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BEAR STATE FINANCIAL, INC. 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

 

 

For the quarterly period ended March 31, 2005

 

 

 

 

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

(Registrant’s 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 ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ý  No o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  As of April 15, 2005, there were issued and outstanding 5,084,408 shares of the Registrant’s Common Stock, par value $.01 per share.

 

 



 

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

 

TABLE OF CONTENTS

 

Part I.

Financial Information

 

 

 

 

Item 1.

Consolidated Financial Statements

 

 

 

 

 

Consolidated Statements of Financial Condition as of March 31, 2005 and December 31, 2004 (unaudited)

 

 

 

 

 

Consolidated Statements of Income for the three months ended March 31, 2005 and 2004 (unaudited)

 

 

 

 

 

Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2005 (unaudited)

 

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004 (unaudited)

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

Part II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

Item 2.

Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

 

 

Item 5.

Other Information

 

 

 

 

Item 6.

Exhibits

 

 

 

 

Signatures

 

 

 

 

 

Exhibits

 

 

 

 

 

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

32.1

Section 906 Certification of the CEO

 

 

 

 

32.2

Section 906 Certification of the CFO

 

 



 

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands, except share data)

(Unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2005

 

2004

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,097

 

$

16,003

 

Investment securities held to maturity

 

55,445

 

56,660

 

Federal Home Loan Bank stock

 

5,958

 

4,876

 

Loans receivable, net

 

666,140

 

634,217

 

Accrued interest receivable

 

5,074

 

4,427

 

Real estate acquired in settlement of loans, net

 

458

 

563

 

Office properties and equipment, net

 

16,011

 

15,295

 

Cash surrender value of life insurance

 

18,094

 

17,897

 

Prepaid expenses and other assets

 

1,756

 

1,727

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

782,033

 

$

751,665

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Deposits

 

$

588,758

 

$

582,424

 

Federal Home Loan Bank advances

 

113,889

 

89,756

 

Advance payments by borrowers for taxes and insurance

 

938

 

757

 

Other liabilities

 

2,880

 

3,427

 

Total liabilities

 

706,465

 

676,364

 

 

 

 

 

 

 

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, 5,084,408 and 5,094,020 shares outstanding at March 31, 2005 and December 31, 2004, respectively

 

103

 

103

 

Additional paid-in capital

 

55,124

 

54,427

 

Employee stock benefit plans

 

(472

)

(582

)

Retained earnings-substantially restricted

 

79,615

 

78,261

 

 

 

134,370

 

132,209

 

Treasury stock, at cost, 5,223,094 and 5,213,482 shares at March 31, 2005 and December 31, 2004, respectively

 

(58,802

)

(56,908

)

Total stockholders’ equity

 

75,568

 

75,301

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

782,033

 

$

751,665

 

 

See notes to unaudited consolidated financial statements.

 

1



 

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

INTEREST INCOME:

 

 

 

 

 

Loans receivable

 

$

9,884

 

$

8,329

 

Investment securities:

 

 

 

 

 

Taxable

 

518

 

794

 

Nontaxable

 

180

 

166

 

Other

 

13

 

91

 

Total interest income

 

10,595

 

9,380

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

Deposits

 

3,283

 

3,187

 

Other borrowings

 

844

 

319

 

Total interest expense

 

4,127

 

3,506

 

 

 

 

 

 

 

NET INTEREST INCOME

 

6,468

 

5,874

 

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

249

 

259

 

 

 

 

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

6,219

 

5,615

 

 

 

 

 

 

 

NONINTEREST INCOME:

 

 

 

 

 

Deposit fee income

 

1,008

 

770

 

Earnings on life insurance policies

 

197

 

211

 

Gain on sale of loans

 

134

 

127

 

Other

 

231

 

324

 

Total noninterest income

 

1,570

 

1,432

 

 

 

 

 

 

 

NONINTEREST EXPENSES:

 

 

 

 

 

Salaries and employee benefits

 

3,003

 

2,679

 

Net occupancy expense

 

499

 

492

 

Data processing

 

341

 

408

 

Professional fees

 

114

 

108

 

Advertising and public relations

 

241

 

128

 

Postage and supplies

 

190

 

179

 

Other

 

508

 

480

 

Total noninterest expenses

 

4,896

 

4,474

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

2,893

 

2,573

 

INCOME TAX PROVISION

 

929

 

813

 

NET INCOME

 

$

1,964

 

$

1,760

 

 

 

 

 

 

 

EARNINGS PER SHARE:

 

 

 

 

 

Basic

 

$

0.39

 

$

0.34

 

 

 

 

 

 

 

Diluted

 

$

0.37

 

$

0.32

 

 

 

 

 

 

 

Cash Dividends Declared

 

$

0.12

 

$

0.10

 

 

See notes to unaudited consolidated financial statements.

 

2



 

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2005

(In thousands, except share data)

(Unaudited)

 

 

 

Issued
Common Stock

 

Additional
Paid-In

 

Employee
Stock
Benefit

 

Retained

 

 

 

Shares

 

Amount

 

Capital

 

Plans

 

Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2004

 

10,307,502

 

$

103

 

$

54,427

 

$

(582

)

$

78,261

 

Net income

 

 

 

 

 

 

 

 

 

1,964

 

Release of ESOP shares

 

 

 

 

 

389

 

104

 

 

 

Tax effect of stock compensation plan

 

 

 

 

 

481

 

 

 

 

 

Treasury shares reissued due to exercise of stock options

 

 

 

 

 

(173

)

 

 

 

 

Purchase of treasury stock, at cost

 

 

 

 

 

 

 

 

 

 

 

MRP shares

 

 

 

 

 

 

 

6

 

 

 

Dividends paid

 

 

 

 

 

 

 

 

 

(610

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2005

 

10,307,502

 

$

103

 

$

55,124

 

$

(472

)

$

79,615

 

 

 

 

Treasury Stock

 

Total
Stockholders’

 

 

 

Shares

 

Amount

 

Equity

 

 

 

 

 

 

 

 

 

Balance, December 31, 2004

 

5,213,482

 

$

(56,908

)

$

75,301

 

Net income

 

 

 

 

 

1,964

 

Release of ESOP shares

 

 

 

 

 

493

 

Tax effect of stock compensation plan

 

 

 

 

 

481

 

Treasury shares reissued due to exercise of stock options

 

(126,388

)

1,397

 

1,224

 

Purchase of treasury stock, at cost

 

136,000

 

(3,291

)

(3,291

)

MRP shares

 

 

 

 

 

6

 

Dividends paid

 

 

 

 

 

(610

)

 

 

 

 

 

 

 

 

Balance, March 31, 2005

 

5,223,094

 

$

(58,802

)

$

75,568

 

 

See notes to unaudited consolidated financial statements.

 

3



 

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

1,964

 

$

1,760

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

249

 

259

 

Provision for real estate losses

 

24

 

 

Deferred tax provision (benefit)

 

(50

)

43

 

Accretion of discounts on investment securities, net

 

(3

)

(33

)

Federal Home Loan Bank stock dividends

 

(39

)

(14

)

Gain on disposition of office properties and equipment

 

 

(34

)

Gain on sale of repossessed assets, net

 

(5

)

(6

)

Originations of loans held for sale

 

(9,446

)

(10,604

)

Proceeds from sales of loans

 

9,742

 

10,613

 

Gain on sale of loans originated to sell

 

(134

)

(127

)

Depreciation

 

294

 

298

 

Amortization of deferred loan fees, net

 

38

 

3

 

Release of ESOP shares

 

493

 

429

 

MRP compensation expense

 

6

 

7

 

Earnings on life insurance policies

 

(197

)

(211

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accrued interest receivable

 

(647

)

(235

)

Prepaid expenses and other assets

 

(13

)

323

 

Other liabilities

 

(16

)

298

 

Net cash provided by operating activities

 

2,260

 

2,769

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of investment securities held to maturity

 

(100

)

(63,878

)

Proceeds from maturities/calls of investment securities held to maturity

 

1,318

 

55,879

 

Purchase of FHLB stock

 

(1,043

)

 

Loan participations sold

 

1,787

 

2,709

 

Loan originations, net of repayments

 

(34,231

)

(24,404

)

Proceeds from sales of repossessed assets

 

142

 

215

 

Proceeds from sales of office properties and equipment

 

 

546

 

Purchases of office properties and equipment

 

(1,010

)

(958

)

Net cash used in investing activities

 

(33,137

)

(29,891

)

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

Net increase in deposits

 

6,334

 

7,267

 

Advances from FHLB

 

45,900

 

2,033

 

Repayment of advances from FHLB

 

(21,767

)

(4,105

)

Net increase in advance payments by borrowers for taxes and insurance

 

181

 

162

 

Purchase of treasury stock

 

(3,291

)

(2,045

)

Reissued treasury stock

 

1,224

 

714

 

Dividends paid

 

(610

)

(532

)

Net cash provided by financing activities

 

27,971

 

3,494

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(2,906

)

(23,628

)

 

(Continued)

 

4



 

 

 

Three Months Ended March 31,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS:

 

 

 

 

 

Beginning of period

 

$

16,003

 

$

56,201

 

End of period

 

$

13,097

 

$

32,573

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest

 

$

4,023

 

$

3,489

 

Income taxes

 

$

2

 

$

168

 

 

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:

 

 

 

 

 

Real estate and other assets acquired in settlement of loans

 

$

72

 

$

151

 

Loans to facilitate sales of real estate owned

 

$

 

$

197

 

Investment securities traded, recorded in investments not yet settled in cash

 

$

 

$

250

 

 

See notes to unaudited consolidated financial statements.

 

(Concluded)

 

5



 

FIRST FEDERAL BANCSHARES OF ARKANSAS, INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 - Basis of Presentation and Principles of Consolidation

 

First Federal Bancshares of Arkansas, Inc. (the “Company”) is a unitary holding company which owns all of the stock of First Federal Bank of Arkansas, FA (the “Bank”).  The Bank provides a broad line of financial products to individuals and small- to medium-sized businesses in Northwest and Northcentral Arkansas.  The unaudited consolidated financial statements also include the accounts of the Bank’s wholly-owned subsidiary, First Harrison Service Corporation (“FHSC”), which is inactive.

 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  However, such information reflects all adjustments which are, in the opinion of management, necessary for a fair statement of results for the interim periods.

 

The accompanying unaudited consolidated financial statements include the accounts of the Company and the Bank.  All material intercompany transactions have been eliminated in consolidation.

 

The results of operations for the three months ended March 31, 2005, are not necessarily indicative of the results to be expected for the year ending December 31, 2005.  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, 2004, contained in the Company’s 2004 Annual Report to Stockholders.

 

Certain amounts in the March 31, 2004, unaudited consolidated financial statements have been reclassified to conform to the classifications adopted for reporting in 2005.

 

Note 2 - Earnings per Share

 

The weighted average number of common shares used to calculate earnings per share for the periods ended March 31, 2005 and 2004 were as follows:

 

 

 

Three months ended March 31,

 

 

 

2005

 

2004

 

Basic weighted - average shares

 

4,987,228

 

5,146,747

 

Effect of dilutive securities

 

280,357

 

345,290

 

Diluted weighted - average shares

 

5,267,585

 

5,492,037

 

 

6



 

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

CRITICAL ACCOUNTING POLICIES

 

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments.  In particular, the methodology for the determination of our allowance for loan losses, due to the judgments, estimates and assumptions inherent in that policy, is critical to preparation of our financial statements.  This policy and the judgments, estimates and assumptions are described in greater detail in subsequent sections of Management’s Discussion and Analysis and in the notes to the unaudited financial statements included herein.  We believe that the judgments, estimates and assumptions used in the preparation of our financial statements are appropriate given the factual circumstances at the time.  However, given the sensitivity of our financial statements to this critical accounting policy, the use of other judgments, estimates and assumptions could result in material differences in our financial condition or results of operations.

 

In estimating the amount of credit losses inherent in our loan portfolio, various judgments and assumptions are made.  For example, when assessing the condition of the overall economic environment, assumptions are made regarding future market conditions and their impact on the loan portfolio.  In the event the national economy were to sustain a prolonged downturn, the loss factors applied to our portfolios may need to be revised, which may significantly impact the measurement of the allowance for loan losses.  For impaired loans that are collateral-dependent, the estimated fair value of the collateral may deviate significantly from the proceeds received when the collateral is sold.

 

CHANGES IN FINANCIAL CONDITION

 

Changes in financial condition between March 31, 2005 and December 31, 2004 are presented in the following table (dollars in thousands).  Material changes between periods will be discussed in the sections which follow the table.

 

 

 

March 31,
2005

 

December 31,
2004

 

Increase
(Decrease)

 

Percentage
Change

 

ASSETS

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,097

 

$

16,003

 

$

(2,906

)

(18.2

)%

Investment securities held to maturity

 

55,445

 

56,660

 

(1,215

)

(2.1

)%

Loans receivable, net

 

666,140

 

634,217

 

31,923

 

5.0

%

Federal Home Loan Bank stock

 

5,958

 

4,876

 

1,082

 

22.2

%

Prepaid expenses and other assets

 

41,393

 

39,909

 

1,484

 

3.7

%

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

782,033

 

$

751,665

 

$

30,368

 

4.0

%

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

Deposits

 

$

588,758

 

$

582,424

 

$

6,334

 

1.1

%

Other borrowings

 

113,889

 

89,756

 

24,133

 

26.9

%

Other liabilities

 

3,818

 

4,184

 

(366

)

(8.7

)%

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

706,465

 

676,364

 

30,101

 

4.4

%

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

75,568

 

75,301

 

267

 

0.4

%

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

782,033

 

$

751,665

 

$

30,368

 

4.0

%

 

 

 

 

 

 

 

 

 

 

BOOK VALUE PER SHARE

 

$

14.86

 

$

14.78

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EQUITY TO ASSETS

 

9.7

%

10.0

%

 

 

 

 

 

7



 

Loans Receivable.  Changes in loan composition between March 31, 2005 and December 31, 2004 are presented in the following table (dollars in thousands).

 

 

 

March 31,
2005

 

December 31,
2004

 

Increase
(Decrease)

 

Percentage
Change

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

$

282,947

 

$

282,144

 

$

803

 

 

 

Multi-family residential

 

14,429

 

9,454

 

4,975

 

 

 

Commercial real estate

 

150,348

 

145,909

 

4,439

 

 

 

Construction

 

182,977

 

159,111

 

23,866

 

 

 

Total first mortgage loans

 

630,701

 

596,618

 

34,083

 

5.7

%

 

 

 

 

 

 

 

 

 

 

Commercial

 

29,679

 

27,545

 

2,134

 

7.7

%

 

 

 

 

 

 

 

 

 

 

Home equity and second mortgage

 

48,089

 

45,256

 

2,833

 

 

 

Automobile

 

18,399

 

19,101

 

(702

)

 

 

Other

 

11,323

 

10,685

 

638

 

 

 

Total consumer

 

77,811

 

75,042

 

2,769

 

3.7

%

 

 

 

 

 

 

 

 

 

 

Total loans receivable

 

738,191

 

699,205

 

38,986

 

5.6

%

Less:

 

 

 

 

 

 

 

 

 

Undisbursed loan funds

 

(69,732

)

(62,661

)

(7,071

)

 

 

Unearned discounts and net deferred loan fees

 

(369

)

(481

)

112

 

 

 

Allowance for loan losses

 

(1,950

)

(1,846

)

(104

)

 

 

 

 

 

 

 

 

 

 

 

 

Total loans receivable, net

 

$

666,140

 

$

634,217

 

$

31,923

 

5.0

%

 

The Bank continued to experience demand for multi-family loans, commercial real estate loans, construction loans, and commercial loans.  Generally, the Bank’s construction loans were for the purpose of constructing single-family residential properties.  The interest rate environment and robust economy of our market area provided continued demand and opportunity for our other loan products as well.  In recent years, the Bank has placed an increased emphasis on commercial real estate lending, construction lending, and commercial lending to diversify its loan portfolio, take advantage of market opportunities in these types of loans, and help the Bank transition to a more full-service community bank, as well as to provide opportunities to cross-sell its other banking products.

 

8



 

Asset Quality.  The following table sets forth the amounts and categories of the Bank’s nonperforming assets at the dates indicated.

 

 

 

March 31, 2005

 

December 31, 2004

 

 

 

(Dollars in Thousands)

 

Nonaccrual loans:

 

 

 

 

 

One- to four-family residential

 

$

2,216

 

$

2,619

 

Construction loans

 

639

 

634

 

Commercial real estate

 

574

 

 

Commercial loans

 

573

 

186

 

Consumer loans

 

603

 

723

 

Total nonaccrual loans

 

4,605

 

4,162

 

 

 

 

 

 

 

Restructured loans

 

3,746

 

3,790

 

Real estate owned

 

458

 

563

 

 

 

 

 

 

 

Nonperforming assets

 

$

8,809

 

$

8,515

 

 

 

 

 

 

 

Total nonaccrual and restructured loans as a percentage of total loans receivable

 

1.13

%

1.14

%

 

 

 

 

 

 

Total nonperforming assets as a percentage of total assets

 

1.13

%

1.13

%

 

Restructured loans reported at March 31, 2005 and December 31, 2004, were comprised of a group of loans to related borrowers.  At those dates the loans were not over 90 days past due.

 

Allowance for Loan Losses.  A summary of the activity in the allowance for loan losses is as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2005

 

2004

 

Balance at beginning of period

 

$

1,846

 

$

1,621

 

Provisions for estimated losses

 

249

 

259

 

Recoveries

 

25

 

24

 

Losses charged off

 

(170

)

(201

)

Balance at end of period

 

$

1,950

 

$

1,703

 

 

Changes in the composition of the allowance for loan losses between March 31, 2005 and December 31, 2004 are presented in the following table (in thousands):

 

 

 

March 31,
2005

 

December 31,
2004

 

Increase
(Decrease)

 

General

 

$

1,558

 

$

1,476

 

$

82

 

Specific

 

306

 

318

 

(12

)

Unallocated

 

86

 

52

 

34

 

 

 

$

1,950

 

$

1,846

 

$

104

 

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as conditions change and more information becomes available.

 

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as loss, doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market

 

9



 

price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based primarily on historical loss experience. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

 

The Bank reviews its non-homogeneous loans for impairment on a quarterly basis.  The Bank considers commercial real estate, construction, multi-family, and commercial loans to be non-homogeneous loans.  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 borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

 

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.  In the event the national economy were to sustain a prolonged downturn, the loss factors applied to our portfolios may need to be revised, which may significantly impact the measurement of the allowance for loan losses.  For impaired loans that are collateral-dependent, the estimated fair value of the collateral may deviate significantly from the proceeds received when the collateral is sold.

 

Although we consider the allowance for loan losses of $2.0 million appropriate and adequate to cover losses inherent in our loan portfolio at March 31, 2005, no assurance can be given that we will not sustain loan losses that are significantly different from the amount provided, 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.

 

10



 

Investment Securities.  Changes in the composition of investment securities held to maturity between March 31, 2005 and December 31, 2004 are presented in the following table (in thousands).

 

 

 

March 31,
2005

 

December 31,
2004

 

Increase
(Decrease)

 

Certificates of deposit

 

$

2,000

 

$

3,000

 

$

(1,000

)

U.S. Government and agency obligations

 

37,756

 

37,821

 

(65

)

Municipal securities

 

15,689

 

15,839

 

(150

)

Total

 

$

55,445

 

$

56,660

 

$

(1,215

)

 

During the first quarter of 2005, investment securities totaling $100,000 were purchased and $1.3 million matured or were called.  The decrease in certificates of deposit and municipal securities was due to calls and maturities in excess of purchases.

 

At March 31, 2005, estimated fair values of investment securities held to maturity were as follows (in thousands):

 

 

 

Amortized Cost

 

Fair Value

 

 

 

 

 

 

 

Certificates of deposit

 

$

2,000

 

$

2,000

 

U.S. Government and agency obligations

 

37,756

 

36,905

 

Municipal securities

 

15,689

 

15,745

 

Total

 

$

55,445

 

$

54,650

 

 

Federal Home Loan Bank Stock.  Federal Home Loan Bank (“FHLB”) stock increased by approximately $1.1 million due to required purchases related to the increase in FHLB advances.

 

Deposits.  Changes in the composition of deposits between March 31, 2005 and December 31, 2004 are presented in the following table (dollars in thousands).

 

 

 

March 31,
2005

 

December 31,
2004

 

Increase
(Decrease)

 

Percentage
Change

 

 

 

 

 

 

 

 

 

 

 

DDA and NOW accounts

 

$

113,636

 

$

109,772

 

$

3,864

 

3.5

%

Money market accounts

 

93,943

 

106,063

 

(12,120

)

(11.4

)%

Savings accounts

 

31,961

 

31,611

 

350

 

1.1

%

Certificates of deposit

 

349,218

 

334,978

 

14,240

 

4.3

%

 

 

 

 

 

 

 

 

 

 

Total deposits

 

$

588,758

 

$

582,424

 

$

6,334

 

1.1

%

 

The Bank experienced a shift in the mix of deposits from money market accounts to certificates of deposit during the quarter.  Certificates of deposit increased as interest rates began to rise.  Further, the Bank has advertised several CD products with special rates and terms ranging from 7 to 40 months.  The cost of deposit funds increased from 2.26% at December 31, 2004 to 2.33% at March 31, 2005.  The Bank will continue to aggressively promote checking accounts with plans to expand its promotion of checking accounts by targeting small- and medium-sized business accounts with its direct mail campaign and “thank you” gifts beginning in the second quarter.  Checking accounts are an attractive source of funds for the Bank as they offer low-interest deposits, fee income potential, and the opportunity to cross-sell other financial services.

 

Federal Home Loan Bank Advances.  The Bank experienced $24.1 million or 26.9% growth in FHLB of Dallas advances during the quarter.  The advances were used to fund loan growth during the quarter.  The balance of advances at March 31, 2005 of $113.9 million consisted of $66.7 million of fixed rate advances with an average cost of 3.69% and $47.2 million of floating rate advances with an average cost of 2.87%.

 

Other Liabilities.  Other liabilities decreased primarily due to a decrease in the payable for unsettled investment transactions of $1 million, offset by increases in income taxes payable of approximately $200,000 and accrued interest payable of approximately $100,000.

 

11



 

Stockholders’ Equity.  Stockholders’ equity increased $267,000 from December 31, 2004 to March 31, 2005.  The increase in stockholders’ equity was primarily due to net income of $2.0 million and the issuance of treasury stock due to exercise of stock options of $1.2 million, offset by the purchase of treasury stock totaling $3.3 million during the first quarter of 2005.  In addition, during the quarter ended March 31, 2005 cash dividends of $610,000 were paid.  See the Unaudited Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2005 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 and the yields earned and rates paid at March 31, 2005.  Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented and outstanding balances at March 31, 2005.  Average balances are based on daily balances during the period.

 

 

 

 

 

Quarter Ended March 31,

 

 

 

 

 

2005

 

2004

 

 

 

March 31,
2005

 

Average
Balance

 

Interest

 

Average
Yield/
Cost

 

Average
Balance

 

Interest

 

Average
Yield/
Cost

 

Yield/Cost

 

 

 

 

(Dollars in Thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable(1)

 

6.15

%

$

651,582

 

$

9,884

 

6.07

%

$

520,908

 

$

8,329

 

6.40

%

Investment securities(2)

 

4.49

 

61,783

 

698

 

4.52

 

88,051

 

960

 

4.36

 

Other interest-earning assets

 

2.75

 

2,348

 

13

 

2.31

 

41,057

 

91

 

0.89

 

Total interest-earning assets

 

6.00

 

715,713

 

10,595

 

5.92

 

650,016

 

9,380

 

5.77

 

Noninterest-earning assets

 

 

 

50,914

 

 

 

 

 

46,961

 

 

 

 

 

Total assets

 

 

 

$

766,627

 

 

 

 

 

$

696,977

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

2.33

 

$

582,420

 

3,283

 

2.25

 

$

577,829

 

3,187

 

2.21

 

Other borrowings

 

3.35

 

103,542

 

844

 

3.26

 

38,490

 

319

 

3.31

 

Total interest-bearing liabilities

 

2.49

 

685,962

 

4,127

 

2.41

 

616,319

 

3,506

 

2.27

 

Noninterest-bearing liabilities

 

 

 

5,173

 

 

 

 

 

5,192

 

 

 

 

 

Total liabilities

 

 

 

691,135

 

 

 

 

 

621,511

 

 

 

 

 

Stockholders’ equity

 

 

 

75,492

 

 

 

 

 

75,466

 

 

 

 

 

Total liabilities and stockholders’ equity

 

 

 

$

766,627

 

 

 

 

 

$

696,977

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

6,468

 

 

 

 

 

$

5,874

 

 

 

Net earning assets

 

 

 

$

29,751

 

 

 

 

 

$

33,697

 

 

 

 

 

Interest rate spread

 

3.51

%

 

 

 

 

3.51

%

 

 

 

 

3.50

%

Net interest margin

 

 

 

 

 

 

 

3.61

%

 

 

 

 

3.61

%

Ratio of interest-earning assets to interest-bearing liabilities

 

 

 

 

 

 

 

104.34

%

 

 

 

 

105.47

%

 


(1)  Includes nonaccrual loans.

(2)  Includes FHLB stock.

 

12



 

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.

 

 

 

Quarter Ended March 31,
2005 vs. 2004

 

 

 

Increase (Decrease)
Due to

 

Total

 

 

 

Volume

 

Rate

 

Rate/
Volume

 

Increase
(Decrease)

 

 

 

(In Thousands)

 

Interest income:

 

 

 

 

 

 

 

 

 

Loans receivable

 

$

2,089

 

$

(427

)

$

(107

)

$

1,555

 

Investment securities

 

(286

)

35

 

(11

)

(262

)

Other interest-earning assets

 

(86

)

145

 

(137

)

(78

)

Total interest-earning assets

 

1,717

 

(247

)

(255

)

1,215

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

25

 

70

 

1

 

96

 

Other borrowings

 

539

 

(5

)

(9

)

525

 

Total interest-bearing liabilities

 

564

 

65

 

(8

)

621

 

Net change in net interest income

 

$

1,153

 

$

(312

)

$

(247

)

$

594

 

 

13



 

CHANGES IN RESULTS OF OPERATIONS

 

The table below presents a comparison of results of operations for the three months ended March 31, 2005 and 2004 (dollars in thousands).  Specific changes in captions will be discussed below the table.

 

 

 

Three Months Ended
March 31,

 

Increase
(Decrease)

 

Percentage
Change

 

 

 

2005

 

2004

 

2005 vs 2004

 

2005 vs 2004

 

Interest income:

 

 

 

 

 

 

 

 

 

Loans receivable

 

$

9,884

 

$

8,329

 

$

1,555

 

 

 

Investment securities

 

698

 

960

 

(262

)

 

 

Other

 

13

 

91

 

(78

)

 

 

Total interest income

 

10,595

 

9,380

 

1,215

 

13.0

%

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

3,283

 

3,187

 

96

 

 

 

Other borrowings

 

844

 

319

 

525

 

 

 

Total interest expense

 

4,127

 

3,506

 

621

 

17.7

%

Net interest income before provision for loan losses

 

6,468

 

5,874

 

594

 

10.1

%

Provision for loan losses

 

249

 

259

 

(10

)

(3.9

)%

Net interest income after provision for loan losses

 

6,219

 

5,615

 

604

 

10.8

%

Noninterest income:

 

 

 

 

 

 

 

 

 

Deposit fee income

 

1,008

 

770

 

238

 

 

 

Gain on sale of loans

 

134

 

127

 

7

 

 

 

Earnings on life insurance policies

 

197

 

211

 

(14

)

 

 

Other

 

231

 

324

 

(93

)

 

 

Total noninterest income

 

1,570

 

1,432

 

138

 

9.6

%

Noninterest expenses:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

3,003

 

2,679

 

324

 

 

 

Net occupancy expense

 

499

 

492

 

7

 

 

 

Data processing

 

341

 

408

 

(67

)

 

 

Advertising and public relations

 

241

 

128

 

113

 

 

 

Other

 

812

 

767

 

45

 

 

 

Total noninterest expenses

 

4,896

 

4,474

 

422

 

9.4

%

Income before income taxes

 

2,893

 

2,573

 

320

 

 

 

Provision for income taxes

 

929

 

813

 

116

 

 

 

Net income

 

1,964

 

1,760

 

204

 

11.6

%

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.39

 

$

0.34

 

$

0.05

 

14.7

%

Diluted earnings per share

 

$

0.37

 

$

0.32

 

$

0.05

 

15.6

%

 

 

 

 

 

 

 

 

 

 

Interest rate spread

 

3.51

%

3.50

%

 

 

 

 

Net interest margin

 

3.61

%

3.61

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Full-time equivalents

 

252

 

248

 

 

 

 

 

Full-service offices

 

15

 

15

 

 

 

 

 

 

Net Interest Income.  Net interest income is determined by the Company’s 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.

 

14



 

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 page 13.

 

Interest Income.  The increase in interest income was primarily due to an increase in the average balance of loans, partially offset by a decrease in the average yield earned on loans and a decrease in the average balance of investment securities.  The decrease in the average yield earned on loans was primarily due to the Company’s efforts to increase variable rate loans, which typically have lower rates at origination than those charged for fixed rate loans.  The average balance of loans increased primarily due to increased construction loan origination activity.  The average balance of investment securities decreased due to calls and maturities.

 

Interest Expense.  The increase in interest expense was primarily due to an increase in the average balance of FHLB advances.  The average balance of FHLB advances increased due to advances being used to fund loan growth.

 

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 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 current economic conditions.

 

While the loan portfolio has increased by $39.0 million since December 31, 2004, the estimated allowance for loan losses did not increase significantly since the majority of the growth was in real estate loans, which have lower estimated loss rates than consumer and commercial loans.  There were no changes in loss factors applied to pooled loans during the quarter.

 

Noninterest Income.  Deposit fee income increased as a result of the Bank’s continued promotion of Bounce ProtectionTM overdraft service as well as an increase in the number of checking accounts and a change in the insufficient funds fee structure.  The number of checking accounts increased approximately 9.6% from March 31, 2004 to March 31, 2005.  The Bank plans to continue to aggressively promote checking accounts in 2005 through direct mail campaigns to further expand its checking accounts and increase deposit fee income.

 

Noninterest Expense

 

Salaries and Employee Benefits.  The changes in the composition of this line item are presented below (in thousands):

 

 

 

Three Months Ended March 31,

 

Increase
(Decrease)

 

 

 

2005

 

2004

 

2005 vs 2004

 

Salaries

 

$

1,977

 

$

1,868

 

$

109

 

Payroll taxes

 

234

 

220

 

14

 

Insurance

 

147

 

144

 

3

 

ESOP expense (1)

 

481

 

410

 

71

 

MRP expense (2)

 

7

 

7

 

 

Defined benefit plan contribution

 

122

 

(8

)

130

 

Other

 

35

 

38

 

(3

)

Total

 

$

3,003

 

$

2,679

 

$

324

 

 


(1)          Employee Stock Ownership Plan

(2)          Management Recognition and Retention Plan

 

15



 

The increase in salaries was due primarily to normal salary and merit increases.  Payroll taxes increased due to the increase in salaries.  The increase in employee stock ownership plan expense was due to an increase in the Company’s average stock price from $20.60 for the quarter ended March 31, 2004 to $23.71 for the same quarter in 2005.  Defined benefit plan expense increased due to the unusual credit during the first quarter of 2004.

 

Data processing expense.  Data processing expense decreased primarily due to the renegotiation of the Bank’s contract with its service provider.

 

Advertising and public relations.  Advertising and public relations increased for the quarter ended March 31, 2005 compared to the same period in 2004 primarily due to costs associated with the new checking account marketing program, including direct mail, “thank you” gifts, marketing brochures, posters and billboards.

 

Other expenses.  The changes in the composition of this line item are presented below (in thousands):

 

 

 

Three Months Ended March 31,

 

Increase
(Decrease)

 

 

 

2005