SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20552
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE # 0-23969
POCAHONTAS BANCORP, INC.
DELAWARE IRS Employer Identification
No. 71-0806097
Address Telephone Number
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203 West Broadway (870) 892-4595
Pocahontas, Arkansas 72455
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 twelve 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
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There were 5,510,614 shares of Common Stock ($.10 par value) issued and
outstanding as of December 31, 1999.
POCAHONTAS BANCORP, INC.
TABLE OF CONTENTS
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Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Statements of Financial Condition at
December 31, 1999 and September 30, 1999 1
Condensed Consolidated Statements of Income for the Three Months Ended
December 31, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
December 31, 1999 and 1998 3
Notes to Condensed consolidated Financial Statements 4
Independent Accountants' Report 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
PART II. OTHER INFORMATION 12
ITEM 1
POCAHONTAS BANCORP, INC
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
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(Unaudited)
December 31, 1999 September 30, 1999
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ASSETS
Cash $ 13,307,318 $ 8,622,050
Cash surrender value of life insurance 6,012,960 5,964,588
Equity investments, at fair value 887,495 1,429,196
Investment securities -- held to maturity 9,488,735 9,482,122
Investment securities -- available for sale 175,243,512 216,492,192
Loans receivable, net 221,680,868 217,709,933
Accrued interest receivable 2,848,943 3,165,427
Premises and equipment, net 3,958,864 4,018,157
Federal Home Loan Bank Stock, at cost 8,693,500 10,981,300
Core deposit premium 2,368,673 2,440,187
Other assets 2,198,584 1,825,710
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TOTAL ASSETS $446,689,452 $ 482,130,862
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $221,106,052 $ 211,890,791
Federal Home Loan Bank advances 170,940,000 213,105,000
Securities sold under agreements to repurchase 2,200,000 2,075,000
Deferred compensation 3,318,755 3,357,890
Accrued expenses and other liabilties 2,386,972 3,669,743
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Total liabilities 399,951,779 434,098,424
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 69,468 69,468
Additional paid-in capital 51,439,643 51,439,643
Reduction for ESOP debt guaranty (2,443,525) (2,443,525)
Unearned RRP Shares (462,771) (524,476)
Unrealized gain (loss) on available
for sale securities, net of tax (1,609,655) 407,950
Retained earnings 11,673,739 10,965,600
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58,666,899 59,914,660
Less treasury stock at cost (11,929,226) (11,882,222)
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Total stockholders' equity 46,737,673 48,032,438
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $446,689,452 $ 482,130,862
============= ==============
See notes to condensed consolidated financial statements.
1
POCAHONTAS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED DECEMBER 31 (UNAUDITED)
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1999 1998
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INTEREST INCOME:
Loans receivable $ 4,286,259 $3,939,958
Investment securities 3,530,266 2,924,831
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Total interest income 7,816,525 6,864,789
INTEREST EXPENSE:
Deposits 2,319,153 2,282,603
Borrowed funds 2,612,662 1,935,361
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Total interest expense 4,931,815 4,217,964
NET INTEREST INCOME 2,884,710 2,646,825
PROVISION FOR LOAN LOSSES - -
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,884,710 2,646,825
OTHER INCOME:
Dividends 163,039 149,295
Fees and service charges 384,936 177,569
Gain on sale of securities 266,690 -
Trading gain (loss) (19,038) 75,197
Other 36,409 173,120
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Total other income 832,036 575,181
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OPERATING EXPENSE:
Compensation and benefits 1,114,908 1,271,295
Occupancy and equipment 242,596 224,236
SAIF deposit insurance premium 30,140 26,740
Professional fees 84,569 60,723
Data processing 81,244 128,306
Advertising 165,872 71,587
OTS assessment 21,330 24,108
Other 361,830 245,529
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Total operating expense 2,102,489 2,052,524
NET INCOME BEFORE INCOME TAXES 1,614,257 1,169,482
INCOME TAXES 575,000 359,068
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NET INCOME 1,039,257 810,414
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OTHER COMPREHENSIVE INCOME (LOSS) NET OF TAX:
Unrealized holding loss on available for sale securities
arising during period (1,845,857) (769,048)
Reclassification adjustment for gains included in net income (171,748) -
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Other comprehensive loss (2,017,605) (769,048)
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COMPREHENSIVE INCOME (LOSS) $ (978,348) $ 41,366
=========== =========
BASIC EARNINGS PER SHARE $ 0.20 $ 0.13
=========== =========
DILUTED EARNINGS PER SHARE $ 0.20 $ 0.13
=========== =========
See notes to condensed consolidated financial statements.
2
POCAHONTAS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31 (UNAUDITED)
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1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,039,257 $ 810,414
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of premises and equipment 117,761 110,623
Amortization of deferred loan fees 20,991 42,636
Amortization of premiums and discounts, net (56,464) (62,596)
Net gain on sale of assets (8,697) (16,958)
Gain on sale of securities (266,690) -
Cash surrender value of life insurance policies (48,371) (45,001)
Trading securities 541,701 (79,509)
Accrued interest receivable 316,484 71,683
Core deposit premium 71,514 (63,347)
Other assets (372,874) (269,608)
Expensed RRP shares 61,702 146,544
Deferred compensation (39,135) 3,069
Other liabilities (1,282,771) (216,091)
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Net cash provided by operating activities 94,408 431,859
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CASH FLOWS FROM INVESTING ACTIVITIES:
Loan repayments and originations, net (4,105,404) (1,704,703)
Net (increase) decrease in FHLB stock 2,287,800 (145,700)
Proceeds from maturities and principal repayments
of investment securities available for sale 5,781,861 13,571,001
Proceeds from sale of available for sale investment securities 33,765,755 -
Proceeds from sale of real estate owned 122,175 -
Purchase of premises and equipment (58,468) (567,230)
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Net cash provided by investing activities 37,793,719 11,153,368
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 9,215,262 276,968
Net increase in repurchase agreements 125,000 549,155
Proceeds of FHLB advances 429,291,000 399,565,000
Repayment of FHLB advances (471,456,000) (401,335,000)
Repurchase of stock (47,004) (5,443,883)
Dividends paid (331,117) (379,450)
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Net cash used by financing activities (33,202,859) (6,767,210)
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NET INCREASE IN CASH 4,685,268 4,818,017
CASH AT BEGINNING OF PERIOD 8,622,050 3,654,077
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CASH AT END OF PERIOD $ 13,307,318 $ 8,472,094
============ ============
See notes to condensed consolidated financial statements.
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10
of Regulation S-X. Certain information required for a complete presentation
in accordance with generally accepted accounting principles has been omitted.
All adjustments that are, in the opinion of management, necessary for a fair
presentation of the interim financial statements have been included. The
results of operations for the three months ended December 31, 1999, are not
necessarily indicative of the results that may be expected for the fiscal
year ended September 30, 2000, or any interim period.
The interim financial information should be read in conjunction with the
consolidated financial statements and notes of Pocahontas Bancorp, Inc. (the
"Company"), included in the Annual Report for the fiscal year ended September
30, 1999. The accompanying unaudited consolidated financial statements
include the accounts of the Company and Pocahontas Federal Savings and Loan
Association (the "Bank"). The intercompany accounts of the Company and the
Bank have been eliminated in consolidation.
2. EARNINGS PER COMMON SHARE
The earnings per share amounts were computed using the weighted average
number of shares outstanding during the periods presented.
The weighted average number of shares used in the basic and diluted earnings
per share calculation are set out in the table below:
Three Months Ended
--------------------------------------
December 31, December 31,
1999 1998
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Total basic shares outstanding 5,302,928 6,007,273
Add dilutive effect of unexercised options 24,758 134,080
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Total weighted average shares outstanding
for dilutive earnings per share calculation 5,327,686 6,141,353
========= =========
3. DECLARATION OF DIVIDENDS
On November 10, 1999, the Board of Directors declared a $0.06 per share
quarterly dividend for holders of record December 13, 1999.
4
4. STOCK COMPENSATION
The Company applies the provisions of APB 25 in accounting for its stock
option plans, as allowed under SFAS 123, Accounting for Stock-Based
Compensation. Accordingly no compensation cost has been recognized for the
options granted to employees or directors. Had compensation cost for these
been determined on the fair value at the grant dates for awards under those
plans consistent with the methods of SFAS No. 123, the Company's pro forma
net income and pro forma earnings pre share would have been as follows:
As Reported Pro forma
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Net income in thousands $1,039 $1,015
Earnings per share:
Basic $ 0.20 $ 0.19
Diluted $ 0.20 $ 0.19
There were 350,000 unexercised options outstanding under the Company's 1998
Stock Option Plan as of September 30, 1999. No options were exercised,
forfeited or granted under the 1998 Stock Option Plan during the quarter
ended December 31, 1999.
* * * * * *
5
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Pocahontas Bancorp, Inc.
Pocahontas, Arkansas
We have reviewed the accompanying condensed consolidated statement of financial
condition of Pocahontas Bancorp, Inc. (the "Company") as of December 31, 1999,
and the related condensed consolidated statements of income and cash flows for
the three-month periods ended December 31, 1999 and 1998. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial condition of Pocahontas
Bancorp, Inc. and subsidiaries as of September 30, 1999, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended (not presented herein); and in our report dated November 1,
1999, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated statement of financial condition as of December 31, 1999,
is fairly stated, in all material respects, in relation to the consolidated
statement of financial condition from which it has been derived.
Little Rock, Arkansas
February 10, 2000
/s/ Deloitte & Touche LLP
6
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Financial Condition at December 31, 1999, as compared to September 30, 1999
General. The Company's total assets decreased $35.4 million or 7.35% to $446.7
million at December 31, 1999, as compared to $482.1 million at September 30,
1999, primarily due to the sale of approximately $35.9 million of investment
securities.
Loans receivable, net. Net loans receivable increased by $4.0 million or 1.8%
to $221.7 million at December 31, 1999, from $217.7 million as of September 30,
1999. Growth in the loan portfolio was due to loan demand in the Company's local
market.
Investment securities held to maturity. Investment securities held to maturity
increased $.01 million, or 0.01%, to $9.49 million at December 31, 1999, from
$9.48 million at September 30, 1999. The increase in the Company's held to
maturity investment portfolio was due to accretion of discounts.
Investment securities available for sale. Investment securities available for
sale decreased $41.2 million, or 19.05%, to $175.2 million at December 31, 1999,
from $216.5 million at September 30, 1999. The decrease is due to the sale of
35.9 million of investments securities during the quarter ended December 31,
1999. The sale of investment securities resulted in a gain of approximately $0.2
million, net of tax. Such investments were sold in an effort to capture a gain
and to restructure the statement of financial condition to mitigate sensitivity
to interest rate risk. The proceeds from the sale of investment securities were
utilized to repay short-term and callable advances. Cash flow from investments
was primarily used to fund growth in net loans receivable.
Trading securities. Trading securities decreased $0.5 million, or 37.9%, to
$0.9 million at December 31, 1999, from $1.4 million at September 30, 1999.
This decrease is the result of a decrease in market value of trading securities
and the sale of certain securities.
Deposits. Deposits increased $9.2 million or 4.34% to $221.1 million at
December 31, 1999, from $211.9 million at September 30, 1999, primarily due to
continued growth within the Company's market area.
Federal Home Loan Bank Advances and securities sold under agreements to
repurchase. FHLB advances decreased $42.2 million or 19.8% to $170.9 million at
December 31, 1999, from $213.1 million at September 30, 1999. This decrease was
due to the increase in deposits and the sale of investments.
Stockholders' equity. Total stockholders' equity decreased $1.2 million or 2.5%
to $46.8 million at December 31, 1999, from $48.0 million at September 30, 1999.
Such decrease was due to the repurchase of 8,000 shares of the Company's common
stock at a total cost of $47,000, a decrease in the unrealized gain on available
for sale securities, net of tax of $1.0 million and net income net of dividends.
7
Comparison of Results of Operations for the Three Months Ended December, 1999
and 1998
Overview. For the three-month periods ended December 31, 1999 and 1998, net
income was $1,039,257 and $810,414 respectively.
Net interest income. For the three-month periods ended December 31, 1999 and
1998, net interest income increased approximately $238,000 or 9.0% to $2.9
million. The increase in net interest income was due the increase in net loans
receivable, decrease in investment securities, increase in deposits and decrease
in Federal Home Loan Bank advances and securities sold under agreements to
repurchase (see discussion of changes in financial condition). The changes in
the Company's asset/liability mix resulted in a decrease in the Company's
interest rate margin to 2.67% for the three months ended December 31, 1999,
compared to 2.8% for the quarter ended December 31, 1998. The Company's strategy
has been to utilize the run-off and principal pay-downs from investment
securities to fund loan growth within the Company's local market and to pay down
FHLB advances. Such loans generally have higher yields than investment
securities.
Fees and Service Charges. For the three month periods ended December 31, 1999
and 1998, fees and service charges increased approximately $207,000, or 116.8%,
to $385,000 for the three-months ended December 31, 1999, from $178,000 for the
three-months ended December 31, 1998. Such increase is due to a new checking
account marketing program and due to a change in the method of charging
overdraft fees.
Non-performing Loans and Loan Loss Provisions
The allowance for loan losses is established through a provision for loan losses
based on management's quarterly asset classification review and evaluation of
the risk inherent in its loan portfolio and changes in the nature and volume of
its loan activity. Such evaluation, which includes a review of all loans of
which full collection may not be reasonably assured, considers among other
matters, the estimated value of collateral, cash flow analysis, historical loan
loss experience, and other factors that warrant recognition in providing
adequate allowances. No provision for loan losses was made during the three
month periods ended December 31, 1999 and 1998. Management believes that the
current allowance for loan loss is adequate to absorb possible loan losses in
the existing portfolio. However, future reviews may require additional
provisions.
The following table sets forth information regarding loans delinquent for 90
days or more and real estate owned by the Bank on the dates indicated.
December 31, December 31,
1999 1998
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(Dollars in Thousands)
Delinquent loans:
Single family mortgage $1,425 $2,284
Other mortgage loans 1 10
Other loans 49 30
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Total delinquent loans 1,475 2,324
Total real estate owned (1) 408 29
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Total non-performing assets 1,883 2,353
Total loans delinquent 90 days or more to
net loans receivable 0.66% 1.26%
Total loans delinquent 90 days or more to total assets 0.33% 0.23%
Total nonperforming loans and REO to total assets 0.42% 0.59%
(1) Net of valuation allowances
8
It is the policy of the Bank to place loans 90 days or more past due on a non-
accrual status by establishing a specific interest reserve that provides for a
corresponding reduction in interest income. Delinquent loans 90 days or more
past due decreased $849,000. or 36.5% during the three-month period ended
December 31, 1999.
Compensation expense. For the three-month periods ended December 31, 1999 and
1998, compensation expenses decreased approximately $0.2 million, or 12.30%, to
$1.1 for the three-months ended December 31, 1999, from $1.3 million for the
three-months ended December 31, 1998. Such decrease was primarily due to the
reduction in RRP expense and cost savings from retirement of the former CEO, net
of salary increases.
Liquidity and Capital Resources
Regulatory liquidity is defined as a percentage of the institution's average
daily balance of net withdrawable deposits and current borrowings, invested with
final maturities no longer than five years. The Office of Thrift Supervision
requires 1.0% total liquidity. The Bank met all liquidity requirements during
the three-months ended December 31, 1999.
At December 31, 1999, the Company had various commitments arising in the normal
course of business. Such commitments were not material and are not expected to
have a material adverse impact on the operations of the Company.
At December 31, 1999, the Bank's capital to asset ratio exceeded all regulatory
requirements.
Year 2000
Changing from the year 1999 to 2000 has the potential to cause problems in data
processing and other date-sensitive systems, a problem known as the Year 2000 or
Y2K dilemma. The Year 2000 date change can affect any system that uses computer
software programs or computer chips, including automated equipment and
machinery. For example, many software programs or computer chips store calendar
dates as two-digits rather than four-digit numbers. These software programs
record the year 1998 as "98." This approach will work until the Year 2000 when
"00" may be read as 1900 instead of 2000.
Regarding the Company, computer systems are used to perform financial
calculations, track deposits and loan payments, transfer funds and make direct
deposits. The processing of the Company's loan and deposit transactions is
outsourced to a third-party data processing vendor. Computer software and
computer chips also are used to run security systems, vaults, communications
networks and other essential bank equipment.
Because of its reliance on these systems (including those used by its third-
party data processing vendor), the Company has followed a comprehensive process
to ensure that such systems are ready for the Year 2000 date change.
To become Y2K compliant, the Company is following a five-step process suggested
by federal bank regulatory agencies. A description of each of the steps and the
status of the Company's efforts in completing the steps is as follows:
Step 1. Awareness and Understanding of the Problem. The Company has formed
a Year 2000 team that has investigated the problem and its potential impact
on the Company's systems.
9
This phase also includes education of the Company's employees and customers
about Y2K issues. The awareness and understanding phase of this step has
been completed. Training and communication has taken place.
Step 2. Identification of All Potentially Affected Systems. This step has
included a review of all major information technology ("IT") and non-
information technology ("non-IT") systems to determine how they are impacted
by Y2K issues. An inventory has been prepared of all vendors who render IT
and non-IT services to the Company. This step is considered complete.
Step 3. Assessment and Planning. The Year 2000 team has completed its
assessment of which systems and equipment are most prone to placing the
Company at risk if they are not Y2K compliant. The project team has
developed an inventory of its vendors, an inventory of actions to be taken,
identification of the team members responsible for completion of each action,
a completion timetable and a project tracking methodology. Significant
vendors have been requested to advise the Company in writing of their Y2K
readiness, including actions to become compliant if they are not already
compliant. A plan has been developed to repair or replace systems and
equipment not currently Y2K compliant. This step is considered complete.
Step 4. Correction and Testing. The Company's third party data processing
services as well as vendors who provide significant technology-related
services have modified their systems to become Y2K compliant. It has also
arranged for repair or replacement of equipment programs affected by Y2K
issues. The testing and corrections have taken place.
Step 5. Implementation. This step includes repair or replacement of systems
and computer equipment and the development of contingency plans. The repair
and replacement phase is completed. Contingency plans for how the Company
would resume business if unanticipated problems arise from non-performance by
IT and non-IT vendors has been completed and tested.
The Company's efforts to become Y2K compliant are being monitored by its federal
banking regulators. Failure to be Y2K compliant could subject the Company to
formal supervisory or enforcement actions.
The Company's expenses related to Y2K have not been material. The Company does
not expect to incur additional costs to become Y2K compliant. The Company
presently believes the Y2K issue will not pose significant operating problems
for the Company. However, if compliance is not completed in a satisfactory and
timely manner by third parties on which the Company is dependent, or other
unforeseen problems arise, the Y2K issue could have a material adverse effect on
the operations of the Company.
10
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See discussion of qualitative and quantitative risks in the September 30, 1999
annual report. There have been no material changes in the market risk of the
Company in the intervening three-month period.
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings to which the Pocahontas Bancorp, Inc. or
the Bank is a party or to which any of their property is subject. From time-to-
time, the Bank is a party to various legal proceedings incident to its business.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
12
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
POCAHONTAS BANCORP, INC.
/s/ James Edington
Date: 2/14/2000 _____________________________
James Edington
President and CEO
/s/ Dwayne Powell
Date: 2/14/2000 _____________________________
Dwayne Powell
Chief Financial Officer
13