SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Fiscal Year Ended September 30, 2000.
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [NO FEE REQUIRED]
For the transition period from _______________ to ______________________
Commission File #0-23969
POCAHONTAS BANCORP, INC.
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(Exact name of registrant as specified in its charter)
United States 71-0806097
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
203 West Broadway, Pocahontas, Arkansas 72455
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(Address of Principal Executive Offices) Zip Code
(870) 892-4595
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(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share
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(Title of Class)
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
requirements for the past 90 days.
YES X . NO _______.
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of December 15, 2000, there were issued and outstanding 4,454,357 shares
of the Registrant's Common Stock. Such shares were listed on the NASDAQ
National Market System.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the last sale price on December 15,
2000, was $22,360,088. This amount does not include shares held by the Employee
Stock Ownership Plan of Pocahontas Federal Savings and Loan Association (the
Registrant's subsidiary), by executive officers and directors, and by the
Registrant or treasury stock.
1
PART I
ITEM 1 BUSINESS
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General
Pocahontas Bancorp, Inc. (the "Registrant" or the "Company") was organized
in March 1998 to be the holding company for Pocahontas Federal Savings and Loan
Association (the "Bank"), a federally chartered savings and loan association
headquartered in Pocahontas, Arkansas. The Bank's deposits are insured by the
Federal Deposit Insurance Corporation ("FDIC") under the Savings Association
Insurance Fund ("SAIF"). The Company is registered as a savings and loan holding
company with the Office of Thrift Supervision ("OTS"). The Company's main office
is located at 203 West Broadway, Pocahontas, Arkansas, and its telephone number
is 870-892-4595.
The Company was organized in conjunction with the mutual-to-stock
conversion of the Bank's majority stockholder, Pocahontas Bancorp, MHC, a
federal mutual holding company in March 1998. In this "second step" conversion,
3,570,750 shares of the Company's common stock were sold in a subscription and
community offering at $10.00 per share, and the outstanding common stock of the
Bank was exchanged for Company common stock at a ratio of 4.0245 to one. The
consolidated financial statements of the Company set forth herein reflect net
proceeds of approximately $34.8 million raised in conjunction with the second
step offering.
The Bank is a community-oriented savings institution headquartered in
Pocahontas, Arkansas that operates fourteen full-service offices in its market
area consisting of Northeast Arkansas. The Bank is primarily engaged in the
business of originating single family residential mortgage loans funded with
deposits, Federal Home Loan Bank ("FHLB") advances and securities sold under
agreements to repurchase.
The Bank's operations are affected by general economic conditions, the
monetary and fiscal policies of the federal government and the regulatory
policies of government authorities. Deposit flows and the cost of interest-
bearing liabilities ("cost of funds") to the Bank are affected by interest rates
on competing investments and general market interest rates. Similarly, the
Bank's loan volume and yields on loans and investment securities and the level
of prepayments on such loans and investment securities are affected by market
interest rates, as well as by additional factors affecting the supply of and
demand for housing and the availability of funds.
At September 30, 2000, the Company and its affiliates employed 100 persons.
Competition
The Bank faces strong competition both in attracting deposits and in
origination of loans. Competitors for deposits include thrift institutions,
commercial banks, credit unions, money market funds, and other investment
alternatives, such as mutual funds, full service and discount broker-dealers,
brokerage accounts, and savings bonds or other government securities. Primary
competitive factors include convenience of locations, variety of deposit or
investment options, rates or terms offered, and quality of customer service.
The Bank competes for mortgage loan originations with thrift institutions,
banks and mortgage companies, including many large financial institutions which
have greater financial and marketing resources available to them. Primary
competitive factors include service quality and speed, relationships with
builders and real estate brokers, and rates and fees.
The Bank believes that it has been able to compete effectively in its
principal markets, and that competitive pressures have not materially interfered
with the Bank's ongoing operations.
2
Lending Activities
Loan Portfolio Composition. The Bank's net loan portfolio consists
primarily of first mortgage loans collateralized by single-family residential
real estate and, to a lesser extent, multifamily residential real estate,
commercial real estate and agricultural real estate loans. However, it should be
noted that non single family loans are increasing at a greater rate than single
family loans. At September 30, 2000, the Bank's net loan portfolio totaled
$234.4 million, of which $175.6 million, or 75.0% were single-family residential
real estate mortgage loans, $1.2 million, or 0.5% were multifamily residential
real estate loans, $7.4 million, or 3.1%, were agricultural real estate loans,
and $25.7 million, or 11.0%, were commercial real estate loans (including land
loans). The remainder of the Bank's loans at September 30, 2000 included
commercial business loans (i.e., crop production, equipment and livestock loans)
which totaled $12.6 million, or 5.2%, of the Bank's net loan portfolio as of
September 30, 2000. Other loans, including automobile loans and loans
collateralized by deposit accounts totaled $15.3, or 6.5% of the Bank's net loan
portfolio as of September 30, 2000.
Analysis of Loan Portfolio
Set forth below is selected data relating to the composition of the Bank's
loan portfolio, including loans held for sale, by type of loan as of the dates
indicated.
At September 30,
---------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------- -------------------- ------------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------------------- -------------------- ------------------- ----------------- -----------------
(Dollars in Thousands)
Real estate loans:
Single-family residential $175,625 75.0% $173,622 79.7% $163,895 84.6% $138,539 86.8% $118,291 86.4%
Multifamily residential 1,163 0.5 1,024 0.5 3,124 1.6 1,600 1.0 4,729 3.5
Agricultural 7,360 3.1 6,878 3.2 6,532 3.4 4,654 2.9 4,552 3.3
Commercial 25,730 11.0 23,296 10.7 10,268 5.3 9,606 6.0 6,703 4.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans 209,878 89.6 204,820 94.1 183,819 94.9 154,399 96.7 134,275 98.1
Other loans:
Savings account loans 1,665 0.7 1,528 0.7 1,161 0.6 1,015 0.6 886 0.6
Commercial business (1) 12,555 5.3 10,932 5.0 8,568 4.4 6,533 4.1 5,729 4.2
Other (2) 13,617 5.8 8,113 3.7 5,943 3.1 2,716 1.7 1,913 1.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total other loans 27,837 11.8 20,573 9.4 15,672 8.1 10,264 6.4 8,528 6.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans receivable 237,715 101.4 225,393 103.5 199,491 103.0 164,663 103.1 142,803 104.3
Less:
Undisbursed loan proceeds 1,345 0.6 5,753 2.6 3,655 1.9 2,815 1.8 3,715 2.7
Unearned discount and net
deferred loan fees 264 0.1 287 0.1 424 0.2 467 0.3 482 0.4
Allowance for loan losses 1,689 0.7 1,643 0.8 1,684 0.9 1,691 1.0 1,734 1.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans receivable,
net $234,417 100.0% $217,710 100.0% $193,728 100.0% $159,690 100.0% $136,872 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
____________________________________
(1) Includes crop-production loans, livestock loans and equipment loans.
(2) Includes second mortgage loans, unsecured personal lines of credit and
automobile loans.
Loan Maturity Schedule. The following table sets forth certain information
as of September 30, 2000, regarding the dollar amount of gross loans maturing in
the Bank's portfolio based on their contractual terms to maturity. Demand loans,
loans having no stated schedule of repayments, and overdrafts are reported as
due in one year or less. Adjustable and floating rate loans are included in the
period in which interest rates are next scheduled to adjust rather than in which
they mature, and fixed rate loans are included in the period in which the final
contractual repayment is due.
Beyond
Within 1-3 3-5 5-10 10-20 20
1 Year Years Years Years Years Years Total
--------- --------- --------- --------- --------- --------- ---------
(In Thousands)
Fixed rate loans $22,113 $15,231 $16,709 $14,760 $36,568 $13,367 $118,748
Variable rate loans 26 443 1,109 8,244 47,757 61,388 118,967
------- ------- ------- ------- ------- ------- --------
Total $22,139 $15,674 $17,818 $23,004 $84,325 $74,755 $237,715
======= ======= ======= ======= ======= ======= ========
3
The following table sets forth at September 30, 2000, the dollar amount of
all fixed rate and adjustable rate loans due after September 30, 2001.
Fixed Adjustable Total
-------------- -------------- ------------
(in Thousands)
Single-family residential $60,404 $117,940 $178,344
Multifamily residential - 1,001 1,001
Agricultural 6,235 - 6,235
Commercial 21,314 - 21,314
Other 8,682 - 8,682
------- -------- --------
Total $96,635 $118,941 $215,576
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Single-Family Residential Real Estate Loans. The Bank's primary lending
activity is the origination of single-family, owner-occupied, residential
mortgage loans collateralized by properties located in the Bank's market area.
The Bank generally does not originate single-family residential loans
collateralized by properties outside of its market area. However, the Bank has
been an active purchaser of single family loans from outside the Bank's primary
marked area. At September 30, 2000, the Bank had $175.6 million, or 75.0%, of
its total net loan portfolio invested in single-family residential mortgage
loans, substantially all of which were collateralized by properties located in
the Bank's market area or in counties contiguous with the Bank's market area.
The Bank's single-family, fixed rate, residential real estate loans
generally are originated and underwritten according to standards that qualify
such loans for resale in the secondary mortgage market. The Bank generally
retains adjustable rate mortgage ("ARM") loans that it originates. Whether the
Bank can or will sell fixed rate loans, however, depends on a number of factors
including the yield and the term of the loan, market conditions, and the Bank's
current interest rate risk analysis. At September 30, 2000 and 1999, loans held
for sale were insignificant. During the fiscal years ended September 30, 2000,
1999 and 1998, the Bank sold into the secondary market $0.6 million, $1.8
million, and $4.3 million, respectively, of single-family, fixed rate,
residential mortgage loans, generally from current period originations. The Bank
generally does not retain the servicing rights on loans it has sold.
The Bank currently offers single-family residential mortgage loans with
terms typically ranging from 10 to 30 years, and with adjustable or fixed
interest rates. Single-family residential real estate loans often remain
outstanding for significantly shorter periods than their contractual terms
because borrowers may refinance or prepay loans at their option. The average
length of time that the Bank's single-family residential mortgage loans remain
outstanding varies significantly depending upon trends in market interest rates
and other factors. Accordingly, estimates of the average length of single-family
loans that remain outstanding cannot be made with any degree of accuracy.
Originations of fixed-rate mortgage loans versus ARM loans are monitored on
an ongoing basis and are affected significantly by the level of market interest
rates, customer preference, the Bank's interest rate risk analysis, and loan
products offered by the Bank's competitors. Particularly in a relatively low
interest rate environment, borrowers may prefer fixed rate loans to ARM loans.
However, management's strategy is to emphasize ARM loans, and the Bank has been
successful in maintaining a level of ARM loan originations acceptable to
management.
The Bank's ARM loans are generally for terms of 30 years, with interest
rates that adjust annually. The Bank establishes various annual and life-of-the-
loan caps on ARM loan interest rate adjustments. The Bank's current index on its
ARM loans is the one-year constant maturity treasury ("CMT") rate for one-year
ARM loans, a three-year CMT rate for three-year ARM loans, and a five-year CMT
rate for five-year ARM loans, plus a range of margin of 225 to 300 basis points,
subject to change based on market conditions. The Bank determines whether a
borrower qualifies for an ARM loan based on the fully indexed rate of the ARM
loan at the time the loan is originated.
The primary purpose of offering ARM loans is to make the Bank's loan
portfolio more interest rate sensitive. ARM loans carry increased credit risk
associated with potentially higher monthly payments by borrowers as general
market interest rates increase. It is possible, therefore, that during periods
of rising interest rates, the risk of default on ARM loans may increase due to
the upward adjustment of interest costs to the borrower. Management believes
that the
4
Bank's credit risk associated with its ARM loans is reduced because of the
lifetime interest rate adjustment limitations on such loans. However, interest
rate caps and the changes in the CMT rate, which is a lagging market index to
which the Bank's ARM loans are indexed, may reduce the Bank's net earnings in a
period of rising market interest rates.
The Bank's single-family residential first mortgage loans customarily
include due-on-sale clauses, which are provisions giving the Bank the right to
declare a loan immediately due and payable in the event, among other things,
that the borrower sells or otherwise disposes of the underlying real property
serving as security for the loan. Due-on-sale clauses are an important means of
adjusting the rates on the Bank's fixed rate mortgage loan portfolio.
Regulations limit the amount that a savings association may lend relative
to the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Such regulations permit a maximum
loan-to-value ratio of 100% for residential property and a lower percentage for
other real estate loans, depending on the type of loan. The Bank's lending
policies limit the maximum loan-to-value ratio on both fixed rate and ARM loans
without private mortgage insurance to 90% of the lesser of the appraised value
or the purchase price of the property to serve as collateral for the loan. The
Bank generally requires fire and casualty insurance, as well as title insurance
regarding good title, on all properties securing real estate loans made by the
Bank.
Multifamily Residential Real Estate Loans. Although the Bank does not
emphasize multifamily residential loans and has not been active recently in this
area, the Bank has originated loans collateralized by multifamily residential
real estate. Such loans constituted approximately $1.2 million, or 0.5% of the
Bank's total net loan portfolio on September 30, 2000, compared to $1.0 million,
or 0.5% of the Bank's total net loan portfolio at September 30, 1999, $3.1
million, or 1.6%, of the Bank's total net loan portfolio at September 30, 1998,
$1.6 million, or 1.0%, of the total net loan portfolio at September 30, 1997,
and $4.7 million, or 3.5%, of the total net loan portfolio as of September 30,
1996. The Bank's multifamily real estate loans are primarily collateralized by
multifamily residences, such as apartment buildings. Multifamily residential
real estate loans are offered with fixed and adjustable interest rates and are
structured in a number of different ways depending upon the circumstances of the
borrower and the type of multifamily project. Fixed interest rate loans
generally have five-to-seven-year terms with a balloon payment based on a 15 to
25 year amortization schedule.
Loans collateralized by multifamily real estate generally involve a greater
degree of credit risk than single-family residential mortgage loans and carry
individually larger loan balances. This increased credit risk is a result of
several factors, including the concentration of principal in a limited number of
loans and borrowers, the effects of general economic conditions on income
producing properties, and the increased difficulty of evaluating and monitoring
these types of loans. Furthermore, the repayment of loans collateralized by
multifamily real estate typically depends upon the successful operation of the
related real estate property. If the cash flow from the project is reduced, the
borrower's ability to repay the loan may be impaired.
Agricultural Real Estate Loans. In recent years the Bank has increased its
originations of agricultural real estate loans for the purchase of farmland in
the Bank's market area. Loans collateralized by farmland constituted
approximately $7.4 million or 3.1%, of the Bank's total net loan portfolio at
September 30, 2000, compared to $6.9 million, or 3.2%, $6.5 million, or 3.4%,
$4.7 million, or 2.9%, and $4.6 million, or 3.3%, of the Bank's total net loan
portfolio at September 30, 1999, 1998, 1997, and 1996, respectively.
Agricultural mortgage loans have various terms up to 10 years with a
balloon payment based on a 20-year amortization schedule. Such loans are
originated with fixed rates and generally include personal guarantees. The loan-
to-value ratio on agricultural mortgage loans is generally limited to 75%. The
Bank earns higher yields on agricultural mortgage loans than on single-family
residential mortgage loans. Agricultural related lending, however, involves a
greater degree of risk than single-family residential mortgage loans because of
the typically larger loan amounts and a somewhat more volatile market. In
addition, repayments on agricultural mortgage loans are substantially dependent
on the successful operation or management of the farm property collateralizing
the loan, which is affected by many factors, such as weather and changing market
prices, outside the control of the borrower.
Commercial Real Estate Loans. Loans collateralized by commercial real
estate, including land loans, constituted approximately $25.7 million, or 11.0%
of the Bank's total net loan portfolio at September 30, 2000, compared to $23.3
million, or 10.7%, $10.3 million, or 5.3%, $9.6 million, or 6.0%, and $6.7
million, or 4.9%, of the
5
Bank's total net loan portfolio at September 30, 1999, 1998, 1997, and 1996,
respectively. The Bank's commercial real estate loans are collateralized by
improved property such as office buildings, churches and other nonresidential
buildings. At September 30, 2000, substantially all of the Bank's commercial
real estate loans were collateralized by properties located within the Bank's
market area.
Commercial real estate loans currently are offered with fixed rates only
and are structured in a number of different ways depending upon the
circumstances of the borrower and the nature of the project. Fixed rate loans
generally have five-to-seven year terms with a balloon payment based on a 15 to
25 year amortization schedule.
Loans collateralized by commercial real estate generally involve a greater
degree of credit risk than single-family residential mortgage loans and carry
larger loan balances. This increased credit risk is a result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effects of general economic conditions on income-producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans collateralized by commercial
real estate is typically dependent upon the successful operation of the related
real estate property. If the cash flow from the project is reduced, the
borrower's ability to repay the loan may be impaired.
Other Loans. The Bank originates various consumer loans, including
automobile, deposit account loans and second mortgage loans, principally in
response to customer demand. As of September 30, 2000, such loans totaled $15.3
million, or 6.5% of the Bank's total net loan portfolio as compared to $9.6
million, or 4.4%, $7.1 million, or 3.7%, $3.7 million, or 2.3%, and $2.8
million, or 2.0%, of the Bank's total net loan portfolio as of September 30,
1999, 1998, 1997, and 1996, respectively. Consumer loans are offered primarily
on a fixed rate basis with maturities generally of less than ten years.
In recent years, the Bank has emphasized the origination of commercial
business loans, which principally include agricultural-related commercial loans
to finance the purchase of livestock, cattle, farm machinery and equipment,
seed, fertilizer and other farm-related products. Such loans comprised $12.6
million, or 5.3% of the Bank's total net loan portfolio at September 30, 2000,
as compared to $10.9 million, or 5.0%, $8.6 million, or 4.4%, $6.5 million, or
4.1%, and $5.7 million, or 4.2%, of the Bank's total net loan portfolio as of
September 30, 1999, 1998, 1997, and 1996.
As with agricultural real estate loans, agricultural operating loans
involve a greater degree of risk than residential mortgage loans because the
payments on such loans are dependent on the successful operation or management
of the farm property for which the operating loan is utilized. See "Agricultural
Real Estate Loans" for the various risks associated with agricultural operating
loans.
6
Origination, Purchase and Sale of Loans and Mortgage-Backed Securities.
The table below shows the Bank's originations, purchases and sales of loans and
mortgage-backed securities for the periods indicated.
Year Ended September 30
2000 1999 1998 1997 1996
---------- ------- ------- ------- --------
(In Thousands)
Total loans receivable, net at beginning of year $217,710 $193,728 $159,690 $136,872 $116,447
Loans originated:
Real estate:
Single-family residential 38,629 53,499 66,988 49,215 48,568
Multifamily residential - 180 100 93 -
Commercial 6,346 13,708 2,010 3,467 299
Agricultural 1,766 2,317 3,429 2,863 1,596
Other:
Commercial business 11,650 11,102 7,593 6,697 5,743
Savings account loans 1,649 1,580 908 926 826
Other 10,316 7,504 4,162 2,684 2,023
-------- -------- -------- -------- --------
Total loans originated $ 70,356 89,890 85,190 65,945 59,055
Loans purchased 4,333 10,552 - - -
Loans sold (635) (1,765) (4,287) (2,156) (1,371)
Loans transferred to REO (948) (943) (129) (294) (233)
Loans to facilitate the sale of REO (505) (513) - (349) (145)
Loan repayments (55,989) (73,239) (46,478) (40,004) (36,470)
Other loan activity (net) 95 - (258) (324) (411)
-------- -------- -------- -------- --------
Total loans receivable, net at end of year $234,417 $217,710 $193,728 $159,690 $136,872
======== ======== ======== ======== ========
Mortgage-backed securities, net at beginning of year $191,125 $151,970 $168,836 $179,359 $163,287
Purchases - 65,737 - - 38,430
Sales (91,600) (1,205) - - (10,020)
Fair value adjustment (2,005) (1,222) 2,474 - -
Repayments (10,831) (24,431) (19,598) (10,669) (13,575)
Discount amortization 241 276 258 146 1,237
-------- -------- -------- -------- --------
Mortgage-backed and related securities, net at end of year $ 86,930 $191,125 $151,970 $168,836 $179,359
======== ======== ======== ======== ========
Total loans receivable, net, and mortage-backed
and related securities, net, at end of year $321,347 $408,835 $345,698 $328,526 $316,231
======== ======== ======== ======== ========
Loans to One Borrower. The maximum loans that a savings association may
make to one borrower or a related group of borrowers is 15% of the savings
association's unimpaired capital and unimpaired surplus on an unsecured basis,
and an additional amount equal to 10% of unimpaired capital and unimpaired
surplus if the loan is collateralized by readily marketable collateral
(generally, financial instruments and bullion, but not real estate).
Asset Quality
When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the deficiency by contacting the borrower and seeking the
payment. Depending upon the type of loan, late notices are sent and/or personal
contacts are made. In most cases, deficiencies are cured promptly. While the
Bank generally prefers to work with borrowers to resolve such problems, when a
mortgage loan becomes 90 days delinquent, the Bank generally institutes
foreclosure or other proceedings, as necessary, to minimize any potential loss.
Loans are placed on non-accrual status when, in the judgment of management,
the probability of collection of interest is deemed to be insufficient to
warrant further accrual. When a loan is placed on non-accrual status,
previously accrued but unpaid interest is deducted from interest income. The
Bank generally does not accrue interest on loans past due 90 days or more.
Loans may be reinstated to accrual status when payments are made to bring the
loan under 90 days past due and, in the opinion of management, collection of the
remaining balance can be reasonably expected.
7
Real estate acquired by the Bank as a result of foreclosure or by deed in
lieu of foreclosure is classified as real estate owned ("REO") until such time
as it is sold. REO is initially recorded at its estimated fair value, less
estimated selling expenses. Valuations are periodically performed by
management, and any subsequent decline in estimated fair value is charged to
operations.
The following table sets forth information regarding loans delinquent for
90 days or more and real estate owned by the Bank at the dates indicated.
At September 30
--------------------------------------------------------
2000 1999 1998 1997 1996
--------- -------- ------- ------- -----
(Dollars In Thousands)
Nonperforming loans:
Single-family residential real estate $1,477 $1,302 $2,240 $ 422 $ 766
All other mortgage loans 485 10 15 195
Other loans 54 66 41 31 62
------ ------ ------ ------ ------
Total delinquent loans $2,016 1,378 2,296 453 1,023
Total real estate owned 646 261 16 17 111
------ ------ ------ ------ ------
Total nonperforming assets $2,662 $1,639 $2,312 $ 470 $1,134
====== ====== ====== ====== ======
Total loans delinquent 90 days or more
to net loans receivable 0.86 % 0.63 % 1.19 % 0.28 % 0.74 %
Total loans delinquent 90 days or more
to total assets 0.50 % 0.28 % 0.56 % 0.12 % 0.27 %
Total nonperforming loans and REO
to total assets 0.66 % 0.34 % 0.57 % 0.12 % 0.30 %
Classification of Assets. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the OTS to be of lesser quality as "substandard," "doubtful," or
"loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the savings institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated "special mention" by management.
Loans designated as special mention are generally loans that, while current in
required payments, have exhibited some potential weaknesses that, if not
corrected, could increase the level of risk in the future.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by
federal regulators, who can order the establishment of additional general or
specific loss allowances.
8
The following table sets forth the aggregate amount of the Bank's
classified assets at the dates indicated.
At September 30,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- --------- --------- ---------- -------
(Dollars In Thousands)
Substandard assets $2,093 $2,905 $2,572 $1,640 $3,515
Doubtful assets 352 - 18 - -
Loss assets 14 32 - 25 89
------ ------ ------ ------ ------
Total classified assets (1) $2,459 $2,937 $2,590 $1,665 $3,604
====== ====== ====== ====== ======
(1) With respect to assets classified "doubtful" and "loss," the Bank has
established aggregate specific loan loss reserves of $14,000, $32,000, $0
$25,000, $89,000, and $155,000 (in actual dollars) for the years ended
September 30, 2000, 1999, 1998, 1997, 1996, and 1995, respectively.
Allowance for Loan Losses. It is management's policy to provide for
estimated losses on the Bank's loan portfolio based on management's evaluation
of the potential losses that may be incurred. The Bank regularly reviews its
loan portfolio, including problem loans, to determine whether any loans require
classification or the establishment of appropriate reserves or allowances for
losses. Such evaluation, which includes a review of all loans for which full
collection of interest and principal may not be reasonably assured, considers,
among other matters, the estimated fair value of the underlying collateral.
Other factors considered by management include the size and risk exposure of
each segment of the loan portfolio, present indicators such as delinquency rates
and the borrower's current financial condition, and the potential for losses in
future periods. Management calculates the general allowance for loan losses in
part based on past experience, and in part based on specified percentages of
loan balances. While both general and specific loss allowances are charged
against earnings, general loan loss allowances are added back to capital,
subject to a limitation of 1.25% of risk-based assets, in computing risk-based
capital under OTS regulations.
During the fiscal year ended September 30, 2000, 1999, 1998, 1997 and 1996,
the Bank added $120,000, $0, $0, $60,000 and $411,200, respectively, to its
allowance for loan losses. The Bank's allowance for loan losses totaled $1.7
million, $1.7 million, $1.7 million, $1.7 million, and $1.7 million at September
30, 2000, 1999, 1998, 1997 and 1996, respectively.
9
Analysis of the Allowance for Loan Losses. The following table sets forth
the analysis of the allowance for loan losses for the periods indicated.
Year Ended September 30
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------- --------- ------------- --------- ----------
(In Thousands)
Total loans outstanding $237,715 $225,393 $199,491 $164,663 $142,803
Average net loans outstanding 224,751 206,001 176,295 147,316 124,609
Allowance balances (at beginning of year) $ 1,643 $ 1,684 $ 1,691 $ 1,734 $ 1,357
Provision for losses:
Real estate loans - - 30 -
Other loans 120 - - 30 411
Charge-offs:
Real estate loans (54) (67) (7) (11) (17)
Other loans (28) (29) - (93) (32)
Recoveries:
Real estate loans 4 1 - 1 15
Other loans 4 54 - - -
-------- -------- -------- -------- --------
Allowance balance (at end of year) 1,689 $ 1,643 $ 1,684 $ 1,691 $ 1,734
======== ======== ======== ======== ========
Allowance for loan losses as a percent
of total loans receivable at end of year 0.71% 0.73% 0.84% 1.03% 1.21%
Net loans charged off as a percent
of average net loans outstanding 0.04% 0.05% 0.00% 0.07% 0.04%
Ratio of allowance for loan losses
to total nonperforming loans
at end of year 83.78% 119.23% 73.34% 373.45% 169.50%
Ratio of allowance for loan losses to
total nonperforming loans and
REO at end of year 63.45% 100.24% 72.84% 359.79% 152.91%
Allocation of Allowance for Loan Losses. The following table sets forth the
allocation of allowance for loan losses by loan category at the dates indicated.
At September 30,
--------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ------------------ ------------------ ------------------ ------------------
% of Loans % of Loans % of Loans % of Loans % of Loans
in Each in Each in Each in Each in Each
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------------------ ------------------ ------------------ ------------------ ------------------
(Dollars in Thousands)
Balance at end of period
applicable to:
Mortgage loans $ 843 90.5% $ 893 92.3% $ 958 94.9% $ 927 96.7% $ 903 93.9%
Non-mortgage loans 846 9.5 750 7.7 726 5.1 764 3.3 831 6.1
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for loan losses $1,689 100.0% $1,643 100.0% $1,684 100.0% $1,691 100.0% $1,734 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Investment Activities
Mortgage-Backed Securities. Mortgage-backed securities represent a
participation interest in a pool of single-family or multifamily mortgages, the
principal and interest payments on which are passed from the mortgagors, through
intermediaries that pool and repackage the participation interests in the form
of securities, to investors such as the Bank. Mortgage-backed securities
typically are issued with stated principal amounts. The securities are backed by
pools of mortgages that have loans with interest rates that are within a range
and have varying maturities. The underlying pool of mortgages can be composed of
either fixed-rate mortgages or ARM loans. As a result, the interest rate risk
10
characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable-rate, as well as the prepayment risk, are passed on to the
certificate holder. The Bank invests in mortgage-backed securities to
supplement local single-family loan originations as well as to reduce interest
rate risk exposure, because mortgage-backed securities are more liquid than
mortgage loans.
Set forth below is selected data relating to the composition of the Bank's
mortgage-backed securities portfolio as of the dates indicated.
At September 30,
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------
$ % $ % $ % $ % $ %
------- ---------- ----------- --------- --------- --------- ----------- --------- ---------- --------
(Dollars In Thousands)
Mortgage-backed securities:
Adjustable 40,969 47.1% $119,975 62.8% $139,528 92.0% $151,766 89.9% $155,949 86.9%
Fixed 45,961 52.9 71,150 37.2 12,442 8.0 17,070 10.1 23,410 13.1
------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage-backed
securities, net 86,930 100.0% $191,125 100.0% $151,970 100.0% $168,836 100.0% $179,359 100.0%
======= ====== ======== ====== ======== ====== ======== ====== ======== ======
At September 30, 2000, mortgage-backed securities aggregated $86.9 million,
or 21.7% of the Bank's total assets. At September 30, 2000, all of the Bank's
mortgage-backed securities were classified as available-for-sale.
Other Investment Securities. The Bank's investment portfolio, excluding
mortgage-backed securities and FHLB stock, consists of obligations of the United
States Government and agencies thereof, municipal bonds, interest-earning
deposits in other institutions and equity investments (principally in other
financial institutions). The carrying value of this portion of the Bank's
investment portfolio totaled $41.7 million, $36.3 million, $32.7 million, $31.7
million, and $40.3 million at September 30, 2000, 1999, 1998, 1997, and 1996,
respectively. At September 30, 2000, none of the Bank's investment securities,
excluding mortgage-backed securities, had a remaining term to maturity of one
year or less, and $0.2 million, or less than 0.1%, had a remaining term to
maturity of five years or less.
The Bank is required under federal regulations to maintain a minimum amount
of liquid assets that may be invested in specified short-term securities and
certain other investments. See "Regulation - Liquidity Requirements." The Bank
generally has maintained a portfolio of liquid assets that exceeds regulatory
requirements. Liquidity levels may be increased or decreased depending upon the
yields on investment alternatives and upon management's judgment as to the
attractiveness of the available yields in relation to other opportunities,
management's expectation of the level of yield that will be available in the
future, as well as management's projections of short term demand for funds in
the Bank's loan origination and other activities.
At September 30,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(Dollars In Thousands)
Investment securities:
Mortgage-backed securities $ 86,930 $191,125 $151,970 $168,836 $179,359
U.S. Government treasury obligations - - - - 1,000
U.S. Government agency obligations 27,095 25,403 21,656 26,858 38,872
Trust Preferred 4,000 - - - -
Municipal bonds 9,466 9,446 9,425 4,859 459
Equity securities 1,127 1,429 1,588 - -
-------- -------- -------- -------- --------
Total investment securities 128,618 227,403 184,639 200,553 219,690
FHLB stock 5,988 10,981 10,060 10,053 11,608
-------- -------- -------- -------- --------
Total investments $134,606 $238,384 $194,699 $210,606 $231,298
======== ======== ======== ======== ========
11
Investment Portfolio Maturities The following table sets forth the
scheduled maturities, carrying values, market values and average yields for the
Bank's investment securities at September 30, 2000.
At September 30, 2000
------------------------------------------------------------------------------------------------
One to Five Five to Ten
One Year Years Years Over Ten Years
-------------------------- ----------------------- --------------------- ------------------
Annualized Annualized Annualized Annualized
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Value
----------- ------------ --------- ----------- -------- ---------- --------- ---------
(Dollars In Thousands)
Investment securities:
U.S. Government agency securities $ - 0.00% 7.20% $12,718 0.00% $ 14,377 7.13%
Trust Preferred - 0.00% - 0.00% 4,000 9.74% - 0.00%
State and municipal obligations
(1) 5 5.40% 20 5.65% 991 5.26% 8,450 5.08%
CMOs (2) - 0.00% - 0.00% 2,082 6.57% 57,378 7.10%
Mortgage-backed securities - 0.00% 152 7.27% 1,232 7.19% 26,086 6.89%
------- ---- -------- ----- ------- ----- -------- -----
Total investment securities 5 5.40% 172 7.20% 21,023 8.03% 106,291 6.89%
===== ===== ===== ====
Equity securities
FHLB stock
Accrued interest on investments
Total investment securities,
---------------------------------------------
Total
---------------------------------------------
Annualized
Average Weighted
Carrying Market Life in Average
Value Value Years Yield
--------------------------------------------
Investment securities:
U.S. Government agency securities $ 27,095 $ 27,095 11.46 7.16%
Trust Preferred 4,000 4,000 9.96 9.74%
State and municipal obligations
(1) 9,466 9,105 6.73 5.10%
CMOs (2) 59,460 59,460 23.62 7.08%
Mortgage-backed securities 27,470 27,470 24.74 6.91%
-------- -------- ----
Total investment securities 127,491 127,130 7.00%
====
Equity securities 1,127 1,127
FHLB stock 5,988 5,988 6.50%
====
Accrued interest on investments 1,202 1,202
-------- --------
Total investment securities, 135,808 135,447
======== ========
(1) The yield on these tax-exempt obligations has not been compiled on a tax-
equivalent basis.
(2) The average life in years is based on actual stated maturities; however,
management anticipates a shorter life on these securities.
12
Sources of Funds
General. Deposits are a significant source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from FHLB advances, the amortization and prepayment of loans and mortgage-backed
securities, the sale or maturity of investment securities, and operations.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions. Borrowings may
be used on a short-term basis to compensate for reductions in the availability
of funds from other sources or on a longer term basis for general business
purposes.
Deposits. Consumer and commercial deposits are received principally from
within the Bank's market area through the offering of a broad selection of
deposit instruments including NOW accounts, passbook savings, money market
deposit accounts, term certificate accounts and individual retirement accounts.
The Bank also markets term certificate accounts nationally to attract deposits.
Deposit account terms vary according to the minimum balance required, the period
of time during which the funds must remain on deposit, and the interest rate,
among other factors. The maximum rate of interest the Bank must pay is not
established by regulatory authority. The Bank regularly evaluates its internal
cost of funds, surveys rates offered by competing institutions, reviews the
Bank's cash flow requirements for lending and liquidity, and executes rate
changes when deemed appropriate.
Time Deposit Rates. The following table sets forth the certificates of
deposit of the Bank classified by rates as of the dates indicated:
At September 30,
2000 1999 1998 1997 1996
-------- -------- -------- -------- -------
(In thousands)
Rate
0.00-3.99% $ 28 $ - $ 275 $ 16 $ 17
4.00-5.99% 34,126 135,563 111,713 76,094 75,615
6.00-7.99% 128,051 14,924 25,225 32,170 6,205
8.00-9.99% - - - - 20
-------- -------- -------- -------- -------
Total $162,205 $150,487 $137,213 $108,280 $81,857
======== ======== ======== ======== =======
Time Deposit Maturities. The following table sets forth the amount and
maturities of certificates of deposit at September 30, 2000.
Maturity
-------------------------------------------------------
3 months 3 to 6 6 to 12 Over 12
or less months months months Total
------- ------- ------- ------- --------
(In thousands)
Certificate of Deposit less than $100,000 $24,528 $34,167 $62,239 $ 9,513 $130,447
Certificate of Deposit greater than $100,000 6,085 5,400 18,680 1,593 $ 31,758
------- ------- ------- ------- --------
Total Certificates of Deposit 30,613 39,567 80,919 11,106 162,205
======= ======= ======= ======= ========
Borrowings
Deposits of the Bank are a significant source of funds as is short term and
long term advances from the FHLB. FHLB advances are collateralized by the
Bank's stock in the FHLB, investment securities and a blanket lien on the Bank's
mortgage portfolio. Such advances are made pursuant to different credit
programs, each of which has its own
13
interest rate and range of maturities. The maximum amount that the FHLB will
advance to member institutions, including the Bank, for purposes other than
meeting withdrawals, fluctuates from time to time in accordance with the
policies of the FHLB. The maximum amount of FHLB advances to a member
institution generally is reduced by borrowings from any other source. At
September 30, 2000, the Bank's FHLB advances totaled $118.0 million.
The Bank sells securities under agreements to repurchase with selected
dealers (reverse repurchase agreements) as a means of obtaining short-term funds
as market conditions permit. In a reverse repurchase agreement, the Bank sells
a fixed dollar amount of securities to a dealer under an agreement to repurchase
the securities at a specific price within a specific period of time, typically
not more than 180 days. Reverse repurchase agreements are treated as a
liability of the Bank. The dollar amount of securities underlying the
agreements remain an asset of the Bank. At September 30, 2000, the Bank's
securities sold under agreements to repurchase totaled $1.4 million.
The following table sets forth certain information regarding borrowings by
the Bank during the periods indicated.
Year Ended September 30,
2000 1999 1998 1997 1996
-------- ------- -------- -------- --------
(Dollars In Thousands)
Weighed average rate paid on: (1)
FHLB advances 5.78 % 5.03 % 5.75 % 5.54 % 5.64 %
Other borrowings (2) 5.62 % 5.16 % 4.97 % 5.81 % 5.59 %
FHLB advances:
Maximum balance $185,535 $216,844 $210,325 $230,317 $239,686
Average balance $145,312 $161,905 $173,812 $203,835 $224,719
Other borrowings: (2)
Maximum balance $ 2,465 $ 3,242 $ 21,850 $ 21,060 $ 10,306
Average balance $ 1,901 $ 2,273 $ 6,215 $ 17,684 $ 2,940
(1) Calculated using monthly weighted average interest rates.
(2) Includes borrowings under reverse repurchase agreements.
Subsidiaries' Activities
The Bank is the wholly owned subsidiary of the Company. The Bank has two
wholly owned subsidiaries, Sun Realty, Inc. and P.F. Service, Inc. Both are
Arkansas corporations and both are substantially inactive.
Regulation
As a federally chartered, SAIF-insured savings association, the Bank is
subject to examination, supervision and extensive regulation by the OTS and the
FDIC. The Bank is a member of the Federal Home Loan Bank ("FHLB") system. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The Registrant also is subject to
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") governing reserves to be maintained against deposits and certain
other matters. The OTS regularly examines the Registrant and the Bank and
prepares a report for the consideration of the Bank's Board of Directors on any
deficiencies that it may find in the Bank's operations. The FDIC also examines
the Bank in its role as the administrator of the SAIF. The Bank's relationship
with its depositors and borrowers also is regulated to a great extent by both
federal and state laws especially in such matters as the ownership of savings
accounts and the form and content of the Bank's mortgage documents. Any change
in such regulation, whether by the FDIC, the OTS or the Congress, could have a
material impact on the Bank and its operations. The description of statutory
provisions and regulations applicable to savings associations set forth herein
does not preport to be a complete description of these statutes and regulations
and their effect on the Bank.
14
Regulatory Capital Requirements. Federally insured savings institutions
are required to maintain minimum levels of regulatory capital. The OTS has
established capital standards applicable to all savings institutions. These
standards generally must be as stringent as the comparable capital requirements
imposed on national banks. The OTS also is authorized to impose capital
requirements in excess of these standards on individual institutions on a case-
by-case basis.
Under the tangible capital requirement, a savings association must maintain
tangible capital in an amount equal to at least 1.5% of adjusted total assets.
Tangible capital generally includes common stockholders' equity including
retained earnings and certain noncumulative perpetual preferred stock and
related earnings. In addition, all intangible assets, other than a limited
amount of purchased mortgage-servicing rights, must be deducted from tangible
capital for calculating compliance with the requirement. Further, the valuation
allowance applicable to the write-down of investments and mortgage-backed
securities in accordance with SFAS No. 115 is excluded from the regulatory
capital calculation. At September 30, 2000, the Bank had no intangible assets
or unrealized loss, net of tax under SFAS No. 115.
The leverage limit adopted by the OTS requires that savings associations
maintain "core capital" in an amount equal to at least 3% of adjusted total
assets. Core capital generally consists of tangible capital plus certain
intangible assets, including supervisory goodwill (which is phased out over a
five-year period) and up to 25% of other intangibles that meet certain separate
salability and market valuation tests. As a result of the prompt corrective
action provisions described below, however, a savings association must maintain
a core capital ratio of at least 4% of to be considered adequately capitalized
unless its supervisory condition is such to allow it to maintain a 3% ratio. At
September 30, 2000, the Bank had core deposits intangibles totaling $2.2
million.
Under the risk-based capital requirement, a savings association must
maintain total capital equal of at least 8% of risk-weighted assets. Total
capital consists of core capital, as defined above, and supplementary capital.
Supplementary capital consists of certain permanent and maturing capital
instruments that do not qualify as core capital and general valuation loan and
lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement only to
the extent of core capital. The OTS is also authorized to require a savings
association to maintain an additional amount of total capital to account for
concentration of credit risk and the risk of non-traditional activities. At
September 30, 2000, the Bank had no capital instruments that qualify as
supplementary capital and $1.7 million of general loss reserves, which was less
than 1.0% of risk-weighted assets.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against associations that fail to meet capital
requirements. The OTS is generally required to take action to restrict the
activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core ratio, a Tier 1 risk-based capital ratio or an
8% risk-based capital ratio). Any such association must submit a capital
restoration plan and until such plan is approved by the OTS may not increase its
assets, acquire another institution, establish a branch or engage in any new
activities, and generally may not make capital distributions.
The imposition by the OTS or the FDIC of any of these measures on the Bank
may have a substantial adverse effect on the Registrant's operations and
profitability and the value of the Common Stock. If the OTS or the FDIC require
an association such as the Bank, to raise additional capital through the
issuance of Company Common Stock or other capital instruments such issuance may
result in the dilution in the percentage of ownership of those persons holding
shares of Common Stock since the Registrant's shareholders do not have
preemptive rights.
Qualified Thrift Lender Test. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (which consists of
total assets less intangibles, properties used to conduct the savings
association's business and liquid assets not exceeding 20% of total assets) in
qualifying thrift investments on a monthly average for nine out of every twelve
months on a rolling basis. At September 30, 2000, the Bank met the test.
A savings institution that fails to become or maintain a qualified thrift
lender must either become a bank (other than a savings bank) or be subject to
certain restrictions. A savings institution that converts to a bank must pay
applicable exit and entrance fees involved in converting from one insurance fund
to another. A savings institution that
15
fails to meet the QTL test and does not convert to a bank will be: (1)
prohibited from making any investment or engaging in activities that would not
be permissible for national banks; (2) prohibited from establishing any new
branch office where a national bank located in the savings institution's home
state would not be able to establish a branch office; (3) ineligible to obtain
new advances from any FHLB; and (4) subject to limitations on the payment of
dividends comparable to the statutory and regulatory dividend restrictions
applicable to national banks.
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"),
every FDIC insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate-income neighborhoods. In
addition, the Equal Credit Opportunity Act and the Fair Housing Act Prohibit
lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. The CRA requires the OTS, in
connection with the examination of the Bank, to assess the institution's record
of meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications, such as a merger or the
establishment of a branch, by the Bank. An institution's failure to comply with
the provisions of the CRA could, at a minimum, result in regulatory restrictions
on its activities, and failure to comply with the Equal Credit Opportunity Act
and the Fair Housing Act could result in enforcement actions by the OTS, as well
as other federal regulatory agencies and the Department of Justice. The Bank
was examined for CRA compliance in August 1999 and received a rating of
satisfactory.
Liquidity Requirements. Federally insured savings associations are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of average daily balances of net withdrawable
deposit accounts and borrowings payable in one year or less. At the present
time, the minimum liquid asset ratio is 4%. At September 30, 2000, the Bank's
liquidity ratio exceeded regulatory requirements.
Accounting. An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with generally
accepted accounting principles ("GAAP"). Under the policy statement, management
must support its classification of and accounting for loans and securities
(i.e., whether held for investment, sale or trading) with appropriate
documentation. The Bank is in compliance with these policy statements.
The OTS has adopted an amendment to its accounting regulations, which may
be made more stringent than GAAP, to require that transactions be reported in a
manner that best reflects their underlying economic substance and inherent risk
notwithstanding GAAP and that financial reports must incorporate any other
accounting regulations or orders prescribed by the OTS.
Insurance of Accounts and Regulation by the FDIC. As insurer of the Bank's
deposit accounts, the FDIC is authorized to conduct examinations of and to
require reporting by the Bank. It also may prohibit any SAIF-insured
association from engaging in any activity the FDIC determines by regulation or
order to pose a serious threat to the SAIF. The FDIC also has the authority to
initiate enforcement actions against savings associations, after first giving
the OTS an opportunity to take such action.
The Federal Deposit Insurance Corporation has adopted a risk-based deposit
insurance assessment system. The Federal Deposit Insurance Corporation assigns
an institution to one of three capital categories, based on the institution's
financial information, as of the reporting period ending seven months before the
assessment period, and one of three supervisory subcategories within each
capital group. The three capital categories are well capitalized, adequately
capitalized and undercapitalized. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
Federal Deposit Insurance Corporation by the institution's primary federal
regulator and information which the Federal Deposit Insurance Corporation
determines to be relevant to the institution's financial condition and the risk
posed to the deposit insurance funds. An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned. The
Federal Deposit Insurance Corporation is authorized to raise the assessment
rates. The Federal Deposit Insurance Corporation has exercised this authority
several times in the past and may raise insurance premiums in the future. If
this type of action is taken by the Federal Deposit Insurance Corporation, it
could have an adverse effect on the earnings of the Bank.
Limitations on Capital Distributions. OTS regulations impose limitations
on all capital distributions by
16
savings institutions. Capital distributions include cash dividends, payments to
repurchase or otherwise acquire the savings association's shares, payments to
shareholders of another institution in a cash-out merger and other distributions
charged against capital.
Under new regulations effective April 1, 1999, a savings institution must
file an application for OTS approval of the capital distribution if either (1)
the total capital distributions for the applicable calendar year exceed the sum
of the institution's net income for that year to date plus the institution's
retained net income for the preceding two years, (2) the institution would not
be at lease adequately capitalized following the distribution, (3) the
distribution would violate any applicable statute, regulation, agreement or OTS-
imposed condition, or (4) the institution is not eligible for expedited
treatment of its filings. If an application is not required to be filed, savings
institutions which are a subsidiary of a holding company, as well as certain
other institutions, must still file a notice with the OTS at least 30 days
before the board of directors declares a dividend or approves a capital
distribution.
Any additional capital distributions would require prior regulatory
approval. In the event the Bank's capital fell below its required levels or the
Office of Thrift Supervision notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the Office of Thrift Supervision could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the Office of Thrift Supervision determines that
the distribution would constitute an unsafe or unsound practice.
Equity Risk Limitations. Certain OTS regulations limit the Registrant's
investment in "equity risk investments," which include investments in equity
securities, real estate, service corporations and operating subsidiaries, as
well as land loans and non-residential construction loans with loan-to-value
ratios in excess of 80%. Equity risk investments increase the capital
requirements of the Bank. Federal laws and regulations also impose certain
limitations on operations, including restrictions on loans-to-one-borrower,
transactions with affiliates and affiliated persons and liability growth. They
also impose requirements for the retention of housing and thrift-related
investments. See "Qualified Thrift Lender Test."
Transactions with Affiliates
The Bank's authority to engage in transactions with related parties or
"affiliates" or to make loans to specified insiders, is limited by Sections 23 A
and 23 B of the Federal Reserve Act. The term "affiliated" for these purposes
generally means any company that controls or is under common control with an
institution, including the Company and it non-savings institution subsidiaries.
Section 23 A limits the aggregate amount of certain "covered" transactions with
any individual affiliate to 10% of the capital and surplus of the savings
institution and also limits the aggregate amount of covered transactions with
all affiliates to 20% of the savings institution's capital and surplus. Covered
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliated is generally prohibited. Section 23 B Provides that
covered transactions with affiliated, including loans and asset purchases, must
be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% stockholders, as entities controlled by these persons, is currently governed
by Sections 22(g) and 22(h) of the Federal Reserve Act, and also by Regulation
O. Among other things, these regulations generally require these loans to be
made on terms substantially the same as those offered to unaffiliated
individuals and do not involve more than the normal risk of repayment. However,
recent regulations now permit executive officers and directors to receive the
same terms through benefit or compensation plans that are widely available to
other employees, as long as the director or executive officer is not given
preferential treatment compared to other participating employees. Regulation O
also places individual and aggregate limits on the amount of loans the Bank may
make to these person based, in part on the Bank's capital position, and requires
approval procedures to be followed. At September 30, 2000, the Bank was in
compliance with these regulations.
17
The Federal Reserve System
Federal Reserve Board regulations require all depository institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and Super NOW checking accounts) and non-personal time deposits.
At September 30, 2000, the Bank was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "Federal Regulations -- Liquidity Requirements."
Holding Company Regulation
The Company is a non-diversified savings and loan holding company within
the meaning of the HOLA, as amended. As such, the Company is registered with
the OTS and is subject to OTS regulations, examinations, supervision and
reporting requirements. In addition, the OTS has enforcement authority over the
Company and its non-savings institution subsidiaries. Among other things, this
authority permits the OTS to restrict or prohibit activities that are determined
to be a serious risk to the subsidiary savings institution. The Bank is
required to notify the OTS 30 days before declaring any dividend to the Company.
As a unitary savings and loan holding company, the Company generally is not
restricted under existing laws as to the types of business activities in which
it may engage, provided that the Bank continues to be a QTL. Upon any
nonsupervisory acquisition by the Company of another savings association or
savings bank that meets the QTL test and is deemed to be a savings institution
by the OTS, the Company would become a multiple savings and loan holding company
(if the acquired institution is held as a separate subsidiary) and would become
a multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the
prior approval of the OTS, and activities authorized by OTS regulation. The OTS
is prohibited from approving any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring other savings
institution or holding company thereof, without prior written approval of the
OTS. It also prohibits the acquisition or retention of, with certain
exceptions, more than 5% of non-subsidiary savings institution, a non-subsidiary
holding company, or a non-subsidiary company engaged in activities other than
those permitted by the HOLA; or acquiring or retaining control of an institution
that is not federally insured. In evaluating applications by holding companies
to acquire savings institutions, the OTS must consider the financial and
managerial resources, future prospects of the company and institution involved,
the effect of the acquisition on the risk to the insurance fund, the convenience
and needs of the community and competitive factors.
Federal Securities Laws
At the time of the "second step" Conversion, the Company filed with the
Securities and Exchange Commission (the "SEC") a registration statement under
the Securities Act of 1933 for the registration of the Common Stock to be issued
pursuant to the Conversion. Upon completion of the conversion, the Company's
Common Stock was registered with the SEC under the Securities Exchange Act of
1934. The Company is subject to the information, proxy solicitation, insider
trading restrictions and other requirements under the Exchange Act.
18
The registration under the Securities Act of shares of the Common Stock
that were issued in the conversion did not cover the resale of such shares.
Shares of the Common Stock purchased by persons who are not affiliates of the
Company may be resold without registration. Shares purchased by an affiliate of
the Company are subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information requirements
of Rule 144 under the Securities Act, each affiliate of the Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) is able
to sell in the public market, without registration, a number of shares not to
exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks. Provision may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.
Executive Officers of the Registrant
Listed below is information, as of September 30, 2000, concerning the
Company's executive officers. Such executive officers also serve in the same
positions with the Bank. There are no arrangements or understandings between the
Company and any of the persons named below with respect to which he or she was
or its to be selected as an officer.
The following individuals hold positions as executive officers of the
Company as is set forth below opposite their names.
Name Position With the Company
---- -------------------------
James Edington......................... President and Chief Executive
Dwayne Powell.......................... Officer Vice President,
Secretary Treasurer and
Chief Financial Officer
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors.
Since the formation of the Company, none of the executive officers,
directors or other personnel has received remuneration from the Company.
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require savings
associations to exhaust other reasonable alternative sources of funds, including
FHLB advances, before borrowing from the Federal Reserve Bank.
19
FEDERAL AND STATE TAXATION
Federal Taxation
Tax Bad Debt Reserves. The Bank is subject to the rules of federal
income taxation generally applicable to corporations under the Internal Revenue
Code of 1986, as amended (the "Code"). Most corporations are not permitted to
make deductible additions to bad debt reserves under the Code. However, savings
and loan associations and savings associations such as the Bank, which meet
certain tests prescribed by the Code may benefit from favorable provisions
regarding deductions from taxable income for annual additions to their bad debt
reserve. For purposes of the bad debt reserve deduction, loans are separated
into "qualifying real property loans," which generally are loans collateralized
by interests in real property, and non-qualifying loans, which are all other
loans. The bad debt reserve deduction with respect to non-qualifying loans must
be based on actual loss experience. The amount of the bad debt reserve deduction
with respect to qualifying real property loans may be based upon actual loss
experience (the "experience method") or a percentage of taxable income
determined without regard to such deduction (the "percentage of taxable income
method").
The Bank has elected to use the method that results in the greatest
deduction for federal income tax purposes. The amount of the bad debt deduction
that a thrift institution may claim with respect to additions to its reserve for
bad debts is subject to certain limitations. First, the full deduction is
available only if at least 60% of the institution's assets fall within certain
designated categories. Second, under the percentage of taxable income method the
bad debt deduction attributable to "qualifying real property loans" cannot
exceed the greater of (i) the amount deductible under the experience method or
(ii) the amount which, when added to the bad debt deduction for non-qualifying
loans, equals the amount by which 12% of the sum of the total deposits and the
advance payments by borrowers for taxes and insurance at the end of the taxable
years exceeds the sum of the surplus, undivided profits, and reserves at the
beginning of the taxable year. Third, the amount of the bad debt deduction
attributable to qualifying real property loans computed using the percentage of
taxable income method is permitted only to the extent that the institution's
reserve for losses on qualifying real property loans at the close of the taxable
year does not exceed 6% of such loans outstanding at such time.
Under recently enacted legislation, the percentage of taxable income
method has been repealed for years beginning after December 31, 1995, "large"
associations, i.e., the quarterly average of the association's total assets or
the consolidated group of which it is a member, exceeds $500 million for the
year, may no longer be entitled to use the experience method of computing
additions to their bad debt reserve. A "large" association must use the direct
write-off method for deducting bad debts, under which charge-offs are deducted
and recoveries are taken into taxable income as incurred. If the Bank is not a
"large" association, the Bank will continue to be permitted to use the
experience method. The Bank will be required to recapture (i.e., take into
income) over a six year period its applicable excess reserves, i.e. the balances
of its reserves for losses on qualifying loans and nonqualifying loans, as of
the close of the last tax year beginning before January 1, 1996, over the
greater of (a) the balance of such reserves as of December 31, 1987 (pre-1988
reserves) or (b) in the case of a bank which is not a "large" association, an
amount that would have been the balance of such reserves as of the close of the
last tax year beginning before January 1, 1996, had the bank always computed the
additions to its reserves using the experience method. Postponement of the
recapture is possible for a two-year period if an association meets a minimum
level of mortgage lending for 1996 and 1997. As of September 30, 2000, the
Bank's bad debt reserve subject to recapture over a four-year period totaled
approximately $584,000. The Bank has established a deferred tax liability of
approximately $223,000 for this recapture.
If an association ceases to qualify as a "bank" (as defined in Code
Section 581) or converts to a credit union, the pre-1988 reserves and the
supplemental reserve are restored to income ratably over a six-year period,
beginning in the tax year the association no longer qualifies as a bank. The
balance of the pre-1988 reserves are also subject to recapture in the case of
certain excess distributions to (including distributions on liquidation and
dissolution), or redemptions of, shareholders.
20
Distributions. To the extent that (i) the Bank's tax bad debt reserve
for losses on qualifying real property loans exceeds the amount that would have
been allowed under an experience method and (ii) the Bank makes "non-dividend
distributions" to stockholders that are considered to result in distributions
from the excess tax bad debt reserve or the reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Bank's taxable income. Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from the Bank's tax bad debt reserves.
Thus, any dividends to the Holding Company that would reduce amounts
appropriated to the Bank's tax bad debt reserves and deducted for federal income
tax purposes would create a tax liability for the Bank. The amount of additional
taxable income created from an Excess Distribution is an amount that when
reduced by the tax attributable to the income is equal to the amount of the
distribution. Thus, if certain portions of the Bank's accumulated tax bad debt
reserve are used for any purpose other than to absorb qualified tax bad debt
losses, such as for the payment of dividends or other distributions with respect
to the Bank's capital stock (including distributions upon redemption or
liquidation), approximately one and one-half times the amount so used would be
includable in gross income for federal income tax purposes, assuming a 34%
corporate income tax rate (exclusive of state taxes). See
"Regulation-Limitations on Capital Distributions" for limits on the payment of
dividends of the Bank. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its tax bad debt reserves.
Corporate Alternative Minimum Tax. The Bank is subject to the corporate
alternative minimum tax which is imposed to the extent it exceeds the Bank's
regular income tax for the year. The alternative minimum tax will be imposed at
the rate of 20% of a specially computed tax base. Included in this base will be
a number of preference items, including the following: (i) 100% of the excess of
a thrift institution's bad debt deduction over the amount that would have been
allowable on the basis of actual experience; (ii) interest on certain tax-exempt
bonds issued after August 7, 1986; and (iii) for years beginning in 1988 and
1989 an amount equal to one-half of the amount by which a institution's "book
income" (as specially defined) exceeds its taxable income with certain
adjustments, including the addition of preference items (for taxable years
commencing after 1989 this adjustment item is replaced with a new preference
item relating to "adjusted current earnings" as specially computed). In
addition, for purposes of the new alternative minimum tax, the amount of
alternative minimum taxable income that may be offset by net operating losses is
limited to 90% of alternative minimum taxable income.
The Bank has not had its income tax returns examined by the IRS or the
State of Arkansas within the last three years. The Bank has not been audited by
the IRS or the Arkansas State Revenue Department in recent years.
Arkansas Taxation
The State of Arkansas generally imposes income tax on thrift
institutions computed at a rate of 6.5% of net earnings. For the purpose of the
6.5% income tax, net earnings are defined as the net income of the thrift
institution computed in the manner prescribed for computing the net taxable
income for federal corporate income tax purposes, less (i) interest income from
obligations of the United States, of any county, municipal or public corporation
authority, special district or political subdivision of Arkansas, plus (ii) any
deduction for state income taxes.
The Company is a Delaware business corporation is required to file
annual income tax returns and an annual franchise tax returns in the states of
Arkansas and Delaware. These taxes and fees are not expected to be material.
21
ITEM 2 PROPERTIES
- ------ ----------
The Bank conducts its business through its main office and 13
full-service branch offices located in eight counties in Northeast Arkansas.
Each office is owned by the Bank. The following table sets forth certain
information concerning the main office and each branch office of the Bank at
September 30, 2000. The aggregate net book value of the Bank's premises and
equipment was $4.0 million at September 30, 2000.
Main Office: Brinkley Branch
---------------
203 W. Broadway 811 West Cedar
Pocahontas, Arkansas Brinkley, Arkansas
(Opened 1935) (Opened 1998)
Branch Offices: England Branch
--------------
Walnut Ridge Branch 100 Stuttgart Hwy.
- ------------------- England, Arkansas
120 W. Main Street (Opened 1998)
Walnut Ridge, Arkansas
(Opened 1968)
Jonesboro Branch Carlisle Branch
- ---------------- ---------------
700 S.W. Drive 124 West Main
Jonesboro, Arkansas Carlisle, Arkansas
(Opened 1976) (Opened 1998)
Corning Branch Lake City Branch
- -------------- ----------------
309 Missouri Avenue 100 Colbine
Corning, Arkansas Lake City, Arkansas
(Opened 1983) (Opened 1998)
Highland Branch Hardy Branch
- --------------- ------------
Highway 62 530 Main Street
Hardy, Arkansas Hardy, Arkansas
(Opened 1983) (Opened 1998)
Jonesboro Branch Pocahontas Walmart Branch
- ---------------- -------------------------
2213 Caraway Road Hwy 67 South
Jonesboro, Arkansas Pocahontas, Arkansas
(Opened 1996) (Opened 1998)
Jonesboro Walmart Branch Paragould Walmart Branch
- ------------------------ ------------------------
Highland Drive 2802 W. Kingshighway
Jonesboro, Arkansas Paragould, Arkansas
(Opened 1999) (Opened 1999)
22
ITEM 3 LEGAL PROCEEDINGS
- ------ -----------------
There are various claims and lawsuits in which the Bank is periodically
involved incident to the Bank's business. In the opinion of management, no
material loss is expected from any of such pending claims or lawsuits.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
No matters were submitted during the fourth quarter of fiscal 2000 to a
vote of security holders.
23
PART II
ITEM 5 MARKET FOR REGISTRANT"S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
- ------ --------------------------------------------------------------------
Trading in Common Stock and Related Matters
The Registrant's Common Stock is traded on the NASDAQ National Market System
using the symbol "PFSL."
The following table shows the quarterly range of bid prices for the Company's
common stock during fiscal 2000 and 1999. This information has been obtained
from monthly statistical stock summaries provided by the Nasdaq Stock Market. As
of December 15, 2000, there were 4,454,357 shares of common stock issued and
outstanding and 764 stockholders of record.
High Low
Quarter Ended Bid Bid
------------- --- ---
December 31, 1999 $ 7.063 $ 5.625
March 31, 2000 6.313 5.500
June 30, 2000 6.188 5.375
September 30, 2000 7.563 6.250
High Low
Quarter Ended Bid Bid
------------- --- ---
December 31,2000 $ 9.250 $ 7.750
March 31, 1999 8.250 7.130
June 30, 1999 7.563 6.500
September 30, 1999 7.563 6.250
Cash Dividends Declared in Fiscal 2000:
Record Payment Dividend
Date Date Per Share
---- ---- ---------
December 15, 1999 January 3, 2000 $ 0.060
March 15, 2000 April 3, 2000 0.060
June 15, 2000 July 3, 2000 0.065
September 15, 2000 October 3, 2000 0.065
Cash Dividends Declared in Fiscal 1999:
Record Payment Dividend
Date Date Per Share
---- ---- ---------
December 15, 1998 January 3, 1999 $ 0.060
March 15, 1999 April 3, 1999 $ 0.060
June 15, 1999 July 3, 1999 $ 0.060
September 15, 1999 October 3, 1999 $ 0.060
24
ITEM 6 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
- ------ ----------------------------------------------
Set forth below are selected consolidated financial and other data of the
Company. This information is derived in part from and should be read in
conjunction with the Consolidated Financial Statements of the Company and its
subsidiaries and the notes thereto presented elsewhere herein.
Selected Financial Condition Data
At September 30,
--------------------------------------------------------------
2000 1999 1998 1997 1996
(In Thousands)
Total assets $ 401,105 482,131 406,981 383,417 381,562
Cash and cash equivalents 12,941 8,622 3,781 2,805 2,046
Cash surrender value of life insurance 6,158 5,965 5,822 5,639 5,439
Investment securities 128,618 227,403 184,640 200,553 219,690
Loans receivable, net 234,417 217,710 193,728 159,690 136,872
Federal Home Loan Bank Stock 5,988 10,981 10,060 10,053 11,608
Deposits (3) 234,972 211,891 195,537 143,354 116,283
FHLB advances (2) 117,990 213,105 143,670 190,601 227,221
Securities sold under agreements to
repurchase 1,375 2,075 2,107 20,685 10,100
Stockholders' equity (2) 41,378 48,032 60,567 24,246 22,689
Summary of Operations
Years Ended September 30,
--------------------------------------------------------------
2000 1999 1998 1997 1996
(in Thousands)
Interest income $ 29,927 $ 27,960 $ 27,854 $ 26,093 $ 25,417
Interest expense 19,724 17,217 18,401 18,699 18,628
--------- ---------- --------- --------- ---------
Net interest income before
provision for loan losses 10,203 10,743 9,453 7,394 6,789
Provision for loan losses 120 - - 60 411
--------- ---------- --------- --------- ---------
Net interest income after
provision for loan losses 10,083 10,743 9,453 7,334 6,378
Noninterest income 3,102 1,927 920 1,351 1,526
Noninterest expense:
Compensation and benefits 4,383 7,628 3,825 2,954 2,704
Occupancy and equipment 996 1,137 662 566 439
Federal deposit insurance premiums (1) 64 118 104 108 1,198
Other 2,658 2,369 1,600 1,337 1,210
--------- ---------- --------- --------- ---------
Total noninterest expense 8,101 11,252 6,191 4,965 5,551
--------- ---------- --------- --------- ---------
Income before income taxes 5,084 1,418 4,182 3,720 2,353
Income tax provision 1,632 466 1,294 1,344 386
--------- ---------- --------- --------- ---------
Net income $ 3,452 $ 95 $ 2,888 $ 2,376 1,967
--------- ---------- --------- --------- ---------
(1) Includes nonrecurring SAIF Premium Assessment of approximately $937,000 in
the fiscal year ended September 30, 1996.
(2) Includes effect of second step offering during the year ended September 30,
1998.
See equity section of Management's Discussion and Analysis of Financial
Condition and Results of Operations.
(3) Increase during the year ended September 30, 1998, was due mainly to
acquisition of branches. See Management's Discussion and Analysis of
Financial Condition and Results of Operations.
25
Key Financial Ratios and Other Data
Certain ratios and other data: (1)
At or for the Year Ended September 30,
2000 1999 1998 1997 1996
Performance Ratios:
Return on average equity 7.79 % 1.80 % 6.16 % 10.07 % 8.98 %
Return on average assets 0.80 0.23 0.67 0.63 0.54
Interest rate spread (2) 2.28 2.37 1.92 1.83 1.65
Net interest margin (2) 2.54 2.72 2.45 2.04 1.89
Noninterest expense to average assets 1.92 2.66 1.55 1.32 1.52
Net interest income after provision
for loan losses to noninterest
expense 124.00 95.48 152.69 147.68 114.89
Efficiency (5) 61.77 88.80 59.69 57.17 70.23
Asset Quality Ratios:
Average interest-earning assets to
average interest-bearing liabilities 105.22 108.11 110.93 104.09 104.61
Nonperforming loans to net loans
(3) (4) 0.86 0.63 1.19 0.28 0.74
Nonperforming assets to total
assets (3) (4) 0.66 0.34 0.57 0.12 0.30
Allowance for loan losses to
nonperforming loans (3) (4) 83.78 119.23 73.34 373.45 169.50
Allowance for loan losses to
nonperforming loan assets (3) (4) 63.45 100.24 72.84 359.79 152.91
Allowance for loan losses to total 0.71 0.73 0.86 1.03 1.21
loans (3)
Capital, Equity and Dividend Ratios:
Tangible capital (3) 8.92 9.35 10.24 6.32 5.97
Core capital (3) 8.92 9.35 10.24 6.32 5.97
Risk-based capital (3) 17.66 20.23 22.62 16.22 16.75
Average equity to average assets
ratio 10.31 12.45 10.87 6.26 5.98
Dividend payout ratio 38.46 151.55 43.20 60.74 63.46
Per Share Data:
Dividends per share 0.25 0.24 0.23 0.22 0.19
Book value per share (6) 9.29 8.70 9.46 3.82 3.62
Basic earnings per share (7) 0.67 0.16 0.45 0.38 0.32
Diluted earnings per share (8) 0.67 0.16 0.44 0.37 0.31
Number of full service offices 14 14 11 6 5
(1) With the exception of period end ratios, ratios are based on average
monthly balances.
(2) Interest rate spread represents the difference between the weighted average
yield on average interest earning assets and the weighted average cost of
average interest bearing liabilities, and net interest margin represents
net interest income as a percent of average interest earning assets.
(3) End of period ratio.
(4) Nonperforming assets consist of nonperforming loans and real estate owned.
Nonperforming loans consist of non-accrual loans while REO consists of real
estate acquired in settlement of loans.
(5) The efficiency ratio is the ratio of noninterest expense to the sum of net
interest income and noninterest income.
(6) This calculation is based on 4,454,357, 5,518,614, 6,399,623, 6,341,553,
and 6,267,905 shares outstanding at September 30, 2000, 1999, 1998, 1997,
and 1996, respectively.
(7) This calculation is based on weighted average shares outstanding of
5,166,038, 5,802,860, 6,388,906, 6,327,798, and 6,240,231 for the fiscal
years ended September 30, 2000, 1999, 1998, 1997, and 1996 , respectively.
(8) This calculation is based on weighted average shares outstanding of
5,172,751, 5,837,619, 6,535,068, 6,486,058, 6,382,328, and 6,367,886 for
the fiscal years ended September 30, 2000, 1999, 1998,
26
ITEM 7 MANAGEMENT"S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Forward- Looking Statements
When used in this Annual Report, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area, and competition that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions which may be made to any forward-
looking statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.
General
The Company's net income is primarily affected by its net interest income, which
is the difference between interest income earned on its loan, mortgage-backed
securities, and investment portfolios, and its cost of funds consisting of
interest paid on deposits and borrowed funds, including FHLB advances. The
Company's net income also is affected by its provisions for losses on loans and
investments in real estate, as well as the amount of noninterest income
(including fees and service charges and gains or losses on sales of loans), and
noninterest expense, including salaries and employee benefits, premises and
equipment expense, data processing expense, federal deposit insurance premiums
and income taxes. Net income of the Company also is affected significantly by
general economic and competitive conditions, particularly changes in market
interest rates, government policies, and actions of regulatory authorities.
Market Risk Analysis
General. It is the objective of the Company to minimize, to the degree prudently
possible, its exposure to interest rate risk, while maintaining an acceptable
interest rate spread. Interest rate spread is the difference between the
Company's yield on its interest-earning assets and its cost of interest-bearing
liabilities. Interest rate risk is generally understood to be the sensitivity of
the Company's earnings, net asset values, and stockholders' equity to changes in
market interest rates.
Changes in interest rates affect the Company's earnings. The effect on earnings
of changes in interest rates generally depends on how quickly the Company's
yield on interest-earnings assets and cost of interest-bearing liabilities react
to the changes in market rates of interest. If the Company's cost of deposit
accounts reacts more quickly to changes in market interest rates than the yield
on the Company's mortgage loans and other interest-earnings assets, then an
increasing interest rate environment is likely to adversely affect the Company's
earnings and a decreasing interest rate environment is likely to favorably
affect the Company's earnings. On the other hand, if the Company's yield on its
mortgage loans and other interest-earnings assets reacts more quickly to changes
in market interest rates than the Company's cost of deposit accounts, then an
increasing rate environment is likely to favorably affect the Company's earnings
and a decreasing interest rate environment is likely to adversely affect the
Company's earnings.
27
Net Portfolio Value. The value of the Company's loan and investment portfolio
will change as interest rates change. Rising interest rates will generally
decrease the Company's net portfolio value ("NPV"), while falling interest rates
will generally increase the value of that portfolio. The following table set
forth, quantitatively, as of September 30, 2000, the OTS estimate of the
projected changes in NPV in the event of a 100, 200, and 300 basis point
instantaneous and permanent increase and decrease in market interest rates:
Change in Change in NPV
Interest Rates as a Percentage of
in Basis Points Net Portfolio Value Estimated Market
----------------------------------
(Rate Shock) Amount $ Change % Change Ratio Value of Assets
----------- ------ --------- -------- ----- ---------------
(Dollars in Thousands)
+300 $15,435 $ (23,984) (60.8)% 4.14% (5.98)
+200 23,681 (15,738) (39.9)% 6.19% (3.92)
+100 31,672 (7,747) (19.7)% 8.08% (1.93)
0 39,419 0 0.0% 9.82% 0.00
-100 45,267 5,848 14.8% 11.08% 1.46
-200 49,163 9,744 24.7% 11.88% 2.43
-300 53,197 13,778 35.0% 12.68% 3.43
Computations of prospective effects of hypothetical interest rate changes are
calculated by the OTS from data provided by the Company and are based on
numerous assumptions, including relative levels of market interest rates, loan
repayments and deposit runoffs, and should not be relied upon as indicative of
actual results. Further, the computations do not contemplate any actions the
Company may undertake in response to changes in interest rates.
Management cannot predict future interest rates or their effect on the Company's
NPV in the future. Certain shortcomings are inherent in the method of analysis
presented in the computation of NPV. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in differing degrees to changes in market interest rates. Additionally, certain
assets, such as adjustable rate loans, which represent the Company's primary
loan product, have features that restrict changes in interest rates during the
initial term and over the remaining life of the asset. In addition, the
proportion of adjustable rate loans in the Company's portfolio could decrease in
future periods due to refinancing activity if market rates decrease. Further, in
the event of a change in interest rates, prepayment and early withdrawal levels
could deviate significantly from those assumed in the table. Finally, the
ability of many borrowers to service their adjustable-rate debt may decrease in
the event of an interest rate increase.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Discussion of Changes in Financial Condition
General. The Company's total assets decreased $81.0 million, or 16.8%, from
$482.1 million at September 30, 1999 to $401.1 million at September 30, 2000.
Total assets increased $75.1 million, or 18.5%, from $407.0 million at September
30, 1998 to $482.1 million at September 30, 1999.
Loans receivable, net. The Company's net loans receivable increased $16.7
million, or 7.7%, and $24.0 million, or 12.4%, in fiscal years 2000 and 1999,
respectively from the prior years. The increases in both periods were due to
modest loan demand within the Company's market area and purchases of loans from
outside the Bank's primary market area. During 2000 and 1999, the Bank purchased
$4.3 million and $10.6 million of loans. Management expects that it will be
necessary to supplement local demand with purchases of loans from outside the
Bank's primary market area. Demand for single family residential loans has been
particularly weak over the past 12 months.
Investment securities. The investment securities portfolio decreased $98.8
million or 43.4% from $227.4 at September 30, 1999, to $128.6 million at
September 30, 2000. In accordance with the Company's present strategy, the
principal paydowns and maturities of investments were used to fund loan growth.
The investment securities portfolio increased $44.2 million, or 24.1% to $227.4
million at September 30, 1999, compared to $183.2 million at September 30, 1998.
Cash surrender value of life insurance. During the year ended September 30,
1996, the Company purchased life insurance on the lives of executive officers
and members of the board of directors. Such life insurance had cash surrender
value of $6.2 million and $6.0 million at September 30, 2000 and 1999,
respectively. The increase in fiscal 2000 was due to earnings on the cash
surrender value, net of premiums.
Deposits. Historically, deposits have provided the Company with a stable source
of relatively low cost funding. The market for deposits is competitive, which
has caused the Company to utilize primarily certificate accounts that are more
responsive to market interest rates rather than passbook accounts. The Company
offers a traditional line of deposit products that currently includes checking,
interest-bearing checking, savings, certificates of deposit, commercial checking
and money market accounts. The $23.1 million, or 10.9%, increase in deposits
during the year ended September 30, 2000, was primarily due to core deposit
growth in the bank's market areas.
FHLB advances and reverse repurchase agreements. The Company also relies upon
FHLB advances and reverse repurchase agreements as a source to fund assets.
Approximately 29.4% and 44.2% of the Company's assets were funded with FHLB
advances and reverse repurchase agreements as of September 30, 2000 and 1999,
respectively. At September 30, 2000, FHLB advances and reverse repurchase
agreements totaled $119.4 million, a decrease of $95.8 million, or 44.5%, from
1999. FHLB advances and reverse repurchase agreements totaled $215.2 million at
September 30, 1999, an increase of $69.4 million, or 47.6% from 1998,
reflecting, in part, the increased deposits resulting from the Company's
acquisition of branches during 1999 and the proceeds from Company's second step
stock offering.
Stockholders' Equity. Stockholders' equity decreased $6.6 million, or 13.8%,
from $48.0 million to $41.4 million at September 30, 2000. This was primarily
due to stock repurchases of $7.8 million, and dividends paid of $1.3 million,
which more than offset net income of $3.5 million. Stockholders' equity
decreased by $12.0 million or 19.8%, to $48.0 million at September 30, 1999.
This was primarily due to stock repurchases of $11.9 million, and dividends paid
of $1.4 million which more than offsets net income of $0.9 million.
Treasury Stock. Treasury stock increased $7.8 million, or 65.5%, to $19.7
million at September 30, 2000 from $11.9 million at September 30, 1999. This
increase was the result of the repurchase of 1.1 million shares of the Company's
outstanding stock. Management anticipates that The Company will continue to
repurchase stock off of the open market from time to time as market conditions
permit.
29
Discussion of Results of Operations
Overview. Net income was $3.5 million for fiscal 2000, compared to $0.9 million
and $2.9 million for fiscal 1999 and 1998, respectively. The Company's average
interest earning assets have increased over the three year period ended
September 30, 2000, which has resulted in higher levels of interest income. The
Company's net interest rate spread decreased to 2.28% for the year ended
September 30, 2000 from 2.37% for the year ended September 30, 1999, and 1.92%
for the year ended September 30, 1998. The decrease in net interest rate spread
during 2000 was primarily due to an increased cost of funds. The weighted
average cost of funds increased 45 basis points for the year ended September 30,
2000 to 5.18% from 4.73% for the year ended September 30, 1999. The Bank's
weighted average cost of funds is directly related to market conditions and
competition for funds. The increase in the net interest rate spread for fiscal
1999 was a result of an increase in higher-yielding average loans outstanding, a
decrease in relatively lower-yielding average investments outstanding, a
decrease in the average cost of borrowed funds and a decrease in borrowed funds.
The Company's strategy has been to utilize principal repayments from investment
securities to fund loan growth within the Company's local market.
Net Interest Income. The Company's results of operations depend primarily on its
net interest income, which is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
The Company's net interest rate spread is impacted by changes in general market
interest rates, including changes in the relation between short- and long-term
interest rates (the "yield curve"), and the Company's interest rate sensitivity
position. While management seeks to manage its business to limit the exposure of
net interest income to changes in interest rates, different aspects of its
business nevertheless remain subject to risk from interest rate changes. Net
interest income was $10.2 million for fiscal 2000 compared to $10.7 million and
$9.5 million, for fiscal 1999 and 1998, respectively. The tables below analyze
net interest income by component and in terms of changes in the volume of
interest-earning assets and interest-bearing liabilities and the changes in the
related yields and rates.
The Company's interest-earning assets are primarily comprised of single family
mortgage loans and investment securities, which are primarily mortgage-backed
securities. Interest-bearing liabilities primarily include deposits and FHLB
advances. The increases in average interest-earning assets during fiscal 2000,
1999, and 1998 can be attributed to increases in the loan portfolio, funded
primarily with deposits and FHLB advances and increases in capital. Fiscal 1998
also benefited from the proceeds of the sale of stock which provided
approximately $34 million to purchase investment securities or repay borrowings.
See "Discussion of Changes in Financial Condition" for a discussion of the
Company's asset portfolio and "Capital Resources and Liquidity" for discussion
of borrowings.
The majority of the Company's interest-earning assets are comprised of
adjustable-rate assets. The Company's adjustable-rate loans and investment
securities are subject to periodic interest rate caps. Periodic caps limit the
amount by which the interest rate on a particular mortgage loan may increase at
its next interest rate reset date. In a rising rate environment, the interest
rate spread could be negatively impacted when the repricing of interest-earning
assets is delayed or prohibited, compared to market interest rate movements, as
a result of periodic interest rate caps.
30
Average Balance Sheets (Dollars in thousands)
Years Ended September 30,
2000 1999 1998
----------------------------- ------------------------------- -----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
----------------------------- ------------------------------- -----------------------------
Interest-earning assets: (1)
Loan receivable, net (6) $224,214 $ 17,671 7.88% $206,001 $ 16,141 7.84% $176,295 $ 14,240 8.08%
Investment securities 176,783 12,256 6.93 187,796 11,818 6.29 209,799 13,614 6.49
-------- -------- ------ -------- -------- ------ -------- -------- ------
Total interest-
earning assets 400,997 29,927 7.46 393,797 27,959 7.10 386,094 27,854 7.21
Noninterest-earning cash 3,622 2,911 685
Other noninterest-
earning assets 25,045 25,750 11,863
-------- -------- --------
Total assets $429,664 $422,458 $398,642
======== ======== ========
Interest-bearing liabilities:
Demand deposits $ 68,779 $ 1,705 2.48 $ 61,416 $ 1,568 2.55 $ 45,513 $ 1,056 2.32
Time deposits 158,052 8,645 5.47 138,651 7,328 5.29 121,232 6,797 5.61
Borrowed funds (5) 154,287 9,374 6.08 164,189 8,321 5.07 181,319 10,548 5.82
-------- -------- ------ -------- -------- ------ -------- -------- ------
Total interest-
bearing liabilities 381,118 19,724 5.18 364,256 17,217 4.73 348,064 18,401 5.29
-------- ------ -------- ------ -------- ------
Noninterest-bearing
liabilities (2) 4,262 5,590 7,233
-------- -------- --------
Total liabilities 385,380 369,846 355,297
Stockholders' equity 44,284 52,612 43,345
-------- -------- --------
Total liabilities and
stockholders' equity $429,664 $422,458 $398,642
======== ======== ========
Net interest income $ 10,203 $ 10,742 $ 9,453
======== ======== ========
Net interest rate spread (3) 2.28% 2.37% 1.92%
====== ====== ======
Interest-earning assets and
net interest margin (4) $400,997 2.54% $393,797 2.72% $386,094 2.45%
======== ====== ======== ====== ======== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 105.22% 108.11% 110.93%
====== ====== ======
(1) All interest-earning assets are disclosed net of loans in process,
unamortized yield adjustments, and valuation allowances.
(2) Escrow accounts are noninterest-bearing and are included in noninterest-
bearing liabilities.
(3) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest margin represents the net interest income as a percentage of
average interest-earning assets.
(5) Includes FHLB advances and securities sold under agreements to repurchase.
(6) Does not include interest on nonaccrual loans. Non-performing loans are
included in loans receivable, net.
31
Rate/Volume Analysis (in thousands)
2000 vs 1999 1999 vs 1998
---------------------------------------- ----------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Due to
------------------------------- Total ------------------------------ Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
------ ------ ------ -------- ------ ----- ------ --------
Interest income:
Loans receivable $ 1,427 $ 124 $ 12 $ 1,563 $ 2,399 $ (423) $ 257 $ 2,233
Investment securities (693) 1,183 (78) 412 (1,428) (420) 1,375 (472)
------- ------- ------ -------- ------- ------- ------- --------
Total interest-
earning assets $ 734 $ 1,307 $ (66) $ 1,975 $ 971 $ (843) $ 1,632 $ 1,760
======= ======= ====== ======== ======= ======= ======= ========
Interest expense:
Deposits $ 1,191 $ 540 $ 69 $ 1,800 $ 1,569 $ (434) $ 777 $ 1,912
Borrowed funds (502) 1,314 (77) 734 (997) (1,360) 145 (2,212)
------- ------- ------ -------- ------- ------- ------- --------
Total interest-
bearing liabilities $ 689 $ 1,854 $ (8) $ 2,534 $ 572 $ 1,794 $ 922 $ (300)
======= ======= ====== ======== ======= ======= ======= ========
Net change in net
interest income $ 45 $ 547 $ (57) $ (559) $ 399 $ 951 $ 710 $ 2,060
======= ======= ====== ======== ======= ======= ======= ========
1998 vs 1997
----------------------------------------
Increase/(Decrease)
Due to
------------------------------ Total
Rate/ Increase
Volume Rate Volume (Decrease)
------ ---- ------ ----------
Interest income:
Loans receivable $ 2,059 $ (442) $ 616 $ 2,233
Investment securities (357) (473) 358 (472)
------- ------- ------- -------
Total interest-
earning assets $ 1,702 $ (915) $ 974 $ 1,761
======= ======= ======= =======
Interest expense:
Deposits $ 1,663 $ (840) $ 1,091 $ 1,914
Borrowed funds (2,362) 2,295 (2,145) (2,212)
------- ------- ------- -------
Total interest-
bearing liabilities $ (699) $ 1,455 $(1,054) $ (298)
======= ======= ======= =======
Net change in net
interest income $ 2,401 $(2,370) $(2,028) $ 2,059
======== ======= ======= =======
32
During fiscal 2000 mortgage loan demand weakened resulting in management's need
to seek loan production outside its current market area. During fiscal 2000, the
Bank purchased $4.3 million in loans from outside its market area. Management
anticipates that loan demand will remain weak for the foreseeable future.
During fiscal 1999, loan demand was relatively strong, resulting in an increase
in mortgage loans outstanding, an increase in the net interest rate spread and
an increase of $1.3 million, or 12.6%, in net interest income. The average yield
on interest earning assets increased to 7.46% in fiscal 2000 compared to 7.10%
and 7.21% in fiscal 1999 and fiscal 1998, respectively, while the average cost
of interest bearing liabilities increased to 5.18% from 4.73% and 5.29% in
fiscal 1999 and fiscal 1998, respectively. The increase in the average yield on
interest earning assets was largely due to an increase in average loans
receivable, net and a decrease in average investments receivable. The increase
in average cost of interest bearing liabilities was primarily due to an increase
in market rates.
Provision for Loan Losses. The Bank provided for loan losses of $120,000, $0,
and $0, respectively, in the fiscal years ended September 30, 2000, 1999, and
1998. Management considered several factors in determining the necessary level
of its allowance for loan losses and as a result of the process, the necessary
provision for loan losses including but not limited to historical loan losses
and current delinquency rates.
Noninterest Income. Non-interest income totaled $3.1 million for the fiscal year
ended September 30, 2000, compared to $1.9 million for the fiscal year ended
September 30, 1999, and $0.9 million for the fiscal year ended September 30,
1998. This increase in 2000 and 1999 was primarily due to an increase in fee
income due to an increase in demand deposit accounts and the change in gain or
loss on trading securities.
Noninterest Expense. Non-interest expense consisting primarily of salaries and
employee benefits, premises and equipment, data processing and federal deposit
insurance premiums totaled $8.1 million for the fiscal year ended September 30,
2000, compared to $11.3 million for the fiscal year ended September 30, 1999, a
decrease of 28.3%. The decrease was primarily attributable to the payment of a
severance agreement to a former executive officer in fiscal 1999.
Income Taxes. Income tax expense for the year ended September 30, 2000, was $1.6
million compared to $0.5 million for the year ended September 30, 1999. The
increase was primarily due to an increase in income before tax. Income tax
expense for the year ended September 30, 1999, was $0.5 million compared to $1.3
million for the year ended September 30, 1998. The decrease was primarily due to
a decrease in income before tax, a decrease in tax exempt income and a change in
an estimate in the year ended September 30, 1998.
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 is currently 4%. The Bank adjusts
liquidity as appropriate to meet its asset and liability management objectives.
At September 30, 2000, the Bank was in compliance with such liquidity
requirements.
The Bank's primary sources of funds are deposits, amortization and prepayment of
loans and mortgage-backed securities, maturities of investment securities, FHLB
advances, and funds provided from operations. While scheduled principal
repayments on loans, and mortgage-backed securities are a relatively predictable
source of funds, deposit flows, loan prepayments and mortgage-backed securities
are greatly influenced by general interest rates, economic conditions, and
competition. The Bank manages the pricing of its deposits to maintain a desired
deposit balance. For additional information about cash flows from the Bank's
operating, financing, and investing activities, see Consolidated Statements of
Cash Flows included in the Consolidated Financial Statements.
33
At September 30, 2000, the Bank exceeded all of its regulatory capital
requirements.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Bank and notes thereto, presented
elsewhere herein, have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time due to inflation. The impact
of inflation is reflected in the increased cost of the Bank's operations. Unlike
most industrial companies, nearly all the assets and liabilities of the Bank are
monetary. As a result, interest rates have a greater impact on the Bank's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
FDIC Insurance Premiums and Assessment
In September 1996, Congress enacted legislation to recapitalize the SAIF by a
one-time assessment on all SAIF-insured deposits held as of March 31, 1995. The
assessment was 65.7 basis points per $100 in deposits, payable on November 30,
1996. For the Bank, the assessment amounted to $937,000 (or $618,000 after
consideration of tax benefits), based on the Bank's SAIF-insured deposits of
$142.6 million. In addition, beginning January 1, 1997, pursuant to the
legislation, interest payments on FICO bonds issued in the late 1980's by the
Financing Corporation to recapitalize the now defunct Federal Savings and Loan
Insurance Corporation were paid jointly by BIF-insured institutions and
SAIF-insured institutions. The FICO assessment will be 1.29 basis points per
$100 in BIF deposits and 6.44 basis points per $100 in SAIF deposits. Beginning
in January 1, 2000, the FICO interest payments will be paid pro-rata by banks
and thrifts based on deposits (approximately 2.4 basis points per $100 in
deposits). The BIF and SAIF was merged on January 1, 1999, provided the saving
association charter is eliminated by that date. In that event, pro-rata FICO
sharing will begin on January 1, 1999.
Impact of New Accounting Standards
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income
("SFAS 130"). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company will be required
to classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the statement of financial condition. Also in June 1997, the FASB
issued Statement No. 131, Disclosures about Segments of an Enterprise and
Related Information, establishing standards for the way public enterprises
report information about operating segments in interim financial reports issued
to shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The adoption of
SFAS 130 and 131 did not have a material effect on the Company's consolidated
financial statements.
In February 1998, the FASB issued Statement No. 132, Employer's Disclosures
about Pensions and Other Postretirement Benefits, an amendment of FASB
Statements No. 87, 88 and 106 ("SFAS 132"). The statement revises employers'
disclosures about pensions and other postretirement benefits. It does not change
the measurement or recognition of those plans. It standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful as
they were when FASB Statements No. 87, No. 88, and No. 106 were issued. The
Statement suggests combined formats for presentation of pension and other
postretirement benefit disclosures. The adoption of SFAS 132 did not have a
material effect on the Company's consolidated financial statements.
34
The Company adopted Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133") on
July 1, 1998. As permitted by SFAS No. 133, on July 1, 1998, the Company
transferred securities previously classified as held-to-maturity with a carrying
value of approximately $177,800,000 and a fair value of approximately
$182,400,000 into the available-for-sale category, where their carrying value
became their fair value. This transfer resulted in a approximately $2,900,000
unrealized gain, net of tax, at July 1, 1998. The other provisions of SFAS No.
133 had no material effect on the Company.
35
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Pocahontas Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Pocahontas Bancorp, Inc. (the "Company") and subsidiaries as of September 30,
2000 and 1999, and the related consolidated statements of income and
comprehensive income, stockholders' equity, and cash flows for each of the three
years in the period ended September 30, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company and
subsidiaries as of September 30, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2000, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 1 to the consolidated financial statements, on July 1,
1998, the Company adopted Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities.
/s/ Deloitte & Touche LLP
Little Rock, Arkansas
November 8, 2000
36
ITEM 8 FINANCIAL STATEMENTS
- ------ --------------------
POCAHONTAS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2000 AND 1999
- --------------------------------------------------------------------------------
2000 1999
ASSETS
Cash and due from banks:
Interest bearing $ 11,177,705 $ 5,273,379
Noninterest bearing 1,763,742 3,348,671
------------ ------------
12,941,447 8,622,050
Cash surrender value of life insurance 6,158,076 5,964,588
Securities held-to-maturity, at amortized cost
(fair value of $9,105,099 and $9,020,480 in 2000 and
1999, respectively) 9,465,856 9,482,122
Securities available-for-sale, at fair value (amortized cost
of $119,683,250 and $215,874,086 in 2000 and 1999, respectively) 118,024,962 216,492,192
Securities-trading, at fair value (amortized cost of $1,536,982
and $2,060,455 in 2000 and 1999, respectively) 1,126,712 1,429,196
Loans receivable, net 234,416,895 217,709,933
Accrued interest receivable 3,251,939 3,165,427
Premises and equipment, net 3,779,850 4,018,157
Federal Home Loan Bank stock 5,988,200 10,981,300
Core deposit premium 2,154,131 2,440,187
Other assets 3,796,455 1,825,710
------------ ------------
TOTAL $401,104,523 $482,130,862
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $234,971,507 $211,890,791
Federal Home Loan Bank advances 117,990,000 213,105,000
Securities sold under agreements to repurchase 1,375,000 2,075,000
Deferred compensation 3,238,092 3,357,890
Accrued expenses and other liabilities 2,151,594 3,669,743
------------ ------------
Total liabilities 359,726,193 434,098,424
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value, 8,000,000 shares authorized;
6,955,365 and 6,946,822 shares issued and 4,454,357 and
5,518,614 shares outstanding in 2000 and 1999, respectively 69,553 69,468
Additional paid-in capital 51,307,395 51,439,643
Unearned ESOP shares (2,032,221) (2,443,525)
Unearned RRP shares (277,660) (524,476)
Accumulated other comprehensive income (loss) (1,094,470) 407,950
Retained earnings 13,089,624 10,965,600
------------ ------------
61,062,221 59,914,660
Less treasury stock at cost, 2,501,008 and 1,428,208 shares (19,683,891) (11,882,222)
------------ ------------
at 2000 and 1999, respectively
Total stockholders' equity 41,378,330 48,032,438
------------ ------------
TOTAL $401,104,523 $482,130,862
============ ============
See notes to consolidated financial statements.
37
POCAHONTAS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998.
- --------------------------------------------------------------------------------
2000 1999 1998
INTEREST INCOME:
Loans receivable $17,671,439 $16,141,250 $14,239,771
Securities:
Taxable 11,798,274 11,362,574 13,298,678
Nontaxable 457,757 455,706 315,008
----------- ----------- -----------
Total interest income
29,927,470 27,959,530 27,853,457
INTEREST EXPENSE:
Deposits 10,350,181 8,895,824 7,852,334
Borrowed funds 9,373,916 8,321,072 10,548,315
------------ ------------ ------------
Total interest expense 19,724,097 17,216,896 18,400,649
------------ ------------ ------------
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSSES 10,203,373 10,742,634 9,452,808
PROVISION FOR LOAN LOSSES 120,000 - -
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 10,083,373 10,742,634 9,452,808
OTHER INCOME:
Dividends on FHLB stock 657,457 590,825 627,676
Fees and service charges 1,617,073 833,277 484,419
Trading gain (loss) 130,031 (51,564) (427,120)
Gain on sale of investment securities 447,563 161,411 6,569
Other 249,817 393,492 228,343
------------ ------------ ------------
Total other income 3,101,941 1,927,441 919,887
OTHER EXPENSES:
Compensation and benefits 4,383,217 7,628,380 3,824,786
Occupancy and equipment 996,156 1,136,583 662,486
Deposit insurance 64,302 118,395 104,020
Professional fees 382,171 297,561 231,714
Data processing 406,865 415,597 294,837
Advertising 483,289 472,338 220,862
OTS assessment 92,669 87,943 93,629
Other 1,292,164 1,094,863 758,791
----------- ----------- -----------
Total other expenses 8,100,833 11,251,660 6,191,125
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 5,084,481 1,418,415 4,181,570
INCOME TAX PROVISION 1,632,852 466,178 1,294,239
----------- ----------- -----------
NET INCOME 3,451,629 952,237 2,887,331
(Continued)
38
POCAHONTAS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998
- --------------------------------------------------------------------------------
2000 1999 1998
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX
Unrealized holding gain (loss) on securities
arising during period $(1,207,028) $(1,291,164) $ 1,809,981
Reclassification adjustment for (gains) losses
included in net income (295,392) (106,531) (4,336)
----------- ----------- -----------
Other comprehensive income (loss) (1,502,420) (1,397,695) 1,805,645
----------- ------------ -----------
COMPREHENSIVE INCOME (LOSS) $ 1,949,209 $ (445,458) $ 4,692,976
=========== =========== ===========
EARNINGS PER SHARE:
Basic earnings per share $ 0.67 $ 0.16 $ 0.45
=========== =========== ===========
Diluted earnings per share $ 0.67 $ 0.16 $ 0.44
=========== =========== ===========
Dividends per share $ 0.25 $ 0.24 $ 0.23
=========== =========== ===========
(Concluded)
See notes to consolidated financial statements.
39
POCAHONTAS BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998
- --------------------------------------------------------------------------------
Common Stock Additional Unearned Unearned
---------------------------
Paid-In ESOP RRP
Shares Amount Capital Shares Shares
BALANCE, SEPTEMBER 30, 1997 6,669,185 $ 66,692 $ 15,010,041 $ (103,644)
Repayment of ESOP loan and related
increase in share value 256,356 103,644
Options exercised 16,098 161 39,839
Proceeds from stock offering 34,788,225 (2,856,600)
Cumulative effect of adoption
of SFAS 133
Net change in unrealized gain (loss) on
available-for-sale securities, net of tax
Net income
Dividends
----------- ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1998 6,685,283 66,853 50,094,461 (2,856,600)
----------- ------------ ------------ ------------ ------------
Repayment of ESOP loan and related
increase in share value 413,075
Options exercised 154,416 1,544 382,146
RRP shares granted 142,830 1,428 1,284,042 $ (1,285,470)
RRP shares forfeited (35,707) (357) (321,006) 321,363
RRP shares earned 439,631
Net change in unrealized gain (loss) on
available-for-sale securities, net of tax
Treasury stock purchased
Net income
Dividends
----------- ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1999 6,946,822 69,468 51,439,643 (2,443,525) (524,476)
Repayment of ESOP loan and related
decrease in share value (153,416) 411,304
Options exercised 8,543 85 21,168
RRP shares earned 246,816
Net change in unrealized gain (loss) on
available-for-sale securities, net of tax
Treasury stock purchased
Net income
Dividends
----------- ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 2000 6,955,365 $ 69,553 $ 51,307,395 $ (2,032,221) $ (277,660)
=========== ============ ============ ============ ============
Accumulated
Other Treasury Stock
----------------------------
Comprehensive Retained Stockholders'
Income (Loss) Earnings Shares Amount Equity
BALANCE, SEPTEMBER 30, 1997 $ 9,273,180 $ 24,246,269
Repayment of ESOP loan and related
increase in share value 360,000
Options exercised 40,000
Proceeds from stock offering 449,424 32,381,049
Cumulative effect of adoption
of SFAS 133 $ 2,944,822 2,944,822
Net change in unrealized gain (loss) on
available-for-sale securities, net of tax (1,139,177) (1,139,177)
Net income 2,887,331 2,887,331
Dividends (1,153,496) (1,153,496)
------------ ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1998 1,805,645 11,456,439 60,566,798
------------ ------------ ------------ ------------ ------------
Repayment of ESOP loan and related
increase in share value 413,075
Options exercised 383,690
RRP shares granted
RRP shares forfeited
RRP shares earned 439,631
Net change in unrealized gain (loss) on
available-for-sale securities, net of tax (1,397,695) (1,397,695)
Treasury stock purchased 1,428,208 $(11,882,222) (11,882,222)
Net income 952,237 952,237
Dividends (1,443,076) (1,443,076)
------------ ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1999 407,950 10,965,600 1,428,208 (11,882,222) 48,032,438
Repayment of ESOP loan and related
decrease in share value 257,888
Options exercised 21,253
RRP shares earned 246,816
Net change in unrealized gain (loss) on
available-for-sale securities, net of tax (1,502,420) (1,502,420)
Treasury stock purchased 1,072,800 (7,801,669) (7,801,669)
Net income 3,451,629 3,451,629
Dividends (1,327,605) (1,327,605)
------------ ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 2000 $ (1,094,470) $ 13,089,624 2,501,008 $(19,683,891) $ 41,378,330
============ ============ ============ ============ ============
See notes to consolidated financial statements.
40
POCAHONTAS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998
- -------------------------------------------------------------------------------
2000 1999 1998
OPERATING ACTIVITIES:
Net income $ 3,451,629 $ 952,237 $ 2,887,331
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation of premises and equipment 478,937 472,633 298,725
Deferred income tax benefit (107,635) (1,281,899) (59,617)
Amortization of deferred loan fees (56,746) (115,677) (103,001)
Amortization of premiums and discounts, net (266,428) (280,855) (269,489)
Amortization of core deposit premium 286,056 136,721 126,228
Adjustment of ESOP shares and release of
shares under recognition and retention plan 504,704 852,706 256,356
Net gains on sales of assets (469,895) (30,821) (60,597)
Increase in cash surrender value of life
insurance policies (193,488) (142,788) (182,639)
Changes in operating assets and liabilities:
Trading securities 302,484 159,339 (1,588,535)
Accrued interest receivable (86,512) (758,154) (177,742)
Other assets (2,485,432) 95,951 132,014
Deferred compensation (119,798) 2,640,164 (229,460)
Accrued expenses and other liabilities (1,518,149) (712,478) (53,819)
------------ ------------ ------------
Net cash provided (used) by operating activities (280,273) 1,987,079 975,755
INVESTING ACTIVITIES:
Purchases of investment securities (8,000,000) (91,852,663) (4,571,962)
Proceeds from sale of securities available-for-sale 97,041,274 13,318,453 -
Proceeds from maturities and principal repayments
of investment securities 13,646,889 33,572,759 25,157,038
Increase in loans, net (16,005,559) (23,835,771) (34,002,694)
Core deposit premium paid - - (2,703,136)
Purchases of premises and equipment (240,629) (1,163,714) (1,820,969)
------------ ------------ ------------
Net cash provided (used) by in investing activities 86,441,975 (69,960,936) (17,941,723)
(Continued)
41
POCAHONTAS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998
- -------------------------------------------------------------------------------
2000 1999 1998
FINANCING ACTIVITIES:
Net increase (decrease) in deposits other
than in acquisitions $ 23,080,716 $ 16,354,083 $ (4,351,344)
Deposits assumed in acquisitions - - 56,533,956
Federal Home Loan Bank advance 3,006,964,100 1,551,084,601 1,580,034,000
Repayment of Federal Home Loan Bank
advances (3,102,079,100) (1,481,649,601) (1,626,965,038)
Net decrease in repurchase agreements (700,000) (32,645) (18,577,355)
Proceeds from stock offering - - 32,381,049
Exercise of stock options 21,253 383,690 40,000
Purchase of treasury shares (7,801,669) (11,882,222) -
Dividends paid (1,327,605) (1,443,076) (1,153,496)
----------------- ---------------- ---------------
Net cash provided (used) by
financing activities (81,842,305) 72,814,830 17,941,772
NET INCREASE IN CASH AND
DUE FROM BANKS 4,319,397 4,840,973 975,804
CASH AND DUE FROM BANKS,
BEGINNING OF YEAR 8,622,050 3,781,077 2,805,273
----------------- ---------------- --------------
CASH AND DUE FROM BANKS, $ 12,941,447 $ 8,622,050 $ 3,781,077
END OF YEAR ================= =============== ==============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 20,123,108 $ 16,923,600 $ 18,832,896
================= =============== ==============
Income taxes $ 2,274,076 $ 1,175,000 $ 1,201,232
================= =============== ==============
SUPPLEMENTAL DISCLOSURES OF
NONCASH INVESTMENT ACTIVITIES:
Transfers from loans to real estate acquired,
or deemed acquired, through foreclosure $ 947,756 $ 943,789 $ 128,829
================= =============== ==============
Loans originated to finance the sale of real
estate acquired through foreclosure $ 505,147 $ 513,150 $ -
================= =============== ==============
(Concluded)
See notes to consolidated financial statements
42
POCAHONTAS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Principles of Consolidation - The accompanying
consolidated financial statements include the accounts of Pocahontas
Bancorp, Inc. ("Bancorp"), its wholly owned subsidiary, Pocahontas Federal
Savings and Loan Association (the "Bank"), as well as the Bank's
subsidiaries, P.F. Service, Inc. and Sun Realty, Inc. which provide real
estate services (collectively referred to as the "Company"). All
significant intercompany transactions have been eliminated in
consolidation. The Bank operates 14 branches in northern and eastern
Arkansas as a federally chartered savings and loan.
On March 31, 1998, the Bank and Pocahontas Federal Mutual Holding Company
(the "Mutual Holding Company") completed a second step conversion (the
"Reorganization"). As part of the Reorganization, Bancorp was formed as a
first-tier wholly owned subsidiary of the Bank. The Mutual Holding Company
was converted to an interim federal stock savings association and
simultaneously merged with and into the Bank, at which point the Mutual
Holding Company ceased to exist and 862,500 shares or 54% of the
outstanding Bank common stock held by the Mutual Holding Company were
canceled. A second interim savings and loan association ("Interim") formed
by Bancorp solely for the Reorganization was then merged with and into the
Bank. As a result of the merger of Interim with and into the Bank, the Bank
became a wholly owned subsidiary of Bancorp. Pursuant to an exchange ratio
of 4.0245 shares for each share of the Bank stock, which provided the
public shareholders of the Bank a maintenance of their 46% ownership of
Bancorp, the 769,924 outstanding shares held by the public shareholders of
the Bank were exchanged for approximately 3,100,000 shares of Bancorp.
Concurrent with the Reorganization, Bancorp sold 3,570,750 (essentially the
equivalent of shares held by the Mutual Holding Company) additional shares
to members of the Mutual Holding Company, employees of the Bank and the
public at a price of $10.00 per share. Reorganization and stock offering
costs of approximately $919,000 resulted in net proceeds from the offering
of approximately $34,800,000.
Each depositor of the Bank as of the effective date of the Reorganization
will have, in the event of liquidation of the Bank, a right to his pro rata
interest in a liquidation account established for the benefit of such
depositors. The Reorganization was accounted for as a change in corporate
form with the historic basis of accounting for the Bank unchanged.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash Equivalents - For the purpose of presentation in the consolidated
statements of cash flows, cash, and cash equivalents are defined as those
amounts included in the statement of financial condition caption "cash and
due from banks." Principally this includes cash on hand and amounts due
from depository institutions and investments having a maturity at
acquisition of three months or less.
43
Liquidity Requirement - Regulations require the Bank to maintain an amount
equal to 4% of deposits (net of loans on deposits) plus short-term
borrowings in cash and U.S. Government and other approved securities.
Trading Securities - Equity securities held principally for resale in the
near term are classified as trading securities and recorded at their fair
values. Unrealized gains and losses on trading securities are included in
other income.
Securities Held-to-Maturity - Bonds, notes, and debentures for which the
Company has the positive intent and ability to hold to maturity are
reported at cost, adjusted for the amortization of premiums and the
accretion of discounts, which are recognized in income using the
level-yield method over the assets' remaining lives, adjusted for
anticipated prepayments. Should other than a temporary decline in the fair
value of a security occur, the carrying value of such security would be
written down to current market value by a charge to operations. As of
September 30, 2000, no securities were determined to have other than a
temporary decline in fair value below cost.
Securities Available-for-Sale - Available-for-sale securities consist of
bonds, notes and debentures. Unrealized holding gains and losses, net of
tax, on available-for-sale securities are reported as accumulated other
comprehensive income, a separate component of stockholders' equity, until
realized. Gains and losses on the sale of available-for-sale securities are
determined using the specific-identification method. Declines in the fair
value of individual available-for-sale securities below their cost that are
other than temporary would result in a write-down of the individual
security to its fair value. The related write-down would be included in
earnings as a realized loss. As of September 30, 2000, no securities were
determined to have other than a temporary decline in fair value below cost.
Loans Receivable - Loans receivable that management has the intent and
ability to hold for the foreseeable future or until maturity or pay-off are
reported at their outstanding principal adjusted for any charge-offs, the
allowance for loan losses, and any deferred fees or costs on originated
loans and unamortized premiums or discounts on purchased loans.
Discounts and premiums on purchased residential real estate loans are
amortized to income using the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments. Discounts and
premiums on purchased consumer loans are recognized over the expected lives
of the loans using methods that approximate the interest method. Loan
origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet contractual
principal or interest obligations or where interest or principal is 90 days
or more past due. When a loan is placed on nonaccrual status, accrual of
interest ceases and, in general, uncollected past due interest (including
interest applicable to prior reporting periods, if any) is reversed and
charged against current income. Therefore, interest income is not
recognized unless the financial condition or payment record of the borrower
warrant the recognition of interest income. Interest on loans that have
been restructured is generally accrued according to the renegotiated terms.
Allowance for Loan Losses - The allowance for loan losses is a valuation
allowance to provide for incurred but not yet realized losses. The Company
reviews its loans for impairment on a quarterly basis. Impairment is
determined by assessing the probability that the borrower will not be able
to fulfill the contractual terms of the agreement. If a loan is determined
to be impaired, the amount of the impairment is measured based on the
present value of expected future cash flows discounted at the loan's
effective interest rate or by use of the observable market price of the
loan or fair value of collateral if the loan is collateral dependent.
Throughout the year management estimates the level of
44
probable losses to determine whether the allowance for loan losses is
appropriate considering the estimated losses existing in the portfolio.
Based on these estimates, an amount is charged to the provision for loan
losses and credited to the allowance for loan losses in order to adjust the
allowance to a level determined by management to be appropriate relative to
losses. The allowance for loan losses is increased by charges to income
(provisions) and decreased by charge-offs, net of recoveries.
Management's periodic evaluation of the appropriateness of the allowance is
based on the Company'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.
Homogeneous loans are those that are considered to have common
characteristics that provide for evaluation on an aggregate or pool basis.
The Company considers the characteristics of (1) one-to-four family
residential first mortgage loans; (2) automobile loans and; (3) consumer
and home improvement 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 and then applying a loss factor to the remaining pool balance based on
several factors including classification of the loans as to grade, past
loss experience, inherent risks, economic conditions in the primary market
areas and other factors which usually are beyond the control of the
Company. Those segregated specific loans are evaluated using the present
value of future cash flows, usually determined by estimating the fair value
of the loan's collateral reduced by any cost of selling and discounted at
the loan's effective interest rate if the estimated time to receipt of
monies is more than three months.
Non-homogeneous loans are those loans that can be included in a particular
loan type, such as commercial loans and multi-family and commercial first
mortgage loans, but which differ in other characteristics to the extent
that valuation on a pool basis is not valid. After segregating specific,
poorly performing loans and applying the methodology as noted in the
preceding paragraph for such specific loans, the remaining loans are
evaluated based on payment experience, known difficulties in the borrowers
business or geographic area, loss experience, inherent risks and other
factors usually beyond the control of the Company. These loans are then
graded and a factor, based on experience, is applied to estimate the
probable loss.
Estimates of the probability of loan losses involve an exercise of
judgment. While it is possible that in the near term the Company may
sustain losses which are substantial in relation to the allowance for loan
losses, it is the judgment of management that the allowance for loan losses
reflected in the consolidated statements of financial condition is
appropriate considering the estimated probable losses in the portfolio.
Interest Rate Risk - The Company's asset base is exposed to risk including
the risk resulting from changes in interest rates and changes in the timing
of cash flows. The Company monitors the effect of such risks by considering
the mismatch of the maturities of its assets and liabilities in the current
interest rate environment and the sensitivity of assets and liabilities to
changes in interest rates. The Company's management has considered the
effect of significant increases and decreases in interest rates and
believes such changes, if they occurred, would be manageable and would not
affect the ability of the Company to hold its assets as planned. However,
the Company is exposed to significant market risk in the event of
significant and prolonged interest rate changes.
45
Foreclosed Real Estate - Real estate properties acquired through, or in
lieu of, loan foreclosure are initially recorded at fair value at the date
of foreclosure establishing a new cost basis. After foreclosure, valuations
are periodically performed by management and the real estate is carried at
the lower of carrying amount or fair value less cost to sell. Revenue and
expenses from operations and changes in the valuation allowance are
included in loss on foreclosed real estate.
Premises and Equipment - Land is carried at cost. Buildings and furniture,
fixtures, and equipment are carried at cost, less accumulated depreciation.
Depreciation for financial statement purposes is computed using the
straight-line method over the estimated useful lives of the assets ranging
from 3 to 40 years.
Core Deposit Premium - Core deposit premiums paid are being amortized over
ten years which approximates the estimated life of the purchased deposits.
The carrying value of core deposit premiums is periodically evaluated to
estimate the remaining periods of benefit. If these periods of benefits are
determined to be less than the remaining amortizable life, an adjustment to
reflect such shorter life may be made.
Income Taxes - Deferred tax assets and liabilities are recorded for
temporary differences between the carrying value and tax bases of assets
and liabilities. Such amounts are reflected at currently enacted income tax
rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws
or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
Stock Compensation - The Company applies the provisions of Accounting
Principles Board Opinion No. 25 in accounting for its stock option plans.
Impact of New Accounting Standards - The Company adopted Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133") on July 1, 1998. As
permitted by SFAS No. 133, on July 1, 1998, the Company transferred
securities previously classified as held-to-maturity with a carrying value
of approximately $177,800,000 and a fair value of approximately
$182,400,000 into the available-for-sale category, where their carrying
value became their fair value. This transfer resulted in an unrealized
gain, net of tax of approximately $2,900,000 at July 1, 1998. The other
provisions of SFAS No. 133 had no significant effect on the Company at July
1 or September 30, 1998, or for the year ended September 30, 1998.
Reclassifications - Certain 1999 and 1998 amounts have been reclassified to
conform to the 2000 presentation.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of financial instruments have been
determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative
of the amounts the Company could realize in a current market exchange. The
use of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts. The carrying
amounts and estimated
46
fair values of financial instruments at September 30, 2000 and 1999, were
as follows (items which are not financial instruments are not included):
2000 1999
Carrying Estimated Carrying Estimated
Amounts Fair Value Amounts Fair Value
Financial assets and liabilities:
Cash and due from banks $ 12,941,447 $ 12,941,447 $ 8,622,050 $ 8,622,050
Cash surrender value of
life insurance 6,158,076 6,158,076 5,964,588 5,964,588
Securities held-to-maturity 9,465,856 9,105,099 9,482,122 9,020,480
Securities-available-for sale 118,024,962 118,024,962 216,492,192 216,492,192
Securities-trading 1,126,712 1,126,712 1,429,196 1,429,196
Loans receivable, net 234,416,895 234,896,000 217,709,933 216,702,000
Accrued interest receivable 3,251,939 3,251,939 3,165,427 3,165,427
Federal Home Loan Bank stock 5,988,200 5,988,200 10,981,300 10,981,300
Demand and savings deposits 72,766,639 72,766,639 61,403,521 61,403,521
Time deposits 162,204,868 162,144,000 150,487,270 150,024,000
Federal Home Loan Bank advances 117,990,000 117,990,000 213,105,000 212,602,000
Securities sold under
agreements to repurchase 1,375,000 1,375,000 2,075,000 2,075,000
For purposes of the above disclosures of estimated fair value, the
following assumptions were used. The estimated fair value for cash and due
from banks, cash surrender value of life insurance, accrued interest
receivable, and Federal Home Loan Bank ("FHLB") stock is considered to
approximate cost. The estimated fair values for securities are based on
quoted market values for the individual securities or for equivalent
securities. The fair value for loans is estimated by discounting the future
cash flows using the current rates the Company would charge for similar
such loans at the applicable date. The estimated fair value for demand and
savings deposits is based on the amount for which they could be settled on
demand. The estimated fair values for time deposits, FHLB advances and
securities sold under agreement to repurchase are based on estimates of the
rate the Company would pay on such deposits and borrowed funds at the
applicable date, applied for the time period until maturity. The estimated
fair values for other financial instruments and off-balance sheet loan
commitments approximate cost and are not considered significant to this
presentation.
3. INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities at September 30
are as follows:
2000
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Held-to-maturity Cost Gains Losses Value
State and municipal securities $ 9,465,856 $ 40,051 $ (400,808) $ 9,105,099
=========== =========== =========== ===========
47
2000
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Available-for-sale Cost Gains Losses Value
U.S. Government agencies $ 28,000,000 $ - $ (904,802) $ 27,095,198
Mortgage backed securities 87,683,250 493,043 (1,246,529) 86,929,764
Corporate securities 4,000,000 0 0 4,000,000
------------ ------------ ----------- ------------
Total $119,683,250 $ 493,043 $(2,151,331) $118,024,962
============ ============ =========== ============
1999
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Held-to-maturity Cost Gains Losses Value
U.S. Government agencies $ 36,363 $ - $ - $ 36,363
State and municipal securities 9,445,759 32,008 (493,650) 8,984,117
------------ ------------ ----------- ------------
Total $ 9,482,122 $ 32,008 $ (493,650) $ 9,020,480
============ ============ =========== ============
1999
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Available-for-sale Cost Gains Losses Value
U.S. Government agencies $ 26,000,000 $ 34,375 $ (667,500) $ 25,366,875
Mortgage backed securities 189,874,086 2,274,571 (1,023,340) 191,125,317
------------ ------------ ----------- ------------
Total $215,874,086 $ 2,308,946 $(1,690,840) $216,492,192
============ ============ =========== ============
The amortized cost and estimated fair value of debt securities at September 30,
2000, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Held-to-Maturity Available-for-Sale
----------------------------- -------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
Due in one year or less $ 5,003 $ 5,010 $ - $ -
Due from one year to five years 20,000 20,038 - -
Due from five years to ten years 991,274 998,041 13,000,000 12,717,698
Due after ten years 8,449,579 8,082,010 19,000,000 18,377,500
Mortgage backed securities - - 87,683,250 86,929,764
----------- ----------- ------------ ------------
Total $ 9,465,856 $ 9,105,099 $119,683,250 $118,024,962
=========== =========== ============ ============
Securities with a carrying value and a fair value of $10,648,549 and $5,584,953
at September 30, 2000 and 1999, respectively, were pledged to collateralize
public and trust deposits.
48
4. LOANS RECEIVABLE
Loans receivable at September 30 are summarized as follows:
2000 1999
Real estate loans:
Single-family residential $ 175,625,198 $ 173,621,025
Multifamily residential 1,163,052 1,024,020
Agricultural 7,360,257 6,877,745
Commercial 25,729,930 23,296,263
-------------- --------------
Total real estate loans 209,878,437 204,819,053
Other loans:
Savings account loans 1,665,225 1,528,578
Commercial business 12,554,881 10,932,200
Other 13,616,455 8,112,081
-------------- --------------
Total other loans 27,836,561 20,572,859
-------------- --------------
Total loans receivable 237,714,998 225,391,912
Less:
Undisbursed loan proceeds 1,345,162 5,753,098
Unearned fees, net 264,192 285,542
Allowance for loan losses 1,688,749 1,643,339
-------------- --------------
Loans receivable, net $ 234,416,895 $ 217,709,933
============== ==============
The Company originates adjustable rate mortgage loans to hold for
investment. The Company also originates 15 year and 30 year fixed rate
mortgage loans and sells substantially all new originations of such loans
to outside investors. Loans held for sale at September 30, 2000 and 1999,
are considered by management to be immaterial. Such loans generally have
market rates of interest.
The Company is not committed to lend additional funds to debtors whose
loans have been modified.
The Company grants real estate loans, primarily single-family residential
loans, and consumer and agricultural real estate loans, primarily in north
and east Arkansas. Substantially all loans are collateralized by real
estate or consumer assets.
5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at September 30 is summarized as follows:
2000 1999
Securities $ 1,202,317 $ 1,465,470
Loans receivable 2,049,622 1,699,957
----------- -----------
TOTAL $ 3,251,939 $ 3,165,427
=========== ===========
49
6. ALLOWANCE FOR LOAN AND FORECLOSED REAL ESTATE LOSSES
Activity in the allowance for losses on loans and foreclosed real estate
for the years ended September 30, 2000, 1999, 1998, and 1997 is as follows:
Foreclosed
Loans Real Estate
----- ------------
BALANCE, SEPTEMBER 30, 1997 $1,691,007 $ 43,287
Charge-offs, net of recoveries (6,566) (1,195)
---------- ---------
BALANCE, SEPTEMBER 30, 1998 $1,684,441 $ 42,092
Charge-offs, net of recoveries (41,102) (42,092)
---------- ---------
BALANCE, SEPTEMBER 30, 1999 $1,643,339 $ -
---------- ---------
Provision for Loan Losses $ 120,000 $ -
Charge-offs, net of recoveries (74,590) -
---------- ---------
BALANCE, SEPTEMBER 30, 2000 $1,688,749 $ 0
========== =========
Gross charge-offs and recoveries are not material.
7. PREMISES AND EQUIPMENT
Premises and equipment at September 30 are summarized as follows:
2000 1999
Cost:
Land $ 573,490 $ 573,490
Buildings and improvements 3,820,888 3,684,512
Furniture, fixtures, and equipment 1,609,221 1,560,996
---------- ----------
6,003,599 5,818,998
Less accumulated depreciation (2,223,749) (1,800,841)
----------- -----------
TOTAL $ 3,779,850 $ 4,018,157
=========== ===========
8. DEPOSITS
Deposits at September 30 are summarized as follows:
2000 1999
Checking accounts, including noninterest-bearing deposits
of $8,511,517 and $8,200,683 in 2000 and 1999, respectively $ 57,461,316 $ 48,385,973
Passbook savings 15,305,323 13,017,548
Certificates of deposit 162,204,868 150,487,270
------------- ------------
TOTAL $ 234,971,507 $ 211,890,791
============= ============
50
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100,000 was $31,757,753 and $26,779,134 at September 30, 2000
and 1999, respectively.
At September 30, 2000, scheduled maturities of certificates of deposit are
as follows:
Years ending september 30: Total
2001 151,098,243
2002 6,757,416
2003 2,301,623
2004 1,300,696
2005 675,538
over 5 years 71,352
-------------
TOTAL $ 162,204,868
=============
Interest expense on deposits for the years ended September 30, 2000, 1999,
and 1998, is summarized as follows:
2000 1999 1998
Checking $ 1,008,497 $1,206,611 $ 743,244
Passbook savings 397,124 361,103 312,143
Certificates of deposit 8,944,560 7,328,110 6,796,947
----------- ---------- ---------
TOTAL $10,350,181 $8,895,824 $7,852,334
=========== ========== ==========
9. FEDERAL HOME LOAN BANK ADVANCES
The Company is required to purchase stock in the FHLB. Such stock may be
redeemed at par but is not readily marketable. At September 30, 2000 and
1999, the Company had stock of $5,988,200 and $10,981,300 respectively.
Pursuant to collateral agreements with the FHLB, advances are
collateralized by all of the Company's stock in the FHLB and by 75% of
qualifying single-family first mortgage loans with a carrying value at
September 30, 2000 and 1999, of approximately $132,000,000 and $127,000,000
respectively, and investment securities having a carrying value of
$85,239,671 at September 30, 1999. Advances at September 30, 2000 and 1999,
have a maturity dates as follows:
2000 1999
------------------------- ----------------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
September 30
2000 - - - -
2001 - - 5.31% $131,105,000
2002 6.63% $109,990,000 0
2003 6.42% 4,000,000 6.42% 4,000,000
2004 - - - -
2005 - - - -
Greater than 5 years 7.03% 4,000,000 4.72 78,000,000
------------ ------------
TOTAL $117,990,000 $213,105,000
============ ============
Interest expense on FHLB advances was $8,946,927, $7,966,406, and
$9,987,640 for the years ended September 30, 2000, 1999, and 1998,
respectively.
51
10. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase ("Reverse Repurchase
Agreements" or "Reverse Repos") are as follows:
2000 1999
Balance outstanding at September 30 $ 2,075,000 $ 2,107,645
Average balance during the year 1,900,833 2,273,133
Average interest rate during the year 5.62% 5.16%
Maximum month-end balance during the year 2,465,000 3,241,800
Investment securities underlying the
agreements at year-end:
Carrying value 2,528,996 3,420,158
Estimated market value 2,528,996 3,420,158
Interest expense on Reverse Repurchase Agreements was $108,293, $118,962,
and $309,048 for the years ended September 30, 2000, 1999, and 1998,
respectively.
11. DEFERRED COMPENSATION
The Company has funded and unfunded deferred compensation agreements with a
former executive and non-officer members of the Board of Directors. The
plans limit the ability of the executive to compete with the Company and
require that the directors continue to serve for a specified period of
time. The amount of expense related to such plans for the years ended
September 30, 2000, 1999, and 1998, was approximately $277,000, $277,000,
and $179,000, respectively.
On March 2, 1999, the Company, the Bank and an executive entered into an
Employment Separation Agreement and Release (the "Agreement"). The
Agreement provides, among other things, for the payment by the Company to
the executive of $2,750,000, in installments of not less than $150,000
annually, with the entire unpaid amount due upon the executive's death. The
unpaid balance earns interest at the Federal Funds rate, as determined each
month, compounded monthly, until distributed. The unpaid balance, including
accrued interest, was approximately $2,645,814 and $2,702,888 at September
30, 2000 and 1999, respectively. The Agreement provides that the executive
will be entitled to an additional payout equal to $550,000 should there be
a change in control of the Company or the Bank on or before April 30, 2003.
Pursuant to the Agreement, the executive forfeits all shares of restricted
stock awarded to him under the Company's current Recognition and Retention
Plan and foregoes any additional benefits accruals or contributions under
the Company's Restated Supplemental Executive Retirement Agreement.
Pursuant to the Agreement, the executive's employment agreement was
terminated (except for certain specified provisions) and no further payouts
under the Employment Agreement are due to him.
12. RETIREMENT PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN
The Bank has a defined contribution retirement plan. The plan covers all
employees who have accumulated one year with 1,000 hours of service in each
year. A flat percentage rate, selected by discretion of the Board of
Directors is applied to the base salary of each eligible employee. The
retirement plan expense for the years ended September 30, 2000, 1999, and
1998, was $0, $0, and $170,000, respectively.
The Bank established an Employee Stock Ownership Plan ("ESOP") on October
1, 1993. During 1994, the ESOP borrowed $523,250 which is collateralized by
common stock of the Company and a guaranty
52
of the Company. The note payable is guaranteed by the Company and was paid
off during the year ended September 30, 1998. In connection with the
Reorganization on March 31, 1998, the Company established a new ESOP.
During 1998, the ESOP borrowed approximately $2.9 million from the Company
to purchase shares of Company stock. The loan is collateralized by the
shares that were purchased with the proceeds of the loan. As the loan is
repaid, ESOP shares will be allocated to participants of the ESOP and are
available for release to the participants subject to the vesting provisions
of the ESOP. The Company contributed $500,000, $302,425, and $104,650,
respectively to the ESOP in years ended September 30, 2000, 1999 and 1998.
The Company also has a supplemental retirement plan for certain executive
officers. The plan requires that a set amount be deposited into a trust
each year until the executive officers reach 60 years of age. The amount of
expense related to such plans was approximately $220,000, $402,000 and
$402,000 for the years ended September 30, 2000, 1999, and 1998,
respectively.
13. INCOME TAXES
The Company and subsidiaries file consolidated federal income tax returns
on a fiscal year basis. During the year ended September 30, 1997, new
legislation was enacted which provides for the recapture into taxable
income of certain amounts previously deducted as additions to the bad debt
reserves for income tax purposes. The Company began changing its method of
determining bad debt reserves for tax purposes following the year ended
September 30, 1996. The amounts to be recaptured for income tax reporting
purposes are considered by the Company in the determination of the net
deferred tax liability.
Income tax provision (benefit) for the years ended September 30 is
summarized as follows:
2000 1999 1998
Current $1,740,487 $1,748,077 $1,353,856
Deferred (107,635) (1,281,899) (59,617)
---------- ----------- ---------
TOTAL $1,632,852 $ 466,178 $1,294,239
========== ============ ==========
The net deferred tax amount, which is included in other assets at September
30, 2000, and other liabilities at September 30, 1999, consisted of the
following:
2000 1999
Deferred tax assets:
Deferred compensation $ 1,327,210 $ 1,358,084
Allowance for loan losses 447,220 305,219
Unrealized loss on securities - trading 162,753 170,411
Unrealized loss on securities - AFS Securities 537,238 0
Core deposit premium amortization 96,703 50,866
Other 122,590 196,871
------------ -----------
Total deferred tax assets 2,693,714 2,081,451
Deferred tax liabilities:
Unrealized gain on available-for-sale securities 0 (236,735)
FHLB stock dividends (628,423) (665,158)
Other (12,686) (8,560)
------------- ----------
Total deferred tax liabilities (641,109) (910,453)
------------- ----------
Net deferred tax asset (liability) $ 2,052,605 $ 1,170,998
============= ==========
53
The income tax provision differed from the amounts computed by applying the
federal income tax rates as a result of the following:
2000 1999 1998 1997
-------------------------- --------------------- ---------------------- ----------------------
Expected income tax expense 34.0% $1,728,724 34.0% $ 482,261 34.0% $1,421,734 34.0% $1,264,802
Exempt income (3.0) (155,637) (10.2) (144,679) (2.6) (107,103) (1.5) (54,618)
Cash surrender value of life
insurance - - (6.4) (90,565) (1.5) (62,098) (2.0) (73,096)
State tax, net of federal benefit 7.10 363,357 11.2 158,669 4.3 179,389 4.0 147,312
ESOP contribution - - (1.8) (25,343) 2.1 87,161 - -
Change in estimate (0.20) (10,208) - - (4.3) (179,892) (0.3) (12,688)
Other (6.00) (293,384) 6.1 85,835 (1.1) (44,952) 1.9 72,778
------- ---------- ------ --------- ----- ---------- ----- ----------
TOTAL 31.9% $1,632,852 32.9% $ 466,178 30.9% $1,294,239 36.1% $1,344,490
======= ========== ====== ========= ====== ========== ===== ==========
The Company and the Bank provide for the recognition of a deferred tax
asset or liability for the future tax consequences of differences in
carrying amounts and tax bases of assets and liabilities. Specifically
exempted from this provision are bad debt reserves for tax purposes of
U.S. savings and loan associations in the association's base year, as
defined. Base year reserves total approximately $2,979,000 at September
30, 2000. Consequently, a deferred tax liability of approximately
$1,141,000 related to such reserves is not provided for in the statement
of financial condition at September 30, 2000.
14. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of tangible and core capital (as defined in the regulations)
to adjusted total assets (as defined), and of total capital (as defined)
to risk weighted assets (as defined). Management believes, as of September
30, 2000, that the Bank meets all capital adequacy requirements to which
it is subject.
As of September 30, 2000 and 1999, the most recent notification from the
OTS categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total, tangible, and core
capital ratios as set forth in the table below. There are no conditions or
events since that notification that management believes have changed the
institution's category.
54
The Bank's actual capital amounts (in thousands) and ratios are also
presented in the table:
Required
To Be Categorized As
Required Well Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
As of September 30, 2000:
Tangible capital to tangible assets $35,423 8.92% $ 5,955 1.50% N/A N/A
Core capital to adjusted tangible assets 35,423 8.92 15,880 4.00 $19,850 5.00
Total capital to risk weighted assets 37,050 17.66 16,784 8.00 20,968 10.00
Tier I capital to risk weighted assets 35,423 16.88 8,392 4.00 12,581 6.00
As of September 30, 1999:
Tangible capital to tangible assets $44,555 9.35% $ 7,151 1.50% N/A N/A
Core capital to adjusted tangible assets 44,555 9.35 19,068 4.00 $23,835 5.00
Total capital to risk weighted assets 46,167 20.23 18,212 8.00 22,764 10.00
Tier I capital to risk weighted assests 44,555 19.56 9,106 4.00 13,659 6.00
15. RETAINED EARNINGS
Upon the Reorganization, the Company established a special liquidation
account for the benefit of eligible account holders and the supplemental
eligible account holders in an amount equal to the net worth of the Bank
as of the date of its latest statement of financial condition contained in
the final offering circular used in connection with the Reorganization.
The liquidation account will be maintained for the benefit of eligible
account holders and supplemental eligible account holders who continue to
maintain their accounts in the Bank after the Reorganization. In the event
of a complete liquidation (and only in such event), each eligible and
supplemental eligible account holder will be entitled to receive a
liquidation distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts
then held.
The Bank may not declare or pay cash dividends on its shares of common
stock if the effect thereof would cause the Bank's stockholders' equity to
be reduced below applicable regulatory capital maintenance requirements
for insured institutions or below the special liquidation account referred
to above. This requirement effectively limits the dividend paying ability
of the Company in that the Company must maintain an investment in equity
of the Bank sufficient to enable the Bank to meet its requirements as
noted above. Required capital amounts are shown in Note 14 to the
consolidated financial statements. Liquidation account balances are not
maintained because of the cost of maintenance and the remote likelihood of
complete liquidation. Additionally, the Bank is limited to distributions
it may make to Bancorp without OTS approval if the distribution would
cause the total distributions to exceed the Bank's net income for the year
to date plus the Bank's net income (less distributions) for the preceding
two years. Bancorp may use assets other than its investment in the Bank as
a source of dividends.
55
16. EARNINGS PER SHARE
Year Ended September 30
2000 1999 1998
Basic EPS weighted average shares 5,166,038 5,802,860 6,388,906
Add dilutive effect of unexercised options 6,713 34,759 146,162
---------- --------- ---------
Dilutive EPS weighted average shares 5,172,751 5,837,619 6,535,068
========== ========== ==========
17. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company and subsidiaries have
various outstanding commitments and contingent liabilities that are not
reflected in the accompanying consolidated financial statements. In
addition, the Company is a defendant in certain claims and legal actions
arising in the ordinary course of business. In the opinion of management,
after consultation with legal counsel, the ultimate disposition of these
matters is not expected to have a material adverse effect on the
consolidated financial statements of the Company and subsidiaries.
18. FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees. Those instruments involve, to
varying degrees, elements of credit and interest-rate risk in excess of the
amount recognized in the consolidated statements of financial condition.
Instruments used to reduce exposure to fluctuations in interest rates are
considered in the aggregate and individually immaterial. The contract or
notional amounts of those instruments reflect the extent of the Company's
involvement in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit, and financial guarantees written is represented
by the contractual notional amount of those instruments. The Company uses
the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments.
Unless noted otherwise, the Company does not require collateral or other
security to support such financial instruments with credit risk.
Commitments to Extend Credit and Financial Guarantees - Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if it is deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
counterparty.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is
56
essentially the same as that involved in extending loan facilities to
customers. The Company holds marketable securities as collateral supporting
these commitments for which collateral is deemed necessary.
At September 30, 2000, the Company had the following outstanding
commitments to extend credit:
Undisbursed loans in process $ 1,345,162
Unfunded lines and letters of credit 2,466,821
Outstanding loan commitments 1,816,593
-----------
Total outstanding commitments $ 5,628,576
===========
The Company has not incurred any losses on its commitments in any of the
three years in the period ended September 30, 2000.
RELATED PARTY TRANSACTIONS
In the normal course of business, the Company has made loans to its
directors, officers, and their related business interests. In the opinion
of management, related party loans are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with unrelated persons and do not involve
more than the normal risk of collectibility. The aggregate dollar amount of
loans outstanding to directors, officers, and their related business
interests total approximately $1,542,073, $1,045,214 and $818,594 at
September 30, 2000, 1999 and 1998, respectively. During the year ended
September 30, 2000, total principal additions were $667,014 and total
principal payments were $170,155.
Deposits from related parties held by the Company at September 30, 2000 and
1999 amounted to $627,578 and $849,889, respectively.
20. RESTRICTED STOCK AWARD PROGRAMS AND STOCK OPTION PLANS
1994 Incentive Stock Option Plan -
The 1994 Incentive Stock Option Plan for senior executives and key
employees granted options to purchase 49,833 shares of common stock. The
plan authorizes the grant of incentive stock options, non-statutory stock
options, and limited rights. Under the plan, options become exercisable 20%
after each of the five years following the grant. The exercise price for
incentive stock options may not be less than the fair market value of the
underlying shares on the date of grant. The plan is administered by a
committee of the Board of Directors. The committee has the authority to
determine the employees to whom awards will be made, the amount of the
awards, and the other terms and conditions of the awards.
1994 Stock Option Plan -
The 1994 Stock Option Plan for outside directors may grant non-qualified
stock options to purchase shares of common stock for each outside director
who was serving in such a capacity on the date of the Company's initial
stock offering in 1994. The purchase price of the common stock deliverable
upon the execution of each non-qualified stock option was the price at
which the common stock of the Company was offered in the initial offering
($10). The Company granted options on 20,643 shares of common stock
(options on 24,917 shares may be granted under the plan). The plan also
provides for subsequent grants of non-qualifying stock options to others
who become outside directors after the date of the offering. Options
reserved for future grant shall vest ratably at 20% each year commencing on
the first September 30th after the person becomes an outside director
through September 30, 2002, at which time all options shall become vested.
1998 Stock Option Plan -
The Company's stockholders adopted the 1998 Stock Option Plan ("SOP") on
October 23, 1998. The SOP provides for a committee of the Company's Board
of Directors to award any one or a combination of incentive stock options,
non-statutory or compensatory stock options, limited rights, dividend
equivalent rights and reload options, representing up to 357,075 shares of
the Company's stock. The options will vest in equal amounts over five
years beginning one year from the date of grant. Options granted vest
immediately in the event of retirement, disability, or death and are
generally exercisable for a three year period following such event.
Outstanding stock options expire no later than 10 years from the date of
grant. Under the SOP, options have been granted to directors and key
employees of the Company. The exercise price in each case equals the fair
market value of the Company's stock at the date of grant. The Company
granted 350,000 options on October 23, 1998 which have an exercise price
of $9.00 per share, the fair value of the stock on that date. Seventy
thousand options are exercisable of as September 30, 2000. The weighted
average remaining contractual life of the options as of September 30,
2000, is 8.1 years.
A summary of the activity of the Company's 1998 Stock Option Plan is as
follows:
Weighted
Average
Exercise
Shares Price
Outstanding at September 30, 1998 -
Granted 350,000 $9.00
Exercised -
Forfeited -
--------
Outstanding at September 30, 1999 350,000 $9.00
Granted -
Exercised -
Forfeited -
--------
Outstanding at September 30, 2000 350,000 $9.00
========
Options exercisable at September 30, 1999 -
========
Options exercisable at September 30, 2000 70,000 $9.00
========
The Company applies the provisions of APB 25 in accounting for its stock
options 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 plans 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 per share would have
been as follows:
Year Ended
September 30
----------------------------------
2000 1999
Net income (in thousands):
As reported $3,452 $ 952
Pro forma 3,180 816
Earnings per share:
Basic - as reported 0.67 0.16
Basic - pro forma 0.62 0.14
Diluted - as reported 0.67 0.16
Diluted - pro forma 0.62 0.14
58
In determining the above pro forma disclosure, the fair value of options
granted during the year was estimated on the date of grant using the Black-
Scholes option pricing model with the following weighted average
assumptions: expected volatility - 37%, expected life of grant - 6.5 years,
risk free interest rate 5.25%, and expected dividend rate of 2.5%.
1998 Recognition Plan -
The 1998 Recognition and Retention Plan ("RRP") provides for a committee of
the Company's Board of Directors to award restricted stock to key officers as
well as non-employee directors. The RRP authorizes the Company to grant up
to 142,830 shares of the Company's common stock. The Committee granted
142,830 shares to key officers and non-employee directors on October 23,
1998.
Compensation expense is being recognized based on the fair market value of
the shares on the grant date of $9.00 over the vesting period. The shares
will vest equally over a five year period with the first vesting date of
January 3, 2000. Shares granted will be vested immediately in the event of
disability or death. Approximately $247,000 and $440,000 in compensation
expense was recognized during the year ended September 30, 2000 and 1999,
respectively.
21.OTHER COMPREHENSIVE INCOME
Year Ended September 30, 2000
----------------------------------------------------------------
Before Tax Tax Expense Net-of-Tax
Amount (Benefit) Amount
UNREALIZED GAINS (LOSSES) ON SECURITIES:
Unrealized holding gain (loss) on securities
arising during period $(1,828,831) $(621,803) $(1,207,028)
Less reclassification adjustment for
(gains) losses included in net income (447,563) (152,171) (295,392)
------------ ---------- -----------
Other comprehensive income (loss) $(2,276,394) $(773,974) $(1,502,420)
============ ========== ===========
Year Ended September 30, 2000
----------------------------------------------------------------
Before Tax Tax Expense Net-of-Tax
Amount (Benefit) Amount
UNREALIZED GAINS (LOSSES) ON SECURITIES:
Unrealized holding gain (loss) on securities
arising during period $(1,956,309) $(665,145) $(1,291,164)
Less reclassification adjustment for
(gains) losses included in net income (161,411) (54,880) (106,531)
------------ ---------- ------------
Other comprehensive income (loss) $(2,117,720) $(720,025) $(1,397,695)
============ ========== ============
59
22. PARENT COMPANY ONLY FINANCIAL INFORMATION
The following condensed statements of financial condition as of September
30, 2000 and 1999, and condensed statements of income and cash flows for
the years ended September 30, 2000 and 1999, for Pocahontas Bancorp, Inc.
should be read in conjunction with the consolidated financial statements
and the notes herein.
POCAHONTAS BANCORP, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2000 AND 1999
2000 1999
ASSETS
Deposit in Bank $ 4,013,763 $ 1,011,892
Investment in Bank 36,481,860 47,552,329
Loan 2,443,525 2,443,525
Investment securities 1,126,712 1,429,196
Other assets 2,145,272 1,401,115
----------- -----------
TOTAL ASSETS $46,211,132 $53,838,057
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities $ 2,186,988 $ 3,102,731
Deferred compensation 2,645,814 2,702,888
Stockholders' equity 41,378,330 48,032,438
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $46,211,132 $53,838,057
=========== ===========
CONDENSED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
INCOME:
Interest and dividend income $ 515,573 $ 423,375
EXPENSES:
Operating expenses 785,477 3,709,582
----------- -----------
LOSS BEFORE INCOME TAXES AND EQUITY IN
IN UNDISTRIBUTED EARNINGS OF BANK SUBSIDIARY (269,904) (3,286,207)
INCOME TAX (BENEFIT) (289,582) (957,778)
----------- -----------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF BANK SUBSIDIARY
19,678 (2,328,429)
EQUITY IN UNDISTRIBUTED EARNINGS OF BANK
SUBSIDIARY 3,431,951 3,280,666
----------- -----------
NET INCOME $ 3,451,629 $ 952,237
=========== ===========
60
POCAHONTAS BANCORP, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
2000 1999
OPERATING ACTIVITIES:
Net income $ 3,451,629 $ 952,237
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Equity in undistributed earnings of Bank subsidiary (3,431,951) (3,280,666)
Stock compensation 504,704 852,706
Other
Changes in operating assets and liabilities:
Investment securities 302,484 159,339
Other assets (744,157) (1,261,176)
Accrued expenses and other liabilities (915,743) 209,646
Deferred compensation (57,074) 2,702,888
----------- ------------
Net cash provided (used) by operating activities (890,108) 334,974
INVESTING ACTIVITIES:
Distribution from subsidiary $13,000,000 $ 15,577
FINANCING ACTIVITIES:
Options exercised 21,253 383,690
Dividends paid (1,327,605) (1,443,076)
Purchase of treasury stock (7,801,669) (11,882,222)
----------- ------------
Net cash used by financing activities (9,108,021) (12,941,608)
----------- ------------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS 3,001,871 (12,591,057)
CASH AND CASH EQUIVALENTS
Beginning of period 1,011,892 13,602,949
----------- ------------
End of period $ 4,013,763 $ 1,011,892
=========== ============
61
23. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables represent summarized data for each of the four
quarters in the years ended September 30, 2000 and 1999:
2000
(in thousands, except per share data)
Fourth Third Second First
Quarter Quarter Quarter Quarter
Interest income $ 7,037 $ 7,415 $ 7,659 $ 7,816
Interest expense 4,908 4,981 4,904 4,932
------- ------- ------- -------
Net interest income 2,129 2,434 2,755 2,884
Provision for loan losses 120 - - -
------- ------- ------- -------
Net interest income after
provision for loan losses 2,009 2,434 2,755 2,884
Non-interest income 761 879 630 832
Non-interest expense 1,695 2,125 2,177 2,102
------- ------- ------- -------
Income before income taxes 1,075 1,188 1,208 1,614
Income tax expense 218 441 399 575
------- ------- ------- -------
Net income $ 857 $ 747 809 $ 1,039
======= ======= ======= =======
Basic earnings per share $ 0.18 $ 0.14 $ 0.15 $ 0.20
Diluted earnings per share $ 0.18 $ 0.14 $ 0.15 $ 0.20
Cash dividends declared per
common share $ 0.065 $ 0.065 $ 0.060 $ 0.060
1999
(in thousands, except per share data)
Fourth Third Second First
Quarter Quarter Quarter Quarter
Interest income $ 7,673 $ 6,780 $ 6,642 $ 6,865
Interest expense 4,859 4,192 3,948 4,218
------- ------- ------- -------
Net interest income 2,814 2,588 2,694 2,647
Provision for loan losses - - - -
------- ------- ------- -------
Net interest income after
provision for loan losses 2,814 2,588 2,694 2,647
Non-interest income 466 564 322 575
Non-interest expense 2,129 2,078 4,992 2,053
------- ------- ------- -------
Income before income taxes 1,151 1,074 (1,976) 1,169
Income tax expense 375 372 (640) 359
------- ------- ------- -------
Net income $ 776 $ 702 $(1,336) $ 810
======= ======= ======= =======
Basic earnings per share $ 0.13 $ 0.13 $ (0.23) $ 0.13
Diluted earnings per share $ 0.13 $ 0.12 $ (0.23) $ 0.13
Cash dividends declared per
common share $ 0.060 $ 0.060 $ 0.060 $ 0.060
* * * * * * * *
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
PART III
ITEM 10 DIRECTORS AND OFFICERS OF THE REGISTRANT
- ------- ----------------------------------------
The table below sets forth certain information, as of September 30, 2000,
regarding members of the Company's Board of Directors, including the terms of
office of Board members.
Shares of
Common Stock
Positions Beneficially
Held in the Served Current Term Owned on Percent
Name (1)Age Company Since (2) to Expire Record Date (3) Of Class
- ----------- --------------------- --------- --------- -------------- --------
Nominees
Skip Martin 51 Director 1988 2001 172,147 3.8%
Charles R. Ervin 63 Director 1988 2001 67,477 1.5%
Dwayne Powell 36 Chief Financial 2000 2001
Officer 96,057 2.1%
Directors Continuing in Office
Ralph B. Baltz 53 Chairman 1986 2000 141,902 3.1%
Marcus Van Camp 52 Director 1990 2000 39,182 *
N. Ray Campbell 50 Director 1992 2000 51,099 *
James A. Edington 50 President and 1994 1999 209,844 4.6%
Director
Robert Rainwater 65 Director 1981 1999 39,324 *
Executive Officer
Bill B. Stacy 58 SVP, Loan Officer 18,203 *
Richard Olvey 57 SVP, Loan Officer 34,043 *
____________________
* Less than 1%
(1) The mailing address for each person listed is 203 West Broadway,
Pocahontas, Arkansas 72455. Each of the persons listed is also a director
of Pocahontas Federal Savings and Loan Association (the "Bank"), the
Company's wholly owned subsidiary.
(2) Reflects initial appointment to the Board of Directors of the Bank's
mutual predecessor.
(3) See definition of "beneficial ownership" in the table "Beneficial
Ownership of Common Stock."
64
James A. Edington has been President and CEO since April 1999. Prior
to that he served the Bank and the Company as Executive Vice President. He has
been the Bank's compliance officer, security officer, secretary, and treasurer.
Mr. Edington has been employed in executive roles with the Bank since 1983.
Skip Martin was the President and Chief Executive Officer of the Bank
from 1990 through April 1999. He has been a member of the Board of Directors of
the Bank since 1988 and of the Company since its formation. Prior to his
appointment as President and Chief Executive Officer, Mr. Martin served as Vice
President of the Bank.
Ralph P. Baltz has been Chairman of the Board of the Bank since
January 1997 and of the Company since its formation. Mr. Baltz is a general
contractor and residential developer and is the President and owner/operator of
Tri-County Sand and Gravel, Inc.
Marcus Van Camp is the Superintendent of Schools at Pocahontas Public
Schools, and has been employed by such schools for 25 years.
Charles R. Ervin is retired. Prior to his retirement, Mr. Ervin was
President and owner of C.E.C., Inc., a construction company, since March 1992.
Prior to that, Mr. Ervin was President and part-owner of M.T.C., Inc., a general
contractor specializing in tenant construction in shopping centers nationally.
N. Ray Campbell is the Owner and Operator of Big Valley Trailer
Manufacturing. Prior to this, Mr. Campbell was the Plant Manager of Waterloo
Industries, an industrial firm located in Pocahontas, Arkansas.
Robert Rainwater is semi-retired. Prior to his retirement, Mr.
Rainwater was the owner of Sexton Pharmacy in Walnut Ridge, Arkansas.
Dwayne Powell, CPA, has served as Chief Financial Officer of the Bank
since October 1996 and of the Company since its formation. Prior to that, Mr.
Powell was an Audit Manager for Deloitte & Touche LLP, primarily serving
financial institution clients.
65
ITEM 11 EXECUTIVE COMPENSATION
- ------- ----------------------
The following table sets forth for the years ended September 30, 2000,
1999, and 1998, certain information as to the total remuneration paid by the
Company to the Chief Executive Officer and all other executive officers whose
salary and bonuses exceeded $100,000 ("Named Executive Officers").
Long-Term Compensation
-------------------------------
Annual Compensation Awards Payouts
------------------------------ -------------------------------
Year Other Restricted Options/ All
Name and Ended Annual Com- Stock SARS LTIP Other
Principal Position Sept. 30, Salary (1) Bonus pensation Awards (3) (#) Payouts Compensation (2)
- ------------------------ --------- ---------- ----- ----------- ----------- --------- ------- ----------------
Skip Martin............. 2000 $ 21,000 -- -- -- -- -- $ --
President and CEO(4).... 1999 142,418 -- -- 80,000 -- -- --
1998 196,000 -- -- -- -- -- 20,161
James A. Edington....... 2000 196,000 -- -- -- -- -- 27,990
President and CEO(4).. 1999 196,565 -- -- 321,354 80,000 -- 30,637
1998 171,000 -- -- -- -- -- 20,161
Dwayne Powell........... 2000 153,500 -- -- -- -- -- 27,668
Chief Financial....... 1999 150,175 -- -- 321,354 80,000 -- 29,387
Officer............... 1998 125,000 -- -- -- -- -- 20,161
_________________________
(1) Includes Board of Director and committee fees.
(2) Consists of payments made pursuant to the Bank's Profit Sharing Plan. See
"--Benefits for Employees and Officers." Also includes the Bank's
contributions or allocations (but not earnings) pursuant to the Bank's
Employee Stock Ownership Plan. Does not include benefits pursuant to the
Bank's Pension Plan. See "--Benefits for Employees and Officers."
(3) Represents awards made pursuant to the Company's Recognition and Retention
Plan for Employees, which awards vest in five equal annual installments
commencing on January 3, 2000. Dividends on such shares accrue and are
paid to the recipient when the shares are granted. The value of such
shares was determined by multiplying the number of shares awarded by the
price at which the shares of common stock were sold.
(4) Mr. Edington was appointed President and Chief Executive Officer in April
1999 upon retirement of Mr. Martin.
==================================================================================================
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
==================================================================================================
Shares
Acquired Number of Unexercised Value of Unexercised
Upon Value Options at In-The-Money Options at
Name Exercise Realized Fiscal Year-End Fiscal Year-End
------------------------------------------------------
Exercisable/Unexercisable Exercisable/Unexercisable
==================================================================================================
Skip Martin -- -- 0/80,000 $0/$0
James A. Edington -- 0/80,000 $0/$0
Dwayne Powell -- 0/80,000 $0/$0
==================================================================================================
66
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
Persons and groups who beneficially own in excess of 5% of Common
Stock are required to file certain reports with the Securities and Exchange
Commission (the "SEC") regarding such ownership pursuant to the Securities
Exchange Act of 1934 (the "Exchange Act").
The following table sets forth, as of the Record Date, the shares of
Common Stock beneficially owned by the Company's directors, named executive
officers (as defined in ""Executive Compensation"), and executive officers and
directors as a group, as well as each person who was the beneficial owner of
more than 5% of the outstanding shares of Company Common Stock as of the Record
Date.
Amount of Shares
Owned and Nature Percent of Shares
of Beneficial of Common Stock
Holder Ownership (1) Outstanding (4)
------ ------------ --------------
All Directors and Executive Officers
as a Group (8 persons) 869,278 18.9
Pocahontas Federal Savings and Loan 460,416 10.0
401(k) Savings and Employee Stock
Ownership Plan. (2)(3)
____________________________
(1) Based solely upon the filings made pursuant to the Exchange Act and
information furnished by the respective persons. In accordance with Rule
13d 3 under the Exchange Act, a person is deemed to be the beneficial owner
for purposes of this table, of any shares of Common Stock if he has sole or
shared voting or investment power with respect to such shares, or has a
right to acquire beneficial ownership at any time within 60 days from the
date as to which beneficial ownership is being determined. As used herein,
"voting power" is the power to vote or direct the voting of shares and
"investment power" is the power to dispose or direct the disposition of
shares. Includes all shares held directly as well as shares owned by
spouses and minor children, in trust and other indirect ownership, over
which shares the named individuals effectively exercise sole or shared
voting or investment power.
(2) Under the Pocahontas Federal Savings and Loan Association 401(k) Savings
and Employee Stock Ownership Plan (the "ESOP"), shares allocated to
participants' accounts are voted in accordance with the participants'
directions. Unallocated shares held by the ESOP are voted by the ESOP
Trustee in the manner calculated to most accurately reflect the
instructions it has received from the participants regarding the allocated
shares. As of the Record Date, 311,007 shares of Common Stock were
allocated under the ESOP.
(3) Excludes 79,970 shares of Common Stock or 14.4% of the shares of Common
Stock outstanding, owned by the ESOP for the benefit of the named Executive
Officers of the Bank.
(4) Total Common Stock outstanding includes shares that may be acquired
pursuant to presently exercisable options.
67
ITEM 13 CERTAIN TRANSACTIONS
- ------- --------------------
The Bank has followed a policy of granting consumer loans and loans
secured by one to four family real estate to officers, directors and employees.
Loans to directors and executive officers are made in the ordinary course of
business and on the same terms and conditions as those of comparable
transactions with the general public prevailing at the time, in accordance with
the Bank's underwriting guidelines, and do not involve more than the normal risk
of collectibility or present other unfavorable features.
All loans by the Bank to its directors and executive officers are
subject to OTS regulations restricting loan and other transactions with
affiliated persons of the Bank. Federal law generally requires that all loans to
directors and executive officers be made on terms and conditions comparable to
those for similar transactions with non-affiliates, subject to limited
exceptions. However, recent regulations now permit executive officers and
directors to receive the same terms on loans through plans that are widely
available to other employees, as long as the director or executive officer is
not given preferential treatment compared to the other participating employees.
Loans to all directors, executive officers, and their associates totaled
$1,542,073 at September 30, 2000, which was 3.7% of the Company's stockholders'
equity at that date. There were no loans outstanding to any director, executive
officer or their affiliates at preferential rates or terms which in the
aggregate exceeded $60,000 during the three years ended September 30, 2000. All
loans to directors and officers were performing in accordance with their terms
at September 30, 2000.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------- ---------------------------------------------------------------
(a)(1) Financial Statements
--------------------
Financial statements have been included in Item 8.
(a)(2) Financial Statement Schedules
-----------------------------
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
(a)(3) Exhibits
--------
Sequential Page
Reference to Prior Number Where
Filing or Exhibit Attached Exhibits
Regulation S-K Number Attached Are Located in This
Exhibit Number Document Hereto Form 10-K Report
- -------------- -------- -------------- ----------------
2 Plan of Reorganization None Not Applicable
3 Articles of Incorporation None Not Applicable
68
Sequential Page
Reference to Prior Number Where
Filing or Exhibit Attached Exhibits
Regulation S-K Number Attached Are Located in This
Exhibit Number Document Hereto Form 10-K Report
- -------------- -------- ------------ ----------------
3 Bylaws None Not Applicable
4 Instruments defining the None Not Applicable
rights of security holders,
including debentures
9 Voting trust agreement None Not Applicable
10 Material contracts None Not Applicable
11 Statement re: computation Not Not Applicable
of per share earnings Required
12 Statement re: computation Not Not Applicable
of ratios Required
13 Annual Report to Stockholders None Not Applicable
16 Letter re: change in
certifying None Not Applicable
accountants
18 Letter re: change in
accounting principles None Not Applicable
19 Previously unfiled
documents None Not Applicable
21 Subsidiaries of Registrant 21 Page 29
69
Sequential Page
Reference to Prior Number Where
Filing or Exhibit Attached Exhibits
Regulation S-K Number Attached Are Located in This
Exhibit Number Document Hereto Form 10-K Report
- -------------- -------- ---------- ----------------
22 Published report regarding None Not Applicable
matters submitted to vote of
security holders
23 Consent of Experts and Not Not Applicable
Counsel Required
24 Power of Attorney None Not Applicable
28 Information from reports None Not Applicable
furnished to state
insurance regulatory
authorities
99 Additional Exhibits None Not Applicable
(b) Reports on Form 8-K:
None
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
POCAHONTAS BANCORP, INC.
Date: December 20, 2000 By: /s/ James Edington
----------------- ------------------------------
James Edington, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ James Edington By: /s/ Dwayne Powell
------------------------------------- ------------------------------
James Edington Dwayne Powell
President, Chief Executive Officer, Chief Financial Officer,
Treasurer and Director Secretary and
(Principal Executive Officer) (Principal Financial Officer)
Date: December 20, 2000 Date: December 20, 2000
----------------- -----------------
By: /s/ Ralph P. Baltz By: /s/ Skip Martin
------------------------------------- ------------------------------
Ralph P. Baltz Skip Martin
Chairman of the Board and Director Director
Date: December 20, 2000 Date: December 20, 2000
----------------- -----------------
By: /s/ Charles R. Ervin By: /s/ Marcus Van Camp
------------------------------------ -------------------------------
Charles R. Ervin Marcus Van Camp
Director Director
Date: December 20, 2000 Date: December 20, 2000
----------------- -----------------
By: /s/ N. Ray Campbell By: /s/ Robert Rainwater
------------------------------------- ------------------------------
N. Ray Campbell Robert Rainwater
Director Director
Date: December 20, 2000 Date: December 20, 2000
----------------- -----------------
71