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FFBH > SEC Filings for FFBH > Form 10-Q on 3-May-2013All Recent SEC Filings

Show all filings for FIRST FEDERAL BANCSHARES OF ARKANSAS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for FIRST FEDERAL BANCSHARES OF ARKANSAS INC


3-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 Condensed Consolidated Financial Statements and the accompanying Notes to the Condensed 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. As of March 31, 2013, the Bank conducted business from its home office, one limited service office, thirteen full service branch offices located in a six county area in Arkansas (comprised of Benton and Washington counties in Northwest Arkansas; Carroll, Boone, Marion and Baxter counties in North-central Arkansas) and a loan production office located in Little Rock, Arkansas. The Company also has executive offices in Little Rock, Arkansas. In April 2013, the Bank announced the sale of its Berryville, Arkansas, branch with such sale expected to close in the second quarter of 2013.

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 automated teller machines; 24-hour telephone banking; online banking, including account access, e-statements, and bill payment; mobile banking; Bounce ProtectionTM overdraft service; debit cards; and safe deposit boxes.

2013 FIRST QUARTER OVERVIEW

The Company's net income was $303,000 for the three months ended March 31, 2013, compared to net income of $192,000 for the same period in 2012. The primary reason for the increase in net income was a decrease in operating expenses, partially offset by decreases in net interest income and noninterest income.

The Bank continued to reduce its level of nonperforming assets during the first quarter of 2013. Total nonperforming assets at March 31, 2013, including nonaccrual loans, real estate owned, and restructured loans, totaled $36.4 million, or 6.64% of total assets, a reduction of $4.9 million compared to December 31, 2012, and a reduction of $22.9 million compared to March 31, 2012. The Bank also reduced its level of classified loans to $33.2 million at March 31, 2013 compared to $34.5 million at December 31, 2012.

While the Bank is continuing its focus on reducing nonperforming assets, it is equally focused on improving its operational performance through improving its net interest margin, increasing noninterest income, and controlling noninterest expense.

CRITICAL ACCOUNTING POLICIES

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, the following estimates, due to the judgments, estimates and assumptions inherent in those policies, are critical to preparation of our financial statements:

Determination of our allowance for loan and lease losses ("ALLL")

Valuation of real estate owned

Valuation of investment securities

Valuation of our deferred tax assets

These policies and the judgments, estimates and assumptions are described in greater detail in subsequent sections of this Management's Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the Condensed Consolidated Financial Statements included herein. We believe that the judgments, estimates and assumptions used in the preparation of our condensed consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of our condensed consolidated financial statements to these critical accounting policies, 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 the loan portfolio, various judgments and assumptions are made. For example, when assessing 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 the portfolios may need to be revised, which may significantly impact the measurement of the allowance for loan and lease 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.

The Company has classified all of its investment securities as available for sale. Accordingly, its investment securities are stated at estimated fair value in the consolidated financial statements with unrealized gains and losses, net of related income taxes, and are reported as a separate component of stockholders' equity with any related changes included in accumulated other comprehensive income (loss). The Company utilizes independent third parties as its principal sources for determining fair value of its investment securities that are measured on a recurring basis. For investment securities traded in an active market, the fair values are based on quoted market prices if available. If quoted market prices are not available, fair values are based on market prices for comparable securities, broker quotes or comprehensive interest rate tables, pricing matrices or a combination thereof. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs. The fair values of the Company's investment securities traded in both active and inactive markets can be volatile and may be influenced by a number of factors including market interest rates, prepayment speeds, discount rates, credit quality of the issuer, general market conditions including market liquidity conditions and other factors. Factors and conditions are constantly changing and fair values could be subject to material variations that may significantly impact the Company's financial condition, results of operations and liquidity.


The Company recognizes deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company evaluates its deferred tax assets for recoverability using a consistent approach that considers the relative impact of negative and positive evidence, including our historical profitability and projections of future taxable income. The Company is required to establish a valuation allowance for deferred tax assets if it is determined, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, the Company estimates future taxable income based on management-approved business plans and ongoing tax planning strategies. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between projected operating performance, our actual results and other factors.

RESULTS OF OPERATIONS

Quarter Ended March 31, 2013 Compared to Quarter Ended March 31, 2012

Net Income. Net income increased to $303,000 for the three months ended March 31, 2013 compared to $192,000 for the three months ended March 31, 2012. The primary reason for the increase in net income was a decrease in operating expenses, partially offset by decreases in net interest income and noninterest income.

Net Interest Income. 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 for the first quarter of 2013 was $3.7 million compared to $4.0 million for the same period in 2012. The decrease in net interest income resulted from changes in interest income and interest expense discussed below.

Interest Income. Interest income for the first quarter of 2013 was $4.6 million compared to $5.2 million for the same period in 2012. The decrease in interest income in 2013 compared to 2012 was primarily related to a decrease in yields earned on loans receivable and, to a lesser degree, a decrease in the average balance of investment securities. The decrease in yields earned on loans receivable is due to origination of high quality loans with average market rates lower than the weighted average rate of the Bank's portfolio in the same period last year. The average balance of investment securities decreased due to calls and maturities of investment securities.

Interest Expense. Interest expense for the first quarter of 2013 was $859,000 compared to $1.3 million for the same period in 2012. The decrease in interest expense in 2013 compared to 2012 was primarily due to a decrease in the average rates paid on deposit accounts and, to a lesser degree, decreases in the average balances of deposits and borrowings. The decrease in the average rates paid on deposit accounts reflects decreases in market interest rates and Bank management's pricing of its deposits at such levels to maintain deposit balances commensurate with its overall balance sheet management and liquidity position.


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 regarding changes attributable to (i) changes in volume (changes in average volume multiplied by prior rate); (ii) changes in rate (change in rate multiplied by prior average volume); (iii) changes in rate-volume (changes in rate multiplied by the change in average volume); and (iv) the net change.

                                              Three Months Ended March 31,
                                                      2013 vs. 2012
                                           Increase (Decrease)
                                                 Due to
                                                                            Total
                                                             Rate/        Increase
                                      Volume        Rate     Volume      (Decrease)
                                                     (In Thousands)
Interest income:
Loans receivable                     $    (30 )    $ (533 )    $   3     $      (560 )
Investment securities                     (61 )       (20 )        2             (79 )
Other interest-earning assets             (24 )        41         (8 )             9
Total interest-earning assets            (115 )      (512 )       (3 )          (630 )

Interest expense:
Deposits                                  (79 )      (316 )       20            (375 )
Other borrowings                          (18 )        (4 )        2             (20 )
Total interest-bearing liabilities        (97 )      (320 )       22            (395 )
Net change in net interest income    $    (18 )    $ (192 )    $ (25 )   $      (235 )

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.

                                                  Three Months Ended March 31,
                                         2013                                       2012
                                                      Average                                    Average
                         Average                      Yield/        Average                      Yield/
                         Balance       Interest        Cost         Balance       Interest        Cost
                                                     (Dollars in Thousands)
Interest-earning
assets:
Loans receivable(1)     $ 356,580     $    4,081          4.64 %   $ 358,896     $    4,641          5.19 %
Investment
securities(2)              52,410            367          2.84        60,643            446          2.95
Other
interest-earning
assets                     73,435            133          0.72        91,246            124          0.54
Total
interest-earning
assets                    482,425          4,581          3.85       510,785          5,211          4.09
Noninterest-earning
assets                     52,343                                     59,590
Total assets            $ 534,768                                  $ 570,375
Interest-bearing
liabilities:
Deposits                $ 458,650            846          0.75     $ 490,392          1,221          1.00
Other borrowings            3,072             13          1.76         6,563             33          2.00
Total
interest-bearing
liabilities               461,722            859          0.75       496,955          1,254          1.01
Noninterest-bearing
liabilities                 2,791                                      4,206
Total liabilities         464,513                                    501,161
Stockholders' equity       70,255                                     69,214
Total liabilities and
stockholders' equity    $ 534,768                                  $ 570,375

Net interest income                   $    3,722                                 $    3,957
Net earning assets      $  20,703                                  $  13,830
Interest rate spread                                      3.10 %                                     3.08 %
Net interest margin                                       3.13 %                                     3.11 %
Ratio of
interest-earning
assets to
Interest-bearing
liabilities                                             104.48 %                                   102.78 %

(1) Includes nonaccrual loans.
(2) Includes FHLB of Dallas stock.


Provision for Loan Losses. The provision for loan losses includes charges to maintain the ALLL at a level considered adequate by the Bank 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. The adequacy of the ALLL is evaluated quarterly by management of the Bank based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral and other qualitative factors.

No provision for loan losses was required for the three months ended March 31, 2013, primarily due to decreases in nonperforming and classified loans. The ALLL as a percentage of loans receivable was 4.5% at March 31, 2013, compared to 4.4% at December 31, 2012. The ALLL as a percentage of classified loans was 47.0% at March 31, 2013, compared to 45.4% at December 31, 2012. See "Allowance for Loan and Lease Losses" in the "Asset Quality" section.

Noninterest Income. Noninterest income is generated primarily through deposit account fee income, profit on sale of loans, and earnings on life insurance policies. Total noninterest income of $1.3 million for the first quarter of 2013 decreased from $1.7 million for the first quarter of 2012. This decrease was primarily due to a decrease in deposit fee income, primarily due to a decrease in insufficient funds fee revenue.

Noninterest Expense. Noninterest expense consists primarily of employee compensation and benefits, office occupancy expense, data processing expense, real estate owned expense, and other operating expense. Total noninterest expense decreased $762,000 or 14% during the first quarter of 2013 compared to the first quarter of 2012. The variances in certain noninterest expense items are further explained in the following paragraphs, with the aggregate expense decrease being primarily related to the decrease in nonperforming assets and improvements in the Bank's operational efficiency and overall staffing levels.

Real estate owned, net. The changes in the composition of this line item are presented below (in thousands):

Three Months Ended

                             March 31,
                        2013           2012       Change
Loss provisions       $     142       $    28     $   114
Net gain on sales          (331 )         (65 )      (266 )
Rental income               (38 )        (258 )       220
Taxes and insurance          67           163         (96 )
Other                        64            97         (33 )
Total                 $     (96 )     $   (35 )   $   (61 )

The increase in the net gain on sales of REO properties for the three months ended March 31, 2013 compared to the same period in 2012 was primarily related to sales of developed residential subdivision lots and land in a single subdivision with total gains of $264,000 during the first quarter of 2013, partially offset by increased loss provisions and decreased rental income.

Real estate owned expenses such as taxes, insurance and maintenance as well as rental income are expected to continue to decline as the size of the REO portfolio continues to decline. Future levels of loss provisions and net gains or losses on sales of real estate owned will depend on market conditions.

Salaries and Employee Benefits. Salaries and employee benefits of $2.7 million for the three months ended March 31, 2013 decreased $197,000 from the same period in 2012. The decrease was primarily attributable to a decrease in average full-time equivalents in the first quarter of 2013 compared to the first quarter of 2012.

FDIC Insurance Premium. The Bank's FDIC insurance premium decreased $127,000 for the three months ended March 31, 2013 compared to the same period in 2012 due to decreases in the assessment rate and the assessment base. The base is defined as average consolidated total assets for the assessment period less average tangible equity capital with potential adjustments for unsecured debt, brokered deposits and depository institution debts.

Data Processing. The decrease in data processing expense of $140,000 in the first quarter of 2013 compared to the same period in 2012 was primarily related to lower overall processing costs for the three months ended March 31, 2013 as a result of the Bank's conversion of its operational software during the second quarter of 2012, as well as one-time costs of approximately $75,000 incurred during the three months ended March 31, 2012.

Professional Fees. Professional fees decreased $139,000 or 35% for the quarter ended March 31, 2013 compared to the same period in 2012, primarily due to a decrease in audit fees and a decrease in loan-related legal fees.

Income Taxes. The Company had no taxable income for the three months ended March 31, 2013 or 2012 and recorded a valuation allowance for the full amount of its net deferred tax asset as of March 31, 2013 and December 31, 2012, respectively.


LENDING ACTIVITIES

Loans Receivable. Changes in loan composition between March 31, 2013 and
December 31, 2012, are presented in the following table (dollars in thousands).

                                    March 31,        December 31,        Increase
                                       2013              2012           (Decrease)        % Change

One- to four-family residential    $    151,553     $      157,936     $     (6,383 )           (4.0 )%
Multifamily residential                  21,138             20,790              348              1.7
Nonfarm nonresidential                  142,624            138,014            4,610              3.3
Construction and land
development                              13,158             14,551           (1,393 )           (9.6 )
Total real estate loans                 328,473            331,291           (2,818 )           (0.9 )

Commercial                               15,833             16,083             (250 )           (1.6 )

Consumer                                  5,214              5,818             (604 )          (10.4 )

Total loans receivable                  349,520            353,192           (3,672 )           (1.0 )
Unearned discounts and net
deferred loan costs                        (177 )             (188 )             11             (5.9 )
Allowance for loan and lease
losses                                  (15,597 )          (15,676 )             79             (0.5 )

Loans receivable, net              $    333,746     $      337,328     $     (3,582 )           (1.1 )%

Total loans receivable decreased $3.7 million to $349.5 million at March 31, 2013, compared to $353.2 million at December 31, 2012. The balance of total loans receivable has recently stabilized, reversing a trend of several consecutive years of decline. Relying mainly on high quality commercial and commercial real estate loans, management has been able to partially offset the reduction in one- to-four family residential mortgage loans resulting from the Bank's gradual but concerted shift away from that loan type in order to better balance the overall loan portfolio.


ASSET QUALITY

Nonperforming Assets. The following table sets forth the amounts and categories
of the Bank's nonperforming assets at the dates indicated (dollars in
thousands).

                                    March 31, 2013                December 31, 2012
                                               % Total                         % Total         Increase
                               Net (2)         Assets          Net (2)         Assets         (Decrease)
Nonaccrual Loans:
One- to four-family
residential                   $    7,222            1.32 %   $     7,027            1.32 %   $        195
Multifamily residential               --              --              --              --               --
Nonfarm nonresidential             6,529            1.20 %         7,236            1.37 %           (707 )
Construction and land
development                        3,808            0.69 %         4,133            0.77 %           (325 )
Commercial                           402            0.07 %           402            0.08 %             --
Consumer                              30            0.01 %            26            0.01 %              4

Total nonaccrual loans            17,991            3.29 %        18,824            3.55 %           (833 )

Accruing loans 90 days or
more past due                         --              --              --              --               --

Real estate owned                 14,445            2.64 %        16,658            3.14 %         (2,213 )

Total nonperforming assets        32,436            5.93 %        35,482            6.69 %         (3,046 )
Performing restructured
loans                              3,936            0.71 %         5,816            1.10 %         (1,880 )

Total nonperforming assets
and performing restructured
loans (1)                     $   36,372            6.64 %   $    41,298            7.79 %   $     (4,926 )



(1) The table does not include substandard loans which were judged not to be impaired totaling $11.4 million and $12.1 million at March 31, 2013 and December 31, 2012, respectively.

(2) Loan balances are presented net of undisbursed loan funds, partial charge-offs and interest payments recorded as reductions in principal balances for financial reporting purposes.

Nonaccrual Loans. The composition of nonaccrual loans by status was as follows as of the dates indicated (dollars in thousands):

                                  March 31, 2013                December 31, 2012               Increase (Decrease)
                                           Percentage                      Percentage                        Percentage
                             Balance        of Total        Balance         of Total        Balance           of Total

Bankruptcy or foreclosure   $   1,762              9.8 %   $    2,347             12.5 %   $     (585 )              (2.7 )%
Over 90 days past due           9,920             55.2          9,913             52.7              7                 2.5
30-89 days past due               564              3.1          1,311              7.0           (747 )              (3.8 )
Not past due                    5,745             31.9          5,253             27.8            492                 4.0
                            $  17,991            100.0 %   $   18,824            100.0 %   $     (833 )                --

The following table presents nonaccrual loan activity for the three months ended March 31, 2013 and 2012 (in thousands):

                                                          Three Months       Three Months
                                                             Ended              Ended
                                                         March 31, 2013     March 31, 2012

Balance of nonaccrual loans-beginning of period          $       18,824     $       33,954
Loans added to nonaccrual status                                  1,050              4,547
Net cash payments                                                  (711 )           (4,458 )
Loans returned to accrual status                                     --             (1,998 )
Charge-offs to the ALLL                                            (220 )           (3,188 )
Transfers to REO                                                   (952 )           (2,816 )

Balance of nonaccrual loans-end of period                $       17,991     $       26,041


Real Estate Owned. Changes in the composition of real estate owned between March 31, 2013 and December 31, 2012, are presented in the following table (dollars in thousands).

                          December 31,                        Fair Value          Net Sales        Net Gain       March 31,
                              2012           Additions        Adjustments        Proceeds(1)        (Loss)          2013
One- to four-family
residential              $        2,586     $       588     $           (51 )   $      (1,219 )   $       61     $     1,965
. . .
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