SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE # 0-23969
POCAHONTAS BANCORP, INC.
State of Incorporation
----------------------
DELAWARE IRS Employer Identification
No. 71-0806097
Address Telephone Number
------- ----------------
1700 E. Highland (870) 802-1700
Jonesboro, Arkansas 72401
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No____
---
There were 4,729,795 shares of Common Stock ($0.01 par value) issued and
outstanding as of June 30, 2002.
POCAHONTAS BANCORP, INC.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statements of Financial Condition at June 30, 2002
(unaudited) and September 30, 2001 1
Condensed Consolidated Statements of Income and Comprehensive Income
for the Three and Nine Months Ended June 30, 2002 and 2001 (unaudited) 2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
June 30, 2002 and 2001 (unaudited) 3
Notes to Condensed Consolidated Financial Statements (unaudited) 5
Independent Accountants' Report 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION 17
Item 1
POCAHONTAS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
June 30, 2002 September 30, 2001
ASSETS
Cash $ 35,513,645 $ 11,145,799
Cash surrender value of life insurance 6,739,572 6,589,293
Investment securities - trading 1,507,781 3,175,274
Investment securities - held to maturity 8,122,548 11,500,879
Investment securities - available for sale 116,668,045 64,974,115
Loans receivable, net 398,984,525 349,376,099
Accrued interest receivable 4,425,176 4,860,860
Premises and equipment, net 13,437,123 12,274,154
Federal Home Loan Bank Stock, at cost 2,109,600 3,786,500
Goodwill 8,818,221 7,665,461
Core deposit premium 8,813,029 6,257,469
Other assets 2,280,886 1,959,575
------------ ------------
TOTAL ASSETS $607,420,151 $483,565,478
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $504,895,593 $348,540,922
Federal Home Loan Bank advances 26,213,404 73,315,804
Securities sold under agreements to repurchase - 350,000
Deferred compensation 4,097,571 5,138,759
Accrued expenses and other liabilities 6,081,187 4,400,383
------------ ------------
Total liabilities 541,287,755 431,745,868
TRUST PREFERRED SECURITIES 16,895,192 7,231,058
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 8,000,000 shares authorized;
6,969,688 and 7,397,203 shares issued and 4,468,680 and
4,729,795 shares outstanding at September 30, 2001 and
June 30, 2002, respectively. 73,971 69,696
Additional paid-in capital 55,485,515 51,201,140
Unearned ESOP Shares (1,441,804) (1,441,804)
Unearned RRP Shares (55,498) (116,237)
Accumulated other comprehesive income 1,013,209 1,222,042
Retained earnings 15,549,275 13,337,606
------------ ------------
70,624,668 64,272,443
Treasury stock at cost, 2,667,408 and 2,501,008
shares, respectively (21,387,464) (19,683,891)
------------ ------------
Total stockholders' equity 49,237,204 44,588,552
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $607,420,151 $483,565,478
============ ============
See notes to condensed consolidated financial statements.
1
POCAHONTAS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
INTEREST INCOME:
Loans receivable $ 6,557,073 $ 5,633,803 $ 19,308,274 $ 15,090,557
Investment securities 2,117,052 1,801,118 5,164,878 6,273,180
------------ ------------ ------------- -------------
Total interest income 8,674,125 7,434,921 24,473,152 21,363,737
INTEREST EXPENSE:
Deposits 3,335,562 3,486,078 9,878,869 9,468,871
Borrowed funds 879,465 1,285,971 2,485,860 4,663,420
------------ ------------ ------------- -------------
Total interest expense 4,215,027 4,772,049 12,364,729 14,132,291
------------ ------------ ------------- -------------
NET INTEREST INCOME 4,459,098 2,662,872 12,108,423 7,231,446
PROVISION FOR LOAN LOSSES 200,000 23,567 400,000 23,567
------------ ------------ ------------- -------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,259,098 2,639,305 11,708,423 7,207,879
OTHER INCOME:
Dividends 20,175 35,372 90,460 207,591
Fees and service charges 814,977 572,098 2,743,954 1,406,011
Gain on sale of loans 592,942 408,789 772,513 408,789
Gain on sale of securities 140,574 362,716 186,093 362,716
Trading gains (losses), net (208,721) (192,162) (164,887) 301,073
Other, net 124,377 (14,867) 273,828 220,504
------------ ------------ ------------- -------------
Total other income 1,484,324 1,171,946 3,901,961 2,906,684
------------ ------------ ------------- -------------
OPERATING EXPENSE:
Compensation and benefits 2,078,762 4,252,731 5,932,787 6,522,388
Occupancy and equipment 611,495 310,848 1,734,889 783,410
Deposit insurance premium 17,634 19,233 44,701 42,218
Professional fees 107,788 74,344 375,230 256,485
Data processing 140,107 115,316 428,834 323,599
Advertising 166,651 117,121 464,478 289,121
OTS assessment 26,182 21,647 66,486 66,047
Other 672,666 337,351 1,801,819 1,047,505
------------ ------------ ------------- -------------
Total operating expense 3,821,285 5,248,591 10,849,224 9,330,773
------------ ------------ ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES 1,922,137 (1,437,340) 4,761,160 783,790
INCOME TAXES 649,950 (473,273) 1,617,806 266,727
------------ ------------ ------------- -------------
NET INCOME (LOSS) 1,272,187 (964,067) 3,143,354 517,063
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Unrealized holding gain (loss) on available-
-for-sale securities arising during period 1,208,750 (24,986) (130,234) 2,035,622
Reclassification adjustment for gains included
in net income (78,597) (286,480) (78,597) (387,064)
------------ ------------ ------------- -------------
COMPREHENSIVE INCOME (LOSS) $ 2,402,340 $ (1,275,533) $ 2,934,523 $ 2,165,621
============ ============ ============= =============
BASIC EARNINGS (LOSS) PER SHARE $ 0.29 $ (0.22) $ 0.72 $ 0.12
============ ============ ============= =============
DILUTED EARNINGS (LOSS) PER SHARE $ 0.29 $ (0.22) $ 0.71 $ 0.12
============ ============ ============= =============
See notes to condensed consolidated financial statements.
2
POCAHONTAS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended
June 30,
2002 2001
OPERATING ACTIVITIES:
Net income $ 3,143,354 $ 517,063
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 400,000 23,567
Depreciation of premises and equipment 742,781 224,034
Amortization of core deposit premium 563,384 214,543
Amortization of deferred loan fees (95,794) (53,106)
Amortization of premiums and discounts, net (121,420) (379,256)
Net (gain) loss on sales of assets (958,606) (771,505)
Increase in cash surrender value of life insurance policies (150,279) (297,050)
Change in operating assets and liabilities:
Trading securities 1,667,493 (1,547,297)
Accrued interest receivable 1,298,106 749,463
Other assets (1,019,618) (1,567,320)
Deferred compensation (1,041,188) 2,054,968
Accrued expenses and other liabilities 750,707 342,653
------------ -------------
Net cash provided (used) by operating activities 5,178,920 (489,243)
------------ -------------
INVESTING ACTIVITIES:
Acquisition of Walden/Smith Financial Group, Inc., net of cash acquired (372,866) (15,385,654)
Acquisition of Southern Mortgage Corp, net of cash acquired (849,049) -
Acquisition of Peoples Bank of Imboden, net of cash acquired 1,475,281 -
Cash acquired from North Arkansas Banchares, Inc. 2,925,033 -
Loan repayments, originations, and purchases, net 211,124 4,738,598
Proceeds from sale of loans 26,665,707 16,748,923
Proceeds from sale of FHLB Stock 2,503,192 3,811,100
Purchase of investment securities (94,913,435) (4,298,050)
Proceeds from sale of REO 775,800 193,849
Proceeds from sale of premises and equipment 20,096 -
Proceeds from sales, maturities and principal repayments of securities 63,399,229 65,878,912
Purchases of premises and equipment (1,497,867) (389,481)
------------ -------------
Net cash provided (used) by investing activities 342,245 71,298,197
------------ -------------
(Continued)
See notes to condensed consolidated financial statements.
3
POCAHONTAS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended
June 30,
2002 2001
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 64,473,656 (12,191,838)
Net increase (decrease) in repurchase agreements (350,000) 130,000
Net decrease in FHLB advances (52,352,956) (62,870,566)
Proceeds from issuance of trust preferred securities, net of issuance costs 9,650,500 7,226,500
Purchase of treasury shares (1,703,573) -
Issuance of RRPs - 277,661
Exercise of stock options 60,739 (118,248)
Dividends paid (931,685) (870,465)
------------ -------------
Net cash provided (used) by financing activities 18,846,681 (68,416,956)
------------ -------------
NET INCREASE IN CASH 24,367,846 2,391,998
CASH AT BEGINNING OF PERIOD 11,145,799 12,941,447
------------ -------------
CASH AT END OF PERIOD $ 35,513,645 $ 15,333,445
============ =============
NON-CASH FINANCING ACTIVITIES -
Issuance of common stock for North Arkansas Banchares, Inc. acquistion $ 4,288,650
============
(Concluded)
See notes to condensed consolidated financial statements.
4
POCAHONTAS BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article
10 of Regulation 10 of Regulation S-X. Certain information required for a
complete presentation in accordance with generally accepted accounting
principles has been omitted. All adjustments that are, in the opinion of
management, necessary for a fair presentation of the interim financial
statements have been included. The results of operations for the three and
nine months ended June 30, 2002, are not necessarily indicative of the
results that may be expected for the entire fiscal year or any interim
period.
The interim financial information should be read in conjunction with the
consolidated financial statements and notes of the Company, including a
summary of significant accounting policies followed by the Company,
included in the Annual Report for the fiscal year ended September 30,
2001. The accompanying unaudited consolidated financial statements include
the accounts of the Company and First Community Bank (the "Bank"), its
wholly owned subsidiary. The intercompany accounts of the Company and the
Bank have been eliminated in consolidation.
2. EARNINGS PER SHARE
The earnings per share amounts were computed using the weighted average
number of shares outstanding during the periods presented. In accordance
with Statement of Position No. 93-6, Employers' Accounting for Employee
Stock Ownership Plans, issued by the American Institute of Certified
Public Accountants, shares owned by the Company's Employee Stock Ownership
Plan that have not been committed to be released are not considered to be
outstanding for the purpose of computing earnings per share.
The weighted average number of shares used in the basic and diluted
earnings per share calculation are set out in the table below:
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Total weighted average basic shares outstanding 4,401,578 4,298,680 4,388,066 4,293,800
Add dilutive effect of unexercised options 35,566 0 20,741 0
---------- ---------- ---------- ----------
Total weighted average shares outstanding
for dilutive earnings-per-share calculation 4,437,144 4,298,680 4,408,807 4,293,800
========== ========== ========== ==========
3. DECLARATION OF DIVIDENDS
On May 28, 2002, the Board of Directors declared a $.07 per share
quarterly dividend for holders of record June 14, 2002.
5
4. BENEFIT PLANS
Stock Option Plan - The Company's stockholders approved 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 incentive stock options,
non-qualified or compensatory stock options to purchase up to 357,075
shares of Company Common Stock. The options will vest in equal amounts
over five years with the first vesting date on October 23, 1999. Options
granted vest immediately in the event of retirement, disability, or death,
or following a change in control of the Company. Outstanding stock options
can be exercised over a ten-year period. Under the SOP, options have been
granted to directors and key employees of the Company. The exercise price
in each case equals the fair market value of the Company's stock at the
date of grant. The Company granted 350,000 options on October 23, 1998,
which have an exercise price of $9.00 per share. As of June 30, 2002,
327,134 were outstanding.
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 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 for the
three and nine months ended June 30, 2002, would have been as follows:
Three-Months Ended Nine-Months Ended
June 30, June 30,
------------------------ ------------------------
2002 2001 2002 2001
Net income (loss) (in thousands):
As reported $ 1,272 $ (964) $ 3,143 $ 517
Pro forma $ 1,248 $ (988) $ 3,071 $ 445
Earnings (loss) per share:
Basic - as reported $ 0.29 $ (0.22) $ 0.72 $ 0.12
Basic - pro forma $ 0.28 $ (0.23) $ 0.70 $ 0.10
Diluted - as reported $ 0.29 $ (0.22) $ 0.71 $ 0.12
Diluted - pro forma $ 0.28 $ (0.23) $ 0.70 $ 0.10
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%.
5. TRUST PREFERRED SECURITIES
On December 8, 2001, the Company issued $10.0 million of trust preferred
securities with a floating coupon rate, which is reset semi-annually,
equal to the six-month LIBOR plus 3.75%. The floating rate may not exceed
11.0% until December 8, 2006. 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. The proceeds, net of issuance
costs, to the Company were approximately $9.65 million. The Company plans
to use the proceeds for general corporate purposes, including
6
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.
6. ACQUISITIONS
On October 1, 2001, Pocahontas Bancorp, Inc. purchased Southern Mortgage
Corp., a mortgage company based in Tulsa, Oklahoma, in a cash acquisition
of $0.9 million. Goodwill of approximately $0.8 million was recognized
related to the acquisition.
On May 31, 2002, the Company, through its subsidiary First Community Bank,
completed its acquisition of Peoples Bank, an Arkansas bank based in
Imboden, Arkansas, in a cash merger of $8.4 million. Peoples Bank had
$71.6 million in assets as of May 31, 2002. Peoples Bank operated four
branches in Lawrence County, Arkansas. A core deposit intangible asset of
$2.5 million and no goodwill was recognized related to the acquisition.
The core deposit intangible asset is estimated to have useful life of 10
years.
On June 18, 2002, the Company completed its acquisition of North Arkansas
Bancshares, Inc., the holding company for Newport Federal Savings Bank, in
a merger valued at $4.3 million or $15.00 per share. In the transaction,
Pocahontas Bancorp issued 442,665 shares of stock at an exchange ratio of
1.5150. Newport Federal Savings Bank had assets of $37.0 million as of
June 18, 2002. A core deposit intangible asset of $0.6 million and no
goodwill was recognized related to the acquisition. The core deposit
intangible asset is estimated to have a useful life of 10 years.
7. GOODWILL AND INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and
Other Intangible Assets. The statement required 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.
The Company has 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. There was no impairment loss resulting from the
transitional impairment test. Any subsequent impairment losses will be
reflected in operating income in the income statement. The Company expects
to perform a goodwill impairment test during the second quarter of each
year.
Had the Company been accounting for its goodwill under SFAS No, 142 for
all periods presented, the Company's net income and earnings (loss) per
share would have been as follows:
7
Three-Months Ended Nine-Months Ended
June 30, June 30,
--------------------- ----------------------
2002 2001 2002 2001
(in thousands, except earnings per share amounts):
Net income (loss) - as reported $ 1,272 $ (964) $ 3,143 $ 517
Add back: Goodwill amortization, net of tax 14 14
-------- --------
Net income (loss) - adjusted $ 1,272 $ (950) $ 3,143 $ 531
======== ======== ========= ========
Basic earnings (loss) per share:
As reported $ 0.29 $ (0.22) $ 0.72 $ 0.12
As adjusted $ 0.29 $ (0.22) $ 0.72 $ 0.12
Diluted earnings (loss) per share:
As reported $ 0.29 $ (0.22) $ 0.71 $ 0.12
As adjusted $ 0.29 $ (0.22) $ 0.71 $ 0.12
Changes in the carrying amount of goodwill for the nine-months ended June
30, 2002, by reporting unit were as follows:
Balance as of October 1, 2001 $ 7,665,461
Additions related to business acquisitions 779,894
Adjustment to Walden/Smith acquistion 372,866
------------
Balance as of June 30, 2002 $ 8,818,221
============
During the quarter ended June 30, 2002, the Company acquired approximately
$3.1 million of core deposit intangible assets. As of June 30, 2002 the
Company has total core deposit intangible assets of $8,813,020, net of
accumulated amortization of $1,615,603. Core deposit intangible assets are
estimated to have a useful life of 10 years.
The Company has no identifiable intangible assets with indefinite useful
lives.
Total amortization expense for core deposit intangible assets was
approximately $188,000 and $563,000 for the three and nine-month periods
ended June 30, 2002. Amortization expense for the net carrying amount of
core deposit intangible assets at June 30, 2002 is estimated to be as
follows (in thousands):
Quarter ending September 30, 2002 $ 266
Year ended September 30, 2003 1,064
Year ended September 30, 2004 1,064
Year ended September 30, 2005 1,064
Year ended September 30, 2006 1,064
Year ended September 30, 2007 1,064
After September 30, 2007 3,227
--------
Total $ 8,813
========
8
8. 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.
9
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors and Stockholders of
Pocahontas Bancorp, Inc.
Pocahontas, Arkansas
We have reviewed the accompanying condensed consolidated statement of financial
condition of Pocahontas Bancorp, Inc. and subsidiaries (the "Company") as of
June 30, 2002, and the related condensed consolidated statements of income and
comprehensive income for the three-month and nine-month periods ended June 30,
2002 and 2001, and of cash flows for the nine-month periods ended June 30, 2002
and 2001. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated statement of
financial condition of Pocahontas Bancorp, Inc. and subsidiaries as of September
30, 2001, and the related consolidated statements of income and comprehensive
income, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated November 9, 2001, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated statement
of financial condition as of September 30, 2001, is fairly stated, in all
material respects, in relation to the consolidated statement of financial
condition from which it has been derived.
/s/ Deloitte & Touche LLP
Little Rock, Arkansas
August 7, 2002
10
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This quarterly report on Form 10-Q contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes", "anticipates", "plans", "expects" and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those contemplated by such forward-looking statements.
These important factors include, without limitation, the Bank's continued
ability to originate quality loans, fluctuation of interest rates, real estate
market conditions in the Bank's lending areas, general and local economic
conditions, the Bank's continued ability to attract and retain deposits, the
Company's ability to control costs, new accounting pronouncements and changing
regulatory requirements.
Financial Condition at June 30, 2002, as compared to September 30, 2001.
General. The Company's total assets increased $123.8 million or 25.6% to $607.4
million at June 30, 2002, as compared to $483.6 million at September 30, 2001.
The increase was primarily due to the acquisition of Peoples Bank and North
Arkansas Bancshares, Inc. Pocahontas Bancorp, Inc. subsidiary First Community
Bank acquired People's Bank on May 31, 2002 with assets of $71.6 million and
Newport Federal Savings and Loan with assets of $37.0 million on June 18, 2002.
Loans receivable, net. Net loans receivable increased by $49.6 million or 14.2%
to $399.0 million at June 30, 2002, from $349.4 million at September 30, 2001.
The increase was primarily due to the acquisition of Peoples Bank loans totaling
$49.1 million and Newport Federal Savings and Loan loans totaling $26.9 million.
During this same period the Company subsidiary First Community Bank sold $26.7
million loans resulting in a gain of $0.5 million.
Investment securities held to maturity. Investment securities held to maturity
decreased $3.4 million, or 29.6% to $8.1 million at June 30, 2002, from $11.5
million at September 30, 2001. The decrease in the Company's held to maturity
investment portfolio was due to the maturity of securities, such funds were used
to purchase investment securities available for sale.
Investment securities available for sale. Investment securities available for
sale increased $51.7 million, or 79.5%, to $116.7 million at June 30, 2002, from
$65.0 million at September 30, 2001. This net change was primarily due to the
purchase of $111.6 million of securities, including an aggregate of $16.7
million of Peoples Bank and Newport Federal Savings and Loan and the principal
pay down, call and maturity of $26.9 million of investment securities. First
Community Bank also sold $36.2 million of investment securities during the nine
month period.
Investment securities trading. Investment securities trading decreased $1.7
million, or 53.1%, to $1.5 million, at June 30, 2002, from $3.2 million at
September 30, 2001. The proceeds were used to repurchase common stock of the
Company.
Deposits. Deposits increased $156.4 million or 44.9% to $504.9 million at June
30, 2002, from $348.5 million at September 30, 2001, primarily due to the
acquisition of Peoples Bank with deposits of $65.1 million and Newport Federal
Savings and Loan with deposits of $26.8 million. Deposits also increased due to
an overall growth in the Bank's market area.
11
Deferred compensation. Deferred compensation decreased $1.0 million or 19.6% to
$4.1 million at June 30, 2002 from $5.1 million at September 30, 2001. The
decrease was due to annual payments made to retired directors and officers in
accordance with their respective retirement and severance agreements.
Accrued expenses and other liabilities. Accrued expenses and other liabilities
increased $1.7 million, or 38.6%, to $6.1 million at June 30, 2002, from $4.4
million at September 30, 2001. The increase was primarily due to additional
accrued expenses as a result of the acquisition of Peoples Bank and North
Arkansas Bancshares, Inc.
Federal Home Loan Bank advances. FHLB advances decreased $47.1 million or 64.3%
to $26.2 million at June 30, 2002, from $73.3 million at September 30, 2001. The
increase in deposits were used to repay FHLB advances.
Stockholders' equity. Stockholders' equity increased $4.6 million or 10.3% to
$49.2 million at June 30, 2002, from $44.6 million at September 30, 2001. The
change in stockholders' equity was primarily due to the issuance of 427,515
shares of common stock valued at $4.3 million for the acquisition of North
Arkansas Bancshares, Inc. net income of $3.1 million which was partially offset
by dividends of $0.9 million and common stock repurchased for the nine-month
period of $1.7 million.
Comparison of Results of Operations for the Three and Nine Months Ended June 30,
2002 and 2001.
Overview. Net income was $1,272,187 for the quarter ended June 30, 2002,
compared to a net loss of $964,067 for the quarter ended June 30, 2001, an
increase of $2,236,255. The net loss for quarter ended June 30, 2001 included
one-time charges of $2.1 million, net of taxes, associated with the acquisition
of Walden Smith Financial Group, Inc. in May 2001. Basic and diluted earnings
per share were $0.29 at June 30, 2002 compared to basic and diluted loss per
share of $0.22 for the three months ended June 30, 2001.
Net income for the nine month period ended June 30, 2002 was $3,143,354 compared
to $517,063, for the same period ended June 30, 2001, an increase of $2,626,291
or 507.9%. Basic earnings per were $0.72 and diluted earnings per share were
$0.71 for the nine-month period ended June 30, 2002 compared to basic and
diluted earnings per share of $0.12 for the same period last year.
Net interest income. Net interest income after provision for loan losses for the
quarter ended June 30, 2002 was $4,259,098 compared to $2,639,305 for the
quarter ended June 30, 2001, an increase of $1,619,793 or 61.4%. The increase
was primarily due to the acquisition of Newport Federal Savings and Loan and
Peoples Bank during the quarter ended June 30, 2002, a decrease in borrowed
funds for the quarter compared to the same period last year and an increase in
investment securities income for this quarter compared to the same period last
year.
Net interest income after provision for loan losses for the nine-month period
ended June 30, 2002 was $11,708,423 compared to $7,207,879 for the nine-month
period ended June 30, 2001, an increase of $4,500,544 or 62.4%. The increase was
primarily due to an increase in loans receivable resulting from the acquisitions
discussed above during the nine-month period ended June 30, 2002 and a decrease
in borrowed funds for the nine-month period compared to the same period last
year.
12
The table below analyzes 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 for the nine-months
period ended June 30, 2002 compared to the nine months ended June 30, 2001.
Rate/Volume Analysis (in thousands)
Nine-Month Periods Ended June 30, 2002 vs. 2001
Increase/(Decrease)
Due to
Total
Rate/ Increase
Volume Rate Volume (Decrease)
--------- --------- --------- ----------
Interest income:
Loan Receivable $ 6,773 $ (865) $ (1,691) $ 4,217
Investment securities (507) (1,025) 424 (1,108)
--------- --------- --------- ---------
Total interest earning assets 6,266 (1,890) (1,267) 3,109
Interest expense:
Deposits 6,475 (3,903) (2,162) 410
Borrowed funds (2,997) 171 648 (2,178)
--------- --------- --------- ---------
Total interest bearing liabilities 3,478 (3,732) (1,514) (1,768)
--------- --------- --------- ---------
Net change in net interest income $ 2,788 $ 1,842 $ 247 4,877
========= ========= =========
Change in provision for loan losses 376
---------
Net change after provision $ 4,501
=========
Non-Interest income. Non-interest income increased to $1,484,324 for the
three-month period ended June 30, 2002 compared to $1,171,946 for the quarter
ended June 30, 2001, an increase of $312,378 or 26.7%. The increase in
non-interest income was primarily due to an increase in fees and service charges
due to an increase in deposits during the period.
Non-interest income increased to $3,901,961 for the nine-month period ended June
30, 2002 compared to $2,906,684 for the nine-month period ended June 30, 2001,
an increase of $995,277 or 34.2%. The increase in non-interest income for the
nine-month period ended June 30, 2002 was primarily the result of an increase in
fees and service charges resulting from an increase in deposits acquired through
acquisitions.
Operating expense. Total operating expenses were $3,821,285 for the quarter
ended June 30, 2002, compared to $5,248,591, which included nonrecurring charges
of $3.2 million, before taxes, for the quarter ended June 30, 2001, a decrease
of $1,427,306 or 27.2%. The nonrecurring charges were primarily related to
severance payments and moving charges associated with the acquisition of
Walden/Smith Financial Group, Inc. in May 2001.
Total operating expenses increased to $10,849,224 for the nine month period
ended June 30, 2002 compared to $9,330,773 for the nine month period ended June
30, 2001, an increase of $1,518,451 or 16.3%. The increase was primarily due to
an increase in expenses resulting from the acquisition of Walden/Smith Financial
Group in May 2001.
13
Non-performing Loans and Loan Loss Provisions
The allowance for loan losses is established through a provision for loan losses
based on management's quarterly asset classification review and evaluation of
the risk inherent in its loan portfolio and changes in the nature and volume of
its loan activity. Such evaluation, which includes a review of all loans on
which full collection may not be reasonably assured, considers among other
matters, the estimated value of collateral, cash flow analysis, historical loan
loss experience, and other factors that warrant recognition in providing
adequate allowances. A provision of $100,000 was made during each of the three
month periods ended December 31, 2001 and March 31, 2002 and a provision of
$200,000 was made during the three month period ended June 30, 2002.
The Company's allowance for loan losses was $3,502,961 at June 30, 2002, or
0.87% of total loans, compared with $2,831,999, or 0.80% of total loans, at
September 30, 2001 and $2,864,727, or 0.82% of total loans, at June 30, 2001.
While management believes the current allowance is adequate based on estimated
losses, changing economic and other conditions may require future adjustments to
the allowance for loan losses
The following table sets forth information regarding loans delinquent for 90
days or more and real estate owned by the Bank on the dates indicated.
June 30, 2002 September 30, 2001
------------- ------------------
(Dollars in Thousands)
Delinquent loans:
Single family mortgage $ 2,485 $ 1,883
Other mortgage loans 1,436 2,988
Other loans 979 1,454
--------- --------
Total delinquent loans 4,900 6,325
Total real estate owned (1) 1,118 1,342
--------- --------
Total non-performing assets $ 6,018 7,667
========= ========
Total loans delinquent 90 days or more to net
loans receivable 1.23% 1.81%
Total loans delinquent 90 days or more to total assets 0.81% 1.31%
Total nonperforming loans and REO to total assets 0.99% 1.59%
(1) Net of valuation allowances
It is the policy of the Bank to place loans 90 days or more past due on a
non-accrual status by establishing a specific interest reserve that provides for
a corresponding reduction in interest income. Delinquent loans 90 days or more
past due decreased $1.4 million or 22.5% between September 30, 2001 and June 30,
2002.
Loan delinquency and losses on loans and REO are closely connected to the local
economy. The Company operates in rural areas and in many of its locations the
local markets are significantly influenced by one or two employers. Should the
economy deteriorate to a point that those employers begin reducing their work
force, it could have a material negative impact on the Company.
14
Liquidity and Capital Resources
Regulatory liquidity is defined as a percentage of the institution's average
daily balance of net withdrawable deposits and current borrowings, invested with
final maturities no longer than five years. The Office of Thrift Supervision
requires 1.0% total liquidity. The Bank met all liquidity requirements during
the nine months ended June 30, 2002.
At June 30, 2002, the Company had various commitments arising in the normal
course of business. Such commitments were not material and are not expected to
have a material adverse impact on the operations of the Company.
At June 30, 2002, the Bank's capital to assets ratio exceeded all regulatory
requirements.
15
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
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 sets
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:
Changes in Change in NPV
Interest Rates as a Percentage of
in Basis Points Net Portfolio Value Estimated Market
-------------------------------------
(Rate Shock) Amount $ Change % Change Ratio Value of Assets
--------------- ------- ----------- --------- ------ -------------------
+300 bp $ 48,971 $ (16,272) -24.9% 10.27% (2.81)bp
+200 bp 54,914 (10,330) -15.8% 11.33% (1.75)bp
+100 bp 60,594 (4,649) -7.1% 12.31% (1.93)bp
0 bp 65,243 - 0.0% 13.08% -
-100 bp 68,501 3,257 5.0% 13.58% 0.50 bp
-200 bp 71,350 6,107 9.0% 14.00% 0.93 bp
-300 bp - - 0.0% 0.00 bp
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
16
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
POCAHONTAS BANCORP, INC.
Date: August 14, 2002 /s/ Dwayne Powell
------------------ ---------------------------------------
Dwayne Powell
President and Chief Executive Officer
Date: August 14, 2002 /s/ Terry Prichard
------------------ ---------------------------------------
Terry Prichard
Senior Vice President and Controller