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, 2001.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to _____________________
Commission File #0-23969
POCAHONTAS BANCORP, INC.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 71-0806097
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1700 E. Highland, Jonesboro, AR 72401
---------------------------------------- -----
(Address of Principal Executive Offices) Zip Code
(870) 802-1700
--------------------------------
(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
- ----------------------
(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 .
----- ------
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 17, 2001, there were issued and outstanding 4,468,680 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 26,
2001, was $27,417,269. This amount does not include shares held by the Employee
Stock Ownership Plan of First Community Bank (the Registrant's subsidiary), by
executive officers and directors, and by the Registrant as treasury stock.
1
PART I
ITEM 1 BUSINESS
- ------ --------
General
Pocahontas Bancorp, Inc. (the "Registrant" or the "Company") was
organized in March 1998 to be the holding company for First Community Bank (the
"Bank"), a federally chartered savings and loan association headquartered in
Jonesboro, 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 1700 E. Highland Drive, Jonesboro, Arkansas, and its telephone number is
870-802-1700.
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.
On May 15, 2001, the Company acquired Walden/Smith Financial Group,
Inc. ("Walden") and its wholly-owned bank subsidiary, First Community Bank
("FCB"). As part of the acquisition, Walden's stockholders received an aggregate
of $27.4 million in cash for all of the issued and outstanding common stock of
Walden. 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 moved its corporate headquarters
to Jonesboro, Arkansas.
On November 20, 2001, the Company announced it has agreed to acquire
North Arkansas Bancshares, Inc., the holding company for Newport Federal Savings
Bank, for $15.00 per share, or $4.4 million in the aggregate. Newport Federal
Savings Bank is a Savings Bank located in Newport, Arkansas with $39.9 million
in total assets at September 30, 2001. Under the terms of the agreement, each
share of North Arkansas Bancshares, Inc. common stock will be converted into the
right to receive that number of shares of Company Common Stock equal to the
number obtained by dividing $15.00 by the average of the closing bid price of
the Company Common Stock on the NASDAQ National Market for the 15 consecutive
trading days ending on the fifth day before the closing date.
The Bank is a community-oriented savings institution that operates 21
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, 2001, the Company and its affiliates employed 169
persons.
2
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.
Lending Activities
Loan Portfolio Composition. The Bank's net loan portfolio consists
primarily of first mortgage loans collateralized by single-family residential
real estate, multifamily residential real estate, commercial real estate and
agricultural real estate loans. At September 30, 2001, the Bank's net loan
portfolio totaled $349.4 million, of which $176.0 million, or 50.4% were
single-family residential real estate mortgage loans, $0.8 million, or 0.2% were
multifamily residential real estate loans, $14.4 million, or 4.1%, were
agricultural real estate loans, and $73.3 million, or 21.0%, were commercial
real estate loans (including land loans). The remainder of the Bank's loans at
September 30, 2001 included commercial business loans (i.e., crop production,
equipment and livestock loans) which totaled $65.7 million, or 18.8%, of the
Bank's net loan portfolio as of September 30, 2001. Other loans, including
automobile loans and loans collateralized by deposit accounts totaled $22.7, or
6.5% of the Bank's net loan portfolio as of September 30, 2001. Due to the
acquisition of FCB during fiscal 2001, the composition of the Bank's loan
portfolio changed. As of September 30, 2001, total real estate loans made up
75.8% of the Bank's portfolio compared to 89.6% as of September 30, 2000. The
majority of FCB's loans were commercial real estate and non-real estate loans.
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.
3
At September 30,
--------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------------------ ------------------ ------------------ ------------------ ------------------
(Dollars in Thousands)
Real estate loans:
Single-family
residential $175,977 50.4% $175,625 75.0% $173,622 79.7% $163,895 84.6% $138,539 86.8%
Multifamily
residential 826 0.2 1,163 0.5 1,024 0.5 3,124 1.6 1,600 1.0
Agricultural 14,386 4.1 7,360 3.1 6,878 3.2 6,532 3.4 4,654 2.9
Commercial 73,282 21.0 25,730 11.0 23,296 10.7 10,268 5.3 9,606 6.0
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real
estate loans 264,471 75.7 209,878 89.6 204,820 94.1 183,819 94.9 154,399 96.7
Other loans:
Savings account
loans 5,166 1.5 1,665 0.7 1,528 0.7 1,161 0.6 1,015 0.6
Commercial
business(1) 65,722 18.8 12,555 5.3 10,932 5.0 8,568 4.4 6,533 4.1
Other (2) 17,551 5.0 13,617 5.8 8,113 3.7 5,943 3.1 2,716 1.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total other loans 88,439 25.3 27,837 11.8 20,573 9.4 15,672 8.1 10,264 6.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans
receivable 352,910 101.0 237,715 101.4 225,393 103.5 199,491 103.0 164,663 103.1
Less:
Undisbursed loan
proceeds 416 0.1 1,345 0.6 5,753 2.6 3,655 1.9 2,815 1.8
Unearned discount
and net deferred
loan fees 286 0.1 264 0.1 287 0.1 424 0.2 467 0.3
Allowance for loan
losses 2,832 0.8 1,689 0.7 1,643 0.8 1,684 0.9 1,691 1.0
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans
receivable, net $349,376 100.0% $234,417 100.0% $217,710 100.0% $193,728 100.0% $159,690 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
- ------------------------------------
(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, 2001, 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
Variable rate loans $99,750 $51,654 $45,673 $16,826 $26,971 $ 7,809 $248,683
24 340 1,220 8,789 37,877 55,977 104,227
------- ------- ------- ------- ------- ------- --------
Total $99,774 $51,994 $46,893 $25,615 $64,848 $63,786 $352,910
======= ======= ======= ======= ======= ======= ========
The following table sets forth at September 30, 2001, the dollar amount
of all fixed rate and adjustable rate loans due after September 30, 2002.
Fixed Adjustable Total
-------- ---------- --------
(in Thousands)
Single-family residential $ 60,140 $103,377 $163,517
Multifamily residential -- 826 826
Agricultural 6,363 -- 6,363
Commercial 41,973 -- 41,973
Other 40,457 -- 40,457
-------- -------- --------
Total $148,933 $104,203 $253,136
======== ======== ========
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
4
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 market area. At
September 30, 2001, the Bank had $176.0 million, or 50.4%, 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, 2001 and 2000, loans held
for sale were insignificant. During the fiscal years ended September 30, 2001,
2000 and 1999, the Bank sold into the secondary market $19.7 million, $0.6
million, and $1.8 million, respectively, of single-family, fixed rate,
residential mortgage loans, generally from current period originations. The Bank
retained the servicing rights on $16.7 million of loans sold in fiscal year
2001.
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 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, on all properties securing real estate loans made by the Bank.
5
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 $0.8 million, or 0.2% of the
Bank's total net loan portfolio on September 30, 2001, compared to $1.2 million,
or 0.5% of the Bank's total net loan portfolio at September 30, 2000, $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 total net loan portfolio at September 30, 1998,
and $1.6 million, or 1.0%, of the total net loan portfolio at September 30,
1997. 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 $14.4 million or 4.1%, of the Bank's total net loan portfolio at
September 30, 2001, compared to $7.4 million, or 3.1%, $6.9 million, or 3.2%,
$6.5 million, or 3.4%, and $4.7 million, or 2.9%, of the Bank's total net loan
portfolio at September 30, 2000, 1999, 1998, and 1997, 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 $73.6 million, or 21.1%
of the Bank's total net loan portfolio at September 30, 2001, compared to $25.7
million, or 11.0%, $23.3 million, or 10.7%, $10.3 million, or 5.3%, and $9.6
million, or 6.0%, of the Bank's total net loan portfolio at September 30, 2000,
1999, 1998, and 1997, respectively. The increase in these loans during fiscal
2001 was primarily due to the acquisition of FCB, which had approximately $44.8
million in commercial real estate loans. The Bank's commercial real estate loans
are collateralized by improved property such as office buildings, churches and
other nonresidential buildings. At September 30, 2001, 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 greater 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
6
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, 2001, such loans totaled $22.7
million, or 6.5% of the Bank's total net loan portfolio as compared to $15.3
million, or 6.5%, $9.6 million, or 4.4%, $7.1 million, or 3.7%, and $3.7
million, or 2.3%, of the Bank's total net loan portfolio as of September 30,
2000, 1999, 1998, and 1997, 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 $65.7
million, or 18.8% of the Bank's total net loan portfolio at September 30, 2001,
as compared to $12.6 million, or 5.3%, $10.9 million, or 5.0%, $8.6 million, or
4.4%, and $6.5 million, or 4.1%, of the Bank's total net loan portfolio at
September 30, 2000, 1999, 1998, and 1997, respectively.
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.
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
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(In Thousands)
Total loans receivable, net
at beginning of year $ 234,417 $ 217,710 $ 193,728 $ 159,690 $ 136,872
Loans originated:
Real estate:
Single-family residential 37,264 38,629 53,499 66,988 49,215
Multifamily residential -- -- 180 100 93
Commercial 28,367 6,346 13,708 2,010 3,467
Agricultural 920 1,766 2,317 3,429 2,863
Other:
Commercial business 24,305 11,650 11,102 7,593 6,697
Savings account loans 3,387 1,649 1,580 908 926
Other 27,234 10,316 7,504 4,162 2,684
--------- --------- --------- --------- ---------
Total loans originated 121,477 70,356 89,890 85,190 65,945
Loans purchased 139,094 4,333 10,552 -- --
Loans sold (21,786) (635) (1,765) (4,287) (2,156)
Loans transferred to REO (1,603) (948) (943) (129) (294)
Loans to facilitate the sale of REO (777) (505) (513) -- (349)
Loan repayments (121,571) (55,989) (73,239) (46,478) (40,004)
Other loan activity (net) 125 95 -- (258) (324)
--------- --------- --------- --------- ---------
Total loans receivable,
net at end of year $ 349,376 $ 234,417 $ 217,710 $ 193,728 $ 159,690
========= ========= ========= ========= =========
Mortgage-backed securities, net
at beginning of year $ 86,930 $ 191,125 $ 151,970 $ 168,836 $ 179,359
Purchases 400 -- 65,737 -- --
Sales (41,459) (91,600) (1,205) -- --
Fair value adjustment 2,144 (2,005) (1,222) 2,474 --
Repayments (11,194) (10,831) (24,431) (19,598) (10,669)
Discount amortization 269 241 276 258 146
--------- --------- --------- --------- ---------
Mortgage-backed and related securities,
net at end of year $ 37,090 $ 86,930 $ 191,125 $ 151,970 $ 168,836
========= ========= ========= ========= =========
Total loans receivable, net, and
mortage-backed and related
securities, net, at end of year $ 386,466 $ 321,347 $ 408,835 $ 345,698 $ 328,526
========= ========= ========= ========= =========
7
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.
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
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(Dollars In Thousands)
Nonperforming loans:
Single-family residential real estate $1,883 $1,477 $1,302 $2,240 $ 422
All other mortgage loans 2,988 485 10 15
Other loans 1,454 54 66 41 31
------ ------ ------ ------ ------
Total delinquent loans $6,325 $2,016 1,378 2,296 453
Total real estate owned 1,342 646 261 16 17
------ ------ ------ ------ ------
Total nonperforming assets $7,667 $2,662 $1,639 $2,312 $ 470
====== ====== ====== ====== ======
Total loans delinquent 90 days or more
to net loans receivable 1.81% 0.86% 0.63% 1.19% 0.28%
Total loans delinquent 90 days or more
to total assets 1.30% 0.50% 0.28% 0.56% 0.12%
Total nonperforming loans and REO
to total assets 1.58% 0.66% 0.34% 0.57% 0.12%
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"
8
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.
The following table sets forth the aggregate amount of the Bank's
classified assets at the dates indicated.
At September 30,
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(Dollars In Thousands)
Substandard assets $5,435 $2,093 $2,905 $2,572 $1,640
Doubtful assets 597 352 -- 18 --
Loss assets 290 14 32 -- 25
------ ------ ------ ------ ------
Total classified assets (1) $6,322 $2,459 $2,937 $2,590 $1,665
====== ====== ====== ====== ======
(1) With respect to assets classified "doubtful" and "loss," the Bank has
established aggregate specific loan loss reserves of $290,000, $14,000,
$32,000, $0, and $25,000 (in actual dollars) for the years ended September
30, 2001, 2000, 1999, 1998, and 1997, 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, 2001, 2000, 1999, 1998 and
1997, the Bank added $200,000, $120,000, $0, $0, $60,000 and $411,200,
respectively, to its allowance for loan losses. The Bank's allowance for loan
losses totaled $2.8 million, $1.7 million, $1.6 million, $1.7 million, and $1.7
million at September 30, 2001, 2000, 1999, 1998 and 1997, 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
2001 2000 1999 1998 1997
--------- --------- --------- -------- ---------
(In Thousands)
Total loans outstanding $352,910 $237,715 $225,393 $199,491 $164,663
Average net loans outstanding 265,182 224,751 206,001 176,295 147,316
Allowance balances (at beginning of year) $ 1,689 $ 1,643 $ 1,684 $ 1,691 $ 1,734
Provision for losses:
Real estate loans -- -- -- -- 30
Other loans 200 120 -- -- 30
Balance transferred at acquisition of FCB 1,595 -- -- -- --
Charge-offs:
Real estate loans (242) (54) (67) (7) (11)
Other loans (423) (28) (29) -- (93)
Recoveries:
Real estate loans 1 4 1 -- 1
Other loans 12 4 54 -- --
--------- --------- --------- -------- ---------
Allowance balance (at end of year) $ 2,832 $ 1,689 $ 1,643 $ 1,684 $ 1,691
========= ========= ========= ======== =========
Allowance for loan losses as a percent
of total loans receivable at end of year 0.80% 0.71% 0.73% 0.84% 1.03%
Net loans charged off as a percent
of average net loans outstanding 0.25% 0.04% 0.05% 0.00% 0.07%
Ratio of allowance for loan losses
to total nonperforming loans
at end of year 44.77% 83.78% 119.23% 73.34% 373.45%
Ratio of allowance for loan losses to
total nonperforming loans and
REO at end of year 36.94% 63.45% 100.24% 72.84% 359.79%
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,
2001 2000 1999 1998 1997
-------------------- -------------------- -------------------- -------------------- --------------------
% 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 $ 716 75.7% $ 843 89.6% $ 893 94.1% $ 958 94.9% $ 927 96.7%
Non-mortgage
loans 2,116 24.3 846 10.4 750 5.9 726 5.1 764 3.3
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total allowance
for loan
losses $2,832 100.0% $1,689 100.0% $1,643 100.0% $1,684 100.0% $1,691 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
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
10
mortgages can be composed of either fixed-rate mortgages or ARM loans. As a
result, the interest rate risk 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,
2001 2000 1999 1998 1997
---------------- ---------------- ---------------- ---------------- ----------------
$ % $ % $ % $ % $ %
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(Dollars In Thousands)
Mortgage-backed
securities:
Adjustable $ 796 2.1% $40,969 47.1% $119,975 62.8% $139,528 92.0% $151,766 89.9%
Fixed 36,294 97.9 45,961 52.9 71,150 37.2 12,442 8.0 17,070 10.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total mortgage-backed
securities, net $ 37,090 100.0% $86,930 100.0% $191,125 100.0% $151,970 100.0% $168,836 100.0%
======== ====== ======= ===== ======== ===== ======== ===== ======== =====
At September 30, 2001, mortgage-backed securities aggregated $37.0
million, or 7.6% of the Bank's total assets. At September 30, 2001, 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 treasuries 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 $39.4 million, $40.6 million,
$36.3 million, $32.7 million, and $31.7 million at September 30, 2001, 2000,
1999, 1998, and 1997, respectively. At September 30, 2001, $3.3 million of the
Bank's investment securities, excluding mortgage-backed securities, had a
remaining term to maturity of one year or less, and $2.3 million, or 3.2%, 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,
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(Dollars In Thousands)
Investment securities:
Mortgage-backed securities $ 37,090 $ 86,930 $191,125 $151,970 $168,836
Corporate Bonds 2,014 -- -- -- --
U.S. Government treasury obligations 1,951 -- -- -- --
U.S. Government agency obligations 13,803 27,095 25,403 21,656 26,858
Trust preferred securities 4,040 4,000 -- -- --
Municipal bonds 12,537 9,466 9,446 9,425 4,859
Equity securities 5,040 1,127 1,429 1,588 --
-------- -------- -------- -------- --------
Total investment securities 76,475 128,618 227,403 184,639 200,553
FHLB stock 3,787 5,988 10,981 10,060 10,053
-------- -------- -------- -------- --------
Total investments $ 80,262 $134,606 $238,384 $194,699 $210,606
======== ======== ======== ======== ========
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, 2001.
At September 30, 2001
---------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten 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 Yield
-------- ---------- -------- ---------- -------- ---------- -------- ----------
(Dollars In Thousands)
Investment securities:
U.S. Government Agency
Securities $ - 0.00% $ 519 4.76% $13,283 7.25% $ - 0.00%
U.S. Government Treasury
securities 1,006 3.85% 946 4.49% - 0.00% - 0.00%
Trust Preferred - 0.00% - 0.00% 4,040 9.74% - 0.00%
State and municipal
obligations (1) 273 4.96% 798 5.35% 8,687 5.42% 2,779 5.67%
Corporate Bonds 2,014 12.08% - 0.00% - 0.00% - 0.00%
CMOs (2) - 0.00% - 0.00% 1,885 6.53% 13,397 6.68%
Mortgage-backed
securities - 0.00% 150 7.70% 2,578 7.16% 19,074 7.48%
------ ------ ------- ----- ------- ----- ------- -----
Total investment
securities 3,293 8.98% 2,413 5.03% 30,473 7.01% 35,250 7.03%
====== ===== ===== =====
Equity securities
FHLB stock
Accrued interest on
investments
Total investment
securities,
At September 30, 2001
--------------------------------
Total
--------------------------------
Average
Carrying Market Life in
Value Value Years
-------- ------- --------
(Dollars In Thousands)
Investment securities:
U.S. Government Agency
Securities $13,803 $13,803 9.56
U.S. Government Treasury
securities 1,951 1,951 0.02
Trust Preferred 4,040 4,040 8.96
State and municipal
obligations (1) 12,537 12,546 8.84
Corporate Bonds 2,014 2,030 0.13
CMOs (2) 15,282 15,282 25.01
Mortgage-backed
securities 21,808 21,808 17.23
------- -------
Total investment
securities 71,435 71,460
Equity securities 5,040 5,040
FHLB stock 3,787 3,787
Accrued interest on
investments 845 845
------- -------
Total investment
securities, 81,107 81,132
======= =======
(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,
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(In thousands)
Rate
0.00-3.99% $ 35,219 $ 28 $ -- $ 275 $ 16
4.00-5.99% 154,585 34,126 135,563 111,713 76,094
6.00-7.99% 43,252 128,051 14,924 25,225 32,170
8.00-9.99% 225 -- -- -- --
-------- -------- -------- -------- --------
Total $233,281 $162,205 $150,487 $137,213 $108,280
======== ======== ======== ======== ========
Time Deposit Maturities. The following table sets forth the amount
and maturities of certificates of deposit at September 30, 2001.
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 $43,880 $59,573 $48,129 $12,644 $164,226
Certificate of Deposit greater than $100,000 21,750 26,312 18,083 2,910 $ 69,055
------- ------- ------- ------- --------
Total Certificates of Deposit 65,630 85,885 66,212 15,554 233,281
======= ======= ======= ======= ========
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, 2001, the Bank's FHLB advances totaled $73.3 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, 2001, the Bank's securities sold under
agreements to repurchase totaled $0.4 million.
The following table sets forth certain information regarding borrowings
by the Bank during the periods indicated.
Year Ended September 30,
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(Dollars In Thousands)
Weighed average rate paid on: (1)
FHLB advances 5.66% 5.78% 5.03% 5.75% 5.54%
Other borrowings (2) 5.38% 5.62% 5.16% 4.97% 5.81%
FHLB advances:
Maximum balance $112,125 $185,535 $216,844 $210,325 $230,317
Average balance $ 82,915 $145,312 $161,905 $173,812 $203,835
Other borrowings: (2)
Maximum balance $ 2,650 $ 2,465 $ 3,242 $ 21,850 $ 21,060
Average balance $ 1,598 $ 1,901 $ 2,273 $ 6,215 $ 17,684
(1) Calculated using monthly weighted average interest rates.
(2) Includes borrowings under reverse repurchase agreements.
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.
Trust Preferred Securities
On March 28, 2001, the Company issued $7.5 million of trust-preferred
securities with a coupon rate of 10.18%. The net proceeds to the Company were
approximately $7.2 million. The Company contributed $5.0 million to the Bank on
May 15, 2001, as additional paid-in capital to increase the Bank's capital
percentages following the acquisition of Walden. The Company used the remaining
proceeds for general corporate purposes, including but not limited to additional
business acquisitions, stock repurchases, dividends and corporate expenses.
Under current tax law, the dividend paid on trust-preferred securities is
deductible.
On December 8, 2001, the Company issued $10.0 million of trust
preferred securities. The securities were issued by a special purpose business
trust formed by Pocahontas Bancorp and were sold in a private transaction to a
pooled investment vehicle sponsored by Sandler O'Neil. The securities were sold
pursuant to an exemption from registration under the Securities Act of 1933 (the
"Act"), and have not been registered under the Act. Sandler O'Neil assisted
Pocahontas Bancorp in the placement of the trust preferred securities. The
securities may not be offered or sold in the United States absent registration
under the Act or an applicable exemption from registration. The trust preferred
securities have a floating rate of interest, which is reset semi annually, equal
to 6-month LIBOR plus 3.75%. The floating rate, however, may not exceed 11.00%
until December 8, 2006.
14
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.
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, 2001, 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.
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, 2001, the Bank had no capital instruments that qualify as
supplementary capital and $2.8 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
15
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, 2001, 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 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 September 2001 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, 2001, 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.
16
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 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 least 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 23A
and 23B 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 23A limits the aggregate amount of certain "covered" transactions with
any
17
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 23B 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, 2001, the Bank was in compliance with these regulations.
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, 2001, 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
18
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
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.
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, 2001, 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
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
---- -------------------------
Dwayne Powell ........ President and Chief Executive Officer
The executive officer of the Company is 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.
Effective October 1, 2001, James Edington resigned as President and
Chief Executive Officer.
Since the formation of the Company, none of the executive officers,
directors or other personnel has received remuneration from the Company.
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
19
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, 2001, the
Bank's bad debt reserve subject to recapture over a two-year period totaled
approximately $389,000. The Bank has established a deferred tax liability of
approximately $149,000 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(Y)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 21
full-service branch offices located in nine 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,
2001. The aggregate net book value of the Bank's premises and equipment was
$12.3 million at September 30, 2001.
Main Office:
1700 E. Highland
Jonesboro, Arkansas
Branch Offices:
Walnut Ridge Branch Brinkley Branch Jonesboro Branches
- ------------------- --------------- ------------------
121 SW Third Street 311 West Cedar 1700 E. Highland Drive
Walnut Ridge, Arkansas Brinkley, Arkansas Jonesboro, Arkansas
(Opened 1968) (Opened 1998) (Opened 2001)
Jonesboro Branch England Branch
- ---------------- --------------
700 S.W. Drive 100 Stuttgart Hwy. 209 West Washington
Jonesboro, Arkansas England, Arkansas Jonesboro, Arkansas
(Opened 1976) (Opened 1998) (Opened 2001)
Corning Branch Carlisle Branch Tuckerman Branch
- -------------- --------------- ----------------
309 Missouri Avenue 124 West Main 106 E. Main Street
Corning, Arkansas Carlisle, Arkansas Tuckerman, Arkansas
(Opened 1983) (Opened 1998) (Opened 2001)
Highland Branch Lake City Branch Swifton Branch
- --------------- ---------------- --------------
1566 Highway 62/412 100 Cobean Blvd. 101 Main Street
Hardy, Arkansas Lake City, Arkansas Swifton, Arkansas
(Opened 1983) (Opened 1998) (Opened 2001)
Jonesboro Branch Hardy Branch Newport Branch
- ---------------- ------------ --------------
2213 Caraway Road 101 W. Main Street 2101 Malcolm Ave.
Jonesboro, Arkansas Hardy, Arkansas Newport, Arkansas
(Opened 1996) (Opened 1998) (Opened 2001)
Jonesboro Wal-Mart Branch Pocahontas Wal-Mart Branch Grubbs Branch
- ------------------------- -------------------------- -------------
1815 E. Highland Drive 1415 Hwy 67 South 130 N. Main
Jonesboro, Arkansas Pocahontas, Arkansas Grubbs, Arkansas
(Opened 1999) (Opened 1998) (Opened 2001)
Pocahontas Branch Pocahontas Branch Paragould Wal-Mart Branch
- ----------------- ----------------- -------------------------
205 Rice Street 203 W. Broadway 2802 W. Kings Highway
Pocahontas, Arkansas Pocahontas, Arkansas Paragould, Arkansas
(Opened 2001) (Opened 1935) (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 2001 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 2001 and 2000. This information has been obtained
from monthly statistical stock summaries provided by the Nasdaq Stock Market.
As of December 17, 2001, there were 4,468,680 shares of common stock issued
and outstanding and 721 stockholders of record.
High Low
Quarter Ended Bid Bid
- -------------- ------ ------
December 31, 2000 $7.750 $6.880
March 31, 2001 7.380 6.630
June 30, 2001 8.000 6.810
September 30, 2001 9.370 8.000
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
Cash Dividends Declared in Fiscal 2001:
Record Payment Dividend
Date Date Per Share
------ --------------- ---------
December 15, 2000 January 3, 2001 $0.065
March 15, 2001 April 3, 2001 0.065
June 15, 2001 July 3, 2001 0.065
September 15, 2001 October 3, 2001 0.065
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
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,
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(In Thousands)
Total assets $483,565 $401,105 $482,131 $406,981 $383,417
Cash and cash equivalents 11,146 12,941 8,622 3,781 2,805
Cash surrender value of life insurance 6,589 6,158 5,965 5,822 5,639
Investment securities 79,650 128,618 227,403 184,640 200,553
Loans receivable, net 349,376 234,417 217,710 193,728 159,690
Federal Home Loan Bank Stock 3,787 5,988 10,981 10,060 10,053
Deposits 348,541 234,972 211,891 195,537 143,354
FHLB advances 73,316 117,990 213,105 143,670 190,601
Securities sold under agreements to
repurchase 350 1,375 2,075 2,107 20,685
Stockholders' equity (1) 44,589 41,378 48,032 60,567 24,246
Summary of Operations
Years Ended September 30,
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(in Thousands)
Interest income $29,891 $29,927 $27,960 $27,854 $26,093
Interest expense 19,099 19,724 17,217 18,401 18,699
------- ------- ------- ------- -------
Net interest income before
provision for loan losses 10,792 10,203 10,743 9,453 7,394
Provision for loan losses 200 120 -- -- 60
------- ------- ------- ------- -------
Net interest income after
provision for loan losses 10,592 10,083 10,743 9,453 7,334
Noninterest income 3,662 3,102 1,927 920 1,351
Noninterest expense:
Compensation and benefits 8,102 4,383 7,628 3,825 2,954
Occupancy and equipment 1,278 996 1,137 662 566
Federal deposit insurance premiums 66 64 118 104 108
Other 3,017 2,658 2,369 1,600 1,337
------- ------- ------- ------- -------
Total noninterest expense 12,463 8,101 11,252 6,191 4,965
------- ------- ------- ------- -------
Income before income taxes 1,791 5,084 1,418 4,182 3,720
Income tax provision 382 1,632 466 1,294 1,344
------- ------- ------- ------- -------
Net income $ 1,409 $ 3,452 $ 952 $ 2,888 $ 2,376
======= ======= ======= ======= =======
(1) 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.
25
Key Financial Ratios and Other Data
Certain ratios and other data: (1)
At or for the Year Ended September 30,
2001 2000 1999 1998 1997
----- ------ ----- ------ ------
Performance Ratios:
Return on average equity 3.39% 7.79% 1.80% 6.16% 10.07%
Return on average assets 0.35 0.80 0.23 0.67 0.63
Interest rate spread (2) 2.74 2.28 2.37 1.92 1.83
Net interest margin (2) 2.90 2.54 2.72 2.45 2.04
Noninterest expense to average assets 3.05 1.92 2.66 1.55 1.32
Net interest income after provision
for loan losses to noninterest expense 84.99 124.00 95.48 152.69 147.68
Efficiency (5) 87.42 61.77 88.80 59.69 57.17
Asset Quality Ratios:
Average interest-earning assets to
average interest-bearing liabilities 103.23 105.22 108.11 110.93 104.09
Nonperforming loans to net loans (3) (4) 1.81 0.86 0.63 1.19 0.28
Nonperforming assets to total
assets (3) (4) 1.58 0.66 0.34 0.57 0.12
Allowance for loan losses to
nonperforming loans (3) (4) 44.77 83.78 119.23 73.34 373.45
Allowance for loan losses to
nonperforming loan assets (3) (4) 36.94 63.45 100.24 72.84 359.79
Allowance for loan losses to total
loans (3) 0.80 0.71 0.73 0.86 1.03
Capital, Equity and Dividend Ratios:
Tangible capital (3) 7.14 8.92 9.35 10.24 6.32
Core capital (3) 7.14 8.92 9.35 10.24 6.32
Risk-based capital (3) 10.17 17.66 20.23 22.62 16.22
Average equity to average assets ratio 9.47 10.31 12.45 10.87 6.26
Dividend payout ratio 81.27 38.46 151.55 43.20 60.74
Per Share Data:
Dividends per share $0.26 $0.25 $0.24 $0.23 $0.22
Book value per share (6) $9.98 $9.29 $8.70 $9.46 $3.82
Basic earnings per share (7) $0.33 $0.67 $0.16 $0.45 $0.38
Diluted earnings per share (8) $0.33 $0.67 $0.16 $0.44 $0.37
Number of full service offices 21 14 14 11 6
(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 4,468,680, 4,454,357, 5,518,614, 6,399,623,
and 6,341,553 shares outstanding at September 30, 2001, 2000, 1999, 1998,
and 1997, respectively.
(7) This calculation is based on weighted average shares outstanding of
4,295,020, 5,166,038, 5,802,860, 6,388,906 and 6,327,798, for the fiscal
years ended September 30, 2001, 2000, 1999, 1998, and
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, 2001, 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 Net Portfolio Value as a Percentage of
in Basis Points ------------------------------------- Estimated Market
(Rate Shock) Amount $ Change % Change Ratio Value of Assets
- --------------- ------- -------- -------- ----- ------------------
(Dollars in Thousands)
+300 $ 48,971 $(16,272) (24.9)% 10.27% (2.81)%
+200 54,914 (10,330) (15.8)% 11.33% (1.75)%
+100 60,594 (4,649) (7.1)% 12.31% (1.93)%
0 65,243 0 0.0% 13.08% 0.00%
- -100 68,501 3,257 5.0% 13.58% 0.50%
- -200 71,350 6,107 9.4% 14.00% 0.93%
- -300 0 0 0.0% 0.00% 0.00%
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 increased $82.5 million, or 20.6%, from
$401.1 million at September 30, 2000 to $483.6 million at September 30, 2001.
The increase was primarily due to the acquisition of First Community Bank that
included total assets of $152.2 million. The Bank sold $16.7 million of
fixed-rate mortgage loans and $45.6 million of available-for-sale investment
securities during fiscal year 2001. 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.
Loans receivable, net. The Company's net loans receivable increased $114.6
million, or 48.9%, and $16.7 million, or 7.7%, in fiscal years 2001 and 2000,
respectively from the prior years. The net change in fiscal year 2001 was
primarily due to the acquisition of First Community Bank that included
approximately $133.8 million in loans, while the Bank sold approximately $16.7
million of fixed rate loans in fiscal year 2001. The Bank retained the servicing
rights and the customer relationships. During the year ended September 30, 2000,
the Bank purchased $4.3 million of loans.
Investment securities. The investment securities portfolio decreased $48.9
million or 38.0% from $128.6 at September 30, 2000, to $79.7 million at
September 30, 2001. In accordance with the Company's present strategy, the
principal pay-downs and maturities of investments were used to fund loan growth.
This net change was primarily due to the sale of $45.6 million of
available-for-sale securities, and called securities of $14.6 million which was
partially offset by the acquisition of First Community Bank that included $12.7
million of available for sale investment securities. The investment securities
portfolio decreased $98.8 million, or 43.4% to $128.6 million at September 30,
2000, compared to $227.4 million at September 30, 1999.
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 $6.6 million and $6.2 million at September 30, 2001 and 2000,
respectively. The increase in fiscal 2001 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. Deposits increased $113.5 million or 48.3% to $348.5
million at September 30, 2001, from $235.0 million at September 30, 2000. The
increase was primarily due to the acquisition of First Community Bank on May 15,
2001. Deposits increased $23.1 million or 10.9% during fiscal year 2000,
primarily due to core deposit growth in the Bank's market area.
FHLB advances and reverse repurchase agreements. The Company also relies upon
FHLB advances and reverse repurchase agreements as a source to fund assets.
Approximately 15.2% and 29.8% of the Company's assets were funded with FHLB
advances and reverse repurchase agreements as of September 30, 2001 and 2000,
respectively. At September 30, 2001, FHLB advances and reverse repurchase
agreements totaled $73.7 million, a decrease of $45.7 million, or 38.3%, from
2000. FHLB advances and reverse repurchase agreements totaled $119.4 million at
September 30, 2000, a decrease of $95.8 million, or 44.5% from 1999, reflecting,
in part, the increased deposits resulting from the Company's acquisition of
branches during 1999 and the proceeds from the Company's second step stock
offering.
Trust preferred securities - Trust preferred securities of $7.5 million were
issued during the year ended September 30, 2001. Net proceeds to the Company
were $7.2 million.
Stockholders' Equity. Stockholders' equity increased $3.2 million, or 7.7%, from
$41.4 million to $44.6 million at September 30, 2001. The increase was due to
net income of $1.4 million and in unrealized gains on available-for-sale
securities, offset by dividends of $1.2 million. Stockholders' equity as of
September 30, 2000, decreased by $12.0 million or
29
19.8%, to $41.4 million. This decrease was primarily due to stock repurchases of
$7.8 million, change in unrealized losses on available-for-sale securities, and
dividends paid of $1.4 million, which offset net income of $3.5 million.
Discussion of Results of Operations
Overview. Net income was $1.4 million for fiscal 2001, compared to $3.5 million
and $0.9 million for fiscal 2000 and 1999, respectively. The Company's average
interest earning assets have increased over the three year period ended
September 30, 2001, which has resulted in higher levels of interest income. The
Company's net interest rate spread increased to 2.74% for the year ended
September 30, 2001 from 2.28% for the year ended September 30, 2000, and 2.37%
for the year ended September 30, 1999. The increase in net interest rate spread
during 2001 was primarily due to a decreased cost of funds. The increase in the
net interest rate spread for fiscal 2001 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 $10.8 million for fiscal 2001 compared to $10.2 million and
$10.7 million, for fiscal 2000 and 1999, 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 mortgage loans
and investment securities, including mortgage-backed securities.
Interest-bearing liabilities primarily include deposits and FHLB advances. The
increases in average interest-earning assets during fiscal 2000 and 1999can be
attributed to increases in the loan portfolio, funded primarily with deposits
and FHLB advances and increases in capital. The increase in fiscal 2001, was
mainly attributable to the purchase of First Community Bank.
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,
2001 2000 1999
------------------------------ ---------------------------- ---------------------------
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) $265,210 $ 22,151 8.35% $224,214 $ 17,671 7.88% $206,001 $16,141 7.84%
Investment securities 107,239 7,740 7.22 176,783 12,256 6.93 187,796 11,818 6.29
-------- -------- ------ -------- -------- ----- -------- ------- -------
Total interest-earning assets 372,449 29,891 8.03 400,997 29,927 7.46 393,797 27,959 7.10
Noninterest-earning cash 6,383 3,622 2,911
Other noninterest-earning assets 29,361 25,045 25,750
-------- -------- --------
Total assets $408,193 $429,664 $422,458
======== ======== ========
Interest-bearing
liabilities:
Demand deposits $ 88,132 $ 1,797 2.04 $ 68,779 $ 1,705 2.48 $ 61,416 $ 1,568 2.55
Time deposits 187,328 11,619 6.20 158,052 8,645 5.47 138,651 7,328 5.29
Borrowed funds (5) 85,350 5,683 6.66 154,287 9,374 6.08 164,189 8,321 5.07
-------- -------- ------ -------- -------- ----- ------- ------- -------
Total interest-
bearing liabilities 360,810 19,099 5.29 381,118 19,724 5.18 364,256 17,217 4.73
-------- -------- ------ -------- -------- ----- -------- ------- -------
Noninterest-bearing
liabilities (2) 5,800 4,262 5,590
-------- -------- --------
Total liabilities 366,610 385,380 369,846
Stockholders' equity 41,583 44,284 52,612
-------- -------- -------
Total liabilities and
stockholders' equity $408,193 $429,664 $422,458
======== ======== ========
Net interest income $ 10,792 $ 10,203 $10,742
======== ======== ========
Net interest rate spread (3) 2.74% 2.28% 2.37%
====== ====== ======
Interest-earning assets and
net interest margin (4) $372,449 2.90% $400,997 2.54% $393,797 2.72%
======== ====== ======== ====== ======== ======
Ratio of average
interest-earning assets to
average interest-bearing liabilities 103.23% 105.22% 108.11%
====== ====== ======
(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)
2001 vs 2000 2000 vs 1999 1999 vs 1998
------------------------------------- ------------------------------------- ----------------------------
Increase/(Decrease) Increase/(Decrease) Increase/(Decrease)
Due to Due to Due to
-------------------------- Total --------------------------- Total ----------------------------
Rate/ Increase Rate/ Increase Rate/
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease) Volume Rate Volume
------- ------- ------- --------- ------- ------- ------- --------- ------- ------- -------
Interest income:
Loans receivable $ 3,098 $ 1,054 $ 197 $ 4,349 $ 1,447 $ 124 $ 12 $ 1,583 $ 2,399 $ (423) $ 257
Investment
securities (4,821) 513 (206) (4,514) (693) 1,183 (78) 412 (1,428) (420) 1,375
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning
assets $(1,723) $ 1,567 $ (9) $ (165) $ 754 $ 1,307 $ (66) $ 1,995 $ 971 $ (843) $ 1,632
======= ======= ======== ======= ======= ======= ======= ======= ======= ======= =======
Interest expense:
Deposits 2,217 $ 703 $ 145 3,065 1,191 540 $ 69 $ 1,800 1,569 (434) $ 777
Borrowed funds (4,191) 663 (291) (3,819) (502) 1,314 (78) 734 (997) (1,360) 145
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-
bearing liabilities $(1,974) $ 1,366 $ (146) $ (754) $ 689 $ 1,854 $ (9) $ 2,534 $ 572 $ 1,794 $ 922
======= ======= ======== ======= ======= ======= ======= ======= ======= ======= =======
Net change in net
interest income $ 251 $ 201 $ 137 $ 589 $ 65 $ (547) $ (57) $ (539) 399 $ 951 $ 710
======= ======= ======== ======= ======= ======= ======= ======= ======= ======= =======
32
During fiscal 2001, loan demand was relatively strong, resulting in an increase
in loans outstanding, an increase in the net interest rate spread and an
increase of $0.6 million, or 5.9%, in net interest income. The average yield on
interest earning assets increased to 8.03% in fiscal 2001 compared to 7.46% and
7.10% in fiscal 2000 and 1999, respectively, while the average cost of interest
bearing liabilities increased to 5.18% and 4.73% in fiscal 2000 and fiscal 1999,
respectively. The increase in the average yield on interest earning assets was
largely due to an increase in higher-yielding average loans receivable and an
increase in the yield on loans receivable. The increase in average cost of
interest bearing liabilities was primarily due to an increase in market rates.
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.
Provision for Loan Losses. The Bank provided for loan losses of $200,000,
$120,000, and $0, respectively, in the fiscal years ended September 30, 2001,
2000, and 1999. 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. The increased provision in fiscal
2001 was due to the significant growth in the higher risk categories of the loan
portfolio in fiscal 2001.
Noninterest Income. Non-interest income totaled $3.7 million for the fiscal year
ended September 30, 2001, compared to $3.1 million for the fiscal year ended
September 30, 2000, and $1.9 million for the fiscal year ended September 30,
1999. This increases in 2001 and 2000 were 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 $12.5 million for the fiscal year ended September 30,
2001, compared to $8.1 million for the fiscal year ended September 30, 2000, an
increase of 54.3%. The increase was primarily due to charges before taxes of
$3.2 million that was related to the charge-off of excess facilities in the
Pocahontas area and funding of retirement and severance agreements associated
with the move of the corporate headquarters to Jonesboro. Non-interest expense
decreased $3.2 million or 28.3% from $11.3 million for the fiscal year ended
September 30, 1999. The decrease from fiscal 1999 to fiscal 2000 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, 2001, was $0.4
million compared to $1.6 million for the year ended September 30, 2000. The
decrease was primarily due to the decrease in income before taxes and a decrease
in the effective tax rate due to tax-exempt income and changes in tax estimates.
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.
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, 2001, 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.
At September 30, 2001, the Bank exceeded all of its regulatory capital
requirements.
33
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 was 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 are to 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 July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, Business Combinations. The
statement discontinues the use of the pooling of interest method of accounting
for business combinations and is effective for all business combinations
initiated after June 30, 2001. Management has completed an evaluation of the
effects of this statement and does not believe that the adoption of SFAS No. 141
will have a material effect on the Company's consolidated financial statements.
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. The statement will require discontinuing the amortization of goodwill
and other intangible assets with indefinite useful lives. Instead, these assets
will be tested periodically for impairment and written down to their fair value
as necessary. The Company adopted the provisions of this statement on October 1,
2001. Annual amortization expense for the fiscal year ended September 30, 2002,
would have been approximately $383,000. Within six months (by March 31, 2002) of
adoption of SFAS No. 142, the Company will have completed a transitional
impairment review to identify if there is an impairment to the goodwill or
intangible assets of indefinite life using fair value methodology which differs
from an undiscounted cash flow methodology which continues to be used for
intangible assets with an identifiable life. Any impairment loss resulting from
the transitional impairment test will be recorded as a cumulative effect of a
change in accounting principle for the quarter ended March 31, 2002. Subsequent
impairment losses will be reflected in operating income in the income statement.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 provides one accounting model, based
on the framework established by SFAS No. 121, for long-lived assets to be
disposed of by sale and addresses significant implementation issues. SFAS No.
144 is effective for fiscal years beginning after December 15, 2001. The effect
of this adoption on the Company's financial statements, if any, has not been
determined.
34
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,
2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2001, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Deloitte & Touche LLP
Little Rock, Arkansas
November 9, 2001
35
ITEM 8 FINANCIAL STATEMENTS
- ------ --------------------
POCAHONTAS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------
2001 2000
ASSETS
Cash and due from banks:
Interest bearing $ 10,265,642 $ 11,177,705
Noninterest bearing 880,157 1,763,742
------------- -------------
11,145,799 12,941,447
Cash surrender value of life insurance 6,589,293 6,158,076
Securities held-to-maturity, at amortized cost
(fair value of $11,526,845 and $9,105,099 in 2001 and
2000, respectively) 11,500,879 9,465,856
Securities available-for-sale, at fair value (amortized cost of
$63,122,537 and $119,683,250 in 2001 and 2000, respectively) 64,974,115 118,024,962
3,175,274 1,126,712
Securities trading, at fair value
Loans receivable, net 349,376,099 234,416,895
4,860,860 3,251,939
Accrued interest receivable
12,274,154 3,779,850
Premises and equipment, net
Federal Home Loan Bank stock 3,786,500 5,988,200
Goodwill 7,665,461 --
Core deposit premiums 6,257,469 2,154,131
Other assets 1,959,575 3,796,455
------------- -------------
TOTAL $ 483,565,478 $ 401,104,523
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 348,540,922 $ 234,971,507
Federal Home Loan Bank advances 73,315,804 117,990,000
Securities sold under agreements to repurchase 350,000 1,375,000
Deferred compensation 5,138,759 3,238,092
Accrued expenses and other liabilities 4,400,383 2,151,594
------------- -------------
Total liabilities 431,745,868 359,726,193
7,231,058 --
TRUST PREFERRED SECURITIES
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value, 8,000,000 shares authorized; 6,969,688 and
6,955,365 shares issued and 4,468,680 and 4,454,357 shares outstanding in
2001 and 2000, respectively
69,696 69,553
Additional paid-in capital 51,201,140 51,307,395
Unearned ESOP shares (1,441,804) (2,032,221)
Unearned RRP shares (116,237) (277,660)
Accumulated other comprehensive income (loss) 1,222,042 (1,094,470)
Retained earnings 13,337,606 13,089,624
------------- -------------
64,272,443 61,062,221
Less treasury stock at cost, 2,501,008 shares (19,683,891) (19,683,891)
------------- -------------
Total stockholders' equity 44,588,552 41,378,330
------------- -------------
TOTAL $ 483,565,478 $ 401,104,523
============= =============
See notes to consolidated financial statements.
36
POCAHONTAS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 2001, 2000, AND 1999
- -------------------------------------------------------------------------------
2001 2000 1999
----------- ----------- ------------
INTEREST INCOME:
Loans receivable $22,150,724 $17,671,439 $ 16,141,250
Securities:
Taxable 7,201,164 11,798,274 11,362,574
Nontaxable 539,749 457,757 455,706
----------- ----------- ------------
Total interest income 29,891,637 29,927,470 27,959,530
INTEREST EXPENSE:
Deposits 13,416,283 10,350,181 8,895,824
Borrowed funds 5,683,153 9,373,916 8,321,072
----------- ----------- ------------
Total interest expense 19,099,436 19,724,097 17,216,896
----------- ----------- ------------
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSSES 10,792,201 10,203,373 10,742,634
PROVISION FOR LOAN LOSSES 200,000 120,000 --
----------- ----------- ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 10,592,201 10,083,373 10,742,634
OTHER INCOME:
Dividends on FHLB stock 272,811 657,457 590,825
Fees and service charges 1,987,978 1,617,073 833,277
Trading gains (losses) 358,519 130,031 (51,564)
Gain on sales of investment securities 380,009 447,563 161,411
Other 662,618 249,817 393,492
----------- ----------- ------------
Total other income 3,661,934 3,101,941 1,927,441
OTHER EXPENSES:
Compensation and benefits 8,102,419 4,383,217 7,628,380
Occupancy and equipment 1,278,463 996,156 1,136,583
Deposit insurance
65,593 64,302 118,395
Professional fees 406,201 382,171 297,561
Data processing 457,677 406,865 415,597
Advertising 450,396 483,289 472,338
OTS assessment 94,294 92,669 87,943
Other 1,607,662 1,292,164 1,094,863
----------- ----------- ------------
Total other expenses 12,462,705 8,100,833 11,251,660
----------- ----------- ------------
INCOME BEFORE INCOME TAXES 1,791,431 5,084,481 1,418,415
INCOME TAX PROVISION 382,520 1,632,852 466,178
----------- ----------- ------------
NET INCOME 1,408,911 3,451,629 952,237
(Continued)
37
POCAHONTAS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 2001, 2000, AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
----------- ----------- -----------
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Unrealized holding gain (loss)
on securities arising
during period $ 2,567,318 $(1,207,028) $(1,291,164)
Reclassification adjustment
for (gains) losses
included in net income (250,806) (295,392) (106,531)
----------- ----------- -----------
Other comprehensive
income (loss) 2,316,512 (1,502,420) (1,397,695)
----------- ----------- -----------
COMPREHENSIVE INCOME (LOSS) $ 3,725,423 $ 1,949,209 $ (445,458)
=========== =========== ===========
EARNINGS PER SHARE:
Basic earnings per share $ 0.33 $ 0.67 $ 0.16
=========== =========== ===========
Diluted earnings per share $ 0.33 $ 0.67 $ 0.16
=========== =========== ===========
Dividends per share $ 0.26 $ 0.25 $ 0.24
=========== =========== ===========
(Concluded)
See notes to consolidated financial statements.
38
POCAHONTAS BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2001, 2000, AND 1999
- --------------------------------------------------------------------------------
Accumulated
Common Stock Additional Unearned Unearned Other
-------------------------- Paid-In ESOP RRP Comprehensive
Shares Amount Capital Shares Shares Income (Loss)
----------- ------------ ------------ ----------- ----------- -------------
BALANCE, SEPTEMBER 30, 1998 $ 6,685,283 $ 66,853 $ 50,094,461 $(2,856,600) $ 1,805,645
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 (1,397,695)
Treasury stock purchased
Net income
Dividends
----------- ------------ ------------ ----------- ----------- -------------
BALANCE, SEPTEMBER 30, 1999 6,946,822 69,468 51,439,643 (2,443,525) (524,476) 407,950
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 (1,502,420)
Treasury stock purchased
Net income
Dividends
----------- ------------ ------------ ----------- ----------- -------------
BALANCE, SEPTEMBER 30, 2000 6,955,365 69,553 51,307,395 (2,032,221) (277,660) (1,094,470)
Repayment of ESOP loan and
related decrease in share
value (141,700) 590,417
Options exercised 14,323 143 35,445
RRP shares earned 161,423
Net change in unrealized
gain (loss) on
available-for-sale
securities, net of
tax 2,316,512
Net income
Dividends
------------ ------------ ----------- ----------- ------------ -----------
BALANCE, SEPTEMBER 30, 2001 $6,969,688 $69,696 $51,201,140 $(1,441,804) $(116,237) $1,222,042
=========== ============ ============ =========== =========== ============
Treasury Stock Total
Retained ------------------------ Stockholders'
Earnings Shares Amount Equity
----------- ---------- ----------- ------------
BALANCE, SEPTEMBER 30, 1998 $ 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)
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 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)
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 13,089,624 2,501,008 (19,683,891) 41,378,330
Repayment of ESOP loan and
related decrease in share
value 448,717
Options exercised 35,588
RRP shares earned 161,423
Net change in unrealized
gain (loss) on
available-for-sale
securities, net of
tax 2,316,512
Net income 1,408,911 1,408,911
Dividends (1,160,929) (1,160,929)
----------- ---------- ----------- ----------
BALANCE, SEPTEMBER 30, 2001 $13,337,606 $2,501,008 $(19,683,891) $44,588,552
=========== ========== =========== ==========
See notes to consolidated financial statements.
39
POCAHONTAS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2001, 2000, AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
OPERATING ACTIVITIES:
Net income $ 1,408,911 $ 3,451,629 $ 952,237
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 200,000 120,000 -
Depreciation of premises and equipment 599,326 478,937 472,633
Deferred income tax benefit (925,321) (107,635) (1,281,899)
Amortization of deferred loan fees (74,982) (56,746) (115,677)
Amortization of premiums and discounts, net (408,253) (266,428) (280,855)
Amortization of core deposit premium 428,124 286,056 136,721
Amortization of goodwill 63,857 - -
Adjustment of ESOP shares and release of
shares under recognition and retention plan 610,140 504,704 852,706
Net gains on sales of assets (375,339) (469,895) (30,821)
Increase in cash surrender value of life
insurance policies (193,488) (193,488) (142,788)
Changes in operating assets and liabilities:
Trading securities (2,048,562) 302,484 159,339
Accrued interest receivable 399,724 (86,512) (758,154)
Other assets 436,106 (2,485,432) 95,951
Deferred compensation 1,900,667 (119,798) 2,640,164
Accrued expenses and other liabilities 849,029 (1,518,149) (712,478)
--------------- --------------- ---------------
Net cash provided (used) by
operating activities 2,869,939 (160,273) 1,987,079
INVESTING ACTIVITIES:
Acquisition of Walden/Smith Financial Group, Inc., (15,385,654)
net of cash acquired of $12,035,545 - -
Purchases of investment securities (9,338,050) (8,000,000) (91,852,663)
Proceeds from sale of securities available-for-sale 49,818,508 97,041,274 13,318,453
Proceeds from maturities and principal repayments
of investment securities 30,179,578 13,646,889 33,572,759
Increase in loans, net (3,967,258) (16,125,559) (23,835,771)
Proceeds from sale of loans 19,686,272 - -
Purchases of premises and equipment (2,106,836) (240,629) (1,163,714)
--------------- --------------- ---------------
Net cash provided (used) by
investing activities 68,886,560 86,321,975 (69,960,936)
(Continued)
40
POCAHONTAS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2001, 2000, AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Net increase (decrease) in deposits other
than in acquisitions $ (30,521,001) $ 23,080,716 $ 16,354,083
Federal Home Loan Bank advances 1,448,426,334 3,006,964,100 1,551,084,601
Repayment of Federal Home Loan Bank
advances (1,496,538,197) (3,102,079,100) (1,481,649,601)
Net decrease in repurchase agreements (1,025,000) (700,000) (32,645)
Proceeds from issuance of trust preferred
securities, net of issuance costs 7,231,058 - -
Exercise of stock options 35,588 21,253 383,690
Purchase of treasury shares - (7,801,669) (11,882,222)
Dividends paid (1,160,929) (1,327,605) (1,443,076)
--------------- --------------- ---------------
Net cash provided (used) by
financing activities (73,552,147) (81,842,305) 72,814,830
NET INCREASE (DECREASE) IN CASH
AND DUE FROM BANKS (1,795,648) 4,319,397 4,840,973
CASH AND DUE FROM BANKS,
BEGINNING OF YEAR 12,941,447 8,622,050 3,781,077
--------------- --------------- ---------------
CASH AND DUE FROM BANKS,
END OF YEAR $ 11,145,799 $ 12,941,447 $ 8,622,050
=============== =============== ===============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 18,231,042 $ 20,123,108 $ 16,923,600
=============== =============== ===============
Income taxes $ 662,442 $ 2,274,076 $ 1,175,000
=============== =============== ===============
SUPPLEMENTAL DISCLOSURES OF
NONCASH INVESTMENT ACTIVITIES:
Transfers from loans to real estate acquired,
or deemed acquired, through foreclosure $ 1,607,364 $ 947,756 $ 943,789
=============== =============== ===============
Loans originated to finance the sale of real
estate acquired through foreclosure $ 805,846 $ 505,147 $ 513,150
=============== =============== ===============
(Concluded)
See notes to consolidated financial statements.
41
POCAHONTAS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2001, 2000, AND 1999
- -------------------------------------------------------------------------------
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, First Community
Bank (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 21 branches in
northern and eastern Arkansas as a federally chartered savings and loan.
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 and Due From Banks - 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.
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 and 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, 2001, 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
42
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, 2001, 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 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
43
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.
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.
Revenues 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 will be made.
Goodwill - Costs in excess of net assets acquired are amortized on a
straight-line basis over 20 years.
44
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 - In July 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 141, Business Combinations. The
statement discontinues the use of the pooling of interest method of
accounting for business combinations and is effective for all business
combinations initiated after June 30, 2001. Management has completed an
evaluation of the effects of this statement and does not believe that the
adoption of SFAS No. 141 will have a material effect on the Company's
consolidated financial statements.
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. The statement will require discontinuing the amortization of
goodwill and other intangible assets with indefinite useful lives.
Instead, these assets will be tested periodically for impairment and
written down to their fair value as necessary. The Company adopted the
provisions of this statement on October 1, 2001. Annual amortization
expense would have been approximately $383,000 for the year ended
September 30, 2002. Within six months (by March 31, 2002) of adoption of
SFAS No. 142, the Company will have completed a transitional impairment
review to identify if there is an impairment to the goodwill or intangible
assets of indefinite life using fair value methodology which differs from
an undiscounted cash flow methodology which continues to be used for
intangible assets with an identifiable life. Any impairment loss resulting
from the transitional impairment test will be recorded as a cumulative
effect of a change in accounting principle for the quarter ended March 31,
2002. Subsequent impairment losses will be reflected in operating income
in the income statement.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 provides one
accounting model, based on the framework established by SFAS No. 121, for
long-lived assets to be disposed of by sale and addresses significant
implementation issues. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. The effect of this adoption on the
Company's financial statements, if any, has not been determined.
Reclassifications - Certain 2000 and 1999 amounts have been reclassified
to conform to the 2001 presentation.
2. ACQUISITION
On May 15, 2001, 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. Goodwill of approximately $7.7 million is being
amortized on a straight-line basis over 20 years. A core deposit premium
intangible asset of approximately $4.5 million was recorded using the best
available evidence as of September 30, 2001. The Company has engaged a
valuation specialist to perform a study of the fair value of the core
deposit premium as of the acquisition date. The preliminary amounts
assigned to core deposit premium and goodwill may change as a result of
the study.
45
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 has moved its corporate
headquarters to Jonesboro, Arkansas.
The following unaudited pro forma information is being provided as though
the Company purchased Walden at the beginning of the year ended September
30.
2001 2000
------- -------
Net interest income $15,263 $13,208
Income before income taxes 2,811 2,551
Net income 2,032 1,819
Earnings per share - basic & diluted $0.47 $ 0.35
3. 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 fair values of financial instruments at September
30, 2001 and 2000, were as follows (items which are not financial
instruments are not included):
2001 2000
------------------------- --------------------------
Carrying Estimated Carrying Estimated
Amounts Fair Value Amounts Fair Value
------------ ----------- ------------ ------------
Financial assets and liabilities:
Cash and due from banks $ 11,145,799 $ 11,145,799 $ 12,941,447 $ 12,941,447
Cash surrender value of
life insurance 6,589,293 6,589,293 6,158,076 6,158,076
Securities held-to-maturity 11,500,879 11,526,845 9,465,856 9,105,099
Securities available-for sale 64,974,115 64,974,115 118,024,962 118,024,962
Securities trading 3,175,274 3,175,274 1,126,712 1,126,712
Loans receivable, net 349,376,099 349,233,000 234,416,895 234,896,000
Accrued interest receivable 4,860,860 4,860,860 3,251,939 3,251,939
Federal Home Loan Bank Stock 3,786,500 3,786,500 5,988,200 5,988,200
Demand and savings deposits 115,259,333 115,259,333 72,766,639 72,766,639
Time deposits 233,281,589 232,624,000 162,204,868 162,144,000
Federal Home Loan Bank
advances 73,315,804 73,315,804 117,990,000 117,990,000
Securities sold under
agreements to repurchase 350,000 350,000 1,375,000 1,375,000
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
46
under agreements 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.
4. INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities at September 30
are as follows:
2001
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Held-to-Maturity Cost Gains Losses Value
------------ -------- ----------- ------------
Municipal Bonds $ 9,487,265 $157,544 $(148,269) $ 9,496,540
Corporate Bonds 2,013,614 16,691 -- 2,030,305
------------ -------- ----------- ------------
Total $11,500,879 $174,235 $(148,269) $11,526,845
=========== ======== ========= ===========
2001
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Available-for-sale Cost Gains Losses Value
------------ -------- ----------- ------------
U.S. Government Agencies $15,427,193 $ 327,056 $ -- $15,754,249
Mortgage backed securities 35,699,548 1,390,670 -- 37,090,218
Municipal Bonds 2,980,824 71,367 (2,543) 3,049,648
Trust preferred securities 3,974,972 65,028 -- 4,040,000
Equity preferred securities 5,040,000 -- -- 5,040,000
------------ -------- ----------- ------------
Total $63,122,537 $1,854,121 $(2,543) $64,974,115
=========== ======== ========= ===========
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
------------ -------- ----------- ------------
Total $9,465,856 $40,051 $(400,808) $9,105,099
=========== ======== ========= ===========
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
Corporate Bonds 4,000,000 -- -- 4,000,000
Mortgage backed securities 87,683,250 493,043 (1,246,529) 86,929,764
------------ -------- ----------- ------------
Total $119,683,250 $493,043 $(2,151,331) $118,024,962
============ ======== =========== ============
47
The amortized cost and estimated fair value of debt securities at
September 30, 2001, 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 $ 2,018,614 $ 2,035,321 $ 1,269,437 $ 1,280,106
Due from one year to five years 20,000 20,045 2,188,435 2,243,116
Due from five years to ten years 2,744,762 2,831,567 1,695,742 1,793,761
Due after ten years 6,717,503 6,639,912 17,229,375 17,526,914
Mortgage backed securities -- -- 35,699,548 37,090,218
Equity preferred securities -- -- 5,040,000 5,040,000
----------- ----------- ----------- -----------
Total $11,500,879 $11,526,845 $63,122,537 $64,974,115
=========== =========== =========== ===========
Securities with a carrying value and a fair value of $29,507,871 and
$10,648,549 at September 30, 2001 and 2000, respectively, were pledged to
collateralize public and trust deposits.
5. LOANS RECEIVABLE
Loans receivable at September 30 are summarized as follows:
2001 2000
------------ ------------
Real estate loans:
Single-family residential $175,976,974 $175,625,198
Multifamily residential 825,600 1,163,052
Agricultural 14,385,767 7,360,257
Commercial 73,282,495 25,729,930
------------ ------------
Total real estate loans 264,470,836 209,878,437
Other loans:
Savings account loans 5,165,816 1,665,225
Commercial business 65,722,144 12,554,881
Other 17,551,593 13,616,455
------------ ------------
Total other loans 88,439,553 27,836,561
------------ ------------
Total loans receivable 352,910,389 237,714,998
Less:
Undisbursed loan proceeds 416,130 1,345,162
Unearned fees, net 286,161 264,192
Allowance for loan losses 2,831,999 1,688,749
------------ ------------
Loans receivable, net $349,376,099 $234,416,895
============ ============
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. Certain loans are originated for sale. These loans
are typically held for sale only a short time, and do not represent a
material amount in the aggregate prior to their sale. Normally the short
time between origination and sale does not provide for significant
differences between cost and market values.
48
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.
6. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at September 30 is summarized as follows:
2001 2000
---------- ----------
Securities $ 951,743 $1,202,317
Loans receivable 3,909,117 2,049,622
---------- ----------
TOTAL $4,860,860 $3,251,939
========== ==========
7. 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, 2001, 2000, and 1999 is as follows:
Foreclosed
Loans Real Estate
----------- ---------
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 losses 120,000 --
Charge-offs, net of recoveries (74,590) --
----------- ---------
BALANCE, SEPTEMBER 30, 2000 1,688,749 --
----------- ---------
Provision for losses 200,000 100,000
Balance transferred at acquisition 1,594,506 --
Charge-offs, net of recoveries (651,256) --
----------- ---------
BALANCE, SEPTEMBER 30, 2001 $ 2,831,999 $ 100,000
=========== =========
Gross recoveries are not material.
49
8. PREMISES AND EQUIPMENT
Premises and equipment at September 30 are summarized as follows:
2001 2000
------------ ------------
Cost:
Land $ 1,483,490 $ 573,490
Buildings and improvements 10,473,412 3,820,888
Furniture, fixtures, and equipment 3,090,223 1,609,221
------------ ------------
15,047,125 6,003,599
Less accumulated depreciation (2,772,971) (2,223,749)
------------ ------------
TOTAL $ 12,274,154 $ 3,779,850
============ ============
9. DEPOSITS
Deposits at September 30 are summarized as follows:
2001 2000
------------ ------------
Checking accounts, including
noninterest-bearing deposits of
$24,180,340 and $11,402,437 in
2001 and 2000, respectively $ 92,806,085 $ 57,461,316
Passbook savings 22,453,248 15,305,323
Certificates of deposit 233,281,589 162,204,868
------------ ------------
TOTAL $348,540,922 $234,971,507
============ ============
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, 2001 and 2000, respectively.
At September 30, 2001, scheduled maturities of certificates of deposit are
as follows:
Years ending September 30: Total
------------
2002 $217,726,684
2003 10,984,903
2004 2,821,253
2005 1,343,958
2006 404,791
------------
TOTAL $233,281,589
============
Interest expense on deposits for the years ended September 30, 2001, 2000,
and 1999, is summarized as follows:
2001 2000 1999
----------- ----------- ----------
Checking $ 779,118 $ 1,008,497 $1,206,611
Passbook savings 606,777 397,124 361,103
Certificates of deposit 12,030,388 8,944,560 7,328,110
----------- ----------- ----------
TOTAL $13,416,283 $10,350,181 $8,895,824
=========== =========== ==========
50
10. 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, 2001 and
2000, the Company had stock of $3,786,500 and $5,988,200, 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, 2001 and 2000, of approximately $169,319,000 and
$132,000,000, respectively. Advances at September 30, 2001 and 2000, have
maturity dates as follows:
2001 2000
------------------------------- ---------------------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
-------- ------------- -------- --------------
September 30: - -
2001 6.63% $109,990,000
2002 3.33% $51,895,000 6.42% 4,000,000
2003 6.60% 14,400,000 - -
Greater than 5 years 6.78% 7,020,804 7.03% 4,000,000
------------- --------------
TOTAL $ 73,315,804 $ 117,990,000
============= ==============
Interest expense on FHLB advances was $5,117,593, $8,946,927, and
$7,966,406 for the years ended September 30, 2001, 2000, and 1999,
respectively. Interest rates on all FHLB advances are fixed as of
September 30, 2001.
11. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase ("Reverse Repurchase
Agreements" or "Reverse Repos") are as follows:
2001 2000
------------- ------------
Balance outstanding at September 30 $ 350,000 $ 1,375,000
Average balance during the year 1,598,333 1,900,833
Average interest rate during the year 5.38% 5.62%
Maximum month-end balance during the year 2,650,000 2,465,000
Investment securities underlying the agreements at year-end:
Carrying value 3,965,037 2,528,996
Estimated market value 3,965,037 2,528,996
Interest expense on Reverse Repurchase Agreements was $99,206, $108,293,
and $118,962 for the years ended September 30, 2001, 2000 and 1999,
respectively.
12. TRUST PREFERRED SECURITIES
On March 28, 2001, the Company issued $7.5 million of trust-preferred
securities with a coupon rate of 10.18%. The net proceeds to the Company
were approximately $7.2 million. The Company contributed $5.0 million to
the Bank on May 15, 2001, as additional paid-in capital to increase the
Bank's capital percentages following the acquisition of Walden (see Note
2). The Company used the
51
remaining proceeds for general corporate purposes, including but not
limited to additional business acquisitions, stock repurchases, dividends
and corporate expenses. Under current tax law, the dividend paid on
trust-preferred securities is deductible.
13. 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, 2001, 2000 and 1999, was approximately $340,000, $277,000,
and $277,000, respectively. During the year ended September 30, 2001, an
additional expense of $900,730 was incurred related to the termination of
the agreements with certain directors. As of September 30, 2001,
approximately $534,000 had not been paid to certain directors as a result
of the termination of the agreements. As of September 30, 2001, an
additional amount of approximately $529,000 was payable to the directors
under the remaining agreements.
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.
Total payments under this agreement were expensed during the year ended
September 30, 1999. 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 $2,476,414 and $2,645,814
at September 30, 2001 and 2000, 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.
On June 13, 2001, the Company, the Bank, and an executive entered into an
agreement to terminate his employment as President and Chief Executive
Officer (the "Termination Agreement") effective September 30, 2001. The
Termination Agreement provides, among other things, for the payment by the
Company to the executive of $1,600,000, in installments of not less than
$60,000 annually, with the entire unpaid amount due upon the executive's
death. Total payments under this agreement were expensed during the year
ended September 30, 2001. The unpaid balances earn interest at the Federal
Funds rate, as determined each month, compounded monthly, until
distributed. The unpaid balance, including accrued interest, was
$1,600,000 at September 30, 2001. Pursuant to the Termination Agreement,
the parties agree that the stock options and common stock awarded to the
executive under the stock option plans and the Recognition and Retention
Plan shall continue to vest in accordance with the terms of such plans for
so long as the executive maintains Continuous Service (as defined in the
Termination Agreement) as an employee of the Company or the Bank. Pursuant
to the Termination Agreement, the executive forgoes any additional benefit
accruals or contributions under the Company's Restated Supplemental
Executive Retirement Agreement.
14. 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
52
discretion of the Board of Directors is applied to the base salary of each
eligible employee. The Company made no contributions to the plan for the
years ended September 30, 2001, 2000 and 1999.
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 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 $473,627, $514,858 and $302,425, respectively, to
the ESOP in years ended September 30, 2001, 2000 and 1999.
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, $220,000 and
$402,000 for the years ended September 30, 2001, 2000 and 1999,
respectively.
15. 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:
2001 2000 1999
-------------- ------------- -------------
Current $ 1,307,841 $ 1,740,487 $ 1,748,077
Deferred (925,321) (107,635) (1,281,899)
-------------- ------------- -------------
TOTAL $ 382,520 $ 1,632,852 $ 466,178
============== ============= =============
The net deferred tax amount, which is included in other assets at
September 30, 2001, and other liabilities at September 30, 2000, consisted
of the following:
2001 2000
---------- ----------
Deferred tax assets:
Deferred compensation $ 2,101,084 $ 1,327,210
Allowance for loan losses 599,364 447,220
Unrealized loss on securities - trading -- 162,753
Unrealized loss on available-for-sale securities -- 537,238
Core deposit premium amortization
Other 116,608 96,703
---------- ----------
27,593 122,590
---------- ----------
Total deferred tax assets 2,844,649 2,693,714
Deferred tax liabilities:
Acquired intangibles (2,296,511) --
Unrealized gain on available-for-sale securities (629,537) --
FHLB stock dividends (202,205) (628,423)
Other (38,283) (12,686)
---------- ----------
Total deferred tax liabilities (3,166,536) (641,109)
---------- ----------
Net deferred tax asset (liability) $ (321,887) $ 2,052,605
========== ==========
53
The income tax provision differed from the amounts computed by applying
the federal income tax rates as a result of the following:
2001 2000 1999
--------------------- ------------------- ------------------
Expected income tax expense 34.0% $ 609,087 34.0% $1,728,724 34.0% $482,261
Exempt income (10.2) (183,515) (3.0) (155,637) (10.2) (144,679)
Cash surrender value of life
insurance -- - - - (6.4) (90,565)
State tax, net of federal
benefit 1.8 32,624 7.1 363,357 11.2 158,669
ESOP contribution -- - - - (1.8) (25,343)
Change in estimate (4.8) (85,849) (0.2) (10,208) - -
Other 0.6 10,173 (6.0) (293,384) 6.1 85,835
------ -------- ----- ---------- ------ --------
TOTAL 21.4% $382,520 31.9% $1,632,852 32.9% $466,178
====== ======== ===== ========== ===== ========
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, 2001. 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, 2001.
16. 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, 2001, that the Bank meets all capital adequacy requirements to which
it is subject.
As of September 30, 2001 and 2000, 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 Well
Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------- --------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------ ----- ------ ------
As of September 30, 2001:
Tangible capital to tangible assets $33,153 7.14% $ 6,968 1.50% N/A N/A
Core capital to adjusted tangible
assets 33,153 7.14 18,581 4.00 $ 23,227 5.00
Total capital to risk weighted
assets 35,599 10.17 27,993 8.00 34,991 10.00
Tier I capital to risk weighted
assets 33,153 9.47 13,996 4.00 20,995 6.00
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
17. RETAINED EARNINGS
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 16 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.
18. EARNINGS PER SHARE
Year Ended September 30
2001 2000 1999
--------- --------- ---------
Basic EPS weighted average shares 4,295,002 5,166,038 5,802,860
Add dilutive effect of unexercised options 791 6,713 34,759
--------- --------- ---------
Dilutive EPS weighted average shares 4,295,793 5,172,751 5,837,619
========= ========= =========
19. COMMITMENTS AND CONTINGENCIES
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.
55
20. 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 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, 2001, the Company had the following outstanding
commitments to extend credit:
Undisbursed loans in process $ 416,130
Unfunded lines and letters of credit 10,311,631
Outstanding loan commitments 5,238,404
--------------
Total outstanding commitments $ 15,966,165
==============
The Company has not incurred any losses on its commitments in any of the
three years in the period ended September 30, 2001.
56
19. 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 $14,233,928, $1,542,073 and $1,045,214 at
September 30, 2001, 2000 and 1999, respectively. The increase in the
amount of loans outstanding to directors, officers, and their related
business interests was a result of the appointment of new directors during
the year ended September 30, 2001. During the year ended September 30,
2001, total principal additions were $17,514,900 and total principal
payments were $4,823,045.
Deposits from related parties held by the Company at September 30, 2001
and 2000, amounted to $4,530,282 and $627,578, respectively.
22. 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
57
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. The weighted average remaining contractual life of the
options as of September 30, 2001, is 7.1 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, 1999 350,000 $9.00
Granted -
Exercised -
Forfeited -
-------
Outstanding at September 30, 2000 350,000 $9.00
Granted
Exercised -
Forfeited -
-------
Outstanding at September 30, 2001 350,000 $9.00
=======
Options exercisable at September 30, 2000 70,000
=======
Options exercisable at September 30, 2001 197,600 $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
--------------------------------
2001 2000 1999
----- ----- -----
Net income (in thousands):
As reported $1,409 $3,452 $952
999 3,180 816
Earnings per share:
Basic - as reported 0.33 0.67 0.16
Basic - pro forma 0.23 0.62 0.14
Diluted - as reported 0.33 0.67 0.16
Diluted - pro forma 0.23 0.62 0.14
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%.
58
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 $161,000 and $247,000 in compensation
expense was recognized during the year ended September 30, 2001 and 2000,
respectively.
23. OTHER COMPREHENSIVE INCOME
Year Ended September 30, 2001
------------------------------------------------
Before Tax Tax Expense Net-of-Tax
Amount (Benefit) Amount
----------- ---------- -----------
UNREALIZED GAINS (LOSSES) ON SECURITIES:
Unrealized holding gain (loss) on securities
arising during period $ 3,889,876 $ 1,322,558 $ 2,567,318
Less reclassification adjustment for
(gains) losses included in net income (380,009) (129,203) (250,806)
----------- ---------- -----------
Other comprehensive income (loss) $ 3,509,867 $ 1,193,355 $ 2,316,512
=========== =========== ===========
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, 1999
------------------------------------------------
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
24. SUBSEQUENT EVENTS
The Company entered into an Agreement and Plan of Merger (the "Plan of
Merger") with North Arkansas Bancshares, Inc. ("NARK"), which provides,
among other things, that (i) NARK will be merged (the "Merger") with and
into the Company, with the Company as the surviving corporation (ii)
Newport Federal Savings Bank, the savings bank subsidiary of NARK
("Newport Federal"), will be merged with and into the Bank with the Bank
as the surviving institution, (iii) each outstanding share of NARK common
stock issued and outstanding at the effective time of the Merger will be
converted into shares of common stock of the Company in accordance with an
"Exchange Ratio," as defined in the Plan of Merger, and (iv) each share of
the Registrant's common stock issued and outstanding immediately prior to
the effective time of the Merger will remain an outstanding share of
common stock of the Company. The directors and executive officers of NARK
have entered into agreements to vote NARK shares owned by them in favor of
the Plan of Merger.
In connection with the Plan of Merger, the Company and NARK entered into a
Stock Option Agreement in which NARK granted to the Company the option to
purchase, under certain conditions, up to 55,802 shares of NARK common
stock at an exercise price of $11.25 per share. The option is exercisable
only upon the occurrence of certain events that would jeopardize
completion of the Merger. The Stock Option Agreement also permits the
Company to require NARK to repurchase the option shares.
Consummation of the Merger is subject to certain conditions, including the
approval of stockholders of NARK, and the receipt of all required
regulatory approvals. The Merger is structured as a tax-free
reorganization. It is expected that the Merger will be completed prior to
June 30, 2002.
60
22. PARENT COMPANY ONLY FINANCIAL INFORMATION
The following condensed statements of financial condition as of September
30, 2001 and 2000, and condensed statements of income and cash flows for
the years ended September 30, 2001 and 2000, 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, 2001 AND 2000
2001 2000
ASSETS
Deposit in Bank $ 2,317,583 $ 4,013,763
Investment in Bank 48,392,301 36,481,860
Loan receivable 2,000,068 2,443,525
Investment securities 3,175,274 1,126,712
Other assets 878,842 2,145,272
------------ ------------
TOTAL ASSETS $ 56,764,068 $ 46,211,132
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities $ 335,253 $ 2,186,988
Deferred compensation 4,609,205 2,645,814
Trust preferred securities 7,231,058 -
Stockholders' equity 44,588,552 41,378,330
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 56,764,068 $ 46,211,132
============ ============
CONDENSED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2001 AND 2000
INCOME:
Interest and dividend income $ 593,573 $ 515,573
EXPENSES:
Operating expenses 3,907,547 785,477
------------ ------------
LOSS BEFORE INCOME TAXES AND EQUITY IN
IN UNDISTRIBUTED EARNINGS OF BANK SUBSIDIARY (3,313,974) (269,904)
INCOME TAX BENEFIT (1,128,956) (289,582)
------------ ------------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF BANK SUBSIDIARY (2,185,018) 19,678
EQUITY IN UNDISTRIBUTED EARNINGS OF BANK
SUBSIDIARY 3,593,929 3,431,951
------------ ------------
NET INCOME $ 1,408,911 $ 3,451,629
============ ============
61
POCAHONTAS BANCORP, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2001 AND 2000
2001 2000
OPERATING ACTIVITIES:
Net income $ 1,408,911 $ 3,451,629
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Equity in undistributed earnings of Bank subsidiary (3,593,929) (3,431,951)
Stock compensation 610,140 504,704
Changes in operating assets and liabilities:
Investment securities (2,048,562) 302,484
Loan receivable 443,457
Other assets 1,266,430 (744,157)
Accrued expenses and other liabilities (1,851,735) (915,743)
Deferred compensation 1,963,391 (57,074)
------------ ------------
Net cash provided (used) by operating activities (1,801,897) (890,108)
INVESTING ACTIVITIES:
Distribution from (to) subsidiary $ (6,000,000) $ 13,000,000
FINANCING ACTIVITIES:
Options exercised 35,588 21,253
Dividends paid (1,160,929) (1,327,605)
Proceeds from issuance of trust preferred securities,
net of issuance costs 7,231,058
Purchase of treasury stock - (7,801,669)
------------ ------------
Net cash used by financing activities 6,105,717 (9,108,021)
------------ ------------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS (1,696,180) 3,001,871
CASH AND CASH EQUIVALENTS
Beginning of period 4,013,763 1,011,892
------------ ------------
End of period $ 2,317,583 $ 4,013,763
============ ============
62
26. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables represent summarized data for each of the four
quarters in the years ended September 30, 2001 and 2000:
2001
(in thousands, except per share data)
Fourth Third Second First
Quarter Quarter Quarter Quarter
Interest income $ 8,528 $ 7,435 $ 6,872 $ 7,056
Interest expense 4,967 4,772 4,459 4,901
------- ------- ------- -------
Net interest income 3,561 2,663 2,413 2,155
Provision for loan losses 200 - - -
------- ------- ------- -------
Net interest income after
provision for loan losses 3,361 2,663 2,413 2,155
Non-interest income 755 1,172 1,061 674
Non-interest expense 3,109 5,272 2,096 1,986
------- ------- ------- -------
Income (loss) before income taxes 1,007 (1,437) 1,378 843
Income tax expense (benefit) 115 (473) 550 190
------- ------- ------- -------
Net (loss) income $ 892 $ (964) $ 828 $ 653
======= ======= ======= =======
Basic earnings per share $ 0.21 $ 0.22 $ 0.19 $ 0.15
Diluted earnings per share $ 0.21 $ 0.22 $ 0.19 $ 0.15
Cash dividends declared per
common share $ 0.065 $ 0.065 $ 0.065 $ 0.065
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
* * * * * *
63
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
64
PART III
ITEM 10 DIRECTORS AND OFFICERS OF THE REGISTRANT
- ------- ----------------------------------------
The table below sets forth certain information, as of September 30, 2001,
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
- -------- --- ------- --------- --------- --------------- --------
Directors Continuing in Office
- ------------------------------
Ralph B. Baltz 53 Chairman 1986 2003 193,094 4.3%
Marcus Van Camp 52 Director 1990 2003 42,352 *
N. Ray Campbell 50 Director 1992 2003 54,299 1.2%
Dwayne Powell 36 President, 2000 2004 166,633 3.7%
CEO And
Director
Nominees
- --------
James A. Edington 50 Director 1994 2002 229,611 5.1%
Robert Rainwater 65 Director 1981 2002 42,524 1.0%
A.J. Baltz, JR 74 Director 2001 2002 190,952 4.3%
___________________________
* Less than 1%
(1) The mailing address for each person listed is 1700 East Highland Drive,
Jonesboro, AR 72401. Each of the persons listed is also a director of First
Community Bank (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."
65
James A. Edington served as President and CEO from April 1999 through
September 2001. 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.
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.
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, is the President and CEO, being appointed in October
2001. Previously, he served as Chief Financial Officer of the Bank from October
1996 thru September 2001 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.
A. J. Baltz, Jr. is owner and operator of Baltz Feed Store in Pocahontas,
AR. Mr. Baltz owns farmland and leases out commercial properties. Mr. Baltz is a
distant cousin of Ralph P. Baltz.
66
ITEM 11 EXECUTIVE COMPENSATION
- ------- ----------------------
The following table sets forth for the years ended September 30, 2001,
2000, and 1999, 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 Payout
------------------------------- -----------------------------
Year Other Restricted Options/ All
Name and Ended Annual Com- Stock SARS LTIP Other
PrincipalPosition Sept.30, Salary (1) Bonus pensation Awards (3) (#) Payouts Compensation
- ----------------- -------- ---------- ----- --------- ---------- --- ------- ------------
(2)
- ---
Dwayne Powell ................. 2001 169,250 -- -- -- -- -- 34,667
President and CEO(4) ....... 2000 153,500 -- -- -- -- -- 27,668
.............................. 1999 150,175 -- -- 321,354 80,000 -- 29,387
- ------------------------------------
(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. Powell was appointed President and Chief Executive Officer in October
2001 upon retirement of Mr. Edington.
=================================================================================================================
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
=================================================================================================================
Name Shares Value Number of Unexercised Value of Unexercised
Acquired Realized Options at In-The-Money Options at
Upon Fiscal Year-End Fiscal Year-End
Exercise
--------------------------------------------------------------
Exercisable/Unexercisable Exercisable/Unexercisable
=================================================================================================================
Dwayne Powell -- 0/80,000 $0/$0
=================================================================================================================
67
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
of Beneficial Common Stock
Holder Ownership (1) Outstanding (4)
- ------ ------------- ---------------
All Directors and Executive Officers
as a Group (8 persons) 919,465 20.6%
Pocahontas Federal Savings and Loan 468,623 10.5%
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 First Community Bank 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, 367,717 shares of
Common Stock were allocated under the ESOP.
(3) Excludes 43,274 shares of Common Stock or 8.5% 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.
68
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
collectability 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 $14,233,928 at
September 30, 2001, which was 31.9% 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 during the three years ended
September 30, 2001. All loans to directors and officers were performing in
accordance with their terms at September 30, 2001.
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
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
-------------- -------- ------ ----------------
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
70
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
71
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, 2001 By: /s/ Dwayne Powell
----------------- ------------------------------------
Dwayne Powell, 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/ Dwayne Powell By: /s/ Terry Prichard
------------------------------------ -------------------------------
Dwayne Powell Terry Prichard
President, Chief Executive Officer, Vice President, Controller
Treasurer and Director (Principal Financial Officer)
(Principal Executive Officer)
Date: December 26, 2001 Date: December 26, 2001
----------------- -----------------
By: /s/ Ralph P. Baltz By: /s/ James Edington
------------------------------------ -------------------------------
Ralph P. Baltz James Edington
Chairman of the Board and Director Director
Date: December 26, 2001 Date: December 26, 2001
----------------- -----------------
By: /s/ A.J. Baltz, Jr. By: /s/ Marcus Van Camp
------------------------------------ -------------------------------
A.J. Baltz, Jr. Marcus Van Camp
Director Director
Date: December 26, 2001 Date: December 26, 2001
----------------- -----------------
By: /s/ N. Ray Campbell By: /s/ Robert Rainwater
------------------------------------ -------------------------------
N. Ray Campbell Robert Rainwater
Director Director
Date: December 26, 2001 Date: December 26, 2001
----------------- -----------------
72