<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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
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(Address) (Zip Code)
Registrant's telephone number, including area code: (870) 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 23, 1998, the aggregate value of the 4,544,061 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
352,002 shares held by all directors and officers of the Registrant as a group,
was approximately $116.7 million. This figure is based on the last sales price
of $25.6875 per share of the Registrant's Common Stock on March 23, 1998.
Number of shares of Common Stock outstanding as of March 23, 1998: 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, 1997 are incorporated into Part II, Items 5 through 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 1998 Annual Meeting of
Stockholders are incorporated into Part III, Items 9 through 13 of this Form
10-K.
<PAGE>
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, 1997, the
Company had $549.6 million in total assets, $466.7 million in total liabilities
and $82.9 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 (870) 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 eleven 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. 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.
1
<PAGE>
This Form 10-K and the Company's Annual Report to Stockholders contain
certain forward-looking statements and information relating to the Company that
are based on the beliefs of management as well as assumptions made by and
information currently available to management. In addition, in those and other
portions of this document and the Company's Annual Report to Stockholders, the
words "anticipate, "believe," "estimate," "expect," "intend," "should" and
similar expressions, or the negative thereof, as they relate to the Company or
the Company's management, are intended to identify forward-looking statements.
Such statements reflect the current views of the Company with respect to future
looking events and are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. The Company does not intend to update these forward-looking
statements.
Lending Activities
General. At December 31, 1997, the Bank's total portfolio of loans
receivable ("total loan portfolio"), amounted to $446.0 million or 81.1% of the
Company's $549.6 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, $371.0 million or 83.18% of the Bank's
total loan portfolio consisted of one- to four-family residential loans at
December 31, 1997. 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, 1997, such loan
categories amounted to $1.3 million, $18.6 million, $20.8 million, $5.6 million
and $28.7 million, respectively, or .29%, 4.17%, 4.66%, 1.27% and 6.43% 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").
2
<PAGE>
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,
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1997 1996 1995 1994
----------------------- ----------------------- ----------------------- ---------------------
Percentage Percentage Percentage Percentage
Amount of Loans Amount of Loans Amount of Loans Amount of Loans
------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family residential $370,955 83.18% $338,349 82.36% $287,872 82.54% $237,724 82.96%
Multi-family residential 1,303 .29 1,555 .38 1,060 .30 800 0.28
Commercial real estate 18,593 4.17 19,136 4.66 19,723 5.66 17,529 6.12
Construction 20,753 4.66 20,053 4.88 11,603 3.33 7,468 2.61
-------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans 411,604 92.30 379,093 92.28 320,258 91.83 263,521 91.97
-------- ------ -------- ------ -------- ------ -------- ------
Commercial loans 5,649 1.27 4,348 1.06 4,014 1.15 3,192 1.11
-------- ------ -------- ------ -------- ------ -------- ------
Consumer loans:
Home equity and second
mortgage loans 13,023 2.92 12,549 3.06 10,466 3.00 8,752 3.05
Automobile 8,307 1.86 7,556 1.84 6,993 2.01 5,154 1.80
Other 7,372 1.65 7,244 1.76 7,021 2.01 5,938 2.07
-------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans 28,702 6.43 27,349 6.66 24,480 7.02 19,844 6.92
-------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable 445,955 100.00% 410,790 100.00% 348,752 100.00% 286,557 100.00%
-------- ====== -------- ====== -------- ====== -------- ======
Less:
Undisbursed loan funds (7,305) (8,670) (4,298) (3,318)
Unearned discounts and net
deferred loan fees (3,512) (4,361) (3,721) (2,322)
Allowance for loan losses (1,196) (1,251) (1,228) (1,134)
-------- -------- -------- --------
Total loans receivable, net $433,942 $396,508 $339,505 $279,783
======== ======== ======== ========
</TABLE>
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December 31,
------------------------
1993
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Percentage
Amount of Loans
------ ----------
(Dollars in Thousands)
Real estate loans:
Single-family residential $ 197,833 81.11%
Multi-family residential 1,622 0.66
Commercial real estate 18,645 7.64
Construction 7,098 2.91
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Total real estate loans 225,198 92.32
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Commercial loans 2,052 0.84
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Consumer loans:
Home equity and second
mortgage loans 6,089 2.50
Automobile 4,771 1.96
Other 5,805 2.38
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Total consumer loans 16,665 6.84
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Total loans receivable 243,915 100.00%
--------- ======
Less:
Undisbursed loan funds (3,798)
Unearned discounts and net
deferred loan fees (2,011)
Allowance for loan losses (1,447)
---------
Total loans receivable, net $ 236,659
=========
3
<PAGE>
Loan Maturity and Interest Rates. The following table sets forth certain
information at December 31, 1997 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 Ten Through Twenty
One Year Three Years Five Years Years Twenty Years Years Total
-------- ----------- ---------- ----- ------------ ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family residential $ 744 $ 1,022 $ 3,207 $ 39,755 $146,823 $179,404 $370,955
Multi-family residential 187 45 110 109 852 -- 1,303
Commercial real estate 4,688 4,051 2,201 6,299 1,354 -- 18,593
Construction 6,301 -- -- -- 5,102 9,350 20,753
Commercial loans 2,583 1,090 1,325 553 98 -- 5,649
Consumer loans 9,133 6,828 11,135 1,515 91 -- 28,702
-------- -------- -------- -------- -------- -------- --------
Total(1) $ 23,636 $ 13,036 $ 17,978 $ 48,231 $154,320 $188,754 $445,955
======== ======== ======== ======== ======== ======== ========
</TABLE>
- ----------
(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, 1997 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 $134,475 $235,736 $370,211
Multi-family residential 664 452 1,116
Commercial real estate 13,905 -- 13,905
Construction 5,102 9,350 14,452
Commercial loans 3,066 -- 3,066
Consumer loans 19,569 -- 19,569
-------- -------- --------
Total $176,781 $245,538 $422,319
======== ======== ========
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 appraisal and underwriting staff. The Bank requires
hazard, title and, to the extent applicable, flood insurance on all security
property.
4
<PAGE>
Loan applications are initially processed by branch managers or loan
officers and all real estate loans up to $500,000 must be approved by two
members of the Bank's Loan Committee, one of which must be a member of senior
management. Loans in excess of $500,000 up to $750,000 must be approved by three
members of the Bank's Loan Committee, two of which must be members of senior
management. Real estate loans in excess of $750,000 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, the Bank purchased $3.2
million of loans. No loans were purchased during 1997 or 1996. In 1997 and 1996,
the Bank's loan sales were $2.2 million and $73,000, respectively. The Bank did
not engage in any loan sales in 1995.
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,
-------------------------------------
1997 1996 1995
--------- --------- ---------
(In Thousands)
Loans receivable at beginning
of period $ 410,790 $ 348,752 $ 286,557
--------- --------- ---------
Loan originations:
Real estate:
Single-family residential 92,684 102,214 90,014
Multi-family residential -- 556 135
Commercial real estate 3,633 4,866 2,542
Construction 20,587 25,537 15,167
Commercial loans 5,257 3,060 2,361
Consumer:
Home equity and second
mortgage loans 8,807 10,400 8,575
Automobile 7,311 7,235 6,633
Other 6,798 7,225 7,578
--------- --------- ---------
Total loan originations 145,077 161,093 133,005
Purchases -- -- 3,235
--------- --------- ---------
Total loan originations and
purchases 145,077 161,093 136,240
Repayments (106,408) (98,540) (73,739)
Loan sales (2,244) (73) --
Other (1,260) (442) (306)
--------- --------- ---------
Net loan activity 35,165 62,038 62,195
--------- --------- ---------
Loans receivable
at end of period $ 445,955 $ 410,790 $ 348,752
========= ========= =========
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,
1997, the Bank's limit on loans-to-one borrower was approximately $10.0 million.
At December 31, 1997, the Bank's largest loans or groups of loans-to-one
borrower, including persons or entities related to the borrower, amounted to
$5.2 million. Such amount consists of 20 loans, primarily commercial real estate
loans, all of which were current at December 31, 1997. The Bank's ten largest
loans or groups of loans to one borrower, including persons or entities related
to the borrower, amounted to $17.1 million at December 31, 1997. In addition,
the Bank's wholly owned subsidiary has extended a $3.4 million loan
collateralized by a hotel in Oklahoma City, Oklahoma which the Bank currently
anticipates accepting a deed in lieu of foreclosure in the first quarter of
1998. 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, 1997, $371.0 million or 83.2% of the Bank's total
loan portfolio consisted of one- to four-family residential real estate loans.
The Bank originated $92.7 million, $102.2 million and $90.0 million of one- to
four-family residential loans in 1997, 1996, and 1995, 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 $371.0 million of such loans at December 31, 1997, $236.0 million
or 63.6% had adjustable-rates of interest (including $198.3 million in
seven-year adjustable rates) and $135.0 million or 36.4% 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 exceeding fifteen 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-, five- 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 generally does not offer
below market rates, and the amount of any increase or decrease in the interest
rate per one or three year period is generally limited to 2%, with a limit of 6%
over the life of the loan. The Bank's five-year adjustable rate loans provide
that any increase or decrease in the interest rate per period is limited to 3%,
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, 1997, the Bank had $1.0 million of
nonperforming single-family residential loans. See "- Asset Quality."
6
<PAGE>
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, 1997, $1.3 million or .3%
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, 1997, the Bank did have one $109,000 nonperforming multi-family real estate
loan. 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, 1997, $18.6 million or 4.2% 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, 1997, the Bank had approximately $6.8 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,
1997, the Bank did have one nonperforming commercial real estate loan in the
amount of $3.4 million. See"- Asset Quality."
7
<PAGE>
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, 1997, construction loans amounted to $20.8 million or 4.7% of
the Bank's total loan portfolio, of which $14.4 million consisted of
single-family residential construction loans and $6.4 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, 1997, 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, 1997, such loans amounted to $5.6 million or
1.3% of the total loan portfolio. At December 31, 1997, the Bank did have one
nonperforming commercial loan in the amount of $48,000. 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
$28.7 million or 6.4% of the total loan portfolio at December 31, 1997, of which
$13.0 million, $8.3 million and $7.4 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, 1997. 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, 1997, the Bank had $434,000 of
nonperforming consumer loans. See "-Asset Quality."
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.
10
<PAGE>
Delinquent Loans. The following table sets forth information concerning
delinquent loans at December 31, 1997, 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.
<TABLE>
<CAPTION>
Single-family Multi-Family Commercial
Residential Residential Real Estate Construction Commercial Consumer
------------------ ------------------ ------------------ ------------------ ------------------ ------------------
Percentage Percentage Percentage Percentage Percentage Percentage
of Total of Total of Total of Total of Total of Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans
delinquent:
30-59 days $1,360 .30% $ -- --% $ 1,086 .24% $ 50 .01% $ 33 .01% $296 .07%
60-89 days 925 .21 -- -- -- -- -- -- 42 .01 166 .04
90 days and 1,001 .22 109 .02 3,365 .75 -- -- 48 .01 434 .10
------ ----- ------- ---- ---- ----
over
Total $3,286 $ 109 $ 4,451 $ 50 $123 $896
====== ===== ======= ==== ==== ====
</TABLE>
11
<PAGE>
The following table sets forth the amounts and categories of the Bank's
nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
------ ----- ----- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Single-family residential $1,001 $ 493 $ 223 $ 159 $ 146
Multi-family residential 109 -- -- -- --
Commercial real estate 3,365 -- -- -- 1,215
Construction loans -- -- -- 78 --
Commercial loans 48 -- -- -- --
Consumer loans 434 228 127 33 97
------ ----- ----- ------- -------
Total nonperforming loans $4,957 721 350 270 1,458
------ ----- ----- ------- -------
Real estate owned 195 154 234 250 491
------ ----- ----- ------- -------
Total nonperforming assets $5,152 $ 875 $ 584 $ 520 $ 1,949
====== ===== ===== ======= =======
Total nonperforming loans as a
percentage of total loans
receivable 1.11% 0.18% 0.10% 0.09% 0.60%
====== ===== ===== ======= =======
Total nonperforming assets as a
percentage of total assets 0.94% 0.17% 0.13% 0.12% 0.48%
====== ===== ===== ======= =======
</TABLE>
Interest income that would have been recorded under the original terms of
the Bank's non-accruing loans for the year ended December 31, 1997 amounted to
$556,000, and the interest recognized during this period amounted to $221,000.
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,
1997, the Bank had $5.1 million of classified assets, $4.8 million of which were
classified as substandard and $329,000 of which were classified as loss. In
addition, at such date, the Bank had $43,000 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
provisions for loan losses which are charged against income. When consumer loans
become 90 days or more past due, the Bank reserves for the amount of the loan in
excess of the estimated value of the collateral, if any.
12
<PAGE>
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,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding at
end of period $ 445,955 $ 410,790 $ 348,752 $ 286,557 $ 243,915
========= ========= ========= ========= =========
Average loans outstanding $ 415,075 $ 369,185 $ 306,175 $ 257,261 $ 228,460
========= ========= ========= ========= =========
Allowance at beginning of period $ 1,251 $ 1,228 $ 1,134 $ 1,447 $ 991
--------- --------- --------- --------- ---------
Charge-offs:
Single-family residential -- -- (2) (24) --
Commercial real estate -- -- (8) (335) (9)
Commercial loans -- -- -- -- (17)
Consumer loans (67) (40) (30) (9) (36)
--------- --------- --------- --------- ---------
Total charge-offs (67) (40) (40) (368) (62)
--------- --------- --------- --------- ---------
Recoveries:
Commercial real estate -- 1 -- -- --
Consumer loans 12 2 1 1 7
--------- --------- --------- --------- ---------
Total recoveries 12 3 1 1 7
--------- --------- --------- --------- ---------
Net charge-offs (55) (37) (39) (367) (55)
--------- --------- --------- --------- ---------
Total provisions for losses -- 60 133 54 511
--------- --------- --------- --------- ---------
Allowance at end of period $ 1,196 $ 1,251 $ 1,228 $ 1,134 $ 1,447
========= ========= ========= ========= =========
Allowance for loan losses as a
percentage of total loans
outstanding at end of period 0.27% 0.30% 0.35% 0.40% 0.59%
========= ========= ========= ========= =========
Net loans charged-off as a
percentage of average loans
outstanding 0.01% 0.01% 0.01% 0.14% 0.02%
========= ========= ========= ========= =========
</TABLE>
13
<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,
-------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- ------------------- ------------------- ------------------- -------------------
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 $ 49 83.18% $ 11 82.36% $ 11 82.54% $ 16 82.96% $ 37 81.11%
Multi-family residential -- .29 -- .38 -- .30 -- 0.28 -- 0.66
Commercial real estate 125 4.17 117 4.66 124 5.66 117 6.12 439 7.64
Construction loans -- 4.66 -- 4.88 -- 3.33 -- 2.61 -- 2.91
Commercial loans 13 1.27 19 1.06 27 1.15 21 1.11 14 0.84
Consumer loans 221 6.43 270 6.66 241 7.02 143 6.92 123 6.84
Unallocated 788 -- 834 -- 825 -- 837 -- 834 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $1,196 100.00% $1,251 100.00% $1,228 100.00% $1,134 100.00% $1,447 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
14
<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.
December 31,
----------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Mortgage-backed securities held to maturity:
FHLMC $157 $227 $323
---- ---- ----
Total mortgage-backed
securities $157 $227 $323
==== ==== ====
15
<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, 1997,
no mortgage-backed securities were pledged to secure obligations of the Bank.
Of the $157,000 of mortgage-backed securities at December 31, 1997, $7,000
was scheduled to mature between one and five years, $30,000 between five and ten
years and the remaining $120,000 was scheduled to mature after ten years. The
$7,000, $30,000 and $120,000 of mortgage-backed securities had weighted average
yields of 7.13%, 8.50% and 9.00%, respectively. 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,
1997, approximately $15 million of the Bank's investment securities were pledged
to secure obligations of the Bank. At December 31, 1997, 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, 1997, the Bank's investment securities included structured
notes of $9.1 million, of which $3.0 million were FHLB step-up notes, $3.0
million were adjustable-rate FHLB notes and $3.1 million were FHLB zero coupon
bonds with a face value of $10.9 million. 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 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 interest rate is less
than the then current market rate, the note would generally not be called and
the Bank would continue to hold the note with a below market interest rate. The
step-up
16
<PAGE>
FHLB notes do not have caps or floors and have remaining maturities of three
years. At December 31, 1997, $1.0 million of the adjustable-rate FHLB notes
adjust monthly based on the five-year constant maturity treasury ("CMT") index
minus 170 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
three years. The CMT index could result in the interest rate on these notes
being less than market rates of interest. The FHLB zero coupon bonds have
remaining maturities of fifteen to twenty years with callable dates beginning in
one to two years.
The maturity terms of the investment securities purchased in 1997
generally have been longer term, up to twenty years with six month to two year
call protection.
The following table sets forth the amount of investment securities which
contractually mature during each of the periods indicated and the weighted
average yields for each range of maturities at December 31, 1997. Expected
maturities may differ from contractual maturities because issuers may have the
right to call or prepay the obligation without prepayment penalties.
<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 $12,009 5.07% $25,290 6.05% $24,092 6.94% $33,985 7.58% $95,376 6.70%
------- ------- ------- ------- -------
Total investment securities $12,009 $25,290 $24,092 $33,985 $95,376
======= ======= ======= ======= =======
</TABLE>
As of December 31, 1997, there were approximately $71 million of
investments with call options, of which approximately $60 million are callable
within 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,
-----------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
Investment securities held
to maturity:
U.S. Government and agency
obligations $95,376 $90,755 $95,731
Equity securities available for sale:
FHLMC preferred stock(1) -- 340 258
------- ------- -------
Total investment securities $95,376 $91,095 $95,989
======= ======= =======
- ----------
(1) Reflects carrying value at fair market value. At December 31, 1997, the
Company held no securities as available for sale.
As a member of the FHLB of Dallas, the Bank is required to maintain an
investment in FHLB stock. At December 31, 1997, the Bank's investment in FHLB
stock amounted to $3.6 million. No ready market exists for such stock and it has
no quoted market value.
17
<PAGE>
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, maturities
of investment securities and advances from the FHLB of Dallas. 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 began utilizing FHLB of Dallas
advances as an additional source of funds during 1997.
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 period 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, 1997.
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,
--------------------------------------------------------------
1997 1996 1995
------------------ ----------------- ------------------
Amount % Amount % Amount %
-------- ----- -------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
3.00% - 3.99% $ 362 .1% $ 607 .2% $ -- --%
4.00% - 5.99% 241,660 53.6 205,912 48.7 157,718 37.8
6.00% - 7.99% 97,885 21.7 90,568 21.4 127,456 30.6
8.00% and over 20,236 4.5 36,408 8.6 42,323 10.1
-------- ----- -------- ----- -------- -----
Total certificate accounts 360,143 79.9 333,495 78.9 327,497 78.5
-------- ----- -------- ----- -------- -----
Transaction accounts:
Passbook and statement savings 25,330 5.6 26,451 6.2 27,480 6.6
Money market accounts 15,438 3.4 17,214 4.1 19,920 4.8
NOW accounts/DDA 49,963 11.1 45,698 10.8 42,332 10.1
-------- ----- -------- ----- -------- -----
Total transaction accounts 90,731 20.1 89,363 21.1 89,732 21.5
-------- ----- -------- ----- -------- -----
Total deposits $450,874 100.0% $422,858 100.0% $417,229 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
18
<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,
1997 1996 1995
--------------------- --------------------- -------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid(1)
------- ---- ------- ---- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Passbook and statement savings
accounts $ 26,092 2.72% $ 27,149 2.72% $ 29,145
Money market accounts and
NOW accounts 55,486 2.34 54,748 2.42 55,269
Demand deposit accounts 9,624 -- 9,244 -- 7,590
Certificates of deposit 348,945 6.11 328,921 6.19 312,926
-------- ---- -------- ---- --------
Total deposits $440,147 5.30% $420,062 5.33% $404,930 5.32%
======== ==== ======== ==== ======== ====
</TABLE>
- ----------
(1) The average rate paid for each type of deposit was not available in 1995.
The following table presents, by various interest rate categories, the
amount of certificates of deposit at December 31, 1997 and 1996 and the amounts
at December 31, 1997 which mature during the periods indicated.
<TABLE>
<CAPTION>
Balance at December 31, 1997
December 31, Maturing in the 12 Months Ending December 31,
-------------------- ---------------------------------------------
1997 1996 1998 1999 2000 Thereafter
-------- -------- -------- -------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificates of Deposit
3.00% - 3.99% $ 362 $ 607 $ 362 $ -- $ -- $ --
4.00% - 5.99% 241,660 205,912 208,247 26,821 5,851 741
6.00% - 7.99% 97,885 90,568 8,448 20,512 13,331 55,594
8.00% and over 20,236 36,408 11,732 3,068 221 5,215
-------- -------- -------- -------- -------- --------
Total certificate accounts $360,143 $333,495 $228,789 $ 50,401 $ 19,403 $ 61,550
======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth the savings flows of the Bank during the
periods indicated.
Year Ended December 31,
---------------------------------
1997 1996 1995
-------- -------- --------
(In Thousands)
Increase (decrease) before interest credited $ 10,786 $(10,731) $ 6,118
Interest credited 17,230 16,360 15,628
-------- -------- --------
Net increase in deposits $ 28,016 $ 5,629 $ 21,746
======== ======== ========
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, 1997 by time remaining to maturity.
Amounts
--------------
Period Ending: (In Thousands)
March 31, 1998 $ 18,016
June 30, 1998 14,485
December 31, 1998 9,095
After December 31, 1998 20,605
--------
Total certificates of deposit with
balances of $100,000 or more $ 62,201
========
19
<PAGE>
Borrowed funds. The Bank has utilized FHLB advances in its normal
operating and investing activities during 1997. There were no advances
outstanding at previous year ends. The Bank pledges as collateral for FHLB
advances their FHLB stock and has entered into blanket collateral agreements
with the FHLB whereby the Bank agrees to maintain, free of other encumbrances,
qualifying single family first mortgage loans with unpaid principal balances,
when discounted at 75% of the such balances, of at least 100% of total
outstanding advances.
Advances at December 31, 1997, have maturity dates and weighted average
rates as follows:
Weighted
Year Ending Average
December 31 Rate Amount
----------- -------- ------
1999 6.19% $ 4,000
2000 6.04 2,000
2002 6.59 3,997
Thereafter 6.26 2,000
-------
Total 6.31% $11,997
=======
Employees
The Bank had 156 full-time employees and 15 part-time employees at
December 31, 1997. 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, 1997, the Service Corporation's only significant
asset was a $3.4 million loan collateralized by a hotel in Oklahoma City,
Oklahoma. The Bank currently anticipates accepting a deed in lieu of foreclosure
in the first quarter of 1998. The property will be promptly listed and
aggressively marketed, and will be operated by a management company until
disposition. A preliminary appraisal amount has been determined as of December
31, 1997 and an adequate loan loss allowance has been established. The Service
Corporation generated net income of approximately $118,000 during 1997.
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.
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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, 1997, 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 1997. 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 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 are 1.3 and approximately 6.5 basis points, respectively,
effective 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, 1997. 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, 1997, 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 4%. At December 31, 1997, the Bank's liquidity ratio was
18.3%.
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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, 1997, 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 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).
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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, 1997, the qualified thrift investments of the Bank were
approximately 90.3% 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, 1997, the
Bank had $12.0 million of 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, 1997, the Bank had $3.6 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, 1997, no reserves were required to be maintained on
the first $4.7 million of transaction accounts, reserves of 3% were required to
be maintained against the next $47.8 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 Company and the Bank
and is not a comprehensive discussion of the tax rules applicable to the Company
and Bank.
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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 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
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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, 1997, 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, 1997, 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,
1994 forward are open under the statute of limitations and are subject to review
by the IRS.
28
<PAGE>
State Taxation
The Bank will continue to be subject to Arkansas corporation income tax
which is a progressive rate up to a maximum of 6.5% of all taxable earnings.
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.
Item 2. Properties.
At December 31, 1997, the Bank conducted its business from its executive
office in Harrison, Arkansas, and eleven full service offices, all of which are
located in Northcentral and Northwest Arkansas.
29
<PAGE>
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, 1997.
Leased/ Net Book Value
Description/Address Owned of Property Amount of Deposits
------------------- ----- ----------- ------------------
(In Thousands)
200 West Stephenson
Harrison, AR 72601 Owned $1,295(1) $141,600
128 West Stephenson Owned 124 (2)
Harrison, AR 72601
Corner Central & Willow Owned 266 (2)
Harrison, AR 72601
Ozark Mall - Hwy. 62-65 North Leased(3) 32 26,996
Harrison, AR 72601
324 Hwy. 62-65 Bypass Owned 293 38,280
Harrison, AR 72601
210 South Main Owned 273 24,985
Berryville, AR 72616
668 Highway 62 East Owned 699 150,465
Mountain Home, AR 72653
301 Highway 62 West Owned 117 18,038
Yellville, AR 72687
307 North Walton Blvd. Owned 281 21,562
Bentonville, AR 72712
3460 North College Owned 483 22,884
Fayetteville, AR 72703
1303 West Hudson Owned 239 512
Rogers, AR 72756
201 East Henri De Tonti Blvd. Owned 250 2,824
Tontitown, AR 72762
2025 North Crossover Road Owned 661 1,996
Fayetteville, AR 72703
249 West Main Street Leased(4) 205 732
Farmington, AR 72730
- ----------
(1) Includes property acquisition for expansion in North Harrison.
(2) Such offices do not open deposit accounts.
(3) Such property is subject to a month-to-month lease.
(4) Such property is subject to a five year lease expiring November 1, 2002.
30
<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 1997 Annual Report to Stockholders
("1997 Annual Report").
Item 6. Selected Financial Data.
The information required herein is incorporated by reference from pages 3
and 4 of the 1997 Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required herein is incorporated by reference from pages 6
to 15 of the 1997 Annual Report.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
The information required herein is incorporated by reference from pages 6
and 7 of the 1997 Annual Report.
Item 8. Financial Statements and Supplementary Data.
The information required herein is incorporated by reference from page 5
and pages 16 to 38 of the 1997 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 April 23, 1998 ("Definitive Proxy Statement").
31
<PAGE>
Item 11. Executive Compensation.
The information required herein is incorporated by reference from pages 8
to 13 of the Definitive Proxy Statement.
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 12
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,
1997 and 1996
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.
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.
32
<PAGE>
Exhibit Index
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, Jr.
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 1997 Annual Report to Stockholders
22.0 Subsidiaries of the Registrant - Reference is made to
"Item 1 Business - Subsidiaries" for the required information
27.0 Financial Data Schedule
- ----------
(*) 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.
33
<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, Jr. March 25, 1998
- -------------------------------
Frank L. Coffman
Chairman of the Board and Chief
Executive Officer
/s/ Larry J. Brandt March 25, 1998
- -------------------------------
Larry J. Brandt
President and Chief
Operating Officer
/s/ John P. Hammerschmidt March 25, 1998
- -------------------------------
John P. Hammerschmidt
Director
/s/ James D. Heuer March 25, 1998
- -------------------------------
James D. Heuer
Director
/s/ William F. Smith March 25, 1998
- -------------------------------
William F. Smith
Director
March 25, 1998
/s/ Tommy W. Richardson
- -------------------------------
Tommy W. Richardson
Senior Vice President and Chief
Financial Officer
<PAGE>
FIRST FEDERAL BANCSHARES
OF ARKANSAS, INC.
1997
ANNUAL REPORT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
Independent Auditors' Report....................................... 16
Consolidated Financial Statements.................................. 17
Directors and Executive Officers................................... 39
Banking Locations.................................................. 39
Stockholder Information............................................ 40
</TABLE>
<PAGE>
FIRST FEDERAL
BANCSHARES
of Arkansas, Inc.
Dear Stockholder:
First Federal Bancshares had another great year in 1997! Our stock
appreciated over 49% and we increased our quarterly dividend to six cents a
share. We also achieved record profits with net income of $5.5 million.
In 1997 we achieved our third consecutive "outstanding" rating on our
Community Reinvestment Act (CRA) examination. Our outstanding CRA rating is
indicative of our strong banking commitment to our communities we serve.
We continue to excel in both mortgage and installment lending with over
$145 million in new loans originated in 1997 in northwest Arkansas. Our new
Secondary Mortgage Division got off to an excellent start in 1997 and we
anticipate they will surpass their goals for this year.
We also opened two more offices in booming Washington County in Northwest
Arkansas. The first office was opened on Crossover Road in Fayetteville and
we had our grand opening in April. The building was acquired from the Bank of
Arkansas and, with some renovation, has become a flagship office for the
Fayetteville area. The second office was opened in Farmington and we held the
grand opening in November. The Farmington office is a new concept for us in
branch banking. It is located in a leased office adjoining a convenience
store complex. This high visibility location has made this office a valuable
addition to our branch network.
Our new Visa Check Card received an excellent response from our customers
and our VOICELINE 24 telephone banking continues to increase in volume each
month. In addition, we will introduce Internet Banking during 1998. Our
commitment to automation and leading edge technology has been a key to our
outstanding efficiency ratio of 53.8%.
Finally, our vision is to be "the premier family bank in Arkansas". The
board, management and all "First Team" members are committed to this vision
and our mission of "being the best provider of family banking services in our
market areas and maximizing our stockholders' value". We appreciate your
confidence expressed by investing in First Federal Bancshares of Arkansas.
Sincerely,
/s/ Larry J. Brandt President
--------------------------------
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 ("ESOP")
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 eleven 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, 1997, the Company had total assets of $549.6 million,
total deposits of $450.9 million and stockholders' equity of $82.9 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
(870)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,
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets...................... $ 549,607 $ 505,739 $ 454,479 $ 428,312 $ 402,649
Cash and cash equivalents......... 6,627 6,819 8,845 8,280 22,491
Investment securities............. 95,533 91,322 96,312 130,527 134,861
Loans receivable, net............. 433,942 396,508 339,505 279,783 236,659
Deposits.......................... 450,874 422,858 417,229 395,483 374,908
Federal Home Loan Bank advances... 11,997 -- -- -- --
Stockholders' equity.............. 82,884 80,758 35,308 31,242 26,451
Selected Operating Data:
Interest income................... $ 40,445 $ 37,192 $ 32,964 $ 29,790 $ 29,944
Interest expense.................. 23,748 22,449 21,538 17,700 17,047
--------- --------- --------- --------- ---------
Net interest income............... 16,697 14,743 11,426 12,090 12,897
Provision for loan losses......... -- 60 133 54 511
--------- --------- --------- --------- ---------
Net interest income after provision
for loan losses.................. 16,697 14,683 11,293 12,036 12,386
Gain on sale of mortgage-backed
and investment securities........ 394 -- 311 446 1,036
Noninterest income................ 1,526 1,222 1,107 1,137 1,165
Noninterest expense(1)............ 10,016 10,749 6,836 6,667 6,132
--------- --------- --------- --------- ---------
Income before income taxes........ 8,601 5,156 5,875 6,952 8,482
Provision for income taxes........ 3,099 1,756 1,871 2,250 3,109
--------- --------- --------- --------- ---------
Net income(1)................... $ 5,502 $ 3,400 $ 4,004 $ 4,702 $ 5,373
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</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,
----------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Selected Operating Ratios(1):
Return on average assets(2)............... 1.03% .69% .91% 1.12% 1.35%
Return on average equity(2)............... 6.76 5.22 12.03 16.22 22.56
Average equity to average assets.......... 15.26 13.23 7.55 6.91 5.99
Interest rate spread(3)................... 2.47 2.48 2.37 2.74 3.14
Net interest margin(3).................... 3.22 3.08 2.66 2.96 3.33
Net interest income after provision for
loan losses to noninterest expense...... 166.70 136.60 165.20 180.53 201.99
Noninterest expense to average assets..... 1.88 2.18 1.55 1.59 1.54
Average interest-earning assets to
average interest-bearing liabilities.... 116.21 112.96 105.92 105.23 104.37
Operating efficiency(4)................... 53.80 67.33 53.22 48.76 40.54
Asset Quality Ratios(5):
Nonperforming loans to total loans(6)..... 1.11 0.18 0.10 0.09 0.60
Nonperforming assets to total assets(6)... 0.94 0.17 0.13 0.12 0.48
Allowance for loan losses to
non-performing loans(6)................. 24.12 173.51 350.86 420.00 99.25
Allowance for loan losses to total loans.. 0.27 0.30 0.35 0.40 0.59
Capital Ratios(5):
Tangible capital to adjusted total assets. 11.98 12.30 7.74 7.29 6.57
Core capital to adjusted total assets..... 11.98 12.30 7.74 7.29 6.57
Risk-based capital to risk-weighted
assets.................................. 22.52 23.24 15.57 16.62 16.52
Other Data:
Full service offices at end of period..... 12 10 8 8 8
</TABLE>
- ------------------------
(1) Ratios for 1997 are based on average daily balances. Ratios prior to 1997
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 SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
YEAR ENDED DECEMBER 31, 1997 QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income................................................. $ 10,456 $ 10,226 $ 10,048 $ 9,715
Interest expense................................................ 6,191 6,153 5,831 5,573
----------- ----------- ----------- -----------
Net interest income............................................. 4,265 4,073 4,217 4,142
Provision for loan losses....................................... -- -- -- --
----------- ----------- ----------- -----------
Net interest income after provision for loan losses............. 4,265 4,073 4,217 4,142
Noninterest income.............................................. 370 360 872 318
Noninterest expense............................................. 2,501 2,374 3,029 2,112
----------- ----------- ----------- -----------
Income before income taxes...................................... 2,134 2,059 2,060 2,348
Provision for income taxes...................................... 774 748 739 838
----------- ----------- ----------- -----------
Net income...................................................... $ 1,360 $ 1,311 $ 1,321 $ 1,510
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per share(2):
Basic......................................................... $ 0.30 $ 0.29 $ 0.29 $ 0.33
Diluted....................................................... $ 0.30 $ 0.29 $ 0.29 $ 0.33
Selected Ratios (Annualized):
Net interest margin............................................. 3.19% 3.07% 3.29% 3.33%
Return on average assets........................................ 0.99 0.96 1.00 1.18
Return on average equity........................................ 6.62 6.50 6.50 7.41
</TABLE>
<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):
Basic......................................................... $ 0.30 $ (.05) $ 0.28 NA
Diluted....................................................... $ 0.30 $ (.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>
- ------------------------
(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) Basic and Diluted Shares Outstanding
<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
YEAR ENDED DECEMBER 31, 1997 QUARTER QUARTER QUARTER QUARTER
- -------------------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic weighted--average shares................................ 4,542,544 4,532,143 4,521,744 4,511,344
Effect of dilutive securities................................. 59,015 45,714 1,964 0
---------- ---------- ---------- ----------
Diluted weighted--average shares.............................. 4,601,559 4,577,857 4,523,708 4,511,344
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------
Basic and diluted weighted--average shares.................... 4,689,085 4,748,228 4,741,524 NA
</TABLE>
During the year ended December 31, 1996, there were no potential dilutive
securities. 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 financial condition and 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, 1997, the Bank estimates that the ratio of
its one-year gap to total assets was a negative 14.8% and its ratio of
interest-earning assets to interest-bearing liabilities maturing or repricing
within one year was 68.0%.
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"); and (ii) lengthening the maturity on
deposits by offering longer term certificates of deposit. Presently, deposits
into such certificates of deposit are minimal due to the prevailing low interest
rate environment.
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, 1997, $236.0 million or 63.6% of the Bank's
portfolio of one- to four-family residential mortgage loans consisted of ARMs,
including $198.3 million in seven-year ARMs.
The Company's investment securities portfolio amounted to $95.5 million or
17.4% of the Company's total assets at December 31, 1997. Of such amount, $12.0
million or 12.6% is contractually due within one year and $25.3 million or 26.5%
is contractually due after one year to five years. However, actual maturities
are normally shorter than contractual maturities due to the ability of borrowers
to call or prepay such obligations without call or prepayment
6
<PAGE>
penalties. As of December 31, 1997, there was approximately $71 million of
investment securities with call options held by the issuer, of which
approximately $60 million are callable within one year.
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 incur 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. 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, 1997, there would be a decrease in the Bank's NPV of
approximately 3.31% 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, 1997, as
calculated by the OTS, based on information provided to the OTS by the Bank.
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE
- ------------------------------------------------------------------------------------
ESTIMATED NPV AS
CHANGE IN INTEREST A 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 $ 40,569 7.93% $ (40,095) (50)%
+300 51,155 9.72 (29,509) (37)
+200 61,826 11.43 (18,839) (23)
+100 72,124 12.98 (8,540) (11)
-- 80,664 14.19 -- --
-100 84,910 14.70 4,246 5
-200 85,397 14.64 4,733 6
-300 87,900 14.86 7,236 9
-400 91,861 15.29 11,197 14
</TABLE>
7
<PAGE>
CHANGES IN FINANCIAL CONDITION
GENERAL. At December 31, 1997, the Company's total assets amounted to
$549.6 million as compared to $505.7 million at December 31, 1996. The $43.9
million or 8.7% increase was primarily due to an increase of $37.4 million or
9.4% in loans receivable, net, a $4.6 million or 5.0% increase in investment
securities held to maturity, and a $1.7 million or 46.4% increase in office
properties and equipment, net.
The loans receivable increase resulted from the continued origination of
loans during the year ended December 31, 1997. Originations for the twelve
month period ended December 31, 1997 consisted of $92.7 million in one- to
four- family residential loans, $8.9 million in commercial loans, $20.6
million in construction loans and $22.9 million in consumer installment
loans, of which $8.8 million consisted of home equity loans. At December 31,
1997, the Bank had outstanding loan commitments of $3.6 million, unused lines
of credit of $3.6 million, and the undisbursed portion of construction loans
of $7.3 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 $41.7 million or 9.8% to $466.7 million at December 31, 1997
compared to $425.0 million at December 31, 1996. The increase in liabilities
was primarily due to an increase of $28.0 million or 6.6% in deposits, a
$12.0 million increase in advances from the Federal Home Loan Bank ("FHLB")
of Dallas and a $1.6 million outstanding commitment by the Company to
purchase the remaining 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 purchase additional
investment securities. Stockholders' equity amounted to $82.9 million or
15.08% of total assets at December 31, 1997 compared to $80.8 million or
15.97% of total assets at December 31, 1996.
Nonperforming assets, consisting of nonperforming loans and repossessed
assets, amounted to $5.2 million or .94% of total assets at December 31, 1997,
compared to $875,000, or .17% of total assets at December 31, 1996. Such
increase in nonperforming assets was primarily due to the Bank classifying a
commercial real estate loan as non-accrual. The Bank currently anticipates
accepting a deed in lieu of foreclosure in the first quarter of 1998. The
property will be promptly listed and aggressively marketed, and will be operated
by a management company until disposition. A preliminary appraisal amount has
been determined as of December 31, 1997 and an adequate loan loss allowance has
been established.
LOANS RECEIVABLE. Net loans receivable increased by $37.4 million, or 9.4%,
to $433.9 million at December 31, 1997 from $396.5 million at December 31, 1996.
Loan originations for 1997 totaled $145.1 million. The net loans receivable
increase was composed of increases in single-family residential loans of $32.6
million or 9.6%, construction loans, net of undisbursed funds, of $2.1 million
or 18.1%, commercial loans of $800,000 or 3.2%, and consumer loans of $1.4
million or 4.9%. Loans were originated using the Bank's normal underwriting
standards, rates, and terms.
Unearned loan fee income at December 31, 1997 amounted to $3.5 million, down
from $4.4 million at December 31, 1996. Such decrease was primarily due to the
Bank writing off the unearned discount in connection with the classification of
a commercial real estate loan as non-accrual in anticipation of accepting a deed
in lieu of foreclosure in the first quarter of 1998. 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, 1997 were $7.3 million, compared to $8.7 million at December 31,
1996.
INVESTMENT SECURITIES. Investment securities available for sale and held to
maturity amounted to $95.5 million as of December 31, 1997 compared to $91.3
million as of December 31, 1996. In 1997, approximately $51.7 million of
government agency obligations were purchased. Securities which matured or were
called during 1997 amounted to $46.6 million in 1997, which resulted in a
increase of $4.2 million or 4.6% in investment securities at December 31, 1997
compared to December 31, 1996.
8
<PAGE>
DEPOSITS. Deposits at December 31, 1997 amounted to $450.9 million, an
increase of $28.0 million or 6.2% from the December 31, 1996 balance of $422.9
million. The Bank does not advertise for deposits outside of its primary market
area, Northcentral and Northwest Arkansas, or utilize the services of deposit
brokers. In 1997, the Bank began offering special promotion certificate of
deposits.
BORROWED FUNDS. The Bank borrowed $12.0 million in Federal Home Loan Bank
of Dallas advances during the year ended December 31, 1997. The weighted average
rate on such borrowings was 6.31% at December 31, 1997. These borrowings were
used to fund loan growth and to purchase additional investment securities.
STOCKHOLDERS' EQUITY. Stockholders' equity increased $2.1 million to $82.9
million at December 31, 1997 from $80.8 million at December 31, 1996. The
increase was primarily due to net income in the amount of $5.5 million. The
increase in stockholders' equity was offset by the cost of $4.0 million for the
MRR Plan shares which was partially reduced by the shares of stock vested and
accrued for in the current year of $1.2 million, and by the recognition of costs
of $800,000 associated with the release of unallocated shares from the ESOP. In
addition, during the year ended December 31, 1997 cash dividends aggregating
$1.1 million were paid.
9
<PAGE>
AVERAGE BALANCE SHEETS
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, 1997. 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, 1997. For the year
ended December 31, 1997, average balances are based on daily balances during the
period. For the year ended December 31, 1996 and 1995, average balances are
based on month end balances during the periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
DECEMBER 31, ---------------------------------------------------------------------
1997 1997 1996
------------- --------------------------------- -----------------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
COST BALANCE INTEREST COST BALANCE INTEREST COST
------------- --------- ---------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning
assets:
Loans
receivable(1)..... 8.08% $ 415,075 $ 33,804 8.14% $ 369,185 $ 30,498 8.26%
Investment
securities(2)..... 6.75 96,170 6,207 6.45 102,398 6,258 6.11
Mortgage-backed
securities........ 8.82 202 17 8.46 264 22 8.33
Other interest-
earning assets.... 5.42 7,615 417 5.48 6,335 414 6.54
--------- ---------- ---------- ----------
Total interest-
earning assets.. 7.84 519,062 40,445 7.79 478,182 37,192 7.78
---------- ----------
Noninterest-earning
assets.............. 14,550 13,821
--------- ----------
Total assets...... $ 533,612 $ 492,003
--------- ----------
--------- ----------
Interest-bearing
liabilities:
Deposits............ 5.30 440,147 23,331 5.30 $ 420,062 22,409 5.33
Other borrowings.... 6.31 6,493 417 6.42 3,264 40 1.23
--------- ---------- ---------- ----------
Total interest-
bearing
liabilities..... 5.33 446,640 23,748 5.32 423,326 22,449 5.30
Noninterest-bearing
liabilities......... 5,561 3,564
--------- ----------
Total
liabilities..... 452,201 426,890
Stockholders'
equity.............. 81,411 65,113
--------- ----------
Total liabilities
and stockholders'
equity.......... $ 533,612 $ 492,003
--------- ----------
--------- ----------
--------- ----------
Net interest
income.............. $ 16,697 $ 14,743
--------- ----------
--------- ----------
Net earning
assets.............. $ 72,422 $ 54,856
--------- ----------
--------- ----------
Interest rate
spread.............. 2.51% 2.47% 2.48%
--------- ---------- ----------
--------- ---------- ----------
Net interest
margin.............. 3.22% 3.08%
--------- ----------
--------- ----------
Ratio of interest-
earning assets to
interest-bearing
liabilities......... 116.21% 112.96%
--------- ----------
--------- ----------
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995
-------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
---------- ----------- ----------
<S> <C> <C> <C>
Interest-earning
assets:
Loans
receivable(1)..... $ 306,175 $ 25,544 8.34%
Investment
securities(2)..... 109,267 6,343 5.81
Mortgage-backed
securities........ 9,378 778 8.30
Other interest-
earning assets.... 4,069 299 7.35
--------- -----------
Total interest-
earning assets.. 428,889 32,964
-----------
Noninterest-earning
assets.............. 12,326
----------
Total assets...... $ 441,215
----------
----------
Interest-bearing
liabilities:
Deposits............ $ 404,930 21,538 5.32
Other borrowings.... -- -- --
--------- -----------
Total interest-
bearing
liabilities..... 404,930 21,538 5.32
Noninterest-bearing
liabilities......... 2,988
----------
Total
liabilities..... 407,918
Stockholders'
equity.............. 33,297
----------
Total liabilities
and stockholders'
equity.......... $ 441,215
----------
----------
----------
Net interest
income.............. $ 11,426
----------
----------
Net earning
assets.............. $ 23,959
----------
----------
Interest rate
spread.............. 2.37%
------
------
Net interest
margin.............. 2.66%
------
------
Ratio of interest-
earning assets to
interest-bearing
liabilities......... 105.92%
------
------
</TABLE>
- -----------------------
(1) Includes non-accrual loans.
(2) Includes FHLB of Dallas stock and for the years 1996 and 1995 Federal Home
Loan Mortgage Corporation ("FHLMC") preferred stock at cost.
10
<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,
------------------------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
------------------------------------------------ ----------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
----------------------------------- ----------------------
TOTAL
RATE/ INCREASE
VOLUME RATE VOLUME (DECREASE) VOLUME RATE
----------- --------- ----------- ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable............................... $ 3,791 $ (431) $ (54) $ 3,306 $ 5,257 $ (252)
Investment securities.......................... (381) 351 (21) (51) (399) 335
Mortgage-backed securities..................... (5) -- -- (5) (756) 9
Other interest-earning assets.................. 84 (67) (14) 3 166 (33)
----------- --------- ----- ----------- ----------- ---------
Total interest-earning asset................. 3,489 (147) (89) 3,253 4,268 59
----------- --------- ----- ----------- ----------- ---------
Interest expense:
Deposits....................................... 1,072 (143) (7) 922 805 63
Other borrowings............................... 39 170 168 377 -- --
----------- --------- ----- ----------- ----------- ---------
Total interest-bearing liabilities............. 1,111 27 161 1,299 805 63
----------- --------- ----- ----------- ----------- ---------
Net change in interest income.................... $ 2,378 $ (174) $ (250) $ 1,954 $ 3,463 $ (4)
----------- --------- ----- ----------- ----------- ---------
----------- --------- ----- ----------- ----------- ---------
<CAPTION>
TOTAL
RATE/ INCREASE
VOLUME (DECREASE)
----------- -----------
<S> <C> <C>
Interest income:
Loans receivable............................... $ (51) $ 4,954
Investment securities.......................... (21) (85)
Mortgage-backed securities..................... (9) (756)
Other interest-earning assets.................. (18) 115
----- -----------
Total interest-earning assets................ (99) 4,228
----- -----------
Interest expense:
Deposits....................................... 3 871
Other borrowings............................... 40 40
----- -----------
Total interest-bearing liabilities........... 43 911
----- -----------
Net change in interest income.................... $ (142) $ 3,317
----- -----------
----- -----------
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997
AND 1996.
GENERAL. Net income amounted to $5.5 million for 1997 compared to $3.4
million for 1996. The increase in net income of $2.1 million was due primarily
to an increase in net interest income and noninterest income offset by an
increase in noninterest expenses, excluding the one-time SAIF special
assessment.
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 $16.7 million in
1997, an increase of $2.0 million or 13.3% compared to $14.7 million for 1996.
The Company's interest rate spread remained virtually unchanged at 2.47% for
1997 compared to 2.48% for 1996. The Company's net interest margin increased to
3.22% for 1997 compared to 3.08% for 1996. Such increase in the Bank's net
interest margin was due to the increased investment in loans receivable, and an
increase in the ratio of interest-earning assets to interest-bearing liabilities
to 116.21% for 1997 compared to 112.96% for 1996, which was partially offset by
an increase in interest expense due to deposit growth and borrowings of FHLB
advances.
INTEREST INCOME. Interest income increased $3.3 million or 8.7% to $40.4
million for 1997 compared to $37.2 million for 1996. The interest income
increase resulted from an increase of $3.3 million in interest income on loans
receivable which was partially offset by a decrease of $51,000 in interest
income from investment securities. The increase in interest income on loans
receivable was due to an increase of $45.9 million or 12.4% in the average
balance of loans receivable as a result of continued loan originations. The
positive impact of the increase on the average balance of loans receivable was
partially offset by a decrease in the average yield earned on such assets to
8.14% for 1997 from 8.26% in 1996. Such decrease in the average yield was due to
originations of loans at lower
11
<PAGE>
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. The decline was substantially offset by an increase in the
average yield earned on investment securities from 6.11% in 1996 to 6.45% in
1997 due to purchasing investment securities with higher yields and longer
maturity terms. Such bonds typically contain call features.
INTEREST EXPENSE. Interest expense increased $1.3 million or 5.8% to $23.7
million in 1997 compared to $22.4 million in 1996. The increase was due
primarily to an increase of $20.1 million or 4.8% in the average balance of
deposits resulting from the Bank offering special promotion certificates of
deposit and from interest credited on existing accounts.
PROVISION FOR LOAN LOSSES. Provisions for loan losses amounted to $60,000
for 1996. No provisions for loan losses were provided for in 1997. Provisions
for loan 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 for adequacy 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 1997 compared to 1996 was due to management's evaluation of the
adequacy of the allowance for loan losses.
NONINTEREST INCOME. Noninterest income increased $698,000 or 57.1% to $1.9
million compared to $1.2 million for 1997 and 1996, respectively. The increase
was due primarily to a gain of $394,000 on the sale of Federal Home Loan
Mortgage Corporation stock, which was previously classified as an available for
sale investment security, 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 in 1996, increased $1.9 million or 23.1% to $10.0
million in 1997 compared to $8.1 million in 1996. The increase was primarily due
to an increase in salaries and employee benefits, including costs associated
with the implementation of the Company's ESOP and the Company's MRR 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 quarterly FDIC premiums from $902,000 in 1996 compared to $272,000 in 1997.
The salaries and employee benefits increased $2.1 million or 47.6% to $6.4
million compared to $4.3 million for 1997 and 1996, respectively. Such increase
included the $754,000 fair market value of 39,170 vested shares of stock granted
to key officers as well as to non-employee directors during the second quarter
ended June 30, 1997 pursuant to the MRR Plan adopted by the Company's
shareholders on May 7, 1997. An additional cost of $440,000 was accrued during
the year for shares awarded under the plan that will vest in May 1998. The costs
related to the Company's ESOP amounted to $745,000 for 1997 compared to $402,000
for 1996. This $343,000 or 85.3% increase resulted, in part, from the
recognition of compensation expense for ESOP shares committed to be released at
the fair market value which increased during 1997. In addition, the ESOP expense
for 1996 represented a partial year commencing upon conversion on May 3, 1996.
Other increases in salaries and employee benefits are attrituable to an increase
in the number of employees due to expansion and growth.
Net occupancy expense amounted to $804,000 in 1997 compared to $672,000 in
1996, an increase of $132,000 or 19.7%. Such increase was primarily due to
branch expansion as previously discussed. Advertising costs increased $81,000 or
41.6% to $275,000 for 1997 compared to $194,000 for 1996. The increase was
related to targeting special promotions for product offerings and advertising
branch openings. Noninterest expenses also increased as a result of additional
costs attributable to being a public company. Noninterest expense increases were
partially offset by a reduction in the FDIC premiums which amounted to $272,000
in 1997 compared to $902,000 in 1996. Such reduction in the premium was mandated
by the legislation requiring the payment, in the third quarter of 1996, of the
one-time special assessment used to recaptialize the SAIF.
12
<PAGE>
INCOME TAXES. Income taxes amounted to $3.1 million and $1.8 million for
1997 and 1996, respectively, resulting in effective tax rates of 36.0% and
34.1%, respectively. Such increase was primarily due to an increase in pre-tax
income and additional state income tax in 1997 attributable to tax exempt
investment security interest income not sufficient to reduce state taxable
income to the 1996 level of zero.
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. 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%,
respectively, 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 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.
13
<PAGE>
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, an
increase of $870,000 in salaries and employee benefits, an increase of $117,000
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 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.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's liquidity, represented by cash and cash equivalents and eligible
investment securities, is a product of its operating, investing and financing
activities. The Bank's primary sources of funds are deposits, 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 has borrowed from the FHLB of Dallas.
At December 31, 1997, the Bank had outstanding advances from the FHLB of Dallas
of $12.0 million. Such advances were used in the Bank's normal operating and
investing activities.
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
4%. At December 31, 1997, the Bank's liquidity ratio was 18.3%.
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 to fund loan commitments. At December
31, 1997, the total approved mortgage loan origination commitments outstanding,
excluding the undisbursed portion of construction loans, amounted to $3.6
million. At the same date, the undisbursed portion of construction loans
approximated $7.3 million. The Bank's unused lines of credit at December 31,
1997 were approximately $3.6 million. Certificates of deposit scheduled to
mature in one year or less at December 31, 1997 totaled $228.8 million.
Management believes that a significant portion of maturing deposits will remain
with the Bank. Investment securities scheduled to mature in one year or less at
December 31, 1997 totaled $12.0 million. However, actual maturities are
normally shorter than contractual maturities due to the ability of borrowers to
call or prepay such obligations without
14
<PAGE>
call or prepayment penalties. As of December 31, 1997, there was
approximately $60 million of investment securities with call options held by
the issuer exercisable within one year.
As of December 31, 1997, the Bank's regulatory capital was well in excess of
all applicable regulatory requirements. At December 31, 1997, the Bank's
tangible, core and risk-based capital ratios amounted to 11.98%, 11.98% and
22.52%, respectively.
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.
THE YEAR 2000 ISSUE
The Company is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. The Year 2000 Issue is
the result of computer programs being written using two digits rather than four
digits to define the applicable year. Computer programs that have time-sensitive
coding may recognize a date using "00" as the year 1900 rather than the year
2000. Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail.
The Bank has conducted a review of its computer systems to identify the
systems that could be affected by the Year 2000 Issue and is developing an
implementation plan to resolve the issue. The majority of the Bank's data
processing is provided by a third party service bureau. The service bureau is
actively involved in resolving Year 2000 issues and has provided the Bank with
frequent updates regarding their progress. The service bureau has advised the
Bank that it expects to have the majority of the Year 2000 issues resolved
before the end of 1998 to allow the Bank to test their system for Year 2000
compliance. The Bank presently believes that, based on the progress of the
Bank's service bureau, the Year 2000 problem will not pose significant
operational problems for the Bank's computer system.
15
<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, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
- -------------------------
February 27, 1998
16
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996 (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................................................. $ 6,627 $ 6,819
Investment securities:
Available for sale, at fair value (amortized cost of $12 at
December 31, 1996).................................................................... -- 340
Held to maturity, at amortized cost (fair value at December 31, 1997
and 1996, of $95,614 and $90,497, respectively)....................................... 95,533 90,982
Federal Home Loan Bank stock.............................................................. 3,603 3,026
Loans receivable, net of allowance at December 31, 1997 and 1996,
of $1,196 and $1,251, respectively...................................................... 433,942 396,508
Accrued interest receivable............................................................... 4,134 3,620
Real estate acquired in settlement of loans, net.......................................... 195 154
Office properties and equipment, net...................................................... 5,218 3,565
Prepaid expenses and other assets......................................................... 355 725
---------- ----------
TOTAL..................................................................................... $ 549,607 $ 505,739
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits................................................................................ $ 450,874 $ 422,858
Federal Home Loan Bank advances......................................................... 11,997 --
Advance payments by borrowers for taxes and insurance................................... 900 806
Other liabilities....................................................................... 2,952 1,317
---------- ----------
Total liabilities......................................................................... 466,723 424,981
---------- ----------
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.............................................................. 50,237 49,975
Employee stock benefit plans............................................................ (6,207) (3,848)
Unrealized gain on investment securities available for sale,
net of tax of $126 in 1996............................................................ -- 202
Retained earnings--substantially restricted............................................. 42,982 38,557
---------- ----------
87,064 84,938
Treasury stock, at cost, 257,688 shares................................................... (4,180) (4,180)
---------- ----------
Total stockholders' equity............................................................ 82,884 80,758
---------- ----------
TOTAL..................................................................................... $ 549,607 $ 505,739
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable............................................................... $ 33,804 $ 30,498 $ 25,544
Investment securities.......................................................... 6,207 6,258 6,343
Mortgage-backed securities..................................................... 17 22 778
Other.......................................................................... 417 414 299
--------- --------- ---------
Total interest income........................................................ 40,445 37,192 32,964
INTEREST EXPENSE:
Deposits....................................................................... 23,331 22,409 21,538
Other borrowings............................................................... 417 40 --
--------- --------- ---------
Total interest expense....................................................... 23,748 22,449 21,538
--------- --------- ---------
NET INTEREST INCOME.............................................................. 16,697 14,743 11,426
PROVISION FOR LOAN LOSSES........................................................ -- 60 133
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES................................................................ 16,697 14,683 11,293
NONINTEREST INCOME:
Gain on sales of investment securities......................................... 394 -- 311
Deposit fee income............................................................. 814 764 716
Other.......................................................................... 712 458 391
--------- --------- ---------
Total noninterest income..................................................... 1,920 1,222 1,418
--------- --------- ---------
NONINTEREST EXPENSES:
Salaries and employee benefits................................................. 6,384 4,325 3,455
Net occupancy expense.......................................................... 804 672 612
Federal insurance premiums..................................................... 272 902 910
SAIF special assessment........................................................ -- 2,611 --
Provision for real estate losses............................................... 37 38 25
Data processing................................................................ 810 745 628
Postage and supplies........................................................... 369 309 261
Other.......................................................................... 1,340 1,147 945
--------- --------- ---------
Total noninterest expenses................................................... 10,016 10,749 6,836
--------- --------- ---------
INCOME BEFORE INCOME TAXES....................................................... 8,601 5,156 5,875
INCOME TAX PROVISION............................................................. 3,099 1,756 1,871
--------- --------- ---------
NET INCOME....................................................................... $ 5,502 $ 3,400 $ 4,004
--------- --------- ---------
--------- --------- ---------
EARNINGS PER SHARE:
Basic.......................................................................... $ 1.22 $ 0.72 N/A
--------- ---------
--------- ---------
Diluted........................................................................ $ 1.21 $ 0.72 N/A
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
ISSUED GAIN ON
COMMON STOCK ADDITIONAL EMPLOYEE SECURITIES TREASURY STOCK TOTAL
----------------- PAID-IN STOCK AVAILABLE FOR RETAINED ---------------- STOCKHOLDERS'
SHARES AMOUNT CAPITAL BENEFIT PLANS SALE, NET EARNINGS SHARES AMOUNT EQUITY
--------- ------ ---------- ------------- ------------- -------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1995................ $ 89 $31,153 $31,242
Net income.......... 4,004 4,004
Net change in
unrealized gain on
securities
available for
sale.............. 62 62
----- -------- -----------
BALANCE, DECEMBER 31,
1995................ 151 35,157 35,308
Net income.......... 3,400 3,400
Issuance of common
stock............. 5,153,751 $52 $49,848 49,900
Loan to Employee
Stock Ownership
Plan (ESOP)....... $(4,123) (4,123)
Repayment of ESOP
loan.............. 127 275 402
Net change in
unrealized gain on
securities
available for
sale.............. 51 51
Purchase of treasury
stock, at cost.... 257,688 $(4,180) (4,180)
--------- ------ ---------- ------------- ----- -------- ------- ------- -----------
BALANCE, DECEMBER 31,
1996................ 5,153,751 52 49,975 (3,848) 202 38,557 257,688 (4,180) 80,758
Net income.......... 5,502 5,502
Repayment of ESOP
loan.............. 414 416 830
Common stock
acquired or
committed to be
acquired for
employee stock
benefit plan...... (152) (3,968) (4,120)
Stock compensation
expense........... 1,193 1,193
Net change in
unrealized gain on
securities
available for
sale.............. (202) (202)
Dividends paid...... (1,077) (1,077)
--------- ------ ---------- ------------- ----- -------- ------- ------- -----------
BALANCE, DECEMBER 31,
1997................ 5,153,751 $52 $50,237 $(6,207) $ -- $42,982 257,688 $(4,180) $82,884
--------- ------ ---------- ------------- ----- -------- ------- ------- -----------
--------- ------ ---------- ------------- ----- -------- ------- ------- -----------
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................................. $ 5,502 $ 3,400 $ 4,004
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses.................................................. -- 60 133
Provision for real estate losses........................................... 37 38 25
Deferred tax provision..................................................... 27 111 153
Gain on sale of investment securities--available for sale.................. (394) -- (311)
Gain on sale of real estate owned.......................................... (158) (10) (11)
Gain on sale of mortgage loans originated to sell.......................... (30) -- --
Depreciation............................................................... 465 403 391
Accretion of deferred loan fees............................................ (621) (640) (470)
Repayment of ESOP loan..................................................... 830 402 --
Stock compensation expense................................................. 1,193 -- --
Changes in operating assets and liabilities:
Accrued interest receivable.............................................. (514) (143) 17
Prepaid expenses and other assets........................................ 370 (433) 29
Other liabilities........................................................ 299 (21) 157
--------- --------- ---------
Net cash provided by operating activities.............................. 7,006 3,167 4,117
--
--------- --------- ---------
INVESTING ACTIVITIES:
Purchases of investment securities--held to maturity........................ (51,678) (41,172) (24,395)
Purchases of loans.......................................................... -- -- (3,235)
Proceeds from sales of investment securities--available for sale............ 406 -- 10,253
Proceeds from maturities of investment securities -held to maturity......... 46,550 46,040 48,594
Loan originations, net of repayments........................................ (39,305) (56,518) (56,265)
Proceeds from sales of mortgage loans originated to sell.................... 2,251 -- --
Proceeds from sales of real estate owned.................................... 205 146 117
Purchases of office properties and equipment................................ (2,118) (975) (373)
--------- --------- ---------
Net cash used by investing activities.................................. (43,689) (52,479) (25,304)
--------- --------- ---------
FINANCING ACTIVITIES:
Net increase in deposits.................................................... 28,016 5,629 21,746
Advances from Federal Home Loan Bank........................................ 11,997 -- --
Net increase in advance payments by borrowers for taxes and insurance....... 94 60 6
Issuance of common stock, net of related expenses........................... -- 45,777 --
Purchase of treasury stock.................................................. -- (4,180) --
Common stock acquired for employee stock benefit plan....................... (2,539) -- --
Dividends paid.............................................................. (1,077) -- --
--------- --------- ---------
Net cash provided by financing activities.............................. 36,491 47,286 21,752
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... (192) (2,026) 565
CASH AND CASH EQUIVALENTS:
Beginning of year.......................................................... 6,819 8,845 8,280
--------- --------- ---------
End of year................................................................ $ 6,627 $ 6,819 $ 8,845
--------- --------- ---------
--------- --------- ---------
(Continued)
</TABLE>
20
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest................................................................. $ 23,656 $ 22,451 $ 21,417
--------- --------- ---------
--------- --------- ---------
Income taxes............................................................. $ 2,908 $ 1,899 $ 1,916
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Real estate acquired in settlement of loans................................ $ 272 $ 95 $ 128
--------- --------- ---------
--------- --------- ---------
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............................... $ (202) $ 51 $ 62
--------- --------- ---------
--------- --------- ---------
(Concluded)
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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, which is in the process of foreclosure at
December 31, 1997. All material intercompany transactions have been
eliminated in consolidation. The financial statements as of December 31,
1995, and for the year then ended 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.
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 4% 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.
22
<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--Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value
in the aggregate. Loans receivable that management has the intent and ability
to hold until maturity or pay-off are stated at unpaid principal balances
adjusted for any charge-offs, the allowance for loan losses and 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 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
are provided for in the allowance for loan losses. The Bank reviews its loans
for impairment on a quarterly basis.
23
<PAGE>
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.
FORECLOSED 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 carrying amount 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.
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.
24
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS--In June 1997, the FASB issued SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components. The
Company will be required to classify items of other comprehensive income by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial
condition. Also in June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, establishing standards for
the way public enterprises report information about operating segments in
annual financial statements and interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS Nos. 130
and 131 are effective for fiscal years beginning after December 15, 1997,
with reclassification of earlier periods. The adoption of SFAS Nos. 130 and
131 is not expected to have a material effect on the Company's consolidated
financial statements.
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.
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. SFAS
No. 128 establishes standards for computing and presenting earnings per share
("EPS"). The previous presentation of primary EPS is replaced with a
presentation of basic EPS. Dual presentation of basic and diluted EPS is
required on the face of the income statement as well as a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. Basic EPS excludes dilution
and is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
EPS is computed similarly to fully diluted EPS pursuant to APB Opinion No.
15. The Company adopted SFAS No. 128 for the year ended December 31, 1997,
and prior periods were restated.
RECLASSIFICATIONS--Certain amounts in the 1996 and 1995 consolidated
financial statements have been reclassified to conform to the classifications
adopted for reporting in 1997.
2. INVESTMENT SECURITIES
Investment securities consisted of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1997
---------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
HELD TO MATURITY COST GAINS LOSSES VALUE
-------- ----- ----- -----
<S> <C> <C> <C> <C>
U.S. Government and Agency obligations......... $ 95,376 $ 428 $ 351 $ 95,453
Mortgage-backed securities--FHLMC.............. 157 4 -- 161
-------- ----- ----- --------
Total...................................... $ 95,533 $ 432 $ 351 $ 95,614
-------- ----- ----- --------
-------- ----- ----- --------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
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>
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>
The Company has pledged investment securities held to maturity with
carrying values of approximately $15 million and $13 million at December 31,
1997 and 1996, respectively, as collateral for certain deposits in excess of
$100,000.
Gross realized gains on sales of available for sale securities were
approximately $394,000 in 1997 and $311,000 in 1995. There were no
significant gross losses.
The scheduled maturities of debt securities at December 31, 1997, 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.
As of December 31, 1997 and December 31, 1996, there were approximately
$71 million and $50 million, respectively, of investments with call options
held by the issuer, of which approximately $60 million and $42 million,
respectively, are callable within one year.
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 $311,000. Related income
taxes due on gain were approximately $104,000.
26
<PAGE>
3. LOANS RECEIVABLE
Loans receivable consisted of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
First mortgage loans:
One- to four- family residences......................................................... $ 370,955 $ 338,349
Other properties........................................................................ 19,896 20,691
Construction............................................................................ 20,753 20,053
Less:
Unearned discounts.................................................................... (331) (1,253)
Undisbursed loan funds................................................................ (7,305) (8,670)
Deferred loan fees, net............................................................... (3,320) (3,232)
---------- ----------
Total first mortgage loans.......................................................... 400,648 365,938
---------- ----------
Consumer and other loans:
Commercial loans........................................................................ 5,649 4,348
Automobile.............................................................................. 8,307 7,556
Consumer loans.......................................................................... 4,065 4,077
Home equity and second mortgage......................................................... 13,023 12,549
Savings loans........................................................................... 1,339 1,526
Other................................................................................... 1,968 1,641
Deferred loan costs..................................................................... 139 124
---------- ----------
Total consumer and other loans...................................................... 34,490 31,821
---------- ----------
Allowance for loan losses................................................................. (1,196) (1,251)
---------- ----------
Loans receivable, net............................................................... $ 433,942 $ 396,508
---------- ----------
---------- ----------
</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 $2.9 million and $2.3 million at December 31, 1997 and
1996, respectively.
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 at December 31 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Mortgage loans underlying FHLMC pass-through securities........................................ $ 297 $ 440
Mortgage loan portfolios serviced for other investors.......................................... 1,037 1,335
--------- ---------
Total...................................................................................... $ 1,334 $ 1,775
--------- ---------
--------- ---------
</TABLE>
27
<PAGE>
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 at December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Loans.......................................................................................... $ 2,645 $ 2,348
Investment securities.......................................................................... 1,489 1,272
--------- ---------
Total...................................................................................... $ 4,134 $ 3,620
--------- ---------
--------- ---------
</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 for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ---------
REAL REAL
LOANS ESTATE LOANS ESTATE LOANS
--------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year........................................... $ 1,251 $ -- $ 1,228 $ -- $ 1,134
Provisions for estimated losses.................................... -- 37 60 38 133
Recoveries......................................................... 12 -- 3 -- 1
Losses charged off................................................. (67) (37) (40) (38) (40)
--------- ----------- --------- ----------- ---------
Balance, end of year................................................. $ 1,196 $ -- $ 1,251 $ -- $ 1,228
--------- ----------- --------- ----------- ---------
--------- ----------- --------- ----------- ---------
<CAPTION>
REAL
ESTATE
-----------
<S> <C>
Balance, beginning of year........................................... $ --
Provisions for estimated losses.................................... 25
Recoveries......................................................... --
Losses charged off................................................. (25)
-----------
Balance, end of year................................................. $ --
-----------
-----------
</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 ("FHLB") 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.
8. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consisted of the following at December 31
(in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Land........................................................................................... $ 2,014 $ 902
Buildings and improvements..................................................................... 3,276 2,797
Furniture and equipment........................................................................ 3,237 2,796
Automobiles.................................................................................... 410 374
--------- ---------
Total...................................................................................... 8,937 6,869
Accumulated depreciation....................................................................... (3,719) (3,304)
--------- ---------
Office properties and equipment, net....................................................... $ 5,218 $ 3,565
--------- ---------
--------- ---------
</TABLE>
28
<PAGE>
9. DEPOSITS
Deposits are summarized as follows at December 31 (in thousands):
<TABLE>
<CAPTION> 1997 1996
---------- ----------
<S> <C> <C>
Demand and NOW accounts, including noninterest-bearing
deposits of $10,539 and $9,290 in 1997 and 1996, respectively........................... $ 49,963 $ 45,698
Money market.............................................................................. 15,438 17,214
Regular savings........................................................................... 25,330 26,451
Certificates of deposit................................................................... 360,143 333,495
---------- ----------
Total................................................................................... $ 450,874 $ 422,858
---------- ----------
---------- ----------
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a
minimum denomination of $100 thousand was approximately $27 million and $29
million at December 31, 1997 and 1996, respectively.
At December 31, 1997, scheduled maturities of certificates of deposit are as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31:
<S> <C>
1998............................................................. $228,789
1999............................................................. 50,401
2000............................................................. 19,403
2001............................................................. 12,926
2002............................................................. 17,243
Thereafter....................................................... 31,381
--------
Total....................................................... $360,143
--------
--------
</TABLE>
Interest expense on deposits consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
NOW and Money Market............................................................. $ 1,299 $ 1,324 $ 1,359
Regular savings and certificate accounts......................................... 22,145 21,178 20,395
Early withdrawal penalties....................................................... (113) (93) (216)
--------- --------- ---------
Total....................................................................... $ 23,331 $ 22,409 $ 21,538
--------- --------- ---------
--------- --------- ---------
</TABLE>
At December 31, 1997 and 1996, the Bank had pledged investment securities of
approximately $15 million and $13 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").
29
<PAGE>
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.
10. FEDERAL HOME LOAN BANK ADVANCES
The Bank pledges as collateral for FHLB advances their FHLB stock and has
entered into blanket collateral agreements with the FHLB whereby the Bank
agrees to maintain, free of other encumbrances, qualifying single family
first mortgage loans with unpaid principal balances, when discounted at 75%
of such balances, of at least 100% of total outstanding advances. Advances at
December 31, 1997, have maturity dates as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
RATE AMOUNT
----------- ---------
<S> <C> <C>
Years ending December 31:
1999....................................................................... 6.19% $ 4,000
2000....................................................................... 6.04% 2,000
2002....................................................................... 6.59% 3,997
Thereafter................................................................. 6.26% 2,000
---------
Total................................................................. 6.31% $11,997
---------
---------
</TABLE>
11. INCOME TAXES
The provisions for income taxes are summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Income tax provision:
Current............................................................................ $ 3,072 $ 1,645 $ 1,718
Deferred........................................................................... 27 111 153
--------- --------- ---------
Total........................................................................... $ 3,099 $ 1,756 $ 1,871
--------- --------- ---------
--------- --------- ---------
</TABLE>
The reasons for the differences between the statutory federal income tax
rates and the effective tax rates are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995
------------------ ------------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Taxes at statutory rate................ $ 2,924 34.0% $ 1,753 34.0% $ 1,997 34.0%
Increase (decrease) resulting from:
State income tax, net................ 119 1.4% -- -- -- --
Other, net........................... 56 0.6% 3 0.1% (126) (2.2)%
--------- ---- --------- ---- --------- -----
Total............................. $ 3,099 36.0% $ 1,756 34.1% $ 1,871 31.8%
--------- ---- --------- ---- --------- -----
--------- ---- --------- ---- --------- -----
</TABLE>
30
<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
began 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.
The Company's deferred tax liability account was comprised of the following
at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
Deferred tax assets:
Loan fees deferred................................................ $ 158 $ 211
Stock based compensation.......................................... 168 --
Other............................................................. 72 --
------ -----
Total deferred tax assets...................................... 398 211
Deferred tax liabilities:
Office properties................................................. (168) (141)
Federal Home Loan Bank stock...................................... (544) (407)
Investment securities available for sale.......................... -- (126)
Loan loss reserves................................................ (61) (11)
------ -----
Total deferred tax liabilities................................. (773) (685)
------ -----
Net deferred tax liability $(375) $(474)
------ -----
------ -----
</TABLE>
Specifically exempted from deferred tax recognition requirements 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.
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, 1997 and 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.
12. BENEFIT PLANS
In 1997, the Company's shareholders approved the Stock Option Plan ("SOP")
and Management Recognition and Retention Plan ("MRR Plan").
STOCK OPTION PLAN--The SOP provides for a committee of the Company's Board
of Directors to award incentive stock options, non-qualified or compensatory
stock options and stock appreciation rights representing up to 515,375 shares of
Company stock. One-fifth of the options granted vested immediately upon grant,
with the balance vesting in equal amounts on the four subsequent anniversary
dates of the grant. Options granted vest immediately in the event of retirement,
disability, or death. Outstanding stock options can be exercised over a ten year
period.
Under the SOP, options have been granted to directors and key employees to
purchase common stock of the Company. The exercise price in each case equals the
fair market value of the Company's stock at the date of grant. Options granted
in the current year have exercise prices ranging from $19.25 to $20.38, and a
weighted average contract life of 9.4 years.
31
<PAGE>
A summary of the status of the Company's stock option plan as of December
31, 1997, and changes during the year ending on that date is presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTIONS SHARES PRICE
- ------- ------- ---------
<S> <C> <C>
Outstanding at beginning of year.............................. -- --
Granted....................................................... 496,073 $19.27
Exercised..................................................... -- --
Forfeited..................................................... (1,600) 19.25
------- ------
Outstanding at December 31, 1997.............................. 494,473 $ 19
------- ------
------- ------
Options exercisable at December 31, 1997...................... 99,215 $ 19
------- ------
------- ------
</TABLE>
The Company applies the provisions of APB Opinion No. 25 in accounting for
its stock option plan, as allowed under SFAS No. 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation cost has been recognized for options
granted to employees. Had compensation cost for these plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the methods of SFAS No. 123, the Company's pro forma net income
and pro forma earnings per share would have been as follows:
<TABLE>
<CAPTION>
1997
------------------------
AS REPORTED PRO FORMA
----------- -----------
<S> <C> <C>
Net income (in thousands)............................ $5,502 $4,987
Earnings per share:
Basic.............................................. $ 1.22 $ 1.10
Diluted............................................ $ 1.21 $ 1.10
</TABLE>
In determining the above pro forma disclosure, the fair value of options
granted during the year was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: expected volatility--22%, expected life of grant--6.5 years,
risk-free interest rate--5.7%, and expected dividend rate--1.05%. The weighted
average fair value of options granted during the fiscal year ended December 31,
1997, was $7.85 per share.
MANAGEMENT RECOGNITION AND RETENTION PLAN--The MRR Plan provides for a
committee of the Company's Board of Directors to award restricted stock to key
officers as well as non-employee directors. The MRR Plan authorizes the Company
to grant up to 206,150 shares of the Company stock, of which 195,844 shares were
granted during 1997. Compensation expense will be recognized based on the fair
market value of the shares on the grant date of $19.25 over the vesting period.
One-fifth of the shares granted to date (39,170 shares) vested immediately on
the date of grant. The remainder will vest at a rate of 25% per year over the
next four anniversary dates of the grants. Shares granted will be deemed vested
in the event of disability or death. At December 31, 1997, 124,000 shares
awarded under this plan have been purchased in the open market at a cost of $2.5
million. A liability has been established, based on the grant price, for the
remainder of the shares to be purchased. Differences between the price at the
date of grant and the actual purchase price will be recorded as an adjustment to
stockholders' equity. Approximately $1.2 million in compensation expense was
recognized during the current year related to the MRR Plan.
32
<PAGE>
EMPLOYEE STOCK OWNERSHIP PLAN--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 years ended December 31, 1997 and 1996, ESOP expense was
approximately $745,000 and $402,000, respectively.
OTHER POSTRETIREMENT BENEFITS--The Bank is a participant in a 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, 1997, 1996 and 1995, there was a net pension cost of
approximately $56,000, $100,000 and $43,000, respectively.
13. EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- -----------
<S> <C> <C> <C>
Basic EPS -
Income available to common stockholders................................ $ 5,501,617 4,527,043 $ 1.22
Effect of dilutive securities -
Stock options.......................................................... -- 22,365
------------ -------------
Diluted EPS -
Income available to common stockholders and assumed conversions........ $ 5,501,617 4,549,408 $ 1.21
------------ -------------
------------ -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- -----------
<S> <C> <C> <C>
Basic and Diluted EPS -
Income available to common stockholders................................ $ 3,400,036 4,730,010 $ 0.72
</TABLE>
During the year ended December 31, 1996, there were no potential dilutive
securities.
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank 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 Bank does not use financial instruments with
off-balance sheet risk as part of its asset/liability management program or for
trading purposes. The Bank'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 Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
33
<PAGE>
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 Bank
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Bank 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 Bank 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 Bank had the following outstanding commitments at December 31, 1997 (in
thousands):
<TABLE>
<S> <C>
Undisbursed construction loans..................................... $ 7,305
Commitments to originate mortgage loans............................ 3,585
Letters of credit.................................................. 54
Unused lines of credit............................................. 3,566
---------
Total............................................................ $ 14,510
---------
---------
</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, 1997, interest rates on commitments ranged from
6.0% to 10.0%.
15. 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, 1997 DECEMBER 31, 1996
---------------------- ----------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents.................. $ 6,627 $ 6,627 $ 6,819 $ 6,819
Investment securities:
Available for sale....................... -- -- 340 340
Held to maturity......................... 95,533 95,614 90,982 90,497
Federal Home Loan Bank stock............... 3,603 3,603 3,026 3,026
Loans receivable, net...................... 433,942 438,775 396,508 399,175
Accrued interest receivable................ 4,134 4,134 3,620 3,620
LIABILITIES:
Deposits:
Demand, NOW, money market and regular
savings................................ 90,731 90,731 89,363 89,363
Certificates of deposit.................. 360,143 363,640 333,495 336,303
Federal Home Loan Bank advances............ 11,997 12,147 -- --
Accrued interest payable................... 526 526 434 434
Advance payments by borrowers for taxes and
insurance................................ 900 900 806 806
Commitments................................ -- -- -- --
</TABLE>
34
<PAGE>
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 and Federal Home Loan
Bank advances is estimated using the rates currently offered for deposits and
advances 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, 1997 and 1996. 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.
16. 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 (see Note 14). 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.
17. 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.
35
<PAGE>
18. 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 (as defined in the regulations) to tangible assets
(as defined) and core capital (as defined) to adjusted tangible assets (as
defined), and of total risk-based capital (as defined) to risk-weighted assets
(as defined).
At December 31, 1997 and 1996, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum core (Tier I leverage), 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.
The Bank's actual capital amounts (in thousands) and ratios are also
presented in the table:
<TABLE>
<CAPTION>
TO BE CATEGORIZED
AS WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------- ------------------------ ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Tangible Capital to Tangible Assets............... $ 65,852 11.98% $ 8,244 1.50% N/A N/A
Core Capital to Adjusted Tangible Assets.......... 65,852 11.98% 16,488 3.00% $ 27,480 5.00%
Total Capital to Risk-Weighted Assets............. 66,619 22.52% 23,661 8.00% 29,576 10.00%
Tier I Capital to Risk-Weighted Assets............ 65,852 22.27% N/A N/A 17,746 6.00%
As of December 31, 1996:
Tangible Capital to Tangible Assets............... $ 60,932 12.30% $ 7,429 1.50% N/A N/A
Core Capital to Adjusted Tangible Assets.......... 60,932 12.30% 14,858 3.00% $ 24,764 5.00%
Total Capital to Risk-Weighted Assets............. 61,923 23.24% 21,315 8.00% 26,643 10.00%
Tier I Capital to Risk-Weighted Assets............ 60,932 22.87% N/A N/A 15,986 6.00%
</TABLE>
19. PARENT COMPANY ONLY FINANCIAL INFORMATION
The following condensed statements of financial condition, as of December
31, 1997 and 1996, and condensed statements of income and of cash flows for the
year ended December 31, 1997, and for the period from May 3, 1996 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, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................................................... $ 72 $ 49
Investment securities, held to maturity..................................................... -- 9,987
Loan to bank subsidiary..................................................................... 17,793 9,268
Accrued interest receivable................................................................. 82 210
Investment in Bank.......................................................................... 65,852 61,134
Other assets................................................................................ 866 178
--------- ---------
TOTAL ASSETS................................................................................ $ 84,665 $ 80,826
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities...................................................... $ 1,781 $ 68
Stockholders' equity........................................................................ 82,884 80,758
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................................. $ 84,665 $ 80,826
--------- ---------
--------- ---------
</TABLE>
CONDENSED STATEMENTS OF INCOME (in thousands)
YEAR ENDED DECEMBER 31, 1997, AND FOR THE
PERIOD FROM MAY 3, 1996 TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
INCOME:
Interest income--investment securities....................................................... $ 418 $ 537
Interest income--loan to Bank................................................................ 714 401
--------- ---------
Total income............................................................................... 1,132 938
EXPENSES:
Management fees.............................................................................. 66 44
Other operating expenses..................................................................... 142 64
--------- ---------
Total expenses............................................................................. 208 108
--------- ---------
INCOME BEFORE INCOME TAX EXPENSE AND EQUITY IN UNDISTRIBUTED EARNINGS OF BANK SUBSIDIARY....... 924 830
INCOME TAX EXPENSE............................................................................. 343 316
--------- ---------
INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF BANK SUBSIDARY............................... 581 514
EQUITY OF UNDISTRIBUTED EARNINGS OF BANK SUBSIDIARY............................................ 4,921 2,886
--------- ---------
NET INCOME..................................................................................... $ 5,502 $ 3,400
--------- ---------
--------- ---------
</TABLE>
37
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS (in thousands)
FOR THE YEAR ENDED DECEMBER 31, 1997, AND FOR THE
PERIOD FROM MAY 3, 1996 TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................................................. $ 5,502 $ 3,400
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of Bank................................................ (4,921) (2,886)
Repayment of ESOP loan.................................................................... 830 402
Stock compensation expense................................................................ 1,193 --
Changes in operating assets and liabilities:
Accrued interest receivable............................................................. 128 (210)
Other assets............................................................................ (688) (178)
Accrued expenses and other liabilities.................................................. 133 68
--------- ---------
Net cash provided by operating activities............................................. 2,177 596
--------- ---------
INVESTING ACTIVITIES:
Purchase of Bank stock...................................................................... -- (22,889)
Loan to Bank, net of repayments............................................................. (8,525) (9,268)
Purchases of investment securities--held to maturity........................................ -- (14,987)
Proceeds from maturities of investment securities--held to maturity......................... 9,987 5,000
--------- ---------
Net cash provided by (used in) investing activities................................... 1,462 (42,144)
--------- ---------
FINANCING ACTIVITIES:
Increase from issuance of common stock, net of related expenses............................. -- 45,777
Purchase of treasury stock.................................................................. -- (4,180)
Common stock acquired for employee stock benefit plan....................................... (2,539) --
Dividends paid.............................................................................. (1,077) --
--------- ---------
Net cash (used in) provided by financing activities................................... (3,616) 41,597
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS..................................................... 23 49
CASH AND CASH EQUIVALENTS:
Beginning of period......................................................................... 49 --
--------- ---------
End of period............................................................................... $ 72 $ 49
--------- ---------
--------- ---------
</TABLE>
38
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
FIRST FEDERAL BANK OF ARKANSAS, FA
<TABLE>
DIRECTORS EXECUTIVE OFFICERS
<S> <C>
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
MAIN OFFICE
200 West Stephenson
Harrison, Arkansas 72601
BRANCH OFFICES
<TABLE>
<S> <C> <C>
128 West Stephenson Ozark Mall--Highway 62-65 North 301 Highway 62 West
Harrison, Arkansas 72601 Harrison, Arkansas 72601 Yellville, Arkansas 72687
Corner Central & Willow 324 Highway 62-65 Bypass 307 North Walton Blvd.
Harrison, Arkansas 72601 Harrison, Arkansas 72601 Bentonville, Arkansas 72712
210 South Main 1303 West Hudson 3460 North College
Berryville, Arkansas 72616 Rogers, Arkansas 72756 Fayetteville, Arkansas 72703
668 Highway 62 East 201 East Henri De Tonti Blvd. 2025 North Crossover Road
Mountain Home, Arkansas 72653 Tontitown, Arkansas 72762 Fayetteville, AR 72703
249 West Main Street
Farmington, AR 72730
</TABLE>
39
<PAGE>
STOCKHOLDER INFORMATION
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 eleven
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 asistance wiith stock records, transfers or lost
certificates, should contact the Company's transfer agent, Registrar and
Transfer Company, at the telephone number listed above.
- -------------------------------------------------------------------------------
COMMON STOCK INFORMATION
Shares of the Company's common stock are traded under the symbol "FFBH"
on the Nasdaq National Market System. At March 4, 1998, the Company had
4,896,063 shares of common stock outstanding and had approximately 1,392
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).
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
QUARTER --------------------------- --------------------------
ENDED HIGH LOW DIVIDEND HIGH LOW DIVIDEND
- ---------------------------------------- ------- ------- -------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
March 31................................ $ 20.38 $ 15.88 $ 0.05 -- -- --
June 30................................. 20.63 17.38 0.05 $ 14.00 $ 12.88 --
September 30............................ 21.75 20.13 0.06 15.38 12.75 --
December 31............................. 24.38 20.00 0.06 16.50 14.75 --
</TABLE>
40
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0001006424
<NAME> FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,548
<INT-BEARING-DEPOSITS> 79
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 95,533
<INVESTMENTS-MARKET> 95,614
<LOANS> 435,138
<ALLOWANCE> 1,196
<TOTAL-ASSETS> 549,607
<DEPOSITS> 450,874
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,852
<LONG-TERM> 11,997
0
0
<COMMON> 39,902
<OTHER-SE> 42,982
<TOTAL-LIABILITIES-AND-EQUITY> 549,607
<INTEREST-LOAN> 33,804
<INTEREST-INVEST> 6,224
<INTEREST-OTHER> 417
<INTEREST-TOTAL> 40,445
<INTEREST-DEPOSIT> 23,331
<INTEREST-EXPENSE> 23,748
<INTEREST-INCOME-NET> 16,697
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 394
<EXPENSE-OTHER> 10,016
<INCOME-PRETAX> 8,601
<INCOME-PRE-EXTRAORDINARY> 5,502
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,502
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.21
<YIELD-ACTUAL> 7.79
<LOANS-NON> 4,957
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 4,628
<ALLOWANCE-OPEN> 1,251
<CHARGE-OFFS> 67
<RECOVERIES> 12
<ALLOWANCE-CLOSE> 1,196
<ALLOWANCE-DOMESTIC> 408
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 788
</TABLE>
