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, 2003
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____
-----
Indicate by check mark whether the Registrant is an accelerated filer
(as defined by the Rule 12b-2 of the Securities Exchange Act of 1934).
Yes _____ No X
-----
There were 4,549,791 shares of Common Stock ($0.01 par value) issued and
outstanding as of June 30, 2003.
POCAHONTAS BANCORP, INC.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements:
Condensed Consolidated Statements of Financial Condition at June 30, 2003
and September 30, 2002 1
Condensed Consolidated Statements of Income and Comprehensive Income
for the Three and Nine Months Ended June 30, 2003 and 2002 2
Condensed Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended June 30, 2003 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
June 30, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 7
Independent Accountants' Report 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION 23
Signatures 25
Exhibits 26
Item 1
POCAHONTAS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
June 30, 2003 September 30, 2002
ASSETS
Cash $ 24,954,019 $ 34,306,598
Cash surrender value of life insurance 7,121,961 6,883,493
Securities held-to-maturity 7,738,609 8,123,832
Securities available-for-sale 267,876,741 117,340,818
Trading securities, at fair value 1,449,005 1,464,458
Loans receivable, net 381,724,062 396,141,853
Loans receivable, held for sale 7,623,300 11,939,522
Accrued interest receivable 4,907,862 4,362,821
Premises and equipment, net 15,264,430 13,910,158
Federal Home Loan Bank stock, at cost 2,166,700 2,125,500
Goodwill 8,847,572 8,847,572
Core deposit premiums 8,705,135 9,084,027
Other assets 2,635,049 2,484,974
------------- ------------------
TOTAL ASSETS $ 741,014,445 $ 617,015,626
============= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 640,956,002 $ 520,031,702
Federal Home Loan Bank advances 20,513,514 22,136,967
Deferred compensation 2,931,407 4,123,553
Accrued expenses and other liabilities 6,906,135 6,330,406
------------- ------------------
Total liabilities 671,307,058 552,622,628
TRUST PREFERRED SECURITIES 16,915,958 16,900,383
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value, 8,000,000 shares authorized; 7,497,066 and
7,492,353 shares issued and 4,549,791 and 4,376,295 shares outstanding at
June 30, 2003 and September 30, 2002, respectively 74,970 74,923
Additional paid-in capital 56,372,868 56,342,563
Unearned ESOP Shares (671,130) (671,130)
Unearned RRP Shares (8,813) (35,251)
Accumulated other comprehensive income 2,560,503 1,596,925
Retained earnings 18,635,231 16,304,221
------------- ------------------
76,963,629 73,612,251
Treasury stock at cost, 2,947,275 and 3,116,058 shares,
at June 30, 2003 and September 30, 2002, respectively (24,172,200) (26,119,636)
------------- ------------------
Total stockholders' equity 52,791,429 47,492,615
------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 741,014,445 $ 617,015,626
============= ==================
See notes to unaudited 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,
2003 2002 2003 2002
INTEREST INCOME:
Loans receivable $ 6,407,929 $ 6,557,073 $ 20,065,257 $ 19,308,274
Investment securities 2,978,467 2,117,052 7,600,590 5,164,878
------------ ------------ ------------ ------------
Total interest income 9,386,396 8,674,125 27,665,847 24,473,152
INTEREST EXPENSE:
Deposits 4,431,340 3,335,563 12,632,610 9,878,869
Borrowed funds 260,110 543,083 842,701 1,575,299
Interest on trust preferred securities 318,543 336,381 975,351 910,561
------------ ------------ ------------ ------------
Total interest expense 5,009,993 4,215,027 14,450,662 12,364,729
------------ ------------ ------------ ------------
NET INTEREST INCOME 4,376,403 4,459,098 13,215,185 12,108,423
PROVISION FOR LOAN LOSSES 650,000 200,000 1,495,000 400,000
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,726,403 4,259,098 11,720,185 11,708,423
OTHER INCOME:
Dividends 16,507 20,175 54,145 90,460
Fees and service charges 959,644 814,977 2,837,070 2,743,954
Gain on sale of loans 788,204 592,942 2,429,780 772,513
Gain on sale of securities 259,168 140,574 264,896 186,093
Trading gains (losses), net 243,801 (208,721) 331,200 (164,887)
Gain on sale of branches - - 513,595 -
Other, net 86,049 124,377 270,798 273,828
------------ ------------ ------------ ------------
Total other income 2,353,373 1,484,324 6,701,484 3,901,961
------------ ------------ ------------ ------------
OPERATING EXPENSE:
Compensation and benefits 2,466,048 2,078,762 7,474,644 5,932,787
Occupancy and equipment 664,041 611,495 1,917,525 1,734,889
Insurance premiums 87,483 17,634 238,200 44,701
Professional fees 234,176 107,788 781,922 375,230
Data processing 188,934 140,107 550,269 428,834
Advertising 183,434 166,651 465,132 464,478
Office supplies 92,649 159,267 255,444 339,847
REO and other repossessed assets 150,092 87,528 424,666 98,868
Other 355,002 452,053 1,091,336 1,429,590
------------ ------------ ------------ ------------
Total operating expense 4,421,859 3,821,285 13,199,138 10,849,224
------------ ------------ ------------ ------------
INCOME BEFORE TAXES 1,657,917 1,922,137 5,222,531 4,761,160
Income taxes 505,000 649,950 1,832,257 1,617,806
------------ ------------ ------------ ------------
NET INCOME $ 1,152,917 $ 1,272,187 $ 3,390,274 $ 3,143,354
============ ============ ============ ============
(Continued)
2
POCAHONTAS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
June 30 June 30
2003 2002 2003 2002
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized holding gain (loss) on available-
for-sale securities arising during period $ 947,020 $ 1,208,750 $ 1,116,685 $ (130,234)
Reclassification adjustment for gains included
in net income (147,489) (78,597) (153,107) (78,597)
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME $ 1,952,448 $ 2,402,340 $ 4,353,852 $ 2,934,523
============ ============ ============ ============
BASIC EARNINGS PER SHARE $ 0.26 $ 0.29 $ 0.79 $ 0.72
============ ============ ============ ============
DILUTED EARNINGS PER SHARE $ 0.26 $ 0.29 $ 0.78 $ 0.71
============ ============ ============ ============
DIVIDENDS DECLARED PER SHARE $ 0.08 $ 0.07 $ 0.24 $ 0.21
============ ============ ============ ============
(Concluded)
See notes to unaudited condensed consolidated financial statements.
3
POCAHONTAS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Accumulated
Common Stock Additional Unearned Unearned Other Treasury Stock Total
--------------- ------------------
Paid-In ESOP RRP Comprehensive Retained Stockholders'
Shares Amount Capital Shares Shares Income Earnings Shares Amount Equity
Balance, September
30, 2002 7,492,353 $74,923 $56,342,563 $(671,130) $(35,251) $1,596,925 $16,304,221 3,116,058 $(26,119,636) $47,492,615
Options excercised 4,713 47 30,305 30,352
RRP shares earned 26,438 26,438
Net change in
unrealized gain
(loss) on available-
for-sale securities,
net of tax 963,578 963,578
Treasury stock
purchased 109,760 (1,214,027) (1,214,027)
Treasury stock
reissued for
acquisition (278,543) 3,161,463 3,161,463
Net income 3,390,274 3,390,274
Dividends (1,059,264) (1,059,264)
--------- ------- ----------- --------- -------- ---------- ----------- --------- ------------ -----------
Balance, June 30,
2003 7,497,066 $74,970 $56,372,868 $(671,130) $ (8,813) $2,560,503 $18,635,231 2,947,275 $(24,172,200) $52,791,429
========= ======= =========== ========= ======== ========== =========== ========= ============ ===========
See notes to unaudited condensed consolidated financial statements.
4
POCAHONTAS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended
June 30,
2003 2002
OPERATING ACTIVITIES:
Net income $ 3,390,274 $ 3,143,354
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 1,495,000 400,000
Depreciation of premises and equipment 850,235 742,781
Amortization of core deposit premium 829,382 563,384
Amortization of deferred loan fees (52,369) (95,794)
Amortization of premiums and discounts, net (215,653) (121,420)
Net (gain) loss on sales of loans (2,429,780) (772,513)
Net (gain) loss on sales of securities (264,896) (186,093)
Net (gain) loss on sales of branches (513,595) -
Increase in cash surrender value of life insurance policies (238,468) (150,279)
Change in operating assets and liabilities:
Trading securities 15,453 1,667,493
Accrued interest receivable (441,778) 1,298,106
Other assets (1,854,100) (1,019,618)
Deferred compensation (1,192,146) (1,041,188)
Accrued expenses and other liabilities (328,033) 750,707
------------- -------------
Net cash provided (used) by operating activities (950,474) 5,178,920
------------- -------------
INVESTING ACTIVITIES:
Adjustment to acquisition of Walden/Smith Financial Group, Inc., net of cash - (372,866)
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 Bancshares, Inc. - 2,925,033
Cash acquired from Marked Tree Bancshares, Inc. 6,198,350
Net effect of sale of branches to Bank of England (14,044,395) -
Loan repayments, originations, and purchases, net (29,064,578) 211,124
Proceeds from sale of loans 60,442,284 26,665,707
Net (increase) decrease in FHLB Stock (41,200) 2,503,192
Purchase of investment securities (279,482,250) (94,913,435)
Proceeds from sale of REO 1,797,759 775,800
Proceeds from sale of premises and equipment 173,333 20,096
Proceeds from sales, maturities and principal repayments of securities 144,740,793 63,399,229
Purchases of premises and equipment (2,424,563) (1,497,867)
------------- -------------
Net cash provided (used) by investing activities (111,704,467) 342,245
------------- -------------
(Continued)
5
POCAHONTAS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended
June 30,
2003 2002
FINANCING ACTIVITIES:
Net increase in deposits $ 107,142,316 $ 64,473,656
Net (decrease) in repurchase agreements - (350,000)
Net decrease in FHLB advances (1,623,453) (52,352,956)
Proceeds from issuance of trust preferred securities, net of issuance costs - 9,650,500
Purchase of treasury shares (1,214,027) (1,703,573)
Issuance of RRPs 26,438 -
Exercise of stock options 30,352 60,739
Dividends paid (1,059,264) (931,685)
------------- -------------
Net cash provided by financing activities 103,302,362 18,846,681
------------- -------------
NET INCREASE (DECREASE) IN CASH (9,352,579) 24,367,846
CASH AT BEGINNING OF PERIOD 34,306,598 11,145,799
------------- -------------
CASH AT END OF PERIOD $ 24,954,019 $ 35,513,645
============= =============
NON-CASH FINANCING ACTIVITIES -
Issuance of common stock for North Arkansas Bancshares, Inc. acquisition - $ 4,288,650
============= =============
Reissuance of treasury stock for Marked Tree Bancshares, Inc. acquisition $ 3,161,463 -
=============
See notes to unaudited condensed consolidated financial statements.
6
POCAHONTAS BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet information at September 30, 2002
was derived from the audited balance sheets of Pocahontas Bancorp, Inc.
(the "Company"), at September 30, 2002. The condensed consolidated
financial statements at and for the nine months ended June 30, 2003 and
2002 are unaudited. The accompanying condensed 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 nine months ended June 30, 2003, 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,
2002. The accompanying condensed consolidated financial statements include
the accounts of the Company, its wholly owned subsidiaries, First
Community Bank (the "Bank"), Pocahontas Capital Trust I and II (the
"Trusts"), which are business trusts established to facilitate the
issuance of the trust preferred securities; as well as the Bank's
subsidiaries, Southern Mortgage Corporation, 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.
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.
Stock Compensation - 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 with
strike prices at or above the market value of the stock. Had compensation
cost for these options been determined 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, 2003 and 2002, would have been as follows:
7
Three-Months Ended Nine-Months Ended
June 30, June 30,
---------------------- ------------------------
2003 2002 2003 2002
Net income (in thousands):
As reported $ 1,153 $ 1,272 $ 3,390 $ 3,143
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of tax
effects $ (27) $ (24) $ (81) $ (72)
--------- --------- ----------- --------
Pro forma $ 1,126 $ 1,248 $ 3,309 $ 3,071
========= ========= ========== ========
Earnings per share:
Basic - as reported $ 0.26 $ 0.29 $ 0.79 $ 0.72
Basic - pro forma $ 0.26 $ 0.28 $ 0.77 $ 0.70
Diluted - as reported $ 0.26 $ 0.29 $ 0.78 $ 0.71
Diluted - pro forma $ 0.25 $ 0.28 $ 0.76 $ 0.70
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%.
Recently Adopted Accounting Standards - In October 2001, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards 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 Company adopted SFAS No. 144 on October 1, 2002.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions. This Statement amends Statements No. 72 and 144
and FASB Interpretation No. 9. Among other topics, this Statement requires
that an unidentifiable intangible asset that is recognized in an
acquisition of a financial institution, which is accounted for as a
business combination, in which the liabilities assumed exceed the
identifiable assets acquired, be recorded as goodwill. Consequently, this
unidentifiable intangible asset will be subject to the goodwill accounting
standards set forth in SFAS No. 142 and will be evaluated for impairment
on an annual basis instead of being amortized. The Company, which owns
intangible assets of this nature, adopted this Statement on October 1,
2002. The adoption of SFAS No. 147 did not have a material impact on the
results of operations or financial condition of the Company.
In December 2002, the FASB issued Statement No. 148 (SFAS 148), Accounting
for Stock-Based Compensation - Transition and Disclosure, an amendment to
FASB Statement 123. SFAS 148 provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in
both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. SFAS 148 is effective for financial
statements for fiscal years ending after December 15, 2002. The provisions
of the statement related to interim disclosures are effective for interim
periods beginning after December 15, 2002. The Company has adopted the
disclosure provisions of SFAS 148 for the quarter ended June 30, 2003 and
has included the required disclosure in Note 1 to the unaudited
consolidated financial statements.
8
SFAS No. 149, Amendment of Statement 133 on derivative Instruments and
Hedging Activities. SFAS 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities under
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities."
The amendments (i) reflect decisions of the Derivatives Implementation
Group (DIG); (ii) reflect decisions made by the Financial Accounting
Standards Board in conjunction with other projects dealing with financial
instruments; and (iii) address implementation issues related to the
application of the definition of a derivative. SFAS 149 also modifies
various other existing pronouncements to conform with the changes made to
SFAS 133. SFAS 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June
30, 2003, with all provisions applied prospectively. Adoption of SFAS 149
on July 1, 2003 is not expected to have a significant impact on the
Company's financial statements.
SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS 150 establishes
standards for how an issuer classifies, measures and discloses in its
financial statements certain financial instruments with characteristics of
both liabilities and equity. SFAS 150 requires that an issuer classify
financial instruments that are with its scope as liabilities, in most
circumstances. Such financial instruments include (i) financial
instruments that are issued in the form of shares that are mandatorily
redeemable; (ii) financial instruments that embody an obligation to
repurchase the issuer's equity shares, or are indexed to such an
obligation, and that require the issuer to settle the obligation by
transferring assets; (iii) financial instruments that embody an obligation
that the issuer may settle by issuing a variable number of its equity
shares if, at inception, the monetary value of the obligation is
predominantly based on a fixed amount, variation in something other than
the fair value of the issuer's equity shares or variations inversely
related to changes in the fair value of the issuer's equity shares; and
(iv) certain freestanding financial instruments. SFAS 150 is effective for
contracts entered into or modified after May 31, 2003, and is otherwise
effective at the beginning of the first interim period beginning after
June 15, 2003. The Company, which has financial instruments of this
nature, adopted this Statement on July 1, 2003. The adoption of SFAS 150
will require Company's trust preferred securities to be accounted for and
reported as a liability.
FASB Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others ("FIN 45") elaborates on the disclosures to be made by a
guarantor in its financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for
the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements in FIN 45 are effective for financial statements
of annual periods ending after December 15, 2002. The adoption of FIN 45
did not have a material effect on the financial statements of the Company.
FIN No. 46, Consolidation of Variable Interest Entities, an interpretation
of Accountings Research Bulletin No. 51. Fin 46 establishes accounting
guidance for consolidation of variable interest entities (VIE) that
function to support the activities of the primary beneficiary. The primary
beneficiary of the VIE entity is the entity that absorbs a majority of the
controlling interest, contractual relationship or other business
relationship with a VIE. Prior to the implementation FIN 46, VIEs were
generally consolidated by an enterprise when the enterprise had a
controlling financial interest through ownership of a majority of voting
interest in the entity. The provisions of FIN 46 were effective
immediately for all arrangements entered into after January 31, 2003, and
are otherwise effective at the beginning of the first interim period
beginning after June 15, 2003.
9
The Company adopted FIN 46 on July 1, 2003. In its current form, FIN 46
may require the Company to deconsolidate its investment in Pocahontas
Capital Trust I and Pocahontas Capital Trust II (The Trusts) in future
financial statements. The potential de-consolidation of subsidiary trusts
of bank holding companies formed in connection with the issuance of trust
preferred securities, like The Trusts, appears to be an unintended
consequence of FIN 46. It is currently unknown if, or when, the FASB will
address this issue. In July 2003, the Board of Governors of the Federal
Reserve System issued a supervisory letter instructing bank holding
companies to continue to include the trust preferred securities in their
Tier I capital for regulatory capital purposes. As of June 30, 2003,
assuming the Company was not allowed to include the $17.5 million in trust
preferred securities issued by The Trusts in Tier I capital, the Company
would still exceed the regulatory required minimum for capital adequacy
purposes.
Reclassifications - Certain amounts for the three-month and nine-month
periods ended June 30, 2002 have been reclassified to conform to the
presentation for the three-month and nine-month periods ended June 30,
2003.
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 numbers 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, 2003 June 30, 2002 June 30, 2003 June 30, 2002
--------------- ---------------- ---------------- ------------------
Total weighted average basic shares
outstanding 4,393,738 4,401,578 4,305,617 4,388,066
Add dilutive effect of unexercised options 78,105 35,566 63,919 20,741
--------- --------- --------- ---------
Total weighted average shares outstanding
for dilutive earnings-per-share calculation 4,471,843 4,437,144 4,369,536 4,408,807
========= ========= ========= =========
3. DECLARATION OF DIVIDENDS
On May 21, 2003, the Board of Directors declared an $.08 per share
quarterly cash dividend for holders of record June 13, 2003. The dividend
was paid July 2, 2003.
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 non-qualified or
compensatory stock options to purchase up to 357,075 shares of Company
common stock. The options 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, 2003, 254,000 options were outstanding.
NARK Stock Option Plan - In connection with the acquisition of North
Arkansas Bancshares, Inc. (NARK) by the Company on June 18, 2002, the
outstanding options of the 1998 Stock Option and
10
Incentive Plan (SOIP) of NARK were exchanged for options to purchase stock
of the Company. Each outstanding option to purchase a share of NARK stock
was exchanged for an option to purchase 1.515 shares of the Company's
stock. The SOIP granted both incentive and non-incentive options to key
employees and directors of NARK. All options granted expire one year after
the employee or director ceases to maintain continuous service as an
employee or director of the Company or an affiliate. The exercise price in
each case equals the original exercise price divided by the exchange rate.
On June 19, 2002 the exchange resulted in 30,970 outstanding options at an
exercise price of $6.44 each. On June 30, 2003, 26,257 options were
outstanding.
5. ACQUISITION
On April 30, 2003, the Company completed the acquisition of Marked Tree
Bancshares ("Marked Tree") and its bank subsidiary, Marked Tree Bank, in a
stock transaction valued at approximately $3.2 million. The transaction
was structured as a tax-free reorganization whereby Marked Tree
stockholders received 103.1004 shares of Company stock for each
outstanding share of Marked Tree stock. Marked Tree is headquartered in
Marked Tree, Arkansas and operates one full-service banking office. At
April 30, 2003, Marked Tree had net loans receivable of $11.8 million, of
which $3.5 million were classified as commercial real estate loans and
$3.3 million classified as non real estate loans; total assets of $32.6
million, total deposits of $28.6 million and stockholders' equity of $3.2
million.
6. BRANCH SALES
On October 11, 2002, the Company sold its two branches in Carlisle and
England, Arkansas to the Bank of England. The sale of the branches
reflected management's decision to concentrate in the Bank's primary
market area. The Company recognized a gain of approximately $0.5 million
on the branch sales.
7. GOODWILL AND INTANGIBLE ASSETS
In July 2001, the FASB issued 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.
As of April 1, 2003, the Company performed its annual impairment test and
concluded there was no impairment to the book value of the Company's
goodwill. Absent any impairment indicators, the Company will perform its
next impairment test as of April 1, 2004.
As of June 30, 2003 the Company had total core deposit premiums of
$11,374,598, net of accumulated amortization of $2,669,463. 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 premiums was approximately
$829,500 for the nine-month period ended June 30, 2003. Amortization
expense for the net carrying amount of core deposit premiums at June 30,
2003, is estimated to be as follows (in thousands):
11
Three months ending September 30, 2003 $ 288
Year ending September 30, 2004 1,151
Year ending September 30, 2005 1,151
Year ending September 30, 2006 1,151
Year ending September 30, 2007 1,151
After September 30, 2007 3,813
-------
Total $ 8,705
=======
8. 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 its subsidiaries.
9. OFF-BALANCE SHEET ARRANGEMENTS AND COMMITMENTS
The Company, in the normal course of business, makes commitments to buy or
sell assets or to incur or fund liabilities. Commitments include, but are
not limited to the origination, purchase, or sale of loans, the purchase
of investment securities, fulfillment of commitments under
letters-of-credit, extensions of credit on home equity lines of credit and
construction loans, and the commitment to fund withdrawals of savings
accounts at maturity.
At June 30, 2003, the Company's off-balance sheet arrangements principally
included lending commitments, which are described below. At June 30, 2003,
the Company had no interests in non-consolidated special purpose entities.
At June 30, 2003, commitments included:
Total approved loan origination commitments outstanding were $33.7
million, including $7.9 million loans committed to sell.
Rate lock agreements with customers of $7.9 million, all of which have
been locked with an investor.
Undisbursed balances of construction loans of $4.2 million.
Total unused lines of credit of $23.8 million.
Outstanding letters of credit of $0.8 million.
Total certificates of deposit scheduled to mature in one year or less
of $253.5 million.
Based on historical experience, management believes that a significant
portion of maturing deposits will remain with the Company. We
anticipate that we will continue to have sufficient funds, through
repayments, deposits and borrowings, to meet our current commitments.
10. ALLOWANCE FOR LOAN LOSSES
A summary of the activity in the allowance for loan losses is as follows (in
thousands):
12
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
--------------- --------------- --------------- ---------------
Balance at the beginning of the period $ 3,268 $ 2,551 $ 3,205 $ 2,542
Provision for losses 650 200 1,495 400
Balance transferred at acquisition 355 836 355 836
Charge-offs, net of recoveries (775) (86) (1,557) (277)
---------- ---------- ---------- ----------
Balance at the end of the period $ 3,498 $ 3,501 $ 3,498 $ 3,501
========== ========== ========== ==========
13
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, 2003, and the related condensed consolidated statements of income and
comprehensive income and of cash flows for the three and nine month periods
ended June 30, 2003 and 2002, and stockholders' equity for the nine-month period
ended June 30, 2003. 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, 2002, 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 8, 2002, we expressed an
unqualified opinion and includes an explanatory paragraph relating to the
adoption of SFAS No. 142, Goodwill and other Intangible Assets 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, 2002, 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 4, 2003
14
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.
Critical Accounting Policy - The Company's critical accounting policy relates to
the allowance for losses on loans. The Company has established a systematic
method of periodically reviewing the credit quality of the loan portfolio in
order to establish a sufficient allowance for losses on loans. The allowance for
losses on loans is based on management's current judgments about the credit
quality of individual loans and segments of the loan portfolio. The allowance
for losses on loans is established through a provision for loan losses based on
management's evaluation of the risk inherent in the loan portfolio, and
considers all known internal and external factors that affect loan
collectability as of the reporting date. Such evaluation, which includes a
review of all loans on which full collectability may not be reasonably assured,
considers among other matters, the estimated net realizable value or the fair
value of the underlying collateral, economic conditions, historical loan loss
experience, management's knowledge of inherent risks in the portfolio that are
probable and reasonably estimable and other factors that warrant recognition in
providing an appropriate loan loss allowance.
Financial Condition at June 30, 2003, as compared to September 30, 2002.
General. Total assets increased to $741.0 million at June 30, 2003 from $617.0
million at September 30, 2002, an increase of $124.0 million or 20.1%. The
increase was partially the result of $293.3 million of securities purchased
using cash obtained from the growth in deposits, offset by the sale of $16.3
million, and principal payments and maturities of $85.0 million, which resulted
in a net increase in investment securities of $150.2 million or 119.7%. The
yield on average interest earning assets at June 30, 2003 was 6.40% compared to
7.19 % at September 30, 2002.
Loans receivable, net. Net loans receivable decreased to $381.7 million at June
30, 2003 from $396.1 million at September 30, 2002, a decrease of $14.4 million
or 3.6%. Total nonperforming loans increased to $4.5 million at June 30, 2003
from $3.2 million at September 30, 2002, an increase of $1.3 million or 40.6%.
The increase in nonperforming loans was primarily the result of a weakening
economy and the Bank's shift from being a traditional single-family lending
institution to diversifying into a larger percentage of commercial loans.
Loans receivable, held for sale. Loans held for sale decreased to $7.6 million
at June 30, 2003 from $11.9 million at September 30, 2002, a decrease of $4.3
million or 36.1%. During the nine-month period ended June 30, 2003, the Company
sold $60.4 million of loans, of which $11.9 million were classified held for
sale as of September 30, 2002. Management expects to continue to sell loans in
the secondary market as necessary to manage interest rate risks.
15
Securities available for sale. Securities available for sale increased $150.5
million, or 128.4%, to $267.9 million at June 30, 2003, from $117.3 million at
September 30, 2002. This increase was the result of excess cash obtained from
deposit growth used to purchase $279.4 million of securities and $13.9 million
of securities obtained in the merger with Marked Tree Bancshares, offset by the
principal pay down, call, sale and maturity of $145.3 million of investment
securities.
Deposits. Deposits increased to $641.0 million at June 30, 2003 from $520.0
million at September 30, 2002, an increase of $121.0 million or 23.3%. The net
increase in deposits was largely due to a 50+ checking account promotion that
resulted in an increased deposit base, and $28.6 million of deposits obtained
with the acquisition of Marked Tree Bancshares, and was partially offset by the
sale of Carlisle and England, Arkansas branches that had combined deposits of
$14.8 million.
Deferred compensation. Deferred compensation decreased $1.2 million or 29.3% to
$2.9 million at June 30, 2003, from $4.1 million at September 30, 2002. The
decrease related to a $1.3 million final payment to a retired officer and
scheduled payments made to retired directors and officers in accordance with
their respective retirement and severance agreements, net of a new deferred
compensation agreement entered into during the period.
Accrued expenses and other liabilities. Accrued expenses and other liabilities
increased $0.6 million, or 9.5%, to $6.9 million at June 30, 2003, from $6.3
million at September 30, 2002. The increase was primarily the result of a $0.7
million note payable acquired with the purchase of Marked Tree Bancshares during
the period ended June 30, 2003.
Stockholders' equity. Stockholders' equity increased $5.3 million or 11.2% to
$52.8 million at June 30, 2003, from $47.5 million at September 30, 2002. The
increase in stockholders' equity was primarily due to net income of $3.4
million, a $1.0 million increase in unrealized gain on securities, and a $2.0
million net decrease in treasury stock, which was partially offset by dividends
of $1.1 million. The $2.0 million net decrease in treasury stock is the result
of the company issuing $3.2 million from treasury stock for the merger with
Marked Tree Bancshares, partially offset by the repurchase of $1.2 million of
the company's common stock.
Comparison of Results of Operations for the Three and Nine Months Ended June 30,
2003 and 2002.
Overview. Net income was $1.2 million for the quarter ended June 30, 2003,
compared to net income of $1.3 million for quarter ended June 30, 2002, a
decrease of $0.1 million or 7.7%. Basic and diluted earnings per share decreased
$0.03 per share or 10.3% to $0.26 for the quarter ended June 30, 2003 compared
to basic and diluted earnings per share of $0.29 for the same period last year.
Net income for the nine-month period ended June 30, 2003 was $3.4 million
compared to $3.1 million for the nine-month period ended June 30, 2002, an
increase of $0.3 million or 9.7%. Basic earnings per share were $0.79 and
diluted earnings per share were $0.78 for the nine-month period ended June 30,
2003, compared to basic earnings per share of $0.72 and diluted earnings per
share of $0.71 for the same period last year.
Net interest income. Net interest income for the quarter ended June 30, 2003 was
$4.4 million compared to $4.5 million for the quarter ended June 30, 2002, a
decrease of $0.1 million or 2.2%. Net interest income for the nine-month period
ended June 30, 2003 was $13.2 million compared to $12.1 million for the
nine-month period ended June 30, 2002, an increase of $1.1 million or 9.1%. The
increase in net interest income resulted from the increase in earnings due to
the purchase of investment securities with cash provided by deposit growth. The
increase in earnings on the loan portfolio was the result of an increase in the
average loan portfolio due to the acquisitions of North Arkansas Bancshares,
Peoples Bank of Imboden and Marked Tree Bancshares partially offset by a lower
rate environment. Interest expense increased as a result of offering competitive
rates on specific deposit products and an increased deposit portfolio balance
due to the
16
acquisitions of North Arkansas Bancshares, Peoples Bank of Imboden and Marked
Tree Bancshares while interest expense on borrowed funds decreased during the
period compared to the same period last year, due to a decrease in borrowings.
The Company's net interest rate spread was 2.79 % for the three months ended
June 30, 2003 compared to 3.74% for the three months ended June 30, 2002. Net
interest margin was 2.71% for the three months ended June 30, 2003 compared to
3.67% for the three months ended June 30, 2002. The Company's net interest rate
spread was 3.16% for the nine months ended June 30, 2003 compared to 3.68% for
the nine months ended June 30, 2002. Net interest margin was 3.06% for the nine
months ended June 30, 2003 compared to 3.64% for the nine months ended June 30,
2002. The decrease was primarily due to lower yields on average interest earning
assets for the periods ended June 30, 2003 compared to the same periods last
year.
17
Average Balance Sheets (Dollars in Thousands)
Three Months Ended June Three Months Ended June
2003 2002
---------------------------------- -----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------------------------------- -----------------------------------
Interest-earning assets: (1)
Loan receivable, net (6) $ 384,739 $ 6,408 6.66% $ 352,763 $ 6,557 7.44%
Investment securities 260,043 2,978 4.58% 133,700 2,117 6.33%
--------- --------- ----- --------- --------- ------
Total interest-
earning assets 644,782 9,386 5.82% 486,463 8,674 7.13%
Noninterest-earning cash 36,639 26,445
Other noninterest-
earning assets 43,089 40,471
--------- ---------
Total assets 724,510 553,379
========= =========
Interest-bearing liabilities:
Demand deposits $ 308,605 $ 1,763 2.29% $ 106,455 $ 544 2.04%
Time deposits 316,004 2,668 3.38% 328,018 2,792 3.40%
Borrowed funds (5) 20,538 260 5.06% 45,452 543 4.78%
Trust Preferred 16,914 319 7.54% 16,893 336 7.96%
--------- --------- ----- --------- --------- ------
Total interest-
bearing liabilities 662,061 5,010 3.03% 496,818 4,215 3.39%
--------- --------- ----- --------- --------- ------
Noninterest-bearing
liabilities (2) 10,448 9,364
--------- ---------
Total liabilities 672,509 506,182
Stockholders' equity 52,001 47,197
--------- ---------
Total liabilities and
stockholders' equity $ 724,510 $ 553,379
========= =========
Net interest income $ 4,376 $ 4,459
========= =========
Net interest rate spread (3) 2.79% 3.74%
======= =======
Interest-earning assets and
net interest margin (4) $ 644,782 2.71% $ 486,463 3.67%
========= ======= ========= =======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 97.39% 97.92%
======= =======
(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.
18
Average Balance Sheets (Dollars in Thousands)
Nine Months Ended June Year Ended September Nine Months Ended June
2003 2002 2002
------------------------------- ------------------------------- ----------------------------------
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) $ 395,031 $ 20,065 6.77% $ 353,585 $ 26,664 7.54% $ 339,886 $ 19,308 7.57%
Investment securities 181,162 7,601 5.59% 121,083 7,443 6.15% 103,271 5,165 6.67%
--------- --------- ---- --------- -------- ---- --------- --------- ----
Total interest-
earning assets 576,193 27,666 6.40% 474,668 34,107 7.19% 443,157 24,473 7.36%
Noninterest-earning cash 28,271 20,559 15,136
Other noninterest-
earning assets 49,632 39,201 44,228
--------- --------- ---------
Total assets 654,096 534,428 502,521
========= ========= =========
Interest-bearing liabilities:
Demand deposits $ 248,311 $ 4,077 2.19% $ 147,789 $ 1,988 1.35% $ 130,292 $ 1,187 1.21%
Time deposits 307,220 8,556 3.71% 274,805 11,976 4.36% 255,413 8,692 4.54%
Borrowed funds (5) 22,338 843 5.03% 39,495 1,987 5.03% 49,346 1,575 4.26%
Trust Preferred 16,906 975 7.69% 16,087 1,249 7.76% 13,173 911 9.22%
--------- --------- ---- --------- -------- ---- --------- --------- ----
Total interest-
bearing liabilities 594,775 14,451 3.24% 478,176 17,200 3.60% 448,224 12,365 3.68%
--------- --------- ---- --------- -------- ---- --------- --------- ----
Noninterest-bearing
liabilities (2) 10,295 9,959 9,144
--------- --------- ---------
Total liabilities 605,070 488,135 457,368
Stockholders' equity 49,026 46,293 45,153
--------- --------- ---------
Total liabilities and
stockholders' equity $ 654,096 $ 534,428 $ 502,521
========= ========= =========
Net interest income $ 13,215 $ 16,907 $ 12,108
========= ======== =========
Net interest rate spread (3) 3.16% 3.59% 3.68%
==== ==== ====
Interest-earning assets and
net interest margin (4) $ 576,193 3.06% $ 474,668 3.56% $ 443,157 3.64%
========= ==== ========= ==== ========= ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 96.88% 99.27% 98.87%
===== ===== =====
(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.
19
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-month
period ended June 30, 2003, compared to the nine-month period ended June 30,
2002.
Rate/Volume Analysis (in thousands)
Nine-Month Period Ended June 30, 2003 vs. 2002
Increase/(Decrease)
Due to
----------------------------------------------
Total
Rate/ Increase
Volume Rate Volume (Decrease)
--------- --------- --------- ---------
Interest income:
Loan Receivable $ 4,174 $ (2,719) $ (698) $ 757
Investment securities 5,195 (1,115) (1,644) 2,436
-------- -------- -------- --------
Total interest earning assets 9,369 (3,834) (2,342) 3,193
Interest expense:
Deposits 5,808 (1,504) (1,550) 2,754
Borrowed funds (1,234) 550 16 (668)
-------- -------- -------- --------
Total interest bearing liabilities 4,574 (954) (1,534) 2,086
-------- -------- -------- --------
Net change in net interest income $ 4,795 $ (2,880) $ (808) 1,107
======== ======== ========
Change in provision for loan losses 1,095
--------
Net change after provision $ 12
========
Provision for Loan Losses. Provision for loan losses was $0.7 million the
quarter ended June 30, 2003, compared to $0.2 million for the quarter ended June
30, 2002 an increase of $0.5 million or 250.0%. Provision for loan losses
increased to $1.5 million for the nine-month period ended June 30, 2003 compared
to $0.4 million for the nine-month period ended June 30, 2002, an increase of
$1.1 million or 275.0%. The increase in the provision for loan loss was a result
of a weakening economy and the Bank's shift from being a traditional
single-family lending institution to diversifying into a larger percentage of
commercial loans and the corresponding increase in reserve requirements.
Non-Interest income. Non-interest income increased to $2.4 million for the
quarter ended June 30, 2003 compared to $1.5 million for the quarter ended June
30, 2002, an increase of $0.9 million or 60.0%. Non- interest income increased
to $6.7 million for the nine-month period ended June 30, 2003 compared to $3.9
million for the nine-month period ended June 30, 2002, an increase of $2.8
million or 71.8%. The increase in non-interest income was primarily the result
of an increase in gain on sale of loans, a trading gain on the equity securities
and a $0.5 million gain on the sale of the Company's Carlisle and England
offices during the nine-month period ended June 30, 2003.
Operating expense. Total operating expenses were $4.4 million for the quarter
ended June 30, 2003, compared to $3.8 million for quarter ended June 30, 2002,
an increase of $0.6 million or 15.8%. Total operating expenses increased to
$13.2 million for the nine-month period ended June 30, 2003, compared to $10.8
million for the nine-month period ended June 30, 2002, an increase of $2.4
million or 22.2%. The increase in operating expenses compared to last year was
primarily the result of increased operating expenses associated with the growth
of the Company due to the acquisitions of Peoples Bank of Imboden, North
Arkansas Bancshares and Marked Tree Bancshares.
20
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 the Company's 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
allowances. A provision of $1.5 million was made during the nine month period
ended June 30, 2003. Total nonperforming loans increased to $4.3 million at June
30, 2003 from $3.2 million at September 30, 2002, an increase of $1.1 million.
Over the last twenty-four months, the Company has completed acquisitions of four
separate banks, which had the result of increasing commercial loans by $99.6
million. The Company expects that we will continue to diversify our loan
portfolio from being a traditional single-family lending institution to an
increase in the percentage of commercial loans through originations or
additional whole bank acquisitions. The increases in commercial loans associated
with the acquisitions have resulted in an increase of $2.7 million of
nonperforming commercial loans during that twenty-four month period. We believe
that the increase in non-performing commercial loans is a result of the
weakening economy and due to commercial loans having a higher degree of risk of
uncollectability than single-family loans. Approximately, $2.0 million of loan
loss allowance on the commercial loans was transferred with these bank
acquisitions. Additionally, $1.5 million in charge offs have been recorded in
connection with the loans acquired in these acquisitions.
The Company's allowance for loan losses was $3.5 million at June 30, 2003, or
0.90% of total loans, compared with $3.2 million or 0.78% of total loans, at
September 30, 2002, and $3.5 million or 0.88% of total loans, at June 30, 2002.
Based on presently available information, management believes that the current
allowance for loan losses is adequate. 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 (nonperforming loans) and real estate owned by the Company on the
dates indicated.
June 30, 2003 September 30, 2002
----------------- --------------------
(Dollars in Thousands)
Nonperforming loans:
Single family mortgage $ 2,060 $ 1,744
Other mortgage loans 1,397 546
Other loans 793 893
---------- ----------
Total nonperforming loans: 4,250 3,183
Total real estate owned and repossessed assets (1) 1,180 1,707
---------- ----------
Total non-performing assets $ 5,430 $ 4,890
========== ==========
Total nonperforming loans to total loans receivable 1.09% 0.78%
Total nonperforming loans to total assets 0.57% 0.52%
Total nonperforming assets to total assets 0.73% 0.80%
(1) Net of valuation allowances
It is the policy of the Company 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 increased $1.1 million or 40.6% between September 30, 2002 and June 30,
2003 to $4.3 million from $3.2 million. The balance of the specific interest
reserve on non-accrual loans remained $0.3 million on September 30, 2002 and
June 30, 2003.
21
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 one or
two employers significantly influence the local markets. 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.
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, 2002, 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 a 100 basis point decrease in market
interest rates. Due to the current low prevailing interest rate environment, the
changes in NPV is not estimated for a decrease in interest rates of 200 or 300
basis points.
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 $43,808 $(17,547) (28.6)% 7.30% (2.48) %
+200 bp 51,699 (9,656) (15.7)% 8.46% (1.32) %
+100 bp 58,442 (2,913) (4.7)% 9.41% (0.37) %
0 bp 61,355 - 0% 9.78% -
-100 bp 60,912 (443) (0.7)% 9.67% (0.11) %
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.
22
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.
ITEM 4
CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including the Company's Chief Executive Officer and Chief Financial Officer, the
Company evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rule 13a-14(c) under the
Exchange Act) as of the end of the period covered by this report. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, the Company's disclosure controls and procedures were effective
in timely alerting them to the material information relating to the Company (or
its consolidated subsidiaries) required to be included in its periodic SEC
filings.
(b) Changes in internal controls.
There has been no change made in the Company's internal controls over
financial reporting during the period covered by this report that has materially
affected or is reasonably likely to materially affect the Company's internal
control over financial reporting.
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
23
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports
(a) Exhibits
Exhibit No. 31.1 - Written statement of President and Chief Executive Officer.
Exhibit No. 31.2 - Written statement of Chief Financial Officer
(b) Reports
On April 24, 2003, the Company filed with the Securities and Exchange Commission
a Current Report on Form 8-K. The report disclosed in Item 9 "Regulation FD
Disclosure" that the Company had released earnings for the three and six month
periods ended on March 30, 2003. Financial statements were filed as an exhibit
to the report.
On May 2, 2003, the Company filed with the Securities and Exchange Commission a
Current Report on Form 8-K. The report disclosed in Item 5 "Other Events" that
the Company had upon receipt of all regulatory and stockholder approvals
completed the acquisition of Marked Tree Bancshares. No financial statements
were required to be filed with this report. The Agreement and Plan of Merger
dated November 27, 2002, along with the April 30, 2003 was filed as an exhibit
to the report.
On June 20, 2003, the Company filed with the Securities and Exchange Commission
a Current Report on Form 8-K. The report disclosed in Item 5 "Other Events" that
the Company had entered into an agreement to sell the branch office of First
Community Bank located in Brinkley, Arkansas, to the Bank of Brinkley,
headquartered in Brinkley, Arkansas. No financial statements were required to be
filed with this report. The June 5, 2003, press release was filed as an exhibit
to the report.
24
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, 2003 /s/ Dwayne Powell
--------------- ---------------------------------------
Dwayne Powell
President and Chief Executive Officer
Date: August 14, 2003 /s/ Terry Prichard
--------------- ---------------------------------------
Terry Prichard
Chief Financial Officer
25