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| FFBH > SEC Filings for FFBH > Form 10-K on 20-Mar-2009 | All Recent SEC Filings |
20-Mar-2009
Annual Report
GENERAL
Management's discussion and analysis of financial condition and results of operations is intended to assist a reader in understanding the consolidated financial condition and results of operations of the Company for the periods presented. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements and the other sections contained herein.
The Bank is a federally chartered stock savings and loan association that was formed in 1934. First Federal conducts business from its main office and nineteen full-service branch offices, all of which are located in a six county area in Northcentral and Northwest Arkansas comprised of Benton, Marion, Washington, Carroll, Baxter and Boone counties. The Bank will continue to focus its growth and expansion efforts in this six county area, especially in Benton and Washington counties, one of the fastest growing areas of the state. The Bank is a community-oriented financial institution offering a wide range of retail and commercial deposit accounts, including noninterest bearing and interest bearing checking, savings and money market accounts, certificates of deposit, and individual retirement accounts. Loan products offered by the Bank include residential real estate, consumer, construction, lines of credit, commercial real estate and commercial business loans. Other financial services include investment products offered through First Federal Investment Services, Inc.; automated teller machines; 24-hour telephone banking; internet banking, including account access, e-statements, bill payment and online loan applications; Bounce ProtectionTM overdraft service; debit cards; and safe deposit boxes.
First Federal's lending focus has traditionally been on permanent residential real estate. However, in recent years, an increased emphasis has been placed on commercial real estate lending and construction lending based on opportunities in Washington and Benton counties. Beginning in late 2005, we reduced our focus on construction lending due to an oversupply of homes and lots in Northwest Arkansas. While oversupply continues to be a significant issue, the market in Northwest Arkansas continues to outperform the national and state economies with lower unemployment and continued population growth. Washington and Benton County are the headquarters of the state's two largest employers, Wal-Mart and Tyson Foods. These employers attract suppliers who establish offices in the area and create jobs, which fosters demand for housing and office space. As of November 2008, unemployment in the Fayetteville/Springdale/Rogers metro area was 3.9% (not seasonally adjusted), compared to the Arkansas rate of 5.7% and the U.S. rate of 6.8%, both seasonally adjusted.
Certificates of deposit continue to comprise the majority of our deposit accounts. However, in recent years, increased emphasis has been placed on growth 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 Bank's 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.
The Company's results of operations depend primarily on its net interest income, which is the difference between interest income on interest earning assets, such as loans and investments, and interest expense on interest bearing liabilities, such as deposits and borrowings. Net interest income is affected by the level of nonperforming assets as they provide no interest earnings to the Bank. The Company's results of operations are also affected by the provision for loan losses, the level of its noninterest income and expenses, and income tax expense.
Noninterest income is generated primarily through deposit account fee income, profit on sale of loans, loan fee income, and earnings on life insurance policies.
Noninterest expense consists primarily of employee compensation and benefits, office occupancy expense, data processing expense, real estate owned expense, net, and other operating expense.
Like many banks, First Federal Bank's greatest challenge in this economic environment is reducing the level of nonperforming assets and managing interest rate risk and managing asset quality. We strive to maintain the asset quality of our loan portfolio at acceptable levels through sound underwriting procedures, including the use of credit scoring; a thorough loan review function; active collection procedures for delinquent loans; and, in the event of repossession, prompt and efficient liquidation of real estate, automobiles and other forms of collateral. We have experienced an increase in nonperforming assets, primarily due to the housing market oversupply issue in Northwest Arkansas as well as the downturn in the general economy. We attempt to work with troubled borrowers to return their loans to performing status where possible. However, given current market conditions, the trend of increasing nonperforming assets may continue for the foreseeable future. Both the board of directors and senior management place a high priority on reducing our nonperforming assets and managing asset quality.
In addition, management is also challenged with managing interest rate risk. The Bank's current interest rate risk position as measured by our regulator, the OTS, is at a minimal level as defined by Thrift Bulletin 13a. The movement of interest rates impacts the level of interest rate risk and the timing and magnitude of assets repricing compared to liabilities repricing. The Bank attempts to reduce the impact of changes in interest rates on its net interest income by managing the repricing gap as described in the "Asset and Liability Management" section.
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 Management's Discussion and Analysis and in the Notes to the Consolidated Financial Statements included herein. In particular, Note 1 to the Consolidated Financial Statements - "Summary of Significant Accounting Policies" describes generally our accounting policies. We believe that the judgments, estimates and assumptions used in the preparation of our Consolidated Financial Statements are appropriate given the factual circumstances at the time. However, given the sensitivity of our Consolidated Financial Statements to this critical accounting policy, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition.
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 market conditions and their impact on the loan portfolio. In the event the 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 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 December 31, 2008 and 2007 are presented
in the following table (dollars in thousands). Material changes between periods
are discussed in the sections that follow the table.
December 31, Increase
2008 2007 (Decrease) % Change
ASSETS
Cash and cash equivalents $ 9,367 $ 27,387 $ (18,020 ) (65.8 )%
Investment securities held to maturity 136,412 95,590 40,822 42.7
FHLB Stock 4,825 4,433 392 8.8
Loans receivable, net 568,123 601,256 (33,133 ) (5.5 )
Accrued interest receivable 6,701 9,042 (2,341 ) (25.9 )
Real estate owned, net 22,385 8,120 14,265 175.7
Office properties and equipment, net 24,694 24,263 431 1.8
Prepaid expenses and other assets 22,665 21,887 778 3.6
TOTAL $ 795,172 $ 791,978 $ 3,194 0.4 %
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LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits $ 618,003 $ 630,414 $ (12,411 ) (2.0 )% Other borrowings 92,212 82,087 10,125 12.3 Other liabilities 11,840 5,814 6,026 103.6 Total liabilities 722,055 718,315 3,740 0.5 STOCKHOLDERS' EQUITY 73,117 73,663 (546 ) (0.7 ) TOTAL $ 795,172 $ 791,978 $ 3,194 0.4 % BOOK VALUE PER SHARE $ 15.09 $ 15.21 EQUITY TO ASSETS 9.2 % 9.3 % |
Loans Receivable. Changes in loan composition between December 31, 2008 and 2007 are presented in the following table (dollars in thousands).
December 31, Increase
2008 2007 (Decrease) % Change
One- to four-family residences $ 243,321 $ 230,005 $ 13,316 5.8 %
Home equity and second mortgage 31,712 34,315 (2,603 ) (7.6 )
Multifamily 24,147 15,616 8,531 54.6
Commercial real estate 115,935 117,548 (1,613 ) (1.4 )
Land 49,354 42,843 6,511 15.2
Construction:
One- to four-family residences 8,450 20,815 (12,365 ) (59.4 )
Speculative one- to four-family
residences 17,096 40,893 (23,797 ) (58.2 )
Multifamily 15,016 18,632 (3,616 ) (19.4 )
Commercial real estate 18,297 31,239 (12,942 ) (41.4 )
Land development 18,457 42,145 (23,688 ) (56.2 )
Total mortgage loans 541,785 594,051 (52,266 ) (8.8 )
Commercial 23,078 24,846 (1,768 ) (7.1 )
Automobile 8,631 9,531 (900 ) (9.4 )
Other 12,291 14,537 (2,246 ) (15.5 )
Total consumer 20,922 24,068 (3,146 ) (13.1 )
Total loans receivable 585,785 642,965 (57,180 ) (8.9 )
Less:
Undisbursed loan funds (11,750 ) (36,868 ) 25,118 (68.1 )
Unearned discounts and net
deferred loan costs (fees) 529 321 208 64.8
Allowance for loan losses (6,441 ) (5,162 ) (1,279 ) 24.8
Loans receivable, net $ 568,123 $ 601,256 $ (33,133 ) (5.5 )%
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The decrease in the Bank's loan portfolio was primarily due to continued softening of the housing market in the Bank's market area. Market data indicates an overall decrease in home sales in Benton and Washington counties in 2008 and 2007 compared to 2006. 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 for the past several years. We expect this trend to continue for the foreseeable future given the level of oversupply in the market.
Allowance for Loan Losses. Changes in the composition of the allowance for loan losses between December 31, 2008 and 2007 are presented in the following table (in thousands).
2008 2007 Increase
General $ 3,525 $ 2,267 $ 1,258
Specific 2,916 2,895 21
$ 6,441 $ 5,162 $ 1,279
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The general component of the allowance for loan losses increased primarily due to increases in the estimated loss rates applied to commercial loans, land development loans, land loans, and home equity loans, partially offset by decreases in speculative single family construction and land development loan balances. Such loss rates were increased due to our loss experience with these types of loans.
Investment Securities. Changes in the composition of investment securities held to maturity between December 31, 2008 and 2007 are presented in the following table (in thousands).
December 31,
2008 2007 Increase
U.S. Government and agency obligations $ 116,847 $ 78,501 $ 38,346
Municipal securities 19,565 17,089 2,476
Total $ 136,412 $ 95,590 $ 40,822
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During 2008, investment securities totaling approximately $125.2 million with a weighted average tax equivalent yield of 5.94% were purchased and $84.4 million with a weighted average tax equivalent yield of 6.15% matured or were called. Due to lower loan demand, the Bank used funds from loan repayments and borrowings to purchase investment securities.
Federal Home Loan Bank Stock. FHLB stock increased by approximately $392,000 due to balance requirements related to the FHLB advances.
Accrued Interest Receivable. The decrease in accrued interest receivable was primarily due to the decrease in loans receivable balance as well as a decrease in the loan yield and the number of days accrued at December 31, 2008.
Real Estate Owned, net. Changes in the composition of real estate owned between December 31, 2008 and December 31, 2007 are presented in the following table (dollars in thousands).
December 31, Fair Value Net Sales Gain December 31,
2007 Additions Adjustments Proceeds(1) (Loss) 2008
One- to four-family
residential $ 1,566 $ 5,096 $ (537 ) $ (2,648 ) $ (41 ) $ 3,436
Speculative one- to
four-family 5,956 6,222 (853 ) (6,865 ) (150 ) 4,310
Land 598 16,066 (2,927 ) (453 ) 30 13,314
Commercial real
estate - 1,617 (292 ) - - 1,325
$ 8,120 $ 29,001 $ (4,609 ) $ (9,966 ) $ (161 ) $ 22,385
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Deposits. Changes in the composition of deposits between December 31, 2008 and 2007 are presented in the following table (dollars in thousands).
December 31, Increase
2008 2007 (Decrease) % Change
Checking accounts $ 163,468 $ 127,491 $ 35,977 28.2 %
Money market accounts 45,022 51,424 (6,402 ) (12.5 )
Savings accounts 23,019 25,088 (2,069 ) (8.3 )
Certificates of deposit 386,494 426,411 (39,917 ) (9.4 )
Total deposits $ 618,003 $ 630,414 $ (12,411 ) (2.0 )%
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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 Bank's 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. The Bank experienced a $10.1 million or 12.3% increase in FHLB of Dallas and Federal Reserve Bank borrowings during the year. The Bank used the funds primarily to purchase investment securities and to pay deposit withdrawals. The balance of FHLB of Dallas advances at December 31, 2008 of $82.2 million consisted of $66.2 million of fixed rate advances with an average cost of 3.9% and $16.0 million of floating rate advances with an average cost of 0.7%. Federal Reserve Bank overnight borrowings totaled $10.0 million at December 31, 2008 with a cost of 0.5%.
Stockholders' Equity. Stockholders' equity decreased approximately $546,000 from December 31, 2007 to December 31, 2008. The decrease in stockholders' equity was primarily due to the payment of quarterly cash dividends in the amount of $3.1 million. Such a decrease was partially offset by net income in the amount of $2.5 million resulting from continued profitable operations. See the Consolidated Statements of Stockholders' Equity for the years ended December 31, 2008, 2007 and 2006 contained herein for more detail.
Average Balance Sheets
The following table sets forth certain information relating to the Company's average balance sheets and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing interest income or interest expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are based on daily balances during the periods.
Year Ended December 31,
2008 2007 2006
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
(Dollars in Thousands)
Interest earning
assets:
Loans
receivable(1) $ 583,063 $ 36,799 6.31 % $ 649,062 $ 45,473 7.01 % $ 726,642 $ 50,185 6.91 %
Investment
securities(2) 127,100 6,760 5.32 78,831 4,071 5.16 67,395 3,270 4.85
Other interest
earning assets 15,708 388 2.47 17,630 882 5.00 13,288 664 5.00
Total interest
earning assets 725,871 43,947 6.05 745,523 50,426 6.76 807,325 54,119 6.70
Noninterest
earning assets 76,875 68,478 61,841
Total assets $ 802,746 $ 814,001 $ 869,166
Interest bearing
liabilities:
Deposits $ 629,808 18,549 2.95 $ 638,724 23,873 3.74 $ 630,230 20,643 3.28
Other borrowings 92,544 3,553 3.84 94,481 4,311 4.56 154,186 6,933 4.50
Total interest
bearing
liabilities 722,352 22,102 3.06 733,205 28,184 3.84 784,416 27,576 3.51
Noninterest
bearing
liabilities 6,201 5,787 6,182
Total
liabilities 728,553 738,992 790,598
Stockholders'
equity 74,193 75,009 78,568
Total
liabilities and
stockholders'
equity $ 802,746 $ 814,001 $ 869,166
Net interest
income $ 21,845 $ 22,242 $ 26,543
Net earning
assets $ 3,519 $ 12,318 $ 22,909
Interest rate
spread 2.99 % 2.92 % 3.19 %
Net interest
margin 3.01 % 2.98 % 3.29 %
Ratio of
interest earning
assets to
interest bearing
liabilities 100.49 % 101.68 % 102.92 %
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(2) Includes FHLB of Dallas stock.
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.
Year Ended December 31,
2008 vs. 2007
Increase (Decrease)
Due to Total
Rate/ Increase
Volume Rate Volume (Decrease)
(In Thousands)
Interest income:
Loans receivable $ (4,624 ) $ (4,508 ) $ 458 $ (8,674 )
Investment securities 2,493 122 74 2,689
Other interest earning
assets (96 ) (447 ) 49 (494 )
Total interest earning
assets (2,227 ) (4,833 ) 581 $ (6,479 )
Interest expense:
Deposits (333 ) (5,062 ) 71 (5,324 )
Other borrowings (88 ) (684 ) 14 (758 )
Total interest bearing
liabilities (421 ) (5,746 ) 85 (6,082 )
Net change in net interest
income $ (1,806 ) $ 913 $ 496 $ (397 )
Year Ended December 31,
2007 vs. 2006
Increase (Decrease)
Due to Total
Rate/ Increase
Volume Rate Volume (Decrease)
(In Thousands)
Interest income:
Loans receivable $ (5,358 ) $ 723 $ (77 ) $ (4,712 )
Investment securities 555 210 36 801
Other interest earning
assets 217 1 - 218
Total interest earning
assets (4,586 ) 934 (41 ) (3,693 )
Interest expense:
Deposits 278 2,913 39 3,230
Other borrowings (2,684 ) 101 (39 ) (2,622 )
Total interest bearing
liabilities (2,406 ) 3,014 - 608
Net change in net interest
income $ (2,180 ) $ (2,080 ) $ (41 ) $ (4,301 )
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CHANGES IN RESULTS OF OPERATIONS
The table below presents a comparison of results of operations for the years ended December 31, 2008, 2007, and 2006 (dollars in thousands). Specific changes in captions are discussed following the table.
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