<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 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 No.: 0-28312
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FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
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(Exact name of registrant as specified in its charter)
TEXAS 71-0785261
- ---------------------------------- ----------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
200 WEST STEPHENSON
HARRISON, ARKANSAS 72601
- ---------------------------------- ----------------------------
(Address) (Zip Code)
Registrant's telephone number, including area code: (870) 741-7641
Securities registered pursuant to Section 12(b)of the Act:
NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act
COMMON STOCK (PAR VALUE $.01 PER SHARE)
------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of March 22, 2000, the aggregate value of the 3,551,231 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
354,243 shares held by all directors and officers of the Registrant as a group,
was approximately $54.2 million. This figure is based on the last sales price of
$15.25 per share of the Registrant's Common Stock on March 22, 2000.
Number of shares of Common Stock outstanding as of March 22, 2000: 3,905,474
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of the Form 10-K into which the document is incorporated.
(1) Portions of the Annual Report to Stockholders for the year ended December
31, 1999 are incorporated into Part II, Items 5 through 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 2000 Annual Meeting of
Stockholders are incorporated into Part III, Items 10 through 13 of this Form
10-K.
<PAGE>
PART I.
ITEM 1. BUSINESS
GENERAL
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC. First Federal Bancshares of
Arkansas, Inc. (the "Company") is a Texas corporation organized in January 1996
by First Federal Bank of Arkansas, FA ("First Federal" or the "Bank") for the
purpose of becoming a unitary holding company of the Bank. The only significant
assets of the Company are the capital stock of the Bank, the Company's loan to
the Employee Stock Ownership Plan ("ESOP"), and the portion of the net proceeds
retained by the Company in connection with the Bank's conversion to stock form
and the concurrent offering of the Company's common stock (the "Conversion").
The business and management of the Company consists of the business and
management of the Bank. The Company does not presently own or lease any
property, but instead uses the premises, equipment and furniture of the Bank. At
the present time, the Company does not employ any persons other than officers of
the Bank, and the Company utilizes the support staff of the Bank from time to
time. Additional employees will be hired as appropriate to the extent the
Company expands or changes its business in the future. At December 31, 1999, the
Company had $680.7 million in total assets, $507.9 million in total deposits and
$78.8 million in stockholders' equity.
The Company's executive office is located at the home office of the Bank at
200 West Stephenson Avenue, Harrison, Arkansas 72601, and its telephone number
is (870) 741-7641.
FIRST FEDERAL BANK OF ARKANSAS, FA. The Bank is a federally chartered stock
savings and loan association which was formed in 1934. First Federal conducts
business from its main office and twelve full service branch offices, all of
which are located in a six county area in Northcentral and Northwest Arkansas
comprised of Benton, Marion, Washington, Carroll, Baxter and Boone counties.
First Federal's deposits are insured by the Savings Association Insurance Fund
("SAIF"), which is administered by the Federal Deposit Insurance Corporation
("FDIC"), to the maximum extent permitted by law.
The Bank is a community oriented savings institution which has traditionally
offered a wide variety of savings products to its retail customers while
concentrating its lending activities on the origination of loans collateralized
by one- to four-family residential dwellings. To a significantly lesser extent,
the Bank's activities have also included origination of multi-family residential
loans, commercial real estate loans, construction loans, commercial loans and
consumer loans. In addition, the Bank maintains a significant portfolio of
investment securities. In addition to interest and dividend income on loans and
investments, the Bank receives other income from loan fees and various service
charges. The Bank's goal is to continue to serve its market area as an
independent community oriented financial institution dedicated primarily to
financing home ownership while providing financial services to its customers in
an efficient manner.
The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS"), which is the Bank's chartering authority
and primary regulator. The Bank is also regulated by the FDIC, the administrator
of the SAIF. The Bank is also subject to certain reserve requirements
established by the Board of Governors of the Federal Reserve System ("FRB") and
is a member of the Federal Home Loan Bank ("FHLB") of Dallas, which is one of
the 12 regional banks comprising the FHLB System.
1
<PAGE>
This Form 10-K and the Company's Annual Report to Stockholders contain
certain forward-looking statements and information relating to the Company that
are based on the beliefs of management as well as assumptions made by and
information currently available to management. In addition, in those and other
portions of this document and the Company's Annual Report to Stockholders, the
words "anticipate", "believe," "estimate," "expect," "intend," "should" and
similar expressions, or the negative thereof, as they relate to the Company or
the Company's management, are intended to identify forward-looking statements.
Such statements reflect the current views of the Company with respect to future
looking events and are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. The Company does not intend to update these forward-looking
statements.
LENDING ACTIVITIES
GENERAL. At December 31, 1999, the Bank's total portfolio of loans
receivable ("total loan portfolio"), amounted to $474.2 million or 69.7% of the
Company's $680.7 million of total assets at such time. The Bank has
traditionally concentrated its lending activities on conventional first mortgage
loans collateralized by single-family (one- to four-family) residential
property. Consistent with such approach, $368.6 million or 77.73% of the Bank's
total loan portfolio consisted of one- to four-family residential loans at
December 31, 1999. To a significantly lesser extent, the Bank also originates
multi-family residential loans, commercial real estate loans, construction
loans, commercial loans and consumer loans. At December 31, 1999, such loan
categories amounted to $2.8 million, $26.0 million, $25.8 million, $14.2 million
and $36.8 million, respectively, or .59%, 5.49%, 5.44%, 2.99% and 7.76% of the
total loan portfolio, respectively. The Bank currently does not offer loans
which are insured by the Federal Housing Administration ("FHA") nor partially
guaranteed by the Office of Veterans Affairs ("VA").
2
<PAGE>
LOAN COMPOSITION. The following table sets forth certain data relating to the
composition of the Bank's loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------
1999 1998
------------------------------------ ----------------------------------
Percentage Percentage
Amount of Loans Amount of Loans
---------- ---------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate loans:
Single-family residential $ 368,589 77.73% $ 370,211 81.66%
Multi-family residential 2,812 .59 1,540 .34
Commercial real estate 26,018 5.49 23,196 5.12
Construction 25,797 5.44 18,226 4.02
---------- ---------- ---------- -------
Total real estate loans 423,216 89.25 413,173 91.14
---------- ---------- ---------- -------
Commercial loans 14,171 2.99 8,437 1.86
---------- ---------- ---------- -------
Consumer loans:
Home equity and second
mortgage loans 15,009 3.17 13,308 2.94
Automobile 13,205 2.78 10,693 2.36
Other 8,577 1.81 7,712 1.70
---------- ---------- ---------- -------
Total consumer loans 36,791 7.76 31,713 7.00
---------- ---------- ---------- -------
Total loans receivable 474,178 100.00% 453,323 100.00%
---------- ========== ---------- =======
Less:
Undisbursed loan funds (10,437) (6,770)
Unearned discounts and net
deferred loan fees (3,011) (3,296)
Allowance for loan losses (752) (771)
---------- ----------
Total loans receivable, net $ 459,978 $ 442,486
========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------- ----------------------------
Percentage Percentage Percentage
Amount of Loans Amount of Loans Amount of Loans
---------- ---------- --------- ---------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family residential $ 370,955 83.18% $ 338,349 82.36% $ 287,872 82.54%
Multi-family residential 1,303 .29 1,555 .38 1,060 .30
Commercial real estate 18,593 4.17 19,136 4.66 19,723 5.66
Construction 20,753 4.66 20,053 4.88 11,603 3.33
---------- ---------- --------- ---------- --------- ----------
Total real estate loans 411,604 92.30 379,093 92.28 320,258 91.83
---------- ---------- --------- ---------- --------- ----------
Commercial loans 5,649 1.27 4,348 1.06 4,014 1.15
---------- ---------- --------- ---------- --------- ----------
Consumer loans:
Home equity and second
mortgage loans 13,023 2.92 12,549 3.06 10,466 3.00
Automobile 8,307 1.86 7,556 1.84 6,993 2.01
Other 7,372 1.65 7,244 1.76 7,021 2.01
---------- ---------- --------- ---------- --------- ----------
Total consumer loans 28,702 6.43 27,349 6.66 24,480 7.02
---------- ---------- --------- ---------- --------- ----------
Total loans receivable 445,955 100.00% 410,790 100.00% 348,752 100.00%
------- ====== ------- ====== ------- ======
Less:
Undisbursed loan funds (7,305) (8,670) (4,298)
Unearned discounts and net
deferred loan fees (3,512) (4,361) (3,721)
Allowance for loan losses (1,196) (1,251) (1,228)
------ ------ ------
Total loans receivable, net $ 433,942 $ 396,508 $ 339,505
========= ========= =========
</TABLE>
3
<PAGE>
LOAN MATURITY AND INTEREST RATES. The following table sets forth certain
information at December 31, 1999 regarding the dollar amount of loans maturing
in the Bank's loan portfolio based on their contractual terms to maturity.
Demand loans and loans having no stated schedule of repayments and no stated
maturity are reported as due in one year or less. All other loans are included
in the period in which the final contractual repayment is due.
<TABLE>
<CAPTION>
After Three After Five After Ten
One Year Years Years Years Beyond
Within Through Through Through Ten Through Twenty
One Year Three Years Five Years Years Twenty Years Years Total
----------- ------------ ----------- ----------- ------------ ---------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family residential $ 487 $ 1,034 $ 3,108 $44,540 $141,696 $177,724 $368,589
Multi-family residential 156 -- -- 229 2,427 -- 2,812
Commercial real estate 881 1,474 11,002 3,298 9,363 -- 26,018
Construction 3,265 -- 192 2,830 5,757 13,753 25,797
Commercial loans 29 8,337 1,667 3,265 873 -- 14,171
Consumer loans 151 14,082 12,546 9,372 640 -- 36,791
------ ------ ------ ------ -------- ----------- -------
Total(1) $4,969 $24,927 $28,515 $63,534 $160,756 $191,477 $474,178
===== ====== ====== ====== ======= ======= =======
</TABLE>
- ---------------
(1) Gross of undisbursed loan funds, unearned discounts and net deferred loan
fees and the allowance for loan losses.
The following table sets forth the dollar amount of the Bank's loans at
December 31, 1999 due after one year from such date which have fixed interest
rates or which have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed-Rates Adjustable-Rates Total
------------------- ------------------- -------------------
(In Thousands)
<S> <C> <C> <C>
Real estate loans:
Single-family residential $131,178 $236,924 $368,102
Multi-family residential 2,249 407 2,656
Commercial real estate 25,137 -- 25,137
Construction 8,654 13,878 22,532
Commercial loans 14,142 -- 14,142
Consumer loans 36,640 -- 36,640
------- ----------- ---------
Total $217,999 $251,209 $469,209
======= ======= =======
</TABLE>
Scheduled contractual maturities of loans do not necessarily reflect the
actual term of the Bank's portfolio. The average life of mortgage loans is
substantially less than their average contractual terms because of loan
prepayments and refinancing. The average life of mortgage loans tends to
increase, however, when current mortgage loan rates substantially exceed rates
on existing mortgage loans and, conversely, decrease when rates on existing
mortgage loans substantially exceed current mortgage loan rates.
ORIGINATION, PURCHASE AND SALE OF LOANS. The lending activities of the Bank
are subject to the written, non-discriminatory, underwriting standards and loan
origination procedures established by the Bank's Board of Directors and
management. Loan originations are obtained by a variety of sources, including
realtors, walk-in customers, branch managers and radio, television and newspaper
advertising. In its marketing, the Bank emphasizes its community ties and an
efficient underwriting and approval process. The Bank believes it can provide
its personalized service to its customers in a more efficient manner due in part
to the use of in-house appraisal and underwriting staff. The Bank requires
hazard, title and, to the extent applicable, flood insurance on all security
property.
4
<PAGE>
Loan applications are initially processed by branch managers or loan
officers and all real estate loans up to $500,000 must be approved by two
members of the Bank's Loan Committee, one of which must be a member of senior
management. Loans in excess of $500,000 up to $750,000 must be approved by three
members of the Bank's Loan Committee, two of which must be members of senior
management. Real estate loans in excess of $750,000 must be approved by the
Bank's Board of Directors. Consumer loans are initially processed by consumer
loan officers and are required to be approved by designated officers of the Bank
depending on the amount of the loan. All loans are ratified by the Board of
Directors.
Historically, the Bank has not been an active purchaser of loans due to
consistent loan demand. No loans were purchased during the last three years.
The Bank originates and generally sells all loans with fixed terms of
fifteen years or greater to specific investors in the secondary mortgage loan
market. This allows the Bank to provide to its customers competitive long-term
fixed-rate loan products without assuming additional interest rate risk. These
loans are originated subject to underwriting by a third party with the purchase
price confirmed by the respective investor prior to loan closing. Due to these
loans being underwritten by a third party, the repurchase risk typically
associated with such contracts is being assumed by the underwriter. The Bank is
not involved in loan hedging or other speculative mortgage origination
activities. In 1999, 1998, and 1997, the Bank's loan sales were $15.5 million,
$20.5 million, and $2.2 million, respectively.
Set forth below is a table showing the Bank's originations, purchases, sales
and repayments of loans during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
(In Thousands)
<S> <C> <C> <C>
Loans receivable at beginning
of period $453,323 $445,955 $410,790
------- ------- -------
Loan originations:
Real estate:
Single-family residential 97,236 114,518 92,684
Multi-family residential 1,812 590 --
Commercial real estate 7,266 13,776 3,633
Construction 31,175 24,033 20,587
Commercial loans 10,783 7,159 5,257
Consumer:
Home equity and second
mortgage loans 11,861 9,652 8,807
Automobile 11,735 10,273 7,311
Other 8,801 8,830 6,798
-------- --------- ---------
Total loan originations 180,669 188,831 145,077
Purchases -- -- --
------------ ------------- ------------
Total loan originations and
purchases 180,669 188,831 145,077
Repayments (143,388) (156,426) (106,408)
Loan sales (15,516) (20,494) (2,244)
Other (910) (4,543) (1,260)
----------- --------- ---------
Net loan activity 20,855 7,368 35,165
--------- --------- --------
Loans receivable
at end of period $474,178 $453,323 $445,955
======= ======= =======
</TABLE>
5
<PAGE>
LOANS-TO-ONE BORROWER. A savings institution generally may not make
loans-to-one borrower and related entities in an amount which exceeds 15% of its
unimpaired capital and surplus, although loans in an amount equal to an
additional 10% of unimpaired capital and surplus may be made to a borrower if
the loans are fully secured by readily marketable securities. At December 31,
1999, the Bank's limit on loans-to-one borrower was approximately $11.4 million.
At December 31, 1999, the Bank's largest loans or groups of loans-to-one
borrower, including persons or entities related to the borrower, amounted to
$5.7 million. Such amount consists of 23 loans, primarily commercial real estate
loans, all of which were current at December 31, 1999. The Bank's ten largest
loans or groups of loans-to-one borrower, including persons or entities related
to the borrower, amounted to $30.4 million at December 31, 1999. All of such
loans are current.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. The Bank has historically
concentrated its lending activities on the origination of loans collateralized
by first mortgage liens on existing one- to four-family residences. At December
31, 1999, $368.6 million or 77.7% of the Bank's total loan portfolio consisted
of one- to four-family residential real estate loans. The Bank originated $97.2
million, $114.5 million and $92.7 million of one- to four-family residential
loans in 1999, 1998, and 1997, respectively, and intends to continue to
emphasize the origination of permanent loans collateralized by first mortgage
liens on one- to four-family residential properties in the future. Of the $368.6
million of such loans at December 31, 1999, $236.9 million or 64.3% had
adjustable-rates of interest (including $177.9 million in seven-year adjustable
rates) and $131.7 million or 35.7% had fixed-rates of interest.
The Bank currently originates both fixed-rate and adjustable-rate one- to
four-family residential mortgage loans. The Bank's fixed-rate loans for
portfolio are presently originated with maximum terms of typically 15 years and
are fully amortizing with monthly payments sufficient to repay the total amount
of the loan with interest by the end of the loan term. The Bank does offer
fixed-rate loans with terms exceeding fifteen years although such loans are
typically sold in the secondary market. The Bank's one- to four-family loans are
typically originated under terms, conditions and documentation which permit them
to be sold to U.S. Government sponsored agencies such as the Federal Home Loan
Mortgage Corporation ("FHLMC") and the Federal National Mortgage Association
("FNMA"). However, as stated above, such loans with terms of 15 years or less
are generally originated for portfolio while substantially all of such loans
over 15 years are sold in the secondary market. The Bank's fixed-rate loans
typically include "due on sale" clauses.
The Bank's adjustable-rate mortgage loans typically provide for an interest
rate which adjusts every one-, three-, five- or seven-years in accordance with a
designated index plus a margin. Such loans are typically based on a 25- or
30-year amortization schedule. The Bank generally does not offer below market
rates, and the amount of any increase or decrease in the interest rate per one
or three year period is generally limited to 2%, with a limit of 6% over the
life of the loan. The Bank's five-year adjustable rate loans provide that any
increase or decrease in the interest rate per period is limited to 3%, with a
limit of 6% over the life of the loan. The Bank's seven-year adjustable rate
loans provide that any increase or decrease in the interest rate per period is
limited to 5% with a limit of 5% over the life of the loan. The Bank's
adjustable-rate loans are assumable (generally without release of the initial
borrower), do not contain prepayment penalties and do not provide for negative
amortization. The Bank's adjustable-rate mortgage loans typically include "due
on sale" clauses. Such loans may be converted to a fixed-rate loan at the
discretion of the Bank. The Bank generally underwrites its one- and three-year
adjustable-rate loans on the basis of the borrowers' ability to pay at the rate
after the first adjustment. Adjustable-rate loans decrease the risks associated
with changes in interest rates but involve other risks, primarily because as
interest rates rise, the payment by the borrower rises to the extent permitted
by the terms of the loan, thereby increasing the potential for default. At the
same time, the marketability of the underlying property may be adversely
affected by higher interest rates.
The Bank's residential mortgage loans typically do not exceed 90% of the
appraised value of the security property. However, pursuant to underwriting
guidelines adopted by the Board of Directors, the Bank can lend up to 97% of the
appraised value of the property securing a one- to four-family residential loan,
and requires borrowers to obtain private mortgage insurance on loans where the
principal amount of the loan exceeds 90% of the appraised value of the security
property. At December 31, 1999, the Bank had $1.2 million of nonperforming
single-family residential loans. See "- Asset Quality."
MULTI-FAMILY RESIDENTIAL REAL ESTATE LOANS. Although the Bank does not
emphasize multi-family residential loans and has not been active in this area,
the Bank offers mortgage loans for the acquisition and refinancing of existing
multi-family residential properties. At December 31, 1999, $2.8 million or .6%
of the Bank's total loan portfolio consisted of loans collateralized by existing
multi-family residential real estate properties.
6
<PAGE>
Multi-family loans are generally made on terms up to ten years with fixed
rates although the Bank will originate such loans with call provisions up to
five years. Loan to value ratios on the Bank's multi-family real estate loans
are currently limited to 80%. It is also the Bank's general policy to obtain
corporate or personal guarantees, as applicable, on its multi-family residential
real estate loans from the principals of the borrower.
Multi-family real estate lending entails significant additional risks as
compared with one- to four-family residential property lending. Such loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The payment experience on such loans is typically dependent on the
successful operation of the real estate project. The success of such projects is
sensitive to changes in supply and demand conditions in the market for
multi-family real estate as well as economic conditions generally. At December
31, 1999, the Bank did not have any nonperforming multi-family real estate
loans. See "- Asset Quality."
COMMERCIAL REAL ESTATE LOANS. The Bank originates mortgage loans for the
acquisition and refinancing of commercial real estate properties. At December
31, 1999, $26.0 million or 5.5% of the Bank's total loan portfolio consisted of
loans collateralized by existing commercial real estate properties. The Bank
does not actively market its commercial real estate loan products and offers
such loans primarily as an accommodation to its present customers. Management
does not expect the Bank's portfolio of commercial real estate loans to
significantly increase in the future.
The majority of the Bank's commercial real estate loans are collateralized
by office buildings, convenience stores, service stations, mini-storage
facilities, hotels, churches and small shopping malls. The majority of the
Bank's commercial real estate loans are collateralized by property located in
the Bank's market area.
At December 31, 1999, the Bank had approximately $8.4 million of loans which
are either for the construction of service station and convenience store
facilities or are collateralized by such facilities. The Bank requires that
construction loans for such facilities meet present standards established by the
Environmental Protection Agency. With respect to existing facilities, the Bank
requires an environmental study of the property. To date, the Bank has not
experienced any material credit or environmental problems with such loans.
The Bank requires appraisals of all properties securing commercial real
estate loans. The Bank considers the quality and location of the real estate,
the credit of the borrower, cash flow of the project and the quality of
management involved with the property. The Bank's commercial real estate loans
are originated with fixed interest rates generally based on fifteen year
amortization schedule and loan to value ratios on such loans are generally
limited to 80%. As part of the criteria for underwriting multi-family and
commercial real estate loans, the Bank generally imposes a debt coverage ratio
(the ratio of net cash from operations before payment of debt service to debt
service) of not less than 1.2. It is also the Bank's policy to typically obtain
corporate or personal guarantees, as applicable, on its commercial real estate
loans from the principals of the borrower.
Commercial real estate lending entails significant additional risks as
compared with single-family residential property lending. Such loans typically
involve large loan balances to single borrowers or groups of related borrowers.
The payment experience on such loans is typically dependent on the successful
operation of the real estate project. The success of such projects is sensitive
to changes in supply and demand conditions in the market for commercial real
estate as well as regional and economic conditions generally. At December 31,
1999, the Bank did not have any nonperforming commercial real estate loans.
See"-Asset Quality."
CONSTRUCTION LOANS. The Bank also originates primarily residential
construction loans, although the Bank has originated commercial real estate and
multi-family residential construction loans. The Bank's construction lending
activities are limited to the Bank's primary market area. At December 31, 1999,
construction loans amounted to $25.8 million or 5.4% of the Bank's total loan
portfolio, of which $20.2 million consisted of single-family residential
construction loans and $5.6 million consisted of commercial real estate and
multi-family residential construction loans. The Bank's construction loans
generally have fixed interest rates for a term of six months to nine months.
However, the Bank is permitted to originate construction loans with terms of up
to two years under its loan policy. Commercial real estate and multi-family
residential construction loans are made with a maximum loan to value ratio of
80%. Construction loans to individuals are typically made with a loan to value
ratio of up to 90% and non-owner occupied construction loans are limited to 80%.
7
<PAGE>
With limited exceptions, the Bank's construction loans are made to
individual homeowners and a limited number of local real estate builders and
developers for the purpose of constructing one- to four-family residential
homes. Construction loans to individuals are typically made in connection with
the granting of the permanent financing on the property. Such loans convert to a
fully amortizing adjustable or fixed-rate loan at the end of the construction
term. The Bank typically requires that permanent financing with the Bank or some
other lender be in place prior to closing any construction loan to an
individual. Interest on construction/permanent loans is due upon completion of
the construction phase of the loan. At such time, the loan automatically
converts to a permanent loan at the interest rate established at the initial
closing of the construction/permanent loan.
Upon application, credit review and analysis of personal and, if applicable,
corporate financial statements, the Bank makes construction loans to local
builders for the purpose of construction of speculative (or unsold) residential
properties and for the construction of pre-sold single-family homes. Prior to
making a commitment to fund a construction loan, the Bank requires an appraisal
of the property by the Bank's appraisal staff. The Bank's appraisal staff also
reviews and inspects each project at the commencement of construction and
typically before each disbursement of funds during the term of the construction
loan. Loan proceeds are disbursed after inspections of the project based on a
percentage of completion or presentation of substantiated costs incurred.
Interest on construction loans is due upon maturity.
Construction lending is generally considered to involve a higher level of
risk as compared to one- to four-family residential lending, due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on developers and builders. Moreover, a
construction loan can involve additional risks because of the inherent
difficulty in estimating both a property's value at completion of the project
and the estimated cost (including interest) of the project. The nature of these
loans is such that they are generally more difficult to evaluate and monitor. In
addition, speculative construction loans to a builder are not pre-sold and thus
pose a greater potential risk to the Bank than construction loans to individuals
on their personal residences.
The Bank has attempted to minimize the foregoing risks by, among other
things, limiting the extent of its construction lending generally and by
limiting its construction lending to primarily residential properties. In
addition, the Bank has adopted underwriting guidelines which impose stringent
loan to value, debt service and other requirements for loans which are believed
to involve higher elements of credit risk, by limiting the geographic area in
which the Bank will do business and by working with builders with whom it has
established relationships. At December 31, 1999, the Bank did not have any
nonperforming construction loans. See "- Asset Quality."
COMMERCIAL LOANS. To a limited extent, the Bank offers commercial
loans which primarily consist of equipment and inventory loans which are
typically cross-collateralized by commercial real estate. The Bank does not
actively market such loans and offers such loans primarily as an accommodation
to its present customers. At December 31, 1999, such loans amounted to $14.2
million or 3.0% of the total loan portfolio. At December 31, 1999, the Bank had
two nonperforming commercial loans totaling $23,000. See "- Asset Quality."
The Bank's commercial loans are originated with fixed interest rates with
call provisions between one and five years. Such loans are typically based on a
fifteen year amortization schedule.
CONSUMER LOANS. The Bank offers consumer loans in order to provide a full
range of financial services to its customers. The consumer loans offered by the
Bank include primarily home equity and second mortgage loans, automobile loans,
deposit account secured loans and unsecured loans. Consumer loans amounted to
$36.8 million or 7.8% of the total loan portfolio at December 31, 1999, of which
$15.0 million, $13.2 million and $8.6 million consisted of home equity and
second mortgage loans, automobile loans and other consumer loans, respectively.
The Bank intends to continue its emphasis on consumer loans in furtherance of
its role as a community oriented financial institution.
The Bank's home equity and second mortgage loans are typically fixed-rate
loans with terms of up to 15 years. Although the Bank does not require that it
hold the first mortgage on the secured property, the Bank does hold the first
mortgage on a significant majority of its home equity and second mortgage loans.
The Bank limits the mortgages on the secured property to 85% of the value of the
secured property.
8
<PAGE>
The Bank's automobile loans are typically originated for the purchase of new
and used cars and trucks. Such loans are generally originated with a maximum
term of five years.
Other consumer loans consist primarily of deposit account loans and
unsecured loans. Loans secured by deposit accounts are originated for up to 90%
of the account balance, with a hold placed on the account restricting the
withdrawal of the account balance.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. At December 31, 1999, the Bank had $121,000 of
nonperforming consumer loans. See "-Asset Quality."
ASSET QUALITY
When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the deficiency by contacting the borrower and seeking the
payment. Depending upon the type of loan, late notices are sent and/or personal
contacts are made. In most cases, deficiencies are cured promptly. While the
Bank generally prefers to work with borrowers to resolve such problems, when a
mortgage loan becomes 90 days delinquent, the Bank generally institutes
foreclosure or other proceedings, as necessary, to minimize any potential loss.
Loans are placed on non-accrual status when, in the judgment of management,
the probability of collection of interest is deemed to be insufficient to
warrant further accrual. When a loan is placed on non-accrual status, previously
accrued but unpaid interest is deducted from interest income. The Bank does not
accrue interest on loans past due 90 days or more. Loans may be reinstated to
accrual status when payments are made to bring the loan under 90 days past due
and, in the opinion of management, collection of the remaining balance can be
reasonably expected.
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell. Revenue
and expenses from operations are included in the current period income.
Additions to the valuation allowance are included in the provision for real
estate losses.
At December 31, 1999, the Bank owned a 75% interest in a 202 room hotel in
the Oklahoma City metropolitan area. This ownership was acquired as the result
of the Bank's foreclosure of such property in 1998. Originally valued at
approximately $4.7 million, the real estate has been written down to
approximately $3.5 million at December 31, 1999. The Bank has received an offer
to sell such property. While Bank management believes the offeror will proceed
to closing and that the Bank will receive at least the carrying value of the
real estate as net proceeds of the sale, the contract can be rescinded and the
sale may not proceed to closing. The offeror owns other lodging facilities in
the Oklahoma City area and continues to carry out steps consistent with their
expressed plan for acquiring the real estate.
The operations of the hotel are managed by a retained hotel management
company. The hotels operation's lost approximately $98,000 for the year ended
December 31, 1999.
9
<PAGE>
DELINQUENT LOANS. The following table sets forth information concerning
delinquent loans at December 31, 1999, in dollar amounts and as a percentage of
the Bank's total loan portfolio. The amounts presented represent the total
outstanding principal balances of the related loans, rather than the actual
payment amounts which are past due.
<TABLE>
<CAPTION>
Single-family
Residential Construction Commercial Consumer
----------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage Percentage
of Total of Total of Total of Total
Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans
delinquent:
30-59 days $1,326 .28% $ -- --% $ -- --% $131 .03%
60-89 days 474 .10 233 .05 -- -- 76 .02
90 days and
over 1,203 .25 -- -- 23 .01 121 .03
----- ----- --- ---
Total $3,003 $233 $ 23 $328
===== === === ===
</TABLE>
Interest income that would have been recorded under the original terms of
the Bank's non-accruing loans for the year ended December 31, 1999 amounted to
$106,000, and the interest recognized during this period amounted to $59,000.
The following table sets forth the amounts and categories of the Bank's
nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------ ------ ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Single-family residential $1,203 $1,275 $ 1,001 $ 493 $ 223
Multi-family residential -- -- 109 -- --
Commercial real estate -- -- 3,365(1) -- --
Commercial loans 23 30 48 -- --
Consumer loans 121 159 434 228 127
------- ------ ------ ---- -----
Total nonperforming loans 1,347 1,464 4,957 721 350
------- ------ ------ ---- -----
Real estate owned 3,940(1) 4,270(1) 195 154 234
------- ------ ------ ---- -----
Total nonperforming assets $5,287 $5,734 $5,152 $875 $ 584
======= ====== ====== ==== =====
Total nonperforming loans as a
percentage of total loans
receivable 0.28% 0.32% 1.11% 0.18% 0.10%
==== ==== ==== ==== ====
Total nonperforming assets as a
percentage of total assets 0.78% 0.93% 0.94% 0.17% 0.13%
==== ===== ==== ==== ====
</TABLE>
- --------------
(1) The Bank reclassified a previously reported non-accrual commercial real
estate loan secured by a 202 room hotel in Oklahoma to real estate owned in
1998. Real estate owned primarily consists of the Bank's 75% ownership of this
property. As a result of such 75% ownership interest, the Bank is required to
include the 25% minority interest ownership in the real estate owned amount
shown above.
10
<PAGE>
CLASSIFIED ASSETS. Federal regulations require that each insured savings
association classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. There are three
classifications for problem assets: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. At December 31,
1999, the Bank had $4.4 million of classified assets, $4.3 million of which were
classified as substandard and $141,000 of which were classified as loss. In
addition, at such date, the Bank had $187,000 of assets designated as special
mention.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is a valuation
allowance to provide for incurred but not yet realized losses. The Bank reviews
its non-homogeneous loans for impairment on a quarterly basis. Impairment is
determined by assessing the probability that the borrower will not be able to
fulfill the contractual terms of the agreement. If a loan is determined to be
impaired, the amount of the impairment is measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or
by use of the observable market price of the loan or fair value of collateral if
the loan is collateral dependent. Throughout the year management estimates the
level of probable losses to determine whether the allowance for loan losses is
appropriate considering the estimated losses existing in the portfolio. Based on
these estimates, an amount is charged to the provision for loan losses and
credited to the allowance for loan losses in order to adjust the allowance to a
level determined by management to be appropriate relative to losses. The
allowance for loan losses is increased by charges to income (provisions) and
decreased by charge-offs, net of recoveries.
Management's periodic evaluation of the appropriateness of the allowance is
based on the Company's past loan loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral and current economic
conditions.
Homogeneous loans are those that are considered to have common
characteristics that provide for evaluation on an aggregate or pool basis. The
Bank considers the characteristics of (1) one-to-four family residential first
mortgage loans; (2) unsecured consumer loans and; (3) secured consumer loans to
permit consideration of the appropriateness of the allowance for losses of each
group of loans on a pool basis. The primary methodology used to determine the
appropriateness of the allowance for losses includes segregating certain
specific, poorly performing loans based on their performance characteristics
from the pools of loans as to type, grading these loans, and then applying a
loss factor to the remaining pool balance based on several factors including
past loss experience, inherent risks, economic conditions in the primary market
areas, and other factors which usually are beyond the control of the Bank.
Non-homogeneous loans are those loans that can be included in a particular
loan type, such as commercial loans, construction loans, multi-family, and
commercial first mortgage loans, but which differ in other characteristics to
the extent that valuation on a pool basis is not valid. Those segregated
specific loans are evaluated using the present value of future cash flows,
usually determined by estimating the fair value of the loan's collateral reduced
by any cost of selling and discounted at the loan's effective interest rate if
the estimated time to receipt of monies is more that three months or by use of
the observable market price of the loan or fair value of collateral if the loan
is collateral dependent. After segregating specific, poorly performing loans,
the remaining loans are evaluated based on payment experience, known
difficulties in the borrower's business or geographic area, loss experience,
inherent risks and other factors usually beyond the control of the Bank. A
factor, based on experience, is applied to these loans to estimate the probable
loss.
11
<PAGE>
Estimates of the probability of loan losses involve an exercise of
judgement. While it is possible that in the near term the Bank may sustain
losses which are substantial in relation to the allowance for loan losses, it is
the judgment of management that the allowance for loan losses reflected in the
consolidated statements of financial condition is appropriate considering the
estimated probable losses in the portfolio.
The following table summarizes changes in the allowance for loan losses and
other selected statistics for the periods presented.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding at
end of period $ 474,178 $ 453,323 $445,955 $410,790 $348,752
======== ======== ======= ======= =======
Average loans outstanding $ 447,631 $ 441,702 $415,075 $369,185 $306,175
======== ======== ======= ======= =======
Allowance at beginning of period $ 771 $ 1,196 $ 1,251 $ 1,228 $ 1,134
----------- ---------- --------- --------- --------
Charge-offs:
Single-family residential (9) (17) -- -- (2)
Commercial real estate -- (369) -- -- (8)
Consumer loans (57) (103) (67) (40) (30)
------- --------- --------- ------- --------
Total charge-offs (66) (489) (67) (40) (40)
------- --------- --------- ------- --------
Recoveries:
Commercial real estate -- -- -- 1 --
Consumer loans 27 9 12 2 1
------- --------- -------- ------- --------
Total recoveries 27 9 12 3 1
------- --------- -------- ------- --------
Net charge-offs (39) (480) (55) (37) (39)
-------- -------- -------- ------- --------
Total provisions for losses 20 55 -- 60 133
------- -------- --------- ------- -------
Allowance at end of period $ 752 $ 771 $1,196 $1,251 $1,228
====== ======= ===== ===== =====
Allowance for loan losses as a
percentage of total loans
outstanding at end of period 0.16% 0.17% 0.27% 0.03% 0.35%
==== ==== ==== ==== ====
Net loans charged-off as a
percentage of average loans
outstanding 0.01% 0.11% 0.01% 0.01% 0.01%
==== ===== ==== ==== ====
</TABLE>
12
<PAGE>
The following table presents the allocation of the Bank's allowance for loan
losses by the type of loan at each of the dates indicated. The significant
portion of the allowance which is unallocated is due to historically low levels
of nonperforming single-family residential loans, multi-family residential
loans, commercial real estate loans, construction loans, commercial loans and
consumer loans, which would otherwise require a larger allocation of the
allowance, balanced with management's desire to provide for an adequate
allowance in light of the size of the Bank's loan portfolio.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------ ----------------------
Percent of Percent of Percent of
Total Loans Total Loans Total Loans
Amount by Category Amount by Category Amount by Category Amount
----------- ------------ --------- ---------- -------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Single-family residential $ 50 77.73% $ 46 81.66% $ 49 83.18% $ 11
Multi-family residential -- .59 -- .34 -- .29 --
Commercial real estate 149 5.49 147 5.12 125 4.17 117
Construction loans -- 5.44 -- 4.02 -- 4.66 --
Commercial loans 31 2.99 60 1.86 13 1.27 19
Consumer loans 144 7.76 135 7.00 221 6.43 270
Unallocated 378 -- 383 -- 788 -- 834
------ ------ ------ ------ ------ ------ ------
Total $ 752 100.00% $ 771 100.00% $1,196 100.00% $1,251
====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1996 1995
---------------- -------------------------
Percent of Percent of
Total Loans Total Loans
by Category Amount by Category
------------ ----------- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
Single-family residential 82.36% $ 11 82.54%
Multi-family residential .38 -- .30
Commercial real estate 4.66 124 5.66
Construction loans 4.88 -- 3.33
Commercial loans 1.06 27 1.15
Consumer loans 6.66 241 7.02
Unallocated -- 825 --
------ ------ ------
Total 100.00% $1,228 100.00%
====== ====== ======
</TABLE>
13
<PAGE>
INVESTMENT ACTIVITIES
INVESTMENT SECURITIES. The investment policy of the Bank, as established by
the Board of Directors, is designed primarily to provide and maintain liquidity
and to generate a favorable return on investments. The Bank's investment policy
is currently implemented by the Bank's President within the parameters set by
the investment committee and the Board of Directors. The Bank is authorized to
invest in obligations issued or fully guaranteed by the U.S. Government, certain
federal agency obligations, certain time deposits, negotiable certificates of
deposit issued by commercial banks and other insured financial institutions,
investment grade corporate debt securities and other specified investments.
Investment securities that management has the positive intent and ability to
hold to maturity are classified as held to maturity and are reported at
amortized cost. Investment securities classified as available for sale are
reported at fair value, with unrealized gains and losses excluded from earnings,
net of taxes, and reported as a separate component of equity. At December 31,
1999, the Bank held no investment securities classified as available for sale.
At December 31, 1999, approximately $13 million of the Bank's investment
securities were pledged as collateral for certain deposits in excess of
$100,000. At December 31, 1999, investments in the debt and/or equity securities
of any one issuer, other than those issued by U.S. Government agencies, did not
exceed more than 10% of the Company's stockholders' equity.
The maturity terms of the investment securities purchased in 1999 totaling
$92.2 million generally have been longer term, up to fifteen years with three
month to two year call protections.
The following table sets forth the amount of investment securities which
contractually mature during each of the periods indicated and the weighted
average yields for each range of maturities at December 31, 1999. Expected
maturities may differ from contractual maturities because issuers may have the
right to call or prepay the obligation without prepayment penalties.
<TABLE>
<CAPTION>
Less Than One to Five Five to Ten After Ten
One Year Years Years Years Total
---------------- ----------------- ---------------- ---------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- -------- ------ ------- ------ -------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Bonds and other debt
securities held to
maturity:
U.S. Government and
agency obligations $3,503 5.25% $1,501 5.93% $18,211 7.05% $166,048 6.89% $189,263 6.87%
====== ====== ======= ======== ========
</TABLE>
As of December 31, 1999, there were approximately $184 million of
investments with issuer call options, of which approximately $169 million are
callable within one year.
The following table sets forth the carrying value of the Company's
investment securities classified as held to maturity. The Company held no
investment securities as available for sale at the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C>
Investment securities held
to maturity:
U.S. Government and agency
obligations $189,263 $127,175 $95,533
======= ======= ======
</TABLE>
As a member of the FHLB of Dallas, the Bank is required to maintain an
investment in FHLB stock. At December 31, 1999, the Bank's investment in FHLB
stock amounted to $4.3 million. No ready market exists for such stock and it has
no quoted market value.
14
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from loan principal repayments and prepayments and interest payments,
maturities of investment securities and advances from the FHLB of Dallas. Loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows are significantly influenced by general interest rates and money market
conditions. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes. The Bank began
utilizing FHLB of Dallas advances as an additional source of funds during 1997.
DEPOSITS. The Bank's deposit products include a broad selection of
deposit instruments, including negotiable order of withdrawal ("NOW") accounts,
demand deposit accounts ("DDA"), money market accounts, regular savings accounts
and term certificate accounts. Deposit account terms vary, with the principal
differences being the minimum balance required, the time period the funds must
remain on deposit, early withdrawal penalties and the interest rate.
The Bank considers its primary market area to be Northcentral and
Northwest Arkansas. The Bank utilizes traditional marketing methods to attract
new customers and savings deposits. The Bank does not advertise for deposits
outside of its primary market area or utilize the services of deposit brokers,
and management believes that an insignificant number of deposit accounts were
held by non-residents of Arkansas at December 31, 1999.
The Bank has been competitive in the types of accounts and in interest
rates it has offered on its deposit products but does not necessarily seek to
match the highest rates paid by competing institutions. Although market demand
generally dictates which deposit maturities and rates will be accepted by the
public, the Bank intends to continue to promote longer term deposits to the
extent possible and consistent with its asset and liability management goals.
The following table shows the distribution of, and certain other
information relating to, the Bank's deposits by type of deposit, as of the dates
indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------- ----------------------
Amount % Amount % Amount %
------ - ------ - ------ -
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
3.00% - 3.99% $ 1,107 .2% $ 453 .1% $ 362 .1%
4.00% - 5.99% 291,342 57.4 278,335 57.9 241,660 53.6
6.00% - 7.99% 107,065 21.1 91,156 18.9 97,885 21.7
8.00% and over 5,800 1.1 8,821 1.8 20,236 4.5
--------- ----- --------- ------ -------- -------
Total certificate accounts 405,314 79.8 378,765 78.7 360,143 79.9
--------- ----- --------- ------ -------- -------
Transaction accounts:
Passbook and statement savings 26,031 5.1 25,916 5.4 25,330 5.6
Money market accounts 15,735 3.1 16,164 3.4 15,438 3.4
NOW accounts/DDA 60,795 12.0 60,248 12.5 49,963 11.1
-------- ----- -------- ------ ------- ------
Total transaction accounts 102,561 20.2 102,328 21.3 90,731 20.1
------- ------ ------- ------ ------- ------
Total deposits $507,875 100.0% $481,093 100.0% $450,874 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
15
<PAGE>
The following table presents the average balance of each type of
deposit and the average rate paid on each type of deposit and/or total deposits
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---------------------- --------------------------- ---------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
---------- ---------- ------------- ------------ ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook and statement savings
accounts $ 27,098 2.72% $ 26,128 2.72% $ 26,092 2.72%
Money market accounts and
NOW accounts 64,043 2.32 58,226 2.33 55,486 2.34
Demand deposit accounts 14,063 -- 11,758 -- 9,624 --
Certificates of deposit 396,616 5.63 366,484 5.99 348,945 6.11
------- ---- ------- ---- ------- ----
Total deposits $501,820 4.90% $462,596 5.19% $440,147 5.30%
======= ==== ======= ==== ======= ====
</TABLE>
The following table presents, by various interest rate categories, the
amount of certificates of deposit at December 31, 1999 and 1998 and the amounts
at December 31, 1999 which mature during the periods indicated.
<TABLE>
<CAPTION>
Balance at December 31, 1999
December 31, Maturing in the 12 Months Ending December 31,
-------------------------- ------------------------------------------------
1999 1998 2000 2001 2002 Thereafter
------------ ------------ ----------- ----------- --------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificates of Deposit
3.00% - 3.99% $ 1,107 $ 453 $ 1,107 $ -- $ -- $ --
4.00% - 5.99% 291,342 278,335 207,870 72,234 3,697 7,541
6.00% - 7.99% 107,065 91,156 16,002 43,766 19,461 27,836
8.00% and over 5,800 8,821 -- -- -- 5,800
--------- --------- ----------- ----------- ----------- --------
Total certificate accounts $405,314 $378,765 $224,979 $116,000 $23,158 $41,177
======= ======= ======= ======= ====== ======
</TABLE>
The following table sets forth the savings flows of the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1999 1998 1997
----------- ------------ -------------
(In Thousands)
<S> <C> <C> <C>
Increase before interest credited $ 7,926 $11,895 $10,786
Interest credited 18,856 18,324 17,230
------ ------ ------
Net increase in deposits $26,782 $30,219 $28,016
====== ====== ======
</TABLE>
The following table sets forth maturities of the Bank's certificates of
deposit of $100,000 or more at December 31, 1999 by time remaining to maturity.
<TABLE>
<CAPTION>
Amount
----------------
Period Ending: (In Thousands)
<S> <C>
March 31, 2000 $14,497
June 30, 2000 17,223
September 30, 2000 9,608
December 31, 2000 6,975
After December 31, 2000 32,479
------
Total certificates of deposit with
balances of $100,000 or more $80,782
======
</TABLE>
16
<PAGE>
BORROWED FUNDS. The Bank utilizes FHLB advances in its normal operating
and investing activities. The Bank pledges as collateral for FHLB advances their
FHLB stock and has entered into blanket collateral agreements with the FHLB
whereby the Bank agrees to maintain, free of other encumbrances, qualifying
single family first mortgage loans with unpaid principal balances, when
discounted at 75% of the such balances, of at least 100% of total outstanding
advances.
Advances at December 31, 1999, have maturity dates and weighted average
rates as follows:
<TABLE>
<CAPTION>
WEIGHTED
YEAR ENDING AVERAGE
DECEMBER 31 RATE AMOUNT
- ----------------- ------------ ---------
<S> <C> <C>
2000 5.79% $68,000
2001 4.85 7,000
2002 6.60 3,972
2003 5.56 1,000
2004 6.07 1,000
Thereafter 5.99 3,000
-------
Total 5.76% $83,972
======
</TABLE>
The following table sets forth information with respect to the
Company's FHLB advances at and during the periods indicated.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
MAXIMUM BALANCE $83,972 $50,687 $12,997
AVERAGE BALANCE 57,949 30,452 6,493
YEAR END BALANCE 83,972 48,985 11,997
WEIGHTED AVERAGE
INTEREST RATE:
AT END OF YEAR 5.76% 5.57% 6.31%
DURING THE YEAR 5.58 5.81 6.42
</TABLE>
EMPLOYEES
The Bank had 189 full-time employees and 23 part-time employees at
December 31, 1999. None of these employees is represented by a collective
bargaining agent, and the Bank believes that it enjoys good relations with its
personnel.
17
<PAGE>
SUBSIDIARIES
The Bank is permitted to invest up to 2% of its assets in the capital
stock of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. The Bank's only
subsidiary, First Harrison Service Corporation (the "Service Corporation"), was
formed in 1971. At December 31, 1999, the Service Corporation's only significant
asset was a $3.5 million repossessed commercial loan collateralized by a hotel
in Oklahoma City, Oklahoma. A contract to sell such property has been signed
with closing anticipated in the second quarter of 2000. The Service Corporation
recorded a net loss of approximately $270,000 during 1999.
COMPETITION
The Bank faces strong competition both in attracting deposits and
making real estate loans. Its most direct competition for deposits has
historically come from other savings associations, credit unions and commercial
banks, including many large financial institutions which have greater financial
and marketing resources available to them. In addition, during times of high
interest rates, the Bank has faced additional significant competition for
investors' funds from short-term money market securities, mutual funds and other
corporate and government securities. The ability of the Bank to attract and
retain savings deposits depends on its ability to generally provide a rate of
return, liquidity and risk comparable to that offered by competing investment
opportunities.
The Bank experiences strong competition for real estate loans
principally from savings associations, commercial banks and mortgage companies.
The Bank competes for loans principally through the interest rates and loan fees
it charges and the efficiency and quality of services it provides borrowers.
Competition has increased as a result of the continuing reduction of
restrictions on the interstate operations of financial institutions.
18
<PAGE>
REGULATION
SET FORTH BELOW IS A BRIEF DESCRIPTION OF THOSE LAWS AND REGULATIONS
WHICH, TOGETHER WITH THE DESCRIPTIONS OF LAWS AND REGULATIONS CONTAINED
ELSEWHERE HEREIN, ARE DEEMED MATERIAL TO AN INVESTOR'S UNDERSTANDING OF THE
EXTENT TO WHICH THE COMPANY AND THE BANK ARE REGULATED. THE DESCRIPTION OF THE
LAWS AND REGULATIONS HEREUNDER, AS WELL AS DESCRIPTIONS OF LAWS AND REGULATIONS
CONTAINED ELSEWHERE HEREIN, DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO APPLICABLE LAWS AND REGULATIONS.
THE COMPANY
GENERAL. The Company, as a savings and loan holding company within the
meaning of the Home Owners Loan Act ("HOLA"), has registered with the OTS and is
subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, the Bank is
subject to certain restrictions in its dealings with the Company and affiliates
thereof.
HOLDING COMPANY ACQUISITIONS. Federal law generally prohibits a savings
and loan holding company, without prior OTS approval, from acquiring the
ownership or control of any other savings institution or savings and loan
holding company, or all, or substantially all, of the assets or more than 5% of
the voting shares thereof. These provisions also prohibit, among other things,
any director or officer of a savings and loan holding company, or any individual
who owns or controls more than 25% of the voting shares of such holding company,
from acquiring control of any savings institution not a subsidiary of such
savings and loan holding company, unless the acquisition is approved by the OTS.
HOLDING COMPANY ACTIVITIES. The Company operates as a unitary savings
and loan holding company. As a result of recently enacted legislation, the
activities of a new unitary savings and loan holding company like the Company
and its non-savings institution subsidiaries are restricted to activities
traditionally permitted to multiple savings and loan holding companies and to
financial holding companies under newly added provisions of the Bank Holding
Company Act. Multiple savings and loan holding companies may:
- furnish or perform management services for a savings
association subsidiary of a savings and loan holding company;
- hold, manage or liquidate assets owned or acquired from a
savings association subsidiary of a savings and loan holding
company;
- hold or manage properties used or occupied by a savings
association subsidiary of a savings and loan holding company;
- engage in activities determined by the Federal Reserve to be
closely related to banking and a proper incident thereto; and
- engage in services and activities previously determined by the
Federal Home Loan Bank Board by regulation to be permissible
for a multiple savings and loan holding company as of March 5,
1987.
The activities financial holding companies may engage in include:
- lending, exchanging, transferring or investing for others, or
safeguarding money or securities;
- insuring, guaranteeing or indemnifying others, issuing
annuities, and acting as principal, agent or broker for
purposes of the foregoing;
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- providing financial, investment or economic advisory services,
including advising an investment company;
- issuing or selling interests in pooled assets that a bank
could hold directly;
- underwriting, dealing in or making a market in securities; and
- merchant banking activities.
If the OTS determines that there is reasonable cause to believe that
the continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness or stability of
its subsidiary savings institution, the OTS may impose such restrictions as
deemed necessary to address such risk. These restrictions include limiting the
following:
- the payment of dividends by the savings institution;
- transactions between the savings institution and its
affiliates; and
- any activities of the savings institution that might create a
serious risk that the liabilities of the holding company and
its affiliates may be imposed on the savings institution.
Every savings institution subsidiary of a savings and loan holding
company is required to give the OTS at least 30 days' advance notice of any
proposed dividends to be made on its guarantee, permanent or other
non-withdrawable stock, or else such dividend will be invalid.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between a
savings institution and its "affiliates" are subject to quantitative and
qualitative restrictions under Sections 23A and 23B of the Federal Reserve Act
and OTS regulations. Affiliates of a savings institution generally include,
among other entities, the savings institution's holding company and companies
that are controlled by or under common control with the savings institution.
In general, a savings institution or its subsidiaries may engage in
certain "covered transactions" with affiliates up to certain limits. In
addition, a savings institution and its subsidiaries may engage in covered
transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings institution or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate. In addition, a savings institution may not:
- make a loan or extension of credit to an affiliate unless the
affiliate is engaged only in activities permissible for bank
holding companies;
- purchase or invest in securities of an affiliate other than
shares of a subsidiary;
- purchase a low-quality asset from an affiliate; or
- engage in covered transactions and certain other transactions
between a savings institution or its subsidiaries and an
affiliate except on terms and conditions that are consistent
with safe and sound banking practices.
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<PAGE>
With certain exceptions, each loan or extension of credit by a savings
institution to an affiliate must be secured by collateral with a market value
ranging from 100% to 130% (depending on the type of collateral) of the amount of
the loan or extension of credit.
THE BANK
GENERAL. The OTS has extensive authority over the operations of
federally chartered savings institutions. As part of this authority, savings
institutions are required to file periodic reports with the OTS and are subject
to periodic examinations by the OTS and the FDIC. The last regulatory
examination of the Bank by the OTS was completed in January, 1999. The Bank was
not required to make any material changes to its operations as a result of such
examination. The investment and lending authority of savings institutions are
prescribed by federal laws and regulations, and such institutions are prohibited
from engaging in any activities not permitted by such laws and regulations.
Those laws and regulations generally are applicable to all federally chartered
savings institutions and may also apply to state-chartered savings institutions.
Such regulation and supervision is primarily intended for the protection of
depositors.
The OTS' enforcement authority over all savings institutions and their
holding companies includes, among other things, the ability to assess civil
money penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS.
INSURANCE OF ACCOUNTS. The deposits of the Bank are insured to the
maximum extent permitted by the SAIF, which is administered by the FDIC, and are
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
is authorized to conduct examinations of, and to require reporting by,
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious threat to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the OTS an
opportunity to take such action.
Currently, FDIC deposit insurance rates generally range from zero basis
points to 27 basis points, depending on the assessment risk classification
assigned to the depository institution. From 1998 through 1999, SAIF members
paid 6.4 basis points, while Bank Insurance Fund ("BIF") member institutions
paid approximately 1.3 basis points.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings institutions
are required to maintain minimum levels of regulatory capital. The OTS has
established capital standards applicable to all savings institutions. These
standards generally must be as stringent as the comparable capital requirements
imposed on national banks. The OTS also is authorized to impose capital
requirements in excess of these standards on individual institutions on a
case-by-case basis.
Current OTS capital standards require savings institutions to satisfy
three different capital requirements. Under these standards, savings
institutions must maintain "tangible" capital equal to at least 1.5% of adjusted
total assets, "core" capital equal to at least 3.0% of adjusted total assets and
"total" capital (a combination of core and "supplementary" capital) equal to at
least 8.0% of "risk-weighted" assets. For purposes of the regulation, core
capital generally consists
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<PAGE>
of common stockholders' equity (including retained earnings), noncumulative
perpetual preferred stock and related surplus, minority interests in the equity
accounts of fully consolidated subsidiaries, certain nonwithdrawable accounts
and pledged deposits and "qualifying supervisory goodwill." Tangible capital is
given the same definition as core capital but does not include qualifying
supervisory goodwill and is reduced by the amount of all the savings
institution's intangible assets, with only a limited exception for purchased
mortgage servicing rights. The Bank had no goodwill or other intangible assets
at December 31, 1999. Both core and tangible capital are further reduced by an
amount equal to a savings institution's debt and equity investments in
subsidiaries engaged in activities not permissible to national banks (other than
subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities and subsidiary depository institutions or their
holding companies). These adjustments do not materially affect the Bank's
regulatory capital. At December 31, 1999, the Bank exceeded its tangible, core
and risk-based capital requirements.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include both core capital and supplementary
capital in its total capital, provided that the amount of supplementary capital
included does not exceed the savings institution's core capital. Supplementary
capital generally consists of hybrid capital instruments; perpetual preferred
stock which is not eligible to be included as core capital; subordinated debt
and intermediate-term preferred stock; and general allowances for loan losses up
to a maximum of 1.25% of risk-weighted assets. In determining the required
amount of risk-based capital, total assets, including certain off-balance sheet
items, are multiplied by a risk weight based on the risks inherent in the type
of assets. The risk weights assigned by the OTS for principal categories of
assets are (i) 0% for cash and securities issued by the U.S. Government or
unconditionally backed by the full faith and credit of the U.S. Government; (ii)
20% for securities (other than equity securities) issued by U.S.
Government-sponsored agencies and mortgage-backed securities issued by, or fully
guaranteed as to principal and interest by, the FNMA or the FHLMC, except for
those classes with residual characteristics or stripped mortgage-related
securities; (iii) 50% for prudently underwritten permanent one- to four-family
first lien mortgage loans not more than 90 days delinquent and having a
loan-to-value ratio of not more than 80% at origination unless insured to such
ratio by an insurer approved by the FNMA or the FHLMC, qualifying residential
bridge loans made directly for the construction of one- to four-family
residences and qualifying multi-family residential loans; and (iv) 100% for all
other loans and investments, including consumer loans, commercial loans, and
one- to four-family residential real estate loans more than 90 days delinquent,
and for repossessed assets.
LIQUIDITY REQUIREMENTS. All savings institutions are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At the present time, the required minimum
liquid asset ratio is 4%. At December 31, 1999, the Bank's liquidity ratio was
32.8%.
QUALIFIED THRIFT LENDER TEST. All savings institutions are required to
meet a QTL test to avoid certain restrictions on their operations. A savings
institution that does not meet the QTL test must either convert to a bank
charter or comply with the following restrictions on its operations: (i) the
institution may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is permissible for a
national bank; (ii) the branching powers of the institution shall be restricted
to those of a national bank; (iii) the institution shall not be eligible to
obtain any advances from its FHLB; and (iv) payment of dividends by the
institution shall be subject to the rules regarding payment of dividends by a
national bank. Upon the expiration of three years from the date the savings
institution ceases to be a QTL, it must cease any activity and not retain any
investment not permissible for a national bank and immediately repay any
outstanding FHLB advances (subject to safety and soundness considerations).
Currently, the QTL test requires that 65% of an institution's
"portfolio assets" (as defined) consist of certain housing and consumer-related
assets on a monthly average basis in nine out of every 12 months. Assets that
qualify without limit for inclusion as part of the 65% requirement are loans
made to purchase, refinance, construct, improve or repair domestic residential
housing and manufactured housing; home equity loans; mortgage-backed securities
(where the mortgages are secured by domestic residential housing or manufactured
housing); stock issued by the FHLB of Dallas; and direct or indirect obligations
of the FDIC. In addition, the following assets, among others, may be included
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<PAGE>
in meeting the test subject to an overall limit of 20% of the savings
institution's portfolio assets: 50% of residential mortgage loans originated and
sold within 90 days of origination; 100% of consumer and educational loans
(limited to 10% of total portfolio assets); and stock issued by the FHLMC or the
FNMA. Portfolio assets consist of total assets minus the sum of (i) goodwill and
other intangible assets, (ii) property used by the savings institution to
conduct its business, and (iii) liquid assets up to 20% of the institution's
total assets. At December 31, 1999, the qualified thrift investments of the Bank
were approximately 79.2% of its portfolio assets.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of
Dallas, which is one of 12 regional FHLBs that administers the home financing
credit function of savings institutions. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB. At December
31, 1999, the Bank had $84.0 million of outstanding FHLB advances.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Dallas in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At December 31, 1999, the Bank had $4.3 million in
FHLB stock, which was in compliance with this requirement. No ready market
exists for such stock and it has no quoted market value.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid in the past and could
continue to do so in the future. These contributions also could have an adverse
effect on the value of FHLB stock in the future.
FEDERAL RESERVE SYSTEM. The FRB requires all depository institutions to
maintain reserves against their transaction accounts and non-personal time
deposits. As of December 31, 1999, no reserves were required to be maintained on
the first $5.0 million of transaction accounts, reserves of 3% were required to
be maintained against the next $44.3 million of net transaction accounts (with
such dollar amounts subject to adjustment by the FRB), and a reserve of 10%
(which is subject to adjustment by the FRB to a level between 8% and 14%)
against all remaining net transaction accounts. Because required reserves must
be maintained in the form of vault cash or a noninterest-bearing account at a
Federal Reserve Bank, the effect of this reserve requirement is to reduce an
institution's earning assets.
TAXATION
FEDERAL TAXATION
GENERAL. The Company and Bank are subject to the generally applicable
corporate tax provisions of the Internal Revenue Code of 1986, as amended
("Code"), and Bank is subject to certain additional provisions of the Code which
apply to thrift and other types of financial institutions. The following
discussion of federal taxation is intended only to summarize certain pertinent
federal income tax matters material to the taxation of the Company and the Bank
and is not a comprehensive discussion of the tax rules applicable to the Company
and Bank.
YEAR. The Bank files a federal income tax return on the basis of a
fiscal year ending on December 31. The Company filed a consolidated federal
income tax return with both the Bank and the Service Corporation.
BAD DEBT RESERVES. Prior to the enactment of the Small Business Jobs
Protection Act (the "Act"), which was signed into law on August 21, 1996,
certain thrift institutions, such as the Bank, were allowed deductions for bad
debts under methods more favorable than those granted to other taxpayers.
Qualified thrift institutions could compute deductions for bad debts using
either the specific charge off method of Section 166 of the Code or the reserve
method of Section 593 of the Code.
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Under Section 593, a thrift institution annually could elect to deduct
bad debts under either (i) the "percentage of taxable income" method applicable
only to thrift institutions, or (ii) the "experience" method that also was
available to small banks. Under the "percentage of taxable income" method, a
thrift institution generally was allowed a deduction for an addition to its bad
debt reserve equal to 8% of its taxable income (determined without regard to
this deduction and with additional adjustments). Under the experience method, a
thrift institution was generally allowed a deduction for an addition to its bad
debt reserve equal to the greater of (i) and amount based on its actual average
experience for losses in the current and five preceding taxable years, or (ii)
an amount necessary to restore the reserve to its balance as of the close of the
base year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the experience
method or the percentage of taxable income method. For tax years 1995 and 1994,
the Bank used the percentage of taxable income method because such method
provided a higher bad debt deduction than the experience method.
Section 1616(a) of the Act repealed the Section 593 reserve method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that are treated as small banks are
allowed to utilize the experience method applicable to such institutions, while
thrift institutions that are treated as large banks are required to use only the
specific charge off method. The percentage of taxable income method of
accounting for bad debts is no longer available for any financial institution.
A thrift institution required to change its method of computing
reserves for bad debts will treat such change as a change in the method of
accounting, initiated by the taxpayer and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts to
be recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will be
taken into account ratably over a six- taxable year period, beginning with the
first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that is treated
as a large bank, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans (generally loans secured by improved real estate)
and its reserve for losses on nonqualifying loans (all other types of loans) as
of the close of its last taxable year beginning before January 1, 1996, over
(ii) the balances of such reserves as of the close of its last taxable year
beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of
a thrift institution that is treated as a small bank, the amount of the
institution's applicable excess reserves generally is the excess of (i) the
balances of its reserve for losses on qualifying real property loans and its
reserve for losses on nonqualifying loans as of the close of its last taxable
year beginning before January 1, 1996, over (ii) the greater of the balance of
(a) its pre-1988 reserves or, (b) what the thrift's reserves would have been at
the close of its last year beginning before January 1, 1996, had the thrift
always used the experience method.
For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996.
A residential loan is a loan as described in Section 7701(a)(19)(C)(v)
(generally a loan secured by residential or church property and certain mobile
homes), but only to the extent that the loan is made to the owner of the
property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which requires recapture in the case of
certain excessive distributions to shareholders. The pre-1988 reserves may not
be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first, out
of the institution's post-1951 accumulated earnings and profits; second, out of
the pre-1988 reserves; and third, out of such other accounts as may be proper.
To the extent a distribution by the Bank to the Company is deemed paid out of
its pre-1988 reserves under these rules, the pre-1988 reserves would
24
<PAGE>
be reduced and the Bank's gross income for tax purposes would be increased by
the amount which, when reduced by the income tax, if any, attributable to the
inclusion of such amount in its gross income, equals the amount deemed paid out
of the pre-1988 reserves. As of December 31, 1999, the Bank's pre-1988 reserves
for tax purposes totaled approximately $4.2 million.
MINIMUM TAX. The Code imposes an alternative minimum tax at a rate of
20%. The alternative minimum tax generally applies to a base of regular taxable
income plus certain tax preferences ("alternative minimum taxable income" or
"AMTI") and is payable to the extent such AMTI is in excess of an exemption
amount. The Code provides that an item of tax preference is the excess of the
bad debt deduction allowable for a taxable year pursuant to the percentage of
taxable income method over the amount allowable under the experience method.
Other items of tax preference that constitute AMTI include (a) tax-exempt
interest on newly issued (generally, issued on or after August 8, 1986) private
activity bonds other than certain qualified bonds and (b) 75% of the excess (if
any) of (i) adjusted current earnings as defined in the Code, over (ii) AMTI
(determined without regard to this preference and prior to reduction by net
operating losses).
NET OPERATING LOSS CARRYOVERS. A financial institution may, for federal
income tax purposes, carry back net operating losses ("NOLs") to the preceding
two taxable years and forward to the succeeding 20 taxable years. This provision
applies to losses incurred in taxable years beginning after 1997. At December
31, 1999, the Bank had no NOL carryforwards for federal income tax purposes.
CAPITAL GAINS AND CORPORATE DIVIDENDS-RECEIVED DEDUCTION. Corporate net
capital gains are taxed at a maximum rate of 35%. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated tax
return, and corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct only 70% of dividends received or accrued on
their behalf. However, a corporation may deduct 100% of dividends from a member
of the same affiliated group of corporations.
OTHER MATTERS. Federal legislation is introduced from time to time that
would limit the ability of individuals to deduct interest paid on mortgage
loans. Individuals are currently not permitted to deduct interest on consumer
loans. Significant increases in tax rates or further restrictions on the
deductibility of mortgage interest could adversely affect the Bank.
The Bank's federal income tax returns for the tax years ended December
31, 1996 forward are open under the statute of limitations and are subject to
review by the IRS.
STATE TAXATION
The Bank will continue to be subject to Arkansas corporation income tax
which is a progressive rate up to a maximum of 6.5% of all taxable earnings.
The Company is incorporated under Texas law and, accordingly, is
subject to Texas franchise tax in an amount equal to 4.5% of net income
allocated to Texas pursuant to apportionments of gross receipts based upon where
the Company conducts business.
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ITEM 2. PROPERTIES.
At December 31, 1999, the Bank conducted its business from its
executive office in Harrison, Arkansas, and twelve full service offices, all of
which are located in Northcentral and Northwest Arkansas.
The following table sets forth the net book value (including leasehold
improvements and equipment) and certain other information with respect to the
offices and other properties of the Bank at December 31, 1999.
<TABLE>
<CAPTION>
Leased/ Net Book Value
Description/Address Owned of Property Amount of Deposits
- ---------------------------------- ---------------------- ---------------------- -----------------------
(In Thousands)
<S> <C> <C> <C>
200 West Stephenson Owned $1,783(1) $141,963
Harrison, AR 72601
128 West Stephenson Owned 216 (2)
Harrison, AR 72601
Corner Central & Willow Owned 244 (2)
Harrison, AR 72601
Ozark Mall - Hwy. 62-65 North Leased(3) 33 25,352
Harrison, AR 72601
324 Hwy. 62-65 Bypass Owned 290 43,624
Harrison, AR 72601
210 South Main Owned 269 29,372
Berryville, AR 72616
668 Highway 62 East Owned 650 160,535
Mountain Home, AR 72653
1337 Highway 62 SW Owned 1,016 6,340
Mountain Home, AR 72653
301 Highway 62 West Owned 121 20,740
Yellville, AR 72687
307 North Walton Blvd. Owned 321 27,040
Bentonville, AR 72712
3460 North College Owned 424 31,196
Fayetteville, AR 72703
1303 West Hudson Owned 228 3,976
Rogers, AR 72756
201 East Henri De Tonti Blvd. Owned 238 5,221
Tontitown, AR 72762
2025 North Crossover Road Owned 816 6,845
Fayetteville, AR 72703
249 West Main Street Leased(4) 160 5,671
Farmington, AR 72730
</TABLE>
- --------------
(1) Includes property acquisition for expansion in north Harrison.
(2) Such offices do not open deposit accounts.
(3) Such property is subject to a month-to-month lease.
(4) Such property is subject to a five year lease expiring November 1,2002.
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ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor the Bank is involved in any pending legal
proceedings other than nonmaterial legal proceedings occurring in the ordinary
course of business.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
None.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required herein, to the extent applicable, is
incorporated by reference from page 44 of the Company's 1999 Annual Report to
Stockholders ("1999 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from pages
4and 5 of the 1999 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required herein is incorporated by reference from pages
7 to 16 of the 1999 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The information required herein is incorporated by reference from pages
7 to 9 of the 1999 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from page
6 and pages 18 to 42 of the 1999 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein is incorporated by reference from pages
4 to 6 of the definitive proxy statement of the Company for the Annual Meeting
of Stockholders to be held on April 27, 2000 ("Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from pages
10 to 13 of the Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from pages
8 and 9 of the Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from page
13 of the Definitive Proxy Statement.
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PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS PART OF THIS REPORT
(1) The following financial statements are incorporated by reference
from Item 8 hereof (see Exhibit 13):
Independent Auditors' Report
Consolidated Statements of Financial Condition at December 31,
1999 and 1998
Consolidated Statements of Income and Comprehensive Income for
the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because of the absence of
conditions under which they are required or because the required information is
included in the financial statements and related notes thereto.
(3) The following exhibits are filed as part of this Form 10-K and this
list includes the Exhibit Index.
28
<PAGE>
EXHIBIT INDEX
2.1* Plan of Conversion
3.1* Articles of Incorporation of First Federal Bancshares of Arkansas, Inc.
3.2* Bylaws of First Federal Bancshares of Arkansas, Inc.
4.0** Stock Certificate of First Federal Bancshares of Arkansas, Inc.
10.5* Employment Agreement between the Company, the Bank and Frank L.
Coffman, Jr.
10.6* Employment Agreement between the Company, the Bank and Larry J. Brandt
10.7* Employment Agreement between the Company, the Bank and Carolyn M.
Thomason
13.0 1999 Annual Report to Stockholders
22.0 Subsidiaries of the Registrant - Reference is made to "Item 1 Business
- Subsidiaries" for the required information
27.0 Financial Data Schedule
(*) Incorporated herein by reference from the Company's Registration Statement
on Form S-1 (File No. 333-612) filed with the SEC.
(**) Incorporated herein by reference from the Company's Registration Statement
on Form 8-A filed with the SEC.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
By: /s/ LARRY J. BRANDT
---------------------------------------------
Larry J. Brandt
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ FRANK L. COFFMAN, JR. March 30, 2000
- ------------------------------------------
Frank L. Coffman, Jr.
Chairman of the Board and Chief
Executive Officer
/s/ LARRY J. BRANDT March 30, 2000
- ------------------------------------------
Larry J. Brandt
President and Chief
Operating Officer
/s/ JOHN P. HAMMERSCHMIDT March 30, 2000
- ------------------------------------------
John P. Hammerschmidt
Director
/s/ JAMES D. HEUER March 30, 2000
- --------------------------------------------
James D. Heuer
Director
/s/ KENNETH C. SAVELLS March 30, 2000
- -------------------------------------------
Kenneth C. Savells
Director
/s/ TOMMY W. RICHARDSON March 30, 2000
- -------------------------------------------
Tommy W. Richardson
Senior Vice President and Chief
Financial Officer
<PAGE>
FIRST FEDERAL BANCSHARES
OF ARKANSAS, INC.
------------------------------------------
1999
------------------------------------------
ANNUAL REPORT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
President's Letter to Stockholders.............................................. 1
Corporate Profile............................................................... 3
Selected Consolidated Financial and Other Data.................................. 4
Selected Quarterly Operating Results............................................ 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 7
Independent Auditors' Report.................................................... 18
Consolidated Financial Statements............................................... 19
Directors and Executive Officers................................................ 43
Banking Locations............................................................... 43
Stockholder Information......................................................... 44
</TABLE>
<PAGE>
[GRAPHIC OMITTED]
FIRST FEDERAL
- --------------------------------------------------------------------------------
BANCSHARES
- --------------------------------------------------------------------------------
OF ARKANSAS, INC.
Dear Stockholder:
First Federal Bancshares of Arkansas had another great year in 1999. We had
record net income of $6.3 million. Our basic earnings per share once again
exceeded analysts' expectations with a 16.3% increase to $1.57 per share. Our
book value also increased 8.7% to $19.51. In addition, in 1999 we increased our
quarterly dividend by 14.3% to 8 cents per share.
We are continuing to repurchase our stock and have repurchased approximately 24%
of our stock since our initial public offering in 1996. We firmly believe that
with our bank stock substantially below its book value, repurchase of our shares
is a very wise and prudent use of our capital. Our results have proven that our
repurchase programs have been accretive to earnings and have definitely enhanced
shareholder value.
During the fourth quarter of 1999, we began the development of plans for our new
North Town office in Harrison. We have experienced very steady growth in our
recent history but now we have the need for additional space to accommodate our
growth. Therefore, we have retained an architect to develop plans for relocation
of many of our corporate departments to a more efficient office in the rapidly
growing corridor near the WalMart Supercenter along U.S. Highways 62 and 65. The
expansion will also serve as a branch facility and allow us to better serve our
Harrison customer base. We currently own the 5.5 acre tract and have an
automated teller machine already on the location.
Additionally, our Board of Directors approved the acquisition of another branch
bank building in Rogers, Arkansas. Rogers is the largest city in Benton County
and that will now give us three offices in Benton County, one of the fastest
growing counties in Arkansas. This office is scheduled to open the first week of
April 2000.
As we enter the 21st century, the board, management, and all "First Team"
members remain committed to our mission of "being the best provider of family
banking services in our market areas and maximizing our shareholders' value".
Our vision of "being the premier family bank in Arkansas" is only possible
through the loyalty and support of our customers and stockholders. We appreciate
you and pledge to do our best to continue to merit your confidence in the year
2000 and beyond.
Sincerely,
/s/ Larry J. Brandt
-----------------------
Larry J. Brandt
President
<PAGE>
[INTENTIONALLY LEFT BLANK]
2
<PAGE>
CORPORATE PROFILE
First Federal Bancshares of Arkansas, Inc. (the "Company") was
incorporated in January 1996 under Texas law for the purpose of acquiring all of
the capital stock issued by First Federal Bank of Arkansas, FA ("First Federal"
or the "Bank") in connection with its conversion from a federally chartered
mutual savings and loan association to a federally chartered stock savings and
loan association (the "Conversion"). The Conversion was consummated on May 3,
1996 and, as a result, the Company became a unitary savings and loan holding
company of the Bank. The Company has no significant assets other than the shares
of the Bank's common stock acquired in the Conversion, the Company's loan to the
Employee Stock Ownership Plan ("ESOP") and the portion of the net Conversion
proceeds retained and invested by the Company. The Company has no significant
liabilities.
The Bank is a federally chartered stock savings and loan association
which was formed in 1934. First Federal conducts business from its main office
and twelve full service branch offices, all of which are located in a six county
area in Northcentral and Northwest Arkansas comprised of Benton, Marion,
Washington, Carroll, Baxter and Boone counties. First Federal's deposits are
insured by the Savings Association Insurance Fund ("SAIF"), which is
administered by the Federal Deposit Insurance Corporation ("FDIC"), to the
maximum extent permitted by law. The Bank is a community oriented savings
institution which has traditionally offered a wide variety of savings products
to its retail customers while concentrating its lending activities on the
origination of loans secured by one- to four-family residential dwellings. To a
significantly lesser extent, the Bank's activities have also included
origination of multi-family residential loans, commercial real estate loans,
construction loans, commercial loans and consumer loans. In addition, the Bank
maintains a significant portfolio of investment securities.
At December 31, 1999, the Company had total assets of $680.7 million,
total deposits of $507.9 million and stockholders' equity of $78.8 million. The
Company's and the Bank's principal executive offices are located at 200 West
Stephenson, Harrison, Arkansas 72601, and their telephone number is
(870)741-7641.
3
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated financial and other data of the Company set
forth below and on the following page does not purport to be complete and should
be read in conjunction with, and is qualified in its entirety by, the more
detailed information, including the Consolidated Financial Statements and
related Notes, appearing elsewhere herein.
<TABLE>
<CAPTION>
At or For the
Year Ended December 31,
---------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- --------------- ------------ ------------ ------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets $680,719 $615,055 $549,607 $505,739 $454,479
Cash and cash equivalents 9,983 26,163 6,627 6,819 8,845
Investment securities 189,263 127,175 95,533 91,322 96,312
Loans receivable, net 459,978 442,486 433,942 396,508 339,505
Allowance for loan losses 752 771 1,196 1,251 1,228
Deposits 507,875 481,093 450,874 422,858 417,229
Federal Home Loan Bank advances 83,972 48,985 11,997 -- --
Stockholders' equity 78,815 81,023 82,884 80,758 35,308
SELECTED OPERATING DATA:
Interest income $ 47,066 $ 43,814 $ 40,445 $ 37,192 $ 32,964
Interest expense 27,799 25,774 23,748 22,449 21,538
------ ------- ------- ------- -------
Net interest income 19,267 18,040 16,697 14,743 11,426
Provision for loan losses 20 55 -- 60 133
-------- -------- ---------- ---------- -------
Net interest income after provision
for loan losses 19,247 17,985 16,697 14,683 11,293
Gain on sale of mortgage-backed
and investment securities -- -- 394 -- 311
Noninterest income 1,776 1,836 1,526 1,222 1,107
Noninterest expense(1) 11,594 10,482 10,016 10,749 6,836
------ ------- ------ ------ -------
Income before income taxes 9,429 9,339 8,601 5,156 5,875
Provision for income taxes 3,149 3,309 3,099 1,756 1,871
------ -------- ------- ------- -------
Net income(1) $ 6,280 $ 6,030 $ 5,502 $ 3,400 $ 4,004
====== ======== ======= ======= =======
EARNINGS PER SHARE:
Basic $1.57 $1.35 $1.22 $0.72 NA
Diluted 1.57 1.33 1.21 0.72 NA
CASH DIVIDENDS DECLARED PER SHARE $0.32 $0.28 $0.22 -- NA
</TABLE>
- ------------------------------------
(1) The year ended December 31, 1996 includes a nonrecurring SAIF special
assessment of approximately $2.6 million or approximately $1.7 million
net of the income tax benefit.
4
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING RATIOS(1):
Return on average assets(2) .97% 1.04% 1.03% .69% .91%
Return on average equity(2) 7.84 7.22 6.76 5.22 12.03
Average equity to average assets 12.41 14.36 15.26 13.23 7.55
Interest rate spread(3) 2.59 2.55 2.47 2.48 2.37
Net interest margin(3) 3.10 3.20 3.22 3.08 2.66
Net interest income after provision for
loan losses to noninterest expense 166.02 171.58 166.70 136.60 165.20
Noninterest expense to average assets 1.80 1.80 1.88 2.18 1.55
Average interest-earning assets to
average interest-bearing liabilities 111.21 114.20 116.21 112.96 105.92
Operating efficiency(4) 55.15 52.74 53.80 67.33 53.22
ASSET QUALITY RATIOS(5):
Nonperforming loans to total loans(6) 0.28 0.32 1.11 0.18 0.10
Nonperforming assets to total assets(6) 0.78 0.93 0.94 0.17 0.13
Allowance for loan losses to non-
performing loans(6) 55.82 52.65 24.12 173.51 350.86
Allowance for loan losses to total loans 0.16 0.17 0.27 0.30 0.35
CAPITAL RATIOS(7):
Tangible capital to adjusted total assets 11.09 11.67 11.98 12.30 7.74
Core capital to adjusted total assets 11.09 11.67 11.98 12.30 7.74
Risk-based capital to risk-weighted
assets 21.52 22.44 22.52 23.24 15.57
OTHER DATA:
Dividend payout ratio(8) 21.66 22.11 19.58 -- --
Full service offices at end of period 13 12 12 10 8
</TABLE>
- ------------------------------------
(1) Ratios for 1999, 1998 and 1997 are based on average daily balances.
Ratios prior to 1997 are based on average month end balances.
(2) The year ended December 31, 1996 includes a nonrecurring SAIF special
assessment of approximately $2.6 million or approximately $1.7 million
net of the income tax benefit. For the year ended December 31, 1996,
return on average assets, without the SAIF special assessment, would
have been 1.04% and return on average equity for the same period would
have been 7.83%.
(3) Interest rate spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted
average cost of average interest-bearing liabilities, and net interest
margin represents net interest income as a percent of average
interest-earning assets.
(4) Noninterest expense to net interest income plus noninterest income.
(5) Asset quality ratios are end of period ratios.
(6) Nonperforming assets consist of nonperforming loans and real estate
owned ("REO"). Nonperforming loans consist of non-accrual loans while
REO consists of real estate acquired in settlement of loans.
(7) Capital ratios are end of period ratios for First Federal Bank.
(8) The calendar year ended December 31, 1997 was the first full year the
Company was publicly traded. Dividend payout ratio is the total
dividends declared divided by net income.
5
<PAGE>
SELECTED QUARTERLY OPERATING RESULTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $12,281 $11,934 $11,527 $11,324
Interest expense 7,400 7,063 6,689 6,647
------ ------ ------ ------
Net interest income 4,881 4,871 4,838 4,677
Provision for loan losses -- -- -- 20
------- ------- -------- -------
Net interest income after provision
for loan losses 4,881 4,871 4,838 4,657
Noninterest income 448 422 513 393
Noninterest expense 3,017 2,805 3,042 2,730
------ ------ ------ ------
Income before income taxes 2,312 2,488 2,309 2,320
Provision for income taxes 783 837 727 802
------- ------- ------- -------
Net income $ 1,529 $ 1,651 $ 1,582 $ 1,518
====== ====== ====== ======
Earnings per share(1):
Basic $ 0.398 $0.419 $0.387 $0.366
Diluted $ 0.398 $0.419 $0.387 $0.366
Selected Ratios (Annualized):
Net interest margin 3.01% 3.09% 3.17% 3.12%
Return on average assets 0.91 1.01 1.00 0.98
Return on average equity 7.71 8.30 7.82 7.53
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $11,270 $11,052 $10,864 $10,628
Interest expense 6,676 6,545 6,375 6,178
------ ------ ------ ------
Net interest income 4,594 4,507 4,489 4,450
Provision for loan losses 30 -- 10 15
------- ------- -------- -------
Net interest income after provision
for loan losses 4,564 4,507 4,479 4,435
Noninterest income 426 514 438 458
Noninterest expense 2,565 2,583 2,671 2,663
------ ------ ------ ------
Income before income taxes 2,425 2,438 2,246 2,230
Provision for income taxes 854 861 784 810
------- ------- ------- -------
Net income $ 1,571 $ 1,577 $ 1,462 $ 1,420
====== ====== ====== ======
Earnings per share(1):
Basic $ 0.369 $0.353 $0.321 $0.312
Diluted $ 0.368 $0.348 $0.310 $0.304
Selected Ratios (Annualized):
Net interest margin 3.15% 3.18% 3.23% 3.26%
Return on average assets 1.04 1.08 1.02 1.01
Return on average equity 7.71 7.52 6.89 6.77
</TABLE>
- ----------------------------------------
(1) Basic and Diluted Shares Outstanding
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic weighted - average shares 3,840,470 3,938,312 4,092,848 4,145,349
Effect of dilutive securities -- -- -- --
-------------- -------------- -------------- --------------
Diluted weighted - average shares 3,840,470 3,938,312 4,092,848 4,145,349
========= ========= ========= =========
YEAR ENDED DECEMBER 31, 1998
Basic weighted - average shares 4,262,883 4,465,271 4,560,765 4,552,948
Effect of dilutive securities 3,790 62,085 152,851 114,397
------------- ----------- ----------- ----------
Diluted weighted - average shares 4,266,673 4,527,356 4,713,616 4,667,345
========== ========= ========== ==========
</TABLE>
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and results
of operations is intended to assist in understanding the consolidated financial
condition and results of operations of the Company. The information contained in
this section should be read in conjunction with the Consolidated Financial
Statements and the accompanying Notes to Consolidated Financial Statements and
the other sections contained in this Annual Report.
The Company's results of operations depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets and interest expense on interest-bearing liabilities. The Company's
results of operations also are affected by the provision for loan losses, the
level of its noninterest income and expenses, and income tax expense.
ASSET AND LIABILITY MANAGEMENT
The ability to maximize net interest income is largely dependent upon
the achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap", provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities, and is considered negative when the amount of
interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap within shorter maturities would adversely affect net interest
income, while a positive gap within shorter maturities would result in an
increase in net interest income, and during a period of falling interest rates,
a negative gap within shorter maturities would result in an increase in net
interest income while a positive gap within shorter maturities would have the
opposite effect. As of December 31, 1999, the Bank estimates that the ratio of
its one-year gap to total assets was a negative 29.0% and its ratio of
interest-earning assets to interest-bearing liabilities maturing or repricing
within one year was 38.6%.
The Bank focuses its lending activities on the origination of one-,
three-, five- and seven-year adjustable-rate residential mortgage loans.
Although adjustable-rate loans involve certain risks, including increased
payments and the potential for default in an increasing interest rate
environment, such loans decrease the risks associated with changes in interest
rates. As a result of the Bank's efforts, as of December 31, 1999, $236.9
million or 64.3% of the Bank's portfolio of one- to four-family residential
mortgage loans consisted of ARMs, including $177.9 million in seven-year ARMs.
The Company's investment securities portfolio amounted to $189.3 million
or 27.8% of the Company's total assets at December 31, 1999. Of such amount,
$3.5 million or 1.9% is contractually due within one year and $1.5 million or
.8% is contractually due after one year to five years. However, actual
maturities can be shorter than contractual maturities due to the ability of
borrowers to call or prepay such obligations without call or prepayment
penalties. As of December 31, 1999, there was approximately $184.2 million of
investment securities at an average interest rate of 6.89% with call options
held by the issuer, of which approximately $169.1 million, at an average
interest rate of 6.87%, are callable within one year. However in the prevailing
interest rate environment it is not likely the securities will be called.
Deposits are the Bank's primary funding source and the Bank prices its
deposit accounts based upon competitive factors and the availability of prudent
lending and investment opportunities. The Bank seeks to lengthen the maturities
of its deposits by soliciting longer term certificates of deposit when market
conditions have created
7
<PAGE>
opportunities to attract such deposits. However, the Bank does not solicit
high-rate jumbo certificates of deposit and does not pursue an aggressive growth
strategy which would force the Bank to focus exclusively on competitors' rates
rather than deposit affordability. At December 31, 1999 the Bank had $405.3
million in certificates of deposit of which $225.0 million mature in one year or
less. In 1999, the Bank utilized FHLB of Dallas advances as an additional
funding source. At December 31, 1999, the Bank had $84.0 million of FHLB
advances of which $68.0 million is due in one year or less.
NET PORTFOLIO VALUE
The value of the Bank's loan and investment portfolio will change as
interest rates change. Rising interest rates will generally decrease the Bank's
net portfolio value ("NPV"), while falling interest rates will generally
increase the value of that portfolio. NPV is the difference between incoming and
outgoing discounted cash flows from assets, liabilities, and off-balance sheet
contracts. The following tables set forth, quantitatively, as of December 31,
1999 and 1998, the OTS estimate of the projected changes in NPV in the event of
a 100, 200 and 300 basis point instantaneous and permanent increase and decrease
in market interest rates:
<TABLE>
<CAPTION>
1999
- ------------------------------------------------------------------------------------------------------------------------
Estimated NPV as
a Percentage of
Change in Interest Present Value Amount Percent
Rates (basis points) Estimated NPV of Assets of Change of Change
- -------------------- -------------------- -------------------- -------------------- --------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
+300 $19,113 3.12% $(53,007) (73)%
+200 37,086 5.85 (35,034) (49)
+100 55,264 8.43 (16,856) (23)
-- 72,120 10.67 -- --
-100 84,291 12.18 12,171 17
-200 89,568 12.76 17,448 24
-300 91,263 12.89 19,143 27
</TABLE>
<TABLE>
<CAPTION>
1998
- ----------------------------------------------------------------------------------------------------------------
Estimated NPV as
a Percentage of
Change in Interest Present Value Amount Percent
Rates (basis points) Estimated NPV of Assets of Change of Change
- -------------------- -------------------- -------------------- -------------------- --------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
+300 $ 59,870 10.06% $(36,000) (38)%
+200 72,793 11.88 (23,077) (24)
+100 85,269 13.53 (10,061) (11)
-- 95,870 14.84 -- --
-100 104,300 15.80 8,430 9
-200 113,775 16.84 17,905 19
-300 125,218 18.07 29,348 31
Computations of prospective effects of hypothetical interest rate
changes are calculated by the OTS from data provided by the Bank and are based
on numerous assumptions, including relative levels of market interest rates,
loan repayments and deposit runoffs, and should not be relied upon as indicative
of actual results. Further, the computations do not contemplate any actions the
Bank may undertake in response to changes in interest rates.
</TABLE>
8
<PAGE>
Management cannot predict future interest rates or their effect on the
Bank's NPV in the future. Certain shortcomings are inherent in the method of
analysis presented in the computation of NPV. For example, although certain
assets and liabilities may have similar maturities or periods to repricing, they
may react in differing degrees to changes in market interest rates.
Additionally, certain assets, such as adjustable-rate loans have features that
restrict changes in interest rates during the initial term and over the
remaining life of the asset. In addition, the proportion of adjustable-rate
loans in the Bank's portfolio could decrease in future periods due to
refinancing activity if market rates decrease. Further, in the event of a change
in interest rates, prepayment and early withdrawal levels could deviate
significantly from those assumed in the table. Finally, the ability of many
borrowers to service their adjustable-rate debt may decrease in the event of an
interest rate increase.
CHANGES IN FINANCIAL CONDITION
GENERAL. At December 31, 1999, the Company's total assets amounted to
$680.7 million as compared to $615.1 million at December 31, 1998. The $65.6
million or 10.7% increase was primarily due to an increase of $62.1 million or
48.8% in investment securities held to maturity, a $17.5 million or 4.0%
increase in loans receivable, net, and a $754,000 or 12.5% increase in office
properties and equipment. Such increases were partially offset by a decrease of
$16.2 million or 61.8% in cash and cash equivalents.
During 1999, investment securities totaling $92.2 million were purchased
and $30.2 million matured or were called resulting in a net increase of $62.1 or
48.8% in investment securities at December 31, 1999 compared to December 31,
1998. The loans receivable increase resulted from the continued origination of
loans during the year ended December 31, 1999. Originations for the year ended
December 31, 1999 consisted of $97.2 million in one-to four- family residential
loans, $1.8 in multi-family residential, $18.1 million in commercial loans,
$31.2 million in construction loans and $32.4 million in consumer installment
loans, of which $11.7 million consisted of automobile loans and $11.9 million
consisted of home equity loans. At December 31, 1999, the Bank had outstanding
loan commitments of $2.3 million, unused lines of credit of $6.7 million, and
the undisbursed portion of construction loans of $10.4 million. Liabilities
increased $68.0 million or 12.8% to $601.1 million at December 31, 1999 compared
to $533.1 million at December 31, 1998. The increase in liabilities was
primarily due to an increase of $26.8 million or 5.6% in deposits, and a $35.0
million or 71.4% increase in advances from the FHLB of Dallas. The increases in
deposits and advances from the FHLB of Dallas were used primarily to fund the
net loan increase and to purchase additional investment securities.
Stockholders' equity amounted to $78.8 million or 11.58% of total assets at
December 31, 1999 compared to $81.0 million or 13.17% of total assets at
December 31, 1998.
Nonperforming assets, consisting of nonperforming loans and repossessed
assets, amounted to $5.3 million or .78% of total assets at December 31, 1999,
compared to $5.7 million, or .93% of total assets at December 31, 1998. Included
in non-performing assets is a commercial real estate property that had a
carrying value at December 31, 1999 of $3.5 million. The Bank has received an
offer to sell such property. While management believes the offeror will proceed
to closing and that the Bank will receive at least the carrying value of the
real estate as net proceeds of the sale, the contract can be rescinded and the
sale may not proceed to closing. The offeror owns other lodging facilities in
the Oklahoma City area and continues to carry out steps consistent with their
expressed plan for acquiring the real estate.
LOANS RECEIVABLE. Net loans receivable increased by $17.5 million, or
4.0%, to $460.0 million at December 31, 1999 from $442.5 million at December 31,
1998. Loan originations for 1999 totaled $180.7 million. The net loans
receivable increase was composed of increases in commercial loans of $8.6
million or 27.0%, multi-family residential loans of $1.3 million or 82.6%,
consumer loans of $5.1 million or 16.0%, and construction loans, net of
undisbursed funds of $3.9 million or 34.1%, and a decrease in single-family
residential loans of $1.6 million or .4%. Loans were originated using the Bank's
normal underwriting standards, rates, and terms.
Unearned loan fee income at December 31, 1999 amounted to $3.0 million,
down from $3.3 million at December 31, 1998. These unearned fees are recognized
as an adjustment to yield over the contractual lives of the
9
<PAGE>
related loans. Undisbursed amounts of loans in process related to construction
loans at December 31, 1999 were $10.4 million, compared to $6.8 million at
December 31, 1998.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses was $771,000 at
December 31, 1998, compared to $752,000 at December 31, 1999. The composition of
the allowance remained relatively unchanged. There were no changes in
concentrations, terms, methods or assumptions that occurred or significantly
affected the allowance during the year ended December 31, 1999. Management
compared the loan portfolio's loss experience ratios from year to year and
adjusted the ratios to reflect current loss experience. Management also
considered whether there were any other matters that might affect the adequacy
of the allowance and identified no such matters.
INVESTMENT SECURITIES. Investment securities all of which were
classified as held to maturity amounted to $189.3 million as of December 31,
1999 compared to $127.2 million as of December 31, 1998. In 1999, approximately
$90.4 million of government agency obligations and $1.8 of municipal bonds were
purchased. Securities which matured or were called during 1999 amounted to $30.2
million, which resulted in an increase of $62.1 million or 48.8% in investment
securities at December 31, 1999 compared to December 31, 1998.
DEPOSITS. Deposits at December 31, 1999 amounted to $507.9 million, an
increase of $26.8 million or 5.6% from the December 31, 1998 balance of $481.1
million. The Bank does not advertise for deposits outside of its primary market
area, Northcentral and Northwest Arkansas, or utilize the services of deposit
brokers. In 1997, the Bank began offering special promotion certificate of
deposits which continued throughout 1999.
BORROWED FUNDS. Borrowed funds, which consist entirely of FHLB of Dallas
advances, increased by $35.0 million or 71.4% to $84.0 million at December 31,
1999 from $49.0 million at December 31, 1998. These borrowings were used to fund
loan growth and to purchase additional investment securities.
STOCKHOLDERS' EQUITY. Stockholders' equity decreased $2.2 million to
$78.8 million at December 31, 1999 from $81.0 million at December 31, 1998. The
decrease in stockholders' equity was primarily due to the purchase of treasury
stock totaling $8.6 million. In addition, during the twelve months ended
December 31, 1999 cash dividends aggregating $1.4 million were paid. Such
decreases in stockholders' equity were partially offset by net income in the
amount of $6.3 million for the year ended December 31, 1999.
10
<PAGE>
AVERAGE BALANCE SHEETS
The following table sets forth certain information relating to the
Company's average balance sheets and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the yields earned and
rates paid at December 31, 1999. Such yields and costs are derived by dividing
income or expense by the average balance of assets or liabilities, respectively,
for the periods presented and outstanding balances at December 31, 1999. For the
years ended December 31, 1999, 1998, and 1997 average balances are based on
daily balances during the period.
<TABLE>
<CAPTION>
December 31, Year Ended December 31,
-------------------------------------------------------------------------------
1999 1999 1998
---- ------------------------------ -------------------------------------
Average Average
Yield/ Average Yield/ Average Yield/
Cost Balance Interest Cost Balance Interest Cost
---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) 7.91% $447,631 $35,537 7.94% $441,702 $35,762 8.10%
Investment securities(2) 6.85 164,790 11,052 6.71 116,590 7,808 6.70
Other interest-earning assets 5.25 10,089 477 4.72 4,777 244 5.09
-------- -------- --------- --------
Total interest-earning assets 7.59 622,510 47,066 7.56 563,069 43,814 7.78
-------
Noninterest-earning assets 23,099 18,502
-------- ---------
Total assets $645,609 $581,571
======= =======
Interest-bearing liabilities:
Deposits 4.94 $501,820 24,566 4.90 $462,596 24,004 5.19
Other borrowings 5.76 57,949 3,233 5.58 30,452 1,770 5.81
------- ------- -------- ---------
Total interest-bearing liabilities 5.06 559,769 27,799 4.97 493,048 25,774 5.23
Noninterest-bearing liabilities 5,740 5,019
-------- --------
Total liabilities 565,509 498,067
Stockholders' equity 80,100 83,504
-------- --------
Total liabilities and
stockholders' equity $645,609 $581,571
======= ------- ======= -------
Net interest income $ 19,267 $ 18,040
======= ======
Net earning assets $ 62,741 $ 70,021
======== =======
Interest rate spread 2.53% 2.59% 2.55%
==== ==== =====
Net interest margin 3.10% 3.20%
==== =====
Ratio of interest-earning assets to
interest-bearing liabilities 111.21% 114.20%
====== =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997
----------------------------------
Average
Average Yield/
Balance Interest Cost
------- -------- ----
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) $415,075 $33,804 8.14%
Investment securities(2) 96,372 6,224 6.45
Other interest-earning assets 7,615 417 5.48
--------- --------
Total interest-earning assets 519,062 40,445 7.79
-------
Noninterest-earning assets 14,550
--------
Total assets $533,612
=======
Interest-bearing liabilities:
Deposits $440,147 23,331 5.30
Other borrowings 6,493 417 6.42
--------- --------
Total interest-bearing liabilities 446,640 23,748 5.32
Noninterest-bearing liabilities 5,561
---------
Total liabilities 452,201
Stockholders' equity 81,411
--------
Total liabilities and
stockholders' equity $533,612
======= -------
Net interest income $ 16,697
=======
Net earning assets $ 72,422
=======
Interest rate spread 2.47%
====
Net interest margin 3.22%
====
Ratio of interest-earning assets to
interest-bearing liabilities 116.21%
======
</TABLE>
- ----------------
(1) Includes non-accrual loans.
(2) Includes FHLB of Dallas stock.
11
<PAGE>
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by prior rate); (ii) changes in rate
(change in rate multiplied by prior average volume); (iii) changes in
rate-volume (changes in rate multiplied by the change in average volume); and
(iv) the net change.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
---------------------------------------------- ------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------------------- ---------------------------------
Total
Rate/ Increase Rate/
Volume Rate Volume (Decrease) Volume Rate Volume
---------- --------- ---------- ----------- ------------ ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable............. $ 480 $(696) $ (9) $ (225) $2,169 $(198) $ (13)
Investment securities........ 3,228 12 4 3,244 1,302 231 51
Other interest-earning assets 271 (18) (20) 233 (155) (29) 11
------ ----- ----- ----- ------- ------ -----
Total interest-earning
assets................. 3,979 (702) (25) 3,252 3,316 4 49
----- ----- ---- ------ ------- ------ -----
Interest expense:
Deposits..................... 2,035 (1,358) (115) 562 1,190 (492) (25)
Other borrowings............. 1,598 (71) (64) 1,463 1,538 (40) (145)
----- ------- ------- ------ ------ ------ ------
Total interest-bearing
liabilities.............. 3,633 (1,429) (179) 2,025 2,728 (532) (170)
----- ------ ----- ------ ------ ------ ------
Net change in net interest income $ 346 $ 727 $ 154 $ 1,227 $ 588 $ 536 $ 219
====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Total
Increase
(Decrease)
----------
<S> <C>
Interest income:
Loans receivable............. $1,958
Investment securities........ 1,584
Other interest-earning assets (173)
-------
Total interest-earning
assets................. 3,369
-------
Interest expense:
Deposits..................... 673
Other borrowings............. 1,353
------
Total interest-bearing
liabilities.............. 2,026
-------
Net change in net interest income $ 1,343
======
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND
1998.
GENERAL. The Company reported net income of $6.3 million for the year
ended December 31, 1999 compared to $6.0 million for the same period in 1998.
The increase of $250,000 or 4.1% in net income in 1999 compared to 1998 was due
to an increase in net interest income and a decrease in income taxes which were
partially offset by an increase in noninterest expenses and a reduction in
noninterest income. Net interest income increased by $1.2 million or 6.8% from
$18.0 million to $19.3 million for the years ended December 31, 1998 and 1999,
respectively. The Company's net interest margin declined to 3.10% and the
interest rate spread increased to 2.59% for 1999 compared to 3.20% and 2.55%,
respectively, for 1998.
NET INTEREST INCOME. Net interest income is determined by the Company's
interest rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities. The Company's net interest income amounted to $19.3 million in
1999, an increase of $1.2 million or 6.8% compared to $18.0 million for 1998.
The Company's interest rate spread increased to 2.59% for 1999 from 2.55% for
1998. The Company's net interest margin declined to 3.10% for 1999 compared to
3.20% for 1998.
INTEREST INCOME. Interest income amounted to $47.1 million for the year
ended December 31, 1999 compared to $43.8 million for the same period in 1998.
The increase of $3.3 million or 7.4% was primarily due to an increase in the
average balance of loans receivable and investment securities. The average
balance of loans receivable increased as a result of continued loan demand and
portfolio growth. The average balance of investment securities increased due to
additional purchases of longer-term investment securities. Such increase in
interest income was partially offset by
12
<PAGE>
a decline in the average yield earned on loans receivable due primarily to the
origination or modification of loans at market interest rates which were lower
than the average yield of the Bank's loan portfolio.
INTEREST EXPENSE. Interest expense increased $2.0 million or 7.9% to
$27.8 million for the year ended December 31, 1999 compared to $25.8 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
yield paid on both deposit accounts and FHLB of Dallas advances.
PROVISION FOR LOAN LOSSES. Provisions for loan losses amounted to
$20,000 for 1999 as compared to $55,000 for 1998. Provisions for loan losses
include charges to reduce the recorded balance of mortgage loans to their
estimated fair value. Such provision and the adequacy of the allowance for loan
losses is evaluated quarterly by management of the Bank based on the Bank's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated value
of any underlying collateral and current economic conditions. The decrease in
the provision for loan losses in 1999 compared to 1998 was due to management's
evaluation of the adequacy of the allowance for loan losses.
NONINTEREST INCOME. Noninterest income amounted to $1.8 million for the
year ended December 31, 1999 compared to $1.8 million for the same period in
1998. The decrease of $60,000 or 3.3% was due primarily to the recognition of a
$98,000 net loss from operations of real estate owned for the year ended
December 31, 1999 compared to net income of $12,000 for the same period in 1998.
Such decrease was also due to a decline in gain on the sale of mortgage loans in
the secondary mortgage market from $270,000 to $189,000 or 30.0% for the years
ended December 31, 1998 and 1999, respectively. The decrease in noninterest
income for the year ended December 31, 1999 compared to the year ended December
31, 1998 was partially offset by an increase of $75,000 from $896,000 to
$971,000 in deposit fee income.
NONINTEREST EXPENSE. Noninterest expenses increased $1.1 million or
10.6% to $11.6 million compared to $10.5 million for the year ended December 31,
1999 and December 31, 1998, respectively. Such increase in noninterest expenses
during 1999 compared to 1998 was primarily due to increases in salaries and
employee benefits, provision for loss on real estate owned, net occupancy
expense and data processing expense. Salaries and employee benefits amounted to
$7.1 million compared to $6.5 million resulting in an increase of $555,000 or
8.5% for the years ended December 31, 1999 and 1998, respectively. Such increase
in salaries and employee benefits was primarily due to an increase in personnel
as well as normal salary and merit increases. Provision for loss on real estate
owned amounted to $312,000 compared to $15,000 for the years ended December 31,
1999 and 1998, respectively. Such increase was a result of a write-down on a
foreclosed commercial real estate property. Net occupancy expense for the year
ended December 31, 1999 was $933,000 compared to $874,000 for the same period in
1998. Such increase in net occupancy expense was due to increased costs related
to branch expansions. Data processing expense increased $79,000 or 9.8% from
$804,000 to $883,000 between 1999 and 1998, respectively. The increase in data
processing expense was primarily due to expanded services such as online
banking, normal contractual increases and fees related to volume usage.
INCOME TAXES. Income taxes amounted to $3.1 million and $3.3 million for
the year ended December 31, 1999 and December 31, 1998, respectively, resulting
in effective tax rates of 33.4% and 35.4%, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
1997.
GENERAL. The Company reported net income of $6.0 million for the year
ended December 31, 1998 compared to $5.5 million for the same period in 1997.
The increase of $528,000 or 9.6% in net income in the 1998 period compared to
the same period in 1997 was due to an increase in net interest income which was
partially offset by an increase in noninterest expenses and income taxes and a
reduction in noninterest income. Net interest income increased by $1.3 million
or 8.0% from $16.7 million to $18.0 million for the years ended December 31,
1997 and 1998,
13
<PAGE>
respectively. The Company's net interest margin remained relatively unchanged at
3.20% and the interest rate spread increased to 2.55% for 1998 compared to 3.22%
and 2.47%, respectively, for 1997.
NET INTEREST INCOME. The Company's net interest income amounted to $18.0
million in 1998, an increase of $1.3 million or 8.0% compared to $16.7 million
for 1997. The Company's interest rate spread increased to 2.55% for 1998 from
2.47% for 1997. The Company's net interest margin remained stable at 3.20% for
1998 compared to 3.22% for 1997.
INTEREST INCOME. Interest income amounted to $43.8 million for the year
ended December 31, 1998 compared to $40.4 million for the same period in 1997.
The increase of $3.4 million or 8.3% was primarily due to an increase in the
average balance of loans receivable and investment securities. The average
balance of loans receivable increased as a result of continued loan demand and
portfolio growth. Such increase was partially offset by a decline in the average
yield earned on such assets due primarily to the origination or modification of
loans at market interest rates which are currently lower than the average yield
of the Bank's loan portfolio. The average balance of investment securities
increased due to additional purchases of investment securities. The average
balance and rate earned on investment securities increased due to the purchase
of longer-term investments at rates higher than the average yield earned on such
assets in portfolio. Such increases were partially offset by a decline in the
average balance of other interest-earning assets, primarily overnight
interest-bearing cash accounts.
INTEREST EXPENSE. Interest expense increased $2.0 million or 8.5% to
$25.8 million for the year ended December 31, 1998 compared to $23.8 million for
the same period in 1997. Such increase was primarily due to an increase in the
average balance of FHLB of Dallas advances as well as an increase in the average
balance of deposits. Such increases were offset by a decrease in the average
yield paid on both deposit accounts and FHLB of Dallas advances.
PROVISION FOR LOAN LOSSES. Provisions for loan losses amounted to
$55,000 for 1998. No provisions for loan losses were provided for in 1997.
Provisions for loan losses include charges to reduce the recorded balance of
mortgage loans to their estimated fair value. Such provision and the adequacy of
the allowance for loan losses is evaluated quarterly by management of the Bank
based on the Bank's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral and current economic
conditions. The increase in the provision for loan losses in 1998 compared to
1997 was due to management's evaluation of the adequacy of the allowance for
loan losses.
NONINTEREST INCOME. Noninterest income amounted to $1.8 million for the
year ended December 31, 1998 compared to $1.9 million for the same period in
1997. The decrease of $84,000 or 4.4% was due primarily to a gain of $394,000
recognized in 1997 on the sale of FHLMC stock and to the recognition in 1997 of
$145,000 on previously deferred profit on the sale of real estate owned. There
were no similar gains in 1998. The decrease in noninterest income for the year
ended December 31, 1998 compared to the year ended December 31, 1997 was
partially offset by an increase of $240,000 from $30,000 to $270,000 in gain on
the sale of mortgage loans in the secondary mortgage market. In addition,
deposit fee income increased $82,000 or 10.1% to $896,000 compared to $814,000
for the year ended December 31, 1998 and 1997, respectively.
NONINTEREST EXPENSE. Noninterest expenses increased $466,000 or 4.7% to
$10.5 million compared to $10.0 million for the year ended December 31, 1998 and
December 31, 1997, respectively. This increase was primarily due to increased
costs associated with the Company's ESOP as a result of an increase in the
Company's daily average stock price, occupancy costs due to branch expansions,
salaries and benefits due to increased personnel and normal salary and merit
increases, and a loss on disposition of real estate held for investment. Such
increases were partially offset by a decrease in costs related to the Management
Recognition and Retention Plan. Such costs amounted to $754,000 compared to $1.2
million for the year ended December 31, 1998 and 1997, respectively, resulting
in a $440,000 decrease. This decrease was due to the cost recognition, in the
second quarter of 1997, of an immediate 20% vesting after the plan was approved
by the Company's shareholders.
14
<PAGE>
INCOME TAXES. Income taxes amounted to $3.3 million and $3.1 million for
the year ended December 31, 1998 and December 31, 1997, respectively, resulting
in effective tax rates of 35.4% and 36.0%, 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 December 31,
1999, the Bank had outstanding advances from the FHLB of Dallas of $84.0
million. Such advances were used in the Bank's normal operating and investing
activities.
All savings institutions are required to maintain an average daily
balance of liquid assets equal to a certain percentage of the sum of its average
daily balance of net withdrawable deposit accounts and borrowings payable in one
year or less. The liquidity requirement may vary from time to time (between 4%
and 10%) depending upon economic conditions and savings flows of all savings
institutions. At the present time, the required minimum liquid asset ratio is
4%. At December 31, 1999, the Bank's liquidity ratio was 32.8%.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, the Bank maintains a
strategy of investing in various lending products. The Bank uses its sources of
funds primarily to meet its ongoing commitments, to pay maturing savings
certificates and savings withdrawals, to repay maturing FHLB of Dallas advances,
and to fund loan commitments. At December 31, 1999, the total approved mortgage
loan origination commitments outstanding, excluding the undisbursed portion of
construction loans, amounted to $2.3 million. At the same date, the undisbursed
portion of construction loans approximated $10.4 million. The Bank's unused
lines of credit at December 31, 1999 were approximately $6.7 million.
Certificates of deposit scheduled to mature in one year or less at December 31,
1999 totaled $225.0 million. Management believes that a significant portion of
maturing deposits will remain with the Bank. FHLB of Dallas advances scheduled
to mature within one year at December 31, 1999 totaled $68.0 million. Investment
securities scheduled to mature in one year or less at December 31, 1999 totaled
$3.5 million. However, actual maturities can be shorter than contractual
maturities due to the ability of borrowers to call or prepay such obligations
without call or prepayment penalties. As of December 31, 1999, there was
approximately $169.1 million of investment securities with call options held by
the issuer exercisable within one year.
As of December 31, 1999, the Bank's regulatory capital was well in
excess of all applicable regulatory requirements. At December 31, 1999, the
Bank's tangible, core and risk-based capital ratios amounted to 11.09%, 11.09%
and 21.52%, respectively.
15
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars, without considering changes in relative purchasing
power over time due to inflation.
Unlike most industrial companies, virtually all of the Bank's assets and
liabilities are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution's performance than does the
effect of inflation.
YEAR 2000
The Bank developed a Year 2000 Project Plan beginning in 1997. This plan
was developed to ensure that the Bank's computer systems and software would
function properly in the Year 2000. Various phases of the plan were completed
throughout 1998 and 1999. A Year 2000 Contingency Plan was also developed to
prepare for possible problems that might arise. As a result of the Bank's
efforts, the Bank's systems and operations experienced no Year 2000 problems
when the century rolled over to the Year 2000. Based on the successful
transition into the new century, the Bank does not expect to experience Year
2000 problems in the future and therefore does not plan any subsequent
disclosures regarding the Year 2000.
16
<PAGE>
[INTENTIONALLY LEFT BLANK]
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
First Federal Bancshares of Arkansas, Inc.:
We have audited the accompanying consolidated statements of financial condition
of First Federal Bancshares of Arkansas, Inc. and its subsidiary (the "Company")
as of December 31, 1999 and 1998, and the related consolidated statements of
income and comprehensive income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of First Federal Bancshares of
Arkansas, Inc. and its subsidiary at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Little Rock, Arkansas
February 18, 2000
18
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998 (IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
ASSETS
Cash and cash equivalents:
Cash and collection items $ 8,953 $ 8,842
Interest-bearing deposits with banks 1,030 17,321
------- --------
Total cash and cash equivalents 9,983 26,163
Investment securities -
Held to maturity, at amortized cost (fair value at December 31, 1999
and 1998, of $177,170 and $127,013, respectively) 189,263 127,175
Federal Home Loan Bank stock 4,258 3,912
Loans receivable, net of allowance at December 31, 1999 and 1998,
of $752 and $771, respectively 459,978 442,486
Accrued interest receivable 5,977 4,755
Real estate acquired in settlement of loans, net 3,940 4,270
Office properties and equipment, net 6,809 6,055
Prepaid expenses and other assets 511 239
---------- ---------
TOTAL $680,719 $615,055
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Interest-bearing $494,501 $466,960
Noninterest-bearing 13,374 14,133
-------- --------
Total deposits 507,875 481,093
Federal Home Loan Bank advances 83,972 48,985
Advance payments by borrowers for
taxes and insurance 1,089 1,006
8,146 1,990
------- -------
Total liabilities 601,082 533,074
------- -------
MINORITY INTEREST 822 958
------- -------
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, 4,039,374 and 4,512,760 shares outstanding at 52 52
December 31, 1999 and 1998, respectively
Additional paid-in capital 50,793 50,487
Employee stock benefit plans (3,867) (5,037)
Retained earnings - substantially restricted 52,598 47,678
-------- ------
99,576 93,180
Treasury stock, at cost, 1,114,377 and 640,991 shares at
December 31, 1999 and 1998, respectively (20,761) (12,157)
------- -------
Total stockholders' equity 78,815 81,023
-------- ------
TOTAL $680,719 $615,055
======== ========
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable $35,537 $35,762 $33,804
Investment securities 11,052 7,808 6,224
Other 477 244 417
----- ----- -----
Total interest income 47,066 43,814 40,445
INTEREST EXPENSE:
Deposits 24,566 24,004 23,331
Federal Home Loan Bank advances 3,233 1,770 417
------- ------- -----
Total interest expense 27,799 25,774 23,748
------- ------- ------
NET INTEREST INCOME 19,267 18,040 16,697
PROVISION FOR LOAN LOSSES 20 55
------- ------- ------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 19,247 17,985 16,697
NONINTEREST INCOME:
Gain on sales of available for sale investment securities 394
Deposit fee income 971 896 814
Other 805 940 712
------ ------ ------
Total noninterest income 1,776 1,836 1,920
------ ------ ------
NONINTEREST EXPENSES:
Salaries and employee benefits 7,080 6,525 6,384
Net occupancy expense 933 874 804
Federal insurance premiums 285 276 272
Provision for real estate losses 312 15 37
Data processing 883 804 810
Postage and supplies 446 393 369
Other 1,655 1,595 1,340
------- ------- ------
Total noninterest expenses 11,594 10,482 10,016
------- ------- ------
INCOME BEFORE INCOME TAXES 9,429 9,339 8,601
INCOME TAX PROVISION 3,149 3,309 3,099
------ ------ ------
NET INCOME 6,280 6,030 5,502
OTHER COMPREHENSIVE INCOME, Net of tax:
Unrealized holding gain on securities arising during period 58
Less: reclassification adjustment for gains included
in net income (260)
------ ------ ------
COMPREHENSIVE INCOME $ 6,280 $ 6,030 $ 5,300
======= ======= ======
EARNINGS PER SHARE:
Basic $ 1.57 $ 1.35 $ 1.22
======= ======= =======
Diluted $ 1.57 $ 1.33 $ 1.21
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ISSUED ACCUMULATED
COMMON STOCK ADDITIONAL EMPLOYEE OTHER
--------------------- PAID-IN STOCK COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL BENEFIT PLANS INCOME EARNINGS
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 5,153,751 $ 52 $ 49,975 $ (3,848) $ 202 $ 38,557
Net income 5,502
Release of ESOP shares 414 416
Common stock acquired or committed to be
acquired for employee stock benefit plan (152) (3,968)
Stock compensation expense 1,193
Net change in unrealized gain on
securities available for sale (202)
Dividends paid (1,077)
--------- ----- -------- -------- ------ --------
BALANCE, DECEMBER 31, 1997 5,153,751 52 50,237 (6,207) -- 42,982
Net income 6,030
Release of ESOP shares 564 416
Common stock acquired for employee
stock benefit plan (434)
Stock compensation expense 754
Shares released from restricted stock trust 120
Purchase of treasury stock, at cost
Dividends paid (1,334)
--------- ----- -------- -------- ------ --------
BALANCE, DECEMBER 31, 1998 5,153,751 52 50,487 (5,037) -- 47,678
Net income 6,280
Release of ESOP shares 316 416
Stock compensation expense 754
Shares released from restricted stock trust (10)
Purchase of treasury stock, at cost
Dividends paid (1,360)
--------- ----- -------- -------- ------ --------
BALANCE, DECEMBER 31, 1999 5,153,751 $ 52 $ 50,793 $ (3,867) $ -- 52,598
========= ===== ======== ======== ====== ========
<CAPTION>
TREASURY STOCK TOTAL
------------------------ STOCKHOLDERS'
SHARES AMOUNT EQUITY
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1997 257,688 $ (4,180) $ 80,758
Net income 5,502
Release of ESOP shares 830
Common stock acquired or committed to be
acquired for employee stock benefit plan (4,120)
Stock compensation expense 1,193
Net change in unrealized gain on
securities available for sale (202)
Dividends paid (1,077)
--------- -------- --------
BALANCE, DECEMBER 31, 1997 257,688 (4,180) 82,884
Net income 6,030
Release of ESOP shares 980
Common stock acquired for employee
stock benefit plan (434)
Stock compensation expense 754
Shares released from restricted stock trust 120
Purchase of treasury stock, at cost 383,303 (7,977) (7,977)
Dividends paid (1,334)
--------- -------- --------
BALANCE, DECEMBER 31, 1998 640,991 (12,157) 81,023
Net income 6,280
Release of ESOP shares 732
Stock compensation expense 754
Shares released from restricted stock trust (10)
Purchase of treasury stock, at cost 473,386 (8,604) (8,604)
Dividends paid (1,360)
--------- -------- --------
BALANCE, DECEMBER 31, 1999 1,114,377 $(20,761) $ 78,815
========= ========= ========
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING ACTIVITIES: 1999 1998 1997
<S> <C> <C> <C>
Net income $ 6,280 $ 6,030 $ 5,502
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 20 55
Provision for real estate losses 312 15 37
Deferred tax provision (benefit) (192) 227 27
Federal Home Loan Bank stock dividends (220) (222) (202)
Gain on disposition of fixed assets (6)
Gain on sale of investment securities - available for sale (394)
(Gain) loss on sale of repossessed assets, net (6) 47 (158)
Originations of loans held for sale (14,931) (21,178) (2,393)
Proceeds from sales of loans 15,574 20,709 2,251
Gain on sale of mortgage loans originated to sell (189) (270) (30)
Depreciation 554 508 465
Depreciation on real estate owned 129 115 -
Accretion of deferred loan fees, net (735) (855) (621)
Release of ESOP shares 732 980 830
Stock compensation expense 754 754 1,193
Changes in operating assets and liabilities:
Accrued interest receivable (1,222) (621) (514)
Prepaid expenses and other assets (299) 116 370
Other liabilities 305 272 299
-------- ------- -------
Net cash provided by operating activities 6,860 6,682 6,662
-------- ------- -------
INVESTING ACTIVITIES:
Purchases of investment securities - held to maturity (86,405) (111,196) (51,476)
Proceeds from sales of investment securities - available
for sale 406
Proceeds from maturities of investment securities -
held to maturity 30,182 79,467 46,550
Loan originations, net of repayments (17,608) (10,510) (36,912)
Proceeds from sales of repossessed assets 235 253 205
Purchases of office properties and equipment (1,332) (1,345) (2,118)
-------- -------- -------
Net cash used by investing activities (74,928) (43,331) (43,345)
-------- -------- -------
FINANCING ACTIVITIES:
Net increase in deposits 26,782 30,219 28,016
Advances from Federal Home Loan Bank 87,350 118,550 13,900
Repayment of advances from Federal Home Loan Bank (52,363) (81,562) (1,903)
Net increase in advance payments by borrowers for taxes
and insurance 83 106 94
Purchase of treasury stock (8,604) (7,977)
Common stock acquired for employee stock benefit plan (1,817) (2,539)
Dividends paid (1,360) (1,334) (1,077)
-------- -------- -------
Net cash provided by financing activities 51,888 56,185 36,491
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (16,180) 19,536 (192)
CASH AND CASH EQUIVALENTS:
Beginning of year 26,163 6,627 6,819
-------- -------- -------
End of year $ 9,983 $ 26,163 $ 6,627
======== ======== =======
</TABLE>
(Continued)
22
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
<S> <C> <C> <C>
Cash paid for:
Interest $ 27,565 $ 25,635 $ 23,656
========== ======== ========
Income taxes $ 3,434 $ 3,125 $ 2,908
========== ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Real estate acquired in settlement of loans $ 649 $ 3,888 $ 272
========== ======== ========
Loans to facilitate sales of real estate owned $ 325 $ 341 $ -
========== ======== ========
Investment securities traded, recorded in investments,
not yet settled in cash $ 6,000 $ - $ -
========== ======== ========
(Concluded)
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION - First Federal
Bancshares of Arkansas, Inc. (the "Company") 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 to owning an interest in a repossessed commercial property.
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 1999 and 1998 financial statements.
The remaining 25% ownership is reflected in the consolidated statements of
financial condition at December 31, 1999 and 1998, as minority interest.
All material intercompany transactions have been eliminated in
consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates and such differences could be significant. Material
estimates that are particularly susceptible to significant change in the
near term relate to the determination of the allowance for loan losses and
the valuation of foreclosed real estate.
LIQUIDITY REQUIREMENT - Regulations require the Bank to maintain an amount
equal to 4% of deposits (net of loans on deposits) plus short-term
borrowings in cash and U.S. Government and other approved securities.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, cash and
cash equivalents includes cash on hand and amounts due from depository
institutions, which includes interest-bearing amounts available upon
demand.
INVESTMENT SECURITIES - The Company classifies investment securities into
one of two categories: held to maturity or available for sale. The Company
does not engage in trading activities. Debt securities that the Company
has the positive intent and ability to hold to maturity are classified as
held to maturity and recorded at cost, adjusted for the amortization of
premiums and the accretion of discounts.
Investment securities that the Company intends to hold for indefinite
periods of time are classified as available for sale and are recorded at
fair value. Unrealized holding gains and losses are excluded from earnings
and reported net of tax in other comprehensive income. Investment
securities in the available for sale portfolio may be used as part of the
Company's asset and liability management practices and may be sold in
response to changes in interest rate risk, prepayment risk, or other
economic factors.
24
<PAGE>
Premiums are amortized into interest income using the interest method to
the earlier of maturity or call date. Discounts are accreted into interest
income using the interest method over the period to maturity. The specific
identification method of accounting is used to compute gains or losses on
the sales of investment securities.
If the fair value of an investment security declines for reasons other
than temporary market conditions, the carrying value of such a security is
written down to fair value by a charge to operations.
LOANS RECEIVABLE - Loans receivable that management has the intent and
ability to hold for the foreseeable future or until maturity or pay-off
are stated at unpaid principal balances adjusted for any charge-offs, the
allowance for loan losses and deferred loan fees or costs and discounts.
Deferred loan fees or costs and discounts on first mortgage loans are
amortized or accreted to income using the level-yield method over the
remaining period to contractual maturity.
Mortgage loans originated and committed for sale in the secondary market
are carried at the lower of cost or estimated market value in the
aggregate. At December 31, 1999 and 1998, the balances of such loans are
not material, and are carried at cost due to the short period of time
between funding and sale, generally one to two weeks.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due or when the loan becomes 90 days past due, whichever occurs
first. When interest accrual is discontinued, all unpaid accrued interest
is reversed. Interest income is subsequently recognized only to the extent
cash payments in excess of principal due are received, until such time
that in management's opinion, the borrower will be able to meet payments
as they become due.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is a valuation
allowance to provide for incurred but not yet realized losses. The Bank
reviews its non-homogeneous loans for impairment on a quarterly basis.
Impairment is determined by assessing the probability that the borrower
will not be able to fulfill the contractual terms of the agreement. If a
loan is determined to be impaired, the amount of the impairment is
measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or by use of the
observable market price of the loan or fair value of collateral if the
loan is collateral dependent. Throughout the year, management estimates
the level of probable losses to determine whether the allowance for loan
losses is appropriate considering the estimated losses existing in the
portfolio. Based on these estimates, an amount is charged to the provision
for loan losses and credited to the allowance for loan losses in order to
adjust the allowance to a level determined by management to be appropriate
relative to losses. The allowance for loan losses is increased by charges
to income (provisions) and decreased by charge-offs, net of recoveries.
Management's periodic evaluation of the appropriateness of the allowance
is based on the Company's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral and
current economic conditions.
Homogeneous loans are those that are considered to have common
characteristics that provide for evaluation on an aggregate or pool basis.
The Bank considers the characteristics of (1) one- to- four family
residential first mortgage loans; (2) unsecured consumer loans and; (3)
secured consumer loans to permit consideration of the appropriateness of
the allowance for losses of each group of loans on a pool basis. The
primary methodology used to determine the appropriateness of the allowance
for losses includes segregating certain specific, poorly performing loans
based on their performance
25
<PAGE>
characteristics from the pools of loans as to type, grading these loans,
and then applying a loss factor to the remaining pool balance based on
several factors including past loss experience, inherent risks, economic
conditions in the primary market areas, and other factors which usually
are beyond the control of the Bank.
Non-homogeneous loans are those loans that can be included in a particular
loan type, such as commercial loans, construction loans, multi-family, and
commercial first mortgage loans, but which differ in other characteristics
to the extent that valuation on a pool basis is not valid. Those
segregated specific loans are evaluated using the present value of future
cash flows, usually determined by estimating the fair value of the loan's
collateral reduced by any cost of selling and discounted at the loan's
effective interest rate if the estimated time to receipt of monies is more
than three months or by use of the observable market price of the loan or
fair value of collateral if the loan is collateral dependent. After
segregating specific, poorly performing loans, the remaining loans are
evaluated based on payment experience, known difficulties in the
borrower's business or geographic area, loss experience, inherent risks,
and other factors usually beyond the control of the Bank. A factor, based
on experience, is applied to these loans to estimate the probable loss.
Estimates of the probability of loan losses involve judgment. While it is
possible that in the near term the Bank may sustain losses which are
substantial in relation to the allowance for loan losses, it is the
judgment of management that the allowance for loan losses reflected in the
consolidated statements of financial condition is appropriate considering
the estimated probable losses in the portfolio.
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS - Real estate acquired in
settlement of loans is initially recorded at estimated fair value less
estimated costs to sell and is subsequently carried at the lower of
carrying amount or fair value less estimated disposal costs. Valuations
are periodically performed by management, and an allowance for losses is
established by a charge to operations or the balance is written off if the
carrying value of a property exceeds its estimated fair value. Costs
relating to the development and improvement of the property are
capitalized, whereas those relating to holding the property are expensed.
OFFICE PROPERTIES AND EQUIPMENT - Office properties and equipment are
stated at cost less accumulated depreciation and amortization. The Company
computes depreciation of office properties and equipment using the
straight-line method over the estimated useful lives of the individual
assets which range from 3 to 30 years.
LOAN ORIGINATION FEES - Loan origination fees and certain direct loan
origination costs are deferred and the net fee or cost is recognized as an
adjustment to interest income using the level-yield method over the
contractual life of the loans. When a loan is fully repaid or sold, the
amount of unamortized fee or cost is recorded in income.
INCOME TAXES - The Company recognizes deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between
the carrying amounts and the tax bases of assets and liabilities.
INTEREST RATE RISK - The Bank's asset base is exposed to risk including
the risk resulting from changes in interest rates and changes in the
timing of cash flows. The Bank monitors the effect of such risks by
considering the mismatch of the maturities of its assets and liabilities
in the current interest rate environment and the sensitivity of assets and
liabilities to changes in interest rates. The Bank's
26
<PAGE>
management has considered the effect of significant increases and
decreases in interest rates and believes such changes, if they occurred,
would be manageable and would not affect the ability of the Bank to hold
its assets as planned. However, the Bank is exposed to significant market
risk in the event of significant and prolonged interest rate changes.
EMPLOYEE STOCK OWNERSHIP PLAN - Compensation expense for the Employee
Stock Ownership Plan ("ESOP") is determined based on the average fair
value of shares committed to be released during the period and is
recognized as the shares are committed to be released. For the purpose of
earnings per share, ESOP shares are included in weighted-average common
shares outstanding as the shares are committed to be released.
STOCK COMPENSATION PLANS - Statement of Financial Accounting Standards No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, encourages all entities to
adopt a fair value based method of accounting for employee stock
compensation plans, whereby compensation cost is measured at the grant
date based on the value of the award and is recognized over the service
period, which is usually the vesting period. However, it also allows an
entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No.25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
whereby compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date (or other measurement date) over the
amount an employee must pay to acquire the stock. Stock options issued
under the Company's stock option plan have no intrinsic value at the grant
date, and under Opinion No. 25 no compensation cost is recognized for
them. The Company has elected to continue with the accounting methodology
in Opinion No. 25 and, as a result, has provided pro forma disclosures of
net income and earnings per share and other disclosures, as if the fair
value based method of accounting had been applied. The pro forma
disclosures include the effects of all awards granted on or after January
1, 1995. (See Note 13.)
EARNINGS PER COMMON SHARE - Basic earnings per share represents income
available to common stockholders divided by the weighted-average number of
common shares outstanding during the period. Diluted earnings per share
reflects additional common shares that would have been outstanding if
dilutive potential common shares had been issued, as well as any
adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by the Company relate solely to
outstanding stock options, and are determined using the treasury stock
method.
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.
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.
RECLASSIFICATIONS - Certain amounts in the 1998 and 1997 consolidated
financial statements have been reclassified to conform to the
classifications adopted for reporting in 1999.
27
<PAGE>
2. INVESTMENT SECURITIES
Investment securities consisted of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1999
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
HELD TO MATURITY COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Government and
Agency obligations $ 189,263 $ 19 $ 12,112 $ 177,170
========== ====== ========= =========
1998
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
HELD TO MATURITY COST GAINS LOSSES VALUE
U.S. Government and
Agency obligations $ 127,175 $ 398 $ 560 $ 127,013
========== ====== ========= =========
</TABLE>
The Company has pledged investment securities held to maturity with
carrying values of approximately $13 million and $16 million at December
31, 1999 and 1998, respectively, as collateral for certain deposits in
excess of $100,000.
Gross realized gains on sales of available for sale securities were
approximately $394,000 in 1997. There were no significant gross losses.
The scheduled maturities of debt securities at December 31, 1999, by
contractual maturity are shown below (in thousands). Expected maturities
may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
1999
-----------------------------
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Due in one year or less $ 3,503 $ 3,497
Due from one year to five years 1,501 1,484
Due from five years to ten years 18,211 17,640
Due after ten years 166,048 154,549
-------- --------
Total $189,263 $177,170
======== ========
</TABLE>
As of December 31, 1999 and December 31, 1998, there were approximately
$184 million and $113 million, respectively, of investments with call
options held by the issuer, of which approximately $169 million and $97
million, respectively, are callable within one year.
28
<PAGE>
3. LOANS RECEIVABLE
Loans receivable consisted of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
First mortgage loans:
One- to- four family residences $368,589 $370,211
Other properties 28,830 24,736
Construction 25,797 18,226
Less:
Unearned discounts (233) (287)
Undisbursed loan funds (10,437) (6,770)
Deferred loan fees, net (2,972) (3,174)
--------- ---------
Total first mortgage loans 409,574 402,942
--------- ---------
Consumer and other loans:
Commercial loans 14,171 8,437
Automobile 13,205 10,693
Consumer loans 4,285 3,977
Home equity and second mortgage 15,009 13,308
Savings loans 1,887 1,537
Other 2,405 2,199
Deferred loan costs 194 164
--------- ---------
Total consumer and other loans 51,156 40,315
--------- ---------
Allowance for loan losses (752) (771)
--------- ---------
Loans receivable, net $459,978 $442,486
========= =========
</TABLE>
The Bank originates and maintains loans receivable which are substantially
concentrated in its lending territory (primarily Northwest and
Northcentral Arkansas). The majority of the Bank's loans are residential
mortgage loans and construction loans for residential property. The Bank's
policy calls for collateral or other forms of repayment assurance to be
received from the borrower at the time of loan origination. Such
collateral or other form of repayment assurance is subject to changes in
economic value due to various factors beyond the control of the Bank.
In the normal course of business, the Bank has made loans to its
directors, officers, and their related business interests. In the opinion
of management, related party loans are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with unrelated persons and do not involve
more than the normal risk of collectibility. The aggregate dollar amount
of loans outstanding to directors, officers, and their related business
interests totaled approximately $3.0 million and $2.6 million at December
31, 1999 and 1998, respectively.
Loans identified by management as impaired at December 31, 1999 and 1998,
were not significant. The Bank is not committed to lend additional funds
to debtors whose loans have been modified.
29
<PAGE>
4. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal
balances of these loans at December 31, 1999 and 1998, were $653 thousand
and $849 thousand, respectively. Servicing loans for others generally
consists of collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors, and foreclosure processing. Loan
servicing income is recorded on the accrual basis and includes servicing
fees from investors and certain charges collected from borrowers, such as
late payment fees.
5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consisted of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Loans $2,626 $2,482
Investment securities 3,351 2,273
------ ------
Total $5,977 $4,755
====== ======
</TABLE>
6. ALLOWANCES FOR LOAN AND REAL ESTATE LOSSES
A summary of the activity in the allowances for loan and real estate
losses is as follows for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- --------------------- -------------------
LOANS REAL ESTATE LOANS REAL ESTATE LOANS REAL ESTATE
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year $ 771 $ -- $ 1,196 $ -- $ 1,251 $--
Provisions for estimated
losses 20 312 55 15 37
Recoveries 28 -- 9 -- 12 --
Losses charged off (67) (312) (489) (15) (67) (37)
-------- ------ -------- ------ -------- ----
Balance, end of year $ 752 $ -- $ 771 $ -- $ 1,196 $--
======== ====== ======== ====== ======== ====
</TABLE>
7. FEDERAL HOME LOAN BANK STOCK
The Bank is a member of the Federal Home Loan Bank System. As a member of
this system, it is required to maintain an investment in capital stock of
the Federal Home Loan Bank ("FHLB") in an amount equal to the greater of
1% of its outstanding home loans or .3% of its total assets. No ready
market exists for such stock and it has no quoted market value. The
carrying value of the stock is its cost.
30
<PAGE>
8. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consisted of the following at December 31
(in thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Land $ 2,397 $ 2,226
Buildings and improvements 3,932 3,698
Furniture and equipment 4,379 3,858
Automobiles 532 443
--------- ---------
Total 11,240 10,225
Accumulated depreciation (4,431) (4,170)
Office properties and equipment, net $ 6,809 $ 6,055
========= ==========
</TABLE>
9. DEPOSITS
Deposits are summarized as follows at December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Demand and NOW accounts, including noninterest-bearing
deposits of $13,374 and $14,133 in 1999 and 1998, respectively $ 60,795 $ 60,248
Money market 15,735 16,164
Regular savings 26,031 25,916
Certificates of deposit 405,314 378,765
--------- ---------
Total $507,875 $481,093
========= =========
</TABLE>
The aggregate amount of time deposits in denominations of $100 thousand
or more was approximately $81 million and $74 million at December 31,
1999 and 1998, respectively.
At December 31, 1999, scheduled maturities of certificates of deposit
are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Years ending December 31:
2000 $224,979
2001 116,000
2002 23,158
2003 21,844
2004 and thereafter 19,333
--------
Total $405,314
========
</TABLE>
31
<PAGE>
Interest expense on deposits consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
NOW and money market $ 1,488 $ 1,358 $ 1,299
Regular savings and certificate accounts 23,182 22,745 22,145
Early withdrawal penalties (104) (99) (113)
-------- -------- --------
Total $24,566 $24,004 $23,331
======== ======== ========
</TABLE>
Eligible deposits of the Bank are insured up to $100 thousand by the
Savings Association Insurance Fund ("SAIF") of the Federal Deposit
Insurance Corporation ("FDIC").
Legislation, passed by the U.S. House of Representatives and the Senate,
was signed into law by the President on September 30, 1996, to
recapitalize the SAIF. The legislation also mandated that the deposit
insurance premiums charged to SAIF-insured institutions (such as the Bank)
decline to approximately 6.50 basis points effective January 1, 1997.
Effective July 1, 1998, the deposit insurance premium declined to 6.10
basis points, and, effective July 1, 1999, the deposit insurance premium
declined to 5.80 basis points.
10. FEDERAL HOME LOAN BANK ADVANCES
The Bank pledges as collateral for FHLB advances their FHLB stock and has
entered into blanket collateral agreements with the FHLB whereby the Bank
agrees to maintain, free of other encumbrances, qualifying single family
first mortgage loans with unpaid principal balances, when discounted at
75% of such balances, of at least 100% of total outstanding advances.
Advances at December 31, 1999 and 1998, consisted of the following:
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT RATE AMOUNT
<S> <C> <C> <C> <C>
Amounts maturing in years ending December 31:
1999 - $ - 5.71 % $19,000
2000 5.79 % 68,000 5.31 % 14,000
2001 4.85 % 7,000 4.85 % 7,000
2002 6.60 % 3,972 6.60 % 3,985
2003 5.56 % 1,000 5.56 % 1,000
2004 6.07 % 1,000 6.07 % 1,000
Thereafter 5.99 % 3,000 5.99 % 3,000
------- -------
Total 5.76 % $83,972 5.57 % $48,985
======= =======
</TABLE>
32
<PAGE>
11. INCOME TAXES
The provisions (benefits) for income taxes are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Income tax provision (benefit):
Current $3,341 $3,082 $3,072
Deferred (192) 227 27
------- ------ ------
Total $3,149 $3,309 $3,099
======= ====== ======
</TABLE>
The reasons for the differences between the statutory federal income tax
rates and the effective tax rates are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Taxes at statutory rate $3,206 34.0 % $3,175 34.0 % $2,924 34.0 %
Increase (decrease)
resulting from:
State income tax, net 48 0.5 % 119 1.4 %
Other, net (57) (0.6)% 86 0.9 % 56 0.6 %
------- ------ ------ ------ ------ ------
Total $3,149 33.4 % $3,309 35.4 % $3,099 36.0 %
======= ====== ====== ====== ====== ======
</TABLE>
The Company's net deferred tax liability account was comprised of the
following at December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets:
ESOP $ 150
Real estate owned 219
Loan fees deferred $ 79
Stock based compensation 178 168
Loan loss reserves 4
Other 2
------- -------
Total deferred tax assets 549 251
------- -------
Deferred tax liabilities:
Office properties (205) (159)
Federal Home Loan Bank stock (754) (629)
Other (65)
------- -------
Total deferred tax liabilities (959) (853)
------- -------
Net deferred tax liability $ (410) $ (602)
======= =======
</TABLE>
33
<PAGE>
Specifically exempted from deferred tax recognition requirements are bad
debt reserves for tax purposes of U.S. savings and loans in the
institution's base year, as defined. Base year reserves totaled
approximately $4.2 million. Consequently, a deferred tax liability of
approximately $1.6 million related to such reserves was not provided for
in the consolidated statements of financial condition at December 31, 1999
and 1998. Payment of dividends to shareholders out of retained earnings
deemed to have been made out of earnings previously set aside as bad debt
reserves may create taxable income to the Bank. No provision has been made
for income tax on such a distribution as the Bank does not anticipate
making such distributions.
12. OTHER COMPREHENSIVE INCOME
The amount of income tax expense or benefit allocated to each component of
comprehensive income, including reclassification adjustments, are shown
below. There were no other comprehensive income components for the years
ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------
(IN THOUSANDS)
TAX
BEFORE-TAX (EXPENSE) NET-OF-TAX
AMOUNT OF BENEFIT AMOUNT
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period $ 66 $ (8) $ 58
Less: reclassification of adjustment for gains
realized in net income (394) 134 (260)
------ ----- ------
Other comprehensive income $(328) $126 $(202)
====== ===== ======
</TABLE>
13. BENEFIT PLANS
STOCK OPTION PLAN - The Stock Option Plan ("SOP") provides for a committee
of the Company's Board of Directors to award incentive stock options,
non-qualified or compensatory stock options and stock appreciation rights
representing up to 515,375 shares of Company stock. One-fifth of the
options granted vested immediately upon grant, with the balance vesting in
equal amounts on the four subsequent anniversary dates of the grant.
Three-fifths of the options granted during 1997 have vested as of December
31, 1999. Options granted vest immediately in the event of retirement,
disability, or death. Stock options granted expire in ten years.
Under the SOP, options have been granted to directors and key employees to
purchase common stock of the Company. The exercise price in each case
equals the fair market value of the Company's stock at the date of grant.
Options granted in 1997 have exercise prices ranging from $19.25 to
$20.38, and a weighted average remaining contract life of 7.4 years at
December 31, 1999. Options granted in 1998 have exercise prices ranging
from $23.25 to $24.00 and a weighted average remaining contract life of
8.1 years at December 31, 1999. Options granted in 1999 have exercise
prices ranging from $17.06 to $18.63 and a weighted average remaining
contract life of 9.3 years at December 31, 1999.
34
<PAGE>
A summary of the status of the Company's SOP as of December 31, 1999,
1998, and 1997, and changes during the years ending on those dates are
presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
<S> <C> <C>
Outstanding at January 1, 1997
Granted 496,073 $ 19.27
Forfeited (1,600) 19.25
-------- -------
Outstanding at December 31, 1997 494,473 19.27
Granted 13,000 23.31
Forfeited (3,600) 20.00
-------- -------
Outstanding at December 31, 1998 503,873 19.37
Granted 5,000 18.23
Forfeited (11,508) 19.67
-------- -------
Outstanding at December 31, 1999 497,365 19.35
-------- -------
Options exercisable at December 31, 1999 301,843 $ 19.34
======== =======
</TABLE>
The Company applies the provisions of APB Opinion No. 25 in accounting for
its stock option plan, as allowed under SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION ("SFAS 123"). Accordingly, no compensation cost
has been recognized for options granted to employees. Had compensation
cost for these plans been determined based on the fair value at the grant
dates for awards under those plans consistent with the methods of SFAS
123, the Company's pro forma net income and pro forma earnings per share
would have been as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- --------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
<S> <C> <C> <C> <C> <C> <C>
Net income (in
thousands) $6,280 $5,763 $6,030 $5,505 $5,502 $4,987
Earnings per share:
Basic $ 1.57 $ 1.44 $ 1.35 $ 1.23 $ 1.22 $ 1.10
Diluted $ 1.57 $ 1.44 $ 1.33 $ 1.21 $ 1.21 $ 1.10
</TABLE>
In determining the above pro forma disclosure, the fair value of options
granted during 1997 was estimated on the date of grant using the Binomial
option-pricing model with the following weighted average assumptions:
expected volatility - 22%, expected life of options - 6.5 years, risk-free
interest rate - 5.7%, and expected dividend rate - 1.05%. The weighted
average fair value of options granted during the fiscal year ended
December 31, 1997, was $7.85 per share.
The fair value of options granted during 1998 was estimated on the date of
grant using the Binomial option-pricing model with the following
assumptions: expected volatility - 20.28% to 21.09%, expected life of
options - 7.0 years, risk-free interest rate - 5.59% and expected dividend
rate - 1.04% to 1.17%. The weighted average fair value of options granted
during the fiscal year ended December 31, 1998, was $9.02 per share.
35
<PAGE>
The fair value of options granted during 1999 was estimated on the date of
grant using the Binomial option-pricing model with the following
assumptions: expected volatility - 27% to 29%, expected life of options -
7.0 years, risk-free interest rate - 4.81% to 6.54% and expected dividend
rate - 1.70% to 1.88%. The weighted average fair value of options granted
during the fiscal year ended December 31, 1999, was $7.27 per share.
MANAGEMENT RECOGNITION AND RETENTION PLAN - The Management Recognition and
Retention Plan ("MRR Plan") provides for a committee of the Company's
Board of Directors to award restricted stock to key officers as well as
non-employee directors. The MRR Plan authorizes the Company to grant up to
206,150 shares of the Company stock, of which 195,844 shares have been
granted through December 31, 1999. Compensation expense will be recognized
based on the fair market value of the shares on the grant date of $19.25
over the vesting period which ends in May 2001. Shares granted will be
deemed vested in the event of disability or death. All shares granted
under the plan have been purchased in the open market at a total cost of
$4.4 million. Approximately $754,000, $754,000, and $1.2 million in
compensation expense was recognized during the years ended December 31,
1999, 1998, and 1997, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN - The Company established an Employee Stock
Ownership Plan on May 3, 1996. During 1996, the ESOP borrowed $4.1 million
from the Company to purchase shares of Company stock. The loan is
collateralized by the shares that were purchased with the proceeds of the
loan. As the loan is repaid, ESOP shares will be allocated to participants
of the ESOP and are available for release to the participants subject to
the vesting provisions of the ESOP.
Forfeitures of nonvested benefits will be reallocated among remaining
participating employees in the same proportion as contributions. During
each of the years ended December 31, 1999, 1998, and 1997, 41,604 shares
were released by the ESOP to participant accounts. At December 31, 1999,
there were 147,375 shares allocated to participant accounts and 260,023
unallocated shares. The fair value of the unallocated shares amounted to
approximately $4.1 million at December 31, 1999.
During the years ended December 31, 1999, 1998, and 1997, ESOP expense was
approximately $636,000, $884,000, and $745,000, respectively.
OTHER POSTRETIREMENT BENEFITS - The Bank is a participant in a
multi-employer retirement plan and therefore separate information is not
available. The plan is noncontributory and covers substantially all
employees. The plan provides a retirement benefit and a death benefit.
Retirement benefits are payable in monthly installments for life and must
begin not later than the first day of the month coincident with or next
following the seventieth birthday or the participant may elect a lump-sum
distribution. Death benefits are paid in a lump-sum distribution, the
amount of which depends on years of service. For the year ended December
31, 1997, there was a net pension cost of approximately $56,000. There was
no net pension cost for the years ended December 31, 1999 and 1998.
36
<PAGE>
14. EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic EPS -
Income available to common stockholders $6,279,557 4,003,229 $ 1.57
Effect of dilutive securities -
Stock options
---------- ---------
Diluted EPS -
Income available to common stockholders
and assumed conversions $6,279,557 4,003,229 $ 1.57
========== =========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
Basic EPS -
<S> <C> <C> <C>
Income available to common stockholders $6,029,505 4,459,685 $ 1.35
Effect of dilutive securities -
Stock options 89,506
---------- ---------
Diluted EPS -
Income available to common stockholders
and assumed conversions $6,029,505 4,549,191 $ 1.33
========== =========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic EPS -
Income available to common stockholders $5,501,617 4,527,043 $ 1.22
Effect of dilutive securities -
Stock options 22,365
---------- ---------
Diluted EPS -
Income available to common stockholders
and assumed conversions $5,501,617 4,549,408 $ 1.21
========== =========
</TABLE>
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit risk in excess of the amount
recognized in the consolidated statements of financial condition. The Bank
does not use financial instruments with off-balance sheet risk as part of
its asset/liability management program or for trading purposes. The Bank's
exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amounts of those
instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Bank upon extension of credit, is based
37
<PAGE>
on management's credit evaluation of the counterparty. Such collateral
consists primarily of residential properties. Standby letters of credit
are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers.
The Bank had the following outstanding commitments at December 31, 1999
(in thousands):
<TABLE>
<S> <C>
Undisbursed construction loans $10,437
Commitments to originate mortgage loans 2,324
Letters of credit 337
Unused lines of credit 6,675
-------
Total $19,773
=======
</TABLE>
The funding period for construction loans is generally less than nine
months and commitments to originate mortgage loans are generally
outstanding for 60 days or less. At December 31, 1999, interest rates on
commitments ranged from 6.25% to 9.50%.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies.
However, considerable judgment is required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts. The estimated fair values of financial
instruments are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------------------------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
ASSETS:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 9,983 $ 9,983 $ 26,163 $ 26,163
Investment securities -
Held to maturity 189,263 177,170 127,175 127,013
Federal Home Loan Bank stock 4,258 4,258 3,912 3,912
Loans receivable, net 459,978 459,355 442,486 448,755
Accrued interest receivable 5,977 5,977 4,755 4,755
LIABILITIES:
Deposits:
Demand, NOW, money
market and regular savings 102,561 102,561 102,328 102,328
Certificates of deposit 405,314 408,888 378,765 385,084
Federal Home Loan Bank advances 83,972 83,562 48,985 49,872
Accrued interest payable 898 898 665 665
Advance payments by borrowers
for taxes and insurance 1,089 1,089 1,006 1,006
Commitments - - - -
</TABLE>
For cash and cash equivalents, Federal Home Loan Bank stock and accrued
interest receivable, the carrying value is a reasonable estimate of fair
value, primarily because of the short-term nature of the instruments or,
as to Federal Home Loan Bank stock, the ability to sell the stock back to
the Federal Home Loan Bank at cost. The fair value of investment
securities is based on quoted market prices, dealer quotes and prices
obtained from independent pricing services. The fair value of variable
rate loans are based on repricing dates. Fixed rate loans were valued
using discounted cash flows. The discount rates used to determine the
present value of these loans were based on interest rates currently being
charged by the Bank on comparable loans as to credit risk and term.
38
<PAGE>
The fair value of demand deposit accounts, NOW accounts, savings accounts
and money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit and Federal
Home Loan Bank advances is estimated using the rates currently offered for
deposits and advances of similar remaining maturities at the reporting
date. For advance payments by borrowers for taxes and insurance and
accrued interest payable the carrying value is a reasonable estimate of
fair value, primarily because of the short-term nature of the instruments.
Commitments are generally made at prevailing interest rates at the time of
funding and, therefore, there is no difference between the contract amount
and fair value.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1999 and 1998.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since
the reporting date and, therefore, current estimates of fair value may
differ significantly from the amounts presented herein.
17. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements (see Note 15). In addition,
the Company is a defendant in certain claims and legal actions arising in
the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters
is not expected to have a material adverse effect on the consolidated
financial statements of the Company.
18. RETAINED EARNINGS - SUBSTANTIALLY RESTRICTED
Upon conversion, the Company established a special liquidation account for
the benefit of eligible account holders and the supplemental eligible
account holders in an amount equal to the net worth of the Bank as of the
date of its latest statement of financial condition contained in the final
offering circular used in connection with the conversion. The liquidation
account will be maintained for the benefit of eligible account holders and
supplemental eligible account holders who continue to maintain their
accounts in the Bank after conversion. In the event of a complete
liquidation (and only in such event), each eligible and supplemental
eligible account holder will be entitled to receive a liquidation
distribution from the liquidation account in an amount proportionate to
the current adjusted qualifying balances for accounts then held.
The Company may not declare or pay cash dividends on its shares of common
stock if the effect thereof would cause the Company's stockholders' equity
to be reduced below applicable regulatory capital maintenance requirements
for insured institutions or below the special liquidation account referred
to above.
19. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision ("OTS"). Failure to meet
minimum capital requirements can initiate certain mandatory--and possible
additional discretionary--actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance sheet items as
39
<PAGE>
calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of tangible capital (as defined in the regulations) to
tangible assets (as defined) and core capital (as defined) to adjusted
tangible assets (as defined), and of total risk-based capital (as defined)
to risk-weighted assets (as defined). Management believes, as of December
31, 1999, that the Bank meets all capital adequacy requirements to which
it is subject.
At December 31, 1999 and 1998, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized the
Bank must maintain minimum core (Tier I leverage), Tier I risk-based, and
total risk-based ratios as set forth in the table. There are no conditions
or events since that notification that management believes have changed
the Bank's category.
The Bank's actual capital amounts (in thousands) and ratios are also
presented in the table:
<TABLE>
<CAPTION>
To be Categorized
as Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------------------------ ---------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Tangible Capital to Tangible Assets $ 75,406 11.09 % $ 10,197 1.50 % N/A N/A
Core Capital to Adjusted Tangible Assets 75,406 11.09 % 20,395 3.00 % $ 33,991 5.00 %
Total Capital to Risk-Weighted Assets 76,017 21.52 % 28,263 8.00 % 35,329 10.00 %
Tier I Capital to Risk-Weighted Assets 75,406 21.34 % N/A N/A 21,198 6.00 %
As of December 31, 1998:
Tangible Capital to Tangible Assets $ 71,654 11.67 % $ 9,211 1.50 % N/A N/A
Core Capital to Adjusted Tangible Assets 71,654 11.67 % 18,423 3.00 % $ 30,705 5.00 %
Total Capital to Risk-Weighted Assets 72,334 22.44 % 25,786 8.00 % 32,233 10.00 %
Tier I Capital to Risk-Weighted Assets 71,654 22.23 % N/A N/A 19,340 6.00 %
</TABLE>
20. PARENT COMPANY ONLY FINANCIAL INFORMATION
The following condensed statements of financial condition, as of December
31, 1999 and 1998, and condensed statements of income and of cash flows
for the years ended December 31, 1999 and 1998, for First Federal
Bancshares of Arkansas, Inc. should be read in conjunction with the
consolidated financial statements and the notes herein.
40
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
(PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF FINANCIAL CONDITION (IN THOUSANDS)
DECEMBER 31, 1999 AND 1998
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS 1999 1998
<S> <C> <C>
Cash and cash equivalents (deposits in Bank) $ 118 $ 85
Loan to Bank subsidiary 2,604 8,573
Accrued interest receivable 4 35
Investment in Bank 75,406 71,654
Other assets 888 893
-------- --------
TOTAL ASSETS $ 79,020 $ 81,240
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities $ 205 $ 217
Stockholders' equity 78,815 81,023
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 79,020 $ 81,240
======== ========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1999 AND 1998
- ---------------------------------------------------------------------------------------------------------------
1999 1998
<S> <C> <C>
INCOME -
Interest income - loan to Bank $ 213 $ 771
------- -------
Total income 213 771
EXPENSES:
Management fees 66 66
Other operating expenses 117 143
------- -------
Total expenses 183 209
------- -------
INCOME BEFORE INCOME TAX PROVISION AND EQUITY
IN UNDISTRIBUTED EARNINGS OF BANK SUBSIDIARY 30 562
INCOME TAX PROVISION 12 215
------- -------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF BANK SUBSIDARY 18 347
EQUITY OF UNDISTRIBUTED EARNINGS OF
BANK SUBSIDIARY 6,262 5,683
------- -------
NET INCOME $ 6,280 $ 6,030
======= =======
</TABLE>
41
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
(PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1999 AND 1998
- ---------------------------------------------------------------------------------------------------------------
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 6,280 $ 6,030
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net income of Bank (6,262) (5,683)
Dividend from subsidiary 2,500 -
Release of ESOP shares 732 980
Stock compensation expense 754 754
Changes in operating assets and liabilities:
Accrued interest receivable 31 47
Other assets 5 (26)
Accrued expenses and other liabilities (12) (181)
------- --------
Net cash provided by operating activities 4,028 1,921
------- --------
INVESTING ACTIVITIES -
Loan to Bank, net of repayments 5,969 9,220
------- --------
Net cash provided by investing activities 5,969 9,220
------- --------
FINANCING ACTIVITIES:
Purchase of treasury stock (8,604) (7,977)
Common stock acquired for employee stock benefit plan (1,817)
Dividends paid (1,360) (1,334)
------- --------
Net cash used in financing activities (9,964) (11,128)
------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 33 13
CASH AND CASH EQUIVALENTS:
Beginning of period 85 72
------- --------
End of period $ 118 $ 85
======= ========
</TABLE>
******
42
<PAGE>
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
FIRST FEDERAL BANK OF ARKANSAS, FA
- -------------------------------------------------------------------------------
DIRECTORS EXECUTIVE OFFICERS
FRANK L. COFFMAN, JR. FRANK L. COFFMAN, JR.
Chairman of the Board and Chairman of the Board and
Chief Executive Officer Chief Executive Officer
LARRY J. BRANDT LARRY J. BRANDT
President and Chief Operating President and Chief Operating
Officer Officer
JOHN P. HAMMERSCHMIDT CAROLYN M. THOMASON
U. S. Congressman, Retired Executive Vice President and Secretary
JAMES D. HEUER TOMMY W. RICHARDSON
Farming and Investments Senior Vice President and Chief Financial
Officer
KENNETH C. SAVELLS SHERRI R. BILLINGS
Registered representative with Senior Vice President and Treasurer
AXA Advisors, LLC
BANKING LOCATIONS
- -------------------------------------------------------------------------------
MAIN OFFICE
200 West Stephenson
Harrison, Arkansas 72601
BRANCH OFFICES
128 West Stephenson Ozark Mall - Highway 62-65 North
Harrison, Arkansas 72601 Harrison, Arkansas 72601
Corner Central & Willow 324 Highway 62-65 Bypass
Harrison, Arkansas 72601 Harrison, Arkansas 72601
210 South Main 1303 West Hudson
Berryville, Arkansas 72616 Rogers, Arkansas 72756
668 Highway 62 East 2030 West Elm
Mountain Home, Arkansas 72653 Rogers, Arkansas 72756
1337 Hwy 62 SW 249 West Main Street
Mountain Home, Arkansas 72653 Farmington, AR 72730
301 Highway 62 West
Yellville, Arkansas 72687
307 North Walton Blvd.
Bentonville, Arkansas 72712
3460 North College
Fayetteville, Arkansas 72703
2025 North Crossover Road
Fayetteville, AR 72703
201 East Henri De Tonti Blvd.
Tontitown, Arkansas 72762
43
<PAGE>
STOCKHOLDER INFORMATION
- -------------------------------------------------------------------------------
First Federal Bancshares of Arkansas, Inc. is a unitary savings and loan
holding company conducting business through its wholly-owned subsidiary, First
Federal Bank of Arkansas, FA. The Bank is a federally-chartered, SAIF-insured
savings institution operating through its main office and eleven full service
branch offices. The Company's and the Bank's principal executive office is
located at 200 West Stephenson, Harrison, Arkansas 72601.
TRANSFER AGENT/REGISTRAR
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
Phone: (800) 368-5948
STOCKHOLDER REQUESTS
Request for annual reports, quarterly reports and related stockholder literature
should be directed to Investor Relations, First Federal Bancshares of Arkansas,
Inc., P. O. BOX 550, Harrison, Arkansas 72602.
Stockholders needing assistance with stock records, transfers or lost
certificates, should contact the company's transfer agent, registrar and
transfer company, at the telephone number listed above.
COMMON STOCK INFORMATION
Shares of the Company's common stock are traded under the symbol "FFBH"
on the Nasdaq National Market System. At March 23, 2000, the Company had
3,905,475 shares of common stock outstanding and had approximately 1,146
stockholders of record. Such holdings do not reflect the number of beneficial
owners of common stock.
The following table sets forth the reported high and low sale prices of
a share of the Company's common stock as reported by Nasdaq for the periods
indicated.
<TABLE>
<CAPTION>
QUARTER YEAR ENDED YEAR ENDED
ENDED DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------------------------------------------------------------------------------
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MARCH 31 $19.00 $15.75 $0.08 $30.25 $22.75 $0.07
JUNE 30 $18.75 $15.75 $0.08 30.13 26.31 0.07
SEPTEMBER 30 $18.88 $16.13 $0.08 26.31 18.50 0.07
DECEMBER 31 $17.81 $15.25 $0.08 21.00 16.00 0.07
</TABLE>
44
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8953
<INT-BEARING-DEPOSITS> 1030
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 189263
<INVESTMENTS-MARKET> 177170
<LOANS> 460730
<ALLOWANCE> 752
<TOTAL-ASSETS> 680719
<DEPOSITS> 507875
<SHORT-TERM> 68000
<LIABILITIES-OTHER> 9235
<LONG-TERM> 15972
0
0
<COMMON> 26217
<OTHER-SE> 52598
<TOTAL-LIABILITIES-AND-EQUITY> 680719
<INTEREST-LOAN> 35537
<INTEREST-INVEST> 11052
<INTEREST-OTHER> 477
<INTEREST-TOTAL> 47066
<INTEREST-DEPOSIT> 24566
<INTEREST-EXPENSE> 27799
<INTEREST-INCOME-NET> 19267
<LOAN-LOSSES> 20
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11594
<INCOME-PRETAX> 9429
<INCOME-PRE-EXTRAORDINARY> 6280
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6280
<EPS-BASIC> 1.57
<EPS-DILUTED> 1.57
<YIELD-ACTUAL> 7.56
<LOANS-NON> 1347
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1347
<ALLOWANCE-OPEN> 771
<CHARGE-OFFS> 67
<RECOVERIES> 28
<ALLOWANCE-CLOSE> 752
<ALLOWANCE-DOMESTIC> 374
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 378
</TABLE>
