UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

	ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the quarterly period ended March 31, 2005
OR
	o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the transition period from                   to

 

Commission File Number 0-28312

 

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

(Exact name of registrant as specified in its charter)

 

Texas		71-0785261
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
1401 Highway 62-65 North 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 ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ý  No o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  As of April 15, 2005, there were issued and outstanding 5,084,408 shares of the Registrant’s Common Stock, par value $.01 per share.

 

 

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

 

TABLE OF CONTENTS

 

Part I.	Financial Information
Item 1.	Consolidated Financial Statements
	Consolidated Statements of Financial Condition as of March 31, 2005 and December 31, 2004 (unaudited)
	Consolidated Statements of Income for the three months ended March 31, 2005 and 2004 (unaudited)
	Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2005 (unaudited)
	Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004 (unaudited)
	Notes to Unaudited Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
Part II.	Other Information
Item 1.	Legal Proceedings
Item 2.	Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits
Signatures
Exhibits
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Section 906 Certification of the CEO
32.2	Section 906 Certification of the CFO

 

 

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands, except share data)

(Unaudited)

 

		March 31,			December 31,
		2005			2004
ASSETS
Cash and cash equivalents		$	13,097		$	16,003
Investment securities held to maturity		55,445			56,660
Federal Home Loan Bank stock		5,958			4,876
Loans receivable, net		666,140			634,217
Accrued interest receivable		5,074			4,427
Real estate acquired in settlement of loans, net		458			563
Office properties and equipment, net		16,011			15,295
Cash surrender value of life insurance		18,094			17,897
Prepaid expenses and other assets		1,756			1,727
TOTAL ASSETS		$	782,033		$	751,665
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits		$	588,758		$	582,424
Federal Home Loan Bank advances		113,889			89,756
Advance payments by borrowers for taxes and insurance		938			757
Other liabilities		2,880			3,427
Total liabilities		706,465			676,364
STOCKHOLDERS’ EQUITY:
Preferred stock, no par value, 5,000,000 shares authorized, none issued
Common stock, $.01 par value, 20,000,000 shares authorized, 10,307,502 shares issued, 5,084,408 and 5,094,020 shares outstanding at March 31, 2005 and December 31, 2004, respectively		103			103
Additional paid-in capital		55,124			54,427
Employee stock benefit plans		(472		)	(582		)
Retained earnings-substantially restricted		79,615			78,261
		134,370			132,209
Treasury stock, at cost, 5,223,094 and 5,213,482 shares at March 31, 2005 and December 31, 2004, respectively		(58,802		)	(56,908		)
Total stockholders’ equity		75,568			75,301
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	782,033		$	751,665

 

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
		March 31,			March 31,
		2005			2004
INTEREST INCOME:
Loans receivable		$	9,884		$	8,329
Investment securities:
Taxable		518			794
Nontaxable		180			166
Other		13			91
Total interest income		10,595			9,380
INTEREST EXPENSE:
Deposits		3,283			3,187
Other borrowings		844			319
Total interest expense		4,127			3,506
NET INTEREST INCOME		6,468			5,874
PROVISION FOR LOAN LOSSES		249			259
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		6,219			5,615
NONINTEREST INCOME:
Deposit fee income		1,008			770
Earnings on life insurance policies		197			211
Gain on sale of loans		134			127
Other		231			324
Total noninterest income		1,570			1,432
NONINTEREST EXPENSES:
Salaries and employee benefits		3,003			2,679
Net occupancy expense		499			492
Data processing		341			408
Professional fees		114			108
Advertising and public relations		241			128
Postage and supplies		190			179
Other		508			480
Total noninterest expenses		4,896			4,474
INCOME BEFORE INCOME TAXES		2,893			2,573
INCOME TAX PROVISION		929			813
NET INCOME		$	1,964		$	1,760
EARNINGS PER SHARE:
Basic		$	0.39		$	0.34
Diluted		$	0.37		$	0.32
Cash Dividends Declared		$	0.12		$	0.10

 

See notes to unaudited consolidated financial statements.

 

2

 

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2005

(In thousands, except share data)

(Unaudited)

 

		Issued Common Stock					Additional Paid-In			Employee Stock Benefit			Retained
		Shares		Amount			Capital			Plans			Earnings
Balance, December 31, 2004		10,307,502		$	103		$	54,427		$	(582	)	$	78,261
Net income													1,964
Release of ESOP shares							389			104
Tax effect of stock compensation plan							481
Treasury shares reissued due to exercise of stock options							(173		)
Purchase of treasury stock, at cost
MRP shares										6
Dividends paid													(610		)
Balance, March 31, 2005		10,307,502		$	103		$	55,124		$	(472	)	$	79,615

 

		Treasury Stock					Total Stockholders’
		Shares		Amount			Equity
Balance, December 31, 2004		5,213,482		$	(56,908	)	$	75,301
Net income							1,964
Release of ESOP shares							493
Tax effect of stock compensation plan							481
Treasury shares reissued due to exercise of stock options		(126,388	)	1,397			1,224
Purchase of treasury stock, at cost		136,000		(3,291		)	(3,291		)
MRP shares							6
Dividends paid							(610		)
Balance, March 31, 2005		5,223,094		$	(58,802	)	$	75,568

 

See notes to unaudited consolidated financial statements.

 

3

 

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

		Three Months Ended March 31,
		2005			2004
OPERATING ACTIVITIES:
Net income		$	1,964		$	1,760
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		249			259
Provision for real estate losses		24			—
Deferred tax provision (benefit)		(50		)	43
Accretion of discounts on investment securities, net		(3		)	(33		)
Federal Home Loan Bank stock dividends		(39		)	(14		)
Gain on disposition of office properties and equipment		—			(34		)
Gain on sale of repossessed assets, net		(5		)	(6		)
Originations of loans held for sale		(9,446		)	(10,604		)
Proceeds from sales of loans		9,742			10,613
Gain on sale of loans originated to sell		(134		)	(127		)
Depreciation		294			298
Amortization of deferred loan fees, net		38			3
Release of ESOP shares		493			429
MRP compensation expense		6			7
Earnings on life insurance policies		(197		)	(211		)
Changes in operating assets and liabilities:
Accrued interest receivable		(647		)	(235		)
Prepaid expenses and other assets		(13		)	323
Other liabilities		(16		)	298
Net cash provided by operating activities		2,260			2,769
INVESTING ACTIVITIES:
Purchases of investment securities held to maturity		(100		)	(63,878		)
Proceeds from maturities/calls of investment securities held to maturity		1,318			55,879
Purchase of FHLB stock		(1,043		)	—
Loan participations sold		1,787			2,709
Loan originations, net of repayments		(34,231		)	(24,404		)
Proceeds from sales of repossessed assets		142			215
Proceeds from sales of office properties and equipment		—			546
Purchases of office properties and equipment		(1,010		)	(958		)
Net cash used in investing activities		(33,137		)	(29,891		)
FINANCING ACTIVITIES:
Net increase in deposits		6,334			7,267
Advances from FHLB		45,900			2,033
Repayment of advances from FHLB		(21,767		)	(4,105		)
Net increase in advance payments by borrowers for taxes and insurance		181			162
Purchase of treasury stock		(3,291		)	(2,045		)
Reissued treasury stock		1,224			714
Dividends paid		(610		)	(532		)
Net cash provided by financing activities		27,971			3,494
Net decrease in cash and cash equivalents		(2,906		)	(23,628		)

 

(Continued)

 

4

 

		Three Months Ended March 31,
		2005			2004
CASH AND CASH EQUIVALENTS:
Beginning of period		$	16,003		$	56,201
End of period		$	13,097		$	32,573
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest		$	4,023		$	3,489
Income taxes		$	2		$	168
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Real estate and other assets acquired in settlement of loans		$	72		$	151
Loans to facilitate sales of real estate owned		$	—		$	197
Investment securities traded, recorded in investments not yet settled in cash		$	—		$	250

 

See notes to unaudited consolidated financial statements.

 

(Concluded)

 

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 “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 in Northwest and Northcentral Arkansas.  The unaudited consolidated financial statements also include the accounts of the Bank’s wholly-owned subsidiary, First Harrison Service Corporation (“FHSC”), which is inactive.

 

The accompanying unaudited consolidated financial statements of the Company 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 unaudited consolidated financial statements include the accounts of the Company and the Bank.  All material intercompany transactions have been eliminated in consolidation.

 

The results of operations for the three months ended March 31, 2005, are not necessarily indicative of the results to be expected for the year ending December 31, 2005.  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, 2004, contained in the Company’s 2004 Annual Report to Stockholders.

 

Certain amounts in the March 31, 2004, unaudited consolidated financial statements have been reclassified to conform to the classifications adopted for reporting in 2005.

 

Note 2 - Earnings per Share

 

The weighted average number of common shares used to calculate earnings per share for the periods ended March 31, 2005 and 2004 were as follows:

 

		Three months ended March 31,
		2005		2004
Basic weighted - average shares		4,987,228		5,146,747
Effect of dilutive securities		280,357		345,290
Diluted weighted - average shares		5,267,585		5,492,037

 

6

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

CRITICAL ACCOUNTING POLICIES

 

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments.  In particular, the methodology for the determination of our allowance for loan losses, due to the judgments, estimates and assumptions inherent in that policy, is critical to preparation of our financial statements.  This policy and the judgments, estimates and assumptions are described in greater detail in subsequent sections of Management’s Discussion and Analysis and in the notes to the unaudited financial statements included herein.  We believe that the judgments, estimates and assumptions used in the preparation of our financial statements are appropriate given the factual circumstances at the time.  However, given the sensitivity of our financial statements to this critical accounting policy, the use of other judgments, estimates and assumptions could result in material differences in our financial condition or results of operations.

 

In estimating the amount of credit losses inherent in our loan portfolio, various judgments and assumptions are made.  For example, when assessing the condition of the overall economic environment, assumptions are made regarding future market conditions and their impact on the loan portfolio.  In the event the national economy were to sustain a prolonged downturn, the loss factors applied to our portfolios may need to be revised, which may significantly impact the measurement of the allowance for loan losses.  For impaired loans that are collateral-dependent, the estimated fair value of the collateral may deviate significantly from the proceeds received when the collateral is sold.

 

CHANGES IN FINANCIAL CONDITION

 

Changes in financial condition between March 31, 2005 and December 31, 2004 are presented in the following table (dollars in thousands).  Material changes between periods will be discussed in the sections which follow the table.

 

		March 31, 2005			December 31, 2004			Increase (Decrease)			Percentage Change
ASSETS
Cash and cash equivalents		$	13,097		$	16,003		$	(2,906	)	(18.2	)%
Investment securities held to maturity		55,445			56,660			(1,215		)	(2.1	)%
Loans receivable, net		666,140			634,217			31,923			5.0	%
Federal Home Loan Bank stock		5,958			4,876			1,082			22.2	%
Prepaid expenses and other assets		41,393			39,909			1,484			3.7	%
TOTAL		$	782,033		$	751,665		$	30,368		4.0	%
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits		$	588,758		$	582,424		$	6,334		1.1	%
Other borrowings		113,889			89,756			24,133			26.9	%
Other liabilities		3,818			4,184			(366		)	(8.7	)%
Total liabilities		706,465			676,364			30,101			4.4	%
STOCKHOLDERS’ EQUITY		75,568			75,301			267			0.4	%
TOTAL		$	782,033		$	751,665		$	30,368		4.0	%
BOOK VALUE PER SHARE		$	14.86		$	14.78
EQUITY TO ASSETS		9.7		%	10.0		%

 

7

 

Loans Receivable.  Changes in loan composition between March 31, 2005 and December 31, 2004 are presented in the following table (dollars in thousands).

 

		March 31, 2005			December 31, 2004			Increase (Decrease)			Percentage Change
One- to four-family residential		$	282,947		$	282,144		$	803
Multi-family residential		14,429			9,454			4,975
Commercial real estate		150,348			145,909			4,439
Construction		182,977			159,111			23,866
Total first mortgage loans		630,701			596,618			34,083			5.7	%
Commercial		29,679			27,545			2,134			7.7	%
Home equity and second mortgage		48,089			45,256			2,833
Automobile		18,399			19,101			(702		)
Other		11,323			10,685			638
Total consumer		77,811			75,042			2,769			3.7	%
Total loans receivable		738,191			699,205			38,986			5.6	%
Less:
Undisbursed loan funds		(69,732		)	(62,661		)	(7,071		)
Unearned discounts and net deferred loan fees		(369		)	(481		)	112
Allowance for loan losses		(1,950		)	(1,846		)	(104		)
Total loans receivable, net		$	666,140		$	634,217		$	31,923		5.0	%

 

The Bank continued to experience demand for multi-family loans, commercial real estate loans, construction loans, and commercial loans.  Generally, the Bank’s construction loans were for the purpose of constructing single-family residential properties.  The interest rate environment and robust economy of our market area provided continued demand and opportunity for our other loan products as well.  In recent years, the Bank has placed an increased emphasis on commercial real estate lending, construction lending, and commercial lending to diversify its loan portfolio, take advantage of market opportunities in these types of loans, and help the Bank transition to a more full-service community bank, as well as to provide opportunities to cross-sell its other banking products.

 

8

 

Asset Quality.  The following table sets forth the amounts and categories of the Bank’s nonperforming assets at the dates indicated.

 

		March 31, 2005			December 31, 2004
		(Dollars in Thousands)
Nonaccrual loans:
One- to four-family residential		$	2,216		$	2,619
Construction loans		639			634
Commercial real estate		574			—
Commercial loans		573			186
Consumer loans		603			723
Total nonaccrual loans		4,605			4,162
Restructured loans		3,746			3,790
Real estate owned		458			563
Nonperforming assets		$	8,809		$	8,515
Total nonaccrual and restructured loans as a percentage of total loans receivable		1.13		%	1.14		%
Total nonperforming assets as a percentage of total assets		1.13		%	1.13		%

 

Restructured loans reported at March 31, 2005 and December 31, 2004, were comprised of a group of loans to related borrowers.  At those dates the loans were not over 90 days past due.

 

Allowance for Loan Losses.  A summary of the activity in the allowance for loan losses is as follows (in thousands):

 

		Three Months Ended March 31,
		2005			2004
Balance at beginning of period		$	1,846		$	1,621
Provisions for estimated losses		249			259
Recoveries		25			24
Losses charged off		(170		)	(201		)
Balance at end of period		$	1,950		$	1,703

 

Changes in the composition of the allowance for loan losses between March 31, 2005 and December 31, 2004 are presented in the following table (in thousands):

 

		March 31, 2005			December 31, 2004			Increase (Decrease)
General		$	1,558		$	1,476		$	82
Specific		306			318			(12		)
Unallocated		86			52			34
		$	1,950		$	1,846		$	104

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as conditions change and more information becomes available.

 

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as loss, doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market

 

9

 

price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based primarily on historical loss experience. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

 

The Bank reviews its non-homogeneous loans for impairment on a quarterly basis.  The Bank considers commercial real estate, construction, multi-family, and commercial loans to be non-homogeneous loans.  A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

 

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures.  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) collateralized 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, valuing these loans, and then applying a loss factor to the remaining pool balance based on several factors, including past loss experience, inherent risks, and economic conditions in the primary market areas.

 

In estimating the amount of credit losses inherent in our loan portfolio, various judgments and assumptions are made.  For example, when assessing the condition of the overall economic environment, assumptions are made regarding future market conditions and their impact on the loan portfolio.  In the event the national economy were to sustain a prolonged downturn, the loss factors applied to our portfolios may need to be revised, which may significantly impact the measurement of the allowance for loan losses.  For impaired loans that are collateral-dependent, the estimated fair value of the collateral may deviate significantly from the proceeds received when the collateral is sold.

 

Although we consider the allowance for loan losses of $2.0 million appropriate and adequate to cover losses inherent in our loan portfolio at March 31, 2005, no assurance can be given that we will not sustain loan losses that are significantly different from the amount provided, or that subsequent evaluations of the loan portfolio, in light of factors then prevailing, would not result in a significant change in the allowance for loan losses.

 

10

 

Investment Securities.  Changes in the composition of investment securities held to maturity between March 31, 2005 and December 31, 2004 are presented in the following table (in thousands).

 

		March 31, 2005			December 31, 2004			Increase (Decrease)
Certificates of deposit		$	2,000		$	3,000		$	(1,000	)
U.S. Government and agency obligations		37,756			37,821			(65		)
Municipal securities		15,689			15,839			(150		)
Total		$	55,445		$	56,660		$	(1,215	)

 

During the first quarter of 2005, investment securities totaling $100,000 were purchased and $1.3 million matured or were called.  The decrease in certificates of deposit and municipal securities was due to calls and maturities in excess of purchases.

 

At March 31, 2005, estimated fair values of investment securities held to maturity were as follows (in thousands):

 

		Amortized Cost			Fair Value
Certificates of deposit		$	2,000		$	2,000
U.S. Government and agency obligations		37,756			36,905
Municipal securities		15,689			15,745
Total		$	55,445		$	54,650

 

Federal Home Loan Bank Stock.  Federal Home Loan Bank (“FHLB”) stock increased by approximately $1.1 million due to required purchases related to the increase in FHLB advances.

 

Deposits.  Changes in the composition of deposits between March 31, 2005 and December 31, 2004 are presented in the following table (dollars in thousands).

 

		March 31, 2005			December 31, 2004			Increase (Decrease)			Percentage Change
DDA and NOW accounts		$	113,636		$	109,772		$	3,864		3.5	%
Money market accounts		93,943			106,063			(12,120		)	(11.4	)%
Savings accounts		31,961			31,611			350			1.1	%
Certificates of deposit		349,218			334,978			14,240			4.3	%
Total deposits		$	588,758		$	582,424		$	6,334		1.1	%

 

The Bank experienced a shift in the mix of deposits from money market accounts to certificates of deposit during the quarter.  Certificates of deposit increased as interest rates began to rise.  Further, the Bank has advertised several CD products with special rates and terms ranging from 7 to 40 months.  The cost of deposit funds increased from 2.26% at December 31, 2004 to 2.33% at March 31, 2005.  The Bank will continue to aggressively promote checking accounts with plans to expand its promotion of checking accounts by targeting small- and medium-sized business accounts with its direct mail campaign and “thank you” gifts beginning in the second quarter.  Checking accounts are an attractive source of funds for the Bank as they offer low-interest deposits, fee income potential, and the opportunity to cross-sell other financial services.

 

Federal Home Loan Bank Advances.  The Bank experienced $24.1 million or 26.9% growth in FHLB of Dallas advances during the quarter.  The advances were used to fund loan growth during the quarter.  The balance of advances at March 31, 2005 of $113.9 million consisted of $66.7 million of fixed rate advances with an average cost of 3.69% and $47.2 million of floating rate advances with an average cost of 2.87%.

 

Other Liabilities.  Other liabilities decreased primarily due to a decrease in the payable for unsettled investment transactions of $1 million, offset by increases in income taxes payable of approximately $200,000 and accrued interest payable of approximately $100,000.

 

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Stockholders’ Equity.  Stockholders’ equity increased $267,000 from December 31, 2004 to March 31, 2005.  The increase in stockholders’ equity was primarily due to net income of $2.0 million and the issuance of treasury stock due to exercise of stock options of $1.2 million, offset by the purchase of treasury stock totaling $3.3 million during the first quarter of 2005.  In addition, during the quarter ended March 31, 2005 cash dividends of $610,000 were paid.  See the Unaudited Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2005 for more detail.

 

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 March 31, 2005.  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 March 31, 2005.  Average balances are based on daily balances during the period.

 

				Quarter Ended March 31,
				2005								2004
		March 31, 2005		Average Balance			Interest			Average Yield/ Cost		Average Balance			Interest			Average Yield/ Cost
		Yield/Cost
				(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1)		6.15	%	$	651,582		$	9,884		6.07	%	$	520,908		$	8,329		6.40	%
Investment securities(2)		4.49		61,783			698			4.52		88,051			960			4.36
Other interest-earning assets		2.75		2,348			13			2.31		41,057			91			0.89
Total interest-earning assets		6.00		715,713			10,595			5.92		650,016			9,380			5.77
Noninterest-earning assets				50,914								46,961
Total assets				$	766,627							$	696,977
Interest-bearing liabilities:
Deposits		2.33		$	582,420		3,283			2.25		$	577,829		3,187			2.21
Other borrowings		3.35		103,542			844			3.26		38,490			319			3.31
Total interest-bearing liabilities		2.49		685,962			4,127			2.41		616,319			3,506			2.27
Noninterest-bearing liabilities				5,173								5,192
Total liabilities				691,135								621,511
Stockholders’ equity				75,492								75,466
Total liabilities and stockholders’ equity				$	766,627							$	696,977
Net interest income							$	6,468							$	5,874
Net earning assets				$	29,751							$	33,697
Interest rate spread		3.51	%							3.51	%							3.50	%
Net interest margin										3.61	%							3.61	%
Ratio of interest-earning assets to interest-bearing liabilities										104.34	%							105.47	%

 

(1)  Includes nonaccrual loans.

(2)  Includes FHLB stock.

 

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