Table
of Contents
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 September 30, 2008
|
|
|
|
OR
|
|
|
|
o
|
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
|
|
|
For
the transition period from
to
|
Commission File Number 0-28312
FIRST
FEDERAL BANCSHARES OF ARKANSAS, INC.
(Exact name of registrant as specified in its charter)
Texas
|
|
71-0785261
|
(State or other jurisdiction of incorporation
or organization)
|
|
(I.R.S. Employer
Identification Number)
|
1401 Highway 62-65 North
|
|
|
Harrison, Arkansas
|
|
72601
|
(Address of principal executive office)
|
|
(Zip Code)
|
(870) 741-7641
(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 the 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
Accelerated
Filer
x
|
Non-accelerated Filer
o
|
Smaller
reporting company
o
|
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 October 24, 2008, there were issued and outstanding 4,848,385
shares of the Registrants Common Stock, par value $.01 per share.
Table of Contents
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
(Unaudited)
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,484
|
|
$
|
27,387
|
|
Investment securities held to maturity
|
|
131,437
|
|
95,590
|
|
Federal Home Loan Bank stock
|
|
4,802
|
|
4,433
|
|
Loans receivable, net
|
|
566,775
|
|
601,256
|
|
Accrued interest receivable
|
|
7,303
|
|
9,042
|
|
Real estate owned, net
|
|
17,402
|
|
8,120
|
|
Office properties and equipment, net
|
|
24,961
|
|
24,263
|
|
Cash surrender value of life insurance
|
|
20,210
|
|
20,159
|
|
Prepaid expenses and other assets
|
|
2,454
|
|
1,728
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
789,828
|
|
$
|
791,978
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
Deposits
|
|
$
|
612,572
|
|
$
|
630,414
|
|
Other borrowings
|
|
97,142
|
|
82,087
|
|
Advance payments by borrowers for taxes and
insurance
|
|
690
|
|
575
|
|
Other liabilities
|
|
5,712
|
|
5,239
|
|
Total liabilities
|
|
716,116
|
|
718,315
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
Preferred stock, no par value, 5,000,000
shares authorized, none issued
|
|
|
|
|
|
Common stock, $.01 par value, 20,000,000
shares authorized, 10,307,502 shares issued, 4,848,385 and 4,844,385 shares
outstanding at September 30, 2008 and December 31, 2007,
respectively
|
|
103
|
|
103
|
|
Additional paid-in capital
|
|
56,648
|
|
56,653
|
|
Employee stock benefit plans
|
|
(27
|
)
|
(42
|
)
|
Retained earnings-substantially restricted
|
|
87,587
|
|
87,600
|
|
|
|
144,311
|
|
144,314
|
|
Treasury stock, at cost, 5,459,117 and
5,463,117 shares at September 30, 2008 and December 31, 2007,
respectively
|
|
(70,599
|
)
|
(70,651
|
)
|
Total stockholders equity
|
|
73,712
|
|
73,663
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
789,828
|
|
$
|
791,978
|
|
See notes to unaudited
consolidated financial statements.
1
Table of Contents
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED
STATEMENTS OF INCOME
(In thousands, except share data)
(Unaudited)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME:
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
$
|
8,601
|
|
$
|
11,020
|
|
$
|
28,096
|
|
$
|
35,225
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
1,540
|
|
952
|
|
4,392
|
|
2,319
|
|
Nontaxable
|
|
203
|
|
177
|
|
579
|
|
537
|
|
Other
|
|
107
|
|
232
|
|
387
|
|
722
|
|
Total interest income
|
|
10,451
|
|
12,381
|
|
33,454
|
|
38,803
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
4,224
|
|
6,099
|
|
14,572
|
|
17,991
|
|
Other borrowings
|
|
931
|
|
987
|
|
2,711
|
|
3,353
|
|
Total interest expense
|
|
5,155
|
|
7,086
|
|
17,283
|
|
21,344
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME
|
|
5,296
|
|
5,295
|
|
16,171
|
|
17,459
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR LOAN LOSSES
|
|
1,611
|
|
1,330
|
|
4,110
|
|
3,662
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES
|
|
3,685
|
|
3,965
|
|
12,061
|
|
13,797
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST INCOME:
|
|
|
|
|
|
|
|
|
|
Deposit fee income
|
|
1,471
|
|
1,235
|
|
4,027
|
|
3,661
|
|
Earnings on life insurance policies
|
|
198
|
|
194
|
|
1,760
|
|
566
|
|
Gain on sale of loans
|
|
51
|
|
201
|
|
317
|
|
664
|
|
Other
|
|
493
|
|
365
|
|
1,362
|
|
924
|
|
Total noninterest income
|
|
2,213
|
|
1,995
|
|
7,466
|
|
5,815
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST EXPENSES:
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
3,085
|
|
3,287
|
|
9,717
|
|
10,016
|
|
Net occupancy expense
|
|
672
|
|
560
|
|
1,957
|
|
1,752
|
|
Real estate owned, net
|
|
509
|
|
543
|
|
1,207
|
|
826
|
|
Data processing
|
|
378
|
|
339
|
|
1,065
|
|
1,143
|
|
Professional fees
|
|
126
|
|
119
|
|
399
|
|
401
|
|
Advertising and public relations
|
|
188
|
|
239
|
|
748
|
|
849
|
|
Postage and supplies
|
|
200
|
|
187
|
|
621
|
|
646
|
|
Other
|
|
608
|
|
535
|
|
1,772
|
|
1,701
|
|
Total noninterest expenses
|
|
5,766
|
|
5,809
|
|
17,486
|
|
17,334
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
132
|
|
151
|
|
2,041
|
|
2,278
|
|
INCOME TAX PROVISION (BENEFIT)
|
|
(86
|
)
|
(150
|
)
|
(273
|
)
|
284
|
|
NET INCOME
|
|
$
|
218
|
|
$
|
301
|
|
$
|
2,314
|
|
$
|
1,994
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
$
|
0.06
|
|
$
|
0.48
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.05
|
|
$
|
0.06
|
|
$
|
0.48
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends Declared
|
|
$
|
0.16
|
|
$
|
0.16
|
|
$
|
0.48
|
|
$
|
0.48
|
|
See notes to unaudited
consolidated financial statements.
2
Table
of Contents
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(In thousands, except share data)
(Unaudited)
|
|
Issued
Common Stock
|
|
Additional
Paid-In
|
|
Employee
Stock
Benefit
|
|
Retained
Earnings
(Substantially
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Plans
|
|
Restricted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2008
|
|
10,307,502
|
|
$
|
103
|
|
$
|
56,653
|
|
$
|
(42
|
)
|
$
|
87,600
|
|
Net income
|
|
|
|
|
|
|
|
|
|
2,314
|
|
Tax effect of stock compensation plan
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
Treasury shares reissued due to exercise of
stock options
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
Stock compensation expense
|
|
|
|
|
|
3
|
|
15
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
(2,327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008
|
|
10,307,502
|
|
$
|
103
|
|
$
|
56,648
|
|
$
|
(27
|
)
|
$
|
87,587
|
|
|
|
Treasury Stock
|
|
Total
Stockholders
|
|
|
|
Shares
|
|
Amount
|
|
Equity
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2008
|
|
5,463,117
|
|
$
|
(70,651
|
)
|
$
|
73,663
|
|
Net income
|
|
|
|
|
|
2,314
|
|
Tax effect of stock compensation plan
|
|
|
|
|
|
(2
|
)
|
Treasury shares reissued due to exercise of
stock options
|
|
(4,000
|
)
|
52
|
|
46
|
|
Stock compensation expense
|
|
|
|
|
|
18
|
|
Dividends paid
|
|
|
|
|
|
(2,327
|
)
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008
|
|
5,459,117
|
|
$
|
(70,599
|
)
|
$
|
73,712
|
|
See
notes to unaudited consolidated financial statements.
3
Table of Contents
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
Net income
|
|
$
|
2,314
|
|
$
|
1,994
|
|
Adjustments to reconcile net income to net
cash provided by operating activities:
|
|
|
|
|
|
Provision for loan losses
|
|
4,110
|
|
3,662
|
|
Provision for real estate losses
|
|
480
|
|
390
|
|
Deferred tax benefit
|
|
(714
|
)
|
(1,516
|
)
|
Accretion of discounts on investment
securities, net
|
|
(58
|
)
|
(14
|
)
|
Federal Home Loan Bank stock dividends
|
|
(108
|
)
|
(246
|
)
|
Gain on disposition of office properties
and equipment
|
|
(19
|
)
|
(4
|
)
|
Loss on sale of repossessed assets, net
|
|
207
|
|
97
|
|
Originations of loans held for sale
|
|
(20,026
|
)
|
(48,077
|
)
|
Proceeds from sales of loans held for sale
|
|
22,853
|
|
47,787
|
|
Gain on sale of loans originated to sell
|
|
(317
|
)
|
(664
|
)
|
Depreciation
|
|
1,102
|
|
1,047
|
|
Amortization of deferred loan fees, net
|
|
280
|
|
334
|
|
Stock compensation expense
|
|
18
|
|
31
|
|
Earnings on life insurance policies
|
|
(580
|
)
|
(566
|
)
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
Accrued interest receivable
|
|
1,739
|
|
41
|
|
Prepaid expenses and other assets
|
|
472
|
|
693
|
|
Other liabilities
|
|
655
|
|
691
|
|
Net cash provided by operating activities
|
|
12,408
|
|
5,680
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
Purchases of investment securities held to
maturity
|
|
(113,030
|
)
|
(29,118
|
)
|
Proceeds from maturities/calls of
investment securities held to maturity
|
|
77,051
|
|
5,050
|
|
Federal Home Loan Bank stock purchased
|
|
(261
|
)
|
|
|
Federal Home Loan Bank stock redeemed
|
|
|
|
2,959
|
|
Loan participations purchased
|
|
(1,966
|
)
|
(2,552
|
)
|
Loan participations sold
|
|
4,045
|
|
7,208
|
|
Net loan repayments
|
|
13,224
|
|
57,871
|
|
Proceeds from sales of repossessed assets
|
|
2,796
|
|
3,389
|
|
Improvements to real estate owned
|
|
(436
|
)
|
(579
|
)
|
Proceeds from sales of office properties
and equipment
|
|
30
|
|
10
|
|
Purchases of office properties and
equipment
|
|
(1,811
|
)
|
(1,525
|
)
|
Net cash provided by (used in) investing
activities
|
|
(20,358
|
)
|
42,713
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
Net decrease in deposits
|
|
(17,842
|
)
|
(11,362
|
)
|
Proceeds from other borrowings
|
|
66,000
|
|
9,700
|
|
Repayment of other borrowings
|
|
(50,945
|
)
|
(50,256
|
)
|
Net increase (decrease) in advance payments
by borrowers for taxes and insurance
|
|
115
|
|
(141
|
)
|
Purchase of treasury stock
|
|
|
|
(1,997
|
)
|
Reissued treasury stock
|
|
46
|
|
350
|
|
Dividends paid
|
|
(2,327
|
)
|
(2,336
|
)
|
Net cash used in financing activities
|
|
(4,953
|
)
|
(56,042
|
)
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
(12,903
|
)
|
(7,649
|
)
|
|
|
|
|
|
|
|
|
4
Table of Contents
FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS:
|
|
|
|
|
|
Beginning of period
|
|
$
|
27,387
|
|
$
|
35,518
|
|
End of period
|
|
$
|
14,484
|
|
$
|
27,869
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
Interest
|
|
$
|
17,412
|
|
$
|
21,515
|
|
Income taxes
|
|
$
|
|
|
$
|
951
|
|
|
|
|
|
|
|
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
ACTIVITIES:
|
|
|
|
|
|
Real estate and other assets acquired in
settlement of loans
|
|
$
|
17,349
|
|
$
|
9,297
|
|
Loans to facilitate sales of real estate
owned
|
|
$
|
5,071
|
|
$
|
1,010
|
|
Investment securities traded, recorded in
investments not yet settled in cash
|
|
$
|
3,000
|
|
$
|
170
|
|
See
notes to unaudited consolidated financial statements.
5
Table of Contents
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 and nine months ended September 30,
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 7.
On
October 10, 2008, the FASB issued FASB Staff Position (FSP) No. 157-3,
Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active
. FSP No. 157-3 amended SFAS No. 157
by incorporating an example to illustrate key considerations in determining the
fair value of a financial asset in an inactive market. The FSP was effective upon issuance. This FSP did not have an effect on the
Companys financial statements.
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. 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
Table of Contents
Note 4 - Earnings per Share
The
weighted average number of common shares used to calculate earnings per share
for the periods ended September 30, 2008 and 2007 were as follows:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Basic weighted - average shares
|
|
4,848,385
|
|
4,865,007
|
|
4,848,356
|
|
4,867,729
|
|
Effect of dilutive securities
|
|
|
|
7,700
|
|
647
|
|
20,243
|
|
Diluted weighted - average shares
|
|
4,848,385
|
|
4,872,707
|
|
4,849,003
|
|
4,887,972
|
|
Note 5 Investment Securities
Investment securities consisted of the following at September 30,
2008 (in thousands):
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
Held To Maturity
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
19,634
|
|
$
|
26
|
|
$
|
986
|
|
$
|
18,674
|
|
U.S. Government and Agency obligations
|
|
111,803
|
|
2
|
|
2,394
|
|
109,411
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
131,437
|
|
$
|
28
|
|
$
|
3,380
|
|
$
|
128,085
|
|
The following tables summarize the gross unrealized losses and fair
value of the Companys investments with unrealized losses that are not deemed
to be other-than-temporarily impaired (in thousands), aggregated by investment
category and length of time that individual securities have been in a
continuous unrealized loss position at September 30, 2008:
|
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
9,537
|
|
$
|
678
|
|
$
|
5,162
|
|
$
|
308
|
|
$
|
14,699
|
|
$
|
986
|
|
U.S. Government and Agency obligations
|
|
96,528
|
|
2,275
|
|
7,881
|
|
119
|
|
104,409
|
|
2,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
106,065
|
|
$
|
2,953
|
|
$
|
13,043
|
|
$
|
427
|
|
$
|
119,108
|
|
$
|
3,380
|
|
The unrealized losses are primarily a result of the current disruptions
in the credit market resulting in historically wide credit spreads. The contractual terms of those investments do
not permit the issuer to settle the securities at a price less than the
amortized cost of the investment. Because the Company has the ability and
intent to hold those investments until a recovery of fair value, which may be
maturity, the Company does not consider those investments to be
other-than-temporarily impaired at September 30, 2008.
7
Table of Contents
Note 6 Allowances for Loan and Real Estate Losses
A
summary of the activity in the allowances for loan and real estate losses is as
follows for the quarters ended September 30 (in thousands):
|
|
Three Months Ended
September 30,
2008
|
|
Three Months Ended
September 30,
2007
|
|
|
|
Loans
|
|
Real Estate
|
|
Loans
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
Balancebeginning of period
|
|
$
|
5,215
|
|
$
|
|
|
$
|
4,291
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisions for estimated losses
|
|
1,611
|
|
164
|
|
1,330
|
|
312
|
|
Recoveries
|
|
242
|
|
|
|
43
|
|
|
|
Losses charged off
|
|
(246
|
)
|
(164
|
)
|
(628
|
)
|
(312
|
)
|
|
|
|
|
|
|
|
|
|
|
Balanceend of period
|
|
$
|
6,822
|
|
$
|
|
|
$
|
5,036
|
|
$
|
|
|
|
|
Nine Months Ended
September 30,
2008
|
|
Nine Months Ended
September 30,
2007
|
|
|
|
Loans
|
|
Real Estate
|
|
Loans
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
Balancebeginning of period
|
|
$
|
5,162
|
|
$
|
|
|
$
|
2,572
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisions for estimated losses
|
|
4,110
|
|
480
|
|
3,662
|
|
390
|
|
Recoveries
|
|
436
|
|
|
|
132
|
|
|
|
Losses charged off
|
|
(2,886
|
)
|
(480
|
)
|
(1,330
|
)
|
(390
|
)
|
|
|
|
|
|
|
|
|
|
|
Balanceend of period
|
|
$
|
6,822
|
|
$
|
|
|
$
|
5,036
|
|
$
|
|
|
8
Table
of Contents
Note 7 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)
|
|
September 30,
2008
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Real estate owned, net
|
|
$
|
8,120
|
|
$
|
20,052
|
|
$
|
(2,685
|
)
|
$
|
(7,909
|
)
|
$
|
(176
|
)
|
$
|
17,402
|
|
Impaired loans
|
|
$
|
14,894
|
|
$
|
6,691
|
|
$
|
(1,588
|
)
|
$
|
(9,530
|
)
|
$
|
|
|
$
|
10,467
|
|
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.
9
Table of Contents
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, valuation of real estate owned
and the methodology for the determination of our allowance for loan losses, due
to the judgments, estimates and assumptions inherent in those policies, are critical
to preparation of our financial statements.
These policies 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 these critical accounting policies, 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. If the current downturn
in the economy is prolonged, 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 and for real estate owned, 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 September 30, 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.
|
|
September 30,
|
|
December 31,
|
|
Increase
|
|
Percentage
|
|
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
Change
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,484
|
|
$
|
27,387
|
|
$
|
(12,903
|
)
|
(47.1
|
)%
|
Investment securities held to maturity
|
|
131,437
|
|
95,590
|
|
35,847
|
|
37.5
|
|
Federal Home Loan Bank stock
|
|
4,802
|
|
4,433
|
|
369
|
|
8.3
|
|
Loans receivable, net
|
|
566,775
|
|
601,256
|
|
(34,481
|
)
|
(5.7
|
)
|
Accrued interest receivable
|
|
7,303
|
|
9,042
|
|
(1,739
|
)
|
(19.2
|
)
|
Real estate owned, net
|
|
17,402
|
|
8,120
|
|
9,282
|
|
114.3
|
|
Office properties and equipment, net
|
|
24,961
|
|
24,263
|
|
698
|
|
2.9
|
|
Prepaid expenses and other assets
|
|
22,664
|
|
21,887
|
|
777
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
789,828
|
|
$
|
791,978
|
|
$
|
(2,150
|
)
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
612,572
|
|
$
|
630,414
|
|
$
|
(17,842
|
)
|
(2.8
|
)%
|
Other borrowings
|
|
97,142
|
|
82,087
|
|
15,055
|
|
18.3
|
|
Other liabilities
|
|
6,402
|
|
5,814
|
|
588
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
716,116
|
|
718,315
|
|
(2,199
|
)
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
73,712
|
|
73,663
|
|
49
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
789,828
|
|
$
|
791,978
|
|
$
|
(2,150
|
)
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
BOOK VALUE PER SHARE
|
|
$
|
15.20
|
|
$
|
15.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY TO ASSETS
|
|
9.3
|
%
|
9.3
|
%
|
|
|
|
|
10
Table
of Contents
Loans Receivable.
Changes in loan composition between September 30,
2008 and December 31, 2007 are presented in the following table (dollars
in thousands).
|
|
September 30,
|
|
December 31,
|
|
Increase
|
|
|
|
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residences
|
|
$
|
238,545
|
|
$
|
230,005
|
|
$
|
8,540
|
|
3.7
|
%
|
Home equity lines of credit and second
mortgage
|
|
33,848
|
|
34,315
|
|
(467
|
)
|
(1.4
|
)
|
Multifamily
|
|
20,231
|
|
15,616
|
|
4,615
|
|
29.6
|
|
Commercial real estate
|
|
111,121
|
|
117,548
|
|
(6,427
|
)
|
(5.5
|
)
|
Land
|
|
44,012
|
|
42,843
|
|
1,169
|
|
2.7
|
|
Construction:
|
|
|
|
|
|
|
|
|
|
One- to four-family residences
|
|
13,053
|
|
20,815
|
|
(7,762
|
)
|
(37.3
|
)
|
Speculative one-to four-family residences
|
|
18,766
|
|
40,893
|
|
(22,127
|
)
|
(54.1
|
)
|
Multifamily
|
|
16,850
|
|
18,632
|
|
(1,782
|
)
|
(9.6
|
)
|
Commercial real estate
|
|
16,211
|
|
31,239
|
|
(15,028
|
)
|
(48.1
|
)
|
Land development
|
|
32,378
|
|
42,145
|
|
(9,767
|
)
|
(23.2
|
)
|
Total construction loans
|
|
97,258
|
|
153,724
|
|
(56,466
|
)
|
(36.7
|
)
|
Total mortgage loans
|
|
545,015
|
|
594,051
|
|
(49,036
|
)
|
(8.3
|
)
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
23,053
|
|
24,846
|
|
(1,793
|
)
|
(7.2
|
)
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
8,918
|
|
9,531
|
|
(613
|
)
|
(6.4
|
)
|
Other
|
|
12,715
|
|
14,537
|
|
(1,822
|
)
|
(12.5
|
)
|
Total consumer
|
|
21,633
|
|
24,068
|
|
(2,435
|
)
|
(10.1
|
)
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable
|
|
589,701
|
|
642,965
|
|
(53,264
|
)
|
(8.3
|
)
|
|
|
|
|
|
|
|
|
|
|
Undisbursed loan funds
|
|
(16,625
|
)
|
(36,868
|
)
|
20,243
|
|
(54.9
|
)
|
Deferred loan costs net
|
|
521
|
|
321
|
|
200
|
|
62.3
|
|
Allowance for loan losses
|
|
(6,822
|
)
|
(5,162
|
)
|
(1,660
|
)
|
32.2
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
$
|
566,775
|
|
$
|
601,256
|
|
$
|
(34,481
|
)
|
(5.7
|
)%
|
The
decrease in the Banks loan portfolio was primarily due to the 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 21.2%
for the quarter ended September 30, 2008, compared to the third quarter of
2007 and 16.4% for the nine months ended September 30, 2008 compared to
the first nine months in 2007. Although
the Northwest Arkansas region continues to experience 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.
11
Table
of Contents
Asset Quality.
The following table sets forth
the amounts and categories of the Banks nonperforming assets at the dates
indicated.
|
|
September 30,
2008
|
|
December 31,
2007
|
|
Increase
(Decrease)
|
|
Percentage
Change
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
$
|
7,668
|
|
$
|
6,800
|
|
$
|
868
|
|
12.8
|
%
|
Home equity and second mortgage
|
|
926
|
|
1,194
|
|
(268
|
)
|
(22.4
|
)
|
Speculative one- to four-family
construction
|
|
714
|
|
4,934
|
|
(4,220
|
)
|
(85.5
|
)
|
Multifamily
|
|
210
|
|
|
|
210
|
|
|
|
Land development
|
|
8,149
|
|
11,428
|
|
(3,279
|
)
|
(28.7
|
)
|
Land
|
|
2,085
|
|
1,311
|
|
774
|
|
59.0
|
|
Commercial real estate
|
|
6,246
|
|
4,027
|
|
2,219
|
|
55.1
|
|
Commercial loans
|
|
1,955
|
|
3,367
|
|
(1,412
|
)
|
(41.9
|
)
|
Consumer loans
|
|
182
|
|
268
|
|
(86
|
)
|
(32.1
|
)
|
Total nonaccrual loans
|
|
28,135
|
|
33,329
|
|
(5,194
|
)
|
(15.6
|
)
|
|
|
|
|
|
|
|
|
|
|
Accruing loans 90 days or more past due
|
|
6,171
|
|
2,412
|
|
3,759
|
|
155.8
|
|
Real estate owned
|
|
17,402
|
|
8,120
|
|
9,282
|
|
114.3
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
51,708
|
|
$
|
43,861
|
|
$
|
7,847
|
|
17.9
|
%
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual and accruing loans 90 days
or more past due as a percentage of total loans receivable
|
|
5.82
|
%
|
5.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets as a percentage
of total assets
|
|
6.55
|
%
|
5.54
|
%
|
|
|
|
|
The
decrease in nonaccrual loans is primarily related to the transfer of nonaccrual
land development and speculative single family construction loans to real
estate owned, which was offset somewhat by an increase in nonaccrual land loans
and commercial real estate 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 $2.6 million at September 30,
2008.
We
expect a significant amount of the nonaccrual real estate loans to eventually
migrate to real estate owned as $15.7 million of the nonaccrual real estate
loans reported above are in some stage of the foreclosure process as of September 30,
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 five loan
relationships totaling $13.0 million, or 46.3% of nonaccrual loans. These relationships are described in more
detail in the paragraphs that follow.
The
first relationship totaled $2.2 million with a specific loan loss allowance of
$896,000 at September 30, 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 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 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 specific allowance recorded as of September 30, 2008.
The
second relationship totaled $2.0 million at September 30, 2008, and
consists of a $1.3 million 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 attempting to sell all of the collateral securing his loans. During the
first nine months of 2008 three of the franchise sales closed and the Bank
received proceeds from these sales.
However, the Bank agreed to accept less than the full amount of proceeds
on one of the sales as part of the workout.
Based on this and other valuation changes during the first nine months
of 2008, the Bank
12
Table of Contents
recorded
an additional $555,000 in specific loan loss allowances, bringing the total
specific allowance to $576,000 with respect to this relationship as of September 30,
2008.
The
third 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 September 30, 2008, based on the then current estimated fair
value of the collateral, the Bank estimates it will incur no loss.
The
fourth relationship totaled $1.1 million at September 30, 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 $98,000 loan on a completed
speculative home. As of September 30,
2008, based on the then current estimated fair value of the collateral, the
Bank has established a specific loan loss allowance of $52,000. Based on the nature of this loan and the
current adverse market conditions, we may incur losses in the future in excess
of the specific allowance recorded at September 30, 2008.
The
fifth relationship is new to nonaccrual status this quarter and totaled $5.6
million with a specific loan loss allowance of $973,000 at September 30,
2008. This relationship is comprised of
two phases of a subdivision located in Elm Springs, Arkansas. The first phase consists of 48 lots and is
100% complete and the second phase consists of undeveloped land. Based on the nature of this loan and the
current adverse market conditions, we may incur losses in the future in excess
of the specific allowance recorded at September 30, 2008.
Accruing
loans 90 days or more past due at September 30, 2008, consisted of three
loans whose past due interest is expected to be paid after September 30,
2008.
The
following table sets forth the amounts and categories of the Banks real estate
owned at the dates indicated.
|
|
September 30,
2008
|
|
December 31,
2007
|
|
Increase
|
|
Percentage
Change
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
Real estate owned
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
$
|
2,007
|
|
$
|
1,566
|
|
$
|
441
|
|
28.2
|
%
|
Speculative one- to four-family
construction(1)
|
|
5,798
|
|
5,956
|
|
(158
|
)
|
(2.7
|
)
|
Land(2)
|
|
8,769
|
|
598
|
|
8,171
|
|
1,366.4
|
|
Commercial real estate
|
|
828
|
|
|
|
828
|
|
|
|
Total real estate owned
|
|
$
|
17,402
|
|
$
|
8,120
|
|
$
|
9,282
|
|
114.3
|
%
|
(1)
At September 30, 2008, $4.9 million of
these properties were 100% complete. The
remainder range from 78% to 92% complete.
(2)
At September 30, 2008, $7.1 million of
the land balance represented 192 finished subdivision lots. The remainder consisted of raw land.
The
increase in real estate owned from December 31, 2007 to September 30,
2008 is primarily related to two subdivisions.
The first totaled $4.0 million, and represents two phases of the same
subdivision located in Lowell, Arkansas, one of which is complete and the other
is approximately 10% complete. The
second subdivision totaled $3.8 million for a 110 lot subdivision in
Springdale, Arkansas. During the first
nine months of 2008, thirteen single family residential properties were
transferred to REO and thirteen were sold.
During the same period, seventeen speculative single family properties
were transferred to REO and twenty-two were sold. At September 30, 2008, the Bank owned
eight foreclosed one- to four-family residential properties and twenty-three
speculative single family residential properties compared to eight and
twenty-eight properties, respectively, at December 31, 2007.
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 officers,
credit manager, special assets officer, and team members in the collections
department all work together in this endeavor. The Banks goal is to
liquidate these properties in an orderly and efficient manner without incurring
extraordinary losses due to quick sale pricing.
During the nine months ended September 30, 2008, the Bank
originated loans to facilitate the sales of real estate owned totaling $5.1
million. The Bank offers attractive
rates and financing options to prospective buyers of real estate owned to help
facilitate sales.
13
Table
of Contents
Potential Problem Loans.
Based
on the oversupply of lots in Northwest Arkansas, our land development portfolio
poses a higher risk of default. These
loans are typically structured with interest due at maturity and lot sales as
the source of repayment. Since lot sales
in the Northwest Arkansas market are significantly slower than when these loans
were originated, our borrowers typically must rely on a secondary source of
funds to pay the interest as it becomes due.
Due to the relatively large balances of these types of loans, the
interest due at maturity is usually significant. At September 30, 2008, gross land
development loans totaled $32.4 million with $2.3 million of accrued
interest. Of this total, $8.1 million is
on nonaccrual status with $1.2 million in accrued interest, $11.2 million with
$492,000 in accrued interest is classified as special mention, and $12.7
million with $615,000 in accrued interest is on our watch list. There are three matured land development
loans at September 30, 2008 with a total principal balance of $6.7 million
and accrued interest of $733,000. We are
working with all three borrowers and, as of the date of this report, expect to
be repaid in full. However, should any
of these land development loans default, the Bank may incur losses in the event
of a decline in value of the land securing these loans.
Allowance for Loan Losses
. A
summary of the activity in the allowance for loan losses is as follows (in
thousands):
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Balance at beginning of period
|
|
$
|
5,215
|
|
$
|
4,291
|
|
$
|
5,162
|
|
$
|
2,572
|
|
Provisions for estimated losses
|
|
1,611
|
|
1,330
|
|
4,110
|
|
3,662
|
|
Recoveries
|
|
242
|
|
43
|
|
436
|
|
132
|
|
Losses charged off
|
|
(246
|
)
|
(628
|
)
|
(2,886
|
)
|
(1,330
|
)
|
Balance at end of period
|
|
$
|
6,822
|
|
$
|
5,036
|
|
$
|
6,822
|
|
$
|
5,036
|
|
Changes
in the composition of the allowance for loan losses between September 30,
2008 and December 31, 2007 are presented in the following table (in
thousands):
|
|
September 30,
|
|
December 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
Increase
|
|
General
|
|
$
|
3,109
|
|
$
|
2,267
|
|
$
|
842
|
|
Specific
|
|
3,713
|
|
2,895
|
|
818
|
|
|
|
$
|
6,822
|
|
$
|
5,162
|
|
$
|
1,660
|
|
The
general component of the allowance for loan losses increased primarily due to
increases in the loss factors applied to land loans, land development loans and
commercial 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 a specific valuation allowance of
$973,000 recorded in the third quarter.
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
14
Table of Contents
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. Multifamily 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 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. If the current downturn
in the economy is prolonged, 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 $6.8 million
adequate to cover losses inherent in our loan portfolio at September 30,
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 September 30,
2008 and December 31, 2007 are presented in the following table (in
thousands).
|
|
September 30,
|
|
December 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
Increase
|
|
U.S. Government and agency obligations
|
|
$
|
111,803
|
|
$
|
78,501
|
|
$
|
33,302
|
|
Municipal securities
|
|
19,634
|
|
17,089
|
|
2,545
|
|
Total
|
|
$
|
131,437
|
|
$
|
95,590
|
|
$
|
35,847
|
|
During
the first nine months of 2008, investment securities totaling $112.8 million
with a weighted average tax equivalent yield of 6.06% were purchased and $77.1
million with a weighted average tax equivalent yield of 6.15% matured or were
called.
At
September 30, 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
|
|
$
|
111,803
|
|
$
|
109,411
|
|
Municipal securities
|
|
19,634
|
|
18,674
|
|
Total
|
|
$
|
131,437
|
|
$
|
128,085
|
|
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 and the number of
days accrued at September 30, 2008 compared to December 31, 2007.
15
Table
of Contents
Real Estate Owned, net.
Changes in the composition of real estate owned between September 30,
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)
|
|
September 30,
2008
|
|
One- to four-family residential
|
|
$
|
1,566
|
|
$
|
3,196
|
|
$
|
(313
|
)
|
$
|
(2,363
|
)
|
$
|
(79
|
)
|
$
|
2,007
|
|
Speculative one- to four-family
|
|
5,956
|
|
5,984
|
|
(797
|
)
|
(5,212
|
)
|
(133
|
)
|
5,798
|
|
Land
|
|
598
|
|
10,013
|
|
(1,544
|
)
|
(334
|
)
|
36
|
|
8,769
|
|
Commercial real estate
|
|
|
|
859
|
|
(31
|
)
|
|
|
|
|
828
|
|
|
|
$
|
8,120
|
|
$
|
20,052
|
|
$
|
(2,685
|
)
|
$
|
(7,909
|
)
|
$
|
(176
|
)
|
$
|
17,402
|
|
(1)
Net sales proceeds include $5.1 million of
loans made by the Bank to facilitate the sale of real estate owned.
Deposits.
Changes in the composition of deposits between
September 30, 2008 and December 31, 2007 are presented in the
following table (dollars in thousands).
|
|
September 30,
|
|
December 31,
|
|
Increase
|
|
Percentage
|
|
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Checking accounts
|
|
$
|
157,894
|
|
$
|
127,491
|
|
$
|
30,403
|
|
23.9
|
%
|
Money Market accounts
|
|
46,665
|
|
51,424
|
|
(4,759
|
)
|
(9.3
|
)
|
Savings accounts
|
|
24,001
|
|
25,088
|
|
(1,087
|
)
|
(4.3
|
)
|
Certificates of deposit
|
|
384,012
|
|
426,411
|
|
(42,399
|
)
|
(9.9
|
)
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
612,572
|
|
$
|
630,414
|
|
$
|
(17,842
|
)
|
(2.8
|
)%
|
Deposits
decreased in the comparison period, primarily due to a decrease in certificates
of deposit. The decrease was partially offset by an increase in checking
accounts. The Bank focused its marketing efforts to increase checking accounts
by offering 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 as they 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 Borrowings.
During the first nine months of
2008, the use of FHLB of Dallas and Federal Reserve Bank borrowings increased
by $15.1 million or 18.3%. The Bank used
the funds primarily to purchase investment securities and to pay deposit
withdrawals.
Stockholders Equity.
Stockholders equity increased approximately
$49,000 from December 31, 2007 to September 30, 2008. The increase in stockholders equity was
primarily due to net income totaling $2.3 million during the first nine months
of 2008. In addition, during the nine
months ended September 30, 2008, cash dividends of approximately $2.3
million were paid. See the Unaudited
Consolidated Statement of Stockholders Equity for the nine months ended September 30,
2008 for more detail.
16
Table of Contents
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
September
30,
|
|
|
|
2008
|
|
2007
|
|
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield/
Cost
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield/
Cost
|
|
|
|
(Dollars in Thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable(1)
|
|
$
|
572,572
|
|
$
|
8,601
|
|
6.01
|
%
|
$
|
632,106
|
|
$
|
11,020
|
|
6.97
|
%
|
Investment securities(2)
|
|
132,143
|
|
1,743
|
|
5.28
|
|
85,666
|
|
1,129
|
|
5.27
|
|
Other interest-earning assets
|
|
20,949
|
|
107
|
|
2.04
|
|
18,111
|
|
232
|
|
5.13
|
|
Total interest-earning assets
|
|
725,664
|
|
10,451
|
|
5.76
|
|
735,883
|
|
12,381
|
|
6.73
|
|
Noninterest-earning assets
|
|
79,510
|
|
|
|
|
|
70,399
|
|
|
|
|
|
Total assets
|
|
805,174
|
|
|
|
|
|
806,282
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
625,439
|
|
4,224
|
|
2.70
|
|
639,452
|
|
6,099
|
|
3.82
|
|
Other borrowings
|
|
99,261
|
|
931
|
|
3.75
|
|
85,806
|
|
987
|
|
4.60
|
|
Total interest-bearing liabilities
|
|
724,700
|
|
5,155
|
|
2.84
|
|
725,258
|
|
7,086
|
|
3.91
|
|
Noninterest-bearing liabilities
|
|
5,833
|
|
|
|
|
|
5,803
|
|
|
|
|
|
Total liabilities
|
|
730,533
|
|
|
|
|
|
731,061
|
|
|
|
|
|
Stockholders equity
|
|
74,641
|
|
|
|
|
|
75,221
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
805,174
|
|
|
|
|
|
$
|
806,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
$
|
5,296
|
|
|
|
|
|
$
|
5,295
|
|
|
|
Net earning assets
|
|
$
|
964
|
|
|
|
|
|
$
|
10,625
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
2.92
|
%
|
|
|
|
|
2.82
|
%
|
Net interest margin
|
|
|
|
|
|
2.92
|
%
|
|
|
|
|
2.88
|
%
|
Ratio of interest-earning assets to
interest-bearing liabilities
|
|
|
|
|
|
100.13
|
%
|
|
|
|
|
101.46
|
%
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield/
Cost
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield/
Cost
|
|
|
|
(Dollars in Thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable(1)
|
|
$
|
585,597
|
|
$
|
28,096
|
|
6.40
|
%
|
$
|
661,297
|
|
$
|
35,225
|
|
7.10
|
%
|
Investment securities(2)
|
|
124,259
|
|
4,971
|
|
5.33
|
|
74,260
|
|
2,856
|
|
5.13
|
|
Other interest-earning assets
|
|
20,752
|
|
387
|
|
2.48
|
|
18,730
|
|
722
|
|
5.14
|
|
Total interest-earning assets
|
|
730,608
|
|
33,454
|
|
6.10
|
|
754,287
|
|
38,803
|
|
6.86
|
|
Noninterest-earning assets
|
|
76,527
|
|
|
|
|
|
67,917
|
|
|
|
|
|
Total assets
|
|
807,135
|
|
|
|
|
|
822,204
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
634,797
|
|
14,572
|
|
3.06
|
|
643,475
|
|
17,991
|
|
3.73
|
|
Other borrowings
|
|
91,413
|
|
2,711
|
|
3.96
|
|
97,747
|
|
3,353
|
|
4.57
|
|
Total interest-bearing liabilities
|
|
726,210
|
|
17,283
|
|
3.17
|
|
741,222
|
|
21,344
|
|
3.84
|
|
Noninterest-bearing liabilities
|
|
6,583
|
|
|
|
|
|
5,644
|
|
|
|
|
|
Total liabilities
|
|
732,793
|
|
|
|
|
|
746,866
|
|
|
|
|
|
Stockholders equity
|
|
74,342
|
|
|
|
|
|
75,338
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
807,135
|
|
|
|
|
|
$
|
822,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
$
|
16,171
|
|
|
|
|
|
$
|
17,459
|
|
|
|
Net earning assets
|
|
$
|
4,398
|
|
|
|
|
|
$
|
13,065
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
2.93
|
%
|
|
|
|
|
3.02
|
%
|
Net interest margin
|
|
|
|
|
|
2.95
|
%
|
|
|
|
|
3.09
|
%
|
Ratio of interest-earning assets to
interest-bearing liabilities
|
|
|
|
|
|
100.61
|
%
|
|
|
|
|
101.76
|
%
|
(1)
Includes nonaccrual loans.
(2)
Includes FHLB of Dallas stock.
17
Table
of Contents
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 September 30,
|
|
|
|
2008 vs. 2007
|
|
|
|
Increase (Decrease)
Due to
|
|
|
|
|
|
Volume
|
|
Rate
|
|
Rate/
Volume
|
|
Total
Increase
(Decrease)
|
|
|
|
(In Thousands)
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
$
|
(1,038
|
)
|
$
|
(1,525
|
)
|
$
|
144
|
|
$
|
(2,419
|
)
|
Investment securities
|
|
613
|
|
1
|
|
|
|
614
|
|
Other interest-earning assets
|
|
36
|
|
(140
|
)
|
(21
|
)
|
(125
|
)
|
Total interest-earning assets
|
|
(389
|
)
|
(1,664
|
)
|
123
|
|
(1,930
|
)
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
(134
|
)
|
(1,780
|
)
|
39
|
|
(1,875
|
)
|
Other
borrowings
|
|
155
|
|
(183
|
)
|
(28
|
)
|
(56
|
)
|
Total interest-bearing liabilities
|
|
21
|
|
(1,963
|
)
|
11
|
|
(1,931
|
)
|
Net change in net interest income
|
|
$
|
(410
|
)
|
$
|
299
|
|
$
|
112
|
|
$
|
1
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008 vs. 2007
|
|
|
|
Increase (Decrease)
Due to
|
|
|
|
|
|
Volume
|
|
Rate
|
|
Rate/
Volume
|
|
Total
Increase
(Decrease)
|
|
|
|
(In Thousands)
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
$
|
(4,032
|
)
|
$
|
(3,497
|
)
|
$
|
400
|
|
$
|
(7,129
|
)
|
Investment securities
|
|
1,923
|
|
115
|
|
77
|
|
2,115
|
|
Other interest-earning assets
|
|
78
|
|
(373
|
)
|
(40
|
)
|
(335
|
)
|
Total interest-earning assets
|
|
(2,031
|
)
|
(3,755
|
)
|
437
|
|
(5,349
|
)
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
(243
|
)
|
(3,220
|
)
|
44
|
|
(3,419
|
)
|
Other
borrowings
|
|
(217
|
)
|
(454
|
)
|
29
|
|
(642
|
)
|
Total interest-bearing liabilities
|
|
(460
|
)
|
(3,674
|
)
|
73
|
|
(4,061
|
)
|
Net change in net interest income
|
|
$
|
(1,571
|
)
|
$
|
(81
|
)
|
$
|
364
|
|
$
|
(1,288
|
)
|
18
Table of Contents
CHANGES IN
RESULTS OF OPERATIONS
The table below presents a
comparison of results of operations for the three months ended September 30,
2008 and 2007 (dollars in thousands).
Specific changes in captions are discussed in the sections which follow
the table.
|
|
Three Months Ended
September 30,
|
|
Increase
(Decrease)
|
|
Percentage
Change
|
|
|
|
2008
|
|
2007
|
|
2008 vs 2007
|
|
2008 vs 2007
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
$
|
8,601
|
|
$
|
11,020
|
|
$
|
(2,419
|
)
|
(21.9
|
)%
|
Investment securities
|
|
1,743
|
|
1,129
|
|
614
|
|
54.4
|
|
Other
|
|
107
|
|
232
|
|
(125
|
)
|
(53.9
|
)
|
Total interest income
|
|
10,451
|
|
12,381
|
|
(1,930
|
)
|
(15.6
|
)
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
4,224
|
|
6,099
|
|
(1,875
|
)
|
(30.7
|
)
|
Other
borrowings
|
|
931
|
|
987
|
|
(56
|
)
|
(5.7
|
)
|
Total interest expense
|
|
5,155
|
|
7,086
|
|
(1,931
|
)
|
(27.3
|
)
|
Net interest income before provision for loan losses
|
|
5,296
|
|
5,295
|
|
1
|
|
0.0
|
|
Provision for loan losses
|
|
1,611
|
|
1,330
|
|
281
|
|
21.1
|
|
Net interest income after provision for loan losses
|
|
3,685
|
|
3,965
|
|
(280
|
)
|
(7.1
|
)
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
Deposit fee income
|
|
1,471
|
|
1,235
|
|
236
|
|
19.1
|
|
Earnings on life insurance policies
|
|
198
|
|
194
|
|
4
|
|
2.1
|
|
Gain on sale of loans
|
|
51
|
|
201
|
|
(150
|
)
|
(74.6
|
)
|
Other
|
|
493
|
|
365
|
|
128
|
|
35.1
|
|
Total noninterest income
|
|
2,213
|
|
1,995
|
|
218
|
|
10.9
|
|
Noninterest expenses:
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
3,085
|
|
3,287
|
|
(202
|
)
|
(6.2
|
)
|
Net occupancy expense
|
|
672
|
|
560
|
|
112
|
|
20.0
|
%
|
Real estate owned, net
|
|
509
|
|
543
|
|
(34
|
)
|
(6.3
|
)
|
Other
|
|
1,500
|
|
1,419
|
|
81
|
|
5.7
|
|
Total noninterest expenses
|
|
5,766
|
|
5,809
|
|
(43
|
)
|
(0.7
|
)
|
Income before income taxes
|
|
132
|
|
151
|
|
(19
|
)
|
(12.6
|
)
|
Income tax provision
|
|
(86
|
)
|
(150
|
)
|
64
|
|
(42.7
|
)
|
Net income
|
|
$
|
218
|
|
$
|
301
|
|
$
|
(83
|
)
|
(27.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.05
|
|
$
|
0.06
|
|
$
|
(0.01
|
)
|
(16.7
|
)%
|
Diluted earnings per share
|
|
$
|
0.05
|
|
$
|
0.06
|
|
$
|
(0.01
|
)
|
(16.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
2.92
|
%
|
2.82
|
%
|
|
|
|
|
Net interest margin
|
|
2.92
|
%
|
2.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average full-time equivalents
|
|
300
|
|
301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full-service offices
|
|
20
|
|
18
|
|
|
|
|
|
19
Table of Contents
The table below presents a
comparison of results of operations for the nine months ended September 30,
2008 and 2007 (dollars in thousands).
Specific changes in captions are discussed in the sections which follow
the table.
|
|
Nine Months Ended
September 30,
|
|
Increase
(Decrease)
|
|
Percentage
Change
|
|
|
|
2008
|
|
2007
|
|
2008 vs 2007
|
|
2008 vs 2007
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
$
|
28,096
|
|
$
|
35,225
|
|
$
|
(7,129
|
)
|
(20.2
|
)%
|
Investment securities
|
|
4,971
|
|
2,856
|
|
2,115
|
|
74.1
|
|
Other
|
|
387
|
|
722
|
|
(335
|
)
|
(46.4
|
)
|
Total interest income
|
|
33,454
|
|
38,803
|
|
(5,349
|
)
|
(13.8
|
)
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
14,572
|
|
17,991
|
|
(3,419
|
)
|
(19.0
|
)
|
Other borrowings
|
|
2,711
|
|
3,353
|
|
(642
|
)
|
(19.2
|
)
|
Total interest expense
|
|
17,283
|
|
21,344
|
|
(4,061
|
)
|
(19.0
|
)
|
Net interest income before provision for loan losses
|
|
16,171
|
|
17,459
|
|
(1,288
|
)
|
(7.4
|
)
|
Provision for loan losses
|
|
4,110
|
|
3,662
|
|
448
|
|
12.2
|
|
Net interest income after provision for loan losses
|
|
12,061
|
|
13,797
|
|
(1,736
|
)
|
(12.6
|
)
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
Deposit fee income
|
|
4,027
|
|
3,661
|
|
366
|
|
10.0
|
|
Earnings on life insurance policies
|
|
1,760
|
|
566
|
|
1,194
|
|
211.0
|
|
Gain on sale of loans
|
|
317
|
|
664
|
|
(347
|
)
|
(52.3
|
)
|
Other
|
|
1,362
|
|
924
|
|
438
|
|
47.4
|
|
Total noninterest income
|
|
7,466
|
|
5,815
|
|
1,651
|
|
28.4
|
|
Noninterest expenses:
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
9,717
|
|
10,016
|
|
(299
|
)
|
(3.0
|
)
|
Net occupancy expense
|
|
1,957
|
|
1,752
|
|
205
|
|
11.7
|
|
Real estate owned, net
|
|
1,207
|
|
826
|
|
381
|
|
46.1
|
|
Other
|
|
4,605
|
|
4,740
|
|
(135
|
)
|
(2.8
|
)
|
Total noninterest expenses
|
|
17,486
|
|
17,334
|
|
152
|
|
0.9
|
|
Income before income taxes
|
|
2,041
|
|
2,278
|
|
(237
|
)
|
(10.4
|
)
|
Income tax provision (benefit)
|
|
(273
|
)
|
284
|
|
(557
|
)
|
(196.1
|
)
|
Net income
|
|
$
|
2,314
|
|
$
|
1,994
|
|
$
|
320
|
|
16.1
|
%
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.48
|
|
$
|
0.41
|
|
$
|
0.07
|
|
17.1
|
%
|
Diluted earnings per share
|
|
$
|
0.48
|
|
$
|
0.41
|
|
$
|
0.07
|
|
17.1
|
%
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
2.93
|
%
|
3.02
|
%
|
|
|
|
|
Net interest margin
|
|
2.95
|
%
|
3.09
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average full-time equivalents
|
|
303
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full-service offices
|
|
20
|
|
18
|
|
|
|
|
|
20
Table of Contents
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 and nine month comparative periods
was primarily due to a decrease in the average yield earned on loans receivable
as well as a decrease in the average balance of loans receivable and an
increase in the level of deferred interest on nonperforming loans. These decreases were offset by an increase in
the average balance of investment securities.
The decrease in average yields earned on loans receivable was due to
decreases in market interest rates and the increased level of nonaccrual
loans. 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 and nine month comparative periods
was primarily due to a decrease in the average rates paid on deposits and
borrowings. 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
increased $281,000 to $1.6 million for the quarter ended September 30,
2008 compared to $1.3 million for the quarter ended September 30, 2007 and
increased $448,000 to $4.1 million for the nine months ended September 30,
2008 compared to $3.7 million for the same period in 2007. The increases in the provisions for loan
losses in both comparable periods were primarily due to an increase in our loss
experience on commercial loans and land development loans.
Noninterest
Income.
The
increase in the three month comparative period in 2008 was primarily related to
deposit fee income due to an increased checking account fee structure put in
place during the second quarter of 2008. The increase in other noninterest
income for the nine 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 first quarter in 2008.
Noninterest
Expense
Salaries and
Employee Benefits.
The
changes in the composition of this line item are presented below (in
thousands):
|
|
Three Months Ended
September 30,
|
|
Increase
(Decrease)
|
|
Nine Months Ended
September 30,
|
|
Increase
(Decrease)
|
|
|
|
2008
|
|
2007
|
|
2008 vs 2007
|
|
2008
|
|
2007
|
|
2008 vs 2007
|
|
Salaries
|
|
$
|
2,511
|
|
$
|
2,588
|
|
$
|
(77
|
)
|
$
|
7,692
|
|
$
|
7,824
|
|
$
|
(132
|
)
|
Payroll taxes
|
|
194
|
|
197
|
|
(3
|
)
|
666
|
|
676
|
|
(10
|
)
|
Insurance
|
|
169
|
|
168
|
|
1
|
|
507
|
|
508
|
|
(1
|
)
|
401(k)
|
|
78
|
|
77
|
|
1
|
|
234
|
|
233
|
|
1
|
|
Defined benefit plan contribution
|
|
88
|
|
210
|
|
(122
|
)
|
480
|
|
630
|
|
(150
|
)
|
Other
|
|
45
|
|
47
|
|
(2
|
)
|
138
|
|
145
|
|
(7
|
)
|
Total
|
|
$
|
3,085
|
|
$
|
3,287
|
|
$
|
(202
|
)
|
$
|
9,717
|
|
$
|
10,016
|
|
$
|
(299
|
)
|
Net occupancy
expense.
The
increase in net occupancy expense for the three month and nine month
comparative periods was primarily due to two new branch locations opened during
2008.
21
Table of Contents
Real estate owned,
net.
The
changes in the composition of this line item are presented below (in
thousands):
|
|
Three Months Ended
September 30,
|
|
Increase
(Decrease)
|
|
Nine Months Ended
September 30,
|
|
Increase
|
|
|
|
2008
|
|
2007
|
|
2008 vs 2007
|
|
2008
|
|
2007
|
|
2008 vs 2007
|
|
Loss provisions
|
|
$
|
164
|
|
$
|
312
|
|
$
|
(148
|
)
|
$
|
480
|
|
$
|
390
|
|
$
|
90
|
|
Net loss (gain) on sales
|
|
179
|
|
67
|
|
112
|
|
207
|
|
119
|
|
88
|
|
Taxes and insurance
|
|
42
|
|
69
|
|
(27
|
)
|
321
|
|
161
|
|
160
|
|
Other
|
|
124
|
|
95
|
|
29
|
|
199
|
|
156
|
|
43
|
|
Total
|
|
$
|
509
|
|
$
|
543
|
|
$
|
(34
|
)
|
$
|
1,207
|
|
$
|
826
|
|
$
|
381
|
|
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.
Income Taxes.
The income tax benefit
increased for the nine months ended September 30, 2008 primarily due to an
increase in nontaxable life insurance earnings.
The decrease in income tax benefit for the three month comparative
period was related to a decrease in taxable income resulting from decreased
earnings and increased nontaxable interest from investment securities.
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 September 30, 2008, the
Banks off-balance sheet arrangements principally included lending commitments,
which are described below. At September 30,
2008, the Company had no interests in non-consolidated special purpose
entities.
At September 30, 2008,
commitments included:
·
total
approved commitments to originate or purchase loans amounting to $8.4 million,
including $249,000 of loans committed to sell;
·
rate
lock agreements with customers of $3.0 million, all of which have been locked
with an investor;
·
funded
mortgage loans committed to sell of $322,000;
·
unadvanced
portion of construction loans of $16.6 million;
·
unused
lines of credit of $20.0 million;
·
outstanding
standby letters of credit of approximately $3.8 million;
·
total
predetermined overdraft protection limits of $15.1 million; and
·
certificates
of deposit scheduled to mature in one year or less totaling $277.7 million.
Total unfunded commitments to
originate loans for sale and the related commitments to sell of $3.0 million
meet the definition of a derivative financial instrument. The related asset and liability are
considered immaterial at September 30, 2008.
Historically, a very small
percentage of predetermined overdraft limits have been used. At September 30, 2008, overdrafts of
accounts with Bounce Protection
TM
represented usage of 4.47% 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.
22
Table of Contents
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 deposit balances at levels commensurate
with the operating, investing and financing activities of the Bank. In addition, the Bank invests excess funds in
overnight deposits and other short-term interest-earning assets that provide
liquidity to meet lending requirements and pay deposit withdrawals. When funds
from the retail deposit market are inadequate for the liquidity needs of the
Bank or the pricing of deposits is not as favorable as other sources, the Bank
has borrowed from the FHLB of Dallas and the Federal Reserve Bank of St. Louis
(FRB). During the first nine months
of 2008, the use of FHLB and FRB borrowings increased by $15.1 million or 18.3%. The Bank uses U.S. government agency
investment securities and eligible one- to four-family loans as collateral for
FHLB advances and commercial real estate and U.S. government agency investment
securities as collateral for FRB borrowings.
The Banks borrowing capacity is based on the amount of securities and
loans held in custody by the FHLB and FRB.
The Bank may transfer additional collateral to provide additional
borrowing capacity if needed. Currently,
the Bank may borrow short-term FHLB advances with maturities up to thirty
days. In addition, brokered deposits may
be used to augment the Banks primary funding sources. At September 30, 2008, the Bank had
outstanding brokered deposits of $1.1 million.
For each of the nine months ended September 30,
2008 and 2007, the Company paid dividends of $0.48 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 borrowings, to fund
loan commitments, and to purchase investment securities.
As of September 30, 2008, the
Banks regulatory capital was in excess of all applicable regulatory
requirements. At September 30,
2008, the Banks tangible, core and risk-based capital ratios amounted to
8.93%, 8.93% and 13.29%, 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.
23
Table of Contents
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 nine months ended September 30,
2008. Correspondingly, the Banks net
interest margin decreased from 3.09% for the nine months ended September 30,
2007 to 2.95% for the same period in 2008.
Based on the level of nonperforming assets and competitive pressures on
loan and deposit rates, management anticipates continued pressure on the Banks
interest rate spread and interest margin for the fourth quarter of 2008
although the level of maturing certificate of deposits repricing to lower rates
will somewhat offset the pressure on the interest rate spread and margin.
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.
24
Table of Contents
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
|
|
|
|
|
|
|
|
|
|
|
|
July 1 to
July 31, 2008
|
|
|
|
|
|
|
|
|
|
August 1 to
August 31, 2008
|
|
|
|
|
|
|
|
|
|
September 1 to
September 30, 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 September 30,
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)
25
Table of Contents
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:
|
October 28, 2008
|
By:
|
/s/ Larry J. Brandt
|
|
|
|
Larry J. Brandt
|
|
|
|
Chief Executive
Officer
|
Date:
|
October 28, 2008
|
By:
|
/s/ Sherri R.
Billings
|
|
|
|
Sherri R. Billings
|
|
|
|
Chief Financial
Officer and Chief Accounting Officer
|
26
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