<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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)
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)
(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
--- ---
<PAGE>
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, 2000,
there were issued and outstanding 3,553,981 shares of the Registrant's Common
Stock, par value $.01 per share.
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
As of September 30, 2000 (unaudited) and December 31, 1999 1
Consolidated Statements of Income and Comprehensive Income for
the three and nine months ended September 30, 2000 (unaudited)
and 1999 (unaudited) 2
Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 2000 (unaudited) 3
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 (unaudited) and 1999 (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
</TABLE>
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(Unaudited)
----------- -----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 10,834 $ 9,983
Investment securities - held to maturity 187,808 189,263
Federal Home Loan Bank stock 5,015 4,258
Loans receivable, net of allowance 493,051 459,978
Accrued interest receivable 5,790 5,977
Real estate acquired in settlement of loans, net 242 3,940
Office properties and equipment, net 7,198 6,809
Prepaid expenses and other assets 312 511
----------- -----------
TOTAL ASSETS $ 710,250 $ 680,719
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 536,038 $ 507,875
Federal Home Loan Bank advances 94,762 83,972
Advance payments by borrowers for
taxes and insurance 825 1,089
Other liabilities 2,798 8,146
----------- -----------
Total liabilities 634,423 601,082
----------- -----------
MINORITY INTEREST 4 822
----------- -----------
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, 3,576,981 and 4,039,374 shares outstanding at September 30, 2000
and December 31, 1999, respectively 52 52
Additional paid-in capital 50,962 50,793
Employee stock benefit plans (2,963) (3,867)
Retained earnings-substantially restricted 55,865 52,598
----------- -----------
103,916 99,576
Treasury stock, at cost, 1,576,770 and
1,114,377 shares at September 30, 2000 and
December 31, 1999, respectively (28,093) (20,761)
----------- -----------
Total stockholders' equity 75,823 78,815
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 710,250 $ 680,719
=========== ===========
</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)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
------------------------------------------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable $9,811 $8,896 $28,391 $26,478
Investment securities 3,383 3,006 10,196 7,884
Other 24 32 74 422
------ ------ ------ ------
Total interest income 13,218 11,934 38,661 34,784
------ ------ ------ ------
INTEREST EXPENSE:
Deposits 7,105 6,210 20,252 18,282
Other borrowings 1,521 853 4,026 2,117
------ ------ ------ ------
Total interest expense 8,626 7,063 24,278 20,399
------ ------ ------ ------
NET INTEREST INCOME 4,592 4,871 14,383 14,385
PROVISION FOR LOAN LOSSES -- -- -- 20
------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,592 4,871 14,383 14,365
------ ------ ------ ------
NONINTEREST INCOME:
Deposit fee income 280 259 775 718
Other 284 163 625 611
------ ------ ------ ------
Total noninterest income 564 422 1,400 1,329
------ ------ ------ ------
NONINTEREST EXPENSES:
Salaries and employee benefits 2,006 1,768 5,864 5,241
Net occupancy expense 285 228 816 664
Federal insurance premiums 27 71 79 211
Provision for real estate losses 6 -- 14 312
Data processing 217 228 677 644
Postage and supplies 108 102 350 317
Other 443 408 1,432 1,187
------ ------ ------ ------
Total noninterest expenses 3,092 2,805 9,232 8,576
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 2,064 2,488 6,551 7,118
INCOME TAX PROVISION 678 837 2,163 2,367
------ ------ ------ ------
NET INCOME AND COMPREHENSIVE INCOME $1,386 $1,651 $4,388 $4,751
====== ====== ====== ======
EARNINGS PER SHARE:
Basic $ 0.41 $ 0.42 $ 1.23 $ 1.17
====== ====== ====== ======
Diluted $ 0.41 $ 0.42 $ 1.23 $ 1.17
====== ====== ====== ======
Cash Dividends Declared $ 0.10 $ 0.08 $ 0.30 $ 0.24
====== ====== ====== ======
</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 NINE MONTHS ENDED SEPTEMBER 30, 2000
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Issued Employee
Common Stock Additional Stock Treasury Stock Total
------------- Paid-In Benefit Retained ------------------ Stockholders'
Shares Amount Capital Plans Earnings Shares Amount Equity
-------- ------- -------- ------- ---------- ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 5,153,751 $ 52 $ 50,793 $(3,867) $52,598 1,114,377 $(20,761) $ 78,815
Net income 4,388 4,388
Release of ESOP shares 236 312 548
Stock compensation expense 592 592
Shares released from restricted
stock trust (67) (67)
Purchase of treasury stock, at
cost 462,393 (7,332) (7,332)
Dividends paid (1,121) (1,121)
--------- ------- -------- ------- ------- --------- -------- --------
Balance, September 30, 2000 5,153,751 $ 52 $ 50,962 $(2,963) $55,865 1,576,770 $(28,093) $ 75,823
========== ======= ======== ======= ======= ========= ======== ========
</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)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------
2000 1999
-------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $4,388 $4,751
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses -- 20
Provision for real estate losses 14 312
Deferred tax provision (benefit) 293 (180)
Federal Home Loan Bank stock dividends (284) (161)
Loss (gain) on sale of repossessed assets, net (5) 6
Originations of loans held for sale (4,468) (13,367)
Proceeds from sales of loans 4,368 14,360
Gain on sale of mortgage loans originated to sell (47) (177)
Depreciation 498 393
Depreciation on real estate owned 32 96
Accretion of deferred loan fees, net (358) (600)
Release of ESOP shares 487 546
Stock compensation expense 592 566
Changes in operating assets & liabilities:
Accrued interest receivable 187 (423)
Prepaid expenses & other assets 196 (291)
Other liabilities 280 817
------- -------
Net cash provided by operating activities 6,173 6,668
------- -------
INVESTING ACTIVITIES:
Purchases of investment securities-held to
maturity (11,017) (82,941)
Proceeds from maturities of investment
securities-held to maturity 6,000 28,432
Loan originations, net of repayments (31,745) (14,853)
Proceeds from sales of real estate owned 2,898 157
Purchases of office properties and equipment (901) (1,185)
------- -------
Net cash used by investing activities (34,765) (70,390)
------- -------
</TABLE>
(Continued)
4
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FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------
2000 1999
-------------------------------------
<S> <C> <C>
FINANCING ACTIVITIES:
Net increase in deposits 28,163 28,193
Advances from FHLB 116,575 68,650
Repayment of advances from FHLB (105,785) (41,659)
Net decrease in advance payments
by borrowers for taxes & insurance (264) (239)
Purchase of treasury stock (7,332) (6,584)
Dividends paid (1,121) (1,033)
Distributions related to minority interest (793) --
-------- --------
Net cash provided by financing activities 29,443 47,328
-------- --------
Net increase (decrease) in cash and cash equivalents 851 (16,394)
CASH AND CASH EQUIVALENTS:
Beginning of period 9,983 26,163
------- -------
End of period $10,834 $ 9,769
======= ========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for:
Interest $23,967 $ 20,228
======= ========
Income taxes $ 1,765 $ 2,574
======= ========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Real estate acquired in settlement of loans $ 347 $ 644
======= ========
Loans to facilitate sales of real estate owned $ 1,170 $ 174
======= ========
</TABLE>
(Concluded)
See notes to unaudited consolidated financial statements.
5
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
First Federal Bancshares of Arkansas, Inc. (the "Corporation") is a unitary
holding company which owns all of the stock of First Federal Bank of Arkansas,
FA (the "Bank"). The Bank provides a broad line of financial products to
individuals and small to medium-sized businesses. The consolidated financial
statements also include the accounts of the Bank's wholly-owned subsidiary,
First Harrison Service Corporation ("FHSC"), whose activities are limited.
During the first quarter of 1998, in settlement of a loan, FHSC obtained 75%
ownership of a partnership that owned and operated a 202 room hotel in Oklahoma.
The financial position and results of operations of this hotel property have
been consolidated in the financial statements. The remaining 25% ownership is
reflected in the consolidated statements of financial condition as minority
interest. Such property was sold in the second quarter of 2000.
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 which are, in the opinion of management,
necessary for a fair statement of results for the interim periods.
The accompanying consolidated financial statements include the accounts of the
Corporation and the Bank. All material intercompany transactions have been
eliminated in consolidation.
The results of operations for the nine months ended September 30, 2000 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2000. 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, 1999, contained in the
Corporation's 1999 Annual Report to Stockholders.
NOTE 2 - 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 was originally effective for fiscal years
beginning after June 15, 1999. However, in June 1999 FASB issued Statement
No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -
DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133 ("SFAS 137"). SFAS
137 deferred the effective date of SFAS 133 for all fiscal quarters of all
fiscal years beginning after June 15, 2000.
6
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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.
NOTE 3 - EARNINGS PER SHARE
The weighted average number of common shares used to calculate earnings per
share for the periods ended September 30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- --------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic weighted - average shares 3,407,258 3,938,312 3,562,457 4,058,077
Effect of dilutive securities 125 -- 42 --
--------- --------- --------- ---------
Diluted weighted - average shares 3,407,383 3,938,312 3,562,499 4,058,077
</TABLE>
NOTE 4 - DECLARATION OF DIVIDENDS
At their meeting on August 24, 2000, the Board of Directors declared a $.10 (ten
cent) per share cash dividend on the common stock of the Corporation. The cash
dividend was paid on September 25, 2000 to the stockholders of record at the
close of business on September 11, 2000.
NOTE 5 - INVESTMENT SECURITIES
Investment securities consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 2000
---------------------------
Amortized Fair
Cost Value
---------- ---------
HELD TO MATURITY
<S> <C> <C>
U. S. Government and
Agency obligations $187,808 $178,944
======== ========
</TABLE>
7
<PAGE>
NOTE 6 - LOANS RECEIVABLE
Loans receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
First mortgage loans:
One- to four- family residences $377,527 $368,589
Other properties 39,664 28,830
Construction 26,711 25,797
Less:
Unearned discounts (211) (233)
Undisbursed loan funds (11,557) (10,437)
Deferred loan fees, net (2,796) (2,972)
-------- --------
Total first mortgage loans 429,338 409,574
-------- --------
Consumer and other loans:
Commercial 19,852 14,171
Automobile 15,289 13,205
Consumer 5,564 4,285
Home equity and second mortgage 18,582 15,009
Savings 2,227 1,887
Other 2,676 2,405
Add deferred loan costs 239 194
-------- --------
Total consumer and other loans 64,429 51,156
-------- --------
Allowance for loan losses (716) (752)
-------- --------
Loans receivable, net $493,051 $459,978
======== ========
</TABLE>
Non-accrual loans at September 30, 2000 were $1.1 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, 1999 $752
Provisions for estimated losses --
Recoveries 23
Losses charged off (59)
----
Balance at September 30, 2000 $716
====
</TABLE>
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
At September 30, 2000, the Corporation's assets amounted to $710.3 million
as compared to $680.7 million at December 31, 1999. The $29.6 million or 4.3%
increase was primarily due to an increase of $33.1 million or 7.2% in net loans
receivable. The effect of this increase on total assets was partially offset by
a $3.7 million or 93.9% decrease in real estate acquired in settlement of loans,
net. Loan originations for the nine month period ended September 30, 2000
consisted of $62.4 million in one- to four- family residential loans, $800,000
in multi-family residential loans, $23.3 million in commercial loans, $25.0
million in construction loans and $29.6 million in consumer installment loans,
of which $10.7 million consisted of home equity loans and $10.3 million
consisted of automobile loans. At September 30, 2000, the Bank had outstanding
loan commitments of $3.0 million, unused lines of credit of $7.4 million, and
the undisbursed portion of construction loans of $11.6 million. Liabilities
increased $33.3 million or 5.5% to $634.4 million at September 30, 2000 compared
to $601.1 million at December 31, 1999. The increase in liabilities was
primarily due to an increase of $28.2 million or 5.5% in deposits and an
increase of $10.8 million or 12.8% in advances from the Federal Home Loan Bank
of Dallas ("FHLB of Dallas"). Such increases were primarily used to fund the
increase in net loans receivable. Stockholders' equity amounted to $75.8 million
or 10.7% of total assets at September 30, 2000 compared to $78.8 million or
11.6% of total assets at December 31, 1999. The decrease in stockholders' equity
was primarily due to the purchase of 462,393 shares of treasury stock totaling
$7.3 million in connection with the Corporation's stock repurchase plan and to a
lesser extent due to the payment of cash dividends aggregating $1.1 million.
Such decrease during the nine months ended September 30, 2000 was partially
offset by net income of $4.4 million resulting from continued profitable
operations.
Non-performing assets, consisting of non-accruing loans and repossessed
assets, amounted to $1.3 million or .19% of total assets at September 30, 2000,
compared to $5.3 million or .78% of total assets at December 31, 1999. Such
decrease in non-performing assets was primarily due to a sale of a commercial
real estate property in the second quarter of 2000.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
GENERAL. The Corporation reported net income of $1.4 million during the
three months ended September 30, 2000 compared to net income of $1.7 million for
the same period in 1999. The decrease of $265,000 in net income in the 2000
period compared to the same period in 1999 was primarily due to a decrease in
net interest income and an increase in noninterest expenses which was offset
by an increase in noninterest income and a decrease in income tax expense.
Net interest income declined from $4.9 million for the three months ended
September 30, 1999 to $4.6 million for the same period in 2000. 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 decreased to 2.19%
9
<PAGE>
and 2.67%, respectively, for the 2000 three month period compared to 2.60%
and 3.09%, respectively, for the 1999 three month period. These and other
significant fluctuations in operations are discussed below.
INTEREST INCOME. Interest income amounted to $13.2 million for the three
months ended September 30, 2000 compared to $11.9 million for the same period in
1999. The increase of $1.3 million or 10.8% was primarily due to an increase in
the average balances of net loans receivable and investment securities and in
the average yield earned on net loans receivable and investment securities. The
increase in the average balance of investment securities was due to additional
purchases of investment securities. The increase in the average balance of net
loans receivable was due to the continued origination of loans.
INTEREST EXPENSE. Interest expense increased $1.6 million or 22.1% to $8.6
million for the three months ended September 30, 2000 compared to $7.0 million
for the same period in 1999. Such increase was primarily due to an increase in
the average balance of FHLB of Dallas advances, an increase in interest rates
paid on advances replacing maturing advances, an increase in the average balance
of deposits and an increase in interest rates paid on such deposits.
NONINTEREST INCOME. Noninterest income increased $142,000 or 33.6% to
$564,000 for the three months ended September 30, 2000 compared to $422,000 for
the three months ended September 30, 1999. The increase in noninterest income
for the three month comparable periods ended September 30 was primarily due to
an increase of $58,000 from $9,000 to $67,000 in gross revenue from full service
brokerage operations, an increase of $21,000 or 8.2% from $259,000 to $280,000
in deposit fee income and an increase of $17,000 or 32.0% from $54,000 to
$71,000 in electronic banking transaction fees. The increase in noninterest
income was also due to a decline in the net loss recognized from the operations
of real estate owned in the amount of $34,000. The property primarily incurring
such losses was disposed of in June 2000. The increase in noninterest income was
partially offset by a decline from $28,000 to $19,000 or $9,000 in the gain on
the sale of mortgage loans in the secondary mortgage market.
NONINTEREST EXPENSE. Noninterest expenses increased $287,000 or 10.2%
between the 2000 and 1999 three month periods ended September 30. The increase
in noninterest expenses during the three month period in 2000 compared to 1999
was primarily due to an increase in salaries and employee benefits and net
occupancy expenses. Salaries and employee benefits amounted to $2.0 million
compared to $1.8 million resulting in an increase of $238,000 or 13.5% for the
three month periods ended September 30, 2000 and 1999, respectively. Such
increase in salaries and employee benefits was primarily due to an increase in
personnel as well as salary and merit increases. Net occupancy expense for the
three months ended September 30, 2000 was $285,000 compared to $228,000 for the
same period in 1999 resulting in an increase of $57,000 or 25.0%. Such increase
in noninterest expenses was partially offset by a decrease of $44,000 from
$71,000 to $27,000 in Federal Deposit Insurance Corporation insurance premiums
as a result of a decline in the deposit assessment rate.
10
<PAGE>
INCOME TAXES. Income taxes amounted to $678,000 and $837,000 for the three
months ended September 30, 2000 and 1999, respectively, resulting in effective
tax rates of 32.8% and 33.6%, respectively.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
GENERAL. The Corporation reported net income of $4.4 million during the
nine months ended September 30, 2000 compared to $4.8 million for the same
period in 1999. The decrease of $363,000 in net income in the 2000 period
compared to the same period in 1999 was due to an increase in noninterest
expenses which was partially offset by an increase in net interest income and a
decrease in income tax expense. Net interest income increased by $18,000 or .1%
for the nine month period ended September 30, 1999 compared to the same period
in 2000. The Corporation's net interest margin and interest rate spread was
2.85% and 2.38%, respectively, for the nine months ended September 30, 2000
compared to 3.13% and 2.62%, respectively, for the same period in 1999.
INTEREST INCOME. Interest income amounted to $38.7 million for the nine
months ended September 30, 2000 compared to $34.8 million for the same period in
1999. The increase of $3.9 million or 11.1% was primarily due to increases in
the average balance of investment securities and net loans receivable and in the
average yield earned on investment securities. The increase in the average
balance of investment securities was due to additional purchases of investment
securities. The increase in the average balance of net loans receivable was due
to the continued origination of loans. In addition, the average balance of other
interest earning assets, primarily overnight funds, decreased during the
comparable periods.
INTEREST EXPENSE. Interest expense increased $3.9 million or 19.0% to $24.3
million for the nine months ended September 30, 2000 compared to $20.4 million
for the same period in 1999. Such increase was primarily due to an increase in
the average balance of FHLB of Dallas advances, an increase in interest rates
paid on advances replacing maturing advances, an increase in the average balance
of deposits and an increase in interest rates paid on such deposits.
NONINTEREST INCOME. Noninterest income increased $71,000 or 5.3% to $1.4
million for the nine months ended September 30, 2000 compared to $1.3 million
for the nine months ended September 30, 1999. The increase in noninterest income
for the nine month comparable periods ended September 30 was due to an increase
of $136,000 from $23,000 to $159,000 in gross revenue from full service
brokerage operations, an increase of $57,000 or 8.0% from $718,000 to $775,000
in deposit fee income, and an increase of $43,000 or 29.3% from $146,000 to
$189,000 in electronic banking transaction fees. Such increase was partially
offset by a decrease in gain on the sale of mortgage loans in the secondary
mortgage market and loan fees related to the origination of such loans as well
as an increase in the net loss recognized from the operations of real estate
owned. The gain on the sale of mortgage loans in the secondary mortgage market
decreased $130,000 from $177,000 to $47,000 and loan fees related to the
origination of such loans decreased $33,000 from $53,000 to $20,000. The
increase in noninterest income for the nine months ended September 30, 2000
compared to the nine months ended September 30, 1999 was also partially offset
by an increase
11
<PAGE>
of $34,000 from $77,000 to $111,000 in the net loss recognized from the
operations of real estate owned. The property primarily incurring such losses
was disposed of in June 2000.
NONINTEREST EXPENSE. Noninterest expenses increased $656,000 or 7.6%
between the 2000 and 1999 nine month periods ended September 30. Noninterest
expense increased primarily due to an increase in salaries and employee
benefits, net occupancy expense, data processing expense and advertising
expense. Salaries and employee benefits amounted to $5.9 million compared to
$5.3 million resulting in an increase of $623,000 or 11.9% for the nine month
periods ended September 30, 2000 and 1999, respectively. Such increase in
salaries and employee benefits was primarily due to an increase in personnel as
well as salary and merit increases. Net occupancy expense for the nine months
ended September 30, 2000 was $816,000 compared to $664,000 for the same period
in 1999 resulting in an increase of $152,000 or 22.8%. Data processing expense
increased $33,000 or 5.0% to $677,000 for the nine months ended September 30,
2000 compared to $644,000 for the same period in 1999. Such increase was
primarily due to growth and additional product offerings. The increase of
$61,000 or 33.9% from $180,000 to $241,000 in advertising costs for the nine
month comparable periods was due to promotion of new locations and product
offerings. The increase in noninterest expenses during the nine month period in
2000 compared to 1999 was partially offset by a decrease in provision for
real estate losses. Provision for loss on real estate owned amounted to
$14,000 compared to $312,000 for the nine month periods ended September 30,
2000 and 1999, respectively. The provision in 1999 was due to a write-down of
a commercial real estate property. Such property was disposed of in June
2000. The increase in noninterest expenses was also partially offset by a
decrease of $132,000 from $211,000 to $79,000 in Federal Deposit Insurance
Corporation insurance premiums as a result of a decline in the deposit
assessment rate.
INCOME TAXES. Income taxes amounted to $2.2 million and $2.4 million for
the nine months ended September 30, 2000 and September 30, 1999, respectively,
resulting in effective tax rates of 33.0% and 33.3%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's liquidity, represented by cash and cash equivalents and eligible
investment securities, is a product of its operating, investing and financing
activities. The Bank's primary sources of funds are deposits, collections on
outstanding loans, maturities and calls of investment securities and other
short-term investments and funds provided from operations. While scheduled loan
amortization and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. The Bank manages the pricing of its deposits to maintain a steady
deposit balance. In addition, the Bank invests excess funds in overnight
deposits and other short-term interest-earning assets which provide liquidity to
meet lending requirements. The Bank has generally been able to generate enough
cash through the retail deposit market, its traditional funding source, to
offset the cash utilized in investing activities. As an additional source of
funds, the Bank has borrowed from the FHLB of Dallas. At September 30,
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2000, the Bank had outstanding advances from the FHLB of Dallas of $94.8
million. Such advances were used in the Bank's normal operating and investing
activities.
As of September 30, 2000, the Bank's regulatory capital was well in excess
of all applicable regulatory requirements. At September 30, 2000, the Bank's
tangible, core and risk-based capital ratios amounted to 10.3%, 10.3% and 19.6%,
respectively compared to applicable 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.
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 from those described herein
as anticipated, believed, estimated, expected or intended. The Corporation does
not intend to update these forward-looking statements.
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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
1999 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, 1999.
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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.
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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 13, 2000 By: /s/Larry J. Brandt
--------------------------
Larry J. Brandt
President
Date: November 13, 2000 By: /s/Tommy W. Richardson
----------------------------
Tommy W. Richardson
Chief Financial Officer
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