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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number 0-28312
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
- ---------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 71-0785261
- --------------------------------------------- ---------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
200 West Stephenson
Harrison, Arkansas 72601
- --------------------------------------------- ---------------------
(Address of principal executive office) (Zip Code)
(870) 741-7641
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: As of
August 9, 2002, there were issued and outstanding 2,829,259 shares of
the Registrant's Common Stock, par value $.01 per share.
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
TABLE OF CONTENTS
Page
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
As of June 30, 2002 (unaudited) and December 31, 2001 1
Consolidated Statements of Income for the three months
and six months ended June 30, 2002 (unaudited) and 2001
(unaudited) 2
Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 2002 (unaudited) 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 (unaudited) and 2001 (unaudited) 4
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Part II. Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
June 30, December 31,
2002 2001
----------- -------------
ASSETS (Unaudited)
Cash and cash equivalents $ 64,932 $ 72,326
Investment securities held-to-
maturity 107,971 100,878
Federal Home Loan Bank stock 4,991 4,918
Loans receivable, net of allowance 482,105 474,494
Accrued interest receivable 4,678 4,420
Real estate acquired in settlement
of loans, net 364 455
Office properties and equipment, net 7,927 7,006
Prepaid expenses and other assets 16,278 15,758
----------- -------------
TOTAL ASSETS $689,246 $680,255
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $575,297 $555,933
Federal Home Loan Bank advances 35,807 47,844
Advance payments by borrowers for
taxes and insurance 531 929
Other liabilities 8,218 4,484
----------- -------------
Total liabilities 619,853 609,190
----------- -------------
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, 2,845,759 and
3,050,959 shares outstanding at
June 30, 2002
and December 31, 2001,
respectively 52 52
Additional paid-in capital 51,707 51,434
Employee stock benefit plans (1,759) (1,967)
Retained earnings-substantially
restricted 63,613 60,736
----------- -------------
113,613 110,255
Treasury stock, at cost, 2,307,992
and 2,102,792 shares at June 30, 2002
and December 31, 2001, respectively (44,220) (39,190)
----------- -------------
Total stockholders' equity 69,393 71,065
----------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $689,246 $680,255
=========== =============
See notes to unaudited consolidated financial statements.
1
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
2002 2001 2002 2001
------------------------------------------
INTEREST INCOME:
Loans receivable $9,170 $10,031 $18,489 $20,099
Investment securities 1,728 2,515 3,341 5,454
Other 244 280 516 406
------ ------- ------- -------
Total interest income 11,142 12,826 22,346 25,959
------ ------- ------- -------
INTEREST EXPENSE:
Deposits 5,073 7,153 10,386 14,431
Other borrowings 635 1,151 1,368 2,560
------ ------- ------- -------
Total interest expense 5,708 8,304 11,754 16,991
------ ------- ------- -------
NET INTEREST INCOME 5,434 4,522 10,592 8,968
PROVISION FOR LOAN LOSSES 373 52 736 61
------ ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,061 4,470 9,856 8,907
------ ------- ------- -------
NONINTEREST INCOME:
Deposit fee income 589 335 1,136 643
Other 670 521 1,410 888
------ ------- ------- -------
Total noninterest income 1,259 856 2,546 1,531
------ ------- ------- -------
NONINTEREST EXPENSES:
Salaries and employee
benefits 2,090 2,430 4,187 4,649
Net occupancy expense 313 285 608 559
Federal insurance
premiums 24 25 49 51
Provision for real estate
losses 12 -- 16 7
Data processing 338 275 656 532
Postage and supplies 112 140 243 280
Other 681 580 1,227 1,053
------ ------- ------- -------
Total noninterest
expenses 3,570 3,735 6,986 7,131
------ ------- ------- -------
INCOME BEFORE INCOME TAXES 2,750 1,591 5,416 3,307
INCOME TAX PROVISION 916 529 1,826 1,101
------ ------- ------- -------
NET INCOME $1,834 $1,062 $3,590 $2,206
====== ======= ======= =======
EARNINGS PER SHARE:
Basic $ 0.66 $ 0.34 $ 1.27 $ 0.69
====== ======= ======= =======
Diluted $ 0.64 $ 0.34 $ 1.23 $ 0.69
====== ======= ======= =======
Cash Dividends Declared $ 0.12 $ 0.11 $ 0.24 $ 0.22
====== ======= ======= =======
See notes to unaudited consolidated financial statements.
2
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(In thousands, except share data)
(Unaudited)
Issued
Common Stock Employee Treasury Stock
----------------- Additional Stock ----------------- Total
Paid-In Benefit Retained Stockholders'
Shares Amount Capital Plans Earnings Shares Amount Equity
---------------------------------------------------------------------------------------------------------
Balance, December
31, 2001 5,153,751 $52 $51,434 $(1,967) $60,736 2,102,792 $(39,190) $71,065
Net income 3,590 3,590
Release of ESOP 290 208 498
Tax effect of stock
compensation plan (21) (21)
Treasury shares
reissued due to
exercise of stock
options 4 (8,400) 158 162
Purchase of treasury
stock, at cost 213,600 (5,188) (5,188)
Dividends paid (713) (713)
---------------------------------------------------------------------------------------------------------
Balance, June 30, 2002 5,153,751 $52 $51,707 $(1,759) $63,613 2,307,992 $(44,220) $69,393
=========================================================================================================
See notes to unaudited consolidated financial statements.
3
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended June 30,
2002 2001
---------- ----------
OPERATING ACTIVITIES:
Net income $3,590 $2,206
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 736 61
Provision for real estate losses 16 7
Deferred tax provision (benefit) (174) 115
Federal Home Loan Bank stock dividends (73) (125)
Federal Home Loan Bank stock redeemed -- 386
Loss on sale of repossessed assets, net 8 6
Originations of loans held for sale (21,778) (25,989)
Proceeds from sales of loans 26,981 23,285
Gain on sale of loans originated to sell (374) (260)
Depreciation 373 349
Accretion of deferred loan fees, net (326) (280)
Release of ESOP shares 498 409
Bank owned life insurance earnings (438) (5)
Stock compensation expense -- 297
Changes in operating assets & liabilities:
Accrued interest receivable (258) 1,218
Prepaid expenses & other assets (102) (84)
Other liabilities (2,358) 757
---------- ----------
Net cash provided by operating activities 6,321 2,353
---------- ----------
INVESTING ACTIVITIES:
Purchases of investment securities
held-to-maturity (40,157) (8,289)
Proceeds from maturities/calls of investment
securities held-to-maturity 38,065 46,700
Purchase of bank owned life insurance -- (10,000)
Loan originations, net of repayments (13,163) 14,392
Proceeds from sales of repossessed assets 364 166
Purchases of office properties and equipment (1,294) (219)
---------- ----------
Net cash provided (used) by
investing activities (16,185) 42,750
---------- ----------
4
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended June 30,
2002 2001
---------- ----------
FINANCING ACTIVITIES:
Net increase in deposits 19,364 8,043
Advances from FHLB 4,000 2,450
Repayment of advances from FHLB (16,037) (35,957)
Net decrease in advance payments
by borrowers for taxes & insurance (398) (266)
Purchase of treasury stock (3,908) (4,983)
Reissued treasury stock 162 --
Dividends paid (713) (740)
---------- ----------
Net cash provided (used) by financing activities 2,470 (31,453)
---------- ----------
Net increase (decrease) in cash and cash equivalents (7,394) 13,650
CASH AND CASH EQUIVALENTS:
Beginning of period 72,326 11,564
---------- ----------
End of period $64,932 $25,214
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $11,975 $17,404
========== ==========
Income taxes $ 1,791 $ 912
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Real estate acquired in settlement of loans $ 448 $ 144
========== ==========
Loans to facilitate sales of real estate owned $ 219 $ --
========== ==========
Investment securities traded, recorded in
investments not yet settled in cash $ 5,000 $ --
========== ==========
Treasury stock traded, recorded in treasury stock
not yet settled in cash $ 1,280 $ --
========== ==========
(Concluded)
See notes to unaudited consolidated financial statements.
5
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation and Principles of Consolidation
First Federal Bancshares of Arkansas, Inc. (the "Corporation") is a
unitary holding company which owns all of the stock of First
Federal Bank of Arkansas, FA (the "Bank"). The Bank provides a
broad line of financial products to individuals and small to medium-
sized businesses. The consolidated financial statements also
include the accounts of the Bank's wholly-owned subsidiary, First
Harrison Service Corporation ("FHSC"), whose activities are
limited.
The accompanying unaudited consolidated financial statements of the
Corporation have been prepared in accordance with instructions to
Form 10-Q. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles
for complete financial statements. However, such information
reflects all adjustments which are, in the opinion of management,
necessary for a fair statement of results for the interim periods.
The accompanying consolidated financial statements include the
accounts of the Corporation and the Bank. All material
intercompany transactions have been eliminated in consolidation.
The results of operations for the six months ended June 30, 2002
are not necessarily indicative of the results to be expected for
the year ending December 31, 2002. The unaudited consolidated
financial statements and notes thereto should be read in
conjunction with the audited financial statements and notes thereto
for the year ended December 31, 2001, contained in the
Corporation's 2001 Annual Report to Stockholders.
Note 2 - Recently Issued Accounting Standards
In April 2002 the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections ("SFAS 145"). SFAS 145
rescinds FASB Statement No.4, Reporting Gains and Losses From
Extinguishment of Debt, and an amendment of that statement, FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-
Fund Requirements. SFAS 145 also rescinds FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers and amends FASB
Statement No. 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and accounting for certain lease modifications which
are similar to sale-leaseback transactions. The requirements of
SFAS 145 related to FASB Statement 4 shall be applied in fiscal
years beginning after May 15, 2002. The provisions in certain
paragraphs of SFAS 145 related to FASB Statement 13 are effective
for transactions occurring after May 15, 2002. All other
provisions of SFAS 145 were effective for financial statements
issued on or after May 15, 2002.
6
In June 2002 the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146
addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task
Force issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS 146 will be
effective for exit or disposal activities initiated after December
31, 2002.
The adoption of the required provisions of SFAS 145 did not have a
material effect on the financial positions, results of operations,
or cash flows of the Corporation. Management does not believe that
the adoption of the remaining provisions of SFAS 145 and of SFAS
146 will have a material effect on the financial statements of the
Corporation.
Note 3 - Earnings per Share
The weighted average number of common shares used to calculate
earnings per share for the periods ended June 30, 2002 and 2001
were as follows:
Three months ended Six months ended
June 30, June 30,
-----------------------------------------------------
2002 2001 2002 2001
-----------------------------------------------------
Basic weighted -
average shares 2,776,650 3,146,277 2,817,594 3,200,124
Effect of dilutive
securities 106,737 11,383 96,367 10,633
Diluted weighted - --------- --------- --------- ---------
average shares 2,883,387 3,157,660 2,913,961 3,210,757
Note 4 - Declaration of Dividends
At their meeting on May 20, 2002, the Board of Directors declared a
$.12 (twelve cent) per share cash dividend on the common stock of
the Corporation. The cash dividend was paid on June 21, 2002 to
the stockholders of record at the close of business on June 6,
2002.
Note 5 - Investment Securities
Investment securities consisted of the following (in thousands):
June 30, 2002
----------------------
Amortized Fair
Cost Value
---------- ----------
Held-to-Maturity
Municipal Securities $ 5,625 $ 5,732
U. S. Government and Agency
obligations 102,346 103,024
---------- ----------
$107,971 $108,756
========== ==========
7
Note 6 - Loans Receivable
Loans receivable consisted of the following (in thousands):
June 30, 2002 December 31, 2001
--------------- -------------------
First mortgage loans:
One- to four- family residences $308,728 $330,844
Other properties 65,992 51,282
Construction 33,983 24,842
Less:
Unearned discounts (146) (216)
Undisbursed loan funds (14,687) (10,144)
Deferred loan fees, net (1,777) (2,127)
-------- --------
Total first mortgage loans 392,093 394,481
-------- --------
Consumer and other loans:
Commercial 26,292 23,451
Automobile 21,262 20,506
Consumer 7,521 7,083
Home equity and second mortgage 31,040 24,933
Savings 1,600 1,464
Other 3,500 3,234
Deferred loan costs 255 265
-------- --------
Total consumer and other loans 91,470 80,936
-------- --------
Allowance for loan losses (1,458) (923)
-------- --------
Loans receivable, net $482,105 $474,494
======== ========
Non-accrual loans at June 30, 2002 were $3.6 million. All loans 90
days or more past due are recorded as non-accrual.
A summary of the activity in the allowance for loan losses is as
follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------
2002 2001 2002 2001
---------------------------------------
Balance at beginning of period $1,149 $602 $923 $691
Provisions for estimated losses 373 52 736 61
Recoveries 18 6 38 10
Other 35 -- 35 --
Losses charged off (117) (38) (274) (140)
------ ---- ------ ----
Balance at end of period $1,458 $622 $1,458 $622
====== ==== ====== ====
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
At June 30, 2002, the Corporation's assets amounted to $689.2
million as compared to $680.3 million at December 31, 2001. The
$9.0 million or 1.3% increase was primarily due to an increase of
$7.1 million or 7.0% in investment securities held-to-maturity and
to an increase of $7.6 million or 1.6% in net loans receivable.
Such increases were partially offset by a $7.4 million or 10.2%
decrease in cash and cash equivalents. Loan originations for the
six month period ended June 30, 2002 consisted of $58.2 million in
one- to four- family residential loans, $2.3 million in multi-
family residential loans, $23.6 million in commercial loans, $21.6
million in construction loans and $27.9 million in consumer
installment loans, of which $14.3 million consisted of home equity
loans and $7.8 million consisted of automobile loans. At June 30,
2002, the Bank had outstanding loan commitments of $4.9 million,
unused lines of credit of $10.8 million, and the undisbursed
portion of construction loans of $14.7 million. Liabilities
increased $10.7 million or 1.8% to $619.9 million at June 30, 2002
compared to $609.2 million at December 31, 2001. The increase in
liabilities was primarily due to an increase of $19.4 million or
3.5% in deposits, which was partially offset by a decrease of $12.0
million or 25.2% in advances from the Federal Home Loan Bank of
Dallas ("FHLB of Dallas"). Stockholders' equity amounted to $69.4
million or 10.1% of total assets at June 30, 2002 compared to $71.1
million or 10.4% of total assets at December 31, 2001. The
decrease in stockholders' equity was primarily due to the purchase
of 213,600 shares of treasury stock totaling $5.2 million in
connection with the Corporation's stock repurchase plan and to a
lesser extent due to the payment of cash dividends aggregating
$713,000. Such decrease during the six months ended June 30, 2002
was partially offset by net income of $3.6 million resulting from
continued profitable operations.
Non-performing assets, consisting of non-accruing loans and
repossessed assets, amounted to $4.0 million or .58% of total
assets at June 30, 2002, compared to $3.6 million or .53% of total
assets at December 31, 2001. Such increase was primarily due to
an $850,000 non-accruing loan collateralized by a commercial real
estate property. The allowance for loan losses amounted to $1.5
million at June 30, 2002 or 40.5% of nonperforming loans and .29%
of total loans. The allowance for loan losses amounted to $923,000
at December 31, 2001 or 29.7% of nonperforming loans and .19% of
total loans. The allowance for loan losses includes $653,000 and
$184,000 in allowances allocated to specific loans as of June 30,
2002 and December 31, 2001, respectively. The specific loan
allowance at June 30, 2002 included a $450,000 allocation for the
$850,000 commercial real estate loan referenced above. Subsequent
to June 30, 2002 this loan was settled, resulting in the charge-off
of $450,000 from the loan loss allowance.
Results of Operations for the Three Months Ended June 30, 2002 and 2001
General. The Corporation reported net income of $1.8 million
during the three months ended June 30, 2002 compared to net income
of $1.1 million for the same period in 2001. The increase of
$772,000 in net income in the 2002 period compared to the same
period in 2001 was primarily due to
9
an increase in net interest income, an increase in noninterest income and a
decrease in noninterest expenses, which were offset by an increase in
provision for loan losses and an increase in income tax expense. Net
interest income increased from $4.5 million for the three months
ended June 30, 2001 to $5.4 million for the same period in 2002.
Net interest income is determined by the Corporation's interest
rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing
liabilities) and the relative amounts of interest-earning assets
and interest-bearing liabilities. The Corporation's interest rate
spread and net interest margin increased to 3.13% and 3.35%,
respectively, for the 2002 three month period compared to 2.22% and
2.70%, respectively, for the 2001 three month period. The
increases in the interest rate spread and net interest margin were
primarily the result of declining interest rates and the Bank's
liability-sensitive position. The decline in interest rates
resulted in a 170 basis point reduction in the cost of interest-
bearing liabilities of 3.74% for the three months ended June 30,
2002 compared to 5.44% for the three months ended June 30, 2001.
These and other significant fluctuations in operations are
discussed below.
Interest Income. Interest income amounted to $11.1 million
for the three months ended June 30, 2002 compared to $12.8 million
for the same period in 2001. The decrease of $1.7 million or 13.1%
was primarily due to a decrease in the average balance of
investment securities and net loans receivable and a decrease in
the average yield earned on investment securities, net loans
receivable, and other interest earning assets, primarily overnight
funds, which were partially offset by an increase in the average
balance of other interest earning assets, primarily overnight
funds.
Interest Expense. Interest expense decreased $2.6 million or
31.3% to $5.7 million for the three months ended June 30, 2002
compared to $8.3 million for the same period in 2001. Such
decrease was primarily due to a decrease in the interest rates paid
on deposits and a decrease in the average balance of FHLB of Dallas
advances. Such decreases were partially offset by an increase in
the average balance of deposits.
Provision for Loan Losses. Provision for loan losses amounted
to $373,000 for the three months ended June 30, 2002 compared to
$52,000 for the same period in 2001. Provisions for loan losses
include charges to reduce the recorded balance of 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 2002 three month period compared to the same period
in 2001 was primarily due to economic conditions, an increase in
commercial and consumer loans which are typically considered to
involve a higher degree of risk than one- to four-family loans and
the recognition of a loss on a single commercial real estate loan.
This evaluation includes methodology that considers the
possibility of loss on all loans. Individual loans that exhibit
characteristics indicating a greater possibility of non-performance
are considered for individual evaluation of collateral and a
comparison of the fair value of such collateral to the loan's
carrying value. The methodology also considers loans with common
characteristics, referred to as homogeneous loans, by applying a
historical loss ratio to these loans. While the Bank has historical
information on certain types of loans, other types are relatively new
within the
10
portfolio. With the absence of historically developed loss ratios
for these loans types, management provides for losses based on
consideration of factors believed to be indicative of commensurate risk.
As the commercial and consumer loans portfolios have increased, the
provision for losses using the methodology above has caused increases in
the provision and allowance. Furthermore, during the quarter ended
June 30, 2002, the Bank provided specifically for a loss of
$245,000 related to a commercial real estate loan.
Noninterest Income. Noninterest income increased $403,000 or
47.1% to $1.3 million for the three months ended June 30, 2002
compared to $856,000 for the three months ended June 30, 2001. The
increase in noninterest income for the three-month comparable
periods ended June 30 was primarily due to an increase of $254,000
or 75.8% from $335,000 to $589,000 in deposit fee income resulting
from service charge income from the overdraft protection program
that was introduced by the Bank in the fourth quarter of 2001, and
an increase of $217,000 from $5,000 to $222,000 in earnings from
bank owned life insurance purchased in the second and third
quarters of 2001. Such increases were partially offset by a
decrease of $53,000 from $190,000 to $137,000 in the gain on the
sale of mortgage loans in the secondary mortgage market, a decrease
of $20,000 from $44,000 to $24,000 in additional loan fees related
to loan sales, and a decrease of $27,000 from $57,000 to $30,000 in
loan related insurance commissions.
Noninterest Expense. Noninterest expense decreased $165,000 or
4.4% between the 2002 and 2001 three month periods ended June 30.
Such decrease was primarily due to a decrease in salaries and
employee benefits which was partially offset by an increase in data
processing expense. Salary and employee benefits decreased
$340,000 or 14.0% to $2.1 million for the three month period ended
June 30, 2002 compared to $2.4 million for the same period in 2001.
Such decrease was primarily due to a nonrecurring expense of
$352,000 for a death benefit payable in the second quarter of 2001
pursuant to the employment contract of the Bank's Chief Executive
Officer and Chairman of the Board and to a decline of $118,000 in
the management recognition and retention plan expense as a result
of the awarded shares being fully vested in May 2001. Such decrease
in salaries and employee benefits was partially offset by an
increase in compensation expense due to an increase in personnel as
well as salary and merit increases and an increase in the employee
stock ownership plan expense as a result of the increase in the
average stock price of the Corporation's common stock. Data
processing expenses increased $63,000 or 22.9% to $338,000 for the
three month period ended June 30, 2002 compared to $275,000 for the
same period in 2001. Such increase in data processing expense was
due to growth and additional product and service offerings.
Income Taxes. Income taxes amounted to $916,000 and $529,000
for the three months ended June 30, 2002 and 2001, respectively,
resulting in effective tax rates of 33.3% and 33.2%, respectively.
Results of Operations for the Six Months Ended June 30, 2002 and 2001
General. The Corporation reported net income of $3.6 million
during the six months ended June 30, 2002 compared to net income of
$2.2 million for the same period in 2001. The increase of $1.4
million in net income in the 2002 period compared to the same
period in 2001 was primarily due to an increase in net interest
income, an increase in noninterest income and a decrease in
11
noninterest expense, which were offset by an increase in provision
for loan losses and an increase in income tax expense. Net
interest income increased $1.6 million from $9.0 million for the
six months ended June 30, 2001 to $10.6 million for the same period
in 2002. The Corporation's interest rate spread and net interest
margin increased to 3.04% and 3.28%, respectively, for the 2002 six
month period compared to 2.17% and 2.66%, respectively, for the
2001 six month period. The increases in the interest rate spread
and net interest margin were primarily the result of declining
interest rates and the Bank's liability-sensitive position. The
decline in interest rates resulted in a 165 basis point reduction
in the cost of interest-bearing liabilities of 3.87% for six months
ended June 30, 2002 compared to 5.52% for the six months ended June
30, 2001.
Interest Income. Interest income amounted to $22.4 million
for the six months ended June 30, 2002 compared to $26.0 million
for the same period in 2001. The decrease of $3.6 million was
primarily due to a decrease in the average balances of net loans
receivable and investment securities, and a decrease in the average
yield earned on net loans receivable, investment securities and
other interest earning assets, primarily overnight funds, which
were partially offset by an increase in the average balance of
other interest earning assets, primarily overnight funds.
Interest Expense. Interest expense decreased $5.2 million or
30.8% to $11.8 million for the six months ended June 30, 2002
compared to $17.0 million for the same period in 2001. Such
decrease was primarily due to a decrease in the interest rates paid
on deposits and FHLB of Dallas advances, and a decrease in the
average balance of such advances. Such decrease was partially
offset by an increase in the average balance of deposits.
Provision for Loan Losses. Provision for loan losses amounted
to $736,000 for the six months ended June 30, 2002 compared to
$61,000 for the same period in 2001. Provisions for loan losses
include charges to reduce the recorded balance of 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 2002 six month period compared to the same period
in 2001 was primarily due to economic conditions, an increase in
commercial and consumer loans which are typically considered to
involve a higher degree of risk than one- to four-family loans and
the recognition of a loss on a single commercial real estate loan.
This evaluation includes methodology that considers the
possibility of loss on all loans. Individual loans that exhibit
characteristics indicating a greater possibility of non-performance
are considered for individual evaluation of collateral and a
comparison of the fair value of such collateral to the loan's
carrying value. The methodology also considers loans with common
characteristics, referred to as homogeneous loans, by applying a
historical loss ratio to these loans. While the Bank has
historical information on certain types of loans, other types are
relatively new within the portfolio. With the absence of historically
developed loss ratios for these loans types, management provides for
losses based on consideration of factors believed to be indicative of
commensurate risk. As the commercial and consumer loans portfolios have
increased, the provision for losses using the methodology above has
caused increases in the provision and allowance. Furthermore, during the
12
six months ended June 30, 2002, the Bank provided specifically for a
loss of $415,000, related to a commercial real estate loan.
Noninterest Income. Noninterest income increased $1.0 million
or 66.3% to $2.5 million for the six months ended June 30, 2002
compared to $1.5 million for the six months ended June 30, 2001.
The increase in noninterest income for the six month comparable
periods ended June 30 was primarily due to an increase of $493,000
or 76.7% from $643,000 to $1.1 million in deposit fee income
resulting from service charge income from the overdraft protection
program that was introduced by the Bank in the fourth quarter of
2001, an increase of $433,000 from $5,000 to $438,000 in earnings
from bank owned life insurance purchased in the second and third
quarters of 2001, and an increase of $114,000 from $260,000 to
$374,000 in the gain on the sale of mortgage loans in the secondary
mortgage market. Such increases were partially offset by a
decrease of $48,000 from $97,000 to $49,000 in loan related
insurance commissions.
Noninterest Expense. Noninterest expense decreased $145,000 or
2.0% between the 2002 and 2001 six month periods ended June 30.
Such decrease was primarily due to a decrease in salaries and
employee benefits which was partially offset by an increase in data
processing expense. Salary and employee benefits decreased
$462,000 or 9.9% to $4.2 million for the six month period ended
June 30, 2002 compared to $4.7 million for the same period in 2001.
Such decrease was primarily due to a nonrecurring expense of
$352,000 for a death benefit payable in the second quarter of 2001
pursuant to the employment contract of the Bank's Chief Executive
Officer and Chairman of the Board and to a decline of $298,000 in
the management recognition and retention plan expense as a result
of the awarded shares being fully vested in May 2001. Such decrease
in salaries and employee benefits were partially offset from
increases in compensation expense due to an increase in personnel
as well as salary and merit increases and an increase in the
employee stock ownership plan expense as a result of the increase
in the average stock price of the Corporation's common stock. Data
processing expenses increased $124,000 or 23.3% to $656,000 for the
six month period ended June 30, 2002 compared to $532,000 for the
same period in 2001. Such increase in data processing expense was
due to growth and additional product and service offerings.
Income Taxes. Income taxes amounted to $1.8 million and $1.1
million for the six months ended June 30, 2002 and 2001,
respectively, resulting in effective tax rates of 33.7% and 33.3%,
respectively.
Liquidity and Capital Resources
The Bank's liquidity, represented by cash and cash equivalents
and eligible investment securities, is a product of its operating,
investing and financing activities. The Bank's primary sources of
funds are deposits, collections on outstanding loans, maturities
and calls of investment securities and other short-term investments
and funds provided from operations. While scheduled loan amortization
and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions and competition. The Bank manages the pricing of its
deposits to maintain a steady deposit balance. In addition, the Bank
invests excess funds in overnight deposits and other short-term
interest-earning assets which provide liquidity to meet lending
requirements.
13
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 June 30,
2002, the Bank had outstanding advances from the FHLB of Dallas of
$35.8 million. Such advances were used in the Bank's normal operating
and investing activities.
The Bank began construction in May 2002 of a new corporate and
full-service branch office in north Harrison. Construction is
expected be completed in the spring of 2003. Capital expenditures
are estimated to be $6 million with disbursements occurring
throughout the period of construction.
As of June 30, 2002, the Bank's regulatory capital was in
excess of all applicable regulatory requirements. At June 30,
2002, the Bank's tangible, core and risk-based capital ratios
amounted to 10.2%, 10.2% and 17.5%, respectively, compared to
applicable requirements of 1.5%, 4.0% and 8.0%, respectively.
Impact of Inflation and Changing Prices
The financial statements and related financial data presented
herein have been prepared in accordance with instructions to Form
10-Q, which require the measurement of financial position and
operating results in terms of historical dollars, without
considering changes in relative purchasing power over time due to
inflation.
Unlike most industrial companies, virtually all of the Bank's
assets and liabilities are monetary in nature. As a result,
interest rates generally have a more significant impact on a
financial institution's performance than does the effect of
inflation.
Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements and
information relating to the Corporation that are based on the
beliefs of management as well as assumptions made by and
information currently available to management. In addition, in
those and other portions of this document, the words "anticipate,"
"believe," "estimate," "except," "intend," "should" and similar
expressions, or the negative thereof, as they relate to the
Corporation or the Corporation's management, are intended to
identify forward-looking statements. Such statements reflect the
current views of the Corporation with respect to future looking
events and are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties
materialize or should underlying assumptions prove incorrect,
actual results may vary from those described herein as anticipated,
believed, estimated, expected or intended. The Corporation does
not intend to update these forward-looking statements.
14
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
For a discussion of the Corporation's asset and liability
management policies as well as the potential impact of interest
rate changes upon the market value of the Bank's portfolio equity,
see "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Corporation's 2001 Annual Report
to Stockholders. There has been no material change in the
Corporation's asset and liability position or the market value of
the Bank's portfolio equity since December 31, 2001.
15
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
Part II
Item 1. Legal Proceedings
Neither the Corporation nor the Bank is involved in
any pending legal proceedings other than non-material
legal proceedings occurring in the ordinary course of
business.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On April 25, 2002, the Corporation held an annual
meeting of stockholders for the following purposes:
(1) To elect two directors for a term of three years; and
(2) To ratify the appointment by the Board of Directors of
Deloitte and Touche LLP as the Corporation's independent
auditors for the year ending December 31, 2002.
The results of the voting are set forth below:
Proposal One (Election of Directors):
AGAINST/
NAME FOR WITHHELD
James D. Heuer 2,587,623 10,807
Kenneth C. Savells 2,587,923 10,507
Proposal Two (Ratification of Auditors):
FOR AGAINST ABSTAIN
2,585,139 4,300 8,991
16
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 99.1 - Certification of Chief Executive Officer,
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. 1350)
Exhibit 99.2 - Certification of Chief Financial Officer,
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. 1350)
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
Date: August 14, 2002 By: /s/Larry J. Brandt
----------------------------
Larry J. Brandt
President/CEO
Date: August 14, 2002 By: /s/Sherri R. Billings
---------------------------
Sherri R. Billings
EVP/CFO
18