UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the quarterly period ended
March 31, 2008
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the transition period from
to
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Commission File Number 0-28312
FIRST
FEDERAL BANCSHARES OF ARKANSAS, INC.
(Exact name of registrant as specified in its
charter)
Texas
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71-0785261
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(State or other jurisdiction of
incorporation
or organization)
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(I.R.S. Employer
Identification Number)
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1401 Highway 62-65 North
Harrison, Arkansas
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72601
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(Address of principal executive office)
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(Zip Code)
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(870) 741-7641
(Registrants 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
o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of large accelerated filer, accelerated filer, and
smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
o
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Accelerated
filer
x
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Non-accelerated
filer
o
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Smaller
reporting company
o
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Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
o
No
x
Indicate the number of shares outstanding
of each of the issuers classes of common stock, as of the latest practicable
date: As of April 21, 2008, there
were issued and outstanding 4,848,385 shares of the Registrants Common Stock,
par value $.01 per share.
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
TABLE OF CONTENTS
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
(Unaudited)
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March 31,
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December 31,
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2008
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2007
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ASSETS
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|
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Cash and
cash equivalents
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$
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50,700
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$
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27,387
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Investment
securities held to maturity
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120,864
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95,590
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Federal Home
Loan Bank stock
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4,482
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4,433
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Loans
receivable, net
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584,984
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601,256
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Accrued
interest receivable
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7,804
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9,042
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Real estate
acquired in settlement of loans, net
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11,234
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8,120
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Office
properties and equipment, net
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24,878
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24,263
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Cash
surrender value of life insurance
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19,821
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20,159
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Prepaid
expenses and other assets
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4,291
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1,728
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TOTAL ASSETS
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$
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829,058
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$
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791,978
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LIABILITIES
AND STOCKHOLDERS EQUITY
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LIABILITIES:
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Deposits
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$
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656,913
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$
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630,414
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Federal Home
Loan Bank advances
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87,634
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82,087
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Advance
payments by borrowers for taxes and insurance
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723
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575
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Other
liabilities
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9,763
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5,239
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Total
liabilities
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755,033
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718,315
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STOCKHOLDERS
EQUITY:
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Preferred
stock, no par value, 5,000,000 shares authorized, none issued
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Common
stock, $.01 par value, 20,000,000 shares authorized, 10,307,502 shares
issued, 4,848,385 and 4,844,385 shares outstanding at March 31, 2008 and
December 31, 2007, respectively
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103
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103
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Additional
paid-in capital
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56,646
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56,653
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Employee
stock benefit plans
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(37
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)
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(42
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)
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Retained
earnings-substantially restricted
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87,912
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87,600
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144,624
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144,314
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Treasury
stock, at cost, 5,459,117 and 5,463,117 shares at March 31, 2008 and
December 31, 2007, respectively
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(70,599
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)
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(70,651
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)
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Total
stockholders equity
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74,025
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73,663
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TOTAL
LIABILITIES AND STOCKHOLDERS EQUITY
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$
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829,058
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$
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791,978
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See notes to unaudited consolidated financial statements.
1
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED
STATEMENTS OF INCOME
(In thousands, except share data)
(Unaudited)
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Three Months Ended
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March 31,
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March 31,
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2008
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2007
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INTEREST
INCOME:
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Loans
receivable
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$
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9,975
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$
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12,201
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Investment
securities:
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Taxable
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1,207
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656
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Nontaxable
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186
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182
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Other
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168
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188
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Total
interest income
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11,536
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13,227
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INTEREST
EXPENSE:
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Deposits
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5,568
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5,848
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Other
borrowings
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903
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1,260
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Total
interest expense
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6,471
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7,108
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NET INTEREST
INCOME
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5,065
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6,119
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PROVISION
FOR LOAN LOSSES
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1,528
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1,961
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NET INTEREST
INCOME AFTER PROVISION FOR LOAN LOSSES
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3,537
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4,158
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NONINTEREST
INCOME:
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Deposit fee
income
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1,211
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1,157
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Earnings on
life insurance policies
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1,371
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189
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Gain on sale
of loans
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175
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226
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Other
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447
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286
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Total
noninterest income
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3,204
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1,858
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NONINTEREST
EXPENSES:
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Salaries and
employee benefits
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3,387
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3,443
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Net
occupancy expense
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639
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623
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Real estate
owned, net
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430
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|
162
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Data
processing
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318
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454
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Professional
fees
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130
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141
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Advertising
and public relations
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342
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359
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Postage and
supplies
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239
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275
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Other
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586
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|
609
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Total
noninterest expenses
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6,071
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6,066
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INCOME
(LOSS) BEFORE INCOME TAXES
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670
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(50
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)
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INCOME TAX
BENEFIT
|
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(417
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)
|
(209
|
)
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NET INCOME
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$
|
1,087
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$
|
159
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EARNINGS PER
SHARE:
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Basic
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$
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0.22
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$
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0.03
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Diluted
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$
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0.22
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$
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0.03
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Cash
Dividends Declared
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$
|
0.16
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$
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0.16
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|
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,
2008
(In thousands, except share data)
(Unaudited)
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Issued
Common Stock
|
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Additional
Paid-In
|
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Employee
Stock
Benefit
|
|
Retained
Earnings
(Substantially
|
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|
|
Shares
|
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Amount
|
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Capital
|
|
Plans
|
|
Restricted)
|
|
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|
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|
|
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|
Balance,
January 1, 2008
|
|
10,307,502
|
|
$
|
103
|
|
$
|
56,653
|
|
$
|
(42
|
)
|
$
|
87,600
|
|
Net income
|
|
|
|
|
|
|
|
|
|
1,087
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|
Tax effect
of stock compensation plan
|
|
|
|
|
|
(2
|
)
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|
|
Treasury
shares reissued due to exercise of stock options
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
Stock
compensation expense
|
|
|
|
|
|
1
|
|
5
|
|
|
|
Dividends
paid
|
|
|
|
|
|
|
|
|
|
(775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2008
|
|
10,307,502
|
|
$
|
103
|
|
$
|
56,646
|
|
$
|
(37
|
)
|
$
|
87,912
|
|
|
|
Treasury Stock
|
|
Total
Stockholders
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2008
|
|
5,463,117
|
|
$
|
(70,651
|
)
|
$
|
73,663
|
|
|
|
|
|
Net income
|
|
|
|
|
|
1,087
|
|
|
|
|
|
Tax effect
of stock compensation plan
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
Treasury
shares reissued due to exercise of stock options
|
|
(4,000
|
)
|
52
|
|
46
|
|
|
|
|
|
Stock
compensation expense
|
|
|
|
|
|
6
|
|
|
|
|
|
Dividends
paid
|
|
|
|
|
|
(775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2008
|
|
5,459,117
|
|
$
|
(70,599
|
)
|
$
|
74,025
|
|
|
|
|
|
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,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
Net income
|
|
$
|
1,087
|
|
$
|
159
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Provision
for loan losses
|
|
1,528
|
|
1,961
|
|
Provision
for real estate losses
|
|
229
|
|
74
|
|
Deferred tax
benefit
|
|
(331
|
)
|
(788
|
)
|
Accretion of
discounts on investment securities, net
|
|
(35
|
)
|
(9
|
)
|
Federal Home
Loan Bank stock dividends
|
|
(49
|
)
|
(98
|
)
|
Gain on
disposition of office properties and equipment, net
|
|
(18
|
)
|
(2
|
)
|
Loss on sale
of repossessed assets, net
|
|
53
|
|
43
|
|
Originations
of loans held for sale
|
|
(10,950
|
)
|
(16,100
|
)
|
Proceeds
from sales of loans held for sale
|
|
12,110
|
|
16,076
|
|
Gain on sale
of loans originated to sell
|
|
(175
|
)
|
(226
|
)
|
Depreciation
|
|
358
|
|
354
|
|
Amortization
of deferred loan fees, net
|
|
74
|
|
91
|
|
Stock
compensation expense
|
|
6
|
|
14
|
|
Earnings on
life insurance policies
|
|
(1,371
|
)
|
(189
|
)
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
Accrued
interest receivable
|
|
1,238
|
|
(286
|
)
|
Prepaid
expenses and other assets
|
|
(561
|
)
|
191
|
|
Other
liabilities
|
|
218
|
|
236
|
|
Net cash
provided by operating activities
|
|
3,411
|
|
1,501
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
Purchases of
investment securities held to maturity
|
|
(60,638
|
)
|
(6,299
|
)
|
Proceeds
from maturities/calls of investment securities held to maturity
|
|
39,701
|
|
4,320
|
|
Federal Home
Loan Bank stock redeemed
|
|
|
|
1,315
|
|
Loan
participations sold
|
|
|
|
4,907
|
|
Loan
participations purchased
|
|
(451
|
)
|
|
|
Net loan
repayments
|
|
10,621
|
|
16,090
|
|
Proceeds
from sales of repossessed assets
|
|
355
|
|
1,165
|
|
Improvements
to real estate owned
|
|
(196
|
)
|
(148
|
)
|
Proceeds
from sales of office properties and equipment
|
|
30
|
|
6
|
|
Purchases of
office properties and equipment
|
|
(985
|
)
|
(651
|
)
|
Net cash
provided by (used in) investing activities
|
|
(11,563
|
)
|
20,705
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
Net increase
in deposits
|
|
26,499
|
|
2,128
|
|
Advances
from FHLB
|
|
15,000
|
|
4,000
|
|
Repayment of
advances from FHLB
|
|
(9,453
|
)
|
(21,751
|
)
|
Net decrease
in advance payments by borrowers for taxes and insurance
|
|
148
|
|
202
|
|
Purchase of
treasury stock
|
|
|
|
(1,389
|
)
|
Reissued
treasury stock
|
|
46
|
|
265
|
|
Dividends
paid
|
|
(775
|
)
|
(779
|
)
|
Net cash
provided by (used in) financing activities
|
|
31,465
|
|
(17,324
|
)
|
|
|
|
|
|
|
Net increase
in cash and cash equivalents
|
|
23,313
|
|
4,882
|
|
|
|
|
|
(Continued)
|
|
|
|
|
|
|
|
|
|
4
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS:
|
|
|
|
|
|
Beginning of
period
|
|
$
|
27,387
|
|
$
|
35,518
|
|
End of
period
|
|
$
|
50,700
|
|
$
|
40,400
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
Cash paid
for:
|
|
|
|
|
|
Interest
|
|
$
|
6,416
|
|
$
|
7,253
|
|
Income taxes
|
|
$
|
|
|
$
|
2
|
|
|
|
|
|
|
|
SUPPLEMENTAL
SCHEDULE OF NONCASH INVESTING ACTIVITIES:
|
|
|
|
|
|
Real estate
and other assets acquired in settlement of loans
|
|
$
|
5,323
|
|
$
|
150
|
|
Loans to
facilitate sales of real estate owned
|
|
$
|
1,808
|
|
$
|
|
|
Investment
securities traded, recorded in investments not yet settled in cash
|
|
$
|
7,492
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 Company) is a unitary holding company which owns all of the stock of
First Federal Bank (the Bank). The Bank provides a broad line of financial
products to individuals and small- to medium-sized businesses. The unaudited
consolidated financial statements also include the accounts of the Banks 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, 2008, are not necessarily indicative of the
results to be expected for the year ending December 31, 2008. 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, 2007, contained in the Companys 2007 Annual
Report to Stockholders.
Note 2 Recently Adopted Accounting
Standards
We adopted Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 157,
Fair Value Measurements
, as of January 1,
2008. See Note 6.
We adopted SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities,
, as of January 1, 2008 and have elected
not to measure any of our current eligible financial assets or liabilities at
fair value upon adoption; however, we may elect to measure future eligible
financial assets or liabilities at fair value.
Note 3 Accounting Standards Issued Not Yet Effective
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations.
The objective of this Statement is to improve
the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial reports about a business
combination and its effects. To accomplish that, this Statement establishes
principles and requirements for how the acquirer:
a.
Recognizes
and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree
b.
Recognizes
and measures the goodwill acquired in the business combination or a gain from a
bargain purchase
c.
Determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial
effects of the business combination.
This Statement applies prospectively to business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. An entity may not apply it
before that date. The effective date of this Statement is the same as that of
the related FASB Statement No. 160,
Noncontrolling
Interests in Consolidated Financial Statements.
Based on our
current activities, we estimate that the adoption of this Statement will not
have a material effect on the financial statements of the Company.
In March 2008, the FASB issued SFAS 161,
Disclosures about Derivative Instruments and
Hedging Activities
, effective for financial statements issued for
fiscal years beginning after November 15, 2008. The objective of this
statement is to provide enhanced disclosures about derivative instruments and
related hedging items. Based on the Banks current activities, we estimate that
the adoption of this statement will not have a material effect on the financial
statements of the Company.
6
Note 4 - Earnings per Share
The weighted average number of common shares
used to calculate earnings per share for the periods ended March 31, 2008
and 2007 were as follows:
|
|
Three months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Basic
weighted - average shares
|
|
4,848,297
|
|
4,869,855
|
|
Effect of
dilutive securities
|
|
2,338
|
|
38,509
|
|
Diluted
weighted - average shares
|
|
4,850,635
|
|
4,908,364
|
|
Note 5 Allowances for Loan and Real Estate Losses
A summary of the activity in the allowances
for loan and real estate losses is as follows for the quarters ended March 31
(in thousands):
|
|
Three Months Ended
March 31,
2008
|
|
Three Months Ended
March 31,
2007
|
|
|
|
Loans
|
|
Real Estate
|
|
Loans
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
Balancebeginning
of period
|
|
$
|
5,162
|
|
$
|
|
|
$
|
2,572
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisions
for estimated losses
|
|
1,528
|
|
229
|
|
1,961
|
|
74
|
|
Recoveries
|
|
136
|
|
|
|
49
|
|
|
|
Losses
charged off
|
|
(719
|
)
|
(229
|
)
|
(288
|
)
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
Balanceend
of period
|
|
$
|
6,107
|
|
$
|
|
|
$
|
4,294
|
|
$
|
|
|
The provision for loan losses decreased
between the periods listed above primarily due to a $1.4 million specific loan
loss allowance on two phases of a subdivision recorded at March 31, 2007,
compared to an increase in specific loan loss allowances for the quarter ended March 31,
2008 of approximately $666,000.
7
Note 6 Fair Value Measurement
Effective January 1, 2008, the Bank adopted SFAS 157, which
provides a framework for measuring fair value. SFAS 157 defines fair value as
the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. SFAS 157 also establishes a fair value hierarchy which
requires an entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. The standard describes
three levels of inputs that may be used to measure fair value:
Level 1
|
Unadjusted, quoted prices in active markets for identical assets or
liabilities at the measurement date.
|
|
|
Level 2
|
Observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active;
or other inputs that are observable or can be corroborated by observable
market data at the measurement date for substantially the full term of the
assets or liabilities.
|
|
|
Level 3
|
Unobservable inputs that
reflect managements best estimate of what market participants would use in
pricing the asset or liability at the measurement date.
|
The assets presented at fair value on the Banks financial statements
are related to real estate owned, net, and impaired loans, both of which are
valued based on Level 3 inputs. Management utilizes appraisals, listing prices,
market information from local realtors and market research reports to base the
fair value measurement.
The table below presents a reconciliation for all assets and liabilities
measured at fair value on a recurring basis using significant unobservable
inputs (Level 3):
|
|
December 31,
2007
|
|
Additions
|
|
Fair Value
Adjustments
|
|
Transfers
Out
|
|
Gain
(Loss)
|
|
March 31,
2008
|
|
|
|
(in thousands)
|
|
Real estate
owned, net
|
|
$
|
8,120
|
|
$
|
5,500
|
|
$
|
(229
|
)
|
$
|
(2,111
|
)
|
$
|
(46
|
)
|
$
|
11,234
|
|
Impaired
loans
|
|
14,894
|
|
1,128
|
|
(378
|
)
|
|
|
|
|
15,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized and unrealized gains and losses on
real estate owned are recognized in noninterest expenses in the consolidated
statements of income under the caption Real estate owned, net. Gains on sales of real estate owned which are
financed by the Bank are deferred in certain circumstances and recognized as
the borrower pays down the related loan. Fair value adjustments to impaired
loans are recorded through the allowance for loan losses.
8
MANAGEMENTS
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 Managements 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
local or 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, 2008 and December 31, 2007
are presented in the following table (dollars in thousands). Material changes
between the periods are discussed in the sections which follow the table.
|
|
March 31,
|
|
December 31,
|
|
Increase
|
|
Percentage
|
|
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
Change
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents
|
|
$
|
50,700
|
|
$
|
27,387
|
|
$
|
23,313
|
|
85.1
|
%
|
Investment
securities held to maturity
|
|
120,864
|
|
95,590
|
|
25,274
|
|
26.4
|
|
Federal Home
Loan Bank stock
|
|
4,482
|
|
4,433
|
|
49
|
|
1.1
|
|
Loans
receivable, net
|
|
584,984
|
|
601,256
|
|
(16,272
|
)
|
(2.7
|
)
|
Accrued
interest receivable
|
|
7,804
|
|
9,042
|
|
(1,238
|
)
|
(13.7
|
)
|
Real estate
owned, net
|
|
11,234
|
|
8,120
|
|
3,114
|
|
38.4
|
|
Office
properties and equipment, net
|
|
24,878
|
|
24,263
|
|
615
|
|
2.5
|
|
Prepaid
expenses and other assets
|
|
24,112
|
|
21,887
|
|
2,225
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
829,058
|
|
$
|
791,978
|
|
$
|
37,080
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
656,913
|
|
$
|
630,414
|
|
$
|
26,499
|
|
4.2
|
%
|
Federal Home
Loan Bank advances
|
|
87,634
|
|
82,087
|
|
5,547
|
|
6.8
|
|
Other
liabilities
|
|
10,486
|
|
5,814
|
|
4,672
|
|
80.4
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
755,033
|
|
718,315
|
|
36,718
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS
EQUITY
|
|
74,025
|
|
73,663
|
|
362
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
829,058
|
|
$
|
791,978
|
|
$
|
37,080
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
BOOK VALUE
PER SHARE
|
|
$
|
15.27
|
|
$
|
15.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY TO ASSETS
|
|
8.9
|
%
|
9.3
|
%
|
|
|
|
|
9
Loans Receivable.
Changes in loan composition between March 31,
2008 and December 31, 2007 are presented in the following table (dollars
in thousands).
|
|
March 31,
|
|
December 31,
|
|
Increase
|
|
|
|
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
One- to
four-family residences
|
|
$
|
228,803
|
|
$
|
230,005
|
|
$
|
(1,202
|
)
|
(0.5
|
)%
|
Home equity
lines of credit and second mortgage
|
|
35,240
|
|
34,315
|
|
925
|
|
2.7
|
|
Multi-family
|
|
18,011
|
|
15,616
|
|
2,395
|
|
15.3
|
|
Commercial
real estate
|
|
118,115
|
|
117,548
|
|
567
|
|
0.5
|
|
Land
|
|
44,369
|
|
42,843
|
|
1,526
|
|
3.6
|
|
Construction:
|
|
|
|
|
|
|
|
|
|
One- to
four-family residences
|
|
17,858
|
|
20,815
|
|
(2,957
|
)
|
(14.2
|
)
|
Speculative
one-to four-family residences
|
|
29,345
|
|
40,893
|
|
(11,548
|
)
|
(28.2
|
)
|
Multi-family
|
|
18,904
|
|
18,632
|
|
272
|
|
1.5
|
|
Commercial
real estate
|
|
16,773
|
|
31,239
|
|
(14,466
|
)
|
(46.3
|
)
|
Land development
|
|
39,232
|
|
42,145
|
|
(2,913
|
)
|
(6.9
|
)
|
Total
construction loans
|
|
122,112
|
|
153,724
|
|
(31,612
|
)
|
(20.6
|
)
|
Total
mortgage loans
|
|
566,650
|
|
594,051
|
|
(27,401
|
)
|
(4.6
|
)
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
24,344
|
|
24,846
|
|
(502
|
)
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
9,153
|
|
9,531
|
|
(378
|
)
|
(4.0
|
)
|
Other
|
|
13,902
|
|
14,537
|
|
(635
|
)
|
(4.4
|
)
|
Total
consumer
|
|
23,055
|
|
24,068
|
|
(1,013
|
)
|
(4.2
|
)
|
|
|
|
|
|
|
|
|
|
|
Total loans
receivable
|
|
614,049
|
|
642,965
|
|
(28,916
|
)
|
(4.5
|
)
|
|
|
|
|
|
|
|
|
|
|
Undisbursed
loan funds
|
|
(23,344
|
)
|
(36,868
|
)
|
13,524
|
|
(36.7
|
)
|
Deferred
loan costs net
|
|
386
|
|
321
|
|
65
|
|
20.2
|
|
Allowance
for loan losses
|
|
(6,107
|
)
|
(5,162
|
)
|
(945
|
)
|
18.3
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable, net
|
|
$
|
584,984
|
|
$
|
601,256
|
|
$
|
(16,272
|
)
|
(2.7
|
)%
|
The decrease in the Banks loan
portfolio was primarily due to continued softening of the housing market in the
Banks market area. Market data indicates an overall decrease in home sales in
Benton and Washington counties in 2008 and 2007. The Banks loan originations
were down 21.8% for the quarter ended March 31, 2008, compared to the
first quarter of 2007. Although the Northwest Arkansas region continues to
experience a strong job market and population growth, the supply of new
residential lots and new speculative homes for sale has outpaced demand during
the past several years. We expect this trend to continue for the foreseeable
future given the level of oversupply in the market.
10
Asset Quality.
The
following table sets forth the amounts and categories of the Banks
nonperforming assets at the dates indicated.
|
|
March 31,
2008
|
|
December 31,
2007
|
|
Increase
(Decrease)
|
|
Percentage
Change
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
Nonaccrual
loans:
|
|
|
|
|
|
|
|
|
|
One- to
four-family residential
|
|
$
|
6,845
|
|
$
|
6,800
|
|
$
|
45
|
|
0.7
|
%
|
Home equity
and second mortgage
|
|
1,329
|
|
1,194
|
|
135
|
|
11.3
|
|
Speculative
one- to four-family construction
|
|
2,347
|
|
4,934
|
|
(2,587
|
)
|
(52.4
|
)
|
Land
development
|
|
11,460
|
|
11,428
|
|
32
|
|
0.3
|
|
Land
|
|
2,505
|
|
1,311
|
|
1,194
|
|
91.1
|
|
Commercial
real estate
|
|
4,472
|
|
4,027
|
|
445
|
|
11.1
|
|
Commercial
loans
|
|
2,617
|
|
3,367
|
|
(750
|
)
|
(22.3
|
)
|
Consumer loans
|
|
267
|
|
268
|
|
(1
|
)
|
(0.4
|
)
|
Total
nonaccrual loans
|
|
31,842
|
|
33,329
|
|
(1,487
|
)
|
(4.5
|
)
|
|
|
|
|
|
|
|
|
|
|
Accruing
loans 90 days or more past due
|
|
2,878
|
|
2,412
|
|
466
|
|
19.3
|
|
Real estate
owned
|
|
11,234
|
|
8,120
|
|
3,114
|
|
38.3
|
|
|
|
|
|
|
|
|
|
|
|
Total
nonperforming assets
|
|
$
|
45,954
|
|
$
|
43,861
|
|
$
|
2,093
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
|
Total
nonaccrual, accruing loans 90 days or more past due and restructured loans as
a percentage of total loans receivable
|
|
5.65
|
%
|
5.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
nonperforming assets as a percentage of total assets
|
|
5.54
|
%
|
5.54
|
%
|
|
|
|
|
The decrease in nonaccrual
loans is primarily related to the transfer of nonaccrual speculative single
family construction loans to real estate owned, which was offset somewhat by an
increase in nonaccrual land loans. The Northwest Arkansas market continues to
experience an oversupply of lots and speculative homes. Certain of the Banks
homebuilders are experiencing extended marketing times for the sale of their
homes which has resulted in inadequate cash flow to service the interest carry
on their loans. The specific loan loss allowance related to loans to builders
and developers was approximately $2.9 million at March 31, 2008.
We expect a significant
amount of the nonaccrual real estate loans to eventually migrate to real estate
owned as $17.6 million of the nonaccrual real estate loans reported above are
in some stage of the foreclosure process as of March 31, 2008. Therefore
we expect real estate owned and associated expenses to continue to increase in
future periods as such loans migrate from loans to real estate owned.
The level of nonaccrual speculative
construction loans, land development loans and commercial real estate loans is
attributable primarily to six loan relationships totaling $18.9 million, or 59%
of nonaccrual loans. These relationships are described in more detail in the
paragraphs that follow.
The first relationship totaled $5.9 million
at
March 31,
2008, and is comprised of two subdivision loans totaling $5.4 million
and the borrowers primary residence totaling approximately $520,000. Foreclosure
proceedings have begun on the subdivision and the borrower has filed for
bankruptcy protection. The subdivision loans represent two phases of the same
subdivision located in Lowell, Arkansas, one of which is complete and the other
is approximately 10% complete. Since the time the loans were originated, market
conditions have deteriorated and a subdivision across the street from this
subdivision has gone into default. We are aware that the financial institution
that obtained those lots liquidated them in bulk at a substantial discount,
which had an adverse effect on the value of the lots in the subdivision
securing the Banks loan. As a result, we ordered appraisals in the first
quarter of 2007 on both phases of the subdivision which used discounted cash
flow analysis for the complete phase, given the extended selling period that
would be necessary under current market conditions, and a land only valuation
on the incomplete phase given the decreasing likelihood that these lots would
be developed. These appraisals resulted in a specific loan loss allowance
totaling $1.4 million on this subdivision initially recorded in the first
quarter of 2007. These subdivision loans are also the subject of litigation
alleging fraud and negligence, among other complaints, that the Bank has filed
against various parties to the loan. The Bank may be able to recover some of
its loss through this litigation, although at this time the Bank cannot give
any assurances as to the amount of a recovery, if any. Due to the nature of
these loans, the uncertain nature of the legal process, and the possibility of
continued adverse changes in market conditions, we may incur losses in the
future in excess of the amount estimated as of March 31, 2008.
The second relationship totaled $2.2 million
at
March 31,
2008, and is comprised of a subdivision located in Cave Springs,
Arkansas. The subdivision is 100% complete. The Bank obtained an updated
valuation on the subdivision
11
using discounted cash flow analysis. Due to
the market conditions and the oversupply of lots in Northwest Arkansas, the
valuation indicated lower lot prices and an extended marketing time over that
in the original appraisal obtained when the loan was originated. Based on the
estimated fair value of the collateral, a specific loan loss allowance totaling
$885,000 was recorded during the third quarter of 2007. Based on the nature of
this loan and the possibility of continued adverse changes in the market
conditions, we may incur losses in the future in excess of the amount estimated
as of
March 31,
2008.
The third relationship totaled $2.8 million, which consisted of a $2.1
commercial loan secured by commercial real estate, franchise rights, inventory
and equipment, a $650,000 loan on the borrowers primary residence, and a
$20,000 unsecured loan. The loans in this relationship became over 90 days past
due during the third quarter of 2007. Based on the borrowers workout plans,
these loans were maintained on accrual status at that time. However, due to the
passage of time with no progress on the workout plan, we placed the loans on
nonaccrual status during the fourth quarter of 2007. The borrower is selling
all of the collateral securing his loans and has entered into sales contracts
on some of the franchises. During the first quarter of 2008 one of the
franchise sales closed and the Bank received proceeds from this sale. However,
the Bank agreed to accept less than the full amount of proceeds as part of the
workout. Based on this and other valuation changes during the first quarter,
the Bank recorded an additional $350,000 in specific loan loss allowances,
bringing the total specific allowance to $373,000 with respect to this
relationship as of March 31, 2008.
The fourth relationship totaled $2.1 million and represents a single
commercial real estate loan secured by a convenience store, car wash, and
retail space. This loan became over 90 days past due during the third quarter
of 2007. Based on our expectation that the guarantors would cooperate with us
on a workout plan and our assessment of their financial strength, these loans
were maintained on accrual status at that time. However, due to the passage of
time with no progress on a workout plan, we placed this loan on nonaccrual
status during the fourth quarter of 2007. In the event of a foreclosure and a
possible deficiency judgment, we believe sufficient net worth exists among the
guarantors to satisfy their obligation. As of
March 31, 2008, based on the then current estimated fair
value of the collateral, the Bank estimates it will incur no loss.
The fifth relationship totaled $4.8 million at
March 31, 2008, and is comprised primarily of $3.8 million
in land development loans for a 110 lot subdivision in Springdale, Arkansas, as
well as seven loans totaling approximately $950,000 for a speculative
single-family residence, a pre-sold custom home, a single family residence, a
rental property, and land. This borrower has filed for bankruptcy protection.
We have estimated losses of $15,000 at March 31, 2008.
However, based on factors such as the potential adverse changes in market
conditions, we may incur losses greater than that amount.
The sixth relationship totaled $1.1 million at March 31, 2008, and
is comprised primarily of loans totaling $1.0 million for 35 completed lots in
a
subdivision located in Pea Ridge, Arkansas, and a $96,000 loan on a
completed speculative home.
As of
March 31, 2008, based on the then current estimated fair
value of the collateral, the Bank estimates it will incur no loss. Based
on the nature of this loan and the possibility of continued adverse changes in
the market conditions, we may incur losses in the future.
Accruing loans 90 days or more past due at
March 31, 2008, primarily
consisted of one loan whose past due interest is expected to be paid after March 31, 2008.
The following table sets forth the amounts
and categories of the Banks real estate owned at the dates indicated.
|
|
March 31,
2008
|
|
December 31,
2007
|
|
|
|
(Dollars in Thousands)
|
|
Real estate
owned
|
|
|
|
|
|
One- to
four-family residential
|
|
$
|
2,175
|
|
$
|
1,566
|
|
Speculative
one- to four-family construction(1)
|
|
7,199
|
|
5,956
|
|
Land
|
|
1,032
|
|
598
|
|
Commercial
real estate
|
|
828
|
|
|
|
Total real
estate owned
|
|
$
|
11,234
|
|
$
|
8,120
|
|
(1)
At March 31,
2008 $5.5 million of these properties are 100% complete. The remainder range
from 85% to 97% complete.
The Bank is diligently working to dispose of its REO and has dedicated
an experienced special assets officer who is working full-time to liquidate the
Banks properties in the Northwest Arkansas market. Each property is evaluated
on a case-by-case basis to determine the best course of action with respect to
liquidation. Properties are marketed directly by the Bank or listed with
local real estate agents utilizing appraisals, market information from
realtors, market research reports, and our own market evaluations to make
pricing and selling decisions. The Banks Chief Lending Officer,
loan officer, credit manager, special assets officer, and team members in the
collections department all work
12
together in this endeavor. The Banks goal is to liquidate
these properties as soon as possible without incurring extraordinary losses due
to quick sale pricing. During the quarter ended March 31, 2008, the Bank
originated loans to facilitate the sales of real estate owned totaling $1.8
million. The Bank offers attractive rates and financing options to prospective
buyers of real estate owned to help facilitate sales.
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,
|
|
|
|
2008
|
|
2007
|
|
Balance at
beginning of period
|
|
$
|
5,162
|
|
$
|
2,572
|
|
Provisions
for estimated losses
|
|
1,528
|
|
1,961
|
|
Recoveries
|
|
136
|
|
49
|
|
Losses
charged off
|
|
(719
|
)
|
(288
|
)
|
Balance at
end of period
|
|
$
|
6,107
|
|
$
|
4,294
|
|
Changes
in the composition of the allowance for loan losses between March 31, 2007
and December 31, 2006 are presented in the following table (in thousands):
|
|
March 31,
|
|
December 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
Increase
|
|
General
|
|
$
|
2,546
|
|
$
|
2,267
|
|
$
|
279
|
|
Specific
|
|
3,561
|
|
2,895
|
|
666
|
|
|
|
$
|
6,107
|
|
$
|
5,162
|
|
$
|
945
|
|
The general component of the allowance for
loan losses increased primarily due to increases in the loss factors applied to
single family residential loans, speculative single family construction loans
and land development loans, partially offset by decreases in the related loan
balances. These loss factors were increased due to the recent loss history on
these types of loans. The specific component of the allowance for loan losses
increased primarily due to specific allowances on one borrower. See Asset
Quality.
The allowance for loan losses is established
as losses are estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when
management believes it is likely that a loan balance is uncollectible. Subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses represents
managements estimate of incurred credit losses inherent in the Companys loan
portfolio as of the balance sheet date. The estimation of the allowance is
based on a variety of factors, including past loan loss experience, the current
credit profile of the Companys borrowers, adverse situations that have
occurred that may affect the borrowers ability to repay, the estimated value of
underlying collateral, and general economic conditions. Losses are recognized
when available information indicates that it is probable that a loss has been
incurred and the amount of the loss can be reasonably estimated. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available or
conditions change.
In determining the allowance for loan losses,
the Company allocates a portion of the allowance to its various loan categories
based on an analysis of individual loans and pools of loans. However, the
entire allowance is available to absorb credit losses inherent in the total
loan portfolio as of the balance sheet date.
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
borrowers prior payment record, and the amount of the short fall 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 loans effective interest rate, the loans obtainable market price, or the
fair value of the collateral if the loan is collateral dependent. Multi-family
residential, commercial real estate, land and land development, and commercial
loans that are delinquent or where the borrowers total loan relationship
exceeds $1 million are evaluated on a loan by loan basis at least annually.
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
13
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 or local
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 in the
event that the Bank has to foreclose or repossess the collateral.
Although we consider
the allowance for loan losses of approximately $6.1 million adequate to cover
losses inherent in our loan portfolio at March 31, 2008, no assurance can
be given that we will not sustain loan losses that are significantly different
from the amount recorded, 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.
Investment Securities.
Changes in the composition of
investment securities held to maturity between March 31, 2008 and December 31,
2007 are presented in the following table (in thousands).
|
|
March 31,
|
|
December 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
Increase
|
|
U.S.
Government and agency obligations
|
|
$
|
103,174
|
|
$
|
78,501
|
|
$
|
24,673
|
|
Municipal
securities
|
|
17,690
|
|
17,089
|
|
601
|
|
Total
|
|
$
|
120,864
|
|
$
|
95,590
|
|
$
|
25,274
|
|
During the first three months
of 2008, investment securities totaling $64.9 million with an average tax
equivalent yield of 6.07% were purchased and $39.7 million matured or were
called.
At
March 31,
2008, estimated fair values of investment securities held to maturity
were as follows (in thousands):
|
|
Amortized
Cost
|
|
Fair
Value
|
|
|
|
|
|
|
|
U.S. Government and agency obligations
|
|
$
|
103,174
|
|
$
|
103,708
|
|
Municipal securities
|
|
17,690
|
|
17,646
|
|
Total
|
|
$
|
120,864
|
|
$
|
121,354
|
|
Accrued Interest Receivable.
The
decrease in accrued interest receivable was primarily due to a decrease in the
loans receivable balance as well as a decrease in the loan yield at March 31,
2008 compared to December 31, 2007.
Real Estate
Owned, net.
Changes
in the composition of real estate owned between March 31, 2008 and December 31, 2007 are
presented in the following table (dollars in thousands).
|
|
December 31,
2007
|
|
Additions
|
|
Fair Value
Adjustments
|
|
Net Sales
Proceeds(1)
|
|
Gain (Loss)
|
|
March 31,
2008
|
|
One- to four-family residential
|
|
$
|
1,566
|
|
$
|
763
|
|
$
|
(65
|
)
|
$
|
(65
|
)
|
$
|
(24
|
)
|
$
|
2,175
|
|
Speculative one- to four-family
|
|
5,956
|
|
3,392
|
|
(146
|
)
|
(1,981
|
)
|
(22
|
)
|
7,199
|
|
Land
|
|
598
|
|
517
|
|
(18
|
)
|
(65
|
)
|
|
|
1,032
|
|
Commercial real estate
|
|
|
|
828
|
|
|
|
|
|
|
|
828
|
|
|
|
$
|
8,120
|
|
$
|
5,500
|
|
$
|
(229
|
)
|
$
|
(2,111
|
)
|
(46
|
)
|
$
|
11,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Net sales proceeds include $1.8
million of loans made by the Bank to facilitate the sale of real estate owned.
Prepaid Expenses and Other Assets.
Prepaid expenses and other assets
increased by $2.2 million from December 31, 2007 to March 31, 2008
primarily due to a $1.7 million receivable for a death benefit claim on our
life insurance policies recorded in the first quarter of 2008.
14
Deposits.
Changes in the composition of deposits
between March 31, 2008
and December 31, 2007 are presented in the following table (dollars in
thousands).
|
|
March 31,
2008
|
|
December 31,
2007
|
|
Increase
(Decrease)
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
Checking accounts
|
|
$
|
161,315
|
|
$
|
127,491
|
|
$
|
33,824
|
|
26.5
|
%
|
Money Market accounts
|
|
51,713
|
|
51,424
|
|
289
|
|
0.6
|
|
Savings accounts
|
|
25,073
|
|
25,088
|
|
(15
|
)
|
(0.1
|
)
|
Certificates of deposit
|
|
418,812
|
|
426,411
|
|
(7,599
|
)
|
(1.8
|
)
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
656,913
|
|
$
|
630,414
|
|
$
|
26,499
|
|
4.2
|
%
|
Deposits increased in the comparison period, primarily due to an
increase in checking accounts related to public unit deposits and focused
marketing efforts to increase checking accounts with a checking product which
has a higher interest rate than the Banks other checking account
products. To earn the maximum rate under
the new product, customers must qualify based on usage of electronic banking
services such as debit card transactions, e-statements, and direct deposits or
automatic payments.
The Bank will
continue to promote checking accounts by targeting households and small- and
medium-sized business accounts with its direct mail campaign and thank you
gifts. Checking accounts are an attractive source of
funds for the Bank as they offer overall low-interest deposits, fee income
potential, and the opportunity to cross-sell other financial services.
Other Liabilities.
Other liabilities increased primarily due to
an increase in investment security purchases which settled after period end
from $3.2 million at December 31, 2007, to $7.5 million at March 31,
2008.
Stockholders Equity.
Stockholders
equity increased approximately $362,000 from December 31, 2007 to
March 31,
2008
. The increase in stockholders equity was
primarily due to net income totaling $1.1 million during the first three months
of 2008. In addition, during the three
months ended
March 31, 2008
, cash dividends of approximately $775,000 were paid. See the Unaudited Consolidated Statement of Stockholders
Equity for the three months ended
March 31, 2008
for more detail.
15
Average Balance Sheets
The following table sets forth certain information relating to the Companys
average balance sheets and reflects the average yield on assets and average
cost of liabilities for the periods indicated.
Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods presented. Average balances are based on daily balances
during the period.
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield/
Cost
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield/
Cost
|
|
|
|
(Dollars in Thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable(1)
|
|
$
|
601,996
|
|
$
|
9,975
|
|
6.63
|
%
|
$
|
686,419
|
|
$
|
12,201
|
|
7.11
|
%
|
Investment securities(2)
|
|
105,254
|
|
1,393
|
|
5.29
|
|
66,961
|
|
838
|
|
5.00
|
|
Other interest-earning assets
|
|
21,159
|
|
168
|
|
3.18
|
|
14,650
|
|
188
|
|
5.13
|
|
Total interest-earning assets
|
|
728,409
|
|
11,536
|
|
6.34
|
|
768,030
|
|
13,227
|
|
6.89
|
|
Noninterest-earning assets
|
|
72,425
|
|
|
|
|
|
66,206
|
|
|
|
|
|
Total assets
|
|
$
|
800,834
|
|
|
|
|
|
$
|
834,236
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
632,954
|
|
5,568
|
|
3.52
|
|
$
|
641,633
|
|
5,848
|
|
3.65
|
|
FHLB advances
|
|
84,870
|
|
903
|
|
4.25
|
|
110,491
|
|
1,260
|
|
4.56
|
|
Total interest-bearing liabilities
|
|
717,824
|
|
6,471
|
|
3.61
|
|
752,124
|
|
7,108
|
|
3.78
|
|
Noninterest-bearing liabilities
|
|
8,856
|
|
|
|
|
|
6,201
|
|
|
|
|
|
Total liabilities
|
|
726,680
|
|
|
|
|
|
758,325
|
|
|
|
|
|
Stockholders equity
|
|
74,154
|
|
|
|
|
|
75,911
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
800,834
|
|
|
|
|
|
$
|
834,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
$
|
5,065
|
|
|
|
|
|
$
|
6,119
|
|
|
|
Net earning assets
|
|
$
|
10,585
|
|
|
|
|
|
$
|
15,906
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
2.73
|
%
|
|
|
|
|
3.11
|
%
|
Net interest margin
|
|
|
|
|
|
2.78
|
%
|
|
|
|
|
3.19
|
%
|
Ratio of interest-earning assets to interest-bearing liabilities
|
|
|
|
|
|
101.47
|
%
|
|
|
|
|
102.11
|
%
|
(1) Includes nonaccrual loans.
(2) Includes FHLB of Dallas stock.
16
Rate/Volume Analysis
The table below sets forth certain
information regarding changes in interest income and interest expense of the Company
for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by prior rate); (ii) changes in rate
(change in rate multiplied by prior average volume); (iii) changes in
rate-volume (changes in rate multiplied by the change in average volume); and (iv) the
net change.
|
|
Three Months Ended March 31,
|
|
|
|
2008 vs. 2007
|
|
|
|
Increase (Decrease)
Due to
|
|
Total
|
|
|
|
Volume
|
|
Rate
|
|
Rate/
Volume
|
|
Increase
(Decrease)
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
$
|
(1,501
|
)
|
$
|
(827
|
)
|
$
|
102
|
|
$
|
(2,226
|
)
|
Investment securities
|
|
478
|
|
49
|
|
28
|
|
555
|
|
Other interest-earning assets
|
|
83
|
|
(71
|
)
|
(32
|
)
|
(20
|
)
|
Total interest-earning assets
|
|
(940
|
)
|
(849
|
)
|
98
|
|
(1,691
|
)
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
(80
|
)
|
(203
|
)
|
3
|
|
(280
|
)
|
FHLB advances
|
|
(292
|
)
|
(85
|
)
|
20
|
|
(357
|
)
|
Total interest-bearing liabilities
|
|
(372
|
)
|
(288
|
)
|
23
|
|
(637
|
)
|
Net change in net interest income
|
|
$
|
(568
|
)
|
$
|
(561
|
)
|
$
|
75
|
|
$
|
(1,054
|
)
|
17
CHANGES IN RESULTS OF OPERATIONS
The table below presents a
comparison of results of operations for the three months ended
March 31,
2008 and 2007 (dollars in thousands).
Specific changes in captions are discussed in the sections which follow
the table.
|
|
Three Months Ended
March 31,
|
|
Increase
(Decrease)
|
|
Percentage
Change
|
|
|
|
2008
|
|
2007
|
|
2008 vs 2007
|
|
2008 vs 2007
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
$
|
9,975
|
|
$
|
12,201
|
|
$
|
(2,226
|
)
|
(18.2
|
)%
|
Investment securities
|
|
1,393
|
|
838
|
|
555
|
|
66.2
|
|
Other
|
|
168
|
|
188
|
|
(20
|
)
|
(10.6
|
)
|
Total interest income
|
|
11,536
|
|
13,227
|
|
(1,691
|
)
|
(12.8
|
)
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
5,568
|
|
5,848
|
|
(280
|
)
|
(4.8
|
)
|
FHLB advances
|
|
903
|
|
1,260
|
|
(357
|
)
|
(28.3
|
)
|
Total interest expense
|
|
6,471
|
|
7,108
|
|
(637
|
)
|
(9.0
|
)
|
Net interest income before
provision for loan losses
|
|
5,065
|
|
6,119
|
|
(1,054
|
)
|
(17.2
|
)
|
Provision for loan losses
|
|
1,528
|
|
1,961
|
|
(433
|
)
|
(22.1
|
)
|
Net interest income after
provision for loan losses
|
|
3,537
|
|
4,158
|
|
(621
|
)
|
(14.9
|
)
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
Deposit fee income
|
|
1,211
|
|
1,157
|
|
54
|
|
4.7
|
|
Earnings on life insurance
policies
|
|
1,371
|
|
189
|
|
1,182
|
|
625.4
|
|
Gain on sale of loans
|
|
175
|
|
226
|
|
(51
|
)
|
(22.6
|
)
|
Other
|
|
447
|
|
286
|
|
161
|
|
56.3
|
|
Total noninterest income
|
|
3,204
|
|
1,858
|
|
1,346
|
|
72.4
|
|
Noninterest expenses:
|
|
|
|
|
|
|
|
|
|
Salaries and employee
benefits
|
|
3,387
|
|
3,443
|
|
(56
|
)
|
(1.6
|
)
|
Real estate owned, net
|
|
430
|
|
162
|
|
268
|
|
165.4
|
|
Data processing
|
|
318
|
|
454
|
|
(136
|
)
|
(30.0
|
)
|
Other
|
|
1,936
|
|
2,007
|
|
(71
|
)
|
(3.5
|
)
|
Total noninterest expenses
|
|
6,071
|
|
6,066
|
|
5
|
|
0.1
|
|
Income before income taxes
|
|
670
|
|
(50
|
)
|
720
|
|
1,440.0
|
|
Income tax provision
(benefit)
|
|
(417
|
)
|
(209
|
)
|
(208
|
)
|
99.5
|
|
Net income
|
|
$
|
1,087
|
|
$
|
159
|
|
$
|
928
|
|
583.7
|
%
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.22
|
|
$
|
0.03
|
|
$
|
0.19
|
|
633.3
|
%
|
Diluted earnings per share
|
|
$
|
0.22
|
|
$
|
0.03
|
|
$
|
0.19
|
|
633.3
|
%
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
2.73
|
%
|
3.11
|
%
|
|
|
|
|
Net interest margin
|
|
2.78
|
%
|
3.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average full-time
equivalents
|
|
306
|
|
306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full-service offices
|
|
19
|
|
18
|
|
|
|
|
|
18
Net Interest Income.
Net interest income is determined by the Companys 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 decrease in net interest income was
primarily due to the level of nonperforming loans.
INTEREST INCOME AND INTEREST EXPENSE
Dollar changes in interest income and interest expense for the
comparison periods are presented in the Rate/Volume Analysis table which
appears on a previous page.
Interest Income.
The decrease in interest income for the three month comparative period
was primarily due to a decrease in the average balance of loans receivable and
an increase in the level of deferred interest on nonperforming loans, as well
as a decrease in the average yield earned on loans receivable. These decreases were offset by an increase in
the average balance of investment securities.
The decrease in average yields earned was due to decreases in market
interest rates. The average balance of
loans receivable decreased due to repayments and maturities as well as a
decrease in loan originations.
Interest Expense.
The decrease in interest expense for the three month comparative period
was primarily due to a decrease in the average rates paid on deposits and FHLB
advances and decreases in the average balances of deposits and FHLB advances.
The decrease in the average rates paid on deposit
accounts reflects the recent decreases in market interest rates.
Provision for Loan Losses.
The provision for loan losses includes
charges to maintain an allowance for loan losses adequate to cover probable
credit losses related to specifically identified loans as well as probable
credit losses inherent in the remainder of the loan portfolio that have been
incurred as of the balance sheet date.
Such provision and the adequacy of the allowance for loan losses is
evaluated quarterly by management of the Bank based on the Banks past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrowers ability to repay, the estimated value of any
underlying collateral and current economic conditions.
The provision for loan losses decreased $433,000 to $1.5 million for
the quarter ended March 31, 2008 compared to $2.0 million for the quarter
ended March 31, 2007. The decrease
in the provision for loan losses was primarily due to a large specific loan
loss allowance recorded in the first quarter of 2007.
Noninterest Income.
The increase in other noninterest income for the three month
comparative period in 2008 was primarily due to a $1.2 million increase in
earnings on life insurance policies due to a death benefit claim recorded
during the quarter ended March 31, 2008.
Noninterest
Expense
Salaries and Employee Benefits.
The changes in the
composition of this line item are presented below (in thousands):
|
|
Three Months Ended
March 31,
|
|
Increase
(Decrease)
|
|
|
|
2008
|
|
2007
|
|
2008 vs 2007
|
|
Salaries
|
|
$
|
2,642
|
|
$
|
2,665
|
|
$
|
(23
|
)
|
Payroll taxes
|
|
256
|
|
263
|
|
(7
|
)
|
Insurance
|
|
171
|
|
170
|
|
1
|
|
401(k)
|
|
78
|
|
80
|
|
(2
|
)
|
Stock compensation (1)
|
|
6
|
|
14
|
|
(8
|
)
|
Defined benefit plan
contribution
|
|
196
|
|
210
|
|
(14
|
)
|
Other
|
|
38
|
|
41
|
|
(3
|
)
|
Total
|
|
$
|
3,387
|
|
$
|
3,443
|
|
$
|
(56
|
)
|
(1) Includes stock options and Management
Recognition and Retention Plan (MRP) expense.
19
Real
estate owned, net.
The changes in the composition of this
line item are presented below (in thousands):
|
|
Three Months Ended
March 31,
|
|
Increase
(Decrease)
|
|
|
|
2008
|
|
2007
|
|
2008 vs 2007
|
|
Loss provisions
|
|
$
|
229
|
|
$
|
74
|
|
$
|
155
|
|
Net loss (gain) on sales
|
|
53
|
|
43
|
|
10
|
|
Taxes and insurance
|
|
111
|
|
5
|
|
106
|
|
Other
|
|
37
|
|
40
|
|
(3
|
)
|
Total
|
|
$
|
430
|
|
$
|
162
|
|
$
|
268
|
|
Expenses
associated with real estate owned have increased due to the increase in real
estate owned balances as discussed in Asset Quality. Real estate owned is expected to continue to
increase in the foreseeable future and real estate owned expenses associated
with maintaining the properties are expected to increase accordingly. Future levels of loss provisions and net
gains or losses on sales of real estate owned will be dependent on market
conditions.
Data Processing.
The decrease in the three month comparative
period in 2008 was primarily due to credits received in 2008 associated with
upgrading our computer system in the first quarter of 2007.
Income
Taxes.
The income tax benefit increased primarily due to an
increase in nontaxable life insurance earnings.
OFF-BALANCE SHEET ARRANGEMENTS
The Company, 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
fulfillment of commitments under letters-of-credit, extensions of credit on
home equity lines of credit, construction loans, and predetermined overdraft
protection limits; and
·
the
commitment to fund withdrawals of certificates of deposit at maturity.
At March 31, 2008, the Banks
off-balance sheet arrangements principally included lending commitments, which
are described below. At March 31,
2008, the Company had no interests in non-consolidated special purpose
entities.
At March 31, 2008, commitments included:
·
total
approved commitments to originate or purchase loans amounting to $3.8 million,
including $842,000 of loans committed to sell;
·
rate
lock agreements with customers of $4.4 million, all of which have been locked
with an investor;
·
funded
mortgage loans committed to sell of $1.8 million;
·
unadvanced
portion of construction loans of $23.3 million;
·
unused
lines of credit of $21.5 million;
·
outstanding
standby letters of credit of approximately $135,000;
·
total
predetermined overdraft protection limits of $14.1 million; and
·
certificates
of deposit scheduled to mature in one year or less totaling $330.1 million.
Total unfunded commitments to originate loans for sale and the related
commitments to sell of $4.4 million meet the definition of a derivative
financial instrument. The related asset
and liability are considered immaterial at March 31, 2008.
Historically, a very small percentage of predetermined overdraft limits
have been used. At March 31, 2008,
overdrafts of accounts with Bounce Protection
TM
represented usage of 4.5% of the limit. We expect utilization of these overdraft
limits to remain at comparable levels in the future.
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.
20
LIQUIDITY AND CAPITAL RESOURCES
The Banks liquidity, represented by
cash and cash equivalents and eligible investment securities, is a product of
its operating, investing and financing activities. The Banks primary sources of funds are
deposits, borrowings, payments 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. Calls of investment
securities are determined by the issuer and are generally influenced by the
level of market interest rates at the bonds call date compared to the coupon
rate of the bond. 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 that 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. During
the first quarter of 2008, the use of FHLB advances increased by $5.5 million
or 6.8%. The Bank uses investment
securities and eligible loans as collateral for FHLB advances. In addition, brokered deposits may be used to
augment the Banks primary funding sources.
At March 31, 2008, the Bank had outstanding brokered deposits of
$2.1 million.
For each of the quarters ended March 31,
2008 and 2007, the Company paid dividends of $0.16 per share. The determination of future dividends on the
Companys common stock will depend on conditions existing at that time with
consideration given to the Companys earnings, capital, and liquidity needs.
Liquidity management is both a daily
and long-term function of business management.
Excess liquidity is generally invested in short-term investments such as
overnight deposits and certificates of deposit.
On a longer-term basis, the Bank maintains a strategy of investing in
various lending products and investment securities. The Bank uses its sources of funds primarily
to meet its ongoing commitments, to pay maturing savings certificates and
savings withdrawals, to repay maturing FHLB of Dallas advances, to fund loan
commitments, and to purchase investment securities.
As of
March 31, 2008
, the Banks regulatory capital was in excess of all applicable
regulatory requirements. At
March 31,
2008
, the Banks tangible, core and
risk-based capital ratios amounted to 8.65%, 8.65% and 13.00%, respectively,
compared to regulatory 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 generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars, without considering changes in relative purchasing
power over time due to inflation.
Unlike most industrial companies,
virtually all of the Banks assets and liabilities are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institutions performance than does the
effect of inflation.
FORWARD-LOOKING
STATEMENTS
The Companys Quarterly Report on Form 10-Q
contains certain forward-looking statements and information relating to the
Company that are based on the beliefs of management as well as assumptions made
by and information currently available to management. In addition, in this document, the
words anticipate, believe, estimate,
expect,
intend, should and similar expressions, or the negative thereof, as they
relate to the Company or the Companys management, are intended to identify
forward-looking statements. Such
statements reflect the current views of the Company with respect to future
looking events and are subject to certain risks, uncertainties and
assumptions. Should one or more of these
risks or uncertainties materialize or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended. The Company does not intend to update these
forward-looking statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
There has been no material change in the market value of the Banks
portfolio equity since December 31, 2007.
Similarly, while there has been no material change in the Companys
asset and liability position since such time, the Banks increased level of
nonperforming assets continued to impact the level of net interest income
during the three months ended March 31, 2008. Correspondingly, the Banks net interest
margin decreased from 3.19% for the three months ended March 31, 2007 to
2.78% for the same period in 2008.
Based on the level of nonperforming assets
21
and competitive pressures on loan and deposit rates, management
anticipates continued pressure on the Banks interest rate spread and interest
margin for the second quarter of 2008.
CONTROLS AND PROCEDURES
Our management evaluated, with the
participation of our Chief Executive Officer and Chief Financial Officer, the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934) as of the end of the period covered by
this report. Based on such evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and regulations and
are operating in an effective manner.
No change in the Companys internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under
the Securities Exchange Act) occurred during the most recent fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.
22
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
Part II
Item 1.
Legal Proceedings
Neither the Company nor the Bank is involved in any pending legal
proceedings other than non-material legal proceedings occurring in the ordinary
course of business.
Item 1A.
Risk Factors
There have been no material changes in the
Companys risk factors from those previously disclosed in the Companys Form 10-K
for the year ended December 31, 2007.
Item 2.
Unregistered Sales of Equity Securities
and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
(a) Total
Number of
Shares
Purchased
|
|
(b)
Average
Price Paid
per Share
|
|
(c) Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
|
|
(d) Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs
|
|
|
|
|
|
|
|
|
|
|
|
January 1 to January 31, 2008
|
|
|
|
|
|
|
|
|
|
February 1 to February 29, 2008
|
|
|
|
|
|
|
|
|
|
March 1 to March 31, 2008
|
|
|
|
|
|
|
|
|
|
The Company is in its 19th announced
repurchase program, which was approved by the board of directors on July 25,
2006, and publicly announced on November 8, 2006. Total shares approved to be purchased in this
program are 245,197 of which 214,587 have been purchased as of March 31,
2008. All treasury stock purchases are
made under publicly announced repurchase programs.
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
Exhibit 31.1 Certification of Chief
Executive Officer,
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
Exhibit 31.2 Certification of Chief
Financial Officer,
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
Exhibit 32.1 Certification of Chief
Executive Officer,
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
Exhibit 32.2 Certification of Chief
Financial Officer,
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
23
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:
|
April 30, 2008
|
By:
|
/s/ Larry J. Brandt
|
|
|
|
Larry J. Brandt
|
|
|
|
Chief Executive Officer
|
Date:
|
April 30, 2008
|
By:
|
/s/ Sherri R. Billings
|
|
|
|
Sherri R. Billings
|
|
|
|
Chief Financial Officer and Chief Accounting Officer
|
24
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