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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 March 31, 2003
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 by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: As of May
8, 2003, there were issued and outstanding 2,671,443 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 Page
- ------- --------------------- ----
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
As of March 31, 2003 (unaudited) and December 31, 2002 1
Consolidated Statements of Income for the three months
ended March 31, 2003 (unaudited) and 2002 (unaudited) 2
Consolidated Statement of Stockholders' Equity for the three
months ended March 31, 2003 (unaudited) 3
Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 (unaudited) and 2002 (unaudited) 4
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 20
Part II. Other Information
- -------- -----------------
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Section 302 Certification of the Chief Executive Officer 23
Section 302 Certification of the Chief Financial Officer 24
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
March 31, December 31,
2003 2002
---------- -------------
ASSETS (Unaudited)
Cash and cash equivalents $ 72,547 $ 44,493
Investment securities held to maturity 96,595 114,471
Federal Home Loan Bank stock 5,095 5,064
Loans receivable, net 487,481 483,468
Accrued interest receivable 4,128 4,380
Real estate acquired in settlement of loans, net 618 320
Office properties and equipment, net 12,633 10,690
Prepaid expenses and other assets 17,057 17,010
------- -------
TOTAL ASSETS $696,154 $679,896
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $575,543 $568,762
Federal Home Loan Bank advances 44,184 38,610
Advance payments by borrowers for
taxes and insurance 827 760
Other liabilities 5,214 2,498
------- -------
Total liabilities $625,768 $610,630
------- -------
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, 2,665,743 and
2,687,359 shares outstanding at March 31, 2003
and December 31, 2002, respectively 52 52
Additional paid-in capital 52,216 52,040
Employee stock benefit plans (1,447) (1,551)
Retained earnings-substantially restricted 68,600 67,043
------- -------
119,421 117,584
Treasury stock, at cost, 2,488,008 and
2,466,392 shares at March 31, 2003
and December 31, 2002, respectively (49,035) (48,318)
------- -------
Total stockholders' equity 70,386 69,266
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $696,154 $679,896
======= =======
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,
----------------------
2003 2002
-------- --------
INTEREST INCOME:
Loans receivable $ 8,808 $ 9,319
Investment securities:
Taxable 1,052 1,543
Nontaxable 104 70
Other 127 272
------ ------
Total interest income 10,091 11,204
------ ------
INTEREST EXPENSE:
Deposits 4,023 5,313
Other borrowings 365 733
------ ------
Total interest expense 4,388 6,046
------ ------
NET INTEREST INCOME 5,703 5,158
PROVISION FOR LOAN LOSSES 279 362
------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,424 4,796
------ ------
NONINTEREST INCOME:
Deposit fee income 556 547
Earnings on life insurance policies 217 216
Gain on sale of loans 402 237
Other 367 287
------ ------
Total noninterest income 1,542 1,287
------ ------
NONINTEREST EXPENSES:
Salaries and employee benefits 2,450 2,097
Net occupancy expense 360 295
Professional fees 92 86
Advertising and public relations 151 82
Data processing 385 318
Postage and supplies 157 132
Other 438 407
------ ------
Total noninterest expenses 4,033 3,417
------ ------
INCOME BEFORE INCOME TAXES 2,933 2,666
INCOME TAX PROVISION 949 910
------ ------
NET INCOME $ 1,984 $ 1,756
====== ======
EARNINGS PER SHARE:
Basic $ 0.78 $ 0.61
====== ======
Diluted $ 0.75 $ 0.60
====== ======
Cash Dividends Declared $ 0.16 $ 0.12
====== ======
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, 2003
(In thousands, except share data)
(Unaudited)
Issued Employee
Common Stock Additional Stock Treasury Stock Total
----------------- Paid-In Benefit Retained ------------------- Stockholders'
Shares Amount Capital Plans Earnings Shares Amount Equity
-------- -------- ------------ ---------- ------------ --------- -------- -------------
Balance, December 31, 2002 5,153,751 $52 $52,040 $(1,551) $67,043 2,466,392 $(48,318) $69,266
Net income 1,984 1,984
Release of ESOP shares 164 104 268
Tax effect of stock
compensation plan 22 22
Treasury shares reissued due to
exercise of stock options (10) (24,884) 489 479
Purchase of treasury stock, at 46,500 (1,206) (1,206)
cost
Dividends paid (427) (427)
--------- -- ------ ------ ------ --------- ------- ------
Balance, March 31, 2003 5,153,751 $52 $52,216 $(1,447) $68,600 2,488,008 $(49,035) $70,386
========= == ====== ====== ====== ========= ======= ======
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,
----------------------------
2003 2002
--------------- ------------
OPERATING ACTIVITIES:
Net income $ 1,984 $ 1,756
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 279 362
Provision for real estate losses 14 4
Deferred tax benefit (116) (75)
Federal Home Loan Bank stock dividends (31) (37)
Loss on disposition of office properties and equipment 4 --
Loss (gain) on sale of repossessed assets, net (7) 10
Originations of loans held for sale (27,624) (13,940)
Proceeds from sales of loans 32,602 16,842
Gain on sale of loans originated to sell (402) (237)
Depreciation 251 183
Accretion of deferred loan fees, net (118) (218)
Release of ESOP shares 268 242
Bank owned life insurance earnings (217) (216)
Changes in operating assets and liabilities:
Accrued interest receivable 252 (116)
Prepaid expenses and other assets 197 (164)
Other liabilities 854 (1,483)
------- -------
Net cash provided by operating activities 8,190 2,913
------- -------
INVESTING ACTIVITIES:
Purchases of investment securities held to maturity (49,181) (15,601)
Proceeds from maturities/calls of investment
securities held to maturity 69,057 16,045
Loan originations, net of repayments (9,146) (355)
Proceeds from sales of repossessed assets 53 117
Purchases of office properties and equipment (2,187) (739)
------- -------
Net cash provided by (used in) investing activities 8,596 (533)
------- -------
(Continued)
4
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended March 31,
----------------------------
2003 2002
--------------- ------------
FINANCING ACTIVITIES:
Net increase in deposits 6,781 12,507
Advances from FHLB 11,000 2,000
Repayment of advances from FHLB (5,426) (5,003)
Net increase in advance payments
by borrowers for taxes & insurance 67 71
Purchase of treasury stock (1,206) (893)
Reissued treasury stock 479 85
Dividends paid (427) (365)
------ ------
Net cash provided by financing activities 11,268 8,402
------ ------
Net increase in cash and cash equivalents 28,054 10,782
CASH AND CASH EQUIVALENTS:
Beginning of period 44,493 72,311
------ ------
End of period $72,547 $83,093
====== ======
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for:
Interest $ 4,417 $ 6,189
====== ======
Income taxes $ -- $ --
====== ======
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Real estate and other assets acquired in settlement of
Loans $ 533 $ 153
====== ======
Loans to facilitate sales of real estate owned $ 137 $ 156
====== ======
Investment securities traded, recorded in
investments not yet settled in cash $ 2,000 $ 2,000
====== ======
(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"), which is inactive.
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 three months ended March 31, 2003
are not necessarily indicative of the results to be expected for
the year ending December 31, 2003. 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, 2002, contained in the
Corporation's 2002 Annual Report to Stockholders.
Note 2 - Recently Issued Accounting Standards
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure, an amendment of
FASB Statement No. 123 ("SFAS 148"). SFAS 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation.
In addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used
on reported results. The transition provisions are effective for
fiscal years ending after December 15, 2002. The provisions of the
statement related to interim disclosures are effective for interim
periods beginning after December 31, 2002. The Corporation has
adopted the disclosure provisions of SFAS 148 for the quarter ended
March 31, 2003, and has included the required disclosures in Note 7
to the unaudited consolidated financial statements.
FASB Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others ("FIN 45") elaborates on the disclosures to
be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also
clarifies that a guarantor is required to recognize, at the
inception of a guarantee,
6
a liability for the fair value of the obligation undertaken in issuing
the guarantee. The initial recognition and initial measurement provisions
of FIN 45 are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. The disclosure requirements in FIN 45 are effective for
financial statements of annual periods ending after December 15,
2002. The adoption of FIN 45 did not 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 March 31, 2003 and 2002
were as follows:
Three months ended
March 31,
------------------------
2003 2002
----------- ------------
Basic weighted - average shares 2,542,452 2,858,994
Effect of dilutive securities 101,124 85,338
--------- ---------
Diluted weighted - average shares 2,643,576 2,944,332
========= =========
Note 4 - Declaration of Dividends
At their meeting on February 24, 2003, the Board of Directors
declared a $.16 (sixteen cent) per share cash dividend on the
common stock of the Corporation. The cash dividend was paid on
March 25, 2003 to the stockholders of record at the close of
business on March 10, 2003.
Note 5 - Investment Securities
Investment securities consisted of the following (in thousands):
March 31, 2003
------------------------
Amortized Fair
Held-to-Maturity Cost Value
------------ -----------
Municipal securities $ 9,130 $ 9,289
U. S. Government and Agency obligations 48,575 49,253
Certificates of deposit 38,890 38,913
------ ------
$96,595 $97,455
====== ======
7
Note 6 - Loans Receivable
Loans receivable consisted of the following (in thousands):
March 31, 2003 December 31, 2002
----------------- -------------------
First mortgage loans:
One- to four- family residences $275,543 $289,106
Commercial 71,685 64,888
Multifamily 6,689 5,821
Other properties 1,726 1,735
Construction 58,495 49,144
Less:
Unearned discounts (146) (178)
Undisbursed loan funds (24,752) (20,618)
Deferred loan fees, net (1,243) (1,414)
------- -------
Total first mortgage loans 387,997 388,484
Consumer and other loans:
Commercial 29,717 28,213
Automobile 23,109 22,570
Consumer 8,123 7,741
Home equity and second mortgage 33,821 31,670
Savings 2,148 2,158
Other 3,971 3,907
Deferred loan costs, net 256 254
------- ------
Total consumer and other loans 101,145 96,513
------- ------
Allowance for loan losses (1,661) (1,529)
------- -------
Loans receivable, net $487,481 $483,468
======= =======
Nonaccrual loans at March 31, 2003 were $3.1 million. All loans 90
days or more past due are recorded as nonaccrual.
A summary of the activity in the allowance for loan losses is as
follows (in thousands):
Three Months Ended March 31,
------------------------------
2003 2002
-------------- --------------
Balance at beginning of period $1,529 $ 923
Provisions for estimated losses 279 362
Recoveries 27 21
Losses charged off (174) (157)
----- -----
Balance at end of period $1,661 $1,149
===== =====
8
Note 7 - Stock Option Plan
At March 31, 2003, the Corporation had one stock option plan in
effect covering key employees and directors. The plan is more
fully described in the Notes to Consolidated Financial Statements
included in the Corporation's 2002 Annual Report to Stockholders.
The Corporation accounts for this plan under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. No stock-based
employee or director compensation cost is recognized in net income,
as all options granted under the plan had an exercise price equal
to the market value of the underlying stock on the date of grant.
The following table illustrates the effect on net income and
earnings per share if the Corporation had applied the fair value
recognition provisions of FASB Statement 123, Accounting for Stock-
Based Compensation, to stock-based employee and director
compensation:
Three Months Ended March 31,
------------------------------
2003 2002
------------- --------------
Net income (in thousands):
As reported $1,984 $1,756
Proforma 1,977 1,748
Earnings per share:
Basic, as reported $ 0.78 $ 0.61
Basic, proforma 0.78 0.61
Diluted, as reported 0.75 0.60
Diluted, proforma 0.75 0.59
9
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.
General. At March 31, 2003, the Corporation's assets amounted
to $696.2 million as compared to $679.9 million at December 31,
2002. The $16.3 million or 2.4% increase was primarily due to an
increase of $28.1 million or 63.1% in cash and cash equivalents, an
increase of $4.0 million or .8% in loans receivable, net, and an
increase of $1.9 million or 18.2% in office properties and
equipment. The increase in office properties and equipment was
primarily due to the new corporate headquarters building under
construction in north Harrison, Arkansas. Such increases were
partially offset by a $17.9 million or 15.6% decrease in investment
securities held to maturity. The funds available from the proceeds
of matured or called investment securities held to maturity and the
increase in deposits and FHLB advances were temporarily invested in
cash and cash equivalents and used to fund loan growth.
Liabilities increased $15.1 million or 2.5% to $625.8 million at
March 31, 2003 compared to $610.6 million at December 31, 2002.
The increase in liabilities was primarily due to an increase of
$6.8 million or 1.2% in deposits and an increase of $5.6 million or
14.4% in advances from the Federal Home Loan Bank of Dallas ("FHLB
of Dallas"). Stockholders' equity amounted to $70.4 million or
10.1% of total assets at March 31, 2003 compared to $69.3 million
or 10.2% of total assets at December 31, 2002.
Loans Receivable. Net loans receivable increased by $4.0
million, or .8%, to $487.5 million at March 31, 2003 from $483.5
million at December 31, 2002. The increase in net loans receivable
was comprised mainly of increases in commercial real estate loans
of $6.8 million, multifamily real estate loans of $900,000,
construction loans, net of undisbursed funds, of $5.2 million,
consumer loans of $3.1 million, and commercial loans of $1.5
million. Such increases were partially offset by a decrease in one-
to four- family residential loans of $13.6 million. In recent
years, the Bank has placed an increased emphasis on commercial real
estate lending, construction lending, commercial lending and
consumer lending to diversify its loan portfolio, increase the
average yield on its loan portfolio, expand its operations and
provide greater opportunities to cross-sell its products.
Loan originations for the three month period ended March 31,
2003 consisted of $41.4 million in one- to four- family residential
loans, $24.1 million of which were originated for sale in the
10
secondary market, $1.1 million in multi-family residential loans,
$21.6 million in commercial loans, $3.5 million of which were sold
to investors, $19.6 million in construction loans and $14.5 million
in consumer installment loans, of which $4.7 million consisted of
home equity loans and $4.6 million consisted of automobile loans.
Asset Quality. The following table sets forth the amounts and
categories of the Bank's nonperforming assets at the dates
indicated.
March 31, 2003 December 31, 2002
------------------ -------------------
(Dollars in Thousands)
Nonaccrual loans:
One- to four-family residential $2,290 $2,184
Multi-family residential -- --
Construction loans -- --
Commercial real estate 397 124
Commercial loans 201 245
Consumer loans 204 175
----- -----
Total nonaccrual loans 3,092 2,728
----- -----
Restructured loans 4,222 4,219
Repossessed assets 68 41
Real estate owned 618 320
----- -----
Nonperforming assets $8,000 $7,308
===== =====
Total nonaccrual and restructured
loans as a percentage of total loans
receivable 1.42% 1.37%
===== =====
Total nonperforming assets as a
percentage of total assets 1.15% 1.07%
===== =====
Allowance for Loan Losses. The allowance for loan losses was
$1.7 million or .32% of total loans at March 31, 2003, compared to
$1.5 million or .30% of total loans at December 31, 2002.
Nonperforming assets, consisting of nonaccrual and restructured
loans and repossessed assets, amounted to $8.0 million or 1.15 % of
total assets at March 31, 2003, compared to $7.3 million or 1.07%
of total assets at December 31, 2002. The allowance for loan
losses includes $610,000 and $625,000 in allowances allocated to
specific loans as of March 31, 2003 and December 31, 2002,
respectively.
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, 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.
11
The Bank reviews its non-homogeneous loans for impairment on a
quarterly basis. The Bank considers commercial real estate, non-
one- to four- family construction, multifamily, other non-
residential real estate, 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,
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.
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 $1.7
million adequate to cover losses inherent in our loan portfolio at
March 31, 2003, no assurance can be given that we will not sustain
loan losses that are significantly different from the amount
reserved, 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.
12
Investment Securities. Investment securities, all of which
were classified as held to maturity, amounted to $96.6 million as
of March 31, 2003, compared to $114.5 million as of December 31,
2002. During the first quarter of 2003, investment securities
totaling $51.2 million were purchased and $69.1 million matured or
were called, resulting in a net decrease of $17.9 million or 15.6%.
This decrease in investment securities held to maturity consisted
primarily of a decrease in U.S. government agency securities of
$16.8 million and a decrease in certificates of deposit of $1.5
million.
Deposits. Deposits at March 31, 2003 amounted to $575.5
million, an increase of $6.8 million or 1.2% from the December 31,
2002 balance of $568.8 million. The Bank does not advertise for
deposits outside of its primary market area, Northcentral and
Northwest Arkansas. The Bank continued to experience a change in
the mix of deposits due to the current low interest rate
environment. Money market accounts increased $13.5 million and
checking accounts increased $3.9 million while certificates of
deposit decreased $11.5 million during the first quarter of 2003.
Borrowed Funds. Borrowed funds, which consist entirely of
FHLB of Dallas advances, increased by $5.6 million or 14.4% to
$44.2 million at March 31, 2003 from $38.6 million at December 31,
2002. The Bank is continuing to obtain advances to take advantage
of the current low interest rate environment and extend the
maturity of the portfolio.
Stockholders' Equity. Stockholders' equity increased $1.1
million to $70.4 million at March 31, 2003 from $69.3 million at
December 31, 2002. The increase in stockholders' equity was
primarily due to net income of $2.0 million resulting from
continued profitable operations and the issuance of 24,884 shares
of treasury stock totaling $489,000 as a result of the exercise of
stock options. Such increase was partially offset by the purchase
of 46,500 shares of treasury stock totaling $1.2 million in
connection with the Corporation's stock repurchase plan and, to a
lesser extent, the payment of cash dividends aggregating $427,000.
13
Average Balance Sheets
The following table sets forth certain information relating to
the Corporation'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, 2003.
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, 2003. Average
balances are based on daily balances during the period.
Quarter Ended March 31,
-------------------------------------------------------------
March 31,
2003 2003 2002
---------- ------------------------------- ---------------------------
Average Average
Average Yield/ Average Yield/
Yield/Cost Balance Interest Cost Balance Interest Cost
---------- ------- -------- ------- ------- -------- -------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1) 7.28% $487,575 $8,808 7.23% $473,451 $9,319 7.87%
Investment securities(2) 3.99 109,903 1,156 4.21 103,428 1,613 6.24
Other interest-earning assets 1.14 44,564 127 1.14 66,528 272 1.64
------- ----- ------- -----
Total interest-earning assets 6.21 642,042 10,091 6.29 643,407 11,204 6.97
Noninterest-earning assets 42,238 37,228
------- -------
Total assets $684,280 $680,635
======= =======
Interest-bearing liabilities:
Deposits 2.77 567,691 4,023 2.83 $557,394 5,313 3.81
Other borrowings 3.15 41,543 365 3.51 46,117 733 6.36
------- ----- ------- -----
Total interest-bearing liabilities 2.80 609,234 4,388 2.88 603,511 6,046 4.01
Noninterest-bearing liabilities 4,482 4,935
------- -------
Total liabilities 613,716 608,446
Stockholders' equity 70,564 72,189
------- -------
Total liabilities and
stockholders' equity $684,280 $680,635
------- -------
----- -----
Net interest income $5,703 $5,158
===== =====
Net earning assets $32,808 $39,896
====== ======
Interest rate spread 3.41% 3.41% 2.96%
==== ==== ====
Net interest margin 3.55% 3.21%
==== ====
Ratio of interest-earning assets to
interest-bearing liabilities 105.38% 106.61%
====== ======
________________
(1) Includes nonaccrual loans.
(2) Includes FHLB of Dallas stock.
14
Rate/Volume Analysis
The table below sets forth certain information regarding
changes in interest income and interest expense of the Corporation
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.
Quarter Ended March 31,
2003 vs. 2002
------------------------------------------
Increase (Decrease)
Due to
---------------------------
Total
Rate/ Increase
Volume Rate Volume (Decrease)
-------- ------ --------- -----------
(In Thousands)
Interest income:
Loans receivable....................$278 $ (766) $(23) $ (511)
Investment securities............... 101 (525) (33) (457)
Other interest-earning assets....... (90) (83) 28 (145)
--- ----- --- -----
Total interest-earning
assets............................ 289 (1,374) (28) (1,113)
Interest expense:
Deposits............................ 98 (1,363) (25) (1,290)
Other borrowings.................... (73) (328) 33 (368)
--- ----- --- -----
Total interest-bearing
liabilities....................... 25 (1,691) 8 (1,658)
--- ----- --- -----
Net change in net interest income $264 $ 317 $(36) $ 545
=== ===== === ====
15
Results of Operations for the Three Months Ended March 31, 2003 and
2002
General. The Corporation reported net income of $2.0 million
during the three months ended March 31, 2003 compared to net income
of $1.8 million for the same period in 2002. The increase of
$228,000 in net income in the 2003 period compared to the same
period in 2002 was primarily due to an increase in net interest
income and an increase in noninterest income, which were offset by
an increase in noninterest expenses and an increase in income tax
expense. Net interest income increased from $5.2 million for the
three months ended March 31, 2002 to $5.7 million for the same
period in 2003. 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 3.41% and 3.55%, respectively, for the 2003 three
month period compared to 2.96% and 3.21%, respectively, for the
2002 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 113 basis point reduction
in the cost of interest-bearing liabilities to 2.88% for the three
months ended March 31, 2003 compared to 4.01% for the three months
ended March 31, 2002. These and other significant fluctuations in
operations are discussed below.
Interest Income. Interest income amounted to $10.1 million
for the three months ended March 31, 2003 compared to $11.2 million
for the same period in 2002. The decrease of $1.1 million or 9.9%
was primarily due to decreases in the average yields earned on net
loans receivable, investment securities, and other interest earning
assets, primarily overnight funds, which were partially offset by
increases in the average balances of net loans receivable and
investment securities. The average yield on interest earning assets
decreased 68 basis points from 6.97% for the three months ended
March 31, 2002 to 6.29% for the three months ended March 31, 2003,
primarily as a result of the declining level of interest rates.
The increase in the average balance of loans was primarily due to
an increase in the volume of loan originations.
Interest Expense. Interest expense decreased $1.7 million or
27.4% to $4.4 million for the three months ended March 31, 2003
compared to $6.0 million for the same period in 2002. Such
decrease was primarily due to a decrease in the interest rates paid
on deposits and FHLB of Dallas advances. The decrease in the
interest rates paid on deposits was primarily the result of
maturing certificates and variable interest bearing accounts being
repriced to lower interest rates. The average cost of deposits
decreased 113 basis points from 4.01% for the three months ended
March 31, 2002 to 2.88% for the three months ended March 31, 2003,
primarily as a result of the declining level of interest rates.
Provision for Loan Losses. The provision for loan losses
amounted to $279,000 for the three months ended March 31, 2003
compared to $362,000 for the same period in 2002.
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
16
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.
Noninterest Income. Noninterest income increased $255,000 or
19.8% to $1.5 million for the three months ended March 31, 2003
compared to $1.3 million for the three months ended March 31, 2002.
The increase in noninterest income for the three month comparable
periods ended March 31 was primarily due to an increase of $165,000
in gain on sale of mortgage loans. Secondary mortgage market
activity continues to be high due to historic low mortgage interest
rates.
Noninterest Expense. Noninterest expense increased $616,000 or
18.0% between the 2003 and 2002 three month periods ended March 31.
Such increase was primarily due to an increase in salaries and
employee benefits, net occupancy expense, advertising and public
relations, and data processing expense. The increase of $353,000
in salaries and employee benefits was primarily composed of a
$239,000 increase in compensation expense due to an increase in
personnel as well as salary and merit increases, a $33,000 increase
in related payroll taxes, a $26,000 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 and a $54,000
increase in the required contribution to the multiemployer pension
plan. The $65,000 increase in net occupancy expense was primarily
due to an increase in depreciation expense on equipment in the
amount of $57,000. This increase in depreciation was due to a
general increase in office properties and equipment related to the
overall growth of the Bank. The $69,000 increase in advertising
and public relations was primarily due to growth. Data processing
expense increased $67,000 due to growth and additional product and
service offerings.
Income Taxes. Income taxes amounted to $949,000 and $910,000
for the three months ended March 31, 2003 and 2002, respectively,
resulting in effective tax rates of 32.4% and 34.1%, respectively.
The increase in income taxes was due primarily to an increase in
pre-tax income.
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 March 31, 2003, the
Bank had outstanding advances from the FHLB of Dallas of $44.2
million. Such advances were used in the Bank's normal operating
and investing activities.
17
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. Total cost is
estimated to be $6.9 million, including furniture and equipment,
with disbursements occurring throughout the period of construction.
As of March 31, 2003, $5.0 million had been disbursed for the
construction of the new office.
As of March 31, 2003, the Bank's regulatory capital was in
excess of all applicable regulatory requirements. At March 31,
2003, the Bank's tangible, core and risk-based capital ratios
amounted to 9.85%, 9.85% and 16.87%, respectively, compared to
applicable requirements of 1.5%, 4.0% and 8.0%, respectively.
Off-Balance Sheet Arrangements and Commitments
The Corporation, in the normal course of business, makes
commitments to buy or sell assets or to incur or fund liabilities.
Commitments include, but are not limited to:
* the origination, purchase or sale of loans,
* the purchase of investment securities,
* the fulfillment of commitments under letters-of-credit, extensions of
credit on home equity lines of credit and construction loans, and
* the commitment to fund withdrawals of savings accounts at maturity.
At March 31, 2003, the Bank's off-balance sheet arrangements
principally included lending commitments, which are described
below. At March 31, 2003, the Corporation had no interests in non-
consolidated special purpose entities.
At March 31, 2003, commitments included:
* total approved loan origination commitments outstanding amounting to
$9.7 million, including $5.1 million of loans committed to sell,
* rate lock agreements with customers of $14.1 million, all of
which have been locked with an investor,
* unadvanced portion of construction loans of $24.8 million,
* unused lines of credit of $16.2 million,
* outstanding standby letters of credit of $1.2 million, and
* certificates of deposit scheduled to mature in one year or less
totaling $189.7 million.
Based on historical experience, management believes that a
significant portion of maturing deposits will remain with the Bank.
We anticipate that we will continue to have sufficient funds,
through repayments, deposits and borrowings, to meet our current
commitments.
18
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.
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 2002 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, 2002.
19
CONTROLS AND PROCEDURES
Within 90 days prior to the date of this Quarterly Report on
Form 10-Q, the Corporation carried out an evaluation, under the
supervision and with the participation of the Corporation's
management, including the Corporation's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and
operation of the Corporation's disclosure controls and procedures.
Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Corporation's disclosure
controls and procedures are effective. There were no significant
changes in the Corporation's internal controls or in other factors
that could significantly affect these controls subsequent to the
date of their evaluation.
Disclosure controls and procedures are the controls and other
procedures of the Corporation that are designed to ensure that the
information required to be disclosed by the Corporation in its
reports filed or submitted under the Securities Exchange Act of
1934, as amended ("Exchange Act") is recorded, processed,
summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be
disclosed by the Corporation in its reports filed under the
Exchange Act is accumulated and communicated to the Corporation's
management, including the principal executive officer and principal
financial officer, as appropriate to allow timely decisions
regarding required disclosure.
20
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
Part II
Item 1. Legal Proceedings
Neither the Corporation nor the Bank is involved in
any pending legal proceedings other than non-material
legal proceedings occurring in the ordinary course of
business.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
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)
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
Date: May 9, 2003 By: /s/Larry J. Brandt
---------------------------
Larry J. Brandt
President/CEO
Date: May 9, 2003 By: /s/Sherri R. Billings
---------------------------
Sherri R. Billings
EVP/CFO
22
SECTION 302 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
I, Larry J. Brandt, the Chief Executive Officer of First Federal
Bancshares of Arkansas, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of First
Federal Bancshares of Arkansas, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: May 9, 2003 /s/ Larry J. Brandt
-------------------------------
Larry J. Brandt
Chief Executive Officer
23
SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Sherri R. Billings, the Chief Financial Officer of First Federal
Bancshares of Arkansas, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of First
Federal Bancshares of Arkansas, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: May 9, 2003 /s/ Sherri R. Billings
-----------------------------
Sherri R. Billings
Chief Financial Officer
24