SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(Amendment No.1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 15, 2001
------------
POCAHONTAS BANCORP, INC.
------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 0-23969 71-0806097
------------------------------ --------------------- -------------------
(State or Other Jurisdiction (Commission File No.) (I.R.S. Employer
of Incorporation) Identification No.)
203 West Broadway, Pocahontas, Arkansas 72455
---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (870) 892-4595
--------------
Not Applicable
----------------------------
(Former name or former address, if changed since last report)
Item 2. Acquisition or Disposition of Assets.
On May 15, 2001, Pocahontas Bancorp, Inc. (the "Company") completed its
acquisition of Walden / Smith Financial Group, Inc. ("Walden") and its wholly-
owned bank subsidiary, First Community Bank. As part of the acquisition,
Walden's stockholders received an aggregate of $27.4 million for all of the
issued and outstanding common stock of Walden. The transaction was accounted for
using the purchase method.
In connection with the acquisition, the Company's savings bank subsidiary,
Pocahontas Federal Savings and Loan Association, changed its name to First
Community Bank. In addition, the Company will move its corporate headquarters to
Jonesboro, Arkansas within the next several months to enhance its presence in
that market.
The Company also announced the retirement of James A. Edington, its
President and Chief Executive Officer, effective September 30, 2001. He will be
succeeded by Dwayne Powell, the Company's Chief Financial Officer. In addition,
the Company announced that two of its directors retired from the Board of
Directors effective June 30, 2001. The Company expects to replace these
directors.
The charge-off of excess facilities in the Pocahontas, Arkansas area and
the funding of retirement and severance agreements associated with the move of
the corporate headquarters to Jonesboro, Arkansas will result in an after-tax
restructuring charge in the range of $2.1 million, or $0.47 per share. The
restructuring charge was in the third quarter of fiscal 2001.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial statements of businesses acquired.
See the December 31, 2000 audited consolidated financial statements of
Walden included in this current report.
(b) Pro forma financial information.
The following unaudited pro forma condensed consolidated financial
statements give effect to the acquisition by the Company of all outstanding
shares of Walden in a business combination accounted for as a purchase and have
been prepared on the basis of assumptions described in the notes thereto.
Assumptions related to the allocation of the amount of consideration paid for
the assets and liabilities of Walden are based upon management's preliminary
estimates of their fair value. The actual allocation of the consideration paid
may differ from those assumptions reflected in the pro forma financial
statements after valuations and other procedures to be performed related to the
Walden acquisition are completed.
The following unaudited pro forma condensed combined consolidated financial
information presents the Unaudited Pro Forma Condensed Consolidated Statement of
Financial Condition as of March 31, 2001, giving effect to the acquisition of
Walden as if it had been consummated on that date. Also presented is the
Unaudited Pro Forma Condensed Consolidated Statements of Income for the six
months ended March 31, 2001 and the year ended September 30, 2000,giving effect
to the acquisition of Walden as if such acquisition had been consummated as of
the beginning of the earliest period presented.
The Company's condensed consolidated financial information included in
these unaudited pro forma condensed consolidated financial statements is derived
from its September 30, 2000 audited consolidated
financial statements included in its Form 10-K for the year ended September 30,
2000 filed on December 22, 2000, and its unaudited consolidated financial
statements included its Form 10-Q for the six months ended March 31, 2001 filed
on May 15, 2001, with the Securities and Exchange Commission ("SEC"). Walden's
condensed consolidated financial information included in these unaudited pro
forma condensed consolidated financial statements is derived from internal
financial statements maintained by Walden.
The pro forma adjustments are based on certain assumptions that the
Company's management believes are reasonable under the circumstances. The pro
forma information is not necessarily indicative of the results that would have
been reported if such events had occurred on the date specified nor is it
intended to project results of operations or financial position for any future
period or date. The information set forth should be read in conjunction with the
Company's audited consolidated financial statements for the year ended September
30, 2000 and the unaudited consolidated financial statements of the Company for
the six months ended March 31, 2001, which have previously been filed with the
SEC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
POCAHONTAS BANCORP, INC.
DATE: July 30, 2001 By: /s/ James A. Edington
--------------------------------------
James A. Edington
President and Chief Executive Officer
Pocahontas Bancorp, Inc.
Pro Forma Condensed Consolidated Statement of Financial Condition
March 31, 2001
(Unaudited)
Pro Forma Pro Forma
Company Walden Adjustments Results
------- ------ ----------- -------
ASSETS
Cash $ 16,838,777 $ 5,743,588 $(27,421,199)(A) $ (4,838,834)
Cash surrender value of life insurance 6,254,820 281,593 - 6,536,413
Investment securities - trading 1,513,665 190,084 - 1,703,749
Investment securities - held to maturity 11,429,840 - - 11,429,840
Investment securities - available for sale 103,584,402 20,643,192 - 124,227,594
Loans receivable, net 233,460,023 119,902,487 884,000 (B) 354,246,510
Accrued interest receivable 3,151,154 1,930,624 - 5,081,778
Premises and equipment, net 3,630,404 6,700,110 - 10,330,514
Federal Home Loan Bank Stock, at cost 5,132,500 845,900 - 5,978,400
Core deposit premium 2,011,102 - - 2,011,102
Other assets 2,743,737 2,388,868 10,439,945 (E) 15,572,550
-------------- ------------- ------------ -------------
TOTAL ASSETS $ 389,750,424 $ 158,626,446 $(16,097,254) $ 532,279,616
============== ============= ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 232,277,003 $ 138,230,066 $ (2,432,000)(B) $ 368,075,069
Federal Home Loan Bank advances 98,125,000 3,448,727 - 101,573,727
Securities sold under agreements to repurchase 1,810,000 - - 1,810,000
Deferred compensation 3,170,387 - - 3,170,387
Accrued expenses and other liabilities 2,791,202 1,026,644 2,255,755 (C) 6,073,601
-------------- ------------- ------------ -------------
Total liabilities 338,173,592 142,705,436 (176,245) 480,702,783
TRUST PREFERRED SECURITIES 7,226,500 - - 7,226,500
TOTAL STOCKHOLDERS' EQUITY: 44,350,332 15,921,009 (15,921,009)(D) 44,350,332
-------------- ------------- ------------ -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 389,750,424 $ 158,626,445 $(16,097,254) $ 532,279,615
============== ============= ============ =============
Pocahontas Bancorp, Inc.
Pro Form Condensed Consolidated Statements of Income
Six-Months Ended March 31, 2001
(Unaudited)
Pro Forma Pro Forma
Company Walden Adjustments Results
INTEREST INCOME:
Loans receivable $ 9,456,755 $ 7,734,823 $ 17,191,578
Investment securities 4,472,062 1,334,503 5,806,565
------------ ----------- ------------
Total interest income 13,928,817 9,069,326 22,998,143
INTEREST EXPENSE:
Deposits 5,982,793 4,848,289 10,831,082
Borrowed funds 3,377,448 206,567 3,584,015
------------ ----------- ------------
Total interest expense 9,360,241 5,054,856 14,415,098
NET INTEREST INCOME 4,568,576 4,014,470 8,583,046
PROVISION FOR LOAN LOSSES - 354,980 354,980
------------ ----------- ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,568,576 3,659,491 8,228,066
TOTAL OTHER INCOME 1,734,737 668,235 2,402,972
TOTAL OTHER EXPENSES 4,082,182 3,087,652 260,999 (F) 7,430,833
INCOME BEFORE INCOME TAXES 2,221,131 1,240,073 (260,999) 3,200,206
INCOME TAXES 740,000 425,580 (99,179) 1,066,400
------------ ----------- ------------ ------------
NET INCOME $ 1,481,131 $ 814,494 $ (161,819) $ 2,133,805
============ =========== ============ ============
BASIS EARNINGS PER SHARE $ 0.35 $ 0.50
============ ============
DILUTED EARNINGS PER SHARE $ 0.35 $ 0.50
============ ============
Pocahontas Bancorp, Inc.
Pro Forma Condensed Consolidated Statements of Income
Year Ended September 30, 2000
(Unaudited)
Pro Forma Pro Forma
Company Walden Adjustments Results
INTEREST INCOME:
Loans receivable $ 17,671,439 $ 6,235,757 $ 23,907,196
Investment securities 12,256,031 522,216 12,778,247
------------ ----------- ------------
Total interest income 29,927,470 6,757,972 36,685,442
INTEREST EXPENSE:
Deposits 10,350,181 3,408,519 13,758,700
Borrowed funds 9,373,916 344,444 9,718,360
------------ ----------- ------------
Total interest expense 19,724,097 3,752,963 23,477,060
NET INTEREST INCOME 10,203,373 3,005,010 13,208,383
PROVISION FOR LOAN LOSSES 120,000 280,320 400,320
------------ ----------- ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 10,083,373 2,724,690 12,808,063
TOTAL OTHER INCOME 3,101,941 373,093 3,475,034
TOTAL OTHER EXPENSES 8,100,833 1,909,484 2,621,997 (F),(G) 12,632,314
INCOME BEFORE INCOME TAXES 5,084,481 1,188,298 (2,621,997) 3,650,782
INCOME TAXES 1,632,852 401,753 (996,359) 1,038,247
------------ ----------- ------------ ------------
NET INCOME $ 3,451,629 $ 786,545 $ (1,625,638) $ 2,612,536
============ =========== ============ ============
BASIS EARNINGS PER SHARE $ 0.67 $ 0.51
============ ============
DILUTED EARNINGS PER SHARE $ 0.67 $ 0.51
============ ============
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED SEPTEMBER 30, 2000 AND SIX MONTHS ENDED MARCH 31, 2001
NOTE 1 - BASIS OF PRO FORMA PRESENTATION:
The pro forma financial statements give effect to Company's acquisition of
Walden in a business combination accounted for as a purchase, which was
consummated on May 15, 2001. Upon the effective date of the acquisition, all
outstanding common stock of Walden was acquired by the Company for approximately
$27.4 million in cash.
The pro forma financial statements have been prepared on the basis of
assumptions described in the following notes and include assumptions relating to
the allocation of the consideration paid for the assets and liabilities of
Walden based on preliminary estimates of their fair value. The actual allocation
of the consideration paid may differ from those assumptions reflected in the pro
forma financial statements after valuations and other procedures to be performed
related to the Walden acquisition have been completed. In the opinion of the
Company's management, all adjustments necessary to present fairly such pro forma
financial statements have been made based on the terms and structure of the
Walden acquisition. The Unaudited Pro Forma Condensed Consolidated Statements of
Income for the year ended September 30, 2000 and the six months ended March 31,
2001, give effect to this transaction as if it had taken place on October 1,
1999 (the beginning of the earliest period presented). The Unaudited Pro Forma
Condensed Consolidated Statement of Financial Condition as of March 31, 2001
gives effect to the transaction as if it had taken place on March 31, 2001.
The pro forma financial statements are not necessarily indicative of what the
actual financial results would have been had the transaction taken place on
October 1, 1999, and do not purport to indicate the results of future
operations.
The excess of purchase price over assets acquired and liabilities assumed
amounted to approximately $10.2 million and has been allocated to goodwill.
Management is currently evaluating the allocation of goodwill to certain
identifiable intangible assets. Amortization of goodwill and identifiable
intangible assets is expected to be provided on a straight line basis over 20
years until September 30, 2001, at which time the Company intends to adopt the
provision of FASB Statement No. 142, Goodwill and Other Intangible Assets, which
will require the Company to cease amortizing the goodwill and test the goodwill
for impairment at each of its reporting periods.
The aggregate estimated fair value of the assets and liabilities of the acquired
business and the aggregate consideration paid is as follows (in thousands):
Liabilities assumed $(142,529)
Tangible assets acquired 159,510
Intangible assets acquired 10,440
---------
Total $ 27,421
=========
NOTE 2 - PRO FORMA EARNINGS PER SHARE:
Pro forma basic earnings per share is based on the weighted average number of
shares of Company common stock outstanding during the period. Pro forma diluted
earnings per share includes the dilutive effects of all outstanding options.
NOTE 3 - PRO FORMA ADJUSTMENTS:
A. To record the cash portion of the purchase price for the acquisition of
Walden.
B. To reflect the adjustment of loans and deposits to fair value.
C. To record the accrual of direct acquisition cost related to the Walden
acquisition.
D. To eliminate Walden's stockholders' equity.
E. To record goodwill.
F. To record the amortization of goodwill on a straight-line basis over 20
years.
G. To reflect adjustments for the charge-off of excess facilities in the
Pocahontas, Arkansas area and the funding of retirement and severance agreements
associated with the move of the corporate headquarters to Jonesboro, Arkansas to
be effected after consummation of the acquisition estimated to be $2.1 million.
Page 1
Independent Auditor's Report
February 5, 2001
The Board of Directors and Stockholders
Walden/Smith Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of Walden/Smith
Financial Group, Inc. (formerly Walden Financial Group, Inc.) and Subsidiary as
of December 31, 2000 and 1999, and the related consolidated statements of
earnings, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in
all material respects, the financial position of Walden/Smith Financial Group,
Inc. and Subsidiary as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with generally accepted accounting principles.
/s/ Osborn & Osborn
-------------------
Jonesboro, Arkansas
Page 2
WALDEN/SMITH FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
DECEMBER 31
-------------------------------
ASSETS 2000 1999
------ ------------- ------------
Cash and Cash Equivalents:
Cash and due from banks $ 5,899,809 $ 4,142,573
Federal funds sold 3,470,000 0
------------- ------------
Total Cash and Cash Equivalents 9,369,809 4,142,573
------------- ------------
Investment Securities:
Held-to-maturity 11,574,424 10,226,856
Available-for-sale 7,359,709 194,000
------------- ------------
Total Investment Securities 18,934,133 10,420,856
------------- ------------
Loans 125,724,267 65,866,474
Less: Allowance for loan losses 1,094,032 482,174
------------- ------------
Net Loans 124,630,235 65,384,300
------------- ------------
Premises and equipment, net 6,530,848 3,882,150
Accrued interest receivable 1,985,530 953,465
Other real estate, net 309,200 0
Goodwill, net 232,169 252,545
Other assets 616,613 561,867
------------- ------------
9,674,360 5,650,027
------------- ------------
TOTAL ASSETS $ 162,608,537 $ 85,597,756
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest-bearing $ 16,527,901 $ 9,557,908
Interest-bearing 125,777,222 62,145,425
------------- ------------
Total Deposits 142,305,123 71,703,333
Federal funds purchased 0 4,580,000
Federal Home Loan Bank advances 3,465,098 606,437
Accrued interest payable 859,581 388,315
Other liabilities 258,226 181,644
------------- ------------
Total Liabilities 146,888,028 77,459,729
------------- ------------
Stockholders' Equity
Common stock - 250,000 shares authorized, par value $ .10,
176,882 shares outstanding 12/31/00, 95,216 shares
outstanding 12/31/99 17,688 9,522
Additional paid-in capital 10,369,154 3,710,498
Retained earnings 5,222,517 4,418,007
Accumulated other comprehensive income 111,150 0
------------- ------------
Total Stockholders' Equity 15,720,509 8,138,027
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 162,608,537 $ 85,597,756
============= ============
Page 3
WALDEN/SMITH FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
-----------------------------------
YEARS ENDED DECEMBER 31
----------------------------------------------
2000 1999 1998
INTEREST INCOME ----------- ----------- -----------
---------------
Interest and fees on loans $ 9,587,178 $ 4,716,955 $ 3,386,241
Interest and dividends on investment securities 1,142,503 566,102 545,695
Interest on federal funds sold 89,469 139,374 174,771
----------- ----------- -----------
Total Interest Income 10,819,150 5,422,431 4,106,707
----------- ----------- -----------
INTEREST EXPENSE
----------------
Interest on deposits 5,374,051 2,504,096 1,757,820
Interest on federal funds purchased 72,766 29,742 3,580
Interest on Federal Home Loan Bank advances 391,991 38,061 34,372
----------- ----------- -----------
Total Interest Expense 5,838,808 2,571,899 1,795,772
----------- ----------- -----------
Net Interest Income 4,980,342 2,850,532 2,310,935
Provision for loan losses 391,622 735,351 42,052
----------- ----------- -----------
Net Interest Income After Provision
for Loan Losses 4,588,720 2,115,181 2,268,883
----------- ----------- -----------
NONINTEREST INCOME
------------------
Service charges on deposit accounts 435,295 205,375 229,226
Other customer fees 66,881 25,267 26,777
Other income 57,343 149,431 76,786
----------- ----------- -----------
Total Noninterest Income 559,519 380,073 332,789
----------- ----------- -----------
NONINTEREST EXPENSE
-------------------
Salaries and employee benefits 1,873,559 1,251,714 1,046,267
Net occupancy expense 394,395 165,808 161,326
Equipment expense 445,554 246,663 223,813
Merger expense 27,239 116,668 0
Other expense 1,135,122 735,481 494,225
----------- ----------- -----------
Total Noninterest Expense 3,875,869 2,516,334 1,925,631
----------- ----------- -----------
Earnings (Loss) Before Income Taxes 1,272,370 (21,080) 676,041
Income tax expense 467,860 32,530 233,426
----------- ----------- -----------
Earnings (Loss) Before Minority Interests 804,510 (53,610) 442,615
Minority interests 0 0 8,274
----------- ----------- -----------
NET EARNINGS (LOSS) $ 804,510 $ (53,610) $ 434,341
=========== =========== ===========
EARNINGS (LOSS) PER SHARE
Basic $ 4.92 $ (0.64) $ 6.18
Diluted 4.90 (0.64) 6.18
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 163,681 83,482 70,292
Diluted 164,074 83,482 70,292
WALDEN/SMITH FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED MINORITY COMPREHENSIVE
STOCK CAPITAL EARNINGS INTEREST INCOME TOTAL
------------- ------------ ----------- ---------- --------- -----------
Balance December 31, 1997 - 70,292 shares $ 1,103,000 $ 0 $ 4,037,276 $ 80,968 $ 0 $ 5,221,244
Net earnings for 1998 0 0 434,341 8,274 0 442,615
Minority shares acquired by parent company 0 0 0 (35,285) 0 (35,285)
Minority interest in subsidiary dividends 0 0 0 (5,715) 0 (5,715)
------------- ------------ ----------- ---------- --------- -----------
Balances December 31, 1998 1,103,000 0 4,471,617 48,242 0 5,622,859
Common stock issued for cash - 24,216 shares 2,542,680 0 0 0 0 2,542,680
Common stock issued for minority interest -
708 shares 74,340 0 0 (48,242) 0 26,098
Par value of common stock changed from
no-par value to par value $0.10 per share (3,710,498) 3,710,498 0 0 0 0
Net loss 1999 0 0 (53,610) 0 0 (53,610)
------------- ------------ ----------- ---------- --------- -----------
Balances December 31, 1999 9,522 3,710,498 4,418,007 0 0 8,138,027
Common stock issued in merger with
Rainbow Investment - 81,666 shares 8,166 6,658,656 0 0 56,562 6,723,384
Net earnings for 2000 0 0 804,510 0 0 804,510
Net change in unrealized gain (loss) on
available-for-sale securities, net of tax 0 0 0 0 54,588 54,588
-----------
Total Comprehensive Income 859,098
------------- ------------ ----------- ---------- --------- -----------
Balances December 31, 2000 $ 17,688 $ 10,369,154 $ 5,222,517 $ 0 $ 111,150 $15,720,509
============= ============ =========== ========== ========= ===========
Book value per share at December 31, 2000. $ 88.87
===========
Page 5
WALDEN/SMITH FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
YEARS ENDED DECEMBER 31
--------------------------------------------------
2000 1999 1998
------------ ------------- -------------
OPERATING ACTIVITIES
--------------------
Net earnings (loss) $ 804,510 $ (53,610) $ 434,341
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 237,455 249,681 221,364
Provision for loan losses 391,622 735,351 42,052
(Gain) on sale of securities and other assets (37,397) (28,338) (2,504)
Net amortization (accretion) of investment securities (2,367) (1,819) 819
Noncash dividends received (FHLB stock) (21,000) (10,100) (10,300)
Minority interests share of net income 0 0 8,274
Net changes in:
Accrued interest receivable (368,108) (311,566) 72,722
Accrued interest payable 202,600 129,925 (7,186)
Other assets 212,020 (208,371) (41,699)
Other liabilities (78,749) (48,429) 103,940
------------- ------------- -------------
Net Cash Provided by Operating Activities 1,340,586 452,724 821,823
------------- ------------- -------------
INVESTING ACTIVITIES
--------------------
Proceeds from maturities of held-to-maturity
securities 3,245,074 16,133,814 29,576,979
Purchases of held-to-maturity securities (1,299,131) (11,344,329) (24,958,457)
Proceeds from maturities of available-for-sale securities 5,110,531 0 0
Purchases of available-for-sale securities (3,075,931) (10,100) (17,000)
Net (increase) in loans (24,578,786) (25,498,404) (6,862,869)
Purchase of premises and equipment (2,891,145) (2,073,927) (1,157,798)
Proceeds from sale of other assets 61,066 108,000 42,000
Proceeds from sale of other real estate 9,808 349,900 0
Purchase of First Community Bank stock 0 0 (56,138)
Net cash received from acquired institution 3,313,525 0 0
------------- ------------- -------------
Net Cash Used in Investing Activities (20,104,989) (22,335,046) (3,433,283)
------------- ------------- -------------
Page 6
WALDEN/SMITH FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Continued)
YEARS ENDED DECEMBER 31
----------------------------------------------
2000 1999 1998
FINANCING ACTIVITIES ------------- ------------- -------------
--------------------
Increase (decrease) in deposits 25,712,978 20,633,035 3,770,957
Increase (decrease) in federal funds purchased (4,580,000) 300,000 (1,700,000)
Increase (decrease) in FHLB advances 2,858,661 (37,030) 452,363
Proceeds from issuance of common stock 0 2,542,680 0
Minority interest distributions 0 0 (5,715)
------------- ------------- -------------
Net Cash Provided by Financing Activities 23,991,639 23,438,685 2,517,605
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 5,227,236 1,556,363 (93,855)
Cash and cash equivalents at the beginning of the year 4,142,573 2,586,210 2,680,065
------------- ------------- -------------
Cash and Cash Equivalents at the End of the Year $ 9,369,809 $ 4,142,573 $ 2,586,210
============= ============= =============
Supplemental Disclosures:
Interest paid $ 5,744,052 $ 2,497,391 $ 1,802,958
Income taxes paid, net 586,509 181,359 133,839
Noncash investing and financing activities:
Common stock issued in the acquisition of
Rainbow Investment Company, Inc. (See Note 1) 6,666,822 0 0
Common stock issued for minority interest 0 74,340 0
Transfer to other real estate 83,421 0 459,308
Real estate and other assets donated to schools 224,672 0 0
Page 7
WALDEN/SMITH FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
In March 1990, Walden/Smith Financial Group, Inc. (formerly Walden Financial
Group, Inc.), Jonesboro, Arkansas became a one-bank holding company with the
acquisition of the First Community Bank (formerly Planters and Stockmen Bank),
Pocahontas, Arkansas.
The principal activity of Walden/Smith Financial Group, Inc. ("Parent")
(collectively, "Company") is the ownership and management of the First Community
Bank ("Bank"). Walden/Smith Financial Group, Inc. is subject to regulations
issued by the Federal Reserve Board and the Arkansas State Bank Department.
The Bank provides the standard financial services associated with community
banks including lending activities and acceptance of customer deposits. The Bank
operates under a state bank charter and is subject to regulations by the
Arkansas State Bank Department and the Federal Deposit Insurance Corporation.
On March 1, 2000, the Company acquired Rainbow Investment Company, Inc. and its
wholly owned subsidiary, the Bank of Tuckerman. Rainbow Investment Company was
immediately merged with and into Walden/Smith Financial Group, Inc.
On October 13, 2000, the First Community Bank was merged with and into the Bank
of Tuckerman. The Bank of Tuckerman name was changed to First Community Bank and
the main office was relocated to Jonesboro, Arkansas.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Walden/Smith
Financial Group, Inc. and its bank subsidiary, First Community Bank. All
significant intercompany balances and transactions have been eliminated.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to general practices within the banking
industry. In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from these estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and other real estate owned, management obtains appraisals for
significant properties.
Management believes that the allowances for loan losses and other real estate
owned are adequate. While management uses available information to recognize
losses on loans and other real estate owned, changes in economic conditions may
require future additions to the allowances. Furthermore, as a part of their
examination process, various regulatory agencies periodically review the
Company's allowances for losses on loans and other real estate owned. These
agencies may require the Company to make adjustments to the allowances based on
their judgments about information available to them at the time of their
examination.
INVESTMENT SECURITIES
Investment securities at December 31, 2000 consist primarily of U.S. Treasury
and Government agency securities, and state and political subdivisions
securities. The Company classifies its investment securities in one of three
categories: trading, available-for-sale (AFS), or held-to-maturity (HTM).
Trading securities are bought and held principally for the purpose of selling
them in the near term. Held-to-maturity are those debt securities that the
Company has the ability and intent to hold until maturity. All other securities
not included in trading or held-to-maturity are classified as available-for-
sale.
Page 8
WALDEN/SMITH FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INVESTMENT SECURITIES (Continued)
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains and
losses on trading securities are included in earnings. Unrealized holding gains
and losses, net of the related tax effect, on available-for-sale securities are
excluded from earnings and are reported as a separate component of stockholders'
equity until realized. Transfers of securities between categories are recorded
at fair value at the date of transfer. Unrealized holding gains and losses are
recognized in earnings for transfers into trading securities. Unrealized holding
gains and losses associated with transfers of securities from held-to-maturity
to available-for-sale are recorded as a separate component of stockholders'
equity until realized. Realized gains and losses for securities classified as
available-for-sale and held-to-maturity are included in earnings and are derived
using the specific identification method for determining the cost of securities
sold.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the security. Premiums
and discounts are amortized or accreted over the life of the related security as
an adjustment to yield using the effective interest method. Dividend and
interest income are recognized when earned.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at the principal amounts outstanding. Interest income on loans
is accrued at the contractual rate and credited to income based on the
outstanding principal amounts. It is the policy of management to discontinue the
accrual of interest when the principal and interest is in default for 90 days or
more unless the loan is well secured and in the process of collection. This
applies to all delinquent loans except consumer loans and residential real
estate loans. Such consumer and residential real estate loans shall be reviewed
where principal or interest is in default for 90 days or more. Accrual of
interest shall be adjusted to take into consideration the following: work out
arrangements, extension agreements, and the value of the underlying collateral.
Loan origination fees and direct origination costs are capitalized and
recognized as adjustments to yields on the related loans. Prior to January 1,
1999, loan origination fees and direct origination costs were not deemed
material and, therefore, were recorded when actually received and paid.
The allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based upon 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.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation expense is computed using straight-line and declining-balance
methods based on the estimated useful lives of the assets. Maintenance and
repairs are expensed as incurred, while major additions and improvements are
capitalized. Gains and losses on dispositions are included in current
operations.
INCOME TAXES
The Company files consolidated federal and state income tax returns. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Page 9
WALDEN/SMITH FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STATEMENTS OF CASH FLOWS
Cash and cash equivalents include cash, due from banks, interest-bearing
deposits at other financial institutions, and federal funds sold. Generally,
federal funds are sold for one-day periods.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit and standby letters of credit. Such financial instruments are recorded in
the financial statements when they are funded or related fees are incurred or
received.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS
The Bank subsidiary enters into loan participation agreements, on an ongoing
basis and without recourse, whereby a portion of individual loan balances are
purchased from or sold to other financial institutions. At December 31, 2000,
the Company has purchased loan participations in the approximate amount of
$4,320,000. In accordance with SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", the Company
has reflected the loan participations sold ($1,542,000 and $50,000 at December
31, 2000 and 1999, respectively) as a reduction of the outstanding net loan
balance.
COMPREHENSIVE INCOME
Comprehensive income, which consists of net income and any net unrealized gains
(losses) on AFS securities, is reported in accordance with SFAS No. 130,
"Reporting Comprehensive Income", and is presented in the consolidated
statements of stockholders' equity. SFAS No. 130 only requires additional
disclosures in the consolidated financial statements. There is no effect on the
Company's financial position or results of operations. For the years ended
December 31, 1999 and 1998, comprehensive income and net earnings were the same.
OTHER REAL ESTATE
Properties acquired through foreclosure and unused bank premises are stated at
the lower of the recorded amount of the loan or the property's estimated net
realizable value, reduced by estimated selling costs. Write-downs of the assets
at, or prior to, the date of foreclosure are charged to the allowance for loan
losses. Subsequent write-downs, income and expense incurred in connection with
holding such assets, and gains and losses realized from the sales of such assets
are included in noninterest income and expense.
ACCRUED COMPENSATED ABSENCES
The financial statements do not reflect any future liability for "accrued
compensated absences." Unused vacation time may not be carried forward to a new
year.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current year
presentation. These reclassifications had no effect on earnings.
GOODWILL
The unamortized costs in excess of the fair value of acquired net tangible
assets are included in goodwill. Goodwill is being amortized on a straight-line
basis over fifteen (15) years.
Page 10
WALDEN/SMITH FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1: BUSINESS COMBINATION
Effective March 1, 2000, the Company exchanged 81,666 shares of common stock for
all of the outstanding shares of Rainbow Investment Company, Inc. ("Rainbow"), a
one-bank holding company. Rainbow owned 100% of the Bank of Tuckerman.
The exchange was accounted for by the purchase method. Total value of the
transaction, determined by evaluation of assets net of liabilities acquired, was
$6,666,822.
Rainbow was merged with and into Walden/Smith Financial Group, Inc. ("Walden")
on March 1, 2000.
The following list summarizes the assets acquired and liabilities assumed in the
acquisition on March 1, 2000:
Cash and cash equivalents $ 3,313,525
Investment securities 12,348,545
Loans - net of allowance of $351,735 35,184,988
Other assets 1,186,943
Deposits 44,888,812
Other liabilities 421,804
Because the March 1, 2000 business combination was accounted for as a purchase,
Walden's consolidated financial statements include the results of operations of
the acquired company only from the date of acquisition. The following unaudited
summary information presents the consolidated results of operations of Walden on
a pro forma basis, as if Rainbow had been acquired on January 1, 1999. The pro
forma summary information does not necessarily reflect the results of operations
that would have occurred, if the acquisition had occurred at the beginning of
the periods presented, or of results which may occur in the future.
YEAR ENDED DECEMBER 31
----------------------------------
2000 1999
------------- -------------
Unaudited Unaudited
Interest income $ 11,453,098 $ 9,258,282
Interest expense 6,114,289 4,940,140
------------- -------------
Net Interest Income 5,338,809 4,318,142
Provision for loan losses 391,622 926,351
Noninterest income 616,559 797,038
Noninterest expense 4,057,582 3,817,588
------------- -------------
Income Before Income Taxes 1,506,164 993,239
Applicable income taxes 538,465 370,372
------------- -------------
Net Income $ 967,699 622,867
============= =============
Net income per share $ 5.91 $ 3.81
Net income per share, diluted $ 5.89 $ 3.80
Page 11
WALDEN/SMITH FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 2: INVESTMENT SECURITIES
The amortized cost and approximate fair values of investment securities at
December 31, 2000 are as follows:
HELD-TO-MATURITY
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ------------ -------------- -------------
U.S. Treasury $ 0 $ 0 $ 0 $ 0
U.S. Government Agency Obligations 8,260,224 1,640 43,840 8,218,024
Municipal securities 3,314,200 92,747 35,154 3,371,793
-------------- ------------ -------------- -------------
$ 11,574,424 $ 94,387 $ 78,994 $11,589,817
============== ============ ============== =============
AVAILABLE-FOR-SALE
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ------------ -------------- -------------
U.S. Treasury $ 1,900,255 $ 176,770 $ 0 $ 2,077,025
U.S. Government Agency Obligations 4,237,761 7,184 15,545 4,229,400
Municipal securities 0 0 0 0
Federal Home Loan Bank stock 833,200 0 0 833,200
Other equity securities 220,084 0 0 220,084
-------------- ------------ -------------- -------------
$ 7,191,300 $ 183,954 $ 15,545 $ 7,359,709
============== ============ ============== =============
The amortized cost and approximate fair values of investment securities at
December 31, 1999 are as follows:
HELD-TO-MATURITY
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ------------ -------------- -------------
U.S. Treasury $ 0 $ 0 $ 0 $ 0
U.S. Government Agency Obligations 9,560,669 27 132,480 9,428,216
Municipal securities 666,187 3,574 23,840 645,921
-------------- ------------ -------------- -------------
$ 10,226,856 $ 3,601 $ 156,320 $10,074,137
============== ============ ============== =============
AVAILABLE-FOR-SALE
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ------------ -------------- -------------
Federal Home Loan
Bank stock $ 194,000 $ 0 $ 0 $ 194,000
============== ============ ============== =============
At December 31, 2000, FHLB stock of $173,300 was required to be maintained,
based on 5% of the outstanding FHLB advances of $3,465,098. Fair value of FHLB
stock is considered to equal par value based on the redemption features of the
stock.
Net realized gains on the sale of securities were $39,345 and $0 for the years
ended December 31, 2000 and 1999, respectively.
Page 12
WALDEN/SMITH FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 2: INVESTMENT SECURITIES (Continued)
The amortized cost and approximate fair value of investment securities at
December 31, 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
---------------------------------
AMORTIZED FAIR
COST VALUE
---------------- ---------------
Due in one year or less $ 1,960,224 $ 1,955,314
Due after one year through five years 7,181,794 7,141,810
Due after five years through ten years 886,302 878,648
Due after ten years 1,546,104 1,614,045
---------------- ---------------
$ 11,574,424 $ 11,589,817
================ ===============
AVAILABLE-FOR-SALE
---------------------------------
AMORTIZED FAIR
COST VALUE
---------------- ---------------
Due in one year or less $ 2,600,551 $ 2,616,125
Due after one year through five years 3,037,465 3,190,250
Due after five years through ten years 500,000 500,050
Due after ten years 0 0
6,138,016 6,306,425
Securities with no stated maturity 1,053,284 1,053,284
---------------- ---------------
$ 7,191,300 $ 7,359,709
================ ===============
Investment securities with a reported value of approximately $16,900,000 at
December 31, 2000, and par value of approximately $7,385,000 at December 31,
1999, were pledged to secure public deposits.
Page 13
WALDEN/SMITH FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 3: LOANS
A summary of loans is as follows:
DECEMBER 31
------------------------------
2000 1999
-------------- --------------
Real estate $ 55,075,938 $ 27,127,334
Agriculture 8,050,308 6,153,405
Commercial and other 62,337,899 31,840,172
Installment 281,154 821,406
Less: Unearned discount (21,032) (75,843)
-------------- --------------
$125,724,267 $ 65,866,474
============== ==============
Loans to officers, employees and directors of the Company and their related
business entities are, in the opinion of management, made in the ordinary course
of business and at substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable loans of like
qualities and risk of collectibility. The aggregate indebtedness of these
individuals, both directly and indirectly, to the Company was approximately
$7,975,000 and $3,310,000 at December 31, 2000 and 1999, respectively.
In accordance with SFAS No. 91, the Bank has deferred $280,526 and $291,185 in
direct loan origination costs in the years 2000 and 1999, respectively. The Bank
has recognized amortization of $175,031 and $84,848 during the years ended
December 31, 2000 and 1999, respectively, resulting in a net deferred loan
origination cost of $311,832 at December 31, 2000.
NOTE 4: ALLOWANCE FOR LOAN LOSSES
The following is a summary of the allowance for loan losses:
DECEMBER 31
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
Balance at beginning of year $ 482,174 $ 387,671 $ 355,689
Provision charged to operating expenses 391,622 735,351 42,052
Balance transferred at date of merger 351,735 0 0
------------- ------------- -------------
1,225,531 1,123,022 397,741
------------- ------------- -------------
Loans charged off 141,344 645,787 16,202
Recoveries of loans previously charged off 9,845 4,939 6,132
------------- ------------- -------------
Net Loans Charged Off 131,499 640,848 10,070
------------- ------------- -------------
BALANCE AT END OF PERIOD $ 1,094,032 $ 482,174 $ 387,671
============= ============= =============
The Company has ceased recognition of interest income on loans approximating
$823,000 and $128,000 at December 31, 2000 and 1999, respectively. Approximately
$24,000 and $14,000 of interest income would have been recorded for the years
ended December 31, 2000 and 1999, respectively, if the nonaccrual loans had been
accruing interest in accordance with their original terms.
Of the $645,787 of loans charged off during 1999, $611,817 was in connection
with one (1) loan customer, consisting of three (3) floor plan notes and
significant returned checks. Prior to December 31, 1999, the loan customer
entered a guilty plea for fraudulent acts in the disposition of the collateral
for the line of credit.
Page 14
WALDEN/SMITH FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 5: PREMISES AND EQUIPMENT
A summary of premises and equipment is as follows:
DECEMBER 31
------------------------------
2000 1999
-------------- --------------
Land $ 836,396 $ 1,033,568
Buildings 1,278,859 1,016,786
Furniture and equipment 1,813,027 1,320,754
Information systems building 195,761 184,831
Construction in process:
Jonesboro - bank building 4,214,704 1,697,282
-------------- --------------
8,338,747 5,253,221
Less: Accumulated depreciation 1,807,899 1,371,071
-------------- --------------
NET $ 6,530,848 $ 3,882,150
============== ==============
Depreciation expense $ 217,079 $ 140,922
============== ==============
The Company capitalized $107,844 and $55,417 of interest on the Jonesboro
construction project during the years 2000 and 1999, respectively.
Land has been acquired, and the construction is in process for a bank building
in Jonesboro, Arkansas. Management's estimate of the total cost of land and
building is approximately $4,500,000. The Bank occupied the first two floors
beginning September 2000, with interior construction still in process on the
third floor.
In December 1998, construction was started on a building to house the Bank's
data processing operation in Pocahontas, Arkansas. When completed, the total
cost of the facility was $276,700, including land and lot preparation costs of
$80,939.
Effective August 1, 1998, the cost of the land and bank building ($475,000) that
was purchased from Union Planters Bank of Northeast Arkansas was transferred
from Premises and Equipment to Other Real Estate. The book value of $459,308 was
being amortized on a straight-line basis over a period of sixty (60) months,
until the property was sold in November 1999 for $349,900.
NOTE 6: OPERATING LEASES
The bank leases vehicles (three), telephone systems and several pieces of office
equipment. Generally, the leases are for thirty-six months with provisions to
acquire the item for 10% of original cost. Equipment rental expense was $98,714,
$88,279 and $2,964 for the years 2000, 1999 and 1998, respectively.
The Parent leases its corporate office, and the Bank leases a loan production
office from a major stockholder (42.6%). Lease expense (Parent and Bank) was
$35,000, $34,000 and $36,000 for the years 2000, 1999 and 1998, respectively.
These leases (two) are on a month-to-month basis.
A portion of the main bank facility in Tuckerman, Arkansas is leased from
related parties. This lease is for five (5) years, expires December 31, 2001,
and costs $6,000 per year. The lease provides ten (10) renewal options for five
(5) years each. The Bank is responsible for taxes, insurance and maintenance.
Page 15
WALDEN/SMITH FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 6: OPERATING LEASES (Continued)
A drive-in bank facility in Tuckerman, Arkansas is leased for twenty (20) years,
expires January 31, 2008, and costs $1,200 per month. The lease provides five
(5) renewal options for ten (10) years each. The Bank is responsible for taxes,
insurance and maintenance.
A branch drive-in facility in Newport, Arkansas is leased for three (3) years.
The original lease provided four (4) renewal options for three (3) years each.
The third renewal option, at a cost of $700 per month, expired December 31,
2000. The fourth and final renewal option was exercised for the period January
1, 2001 through December 31, 2003, at a cost of $800 per month.
Future minimum lease obligations are:
Year 2001 $ 100,638
Year 2002 38,696
Year 2003 24,000
Year 2004 14,400
Year 2005 14,400
NOTE 7: DEPOSITS
A summary of deposits is as follows:
DECEMBER 31
-------------------------------
2000 1999
--------------- ---------------
Noninterest-bearing deposits $ 16,527,901 $ 9,557,908
--------------- ---------------
Interest-bearing deposits:
Savings 5,653,059 3,463,051
N.O.W. 20,909,186 15,279,897
Money market 4,553,125 3,305,638
Time 94,661,852 40,096,839
--------------- ---------------
Total Interest-Bearing Deposits 125,777,222 62,145,425
--------------- ---------------
TOTAL DEPOSITS $ 142,305,123 $ 71,703,333
=============== ===============
Some of the directors, officers and employees of the Company are customers of
the Bank, and some of the individuals are principals in entities that are
customers of the Bank. As such customers, the aggregate deposits of those
individuals and their interests as a group in the Bank were approximately
$3,163,400 and $3,058,100 at December 31, 2000 and 1999, respectively.
Time certificates of deposit of $100,000 or more, included in time deposits on
the consolidated balance sheets, amounted to $34,670,761 and $13,122,647 at
December 31, 2000 and 1999, respectively. Interest expense on these deposits
amounted to $1,605,363 and $644,337 for the years ended December 31, 2000 and
1999, respectively.
The scheduled maturities of time deposits are as follows:
DECEMBER 31
-------------------------------
2000 1999
--------------- ---------------
Within one year $ 87,950,600 $ 37,482,800
Within two to three years 5,942,300 2,614,000
After three years 768,900 0
--------------- ---------------
$ 94,661,800 $ 40,096,800
=============== ===============
Page 16
WALDEN/SMITH FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 8: FEDERAL HOME LOAN BANK ADVANCES
The Company's bank subsidiary had outstanding advances from the FHLB. The
advances allow the Bank to fund mortgage loan programs and to satisfy certain
other funding needs. At December 31, 2000, the Company had an adequate amount of
mortgage loans to satisfy the collateral requirements. A summary of the advances
is as follows:
DECEMBER 31
-------------------------------
2000 1999
-------------- --------------
Balances outstanding $ 3,465,098 $ 606,437
Range of interest rates 5.89%-7.04% 5.89%-6.52%
Range of maturities 2002 - 2030 2008 - 2013
Scheduled maturities of FHLB advances are as follows:
2001 $ 67,074
2002 471,419(*)
2003 76,291
2004 81,369
2005 86,462
Thereafter 2,682,483
-------------
$ 3,465,098
=============
(*) One (1) FHLB advance of $400,000 (received June 14, 2000) is due on May
30, 2002. Interest only is being paid monthly on this advance. The
initial rate was 6.903%, but the advance has a floating rate that is
adjusted daily. This advance is part of a standby letter of credit,
which amounts to $1,100,000.
NOTE 9: INCOME TAXES
The components of income tax expense are as follows:
YEARS ENDED DECEMBER 31
--------------------------------------
2000 1999 1998
----------- ----------- -----------
Current taxes (benefit) $ 490,405 $ (65,123) $ 277,676
Deferred taxes (benefit) (22,545) 97,653 (44,250)
----------- ----------- -----------
TOTAL INCOME TAXES $ 467,860 $ 32,530 $ 233,426
=========== =========== ===========
The actual expense for the years ended December 31, 2000, 1999 and 1998 differs
from the "expected" tax expense (computed by applying the U.S. corporate income
tax rate of 34% to income before taxes) as follows:
YEARS ENDED DECEMBER 31
--------------------------------------
2000 1999 1998
----------- ----------- -----------
Computed "expected" tax expense (benefit) $ 432,606 $ (7,167) $ 229,854
Increase (reduction) in taxes resulting from:
Tax-exempt interest (50,976) (9,753) (5,744)
State income tax - net 10,543 0 1,427
Nondeductible expenses 27,536 51,210 8,301
Other - net 48,151 (1,760) (412)
----------- ----------- -----------
TOTALS $ 467,860 $ 32,530 $ 233,426
=========== =========== ===========
Page 17
WALDEN/SMITH FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 9: INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities are as follows:
DECEMBER 31
-------------------------
Deferred Tax Assets: 2000 1999
----------- ----------
Allowance for loan losses $ 276,574 $ 90,341
Contribution carryforward 34,347 6,466
Other real estate (write-offs for financial statement purposes) 9,946 1,700
Other 67,906 18,395
----------- ----------
TOTAL GROSS DEFERRED TAX ASSETS 388,773 116,902
----------- ----------
Deferred Tax Liabilities:
Unrealized gain on AFS securities 57,259 0
Cash basis reporting for income tax purposes 546,409 266,151
FHLB stock dividends 15,856 7,813
Other 0 1,190
----------- ----------
TOTAL GROSS DEFERRED TAX LIABILITIES 619,524 275,154
----------- ----------
NET DEFERRED TAX LIABILITY $ 230,751 $ 158,252
=========== ==========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Based primarily on the expectation of future
taxable income and the ability to carry back future deductible differences
against previous years' taxable income, management believes it is more likely
than not that the Company will realize the benefits of these deductible
differences. Accordingly, a valuation allowance has not been established for
December 31, 2000 or 1999.
NOTE 10: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CREDIT RISK
CONCENTRATIONS
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.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit rate risk in excess of the amount recognized in the consolidated balance
sheets.
The Company's exposure to credit loss, in the event of nonperformance by the
other party, on the financial instrument for commitments to extend credit and
standby letters of credit 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.
A summary of financial instruments with off-balance-sheet risk is as follows:
DECEMBER 31
-----------------------------
2000 1999
------------- -------------
Commitments to Extend Credit $ 24,683,000 $ 17,122,000
Standby Letters of Credit $ 324,000 $ 201,000
Page 18
WALDEN/SMITH FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 10: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CREDIT RISK
CONCENTRATIONS (CONTINUED)
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. Since some
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 deemed necessary by the Company upon extension
of credit, is based on management's credit evaluation of the customer.
Collateral held varies but may include accounts receivable, inventory, property,
plant and equipment, income-producing commercial properties, and liens on crop
production and government subsidy payments.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. All of the Company's
standby letters of credit written at December 31, 2000 expire by October 3,
2001. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.
A substantial portion of the Company's business activity is with customers in
the agricultural industry. Generally, the loans are secured by liens on crop
production, government subsidies, farm real estate or equipment. The Company's
receivables from customers in the agricultural industry were approximately
$14,914,000 and $10,612,000 at December 31, 2000 and 1999, respectively.
NOTE 11: FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
("Statement No. 107"), requires that fair value be disclosed for on- and
off-balance-sheet financial instruments for which it is practicable to estimate
fair value. Statement No. 107 defines the fair value of a financial instrument
as the amount at which the instrument could be exchanged in a current
transaction between willing parties. Fair value approximates the carrying value
for the following classes of financial instruments (due to their short-term
nature): cash and due from banks, federal funds sold, accrued interest
receivable, prepaid insurance and other assets, noninterest-bearing deposits,
interest-bearing deposits excluding time deposits (see Note 7), accrued interest
payable, and other accrued expenses and liabilities.
Fair value of investment securities (see Note 2) is based on quoted market
prices at the reporting date. Variable-rate loans of approximately $8,760,300 at
December 31, 2000, have a fair value equal to their carrying value as such
instruments reprice frequently. The fair value of the Company's
off-balance-sheet instruments (see Note 10) is not considered material as fair
value is based on fees currently charged to enter into similar agreements.
Management has determined that it is not practicable to estimate the fair value
of fixed-rate loans and time deposits without incurring excessive costs from
either (1) updating its computer system to allow for an internal valuation, or
(2) engaging a third party to calculate the fair value of such instruments. The
following information pertains to the Company's financial instruments for which
it is not practicable to estimate fair value:
APPROXIMATE WEIGHTED WEIGHTED
CARRYING AVERAGE AVERAGE
VALUE INTEREST RATE MATURITY
------------ ------------- ----------
Period ended December 31, 2000:
Fixed-rate loans $116,964,000 9.23% 23 months
Fixed-rate time deposits 94,661,800 6.59% 7 months
Page 19
WALDEN/SMITH FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 12: REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal agencies. Failure to meet minimum requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Bank'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
which follows) of Total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined), to
average assets (as defined). Management believes, as of December 31, 2000, that
the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2000, the most recent notification from the Arkansas State
Banking Department categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as adequately
capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
regulatory capital category.
The Bank's actual and required capital amounts and ratios are presented in the
following table (dollars in thousands):
MINIMUM REQUIRED TO
BE WELL CAPITALIZED
MINIMUM REQUIRED UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
---------------------- ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ---------- ---------- ---------- ----------- ---------
As of December 31, 2000:
Total capital (to risk-weighted
assets) $ 13,633 10.5 % $ 10,417 8.0 % $ 13,021 10.0 %
Tier I capital (to risk-weighted
assets) 12,539 9.6 5,208 4.0 7,813 6.0
Tier I capital (to average assets) 12,539 7.8 6,437 4.0 8,046 5.0
As of December 31, 1999:
Total capital (to risk-weighted
assets) 6,354 9.2 5,519 8.0 6,899 10.0
Tier I capital (to risk-weighted
assets) 5,872 8.5 2,759 4.0 4,139 6.0
Tier I capital (to average assets) 5,872 7.2 3,272 4.0 4,090 5.0
Page 20
WALDEN/SMITH FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 13: WALDEN/SMITH FINANCIAL GROUP, INC. (PARENT ONLY) FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
DECEMBER 31
--------------------------
ASSETS 2000 1999
------ ------------ -----------
Investment in First Community Bank $ 12,838,018 $ 6,110,462
Cash in subsidiary bank 1,597,094 1,679,534
Investment securities available for sale 190,084 0
Prepaid income tax 154,295 140,806
Loans receivable 967,438 150,000
Other assets 137,344 154,868
------------ -----------
TOTAL ASSETS $ 15,884,273 $ 8,235,670
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Income taxes payable $ 0 $ 0
Payable to subsidiary bank - taxes 147,414 88,832
Other liabilities 16,350 8,811
------------ -----------
Total Liabilities 163,764 97,643
Stockholders' Equity 15,720,509 8,138,027
------------ -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 15,884,273 $ 8,235,670
============ ===========
CONDENSED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31
---------------------------------------
2000 1999 1998
----------- ------------ ----------
INCOME
------
Dividends from subsidiary bank $ 0 $ 0 $ 354,139
Interest income 105,812 50,542 37,401
----------- ------------ ----------
Total Income 105,812 50,542 391,540
----------- ------------ ----------
EXPENSES
--------
Salaries and employee benefits 98,511 251,189 264,891
Other expenses 194,578 198,903 40,305
----------- ------------ ----------
Total Expenses 293,089 450,092 305,196
----------- ------------ ----------
Earnings (Losses) before Taxes and Equity in
Undistributed Earnings of Subsidiary Bank (187,277) (399,550) 86,344
Applicable income tax (benefit) (60,660) (84,701) (101,812)
----------- ------------ ----------
Earnings (Losses) before Equity in
Undistributed Earnings of Subsidiary Bank (126,617) (314,849) 188,156
Equity in undistributed earnings of
subsidiary bank 931,127 261,239 246,185
----------- ------------ ----------
NET EARNINGS (LOSS) $ 804,510 $ (53,610) $ 434,341
=========== ============ ==========
Page 21
WALDEN/SMITH FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 13: WALDEN/SMITH FINANCIAL GROUP, INC. (PARENT ONLY) FINANCIAL INFORMATION
(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
-------------------------------------
2000 1999 1998
----------- ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
-------------------------------------
Dividends received from subsidiary bank $ 0 $ 0 $ 354,139
Income taxes paid (586,509) (181,359) (133,839)
Interest received 102,056 76,789 7,644
Cash paid to employees and suppliers (174,396) (484,257) (257,487)
Collections on ESOP debt 42,817 0 0
Cash received from subsidiary bank for taxes 628,970 233,188 274,336
----------- ----------- ----------
Net Cash Provided by (Used in) Operating Activities 12,938 (355,639) 244,793
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
-------------------------------------
Purchase of equipment and vehicles 0 (6,826) (3,600)
Collections on notes receivable 25,000 285,000 0
Purchase of First Community Bank stock 0 (1,025,010) (35,285)
Purchase of goodwill 0 0 (20,853)
(Increase) decrease in cash value of life insurance 0 15,735 (4,840)
Purchase of loan (500,000) 0 (175,000)
Proceeds from sale of equipment 29,000 0 32,000
Net cash received from acquired institution 350,622 0 0
Purchase of other assets 0 (50,000) 0
----------- ----------- ----------
Net Cash Used in Investing Activities (95,378) (781,101) (207,578)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
-------------------------------------
Proceeds from issuance of common stock 0 2,542,680 0
----------- ----------- ----------
Net Cash Provided by Financing Activities 0 2,542,680 0
----------- ----------- ----------
Net Increase (Decrease) in Cash (82,440) 1,405,940 37,215
Cash at beginning of the period 1,679,534 273,594 236,379
----------- ----------- ----------
CASH AT END OF THE PERIOD $ 1,597,094 $ 1,679,534 $ 273,594
=========== =========== ==========
Reconciliation of Net Earnings to Net Cash Provided by Operating
Activities:
Net earnings (loss) $ 804,510 $ (53,610) $ 434,371
Undistributed earnings of subsidiary bank (931,127) (261,239) (246,215)
Depreciation and amortization 6,512 3,384 3,602
Noncash contribution 21,000 0 0
Loss on sale of equipment 0 0 71
Management stock bonus plan 10,936 4,400 0
(Increase) decrease in receivable from/payable to
subsidiary bank 58,582 223,920 (117,952)
(Increase) decrease in interest receivable (3,756) 26,247 (29,757)
(Increase) decrease in ESOP debt 42,817 0 0
(Increase) decrease in prepaid tax and expenses 5,671 (140,475) 37,830
Increase (decrease) in accrued income tax 0 (105,676) 105,676
Increase (decrease) in deferred income tax 0 (10,310) 12,800
Increase (decrease) in other liabilities (2,207) (42,280) 44,367
----------- ----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 12,938 $ (355,639) $ 244,793
=========== =========== ==========
Page 22
WALDEN/SMITH FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 14: RESTRICTIONS ON CASH AND DUE FROM BANKS
The Company's bank subsidiary is required to maintain noninterest-bearing
average reserve balances of $25,000 with the Federal Reserve Bank.
NOTE 15: RELATED PARTY TRANSACTIONS
Loans include a demand note receivable from W & W Ranch, which is 100% owned by
major (42.6%) stockholders of Walden/Smith Financial Group, Inc. The balance of
the note receivable was $125,000 and $150,000 at December 31, 2000 and 1999,
respectively. This note bears interest at 7.00% per annum.
Under the provisions of an agreement with the above-referenced major (42.6%)
stockholder, the Bank paid $90,000 in 2000 for consulting services provided by
the stockholder during the year 2000
In December 2000, a major (42.6%) stockholder purchased three vehicles from the
Bank at book value, which was $37,080.
NOTE 16: EMPLOYEE BENEFIT PLAN
The Company's bank subsidiary has adopted a paired profit sharing plan, First
Community Bank 401(k) Plan, as of January 1, 1998. The elective deferral and
employer matching provisions of the Plan became effective June 1, 1998. The Plan
is available to employees who have attained the age of 21, with one or more
years of service and who work at least 1,000 hours per year. Employees may
voluntarily contribute 1% to 15% of their gross compensation on a pretax basis
up to a maximum of $10,500 in 2000. The Bank makes a matching contribution of
50% of each participant's salary reduction contributions up to $8,000. The
Bank's contributions to the 401(k) Plan were $35,050, $32,074 and $18,381 for
the years ended December 31, 2000, 1999 and 1998, respectively.
As a result of the merger with Rainbow Investment Co., Inc. as of March 1, 2000,
an Employee Stock Ownership Plan (ESOP) is in effect, which only covers the
full-time employees of the former Bank of Tuckerman, who have completed at least
one year of service and have attained age 21.
Contributions to the plan are discretionary. The management of the former Bank
of Tuckerman, now operating as First Community Bank, has in the past funded the
ESOP plan in amounts at least equal to the annual principal and interest due on
the related ESOP obligation detailed below.
In November 1993, Rainbow Investment Company, Inc. advanced the ESOP $642,250 to
be used to purchase stock for the plan. This advance (note) is payable over
fifteen (15) years with annual principal payments of $42,816, plus interest at a
variable rate not to exceed 8%. This note is now secured by unallocated shares
of Walden/Smith Financial Group, Inc. stock.
This benefit plan is scheduled to be terminated in the year 2001. The
unallocated shares are to be sold to third parties and the ESOP note collected
in full. This note receivable is reported in with the Loans on the December 31,
2000 consolidated balance sheet.
The Bank's contribution to this plan for the year ended December 31, 2000 was
$76,901.
NOTE 17: MANAGEMENT STOCK BONUS PLAN
The Company has a "Restricted Management Stock Bonus Plan" for the purpose of
retaining and compensating certain senior management employees. The plan has not
been formally adopted as of February 5, 2001; however, when adopted, it is to be
effective January 1, 1999. It provides for the allocation of "share rights"
annually to selected senior management employees (participants). The allocation
value will be equal to ten percent (10%) of the participants' gross earnings.
The annual value will be divided by the Company year-end book value per share to
determine the number of shares to allocate to each participant. Under the Plan,
actual shares would not be issued, or vested, until the participant's tenth year
in the Plan, or sooner in the case of death of such participant, or in case of
the sale of the Company. The Company may purchase the shares from the
participant at 1.333 times book value, either by Company choice (option) or
participant choice (option).
Page 23
WALDEN/SMITH FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 17: MANAGEMENT STOCK BONUS PLAN (Continued)
Rights for 536 shares and 393 shares were issued for years 2000 and 1999
respectively. Expense recognized in these two years was $10,936 and $4,400.
Based on the December 31, 2000 book value, these share rights (929) would have
an option value of $107,764.
The Plan also has a "Change of Control" provision that ensures the participants
of a ten-year benefit by accruing, and vesting, an additional annual benefit for
each year remaining in the original ten-year vesting period. A change of control
occurs when the stock ownership of two major stockholders falls below forty-five
percent (45%) collectively.
NOTE 18: COMMON STOCK TRANSACTIONS
In October 1998, the Parent amended its articles of incorporation to authorize
250,000 shares of common, no-par value stock. Also in October 1998, the
stockholders of the Parent authorized a stock split of 70,292 to 700, effective
at that time. All common stock and per-share data have been restated to reflect
this stock split.
In September 1998, the Parent initiated efforts to raise additional capital by
use of a confidential private offering, which was finalized March 15, 1999,
offering up to 70,000 shares of common stock at a price of $105 per share.
Between April 2, and June 30, 1999, a total of 24,216 shares were issued for a
total of $2,542,680.
The minority stockholders of the Bank have exchanged their Bank stock for 708
shares of the Parent stock. This exchange was part of the confidential private
stock offering that was made dated March 15, 1999.
Pursuant to an agreement and plan of merger, the Parent issued 81,666 shares of
common stock to stockholders of Rainbow Investment Company, Inc. on March 1,
2000. See Note 1.
NOTE 19: RESTRICTIONS ON DIVIDENDS
There are no restrictions on the amount of dividends that are allowed to be paid
by Walden/Smith Financial Group, Inc. to its stockholders. However, the Bank
must have approval of the Arkansas State Bank Department in order to pay
dividends in excess of 75% of current year and the prior year net income after
taxes.
NOTE 20: EARNINGS PER SHARE AND BOOK VALUE PER SHARE
Basic earnings (losses) per share ("EPS") are computed based on the weighted
average shares outstanding during the year. The year 2000 weighted average
shares outstanding gives effect to the 81,666 common shares issued March 1, 2000
in the merger with Rainbow Investment Company, Inc. The 1999 weighted average
shares outstanding gives effect to the common shares issued between April 2,
1999 and June 30, 1999. The diluted earnings (losses) per share for 2000 give
effect to the shares to be available to certain key employees as designated in
the Company's "Restricted Management Stock Bonus Plan", effective January 1,
1999. There were no dilutive share equivalents for 1998. Book value per share is
based on the number of shares outstanding at December 31, 2000 (176,882).
A reconciliation of the numerator and denominator of both basic and dilutive EPS
is shown below:
DECEMBER 31
------------------
2000 1999
------- ------
Basic weighted average shares outstanding 163,681 83,482
Share rights (Management Stock Bonus Plan) 393 0
------- ------
Diluted Weighted Average Shares Outstanding 164,074 83,482
======= ======
Page 24
WALDEN/SMITH FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 20: EARNINGS PER SHARE AND BOOK VALUE PER SHARE (Continued)
The five hundred thirty-six (536) share rights available for the year 2000 in
the Company's "Restricted Management Stock Bonus Plan" were awarded in 2001, and
therefore, would have no impact on weighted average shares outstanding, nor on
diluted ESP amounts for 2000.
NOTE 21: JONESBORO OPERATIONS
In December 1998, the Bank received authorization from the Arkansas State Bank
Department to open a full-service bank branch in Jonesboro, Arkansas in 1999. A
staff was hired, and the branch began operation on January 4, 1999. First
Community Bank's main office has been relocated to the Jonesboro facility at
1700 Highland Drive.
NOTE 22: OTHER COMPREHENSIVE INCOME
The following table presents a reconciliation of the net change in unrealized
gains (losses) on available-for-sale securities:
BEFORE TAX TAX (EXPENSE) NET OF TAX
AMOUNT BENEFIT AMOUNT
----------- ------------- -----------
2000:
-----
Net unrealized gains and tax effect at
February 29, 2000 $ 85,700 $ (29,138) $ 56,562
Net change in unrealized gains (losses) on
available-for-sale securities from
March 1 - December 31, 2000 82,709 (28,121) 54,588
Less: Reclassifications for gains (losses)
included in earnings 0 0 0
---------- ----------- ----------
Net Change in Unrealized Gains (Losses) on
Available-for-Sale Securities $ 168,409 $ (57,259) $ 111,150
========== =========== ==========
NOTE 23: AGREEMENT WITH POCAHONTAS BANCORP, INC.
On January 4, 2001, the Company, on behalf of its stockholders, executed an
agreement with Pocahontas Bancorp, Inc., Pocahontas, Arkansas for the sale of
the outstanding stock of Walden/Smith Financial Group, Inc. The agreement is
subject to regulatory approval. Pocahontas Bancorp, Inc. owns and operates
Pocahontas Federal Savings and Loan Association, a federally chartered savings
and loan, with total assets of 4401 million on September 30, 2000.
NOTE 24: CONTINGENCY
The Bank is involved in litigation with Bank of Oklahoma, dba Transfund, over
termination of a contract. Transfund is asking for $96,488 in damages plus legal
cost. The Bank has set forth substantial defenses. The ultimate resolution of
this matter is not expected to have a material adverse effect on the Company's
financial position. No provisions have been made in the financial statements for
this claim.