<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 March 31, 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 (I.R.S. Employer
organization) Identification Number)
200 West Stephenson
Harrison, Arkansas 72601
- ----------------------------------------------------------- --------------------------
(Address of principal executive office) (Zip Code)
</TABLE>
(870) 741-7641
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of May 10, 1999, there
were issued and outstanding 4,418,697 shares of the Registrant's Common Stock,
par value $.01 per share.
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<CAPTION>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
- ------- --------------------- ----
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
(As of March 31, 1999 (unaudited) and December 31, 1998) 1
Consolidated Statements of Income and Comprehensive Income for the
three months ended March 31, 1999 (unaudited) and 1998 (unaudited) 2
Consolidated Statement of Stockholders' Equity for the three
months ended March 31, 1999 (unaudited) 3
Consolidated Statements of Cash Flows for the three months
ended March 31, 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 14
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 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
</TABLE>
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FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
(Unaudited)
--------- ------------
<S> <C> <C>
Cash and cash equivalents $ 22,602 $ 26,163
Investment securities - held to maturity 144,105 127,175
Federal Home Loan Bank stock 3,965 3,912
Loans receivable, net of allowance 439,716 442,486
Accrued interest receivable 4,281 4,755
Real estate acquired in settlement of loans, net 4,163 4,270
Office properties and equipment, net 6,623 6,055
Prepaid expenses and other assets 328 239
-------- --------
TOTAL ASSETS $625,783 $615,055
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $497,801 $481,093
Federal Home Loan Bank advances 41,982 48,985
Advance payments by borrowers for
taxes and insurance 1,209 1,006
Other liabilities 3,054 1,990
-------- --------
Total liabilities 544,046 533,074
-------- --------
MINORITY INTEREST 939 958
-------- --------
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, 4,418,697 and
4,512,760 shares outstanding at March 31, 1999
and December 31, 1998, respectively 52 52
Additional paid-in capital 50,569 50,487
Employee stock benefit plans (4,744) (5,037)
Retained earnings-substantially restricted 48,842 47,678
-------- -------
94,719 93,180
Treasury stock, at cost, 735,054 and
640,991 shares at March 31, 1999 and
December 31, 1998, respectively (13,921) (12,157)
-------- --------
Total stockholders' equity 80,798 81,023
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $625,783 $615,055
======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
1
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FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except earnings per share)
(Unaudited)
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<CAPTION>
Three Months Ended
March 31,
---------------------
1999 1998
------- --------
<S> <C> <C>
INTEREST INCOME:
Loans receivable $ 8,810 $ 8,843
Investment securities 2,245 1,735
Other 269 50
------- -------
Total interest income 11,324 10,628
------- -------
INTEREST EXPENSE:
Deposits 5,982 5,908
Other borrowings 665 270
------- -------
Total interest expense 6,647 6,178
------- -------
NET INTEREST INCOME 4,677 4,450
PROVISION FOR LOAN LOSSES 20 15
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,657 4,435
------- -------
NONINTEREST INCOME:
Deposit fee income 220 198
Other 173 260
------- -------
Total noninterest income 393 458
------- -------
NONINTEREST EXPENSES:
Salaries and employee benefits 1,751 1,647
Net occupancy expense 217 206
Federal insurance premiums 70 70
Data processing 203 229
Postage and supplies 114 97
Other 375 414
------- -------
Total noninterest expenses 2,730 2,663
------- -------
INCOME BEFORE INCOME TAXES 2,320 2,230
INCOME TAX PROVISION 802 810
------- -------
NET INCOME AND COMPREHENSIVE INCOME $ 1,518 $ 1,420
======= =======
EARNINGS PER SHARE:
Basic $ 0.37 $ 0.31
======= =======
Diluted $ 0.37 $ 0.30
======= =======
</TABLE>
See notes to unaudited consolidated financial statements.
2
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FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 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 1,518 1,518
Release of ESOP shares 82 105 187
Stock compensation expense 188 188
Purchase of treasury stock, at cost (1,764) (1,764)
Dividends paid (354) (354)
-------- -------- -------- -------- -------- --------
Balance, March 31, 1999 $ 52 $ 50,569 $ (4,744) $ 48,842 $(13,921) $ 80,798
======== ======== ======== ======== ======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
3
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FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
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<CAPTION>
Three Months Ended March 31,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,518 $ 1,420
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 20 15
Deferred tax provision (benefit) (65) 13
Loss on sale of real estate owned 5 39
Gain on sale of mortgage loans
originated to sell (74) (42)
Depreciation 131 125
Real estate owned depreciation 32 --
Accretion of deferred loan fees, net (234) (192)
Release of ESOP shares 187 260
Stock compensation expense 188 189
Other (45) --
Changes in operating assets & liabilities:
Accrued interest receivable 474 25
Prepaid expenses & other assets (89) (269)
Other liabilities 1,128 1,245
-------- --------
Net cash provided by operating activities 3,176 2,828
-------- --------
INVESTING ACTIVITIES:
Purchases of investment securities-held to
maturity (36,413) (24,937)
Proceeds from maturities of investment
securities-held to maturity 19,430 16,755
Loan originations, net of repayments (2,715) (10,517)
Proceeds from sales of mortgage loans
originated to sell 5,793 2,988
Proceeds from sales of real estate owned 77 69
Purchases of office properties and equipment (699) (81)
-------- --------
Net cash used by investing activities (14,527) (15,723)
-------- --------
</TABLE>
(Continued)
4
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FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
FINANCING ACTIVITIES:
Net increase in deposits 16,708 11,466
Advances from FHLB - 7,997
Repayment of advances from FHLB (7,003) -
Net increase (decrease) in advance payments
by borrowers for taxes & insurance 203 (462)
Purchase of treasury stock (1,764) --
Common stock acquired for employee stock
benefit plan -- (992)
Dividends paid (354) (343)
-------- --------
Net cash provided by financing activities 7,790 17,666
-------- --------
Net increase (decrease) in cash and cash equivalents (3,561) 4,771
CASH AND CASH EQUIVALENTS:
Beginning of period 26,163 6,627
-------- --------
End of period $ 22,602 $ 11,398
======== ========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for:
Interest $ 6,566 $ 6,150
======== ========
Income taxes $ 129 $ --
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Real estate acquired in settlement of loans $ -- $ 3,356
======== ========
Loans to facilitate sales of real estate owned $ 20 $ --
======== ========
</TABLE>
(Concluded)
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. 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 months ended March 31, 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 is effective for fiscal years beginning
after June 15, 1999. Management has not yet made a determination as to the
effect, if any, the adoption of SFAS 133 will have on the Company's financial
position or results of operations.
6
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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 is not expected to
have a material effect on the Company's consolidated financial statements.
NOTE 4 - EARNINGS PER SHARE
The weighted average number of common shares used to calculate earnings per
share for the quarters ended March 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
Basic weighted - average shares 4,145,349 4,552,948
Effect of dilutive securities -- 114,766
---------------- -----------
Diluted weighted - average shares 4,145,349 4,667,714
</TABLE>
NOTE 5 - DECLARATION OF DIVIDENDS
At their meeting on February 17, 1999, the Board of Directors declared a $.08
(eight cent) per share cash dividend on the common stock of the Corporation. The
cash dividend was paid on March 24, 1999 to the stockholders of record at the
close of business on March 10, 1999.
NOTE 6 - INVESTMENT SECURITIES
Investment securities consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, 1999
-----------------------
Amortized Fair
HELD TO MATURITY Cost Value
-------- --------
<S> <C> <C>
U. S. Government and
Agency obligations $144,084 $141,968
Mortgage-backed securities
-FHLMC 21 21
-------- --------
Total $144,105 $141,989
======== ========
</TABLE>
7
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NOTE 7 - LOANS RECEIVABLE
Loans receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, 1999
--------------
<S> <C>
First mortgage loans:
One- to four- family residences $367,030
Other properties 24,565
Construction 18,845
Less:
Unearned discounts (282)
Undisbursed loan funds (7,983)
Deferred loan fees, net (3,106)
---------
Total first mortgage loans 399,069
---------
Consumer and other loans:
Commercial 9,662
Automobile 10,847
Consumer 3,936
Home equity and second mortgage 13,158
Savings 1,471
Other 2,191
Add deferred loan costs 167
--------
Total consumer and other loans 41,432
---------
Allowance for loan losses (785)
---------
Loans receivable, net $439,716
========
</TABLE>
Non-accrual loans at March 31, 1999 were $1.5 million. All loans 90 days or more
past due 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 3
Losses charged off (9)
----
Balance at March 31, 1999 $785
===
</TABLE>
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
At March 31, 1999, the Corporation's assets amounted to $625.8 million as
compared to $615.1 million at December 31, 1998. The $10.7 million or 1.7%
increase was primarily due to an increase of $16.9 million or 13.3% in
investment securities - held to maturity. The increase in assets was partially
offset by a $3.6 million or 13.6% decrease in cash and cash equivalents and a
$2.8 million or .6% decrease in loans receivable. Loan originations for the
three month period ended March 31, 1999 consisted of $27.3 million in one- to
four- family residential loans, $3.1 million in commercial loans, $6.7 million
in construction loans and $6.5 million in consumer installment loans, of which
$2.5 million consisted of home equity loans and $2.3 million consisted of
automobile loans. At March 31, 1999, the Bank had outstanding loan commitments
of $3.5 million, unused lines of credit of $4.7 million, and the undisbursed
portion of construction loans of $8.0 million. Liabilities increased $11.0
million or 2.1% to $544.0 million at March 31, 1999 compared to $533.1 million
at December 31, 1998. The increase in liabilities was primarily due to an
increase of $16.7 million or 3.5% in deposits. Such increase was partially
offset by a decrease of $7.0 million or 14.3% in advances from the Federal Home
Loan Bank ("FHLB") of Dallas. The increase in deposits was used to repay
advances borrowed from FHLB of Dallas and to purchase additional investment
securities. Stockholders' equity amounted to $80.8 million or 12.9% of total
assets at March 31, 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 $1.8 million and to a lesser extent due to
the payment of cash dividends aggregating $354,000. Such decrease during the
three months ended March 31, 1999 was partially offset by net income of $1.5
million due to continued profitable operations.
Non-performing assets, consisting of non-accruing loans and repossessed
assets, amounted to $5.7 million or .91% of total assets at March 31, 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. At March 31, 1999, as a result of such consolidation, the
Bank's real estate acquired in settlement of loans included a $4.0 million
dollar carrying value for such property with the minority interest ownership
being currently recorded at $939,000. The property is currently operated by a
management company and is being marketed for disposition.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
GENERAL. The Corporation reported net income of $1.5 million during the
three months ended March 31, 1999 compared to net income of $1.4 million for the
same period in 1998. The increase of $100,000 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 reduced by a decrease in noninterest income and an
increase in noninterest expenses. Net interest income rose from $4.5 million for
the three months
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ended March 31, 1998 to $4.7 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 increased to 2.59% for the 1999 three month period compared
to 2.56% for the 1998 three month period. These and other significant
fluctuations in operations are discussed below.
INTEREST INCOME. Interest income amounted to $11.3 million for the three
months ended March 31, 1999 compared to $10.6 million for the same period in
1998. The increase of $696,000 or 6.6% 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.
Such increase was partially offset by a decline in the average yield earned on
loans 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 $469,000 or 7.6% to $6.6
million for the three months ended March 31, 1999 compared to $6.2 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 decreased $65,000 or 14.2% to
$393,000 for the three months ended March 31, 1999 compared to $458,000 for the
three months ended March 31, 1998. The decrease for the three months ended March
31, 1999 was due primarily to the recognition of a loss in the amount of $59,000
from operations of real estate owned. For the three months ended March 31, 1998,
net income from operations of real estate owned of $77,000 was recognized. The
decrease in noninterest income for the three months ended March 31, 1999
compared to the three months ended March 31, 1998 was partially offset by an
increase of $32,000 from $42,000 to $74,000 in gain on the sale of mortgage
loans in the secondary mortgage market. In addition, deposit fee income
increased $22,000 or 10.8% to $220,000 compared to $198,000 for the three month
periods ended March 31, 1999 and 1998, respectively.
NONINTEREST EXPENSE. Noninterest expenses increased $67,000 or 2.5%
between the 1999 and 1998 three month periods. Such increase was due primarily
to an increase in salaries and employee benefits as a result of normal salary
and merit increases as well as an increase in personnel. Salaries and employee
benefits increased by $100,000 or 6.3% from $1.6 million to $1.7 million for the
three month period March 31, 1998 and 1999, respectively. Such increase was
partially offset by a decrease in legal fees, data processing costs and a
decline in losses recognized on disposition of repossessed assets.
INCOME TAXES. Income taxes amounted to $802,000 and $810,000 for the
three months ended March 31, 1999 and 1998, respectively, resulting in effective
tax rates of 34.6% and 36.3%, respectively.
10
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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
March 31, 1999, the Bank had outstanding advances from the FHLB of Dallas in the
amount of $42.0 million. Such advances were used in the Bank's normal operations
and investing activities.
As of March 31, 1999, the Bank's regulatory capital was in excess of all
applicable regulatory capital adequacy requirements. At March 31, 1999, the
Bank's tangible, core and risk-based capital ratios amounted to 11.7%, 11.7% and
22.7%, 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 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, has 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 has developed a Year 2000 Project plan, required by
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<PAGE> 14
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. The awareness and assessment phases are substantially
complete. 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 is on
these mission-critical systems. The testing phase for mission-critical systems
is well underway and the Bank expects that such testing will be completed in the
second quarter of 1999.
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 is substantially complete with 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. Approximately
50% of these software packages currently utilized by the Bank are not Year 2000
compliant, but upgrades or replacement systems are currently available and will
be installed by the Bank. These upgrades or replacements for Year 2000 will also
upgrade the systems to a Windows operating system. The majority of the other
third party software systems will be converted to a Windows operating
environment as well. These upgrades or replacements are scheduled to be
installed by the end of the second quarter of 1999. The testing of these systems
is scheduled to be conducted as the software is replaced and should also be
completed in the second quarter of 1999.
Approximately 85% of the computers within the Bank were identified as not
being Year 2000 compliant. These computers are currently being replaced with
completion scheduled in the second quarter of 1999. Installation of a wide area
network and conversion to a Windows operating environment will be implemented
along with the replacement of the computers. Testing of the computers and the
network is scheduled to be conducted as the hardware and the network are
installed and should be completed in the second quarter of 1999.
The majority of the software and hardware being replaced are or will be
fully depreciated and are a part of a scheduled plan to upgrade the Bank's
systems to a Windows operating environment. Therefore, the Bank is not
accelerating the replacement due to Year 2000 issues and all costs associated
with the replacement of systems are considered costs incurred in the ordinary
course of business. To date the Bank has spent approximately $5,000 in costs
directly related to Year 2000. These costs were primarily related to customer
communications regarding the century date rollover. Any additional costs related
to Year 2000 are not expected to be material to the on-going operating costs of
the Company.
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<PAGE> 15
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 Company'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 Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the Company'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 Company 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 are being addressed by the Bank. The Bank currently 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, is being addressed as well. Due to the possibility of a
power outage occurring at any given time, even outages unrelated to Year 2000,
the Bank is installing a generator powered by natural gas at the corporate
office of the Bank to provide power to mission critical equipment. Contingency
planning for Year 2000 is ongoing as systems are replaced and additional
information becomes available regarding Year 2000 issues. The updating and
validation of the business resumption recovery plan, including contingency plans
for Year 2000 related issues, is expected to be completed by June 30, 1999.
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.
13
<PAGE> 16
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.
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
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.
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: May 12, 1999 By: /s/Larry J. Brandt
--------------------------
Larry J. Brandt
President
Date: May 12, 1999 By: /s/Tommy W. Richardson
--------------------------
Tommy W. Richardson
Chief Financial Officer
16
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