, 1996,
was due to legislation passed by Congress that imposed on SAIF members a
one-time assessment to recapitalize the SAIF. The decline in deposit
insurance premiums is a direct result of this one-time assessment paid in
1996.
INCOME TAXES. Income taxes amounted to $2.3 million and $1.0 million for
the nine months ended September 30, 1997 and 1996, respectively, resulting in
effective tax rates of 36.0% and 34.4%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's liquidity, represented by cash and cash equivalents, is
a product of its operating, investing and financing activities. The
Corporation's primary sources of funds are deposits, amortization,
prepayments and maturities of outstanding loans, maturities of investment
securities, mortgage-backed securities and other short-term investments and
funds provided from operations. While scheduled loan amortization and
maturing investment securities, mortgage-backed securities and short-term
investments are relatively predictable sources of funds, deposit flows and
loan prepayments are greatly influenced by general interest rates, economic
conditions and competition. The Corporation manages the pricing of its
deposits to maintain a steady deposit balance. In addition, the Corporation
invests excess funds in overnight deposits and other short-term
interest-earning assets which provide liquidity to meet lending requirements.
The Corporation 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. At September 30, 1997, the Bank had
outstanding advances from the FHLB of Dallas in the amount of $10.0 million.
Such advances were used in the Bank's normal operations and investing
activities.
As of September 30, 1997, the Bank's regulatory capital was in excess of
all applicable regulatory requirements. At September 30, 1997, the Bank's
tangible, core and risk-based capital ratios amounted to 11.8%, 11.8% and
22.5%, respectively, compared to regulatory requirements of 1.5%, 3.0% and
8.0%, respectively.
13
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
PART II
<TABLE>
<S> <C>
Item 1. Legal Proceedings
Neither the Corporation nor the Bank is involved in any pending legal proceedings
other than non-material legal proceedings occurring in the ordinary course of
business.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
</TABLE>
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
DATE: NOVEMBER 6, 1997 BY: /S/ LARRY J. BRANDT
-------------------------
LARRY J. BRANDT
PRESIDENT
DATE: NOVEMBER 6, 1997 BY: /S/ TOMMY W. RICHARDSON
-------------------------
TOMMY W. RICHARDSON
CHIEF FINANCIAL OFFICER
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,356
<INT-BEARING-DEPOSITS> 8,951
<FED-FUNDS-SOLD> 0
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<LOANS> 425,336
<ALLOWANCE> 1,222
<TOTAL-ASSETS> 547,119
<DEPOSITS> 451,034
<SHORT-TERM> 0
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0
0
<COMMON> 39,553
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</TABLE>
