U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Exchange Act
For the transition period from ______ to ______
Commission file number: 0-23525
NORTH ARKANSAS BANCSHARES, INC.
-------------------------------
(Exact Name of Small Business Issuer
as Specified in its Charter)
Tennessee 71-0800742
--------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
200 Olivia Drive, Newport, Arkansas 72112
-----------------------------------------
(Address of Principal Executive Offices)
(870) 523-3611
--------------
Registrant's Telephone Number, Including Area Code
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the pre-
ceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of November 13, 1998, the issuer had 370,300 shares of
Common Stock issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
CONTENTS
PART I. FINANCIAL INFORMATION
- - -----------------------------
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition as
of September 30, 1998 (unaudited) and
June 30, 1998. . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three
Months Ended September 30, 1998 and 1997
(unaudited). . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 1998 and 1997
(unaudited). . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . .11
Item 2. Changes in Securities. . . . . . . . . . . . . . . . .11
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . .11
Item 4. Submissions of Matters to a Vote of Security Holders .11
Item 5. Other Information. . . . . . . . . . . . . . . . . . .11
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . .11
SIGNATURES
This Form 10-QSB contains forward-looking statements consisting
of estimates or predictions concerning future operations with
respect to the financial condition, results of operations and
other business of North Arkansas Bancshares, Inc. that are
subject to various factors which could cause actual results to
differ materially from those estimates. Such statements are
based on management's beliefs or interpretations of information
currently available. Factors which could influence the
estimates include changes in the national, regional and local
market conditions, legislative and regulatory conditions and an
adverse interest rate environment. In addition, the Year 2000
issue is extremely complex and compliance failures on the part
of third parties that are outside the control of the Company,
could have a material adverse impact on future operating
results.
2
PART I - FINANCIAL INFORMATION
NORTH ARKANSAS BANCSHARES, INC.
Consolidated Statements of Financial Condition
September 30, 1998 and June 30, 1998
September 30, June 30,
1998 1998
------------- -------------
(Unaudited)
Assets
------
Cash and amounts due from banks, includes interest
bearing deposits of $1,261,486 and $1,167,778 at
September 30, 1998 and June 30, 1998, respectively $ 1,649,367 $ 2,094,104
Certificates of deposit with other financial
institutions 2,092,000 1,990,000
Investment securities held-to-maturity, at cost 14,449,187 11,243,627
Loans receivable, net 25,842,585 25,592,938
Real estate owned 535,700 535,700
Office properties and equipment, net 1,612,284 1,623,226
Accrued interest receivable 291,945 313,422
Other assets 197,330 295,608
-------------- ------------
Total assets $ 46,670,398 $ 43,688,625
============== ============
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Deposits $ 34,092,232 $ 34,270,664
Federal Home Loan Bank advances 6,932,363 3,969,525
Other liabilities 261,568 122,202
-------------- ------------
Total liabilities 41,286,163 38,362,391
STOCKHOLDERS EQUITY
-------------------
Preferred stock, $0.01 par value per share,
3,000,000 shares authorized, no shares issued
or outstanding $ -- $ --
Common stock, $0.01 par value per share 9,000,000
shares authorized, 370,300 shares issued
and outstanding at September 30, 1998 and
June 30, 1998 3,703 3,703
Additional paid-in capital 3,298,267 3,298,267
Retained earnings - substantially restricted 2,348,881 2,290,880
Unearned ESOP shares (266,616) (266,616)
-------------- ------------
Total stockholder's equity 5,384,235 5,326,234
-------------- ------------
Total liabilities and stockholder's
equity $ 46,670,398 $ 43,688,625
============== ============
See accompanying notes to consolidated financial statements.
3
NORTH ARKANSAS BANCSHARES, INC.
Consolidated Statements of Operations
For the Three Months Ended September 30, 1998 and 1997
(Unaudited)
Three Months Ended
September 30,
-------------------
1998 1997
----- ------
Interest income:
Loans receivable $523,349 $493,331
Deposits in other financial
institutions 61,189 16,366
Mortgage-backed securities 149,621 81,400
Investment securities 37,388 13,074
-------- --------
Total interest income 771,547 604,171
-------- --------
Interest expense:
Deposits 425,317 395,757
Federal Home Loan advances 66,306 10,034
-------- --------
Total interest expense 491,623 405,791
-------- --------
Net interest income 279,924 198,380
-------- --------
Provision for loan losses -- --
Net interest income after provision
for loan losses 279,924 198,380
-------- --------
Non-interest income - other 40,940 45,002
-------- --------
Non-interest expenses:
Salaries and employee benefits 111,191 95,843
Contribution Expense-ESOP 7,404 --
Legal and professional fees 10,775 10,301
Data processing fees 29,592 23,360
Federal insurance expense 7,854 7,422
Furniture and equipment expense 8,351 9,475
Occupancy expense 21,352 21,260
Other 36,444 56,125
-------- --------
232,963 223,786
-------- --------
Income before income taxes 87,901 19,596
Income tax expense 29,900 --
_________ ________
Net income $ 58,001 $ 19,596
========= ========
Earnings per share (Note 3):
Basic and diluted $ 0.17 $ N/A
Weighted average shares outstanding 343,638 N/A
See accompanying notes to consolidated financial statements.
4
PAGE>
NORTH ARKANSAS BANCSHARES, INC.
Consolidated Statements of Cash Flows
Three Months Ended September 30, 1998 and 1997
(Unaudited)
Three Months Ended
September 30,
-------------------
1998 1997
------ ------
Cash flows from operating activities:
Net income $ 58,001 $ 19,596
Adjustment to reconcile net income to
net cash provided by operating activities:
Depreciation and Amortization 16,768 15,342
Loss on sale of real estate owned -- 267
FHLB stock dividends (4,900) (4,200)
Net premium amortization on investments 6,998 2,727
Decrease in interest receivable 21,477 17,179
Decrease in other assets 97,035 27,955
Increase (decrease) in other liabilities 139,366 (63,531)
---------- -----------
Net cash used by operating activities 334,745 15,335
---------- -----------
Cash flows from investing activities:
Purchase of held to maturity ("HTM") securities (5,637,078) --
Proceeds from maturities/principal repayments
of HTM securities 2,429,420 734,603
Net increase in loan receivable (249,647) (404,647)
Net increase in certificates of
deposit with other financial institutions (102,000) --
Purchase of office properties and equipment (4,583) (19,219)
Proceeds from sale of real estate owned -- 16,739
---------- -----------
Net cash provided by (used in)
investing activities (3,563,888) 327,476
Cash flows from financing activities:
Net decrease in deposits (178,432) (780,488)
Net increase in Federal Home Loan Bank
advances 2,962,838 195,948
---------- -----------
Net cash (used in) provided by
financing activities 2,784,406 (584,540)
---------- -----------
Net decrease in cash and amounts due from banks (444,737) (241,729)
Cash and amounts due from banks at beginning of period 2,094,104 884,002
---------- -----------
Cash and amounts due from banks at end of period $1,649,367 $ 642,273
========== ===========
Supplemental disclosures of cash flow information:
Noncash investing and financing activities:
Transfers from real estate acquired
through foreclosure $ -- $ 17,006
Cash paid during the period:
Interest on deposits 509,495 397,036
Income taxes $ 2,000 $ --
========== ===========
See accompanying notes to consolidated financial statements.
5
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 1 - NORTH ARKANSAS BANCSHARES, INC.
North Arkansas Bancshares, Inc. (the "Company") was incorporated
under the laws of the State of Tennessee for the purpose of
becoming the holding company of Newport Federal Savings Bank
(the "Bank") in connection with the Bank's conversion from a
federally chartered mutual savings bank to a federally chartered
capital stock savings bank. On November 12, 1997, the Company
commenced a subscription offering of its shares in connection
with the Bank's conversion. The Company's offering and the
Bank's conversion closed on December 18, 1997. A total of
370,300 shares were sold at $10.00 per share.
NOTE 2 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying unaudited financial statements (except for the
statement of financial condition at June 30, 1998, which is
audited) have been prepared in accordance with generally
accepted accounting principles for interim financial statements
and with the instructions to Form 10-QSB. Accordingly, they do
not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments,
consisting of normal recurring accruals, necessary to present
fairly the financial position, results of operations, and cash
flows for the interim periods presented have been included. The
financial statements of the Company are presented on a
consolidated basis with those of the Bank. The account balances
include only the accounts and operations of the Bank prior to
December 18, 1997. The results of operations for the three
months ended September 30, 1998 are not necessarily
indicative of the results expected for the full year.
NOTE 3 - EARNINGS PER SHARE
Earnings per share have been calculated in accordance with
Financial Accounting Standards Board Statement No.128, "Earnings
Per Share," and Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans." For purposes of
this computation, the number of shares of common stock purchased
by the employee stock ownership plan (the "ESOP") which have not
been allocated to participant's accounts are not assumed to be
outstanding. As of September 30, 1998, 2,962 of the 29,624
shares of common stock held by the ESOP had been allocated to
participants' accounts. The weighted average number of shares
used for basic and diluted earnings per share for the three
months ended September 30, 1998 were 343,638. Since no shares
of common stock were issued and outstanding during the three
months ended September 30, 1997, no earnings per share for that
period is reported.
NOTE 4 - PLAN OF CONVERSION
On May 29, 1997, the Bank's Board of Directors formally approved
a plan ("Plan") to convert from a federally chartered mutual
savings bank to a federally chartered stock savings bank subject
to approval by the Bank's members and the Office of Thrift
Supervision. The Plan called for the common stock of the Bank
to be purchased by the Company and the common stock of the
Company to be offered to various parties in a subscription
offering at a price based upon an independent appraisal of the
Bank. All requisite approvals were obtained and the conversion
and the Company's offering were consummated effective December
18, 1997.
Upon consummation of the conversion, the Bank established a
liquidation account in an amount equal to its retained earnings
as reflected in the latest statement of financial condition used
in the final conversion prospectus. The liquidation account
will be maintained for the benefit of certain depositors of the
Bank who continue to maintain their deposit accounts in the Bank
after conversion. In the event of a complete liquidation of the
Bank, such depositors will be entitled to receive a distribution
from the liquidation account before any liquidation may be made
with respect to the common stock.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND JUNE
30, 1998
The Company's total assets at September 30, 1998 were $46.7
million, an increase of $3.0 million, or 6.83%, from June 30,
1998's level of $43.7 million. The increase in assets was due
to a $3.2 million increase in the Company's investment
securities classified as held to maturity, partially offset by a
decline of $445,000 in cash and interest-bearing deposits. The
growth in assets was primarily funded by an increase in FHLB
advances. Total FHLB advances rose from $4.0 million at June
30, 1998 to $6.9 million at September 30, 1998 for a net
increase of $2.9 million. Cash and interest-bearing deposits
totaled $1.6 million at September 30, 1998 as compared to $2.1
million at June 30, 1998.
Net loans remained relatively constant during the period,
increasing by only $250,000 from $25.6 million at June 30, 1998
to $25.8 million at September 30, 1998. While a total of $1.7
million in new loans were originated during the period, these
originations were offset by loan repayments. Management
anticipates that the Bank's loan portfolio will increase in
future periods as proceeds from the stock offering are deployed
into loans and other higher-yielding investments. Total
deposits at September 30, 1998 were $34.1 million, a decline of
$178,000 from June 30, 1998's level of $34.3 million. Total
stockholders' equity at September 30, 1998 amounted to $5.4
million, up from $5.3 million at June 30, 1998 reflecting the
retention of earnings from the period.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1998 AND 1997
Net income for the three months ended September 30, 1998
was $58,000 as compared to net income of $20,000 for the three
month period ended September 30, 1997, for an increase of
$38,000 or 193.88%. The increase was primarily attributable to
an increase in interest income, partially offset by an increase
in interest expense and the provision for income taxes.
Net interest income during the three months ended September
30, 1998 increased by $82,000 as compared to the same period in
1997 due to an increase in interest income, partially offset by
an increase in interest expense. Total interest income
increased by $167,000 to $772,000 due to the overall increase in
interest earning assets as a result of the deployment of the
conversion proceeds. Interest expense increased by $86,000 to
$492,000 for the three months ended September 30, 1998 as
compared to $406,000 for the three months ended September 30,
1997 due to increased balances of both deposits and FHLB
advances. In January 1998, the Bank completed the purchase of
the former NationsBank branch located in Newport, Arkansas. As
part of the transaction, the Bank assumed approximately $4.0
million in deposit liabilities. The former NationsBank branch
location was closed effective upon consummation of the
acquisition.
Non-interest income which consists mainly of deposit and
loan fees amounted to $41,000 for the three months ended
September 30, 1998 as compared to $45,000 for the three months
ended September 30, 1997. Noninterest income for the 1997
period included certain nonrecurring items not present in the
1998 period. Total non-interest expense increased by $9,000
during the 1998 period to $233,000 from $224,000 for the three
months ended September 30, 1997 due primarily to increased
compensation and employee benefit expenses, including the
expense associated with the Bank's ESOP, partially offset by a
reduction in miscellaneous expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required to maintain minimum levels of liquid
assets as defined by OTS regulations. This requirement, which
varies from time to time depending upon economic conditions and
deposit flows, is based upon a percentage of deposits and
short-term borrowings. The required ratio at September 30, 1998
was 4%. For the month ended September 30, 1998 the Bank was in
compliance. As a result of the conversion, the Bank's liquidity
has increased due to the additional funds it received.
The Bank's primary sources of funds are deposits,
repayment of loans and mortgage-backed securities, maturities of
investments and interest-bearing deposits, funds provided from
operations and advances from the FHLB of Dallas. While
scheduled repayments of loans and mortgage-backed securities and
maturities of investment securities are predictable sources of
funds, deposit flows and loan prepayments are greatly influenced
by the general level of interest rates, economic conditions and
competition. The Bank uses its liquidity resources principally
to fund existing and future loan commitments, to fund maturing
certificates of deposit and demand deposit withdrawals, to
invest in other interest-earning assets, to maintain liquidity,
and to meet operating expenses.
At September 30, 1998, the Bank was in compliance with
all applicable regulatory capital requirements with total core
and tangible capital of $4.2 million (9.25% of adjusted total
assets) and total risk-based capital of $4.4 million (21.53% of
risk-weighted assets).
YEAR 2000 PLANNING
Like most financial institutions, the Company's principal
subsidiary relies extensively on computers in conducting its
business. It has been widely reported that many computer
programs currently in use were designed without adequately
considering the impact of the upcoming change in century on
their date codes. If these design flaws are not corrected,
these computer applications may malfunction in the year 2000.
The Company's mission-critical processing systems are provided
by a third party. The third party provider has converted its
hardware and software to a new year 2000 compliant system. The
service provider tested its new system at selected sites (not
including the Bank) in September 1998. The Bank has been
provided with the results of such testing and is in the process
of evaluating the results. In addition, the Bank will test this
system on premises in February 1999.
The Bank has developed a contingency plan to address the
possibility that its efforts to become year 2000 compliant are
not successful. The contingency plan provides that the Bank
would process information manually. The Bank's third party
provider has also adopted a contingency plan which calls for the
recovery of processing and information at a back-up site, using
back-up hardware. The Bank has also made arrangements to use
any alternative third-party if its provider is not successful.
The Bank has also evaluated its non-critical applications
and has made necessary changes and/or the third party provider
has made necessary changes. Testing for non-mission critical
systems is expected to be completed by March 1999. The Bank has
also evaluated its nontechnological systems to determine if any
such systems may have embedded technology that could be affected
by the year 2000 issue. As of the date hereof, the Bank does
not anticipate that any such systems will be materially affected
by the year 2000.
The Bank anticipates that its expenses associated with
year 2000 will not exceed $10,000.
10
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27 Financial Data Schedule (EDGAR only)
(b) Reports on Form 8-K. During the quarter ended
September 30, 1998, the registrant did not
file any current reports on Form 8-K.
11
SIGNATURES
In accordance with the requirements of the Securities
Exchange Act of 1934, the registrant caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
NORTH ARKANSAS BANCSHARES, INC.
Date: November 16, 1998 By: /s/ Brad Snider
--------------------------------
Brad Snider
President, Chief Executive
Officer and Treasurer
(Duly Authorized and Principal
Financial Officer)