Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
FFBH > SEC Filings for FFBH > Form 10-Q on 31-Oct-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


31-Oct-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 ("MD&A") 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. References to the Company and the Bank throughout MD&A are made using the first person notations of "we", "us" or "our".

The Bank is a federally chartered stock savings and loan association that was formed in 1934. As of September 30, 2013, the Bank conducted business from its home office, one limited service office, ten full service branch offices located in a five county area in Arkansas (comprised of Benton and Washington counties in Northwest Arkansas; Boone, Marion and Baxter counties in North-central Arkansas) and a loan production office located in Little Rock, Arkansas. Approval was granted on September 18, 2013 for a branch office in Little Rock, Arkansas, which opened on October 15, 2013. The Company also has executive offices in Little Rock, Arkansas. The Bank sold its Berryville, Arkansas branch in June 2013, closed its Rogers Elm Street branch in August 2013, and sold its Farmington, Arkansas branch in September 2013. The branch sales and closure are part of the Bank's overall strategy to improve operational efficiency and to support its expansion into other 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 automated teller machines; 24-hour telephone banking; online banking, including account access, e-statements, and bill payment; mobile banking, including remote deposit capture and funds transfer; Bounce ProtectionTM overdraft service; debit cards; and safe deposit boxes.

OVERVIEW

The Company's net income was $143,000 and $530,000 for the three and nine months ended September 30, 2013, respectively, compared to net income of $353,000 and $1.3 million for the same periods in 2012, respectively. The primary reasons for the decrease in net income during each comparative period were decreases in yields earned on loans receivable and decreases in deposit fee income. The decrease in net income for the nine months ended September 30, 2013 was also impacted by a decrease in gains on sales of investment securities, which was partially offset by decreases in operating expenses.

The Bank continued to reduce its level of nonperforming assets during the first nine months of 2013. Total nonperforming assets at September 30, 2013, including nonaccrual loans and real estate owned, totaled $22.9 million, or 4.32% of total assets, a reduction of $12.6 million compared to December 31, 2012, and a reduction of $17.1 million compared to September 30, 2012. The Bank also reduced its level of classified loans to $16.8 million at September 30, 2013 compared to $34.5 million at December 31, 2012 and $36.2 million at September 30, 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.

Pending Transaction

On July 1, 2013, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with First National Security Company ("FNSC") of Hot Springs, Arkansas, pursuant to which FNSC will merge with and into the Company (the "Merger"). Pursuant to the Merger Agreement, shareholders of FNSC will receive, in the aggregate, 6,252,400 shares of Company common stock and $74 million in cash in exchange for their shares of FNSC common stock. The total transaction value will depend on the closing price of the Company's stock on the closing date of the Merger. Consummation of the Merger is subject to certain conditions, including, among others, approval of the Merger by Company and FNSC shareholders and the receipt of all required governmental regulatory approvals. Under the terms of the Merger Agreement, either party may terminate the Merger Agreement if the Merger is not completed by March 31, 2014.

In connection with the Merger, the Company will sell up to 2,531,645 shares of Company common stock at a price per share equal to $7.90 and issue warrants (the "Investor Warrants") to purchase 177,215 shares of common stock on the same terms as in the Private Placement to its principal shareholder Bear State Financial Holdings, LLC ("Bear State") and certain of its members (the "Investors")(including Richard N. Massey, the Company's Chairman, and Scott T. Ford, a director of the Company). The Investor Warrants were issued on August 13, 2013, have a five year term, and have an exercise price of $7.90 per share, which was the closing stock price for the Company's common stock on June 28, 2013 and is the price of the Company's common stock offered in the Private Placement. On August 23, 2013, the Company entered into a subscription agreement with Bear State for the purchase and sale of 2,291,593 shares of common stock.


The Company also entered into a registration rights agreement with Bear State, which provided Bear State with customary registration rights with respect to the shares it has agreed to purchase in the Private Placement. The Company intends to utilize the commitments of the Investors to backstop the remaining 240,052 shares to be purchased in the Private Placement. The Company anticipates the closing of the Private Placement will occur immediately prior to the closing of the Merger.

As of June 30, 2013, FNSC conducted banking business from 32 locations across Garland, Howard, Scott, Saline, Pulaski, Montgomery, Polk, Pike, Sevier, Little River, Miller, Craighead and Mississippi counties in Arkansas and McCurtain County in Oklahoma, and had total assets of $936.5 million. Based on pro forma combined financial statements as of June 30, 2013, the combined company would have had approximately $1.4 billion in total assets and approximately $1.2 billion in deposits if the transaction had closed as of that date.

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, 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

Three and Nine Months Ended September 30, 2013 Compared to Three and Nine Months Ended September 30, 2012

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 third quarter of 2013 was $3.8 million, which was unchanged from the same period in 2012. Net interest income for the nine months ended September 30, 2013 was $11.1 million compared to $11.6 million for the same period in 2012. Factors impacting interest income and interest expense for the comparison periods are discussed below.

Interest Income. Interest income for the third quarter of 2013 was $4.6 million compared to $4.8 million for the same period in 2012. Interest income for the nine months ended September 30, 2013 was $13.6 million compared to $15.0 million for the same period in 2012. The decrease in interest income for the three and nine months ended September 30, 2013 compared to comparable periods in 2012 was primarily related to a decrease in yields earned on loans receivable. The decrease in yields earned on loans receivable is primarily due to origination during the period 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.

Interest Expense. Interest expense for the third quarter of 2013 was $825,000 compared to $1.1 million for the same period in 2012. Interest expense for the nine months ended September 30, 2013 was $2.5 million compared to $3.4 million for the same period in 2012. The decrease in interest expense for the three and nine months ended September 30, 2013 compared to comparable periods in 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 September 30,
                                                         2013 vs. 2012
                                              Increase (Decrease)
                                                    Due to
                                                                                  Total
                                                                   Rate/        Increase
                                     Volume          Rate          Volume      (Decrease)
                                                        (In Thousands)
Interest income:
Loans receivable                     $     1       $    (286 )    $     --     $      (285 )
Investment securities                     33              15             1              49
Other interest-earning assets            (41 )            24            (8 )           (25 )
Total interest-earning assets             (7 )          (247 )          (7 )          (261 )

Interest expense:
Deposits                                 (51 )          (190 )           9            (232 )
Other borrowings                         (17 )            19           (14 )           (12 )
Total interest-bearing liabilities       (68 )          (171 )          (5 )          (244 )
Net change in net interest income    $    61       $     (76 )    $     (2 )   $       (17 )




                                               Nine Months Ended September 30,
                                                        2013 vs. 2012
                                            Increase (Decrease)
                                                   Due to
                                                                               Total
                                                                Rate/         Increase
                                      Volume        Rate        Volume       (Decrease)
                                                       (In Thousands)
Interest income:
Loans receivable                     $    (11 )   $ (1,287 )   $      1     $     (1,297 )
Investment securities                     (85 )         --           --              (85 )
Other interest-earning assets             (72 )         53           (9 )            (28 )
Total interest-earning assets            (168 )     (1,234 )         (8 )         (1,410 )

Interest expense:
Deposits                                 (169 )       (755 )         38             (886 )
Other borrowings                          (50 )          2           (1 )            (49 )
Total interest-bearing liabilities       (219 )       (753 )         37             (935 )
Net change in net interest income    $     51     $   (481 )   $    (45 )   $       (475 )


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. Interest rate spread represents the difference between the weighted average yield on average interest earning assets and the weighted average cost of average interest bearing liabilities. Net interest margin represents net interest income as a percentage of average interest earning assets.

                                                Three Months Ended September 30,
                                         2013                                       2012
                                                      Average                                    Average
                         Average                      Yield/        Average                      Yield/
                         Balance       Interest        Cost         Balance       Interest        Cost
                                                     (Dollars in Thousands)
Interest-earning
assets:
Loans receivable(1)     $ 359,071     $    4,033          4.46 %   $ 358,990     $    4,318          4.79 %
Investment
securities(2)              61,880            436          2.80        56,992            387          2.70
Other
interest-earning
assets                     52,580            110          0.83        75,859            135          0.71
Total
interest-earning
assets                    473,531          4,579          3.84       491,841          4,840          3.92
Noninterest-earning
assets                     50,232                                     58,243
Total assets            $ 523,763                                  $ 550,084
Interest-bearing
liabilities:
Deposits                $ 449,692            814          0.72     $ 472,661          1,046          0.88
Other borrowings              978             11          4.29         3,933             23          2.35
Total
interest-bearing
liabilities               450,670            825          0.73       476,594          1,069          0.89
Noninterest-bearing
liabilities                 2,122                                      3,515
Total liabilities         452,792                                    480,109
Stockholders' equity       70,971                                     69,975
Total liabilities and
stockholders' equity    $ 523,763                                  $ 550,084

Net interest income                   $    3,754                                 $    3,771
Net earning assets      $  22,861                                  $  15,247
Interest rate spread                                      3.11 %                                     3.02 %
Net interest margin                                       3.15 %                                     3.04 %
Ratio of
interest-earning
assets to
  Interest-bearing
liabilities                                             105.07 %                                   103.20 %



(1) Includes nonaccrual loans.

(2) Includes FHLB of Dallas stock.

                                                 Nine Months Ended September 30,
                                         2013                                       2012
                                                      Average                                    Average
                         Average                      Yield/        Average                      Yield/
                         Balance       Interest        Cost         Balance       Interest        Cost
                                                     (Dollars in Thousands)
Interest-earning
assets:
Loans receivable(1)     $ 355,757     $   12,084          4.54 %   $ 356,057     $   13,381          5.02 %
Investment
securities(2)              54,873          1,152          2.81        58,918          1,237          2.80
Other
interest-earning
assets                     70,690            381          0.72        85,726            409          0.64
Total
interest-earning
assets                    481,320         13,617          3.78       500,701         15,027          4.01
Noninterest-earning
assets                     51,393                                     59,689
Total assets            $ 532,713                                  $ 560,390
Interest-bearing
liabilities:
Deposits                $ 457,072          2,477          0.73     $ 481,345          3,363          0.93
Other borrowings            2,296             37          2.12         5,576             86          2.06
Total
interest-bearing
liabilities               459,368          2,514          0.73       486,921          3,449          0.95
Noninterest-bearing
liabilities                 2,351                                      3,823
Total liabilities         461,719                                    490,744
Stockholders' equity       70,994                                     69,646
Total liabilities and
stockholders' equity    $ 532,713                                  $ 560,390

Net interest income                   $   11,103                                 $   11,578

Net earning assets      $  21,952                                  $  13,780
Interest rate spread                                      3.05 %                                     3.06 %
Net interest margin                                       3.08 %                                     3.08 %
Ratio of
interest-earning
assets to
Interest-bearing
liabilities                                             104.78 %                                   102.83 %



(1) Includes nonaccrual loans.

(2) Includes FHLB of Dallas stock.


Provision for Loan Losses. The provision for loan losses represents the amount that is added to the allowance for loan and lease losses ("ALLL") for the purpose of maintaining 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.

Management determined that no provision for loan losses was required for the three or nine months ended September 30, 2013, primarily due to decreases in nonperforming and classified loans and continued improvement in the Bank's loan portfolio and ALLL coverage of nonaccrual loans. The ALLL as a percentage of loans receivable was 3.6% at September 30, 2013, compared to 4.4% at December 31, 2012. The ALLL as a percentage of nonaccrual loans was 100.1% at September 30, 2013, compared to 83.3% at December 31, 2012. The ALLL as a percentage of classified loans was 77.8% at September 30, 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 investment securities, and earnings on life insurance policies. Total noninterest income of $1.4 million for the third quarter of 2013 was unchanged compared to the third quarter of 2012. Total noninterest income of $4.0 million for the nine months ended September 30, 2013 decreased from $5.1 million for the same period in 2012. The decrease in the nine month comparison period was primarily due to a decrease in gains on sales of investment securities and 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 increased $152,000 or 3.1% during the third quarter of 2013 compared to the third quarter of 2012. Total noninterest expense decreased $868,000 or 5.6% during the nine months ended September 30, 2013 compared to the same period in 2012. The variances in certain noninterest expense items are further explained in the following paragraphs, with the aggregate expense decrease for the nine month comparison period being primarily related to the decrease in nonperforming assets and improvements in the Bank's operational efficiency and overall staffing levels. The increase in noninterest expense for the three month comparison period was primarily due to an increase in salaries and employee benefits and other noninterest expenses partially offset by a decrease in FDIC insurance expense.

Salaries and Employee Benefits. Salaries and employee benefits increased $203,000 for the three months ended September 30, 2013 compared to the same period in 2012 and increased $100,000 for the nine months ended September 30, 2013 compared to the same period in 2012. The increase in the three month comparison period was primarily due to an increase in incentive and stock compensation expense. The increase in the nine month comparison period was also due to an increase in incentive and stock compensation expense, partially offset by a decrease in expenses related to the Bank's employee benefit plans.

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

                        Three Months Ended                       Nine Months Ended
                           September 30,                           September 30,
                        2013           2012         Change       2013          2012         Change
Loss provisions       $     358       $   277     $     81     $    533      $    585     $     (52 )
Net gain on sales          (316 )        (344 )         28         (690 )      (1,135 )         445
Rental income               (22 )         (16 )         (6 )        (85 )        (425 )         340
Taxes and insurance          53           104          (51 )        146           399          (253 )
. . .
  Add FFBH to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for FFBH - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.