<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 September 30, 1999
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)
<TABLE>
<S> <C>
Texas 71-0785261
- -------------------------------------------------------------- ----------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification Number)
</TABLE>
<TABLE>
<S> <C>
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 November 9,
1999, there were issued and outstanding 4,126,962 shares of the Registrant's
Common Stock, par value $.01 per share.
<PAGE> 2
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I. FINANCIAL INFORMATION
- ------- ---------------------
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
As of September 30, 1999 (unaudited) and December 31, 1998 1
Consolidated Statements of Income and Comprehensive Income
for the three and nine months ended September 30, 1999
(unaudited) and 1998 (unaudited) 2
Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 1999 (unaudited) 3
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 (unaudited) and 1998 (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 15
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
<PAGE> 3
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
ASSETS (Unaudited)
------------------ ---------------
<S> <C> <C>
Cash and cash equivalents $ 9,769 $ 26,163
Investment securities - held to maturity 181,676 127,175
Federal Home Loan Bank stock 4,073 3,912
Loans receivable, net of allowance 456,633 442,486
Accrued interest receivable 5,178 4,755
Real estate acquired in settlement of loans, net 4,207 4,270
Office properties and equipment, net 6,847 6,055
Prepaid expenses and other assets 530 239
--------- ---------
TOTAL ASSETS $ 668,913 $ 615,055
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 509,286 $ 481,093
Federal Home Loan Bank advances 75,976 48,985
Advance payments by borrowers for
taxes and insurance 767 1,006
Other liabilities 2,682 1,990
--------- ---------
Total liabilities 588,711 533,074
--------- ---------
MINORITY INTEREST 933 958
--------- ---------
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, 4,157,962 and 4,512,760 shares outstanding at September 30, 1999
and December 31, 1998, respectively 52 52
Additional paid-in capital 50,721 50,487
Employee stock benefit plans (4,159) (5,037)
Retained earnings-substantially restricted 51,396 47,678
--------- ---------
98,010 93,180
Treasury stock, at cost, 995,789 and
640,991 shares at September 30, 1999 and
December 31, 1998, respectively (18,741) (12,157)
--------- ---------
Total stockholders' equity 79,269 81,023
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 668,913 $ 615,055
========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
1
<PAGE> 4
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except earnings per share)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -----------------------------
1999 1998 1999 1998
--------- ---------- ---------- ---------
INTEREST INCOME:
<S> <C> <C> <C> <C>
Loans receivable $ 8,896 $ 9,010 $26,478 $26,771
Investment securities 3,006 2,011 7,884 5,656
Other 32 31 422 117
------- ------- ------- -------
Total interest income 11,934 11,052 34,784 32,544
------- ------- ------- -------
INTEREST EXPENSE:
Deposits 6,210 6,081 18,282 18,011
Other borrowings 853 464 2,117 1,087
------- ------- ------- -------
Total interest expense 7,063 6,545 20,399 19,098
------- ------- ------- -------
NET INTEREST INCOME 4,871 4,507 14,385 13,446
PROVISION FOR LOAN LOSSES -- -- 20 25
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,871 4,507 14,365 13,421
------- ------- ------- -------
NONINTEREST INCOME:
Deposit fee income 259 237 718 657
Other 163 277 611 752
------- ------- ------- -------
Total noninterest income 422 514 1,329 1,409
------- ------- ------- -------
NONINTEREST EXPENSES:
Salaries and employee benefits 1,768 1,603 5,241 4,917
Net occupancy expense 228 226 664 650
Federal insurance premiums 71 70 211 209
Provision for real estate losses -- 8 312 14
Data processing 228 207 644 653
Postage and supplies 102 90 317 299
Other 408 379 1,187 1,174
------- ------- ------- -------
Total noninterest expenses 2,805 2,583 8,576 7,916
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 2,488 2,438 7,118 6,914
INCOME TAX PROVISION 837 861 2,367 2,455
------- ------- ------- -------
NET INCOME AND COMPREHENSIVE INCOME $ 1,651 $ 1,577 $ 4,751 $ 4,459
======= ======= ======= =======
EARNINGS PER SHARE:
Basic $ 0.42 $ 0.35 $ 1.17 $ 0.99
======= ======= ======= =======
Diluted $ 0.42 $ 0.35 $ 1.17 $ 0.96
======= ======= ======= =======
Cash Dividends Declared $ 0.08 $ 0.07 $ 0.24 $ 0.21
======= ======= ======= =======
</TABLE>
See notes to unaudited consolidated financial statements.
2
<PAGE> 5
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Employee
Additional Stock
Common Paid-In Benefit Retained Treasury
Stock Capital Plans Earnings Stock Total
----- ------- ----- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $52 $50,487 $(5,037) $47,678 $(12,157) $81,023
Net income 4,751 4,751
Release of ESOP shares 234 312 546
Stock compensation expense 566 566
Purchase of treasury stock, at (6,584) (6,584)
cost
Dividends paid (1,033) (1,033)
------ ---------- ----------- --------- ----------- --------
Balance, September 30, 1999 $ 52 $50,721 $(4,159) $51,396 $(18,741) $79,269
=== ====== ====== ====== ======= ======
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE> 6
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------
1999 1998
-------------- ---------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 4,751 $ 4,459
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 20 25
Provision for real estate losses 312 14
Deferred tax provision (benefit) (180) 285
Gain on sale of real estate owned (3) (3)
Loss on sale of real estate owned 9 61
Gain on sale of mortgage loans
originated to sell (177) (168)
Depreciation 393 379
Real estate owned depreciation 96 83
Accretion of deferred loan fees, net (600) (598)
Release of ESOP shares 546 778
Stock compensation expense 566 565
Other (56) 12
Changes in operating assets & liabilities:
Accrued interest receivable (423) (360)
Prepaid expenses & other assets (291) (151)
Other liabilities 873 479
-------- --------
Net cash provided by operating activities 5,836 5,860
-------- --------
INVESTING ACTIVITIES:
Purchases of investment securities-held to
maturity (83,102) (86,716)
Proceeds from maturities of investment
securities-held to maturity 28,432 53,859
Loan originations, net of repayments (28,220) (27,958)
Proceeds from sales of mortgage loans
originated to sell 14,360 13,311
Proceeds from sales of real estate owned 157 359
Purchases of office properties and equipment (1,185) (443)
-------- --------
Net cash used by investing activities (69,558) (47,588)
-------- --------
</TABLE>
(Continued)
4
<PAGE> 7
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------
1999 1998
------------- -------------
<S> <C> <C>
FINANCING ACTIVITIES:
Net increase in deposits 28,193 15,344
Advances from FHLB 68,650 113,700
Repayment of advances from FHLB (41,659) (78,184)
Net decrease in advance payments
by borrowers for taxes & insurance (239) (48)
Purchase of treasury stock (6,584) (5,220)
Common stock acquired for employee stock
benefit plan -- (1,817)
Dividends paid (1,033) (1,014)
--------- ---------
Net cash provided by financing activities 47,328 42,761
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (16,394) 1,033
CASH AND CASH EQUIVALENTS:
Beginning of period 26,163 6,627
--------- ---------
End of period $ 9,769 $ 7,660
========= =========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for:
Interest $ 20,228 $ 18,933
========= =========
Income taxes $ 2,574 $ 2,044
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Real estate acquired in settlement of loans $ 644 $ 3,679
========= =========
Loans to facilitate sales of real estate owned $ 174 $ 121
========= =========
</TABLE>
(Concluded)
See notes to unaudited consolidated financial statements.
5
<PAGE> 8
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. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. However, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods.
The results of operations for the nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1999. 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, 1998, contained in the
Corporation's 1998 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
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as "derivatives"), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure those
instruments at fair value. SFAS 133, as amended by SFAS 137, is effective for
fiscal years beginning after June 15, 2000. Management has not yet made a
determination as to the effect, if any, the adoption of SFAS 133 will have on
the Corporation's financial position or results of operations.
6
<PAGE> 9
In October 1998, the FASB issued Statement No. 134, Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise ("SFAS 134"). This statement
amends SFAS 65 to require that after the securitization of mortgage loans held
for sale, an entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities or other retained interests based on its
ability and intent to sell or hold those investments. This statement conforms
the subsequent accounting for securities retained after the securitization of
mortgage loans by a mortgage banking enterprise with the subsequent accounting
for securities retained after the securitization of other types of assets by a
nonmortgage banking enterprise. The adoption of SFAS No. 134 did not have a
material effect on the Corporation's financial position or results of
operations.
NOTE 4 - EARNINGS PER SHARE
The weighted average number of common shares used to calculate earnings per
share for the three and nine months ended September 30, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------------- -----------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic weighted - average shares 3,938,312 4,465,271 4,058,077 4,526,007
Effect of dilutive securities -- 62,085 -- 112,726
--------- --------- --------- ---------
Diluted weighted - average shares 3,938,312 4,527,356 4,058,077 4,638,733
</TABLE>
NOTE 5 - DECLARATION OF DIVIDENDS
At their meeting on August 24, 1999, the Board of Directors declared an $.08
(eight cent) per share cash dividend on the common stock of the Corporation. The
cash dividend was paid on September 23, 1999 to the stockholders of record at
the close of business on September 9, 1999.
NOTE 6 - INVESTMENT SECURITIES
Investment securities consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 1999
----------------------------
Amortized Fair
HELD TO MATURITY Cost Value
-------- --------
<S> <C> <C>
U. S. Government and
Agency obligations $181,658 $172,638
Mortgage-backed securities
-FHLMC 18 17
-------- --------
Total $181,676 $172,655
======== ========
</TABLE>
7
<PAGE> 10
NOTE 7 - LOANS RECEIVABLE
Loans receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 1999
-------------------------
<S> <C>
First mortgage loans:
One- to four- family residences $366,695
Other properties 29,207
Construction 26,058
Less:
Unearned discounts (248)
Undisbursed loan funds (10,915)
Deferred loan fees, net (2,999)
---------
Total first mortgage loans 407,798
---------
Consumer and other loans:
Commercial 13,120
Automobile 13,062
Consumer 4,593
Home equity and second mortgage 14,586
Savings 1,689
Other 2,359
Add deferred loan costs 192
----------
Total consumer and other loans 49,601
----------
Allowance for loan losses (766)
----------
Loans receivable, net $456,633
==========
</TABLE>
Non-accrual loans at September 30, 1999 were $1.2 million. All loans 90 days or
more past due or exhibiting characteristics indicating that it is unlikely that
interest will be collected are recorded as non-accrual.
A summary of the activity in the allowance for loan losses is as follows (in
thousands):
<TABLE>
<S> <C>
Balance at December 31, 1998 $ 771
Provisions for estimated losses 20
Recoveries 22
Losses charged off (47)
-----
Balance at September 30, 1999 $ 766
=====
</TABLE>
8
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
At September 30, 1999, the Corporation's assets amounted to $668.9
million as compared to $615.1 million at December 31, 1998. At September 30,
1999 compared to December 31, 1998, investment securities-held to maturity
increased $54.5 million or 42.9%, net loans receivable increased $14.1 million
or 3.2%, and office properties and equipment increased $792,000 or 13.1%. Such
increases in assets were partially offset by a $16.4 million decrease in cash
and cash equivalents. Loan originations for the nine month period ended
September 30, 1999 consisted of $78.6 million in one- to four- family
residential loans, $1.8 million in multi-family residential loans, $15.5 million
in commercial loans, $24.7 million in construction loans and $24.5 million in
consumer installment loans, of which $8.6 million consisted of home equity loans
and $9.1 million consisted of automobile loans. At September 30, 1999, the Bank
had outstanding loan commitments of $3.6 million, unused lines of credit of $6.3
million, and the undisbursed portion of construction loans of $10.9 million. The
increase in office properties and equipment was primarily due to branch
expansion and the replacement of computer equipment. Liabilities increased $55.6
million or 10.4% to $588.7 million at September 30, 1999 compared to $533.1
million at December 31, 1998. The increase in liabilities was primarily due to
an increase of $28.2 million or 5.9% in deposits and an increase of $27.0
million or 55.1% in FHLB of Dallas advances. The increases in deposits and FHLB
of Dallas advances were used to purchase additional investment securities and to
fund the increase in net loans receivable. Stockholders' equity amounted to
$79.3 million or 11.9% of total assets at September 30, 1999 compared to $81.0
million or 13.2% of total assets at December 31, 1998. The decrease in
stockholders' equity was primarily due to the purchase of treasury stock
totaling $6.6 million and to a lesser extent due to the payment of cash
dividends aggregating $1.0 million. Such decrease during the nine months ended
September 30, 1999 was partially offset by net income of $4.8 million due to
continued profitable operations.
Non-performing assets, consisting of non-accruing loans and
repossessed assets, amounted to $5.4 million or .81% of total assets at
September 30, 1999, compared to $5.8 million or .94% of total assets at December
31, 1998. The majority ownership of a partnership, which owns and operates a
commercial real estate property that was acquired in the settlement of a loan,
was consolidated with the Bank's financial position and operations during the
quarter ended September 30, 1998. Such property had a carrying value at
September 30, 1999 of $3.6 million. A contract to sell this property was
finalized in June 1999. As a result of this agreement, the property was written
down by a charge against the 1999 second quarter and year-to-date income of
$310,000 with an after-tax effect of approximately $205,000. The contract to
sell has been extended to November 15th for the buyer to obtain financing during
which time the buyer may rescind the offer. The terms of the contract extension
include closing the transaction by the end of the year. If this contract to sell
is rescinded, the property will be re-appraised in the fourth quarter.
9
<PAGE> 12
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
GENERAL. The Corporation reported net income of $1.7 million during
the three months ended September 30, 1999 compared to net income of $1.6 million
for the same period in 1998. The increase of $74,000 in net income in the 1999
period compared to the same period in 1998 was primarily due to an increase in
net interest income which was partially offset by an increase in noninterest
expense. Net interest income rose from $4.5 million for the three months ended
September 30, 1998 to $4.9 million for the same period in 1999. 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 was 2.60% and 3.09%, respectively,
for the 1999 three month period compared to 2.54% and 3.18%, respectively, for
the 1998 three month period. The ratio of interest-earning assets to
interest-bearing liabilities was 110.8% for the 1999 three month period compared
to 114.0% for the 1998 three month period. These and other significant
fluctuations in operations are discussed below.
INTEREST INCOME. Interest income amounted to $11.9 million for the
three months ended September 30, 1999 compared to $11.0 million for the same
period in 1998. The increase of $882,000 or 8.0% was primarily due to an
increase in the average balance of investment securities as a result of
additional purchases of investment securities. Such increase was partially
offset by a decline in the average yield earned on loans due primarily to the
origination of loans at market rates which are currently lower than the average
yield of the Bank's loan portfolio.
INTEREST EXPENSE. Interest expense increased $518,000 or 7.9% to $7.1
million for the three months ended September 30, 1999 compared to $6.5 million
for the same period in 1998. 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. Such increases were offset by a decrease in the average
rate paid on deposit accounts.
NONINTEREST INCOME. Noninterest income amounted to $422,000 for the
three months ended September 30, 1999 compared to $514,000 for the same period
in 1998. For the three months ended September 30, 1999, the net loss from
operations of real estate owned was $34,000 compared to net income of $35,000
for the same period in 1998. Such decrease in the three month comparable periods
was also due to a decrease of $36,000 from $64,000 to $28,000 in gain on the
sale of mortgage loans in the secondary mortgage market. Deposit fee income
increased $22,000 or 9.4% between the 1999 and 1998 three month periods ended
September 30.
NONINTEREST EXPENSE. Noninterest expenses increased $222,000 or 8.6%
between the 1999 and 1998 three month periods ended September 30. Such increase
in the 1999 three month period was primarily due to an increase of $165,000 in
salaries and employee benefits resulting from normal salary and merit increases
as well as an increase in personnel.
10
<PAGE> 13
INCOME TAXES. Income taxes amounted to $837,000 and $861,000 for the
three months ended September 30, 1999 and 1998, respectively, resulting in
effective tax rates of 33.6% and 35.3%, respectively.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
GENERAL. The Corporation reported net income of $4.8 million during
the nine months ended September 30, 1999 compared to $4.5 million for the same
period in 1998. The increase of $292,000 or 6.5% in net income in the 1999
period compared to the same period in 1998 was due to an increase in net
interest income which was partially offset by an increase in noninterest
expenses. Net interest income increased by $939,000 or 7.0% from $13.4 million
to $14.4 million for the nine month periods ended September 30, 1998 and 1999,
respectively. The Corporation's interest rate spread and net interest margin was
2.62% and 3.13%, respectively, for the 1999 nine month period compared to 2.55%
and 3.22%, respectively, for the 1998 nine month period.
INTEREST INCOME. Interest income amounted to $34.8 million for the
nine months ended September 30, 1999 compared to $32.5 million for the same
period in 1998. The increase of $2.2 million or 6.9% was primarily due to an
increase in the average balance of investment securities. The increase in the
average balance of investment securities was due to additional purchases of
investment securities. In addition, the average balance of other interest
earning assets, primarily overnight funds, increased during the comparable
periods. Such increase was partially offset by a decline in the average yield
earned on loans receivable 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.
INTEREST EXPENSE. Interest expense increased $1.3 million or 6.8% to
$20.4 million for the nine months ended September 30, 1999 compared to $19.1
million for the same period in 1998. 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. Such increase was offset by a
decline in the average rate paid for deposits.
NONINTEREST INCOME. Noninterest income amounted to $1.3 million for
the nine months ended September 30, 1999 compared to $1.4 million for the same
period in 1998. For the nine months ended September 30, 1999, the net loss from
operations of real estate owned was $77,000 compared to net income of $112,000
for the same period in 1998. Deposit fee income increased $61,000 or 9.3%
between the 1999 and 1998 nine month periods ended September 30.
NONINTEREST EXPENSE. Noninterest expenses increased $660,000 or 8.3%
between the 1998 and 1999 nine month periods. The increase was primarily due to
increases in the provision for loss on real estate owned and salaries and
employee benefits. Provision for loss on real estate owned amounted to $312,000
compared to $14,000 for the nine month periods ended September 30, 1999 and
1998, respectively. Such increase was a result of the write-down of a commercial
real estate property as previously mentioned under the caption "Financial
Condition". Salaries and employee benefits increased by $324,000 or 6.6% from
$4.9 million to $5.2 million for the nine month periods ended September 30, 1998
and 1999, respectively. Salaries and employee benefits increased due to normal
salary and merit increases as well as an increase in personnel resulting from
expansion of the
11
<PAGE> 14
Bank's operations. The recognition of costs related to the release of
unallocated shares from the ESOP decreased by $222,000 from $706,000 to $484,000
for the nine month periods ended September 30, 1998 and 1999, respectively, due
to the decrease 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 period average price of the Corporation's common
stock.
INCOME TAXES. Income taxes amounted to $2.4 million and $2.5 million
for the nine months ended September 30, 1999 and September 30, 1998,
respectively, resulting in effective tax rates of 33.3% and 35.5%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's liquidity, represented by cash and cash
equivalents, is a product of its operating, investing and financing activities.
The Corporation's primary sources of funds are deposits, amortization,
prepayments and maturities of outstanding loans, maturities of investment
securities 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 September 30, 1999, the Bank had outstanding advances from
the FHLB of Dallas in the amount of $76.0 million. Such advances were used in
the Bank's normal operations and investing activities.
As of September 30, 1999, the Bank's regulatory capital was in excess
of all applicable regulatory capital adequacy requirements. At September 30,
1999, the Bank's tangible, core and risk-based capital ratios amounted to 11.4%,
11.4% and 22.0%, respectively, compared to regulatory requirements of 1.5%, 3.0%
and 8.0%, respectively.
12
<PAGE> 15
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 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 result in a system failure or generation of erroneous
data.
The Federal Financial Institutions Examination Council ("FFIEC"),
through bank regulatory agencies including the OTS and the FDIC, issued
mandatory guidelines requiring all financial institutions to develop and
implement plans for addressing Year 2000 issues as they relate to the operations
of financial institutions. The Bank developed a Year 2000 Project plan, required
by these guidelines, that is intended to ensure that its computer systems and
software will function properly with respect to dates in the Year 2000 and
thereafter. The Year 2000 Project consists of various phases including an
awareness phase, assessment phase, renovation phase, testing phase and
implementation phase. In the assessment phase, hardware, software, third-party
vendors, customers, and non-technological systems that could be affected by the
century rollover were identified. In this assessment, various systems were
identified as mission-critical. The primary focus of the renovation and testing
phases was on these mission-critical systems. The testing phase for
mission-critical systems has been successfully completed.
The majority of the Bank's data processing is performed by a third
party service bureau. Processing by the servicer includes account processing for
all deposit and loan accounts. The servicer has completed the remediation of its
host deposit and loan systems. The Bank has completed testing of the servicer's
system. Dates tested on the servicer's system included the century date rollover
from December 31, 1999 through January 3, 2000, leap year 2000, year-end 2000
and 2001 rollover. This testing was performed by Bank personnel.
The Bank utilizes various third party software systems that interface
with the servicer's system that are deemed to be mission-critical. These systems
have been upgraded or replaced for Year 2000 as well as upgraded to a Windows
operating system. The wide area network installation to support the Windows
operating environment has been completed. These systems were successfully tested
for Year 2000 compliance.
The majority of the Bank's computer equipment was replaced to upgrade
to a Windows operating environment. This scheduled plan to upgrade provided for
Year 2000 compliant hardware
13
<PAGE> 16
as well. The majority of the software and hardware replaced was fully
depreciated. Therefore, the Bank did not accelerate the replacement due to Year
2000 issues and all costs associated with the replacement of systems were
considered costs incurred in the ordinary course of business. To date the Bank
has committed approximately $25,000 in costs directly related to Year 2000.
These costs were primarily related to customer communications regarding the
century date rollover and services to support business continuity and customer
assurance needs during century date rollover. Any additional costs related to
Year 2000 are not expected to be material to the on-going operating costs of the
Corporation.
The failure to correct a Year 2000 problem of a mission-critical
system could result in an interruption in, or a failure of, certain normal
business activities or operations. Such failures could materially and adversely
affect the Corporation's results of operations, liquidity, and financial
condition. Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of third-party suppliers, including power
companies and telephone companies, the Corporation is unable to determine at
this time whether the consequences of Year 2000 failures will have a material
impact on the Corporation's result of operations, liquidity or financial
condition. The Bank's Year 2000 Project is anticipated to significantly reduce
the uncertainty about the Year 2000 problem and, in particular, about the Year
2000 readiness of the Bank's data processing servicer. The Corporation believes
that, based on the data processing servicer's Year 2000 efforts, the Bank's
testing of the servicer's system, and the completion of the Year 2000 Project by
the Bank, the likelihood of significant interruptions of normal operations
should be reduced. However, a "worst case scenario" would be one in which the
servicer's system was not available for an extended period of time.
Non-availability of the servicer's system would most likely be the result of a
power or telecommunications failure. In this "worst case scenario" the Bank
could experience material disruptions in its ability to process customer
accounts and otherwise conduct its business.
Contingency plans for Year 2000 issues relating to mission-critical
systems have been developed by the Bank. The Bank has a business resumption
recovery plan that addresses various contingencies within the Bank including the
servicer's computer system being inoperable as well as other mission-critical
systems. Contingency planning for a "worst case scenario", such as a power
failure, has been addressed as well. Due to the possibility of a power outage
occurring at any given time, even outages unrelated to Year 2000, the Bank has
installed a generator powered by natural gas at the corporate office of the Bank
to provide power to mission critical network equipment. Contingency planning for
Year 2000 is a dynamic process due to changes taking place. As additional
information becomes available regarding Year 2000 issues, contingency plans for
Year 2000 will be revised as circumstances dictate.
14
<PAGE> 17
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 very 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 1998 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, 1998.
15
<PAGE> 18
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
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
16
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
Date: November 15, 1999 By: /s/Larry J. Brandt
-------------------------------
Larry J. Brandt
President
Date: November 15, 1999
By: /s/Tommy W. Richardson
-------------------------------
Tommy W. Richardson
Chief Financial Officer
17
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