<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ___________
Commission File Number 0-28312
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
Texas 71-0785261
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification Number)
200 West Stephenson
Harrison, Arkansas 72601
(Address of principal executive office) (Zip Code)
</TABLE>
(870) 741-7641
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: As of August 10,
1998, there were issued and outstanding 4,818,463 shares of the Registrant's
Common Stock, par value $.01 per share.
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FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
TABLE OF CONTENTS
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PAGE
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
As of June 30, 1998 (unaudited) and December 31, 1997 1
Consolidated Statements of Income and Comprehensive Income
for the three and six months ended June 30, 1998 (unaudited)
and 1997 (unaudited) 2
Consolidated Statement of Stockholders' Equity for the six months
ended June 30, 1998 (unaudited) 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 (unaudited) and 1997 (unaudited) 4
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
--------- ---------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 7,431 $ 6,627
Investment securities - held to maturity 111,869 95,533
Federal Home Loan Bank stock 3,799 3,603
Loans receivable, net 441,608 433,942
Accrued interest receivable 4,502 4,134
Real estate acquired in settlement of loans, net 3,456 195
Office properties and equipment, net 5,105 5,218
Prepaid expenses and other assets 372 355
-------- --------
TOTAL ASSETS $578,142 $549,607
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $462,519 $450,874
Federal Home Loan Bank advances 28,341 11,997
Advance payments by borrowers for
taxes and insurance 536 900
Other liabilities 1,715 2,952
--------- ---------
Total liabilities 493,111 466,723
--------- ---------
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, 4,871,063 shares outstanding at June 30, 1998
and 4,896,063 at December 31, 1997 52 52
Additional paid-in capital 50,264 50,237
Employee stock benefit plans (5,622) (6,207)
Retained earnings-substantially restricted 45,178 42,982
--------- ---------
89,872 87,064
Treasury stock, at cost, 282,688 shares at
June 30, 1998 and 257,688 at December 31, 1997 (4,841) (4,180)
--------- ---------
Total stockholders' equity 85,031 82,884
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $578,142 $549,607
======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
1
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<TABLE>
<CAPTION>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)
Three Months-Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable $ 8,917 $ 8,411 $17,760 $ 16,631
Investment securities 1,911 1,546 3,646 2,998
Other 36 91 86 134
-------- -------- -------- --------
Total interest income 10,864 10,048 21,492 19,763
-------- -------- -------- --------
INTEREST EXPENSE:
Deposits 6,022 5,754 11,929 11,313
Other borrowings 353 78 624 91
-------- -------- -------- --------
Total interest expense 6,375 5,832 12,553 11,404
-------- -------- -------- --------
NET INTEREST INCOME 4,489 4,216 8,939 8,359
PROVISION FOR LOAN LOSSES 10 -- 25 --
-------- -------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,479 4,216 8,914 8,359
-------- -------- -------- --------
NONINTEREST INCOME:
Gain on sales of investment securities -- 394 -- 394
Deposit fee income 222 203 420 393
Other 216 275 476 403
-------- -------- -------- --------
Total noninterest income 438 872 896 1,190
-------- -------- -------- --------
NONINTEREST EXPENSES:
Salaries and employee benefits 1,667 2,105 3,314 3,371
Net occupancy expense 218 201 424 389
Federal insurance premiums 69 68 140 135
Provision for real estate losses 7 10 7 10
Data processing 217 206 445 411
Postage and supplies 112 100 209 189
Other 381 339 795 637
-------- -------- -------- --------
Total noninterest expenses 2,671 3,029 5,334 5,142
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 2,246 2,059 4,476 4,407
INCOME TAX PROVISION 784 739 1,594 1,577
-------- -------- -------- --------
NET INCOME 1,462 1,320 2,882 2,830
OTHER COMPREHENSIVE INCOME,
NET OF TAX:
Unrealized holding gain on securities
arising during period -- 46 -- 58
Less: reclassification adjustment for gains
included in net income -- (260) -- (260)
-------- -------- -------- --------
COMPREHENSIVE INCOME $ 1,462 $ 1,106 $ 2,882 $ 2,628
======== ======== ======== ========
EARNINGS PER SHARE:
Basic $ 0.32 $ 0.29 $ 0.63 $ 0.63
======== ======== ======== ========
Diluted $ 0.31 $ 0.29 $ 0.61 $ 0.62
======== ======== ======== ========
See notes to unaudited consolidated financial statements.
2
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<TABLE>
<CAPTION>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(In Thousands)
(Unaudited)
Employee
Additional Stock
Common Paid-In Benefit Retained Treasury
Stock Capital Plans Earnings Stock Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $ 52 $ 50,237 $ (6,207) $ 42,982 $ (4,180) $ 82,884
Net income 2,882 2,882
Repayment of ESOP loan 341 208 549
Common stock acquired for
employee stock benefit plan (434) (434)
Stock compensation expense 377 377
Shares released from
restricted stock trust 120 120
Purchase of treasury stock,
at cost (661) (661)
Dividends paid (686) (686)
-------- -------- -------- -------- -------- --------
Balance, June 30, 1998 $ 52 $ 50,264 $ (5,622) $ 45,178 $ (4,841) $ 85,031
======== ======== ======== ======== ======== ========
See notes to unaudited consolidated financial statements.
3
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<CAPTION>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended June 30,
-----------------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,882 $ 2,830
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 25 --
Provision for real estate losses 7 10
Deferred tax provision 235 75
Gain on sale of real estate owned -- (150)
Loss on sale of real estate owned 54 --
Gain on sale of investment securities -- (394)
Gain on sale of mortgage loans
originated to sell (104) (3)
Depreciation 252 230
Accretion of deferred loan fees (390) (301)
Repayment of ESOP loan 549 382
Stock compensation expense 377 817
Changes in operating assets & liabilities:
Accrued interest receivable (368) (210)
Prepaid expenses & other assets (17) 392
Other liabilities 31 342
-------- --------
Net cash provided by operating activities 3,533 4,020
-------- --------
INVESTING ACTIVITIES:
Purchases of investment securities-held to
maturity (51,287) (14,516)
Proceeds from sale of investment securities -
available for sale -- 406
Proceeds from maturities of investment
securities-held to maturity 34,755 14,008
Loan originations, net of repayments (18,636) (18,590)
Proceeds from sales of mortgage loans
originated to sell 7,986 294
Proceeds from sales of real estate owned 131 63
Purchases of office properties and equipment (138) (1,799)
-------- --------
Net cash used by investing activities (27,189) (20,134)
-------- --------
</TABLE>
(Continued)
4
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FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
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<CAPTION>
Six Months Ended June 30,
-----------------------------
1998 1997
-------- --------
<S> <C> <C>
FINANCING ACTIVITIES:
Net increase in deposits 11,644 21,293
Net increase in advances from FHLB 16,344 6,000
Net decrease in advance payments
by borrowers for taxes & insurance (364) (339)
Purchase of treasury stock (661) --
Common stock acquired for employee stock
benefit plan (1,817) (971)
Dividends paid (686) (490)
-------- --------
Net cash provided by financing activities 24,460 25,493
-------- --------
Net increase in cash and cash equivalents 804 9,379
CASH AND CASH EQUIVALENTS:
Beginning of period 6,627 6,819
-------- --------
End of period $ 7,431 $ 16,198
======== ========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for:
Interest $ 12,540 $ 11,291
======== ========
Income taxes $ 1,194 $ 1,408
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Real estate acquired in settlement of loans $ 3,453 $ 110
======== ========
Change in unrealized gains, net $ -- $ (202)
======== ========
Obligation assumed to acquire common stock
for the stock benefit plan $ -- $ 3,005
======== ========
(Concluded)
</TABLE>
See notes to unaudited consolidated financial statements.
5
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FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
First Federal Bancshares of Arkansas, Inc. (the "Corporation") was incorporated
under Texas law in January 1996 by First Federal Bank of Arkansas, FA (the
"Bank") in connection with the conversion of the Bank from a federally chartered
mutual savings and loan association to a federally chartered stock savings and
loan association, the issuance of the Bank's stock to the Corporation, and the
offer and sale of the Corporation's common stock by the Corporation (the
"Conversion"). Upon consummation of the Conversion on May 3, 1996, the
Corporation became the unitary holding company for the Bank.
The accompanying unaudited consolidated financial statements of the Corporation
have been prepared in accordance with instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. However, such information reflects all adjustments
(consisting solely of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the interim periods.
The results of operations for the three and six months ended June 30, 1998 are
not necessarily indicative of the results to be expected for the year ending
December 31, 1998. The unaudited consolidated financial statements and notes
thereto should be read in conjunction with the audited financial statements and
notes thereto for the year ended December 31, 1997, contained in the
Corporation's 1997 Annual Report to Stockholders.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Corporation and the Bank. All significant intercompany items have been
eliminated.
NOTE 3 - RECENTLY ISSUED ACCOUNTING STANDARDS
The Corporation has adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130") for the quarter ended March 31, 1998. This statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This statement
does not require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive income for
the period in that financial statement. The Corporation has presented the
components of other comprehensive income and total comprehensive income below
the total for net income in the consolidated statements of income and
comprehensive income. SFAS 130 also requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity
6
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section of the statement of financial condition. SFAS 130 requires restatement
of all periods presented.
NOTE 4 - EARNINGS PER SHARE
The weighted average number of common shares used to calculate earnings per
share for the three and six months ended June 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ ---------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic weighted-average shares 4,560,765 4,521,744 4,556,878 4,516,572
Effect of dilutive securities-
stock options 149,598 1,964 134,560 987
---------- ------ -------- ---------
Diluted weighted-average shares 4,710,363 4,523,708 4,691,438 4,517,559
</TABLE>
NOTE 5 - DECLARATION OF DIVIDENDS
At their meeting on May 20, 1998, the Board of Directors declared a $.07 (seven
cent) per share cash dividend on the common stock of the Corporation. The cash
dividend was paid on June 24, 1998 to the stockholders of record at the close of
business on June 10, 1998.
NOTE 6 - INVESTMENT SECURITIES
Investment securities consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 1998
------------------------------
Amortized Fair
Cost Value
----------- ---------
<S> <C> <C>
HELD TO MATURITY
U. S. Government and
Agency obligations $111,766 $111,924
Mortgage-backed securities
-FHLMC 103 108
---------- ----------
Total $111,869 $112,032
======== ========
</TABLE>
7
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NOTE 7 - LOANS RECEIVABLE
Loans receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 1998
--------------------
<S> <C>
First mortgage loans:
One- to four- family residences $377,187
Other properties 20,329
Construction 21,076
Less:
Unearned discounts (304)
Undisbursed loan funds (8,529)
Deferred loan fees, net (3,322)
--------
Total first mortgage loans 406,437
Consumer and other loans:
Commercial 7,404
Automobile 8,683
Consumer 3,608
Home equity and second mortgage 12,700
Savings 1,683
Other 1,972
Add deferred loan costs 145
--------
Total consumer and other loans 36,195
--------
Allowance for loan losses (1,024)
--------
Loans receivable, net $441,608
========
</TABLE>
Non-accrual loans at June 30, 1998 were $1.5 million. All loans 90 days or more
past due are recorded as non-accrual. The Bank reclassified a previously
reported non-accrual commercial real estate loan to real estate acquired in
settlement of loans in the first quarter of 1998. The value of the property was
estimated at $3.2 million based upon an appraisal less estimated selling
expenses. The property is currently operated by a management company and is
being marketed for disposition. It is anticipated that this commercial property
will be sold, or at least committed to sell in the third quarter.
A summary of the activity in the allowances for loan and real estate losses is
as follows (in thousands):
<TABLE>
<CAPTION>
Loans Real Estate
------- -----------
<S> <C> <C>
Balance at December 31, 1997 $1,196 $ --
Provisions for estimated losses 25 7
Recoveries 2 --
Losses charged off (199) (7)
------ ------
Balance at June 30, 1998 $1,024 $ -
====== ======
</TABLE>
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
At June 30, 1998, the Corporation's assets amounted to $578.1 million
as compared to $549.6 million at December 31, 1997. The $28.5 million or 5.2%
increase was primarily due to an increase of $16.3 million or 17.1% in
investment securities - held to maturity, a $7.7 million or 1.8% increase in
loans receivable, and a $3.3 million increase in real estate acquired in
settlement of loans, net.
The loans receivable increase resulted from the continued origination of loans
during the six months ended June 30, 1998. Originations for the six month period
ended June 30, 1998 consisted of $56.8 million in one- to four- family
residential loans, $600,000 in multi-family residential loans, $8.9 million in
commercial loans, $13.2 million in construction loans and $12.7 million in
consumer installment loans, of which $4.3 million consisted of home equity loans
and $4.1 million consisted of automobile loans. At June 30, 1998, the Bank had
outstanding loan commitments of $5.0 million, unused lines of credit of $3.9
million, and the undisbursed portion of construction loans of $8.5 million. Real
estate acquired in settlement of loans increased $3.3 million primarily due to
the Bank accepting a deed in lieu of foreclosure on a commercial real estate
loan.
Liabilities increased $26.4 million or 5.7% to $493.1 million at June 30, 1998
compared to $466.7 million at December 31, 1997. The increase in liabilities was
primarily due to an increase of $11.6 million or 2.6% in deposits and a $16.3
million or 136.2% increase in advances from the Federal Home Loan Bank ("FHLB")
of Dallas. The increases in deposits and advances from the FHLB of Dallas were
used to fund the net loan increase, to purchase additional investment securities
and to increase cash and cash equivalents. Stockholders' equity amounted to
$85.0 million or 14.7% of total assets at June 30, 1998 compared to $82.9
million or 15.1% of total assets at December 31, 1997. The increase in
stockholders' equity was primarily due to net income in the amount of $2.9
million. Such increase during the six months ended June 30, 1998 was partially
offset by the payment of cash dividends aggregating $686,000 and the purchase of
$661,000 of treasury stock.
Non-performing assets, consisting of non-accruing loans and
repossessed assets, amounted to $5.0 million or .86% of total assets at June 30,
1998, compared to $5.2 million or .94% of total assets at December 31, 1997. The
Bank reclassified a previously reported non-accrual commercial real estate loan
to real estate acquired in settlement of loans in the first quarter of 1998. The
value of the property was estimated at $3.2 million based upon an appraisal less
estimated selling expenses. The property is currently operated by a management
company and is being marketed for disposition. It is anticipated that this
commercial property will be sold, or at least committed to sell in the third
quarter.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
GENERAL. The Corporation reported net income of $1.5 million during
the three months ended June 30, 1998 compared to net income of $1.3 million for
the same period in 1997. The increase of
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$142,000 in net income in the 1998 period compared to the same period in 1997
was primarily due to an increase in net interest income and a reduction in
noninterest expenses which was partially offset by a reduction in noninterest
income. Net interest income rose from $4.2 million for the three months ended
June 30, 1997 to $4.5 million for the same period in 1998. Net interest income
is determined by the Corporation's interest rate spread (i.e., the difference
between the yields earned on its interest-earning assets and the rates paid on
its interest-bearing liabilities) and the relative amounts of interest-earning
assets and interest-bearing liabilities. The Corporation's interest rate spread
and net interest margin remained relatively unchanged at 2.56% and 3.23%,
respectively, for the 1998 three month period compared to 2.54% and 3.29%,
respectively, for the 1997 three month period. The ratio of interest-earning
assets to interest-bearing liabilities was 114.6% for the 1998 three month
period compared to 116.5% for the 1997 three month period. These and other
significant fluctuations in operations are discussed below.
INTEREST INCOME. Interest income amounted to $10.9 million for the
three months ended June 30, 1998 compared to $10.1 million for the same period
in 1997. The increase of $816,000 or 8.1% was primarily due to an increase in
the average balance of loans receivable. The increase in the average balance of
loans receivable was due to portfolio growth. Such increase was partially offset
by a decline in the average yield earned on such assets due primarily to the
origination of loans at market interest rates which are currently lower than the
average yield of the Bank's loan portfolio. The average balance of investment
securities increased due to additional purchases of investment securities. The
average balance and rate earned on investment securities increased due to the
purchase of longer term investments at rates higher than the average yield
earned on such assets in portfolio.
INTEREST EXPENSE. Interest expense increased $543,000 or 9.3% to $6.4
million for the three months ended June 30, 1998 compared to $5.8 million for
the same period in 1997. Such increase was primarily due to an increase in the
average balance of deposits as well as an increase in the average balance of
FHLB of Dallas advances.
NONINTEREST INCOME. Noninterest income amounted to $438,000 for the
three months ended June 30, 1998 compared to $872,000 for the same period in
1997. The decrease of $434,000 or 49.8% was due primarily to a gain of $394,000
recognized in 1997 on the sale of Federal Home Loan Mortgage Corporation stock
and to the recognition in 1997 of $145,000 on previously deferred profit on the
sale of real estate owned. The decrease in noninterest income for the three
months ended June 30, 1998 compared to the three months ended June 30, 1997 was
partially offset by an increase of $59,000 from $3,000 to $62,000 in gain on the
sale of mortgage loans in the secondary market.
NONINTEREST EXPENSE. Noninterest expenses decreased $358,000 or 11.8%
between the 1998 and 1997 three month periods. As discussed below, the decrease
was primarily due to the cost recognition of the management recognition and
retention plan. Increases in noninterest expenses were due primarily to
increased costs associated with the Corporation's employee stock ownership plan
("ESOP") as a result of an increase in the Corporation's stock price, occupancy
costs due to
10
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branch expansions, salaries and benefits due to increased personnel, legal fees
in connection with a commercial loan foreclosure and a loss on disposition of
real estate owned. Salaries and employee benefits decreased by $438,000 or 20.8%
from $2.1 million to $1.7 million for the three month periods ended June 30,
1997 and 1998, respectively. Costs related to the management recognition and
retention plan amounted to $189,000 compared to $817,000 for the three month
periods ended June 30, 1998 and 1997, respectively. The 1997 period expense
resulted primarily from the cost recognition due to an immediate 20% vesting
after the plan was approved by the Corporation's shareholders. The recognition
of costs related to the release of unallocated shares from the ESOP increased by
$88,000 or 49.7% from $177,000 to $265,000 for the three month periods ended
June 30, 1997 and 1998, respectively, due to the increase in the Corporation's
stock price. Compensation expenses associated with the ESOP are based on the
number of shares released from the ESOP Trust and the current price of the
Corporation's common stock. In addition, salaries and employee benefits
increased due to normal salary and merit increases as well as an increase in
personnel resulting from expansion of the Bank's operations. Occupancy expenses
were $218,000 and $201,000 for the three month periods ended June 30, 1998 and
1997, respectively, resulting in a $17,000 or 8.5% increase. Such increase was
primarily due to branch expansions.
INCOME TAXES. Income taxes amounted to $784,000 and $739,000 for the
three months ended June 30, 1998 and 1997, respectively, resulting in effective
tax rates of 34.9% and 35.9%, respectively.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
GENERAL. The Corporation reported net income of $2.9 million during
the six months ended June 30, 1998 compared to $2.8 million for the same period
in 1997. The increase of $52,000 or 1.8% in net income in the 1998 period
compared to the same period in 1997 was due to an increase in net interest
income which was partially offset by an increase in noninterest expenses and a
reduction in noninterest income. Net interest income increased by $580,000 or
6.9% from $8.4 million to $8.9 million for the six month periods ended June 30,
1997 and 1998, respectively. In addition, the Corporation's interest rate spread
remained unchanged at 2.56% and net interest margin decreased to 3.25% for the
1998 six month period compared to 2.56% and 3.31%, respectively, for the 1997
six month period.
INTEREST INCOME. Interest income amounted to $21.5 million for the
six months ended June 30, 1998 compared to $19.8 million for the same period in
1997. The increase of $1.7 million or 8.7% was primarily due to an increase in
the average balance of loans receivable as a result of continued loan demand and
portfolio growth. Such increase was partially offset by a decline in the average
yield earned on such assets due primarily to the origination of loans at market
interest rates which are currently lower than the average yield of the Bank's
loan portfolio. The average balance of investment securities increased due to
additional purchases of investment securities. The average balance and rate
earned on investment securities increased due to the purchase of longer term
investments at rates higher than the average yield earned on such assets in
portfolio.
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INTEREST EXPENSE. Interest expense increased $1.2 million or 10.1% to
$12.6 million for the six months ended June 30, 1998 compared to $11.4 million
for the same period in 1997. Such increase was primarily due to an increase in
the average balance of deposits as well as an increase in the average balance of
FHLB of Dallas advances.
NONINTEREST INCOME. Noninterest income amounted to $896,000 for the
six months ended June 30, 1998 compared to $1.2 million for the same period in
1997. The decrease of $294,000 or 24.7% was due primarily to a gain of $394,000
recognized in 1997 on the sale of Federal Home Loan Mortgage Corporation stock
and to the recognition in 1997 of $145,000 on previously deferred profit on the
sale of real estate owned. The decrease in noninterest income for the six months
ended June 30, 1998 compared to the six months ended June 30, 1997 was partially
offset by an increase of $100,000 from $3,000 to $103,000 in gain on the sale of
mortgage loans in the secondary market.
NONINTEREST EXPENSE. Noninterest expenses increased $192,000 or 3.7%
between the 1998 and 1997 six month periods. The increase was primarily due to
increased costs associated with the Corporation's ESOP as a result of an
increase in the Corporation's stock price, occupancy costs due to branch
expansions, salaries and benefits due to increased personnel, legal fees in
connection with a commercial loan foreclosure and a loss on disposition of real
estate owned. Such increases were partially offset by a decrease in cost
recognition related to the management recognition and retention plan and a
decrease in salaries and employee benefits. The recognition of costs related to
the release of unallocated shares from the ESOP increased by $157,000 or 45.7%
from $344,000 to $501,000 for the six month periods ended June 30, 1997 and
1998, respectively, due to the increase in the Corporation's stock price.
Compensation expenses associated with the ESOP are based on the number of shares
released from the ESOP Trust and the current price of the Corporation's common
stock. Salaries and employee benefits increased due to normal salary and merit
increases as well as an increase in personnel resulting from expansion of the
Bank's operations. Occupancy expenses were $424,000 and $389,000 for the six
month periods ended June 30, 1998 and 1997, respectively, resulting in a $35,000
or 9.0% increase. Such increase was primarily due to branch expansions. Costs
related to the management recognition and retention plan amounted to $377,000
compared to $817,000 for the six month periods ended June 30, 1998, and 1997,
respectively. The 1997 period expense resulted primarily from the cost
recognition due to an immediate 20% vesting after the plan was approved by the
Corporation's shareholders. Salaries and employee benefits decreased by $57,000
or 1.7% from $3.4 million to $3.3 million for the six month periods ended June
30, 1997 and 1998, respectively.
INCOME TAXES. Income taxes amounted to $1.6 million for both the six
month period ended June 30, 1998 and June 30, 1997, resulting in effective tax
rates of 35.6% and 35.8%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's liquidity, represented by cash and cash
equivalents, is a product of its operating, investing and financing activities.
The Corporation's primary sources of funds are
12
<PAGE> 15
deposits, amortization, prepayments and maturities of outstanding loans,
maturities of investment securities and other short-term investments and funds
provided from operations. While scheduled loan amortization, 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 Corporation manages the
pricing of its deposits to maintain a steady deposit balance. In addition, the
Corporation invests excess funds in overnight deposits and other short-term
interest-earning assets which provide liquidity to meet lending requirements.
The Corporation has generally been able to generate enough cash through the
retail deposit market, its traditional funding source, to offset the cash
utilized in investing activities. As an additional source of funds, the Bank has
borrowed from the FHLB of Dallas. At June 30, 1998, the Bank had outstanding
advances from the FHLB of Dallas in the amount of $28.3 million. Such advances
were used in the Bank's normal operations and investing activities.
As of June 30, 1998, the Bank's regulatory capital was in excess of
all applicable regulatory capital adequacy requirements. At June 30, 1998, the
Bank's tangible, core and risk-based capital ratios amounted to 11.9%, 11.9% and
22.5%, respectively, compared to regulatory requirements of 1.5%, 3.0% and 8.0%,
respectively.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein
have been prepared in accordance with instructions to Form 10-Q, which require
the measurement of financial position and operating results in terms of
historical dollars, without considering changes in relative purchasing power
over time due to inflation.
Unlike most industrial companies, virtually all of the Bank's assets
and liabilities are monetary in nature. As a result, interest rates generally
have a more significant impact on a financial institution's performance than
does the effect of inflation.
THE YEAR 2000 ISSUE
The Bank is actively working on issues relating to the Year 2000
century change. The Bank has conducted a review of its computer systems as well
as other support systems, vendors, suppliers, and commercial loan customers to
determine those that could be affected by the century change.
The majority of the Bank's data processing is provided by a third
party service bureau that processes data for over 250 banks nationwide. The
service bureau is actively involved in resolving the Year 2000 issue and is
providing the Bank with frequent reports on its progress and is conducting Year
2000 seminars that have been attended by key Bank employees.
An important part of determining Year 2000 compliance is testing of
the various systems within the Bank. A plan for testing has been developed and
the Bank has begun testing in accordance with the plan. Testing will take place
throughout the remainder of 1998 and should be
13
<PAGE> 16
completed by the first quarter of 1999. Tests will be performed of the Bank's
service bureau and account processing. A contingency plan is being developed as
well to help ensure that system processing will not be stopped due to any Year
2000 problems that might be encountered.
The Bank believes that, based on the current progress of the Bank's
service bureau, the Year 2000 century change will not pose significant
operational problems for the Bank's computer system and account processing.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements and
information relating to the Corporation that are based on the beliefs of
management as well as assumptions made by and information currently available
to management. In addition, in those and other portions of this document, the
words "anticipate," "believe," "estimate," "except," "intend," "should" and
similar expressions, or the negative thereof, as they relate to the Corporation
or the Corporation's management, are intended to identify forward-looking
statements. Such statements reflect the current views of the Corporation with
respect to future looking events and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended. The Corporation does not
intend to update these forward-looking statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
For a discussion of the Corporation's asset and liability management
policies as well as the potential impact of interest rate changes upon the
market value of the Bank's portfolio equity, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Corporation's
1997 Annual Report to Stockholders. There has been no material change in the
Corporation's asset and liability position or the market value of the Bank's
portfolio equity since December 31, 1997.
14
<PAGE> 17
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
PART II
Item 1. Legal Proceedings
Neither the Corporation nor the Bank is involved in any
pending legal proceedings other than non-material legal
proceedings occurring in the ordinary course of business.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On April 23, 1998, the Corporation held an annual meeting
of stockholders for the following purposes:
(1) To elect Larry J. Brandt as a director
for a term of three years; and
(2) To ratify the appointment by the Board
of Directors of Deloitte and Touche LLP
as the Corporation's independent
auditors for the year ending December
31, 1998.
The results of the voting are set forth below:
Proposal One (Election of Director):
AGAINST/
NAME FOR WITHHELD
Larry J. Brandt 4,382,537 16,999
Proposal Two (Ratification of Auditors):
FOR AGAINST ABSTAIN
4,369,264 3,200 27,072
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
15
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
Date: August 10, 1998 By: /s/Larry J. Brandt
------------------
Larry J. Brandt
President
Date: August 10, 1998
By: /s/Tommy W. Richardson
-----------------------
Tommy W. Richardson
Chief Financial Officer
16
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