<PAGE>
Filed Pursuant to Rule 424(B)(3)
Registration No. 333 - 35985
-----------
PROSPECTUS
UP TO 370,300 SHARES OF COMMON STOCK
NORTH ARKANSAS BANCSHARES, INC.
200 OLIVIA DRIVE
NEWPORT, ARKANSAS 72112
(870) 523-3611
================================================================================
Newport Federal Savings Bank is converting from a federally chartered
mutual savings bank to a federally chartered stock savings bank. As part of the
conversion, Newport Federal Savings Bank will become a wholly owned subsidiary
of North Arkansas Bancshares, Inc. The Company was formed in September 1997 and
upon completion of the conversion will own all of the shares of Newport Federal
Savings Bank. The common stock of the Company is being offered to the public in
accordance with a plan of conversion. The plan of conversion must be approved
by the Office of Thrift Supervision and by a majority of the votes eligible to
be cast by members of Newport Federal Savings Bank. The offering will not go
forward if Newport Federal Savings Bank does not receive these approvals and the
Company does not sell at least the minimum number of shares.
The shares of common stock are first being offered pursuant to
nontransferable subscription rights in a Subscription Offering. Depositor and
borrower members as of certain eligibility dates will receive subscription
rights. Shares of common stock not subscribed for in the Subscription Offering
may be offered for sale in a community offering with preference given to
residents of Jackson County, Arkansas.
================================================================================
TERMS OF OFFERING
An independent appraiser has estimated the market value of the converted Newport
Federal Savings Bank to be between $2,380,000 and $3,220,000, which establishes
the number of shares to be offered at a price of $10 per share. Subject to
Office of Thrift Supervision approval, up to 370,300 shares, an additional 15%
above the maximum number of shares, may be offered. Based on these estimates, we
are making the following offering of shares of common stock:
. Price Per Share: $10
. Number of Shares Minimum/
Maximum, as adjusted: 238,000 to 370,300
. Offering Expenses: $400,000
. Net Proceeds to the Company
Minimum/Maximum, as adjusted: $1,980,000 to $3,303,000
. Net Proceeds Per Share
Minimum/Maximum, as adjusted: $8.32 to $8.92
PLEASE REFER TO RISK FACTORS BEGINNING ON PAGE 1 OF THIS DOCUMENT.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
Neither the Securities and Exchange Commission, Office of Thrift Supervision,
nor any state securities regulator has approved or disapproved these securities
or determined if this prospectus is accurate or complete. Any representation to
the contrary is a criminal offense.
FOR INFORMATION ON HOW TO SUBSCRIBE, CALL THE STOCK INFORMATION CENTER AT (870)
523-3340.
TRIDENT SECURITIES, INC.
The date of this Prospectus is November 10, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Questions and Answers About the Stock Offering......................................... (i)
Summary................................................................................ (iv)
Selected Financial and Other Data...................................................... (vii)
Recent Developments.................................................................... (ix)
Risk Factors........................................................................... 1
Proposed Purchases by Directors and Officers........................................... 6
The Company............................................................................ 6
Newport Federal Savings Bank........................................................... 7
Use of Proceeds........................................................................ 7
Dividends.............................................................................. 8
Market for the Common Stock............................................................ 9
Capitalization......................................................................... 10
Historical and Pro Forma Capital Compliance............................................ 11
Pro Forma Data......................................................................... 12
The Conversion......................................................................... 15
Management's Discussion and Analysis of Financial Condition and Results of Operations.. 28
Business of North Arkansas Bancshares, Inc............................................. 37
Business of Newport Federal Savings Bank............................................... 38
Regulation............................................................................. 57
Taxation............................................................................... 64
Management of the Company.............................................................. 65
Management of Newport Federal Savings Bank............................................. 66
Restrictions on Acquisitions of the Company............................................ 73
Description of Capital Stock........................................................... 79
Legal and Tax Matters.................................................................. 80
Experts................................................................................ 80
Additional Information................................................................. 81
Newport Federal Savings Bank Index to Financial Statements............................. 82
Glossary............................................................................... A-1
</TABLE>
This document contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors " beginning on page 1 of this document.
Please see the Glossary beginning on page A-1 for the meaning of
capitalized terms that are not defined in this document.
<PAGE>
[MAP OF NEWPORT FEDERAL'S MARKET AREA]
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q. WHAT IS A MUTUAL TO STOCK CONVERSION?
A: The conversion is a change in our form of organization. Currently, we
operate as a federally chartered mutual savings bank with no stockholders.
As a result of the conversion, we will become a federally chartered stock
savings bank. As part of our conversion, the Company is offering for sale
shares of its common stock The Company will be our sole stockholder and
will purchase our stock in exchange for a portion of the proceeds from its
offering.
Q: WHAT IS THE PURPOSE OF THE CONVERSION AND THE OFFERING?
A: As a stock savings association operating through a holding company
structure, we will have the ability to plan and develop long-term growth
and improve our future access to the capital markets. The stock offering
will increase our capital and the amount of funds available to us for
lending and investment activities. This will give us greater flexibility
to diversify operations and expand into other geographic markets if we
choose to do so. If the Company's earnings are sufficient in the future,
you might also receive dividends and benefit from the long-term
appreciation of our stock price.
Q: HOW MANY SHARES OF STOCK WILL BE SOLD?
A: Between 238,000 and 322,000 shares of common stock will be sold, all at a
price of $10.00 per share. The number of shares to be sold may be
increased to 370,300 shares without further notice to you, subject to
receipt of approval of the Office of Thrift Supervision, if market or
financial conditions change prior to completion of the conversion or if
additional shares are needed to fill the order of our employee stock
ownership plan (the "ESOP").
Q: HOW DO I PURCHASE THE STOCK?
A: You must complete and return the Stock Order Form to us together with your
payment or your authorization for withdrawal of the payment amount from an
account you have with us, on or before December 10, 1997. See pages 23 to
24.
Q: HOW MUCH STOCK MAY I PURCHASE?
A: The minimum purchase is 25 shares (or $250). The maximum purchase per
eligible depositor in the subscription offering is 10,000 shares (or
$100,000). In certain instances, your purchase might be grouped together
with purchases by persons with other accounts with whom you are affiliated
or related and in that event the aggregate purchases may not exceed 15,000
shares ($150,000). We may decrease or increase the maximum purchase
limitation without notifying you.
(i)
<PAGE>
If shares are sold in a Community Offering, the maximum number of shares
that may be purchased by any party in the Community Offering, when combined
with the number of shares purchased by other parties with whom your shares
may be aggregated is 10,000 shares ($100,000). See pages 20 to 21.
Q: WHAT HAPPENS IF THERE ARE NOT ENOUGH SHARES TO FILL ALL ORDERS?
A: You might not receive any or all of the shares you want to purchase. If
there is an over subscription, the stock will be offered on a priority
basis to the following persons:
. ELIGIBLE ACCOUNT HOLDERS - Persons who had a deposit account with us
on December 31, 1995 with a balance of at least $50.00. Any remaining
shares will be offered to:
. OUR ESOP. Any remaining shares will be offered to:
. SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS - Persons who had a deposit
account with us on September 30, 1997 with a balance of at least
$50.00. Any remaining shares will be offered to:
. OTHER MEMBERS - Other depositors and certain borrowers of ours, as of
November 7, 1997.
If the above persons do not subscribe for all of the shares, the remaining
shares will be offered to certain members of the general public with
preference given to people who live in Jackson County, Arkansas. See pages
18 to 21.
Q: WHAT PARTICULAR FACTORS SHOULD I CONSIDER WHEN DECIDING WHETHER OR NOT TO
BUY THE STOCK?
A: Because of the small size of the offering, there may not be an active
market for the shares, which may make it difficult to resell any shares you
may own. Before you decide to purchase stock, you should also read the
Risk Factors section beginning on page 1 of this document.
Q: AS A DEPOSITOR OR BORROWER MEMBER OF NEWPORT FEDERAL SAVINGS BANK, WHAT
WILL HAPPEN IF I DO NOT PURCHASE ANY STOCK?
A: You presently have voting rights while we are in the mutual form; however,
once we convert to the stock form you will lose your voting rights unless
you purchase stock. You are not required to purchase stock. Your deposit
account, certificate accounts and any loans you may have with us will be
not be affected. See pages 16 to 18.
(ii)
<PAGE>
Q: WHO CAN HELP ANSWER ANY OTHER QUESTIONS I MAY HAVE ABOUT THE STOCK
OFFERING?
A: In order to make an informed investment decision, you should read this
entire document. In addition, you should contact:
STOCK INFORMATION CENTER
NORTH ARKANSAS BANCSHARES, INC.
200 OLIVIA DRIVE
NEWPORT, ARKANSAS
(870) 523-3340
(iii)
<PAGE>
SUMMARY
This summary highlights selected information from this document and
may not contain all the information that is important to you. To understand the
stock offering fully, you should read carefully this entire document, including
the financial statements and the notes to the financial statements of Newport
Federal Savings Bank. References in this document to "we," "us," and "our" refer
to Newport Federal Savings Bank. In certain instances where appropriate, "us" or
"our" refers collectively to North Arkansas Bancshares, Inc. and Newport Federal
Savings Bank. References in this document to "the Company" refer to North
Arkansas Bancshares, Inc.
NORTH ARKANSAS BANCSHARES, INC.
North Arkansas Bancshares, Inc. was formed in September 1997 as a
Tennessee corporation to be the holding company for Newport Federal Savings
Bank. The Company is not an operating company and has not engaged in any
significant business to date. The holding company structure will provide greater
flexibility in terms of operations, expansion and diversification. See page 6.
NEWPORT FEDERAL SAVINGS BANK
We are a community and customer oriented federal mutual savings bank
with one office located in Newport, Arkansas. We were originally founded in 1934
as a federally chartered mutual savings and loan association. In 1995, we
changed our name to Newport Federal Savings Bank. Our primary market area
consists of Jackson County, Arkansas. Historically, we have emphasized
residential mortgage lending, primarily originating one- to four-family mortgage
loans. We also make consumer loans, commercial real estate loans and commercial
business loans. At June 30, 1997, we had total assets of $34.4 million, deposits
of $31.1 million, and total retained earnings of $2.3 million. See page 7.
On August 20, 1997, we entered into an agreement with NationsBank,
N.A. to purchase the deposits of the Newport branch of NationsBank as well as
the real estate on which the office is located and certain loans and other
assets. We expect to assume approximately $6.3 million in deposits based on the
balance of deposits at the branch as of June 30, 1997, for which we will pay a
deposit premium equal to 2.26% of the balance of deposits to be assumed at
closing. This deposit premium would amount to $143,000 if the deposits amount to
$6.3 million. We will also be required to pay NationsBank $125,000 for the real
estate, branch equipment and furniture we are buying, and the book value of all
loans we are buying. We must obtain regulatory approval before we can close this
transaction. Assuming we obtain such approval, we expect that this transaction
will close in January 1998.
(iv)
<PAGE>
THE STOCK OFFERING
The Company is offering between 238,000 and 322,000 shares of common
stock at $10.00 per share. Subject to approval by the Office of Thrift
Supervision, the number of shares to be sold may be increased to 370,300 shares
without further notice to you if market or financial conditions change prior to
completion of the conversion or if additional shares are needed to fill the
order of our ESOP.
STOCK PURCHASES
The Company is first offering its shares of common stock in a
Subscription Offering. Depositor and borrower members as of certain eligibility
dates will receive subscription rights. The shares of common stock will be
offered on the basis of priorities. Any remaining shares may be offered in a
Community Offering or in a Syndicated Community Offering. See pages 18 to 21.
SUBSCRIPTION RIGHTS
You may not sell or assign your subscription rights. Any transfer of
subscription rights is prohibited by law. All persons exercising their
subscription rights will be required to certify that they are purchasing shares
solely for their own account and that they have no agreement or understanding
regarding the sale or transfer of shares.
THE OFFERING RANGE AND DETERMINATION OF THE PRICE PER SHARE
The offering range is based on an independent appraisal of the pro
forma market value of the common stock by Ferguson & Company ("Ferguson"), an
appraisal firm experienced in appraisals of savings institutions. The pro forma
market value of the shares is our market value after giving effect to the sale
of shares in this offering. Ferguson has estimated that in its opinion as of
September 2, 1997 such value ranged between $2.4 million and $3.2 million (with
a midpoint of $2.8 million) (the "Estimated Valuation Range"). The appraisal
was based in part upon our financial condition and operations and the effect of
the additional capital raised by the sale of common stock in this offering. The
$10.00 price per share was determined by our board of directors and is the price
most commonly used in stock offerings involving conversions of mutual savings
institutions. The appraisal will be updated prior to the consummation of the
conversion. If the updated pro forma market value of the common stock is either
below $2.4 million or above $3.7 million, we will notify you and you will have
the opportunity to modify or cancel your order. See pages 25 to 27.
TERMINATION OF THE OFFERING
The Subscription Offering will terminate at 12:00 p.m., Central Time,
on December 10, 1997. The Community Offering, if any, may terminate at any time
without notice but no later than January 24, 1998, without approval by the OTS.
(v)
<PAGE>
BENEFITS TO MANAGEMENT FROM THE OFFERING
Our full-time employees will participate in the offering through
purchases of stock by our employee stock ownership plan (the "ESOP"), which is a
form of retirement plan. Following the conversion, we also intend to implement a
management recognition plan ("MRP") under which officers will be entitled to
receive awards of restricted stock at no cost to them and a stock option and
incentive plan (the "Option Plan"), which will benefit our officers and
directors. However, the MRP and Option Plan may not be adopted until at least
six months after the conversion and are subject to stockholder approval and
compliance with OTS regulations if adopted within the first year following our
conversion. See pages 71 to 73.
USE OF THE PROCEEDS FROM THE SALE OF COMMON STOCK
The Company will use a portion of the net proceeds from the stock
offering to make a loan to our ESOP to fund its purchase of 8% of the common
stock issued in the conversion. The Company will use a portion of the net
proceeds to purchase all the capital stock to be issued by us in the conversion.
The Company will retain the balance of the funds as its initial capitalization.
These funds will serve as a possible source of funds for the payment of
dividends to stockholders or to repurchase shares of common stock in the future
and for general corporate purposes. See page 7.
DIVIDENDS
Management of the Company has not yet made a decision regarding the
payment of dividends. Management intends to review on a quarterly basis the
possible adoption of a dividend policy. See page 8.
MARKET FOR THE COMMON STOCK
The Company intends to list the common stock over-the-counter through
the OTC "Electronic Bulletin Board" under the symbol "NARK." Since the size of
the offering is small, it is unlikely that an active and liquid trading market
for the shares will develop and be maintained. Investors should have a long-term
investment intent. Persons purchasing shares may not be able to sell their
shares when they desire or to sell them at a price equal to or above $10.00. See
page 9.
IMPORTANT RISKS IN OWNING THE COMPANY'S COMMON STOCK
Before you decide to purchase stock in the offering, you should read
the "Risk Factors" section beginning on page one of this document.
(vi)
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
We are providing the following summary financial information about us
for your benefit. This information is derived from our audited financial
statements for each of the fiscal years shown below. The following information
is only a summary and you should read it in conjunction with our financial
statements and notes to our financial statements which you can find beginning on
page F-1 of this Prospectus. Our results of operations for the fiscal year ended
June 30, 1997 include a special assessment of $179,000 which we were required to
pay to recapitalize the SAIF and a nonrecurring expense of $286,000 to fund our
director's retirement plan.
SELECTED FINANCIAL DATA
The following table sets forth certain information concerning our
financial position at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------
1997 1996
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(IN THOUSANDS)
<S> <C> <C>
Total assets.................................................................................... $34,379 $ 32,446
Cash............................................................................................ 884 1,167
Certificates of deposit with other financial institutions....................................... 691 890
Securities held to maturity.................................................................... 5,923 6,310
Loans receivable, net........................................................................... 24,794 21,982
Deposits........................................................................................ 31,073 29,657
Retained earnings substantially restricted...................................................... 2,266 2,465
</TABLE>
SUMMARY OF OPERATIONS
The following table sets forth certain information concerning our results
of operations for the periods shown.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------
1997 1996
------- --------
(IN THOUSANDS)
<S> <C> <C>
Interest income................................................................................. $ 2,493 $ 2,328
Interest expense................................................................................ 1,597 1,525
------- --------
Net interest income............................................................................. 896 803
------- --------
Provision for loan losses....................................................................... 90 10
------- --------
Net interest income after provision
for loan losses................................................................................ 806 793
Noninterest income.............................................................................. 19 11
Noninterest expense............................................................................. 1,157 726
------- --------
Income (loss) before taxes...................................................................... (332) 78
Income tax expense.............................................................................. (133) 6
------- --------
Net income (loss)............................................................................... $ (199) $ 72
======= ========
</TABLE>
(vii)
<PAGE>
KEY OPERATING RATIOS
The table below sets forth certain performance ratios for us for the
periods indicated.
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED JUNE 30,
---------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
PERFORMANCE RATIOS:
Return on assets (ratio of net earnings (loss)
to average total assets)..................... (.60)% .23% .71%
Return on equity (ratio of net earnings (loss)
to average equity)........................... (8.41) 2.96 9.35
Ratio of average interest-earning assets to
average interest-bearing liabilities......... 102.60 104.12 105.15
Ratio of net interest income, after provision
for loan losses, to noninterest expense........ 69.66 109.23 156.93
Net interest rate spread........................ 2.54 2.49 2.78
Net yield on average interest-earning assets.... 2.77 2.70 3.01
ASSET QUALITY RATIOS:
Nonperforming loans to total loans
at end of period............................. .30 .14 1.60
Nonperforming loans to total assets............. .21 .09 1.06
Nonperforming assets to total assets
at end of period............................. .21 .47 1.40
Allowance for loan losses to nonperforming
loans at end of period....................... 202.70 243.33 19.50
Allowance for loan losses to total loans, net... .60 .33 .31
CAPITAL RATIOS:
Equity to total assets at end of period......... 6.59 7.60 7.85
Average equity to average assets................ 7.08 7.72 7.57
REGULATORY CAPITAL RATIOS:
Tangible capital................................ 6.59 7.59 7.85
Core capital.................................... 6.59 7.59 7.85
Total risk-based capital........................ 13.18 15.67 17.84
OTHER DATA:
Number of full service offices.................. 1 1 1
</TABLE>
(viii)
<PAGE>
RECENT DEVELOPMENTS
The tables below set forth certain selected financial data for the
Bank at the dates and for the periods indicated. The data at September 30, 1997,
and for the three months ended September 30, 1997 and 1996 is unaudited, but in
the opinion of management reflects all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation. This
information at June 30, 1997 is derived in part from, and is qualified in its
entirety by reference to, the Financial Statements and Notes thereto included
elsewhere herein. The financial data for the three months ended September 30,
1997 is not necessarily indicative of the operating results to be expected for
the entire fiscal year.
<TABLE>
<CAPTION>
AT AT
SEPTEMBER 30, JUNE 30,
1997 1997
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
FINANCIAL CONDITION DATA:
Total assets................................................ $ 33,750 $ 34,379
Cash........................................................ 642 884
Certificates of deposit with other financial institutions.. 691 691
Securities held to maturity................................ 5,190 5,923
Loans receivable, net....................................... 25,182 24,794
Deposits.................................................... 30,341 31,073
Retained earnings substantially restricted.................. 2,285 2,266
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
OPERATING DATA:
Interest income............................................ $ 604 $ 614
Interest expense........................................... 406 391
Net interest income........................................ 198 223
Provision for losses on loans.............................. -- --
Net interest income after provision
for loan losses........................................... 198 223
Noninterest income......................................... 45 23
Noninterest expenses....................................... 224 363
Income (loss) before provision for income taxes............ 19 (117)
Provision for income taxes................................. -- --
------- -------
Net income (loss).......................................... $ 19 $ (117)
======= =======
</TABLE>
(ix)
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
--------------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
SELECTED RATIOS:
Interest rate spread......... 2.65% 2.63%
Interest rate margin (1)..... 2.33 2.70
REGULATORY CAPITAL RATIOS:
Tangible capital............. 6.77
Core capital................. 6.77
Total risk-based capital..... 13.08
</TABLE>
- ---------------
(1) Annualized.
RESULTS OF OPERATIONS
We earned net income of $19,000 for the three months ended September
30, 1997 as compared to a net loss of $117,000 for the three month period ended
September 30, 1996. The $136,000 improvement in our net income for the first
three months of fiscal year 1998 was due primarily to the absence of any SAIF
special assessment during the most recent period. During the three months ended
September 30, 1996, we incurred a special assessment equal to $179,000. This
special assessment was required to be paid by all institutions with deposits
insured by the SAIF.
Net interest income during the three months ended September 30, 1997
decreased by $25,000 as compared to the same period in 1996. During the three
months ended September 30, 1997, we placed our largest loan on nonaccrual
status. As such, we were required to deduct from interest income all previously
accrued interest that was unpaid which amounted to approximately $21,000.
FINANCIAL CONDITION
Our total assets at September 30, 1997 were $33.8 million, a slight
decrease from June 30, 1997's level of $34.4 million. The decrease was due to
the combined effects of decreases in cash and securities due to a $732,000
reduction in deposits and payments on and maturities of investment securities.
Net loans receivable increased by $5.4 million, or 21.78%, which reflected our
continued marketing efforts. The $19,000 increase in retained earnings
reflected our earnings for the period. At September 30, 1997, we were in
compliance with all applicable regulatory capital requirements with total core
and tangible capital of $2.3 million (6.77% of adjusted total assets) and total
risk-based capital of $2.4 million (13.08% of risk-weighted assets).
(x)
<PAGE>
RISK FACTORS
In addition to the other information in this document, you should
consider carefully the following risk factors in deciding whether to invest in
the common stock.
LACK OF ACTIVE MARKET FOR COMMON STOCK
Due to the small size of the offering, it is highly unlikely that an
active trading market will develop and be maintained. If an active market does
not develop, you may not be able to sell your shares promptly or perhaps at all,
or sell your shares at a price equal to or above the price you paid for the
shares. The common stock may not be appropriate as a short-term investment. See
"Market for the Common Stock."
BELOW AVERAGE RETURN ON AVERAGE EQUITY AND INCREASED EXPENSES IMMEDIATELY AFTER
CONVERSION
Return on average equity (net income divided by average equity) is a
ratio used by many investors to compare the performance of a savings institution
to its peers. As a result of the conversion, our equity will increase
substantially. Our expenses also will increase because of the compensation
expense associated with our ESOP, MRP, and the costs of being a public company.
Because of the increases in our equity and expenses, our return on equity may
decrease as compared to our performance in previous years. Initially, we intend
to invest the net proceeds in short term investments which generally have lower
yields than residential mortgage loans. At June 30, 1996 and 1997 our return on
average equity was (8.41)% and 2.96%, respectively. A lower return on equity
could reduce the trading price of our shares.
RECENT OPERATING RESULTS
Our net interest income and net income in recent years have been below
what other institutions of a similar size to us have earned. During the year
ended June 30, 1997, we incurred certain nonrecurring expenses as a result of a
special assessment imposed on all institutions whose deposits are insured by the
Savings Association Insurance Fund ("SAIF") of the FDIC and the adoption of a
director retirement plan. The cost of our recently built headquarters has also
affected our net income. While we believe that the headquarters is necessary for
our growth, it is a significant asset that does not generate interest income
like loans do. Because of this, we have a higher percentage of non-interest
earning assets than our peers. This has lowered our net interest income below
some similarly sized thrifts. While the net proceeds we receive from the
conversion will result in an increase in our interest-earning assets and thereby
interest income, we will also incur additional expenses as a result of the
implementation of the ESOP and MRP and the costs associated with being a public
company. We cannot guarantee that our profitability will improve after the
conversion. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
1
<PAGE>
LARGE DELINQUENT LOAN
Subsequent to June 30, 1997, our largest loan became delinquent. As of
September 30, 1997, due to its past due status, we placed the loan on nonaccrual
status. This loan, which had a balance of $625,000 at June 30, 1997, is a
participation in a larger loan which had a total principal balance of $5.8
million and is secured by a 625-room hotel located in Oklahoma City. The loan
payments have not been made due to deteriorating cash flow from operations.
While the lead lender is attempting to resolve this problem, there can be no
assurance that the past due payments will be made or that we will return the
loan to accrual status. Further, if the lead lender proceeds to foreclosure, we
cannot assure you that the underlying property can be sold at a price sufficient
to repay us in full. Our net income will be reduced to the extent that such loan
remains a nonearning asset or if we are required to make additional provisions
to the allowance for loan losses as a result of such loan. While we believe that
our allowance for loan losses is adequate based on the information available to
us at this time, there can be no assurance that we will not be required to make
additional provisions to the allowance for loan losses as a result of this loan.
RISKS ASSOCIATED WITH COMMERCIAL REAL ESTATE, MULTI-FAMILY REAL ESTATE AND
CONSUMER LENDING
Although our primary lending activity is the origination of one- to
four-family mortgage loans, approximately $7.5 million, or 29.94% of our gross
loan portfolio at June 30, 1997 consisted of loans other than single-family
mortgage loans. Such loans included $3.7 million in loans secured by commercial
and multi-family real estate, $3.6 million in consumer loans and $93,000 in
commercial business loans. Following the conversion, we intend to continue to
grow our nonresidential lending portfolio. Although these loans generally
provide for higher interest rates and shorter terms than permanent single-family
residential real estate loans, these loans generally have a higher degree of
credit and other risks. Nonresidential real estate lending often involves larger
loan balances to single borrowers or groups of related borrowers as compared to
residential real estate lending. The payment experience on such loans typically
is dependent on the successful operation of the real estate project. These risks
can be significantly affected by supply and demand conditions in the market for
commercial space, and, as such, may be subject to a greater extent to adverse
conditions in the economy generally. Consumer loans also entail greater risk
than single-family residential loans, particularly in the case of consumer loans
which are unsecured or secured by rapidly depreciable assets, such as
automobiles. In such cases, any repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan
balance as a result of the greater likelihood of damage, loss or depreciation.
Commercial business loans involve a greater degree of risk than other types of
lending as payments on such loans are often dependent on the successful
operation of the business involved which may be subject, to a greater extent, to
adverse conditions in the economy.
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES AND THE CURRENT INTEREST RATE
ENVIRONMENT
Our ability to make a profit, like that of most financial
institutions, is substantially dependent on our net interest income, which is
the difference between the interest income we earn on our interest-earning
assets (such as mortgage loans and investments) and the interest expense we pay
on
2
<PAGE>
our interest-bearing liabilities (such as deposits). Because a portion of the
loans we originate have fixed rates and have longer effective maturities than
our interest-bearing liabilities, the yield on our interest-earning assets
generally will adjust more slowly to changes in interest rates than the cost of
our interest-bearing liabilities. As a result, our net interest income could be
adversely affected by material and prolonged increases in interest rates since
our interest expense would increase at a faster rate than our interest income.
Our earnings may also be adversely affected by rising interest rates due to
decreased customer demand. Although we attempt to reduce this risk by primarily
originating adjustable-rate loans ("ARMs"), the rates on such loans are fixed
for set periods of time (e.g., one, three or five years). In addition, the
terms of such loans do not permit us to increase the rate more than 2.0% at each
rate adjustment or above a fixed "ceiling rate." We may also experience an
increase in delinquencies on our ARMs when interest rates rise since the
payments that borrowers are then required to pay will increase.
The average life of loans and mortgage-backed securities can also be
affected by changes in interest rates. As interest rates decline, borrowers
tend to refinance higher-rate, fixed rate loans at lower rates. We also
experience an increase in prepayments on mortgage-backed securities as the loans
underlying such securities are prepaid. Since rates will have declined, we
would not be able to reinvest such prepayments in assets earning interest rates
as high as the rates on the prepaid loans or mortgage-backed securities. As a
result our interest income could decline.
Our investment portfolio is also affected by changes in interest rates
since a substantial portion of our investments carry fixed rates. Generally,
the value of a fixed rate investment will decrease as interest rates rise. As
of June 30, 1997, the market value of our investment portfolio exceeded the
carrying value of such investments by $28,000.
MARKET AREA LIMITATIONS
Our primary market area consists of Jackson County, Arkansas.
Population growth in Jackson County is below that of the state of Arkansas as a
whole. This trend is expected to continue in the future. Our ability to make new
loans in our market area may be limited to the extent that the rate of
population growth is flat or even declines. In addition, within our market area,
we compete for loans and deposits with several other financial institutions.
Many competing institutions may have resources substantially greater than ours
and may therefore be able to offer a greater variety of loan and deposit
accounts which could give them a competitive advantage over us. Such competition
could adversely affect us in the future. See "Business of Newport Federal
Savings Bank--Competition."
DEPENDENCE ON PRESIDENT
Our successful operations depend to a considerable degree on our
President, Brad Snider, and the loss of his services could adversely affect us.
We have attempted to provide for his continued employment with us by entering
into a three-year employment agreement with Mr. Snider. Mr. Snider could
terminate his employment at any time, however. See "Management of Newport
Federal Savings Bank" and " -- Executive Compensation -- Employment Agreement."
3
<PAGE>
ANTI-TAKEOVER PROVISIONS AND STATUTORY PROVISIONS THAT COULD DISCOURAGE HOSTILE
ACQUISITIONS OF CONTROL
Provisions in the Company's charter and bylaws, the General
Corporation Law of the State of Tennessee, and certain federal regulations may
make it difficult, and expensive, to pursue a tender offer, change in control or
takeover attempt which we oppose. As a result, stockholders who might desire to
participate in such a transaction may not have an opportunity to do so. Such
provisions will also render the removal of the current board of directors or
management of the Company more difficult. In addition, these provisions may
reduce the trading price of our stock. These provisions include: restrictions on
the acquisition of the Company's equity securities and limitations on voting
rights; the classification of the terms of the members of the board of
directors; certain provisions relating to the meeting of stockholders; denial of
cumulative voting by stockholders in the election of directors; the issuance of
preferred stock and additional shares of common stock without shareholder
approval; and super-majority provisions for the approval of certain business
combinations. See "Restrictions on Acquisitions of the Company"
POSSIBLE VOTING CONTROL BY DIRECTORS AND OFFICERS
The proposed purchases of the common stock by our directors, officers
and ESOP (estimated to be approximately 91,400 shares, or 32.64% of the shares
to be outstanding assuming 280,000 shares are sold), as well as the potential
acquisition of common stock through the Option Plan and MRP, could make it
difficult to obtain majority support for stockholder proposals which are opposed
by us. In addition, the voting of those shares could enable us to block the
approval of transactions (i.e., business combinations and amendment to our
charter and bylaws) requiring the approval of 80% of the stockholders under the
Company's charter. See "Management of Newport Federal Savings Bank -- Executive
Compensation -- Employee Stock Ownership Plan," " -- Proposed Future Stock
Benefit Plans -- Stock Option Plan," " -- Management Recognition Plan,"
"Description of Capital Stock," and "Restrictions on Acquisitions of the
Company."
POSSIBLE DILUTIVE EFFECT OF MRP AND STOCK OPTIONS
If the conversion is completed and stockholders subsequently approve
the MRP and Option Plan, we will issue stock to our officers and directors
through these plans. If the shares for the MRP are issued from our authorized
but unissued stock, your ownership percentage could be diluted by up to
approximately 3.8% and the trading price of our stock may be reduced. See "Pro
Forma Data," "Management of Newport Federal Savings Bank -- Proposed Future
Stock Benefit Plans -- Stock Option Plan," and "-- Management Recognition Plan."
FINANCIAL INSTITUTION REGULATION OF THE THRIFT INDUSTRY
We are subject to extensive regulation, supervision, and examination
by the OTS and FDIC. A bill has been introduced to the House Banking Committee
that would consolidate the OTS with the Office of the Comptroller of the
Currency ("OCC"). If this regulation is approved, we could be forced to become a
state or national commercial bank. If we become a commercial bank, our
4
<PAGE>
investment authority, branching authority and the ability of the Company to
engage in, diversified activities may be limited, which could affect our
profitability. See "Regulation."
ARKANSAS USURY LAW
In 1982, Arkansas adopted an amendment to its Constitution which
provides, in part, that the maximum rate of interest we can charge on consumer
loans is 5% over the Federal Reserve Discount Rate in effect at the time the
loan is made up to a maximum of 17%. The effect of this provision is that we are
unable to charge interest rates on certain loans as high as our peers that are
located outside the state of Arkansas. Loans secured by a first mortgage on
residential real estate and all commercial loans are not subject to this maximum
limitation. If we charged an interest rate on consumer loans in excess of these
limits, we could be required to forfeit both the amount of the loan as well as
any interest we have collected.
POSSIBLE ADVERSE TAX CONSEQUENCES OF THE SUBSCRIPTION RIGHTS
We have received the opinion of Ferguson that the subscription rights
granted to eligible members in connection with the conversion have no value.
This opinion is not binding on the Internal Revenue Service ("IRS"), however.
Should the IRS determine that the subscription rights do have ascertainable
value, you could be taxed as a result of your exercise of such rights in an
amount equal to such value.
BRANCH ACQUISITION
On August 20, 1997, we entered into a Purchase and Assumption
Agreement with NationsBank, N.A. pursuant to which we agreed to purchase the
deposits of the Newport branch of NationsBank and to purchase the real estate on
which the office is located and certain loans and other assets. We expect to
assume approximately $6 million in deposits based on the balance of deposits at
the branch as of June 30, 1997. We must obtain regulatory approval before we can
close this transaction. The impact of this transaction on our net income depends
on our ability to invest the funds we will receive in loans and investments
earning higher rates than the rates we will be required to pay on such deposits
plus the additional expense resulting from the amortization of the premium we
will pay to NationsBank to purchase such deposits. We cannot assure you that we
will receive regulatory approval to purchase the branch nor can we assure of the
impact on our net interest income of the additional deposits.
RESTRICTIONS ON REPURCHASE OF SHARES
Generally, during the first year following the conversion, the Company
may not repurchase its shares. During each of the second and third years
following the conversion, the Company may repurchase up to 5% of its outstanding
shares. During those periods, if we decide that additional repurchases would be
a good use of funds, we would not be able to do so, without obtaining OTS
approval. There is no assurance that OTS approval would be given. See "The
Conversion --Restrictions on Repurchase of Shares."
5
<PAGE>
PROPOSED PURCHASES BY DIRECTORS AND OFFICERS
The following table sets forth the approximate purchases of common
stock by each director and executive officer and their associates in the
conversion. The table assumes that 280,000 shares (the midpoint of the Estimated
Valuation Range) of the common stock will be sold at $10.00 per share and that
sufficient shares will be available to satisfy their subscriptions.
<TABLE>
<CAPTION>
AGGREGATE
TOTAL PRICE OF PERCENT
SHARES SHARES OF SHARES
NAME POSITION PURCHASED PURCHASED PURCHASED
- ---- --------- --------- ---------- ----------
<S> <C> <C> <C> <C>
O. E. Guinn, Jr. Director 15,000 $150,000 5.36%
Kaneaster Hodges, Jr. Director 15,000 $150,000 5.36%
Paul K. Holmes Director 9,000 $ 90,000 3.21%
John Minor Director 15,000 $150,000 5.36%
Brad Snider Director; 15,000 $150,000 5.36%
President and
Chief Executive
Officer
All directors and executive
officers as a group (5 persons) 69,000 $690,000 24.65%
ESOP 22,400 $224,000 8.00%
MRP 11,200 $112,000 4.00%
</TABLE>
THE COMPANY
The Company was formed as a Tennessee corporation in September 1997 at
our direction for the purpose of serving as our holding company after the
conversion. Prior to the conversion, it has not engaged and is not expected to
engage in any material operations. The Company has received the approval of the
OTS to acquire control of us upon completion of the conversion. Upon
consummation of the conversion, the only assets the Company is expected to own
are the capital stock we will issue in the conversion, a note receivable from
our ESOP and any proceeds from the offering it retains.
As a holding company, the Company will have greater flexibility than
we would have to diversify its business activities through the formation of
subsidiaries or through acquisition. The Company will be classified as a unitary
savings and loan holding company after the conversion and will be required to
comply with OTS regulations and be subject to examination.
The Company's executive offices are located at 200 Olivia Drive,
Newport, Arkansas 72112 and its main telephone number is (870) 523-3611.
6
<PAGE>
NEWPORT FEDERAL SAVINGS BANK
We are a federal mutual savings bank operating through one office in
Newport, Arkansas. We were founded in 1934 as a federally chartered institution
and a member of the FHLB System. Our deposits are insured up to applicable
limits by the Federal Deposit Insurance Corporation ("FDIC") under the SAIF. At
June 30, 1997, we had total assets of $34.4 million, total deposits of $31.1
million and total retained earnings of $2.3 million.
On August 20, 1997, we entered into a Purchase and Assumption
Agreement with NationsBank, N.A. pursuant to which we agreed to purchase the
deposits of the Newport branch of NationsBank and to purchase the real estate on
which the office is located and certain loans and other assets. We expect to
assume approximately $6 million in deposits based on the balance of deposits at
the branch as of June 30, 1997. We must obtain regulatory approval before we can
close this transaction. Assuming we obtain such approval, we expect that this
transaction will close in January 1998.
Our principal business consists of attracting deposits from the
general public and originating residential mortgage loans. We also offer various
types of consumer loans and commercial business loans.
Our executive offices are located at 200 Olivia Drive, Newport,
Arkansas 72112 and its main telephone number is (870) 523-3611.
USE OF PROCEEDS
The Company will retain a portion of the net proceeds from the
offering. In accordance with applicable OTS regulations and policies, the
Company will retain $815,000, $891,000, $966,000 and $1.1 million, respectively,
at the minimum, midpoint, maximum and maximum, as adjusted, of the Estimated
Valuation Range. The balance will be used to purchase all of the capital stock
we will issue in connection with the conversion. A portion of the net proceeds
to be retained by the Company will be lent to our ESOP to fund its purchase of
8% of the shares sold in the conversion. On a short-term basis, the balance of
the net proceeds retained by the Company initially will be invested in short-
term investments. The net proceeds subsequently may be used to fund acquisitions
of other financial services institutions or to diversify into non-banking
activities, although we have no current plans or agreements to do so. Subject to
applicable regulatory restrictions, the net proceeds may also serve as a source
of funds for the repurchase of shares or for the payment of dividends to
stockholders, although the Company has not yet adopted a dividend policy. A
portion of the net proceeds may also be used to fund the purchase of 4.0% of the
shares for the MRP, which is anticipated to be adopted following the conversion.
See "Pro Forma Data."
The funds we receive from the sale of our capital stock to the Company
will be added to our general funds and be used for general corporate purposes
including: (i) investment in mortgages and other loans, (ii) U.S. Government and
federal agency securities, (iii) mortgage-backed securities, (iv)
7
<PAGE>
funding loan commitments or (v) repaying FHLB advances. However, initially, we
intend to invest the net proceeds in short-term investments until we can deploy
the proceeds into higher yielding loans. The funds added to our capital will
further strengthen our capital position.
The net proceeds may vary because the total expenses of the conversion
may be more or less than those estimated. We expect our estimated expenses to be
$400,000. Our estimated net proceeds will range from $2.0 million to $2.8
million (or up to $3.3 million in the event the maximum of the Estimated
Valuation Range is increased to $3.7 million). See "Pro Forma Data." The net
proceeds will also vary if the number of shares to be issued in the conversion
is adjusted to reflect a change in our estimated pro forma market value.
Payments for shares made through withdrawals from existing deposit accounts with
us will not result in the receipt of new funds for investment by us but will
result in a reduction of our liabilities and interest expense as funds are
transferred from interest-bearing certificates or accounts.
For a period of one year following the completion of the conversion,
we will not pay any dividends that would be construed as a return of capital nor
take any actions to pursue or propose such dividends.
DIVIDENDS
Although no decision has yet been made regarding the payment of
dividends, the Company will review on a quarterly basis the possible adoption of
a dividend policy. However, declarations of dividends by the board of directors
will depend upon a number of factors, including: (i) the amount of the net
proceeds retained by the Company in the conversion, (ii) investment
opportunities available, (iii) capital requirements, (iv) regulatory
limitations, (v) results of operations and financial condition, (vi) tax
considerations, and (vii) general economic conditions. Upon review of such
considerations, the board may authorize future dividends if it deems such
payment appropriate and in compliance with applicable law and regulation. In
addition, from time to time in an effort to manage capital at a desirable level,
the board may determine to pay special cash dividends. Special cash dividends
may be paid in addition to, or in lieu of, regular cash dividends. In addition,
there can be no assurance that regular or special dividends will be paid, or, if
paid, will continue to be paid. See "Historical and Pro Forma Capital
Compliance," "The Conversion --Effects of Conversion to Stock Form on Savers and
Borrowers of Newport Federal Savings Bank --Liquidation Account" and
"Regulation -- Dividend and Other Capital Distribution Limitations."
The Company is not subject to OTS regulatory restrictions on the
payment of dividends to its stockholders although the source of such dividends
will be dependent in part upon the receipt of dividends from us. The Company is
subject, however, to the requirements of Tennessee law. Under Tennessee law, the
Company may pay a dividend as long as it will not affect the ability of the
Company, after the dividend has been distributed, to pay its debts in the
ordinary course of business or result in its assets being less than the sum of
its liabilities plus the amount that would be needed (if any) to satisfy any
preferential rights upon a dissolution of the Company of any stockholders with
rights ahead of those receiving the dividend.
8
<PAGE>
In addition to the foregoing, the portion of our earnings which have
been appropriated for bad debt reserves and deducted for federal income tax
purposes cannot be used by us to pay cash dividends to the Company without the
payment of federal income taxes by us at the then current income tax rate on the
amount deemed distributed, which would include the amount of any federal income
taxes attributable to the distribution. See "Taxation -- Federal Taxation" and
Note 9 to the Financial Statements. The Company does not contemplate any
distribution by us that would result in a recapture of our bad debt reserve or
otherwise create federal tax liabilities.
MARKET FOR THE COMMON STOCK
The Company has never issued common stock to the public. Consequently,
there is no established market for the common stock. Following completion of the
Offering, the Company intends to list the common stock over-the-counter through
the OTC "Electronic Bulletin Board" under the symbol "NARK" and the Company
intends to request that Trident Securities Inc. ("Trident Securities") undertake
to match offers to buy and offers to sell the common stock. Trident Securities
has no obligation to match offers to buy and offers to sell and may cease doing
so at any time. There can be no assurance that timely or accurate quotations
will be available on the OTC "Electronic Bulletin Board." In addition, the
existence of a public trading market will depend upon the presence in the market
of both willing buyers and willing sellers at any given time. The presence of a
sufficient number of buyers and sellers at any given time is a factor over which
neither the Company nor any broker or dealer has control. Due to the relatively
small number of shares of common stock being offered in the conversion and the
concentration of ownership, it is unlikely that an active or liquid trading
market will develop or be maintained. Further, the absence of an active and
liquid trading market may make it difficult to sell the common stock and may
have an adverse effect on the price of the common stock. Purchasers should
consider the potentially illiquid and long-term nature of their investment in
the shares offered hereby.
The aggregate price of the common stock is based upon an independent
appraisal of the pro forma market value of the common stock. However, there can
be no assurance that an investor will be able to sell the common stock purchased
in the conversion at or above the Purchase Price.
9
<PAGE>
CAPITALIZATION
The following table presents our historical capitalization as of
June 30, 1997 and the pro forma consolidated capitalization of Company after
giving effect to the conversion, based upon the sale of the number of shares
shown below and the other assumptions set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED CAPITALIZATION OF
CAPITALIZATION THE COMPANY AT JUNE 30, 1997 BASED ON THE SALE OF
OF THE ----------------------------------------------------------------
BANK AT 238,000 SHARES 280,000 SHARES 322,000 SHARES 370,300 SHARES
JUNE 30, AT $10.00 AT $10.00 AT $10.00 AT $10.00
1997 PER SHARE PER SHARE PER SHARE PER SHARE
-------------- -------------- -------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits (1)..................................... $31,073 $31,073 $31,073 $31,073 $31,073
FHLB advances.................................... 618 618 618 618 618
------- ------- ------- ------- -------
Total deposits and borrowed funds............ $31,691 $31,691 $31,691 $31,691 $31,691
======= ======= ======= ======= =======
Capital stock:
Preferred stock, $0.01 par value per share:
authorized - 3,000,000 shares;
assumed outstanding - none................... -- -- -- -- --
Common stock, $0.01 par value per share
authorized - 9,000,000 shares;
shares to be outstanding - as shown.......... -- 2 3 3 4
Paid-in capital (2)............................ -- 1,978 2,397 2,817 3,299
Less: Common stock acquired by ESOP (3)........ -- (190) (224) (258) (296)
Common stock acquired by MRP (4)......... -- (95) (112) (129) (148)
Retained earnings -- substantially restricted.. 2,266 2,266 2,266 2,266 2,266
------- ------- ------- ------- -------
Total stockholders' equity................... $ 2,266 $ 3,961 $ 4,330 $ 4,699 $ 5,125
======= ======= ======= ======= =======
- --------------------
</TABLE>
(1) Withdrawals from savings accounts for the purchase of stock have not been
reflected in these adjustments. Any withdrawals will reduce pro forma
capitalization by the amount of such withdrawals.
(2) Based upon the estimated net proceeds from the sale of capital stock less
the par value of shares sold.
(3) Assumes 8% of the shares of common stock to be sold in the conversion are
purchased by the ESOP and that the funds used to purchase such shares are
borrowed from the Company. See "Pro Forma Data" for additional details.
(4) Assumes the Company issues 4.0% of the shares sold in the offering to the
MRP and the purchase price for the shares purchased by the MRP was equal to
the purchase price of $10 per share and 20% of the amount contributed was
an amortized expense during such period. As a result of the MRP,
stockholders' interests will be diluted by approximately 3.8%. See
"Management of Newport Federal Savings Bank - Proposed Future Stock Benefit
Plans - Management Recognition Plan." Implementation of the MRP within one
year of conversion would require regulatory and stockholder approval at a
meeting of our stockholders to be held no earlier than six months after the
conversion.
10
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table shows our historical capital position relative
to our regulatory capital requirements as of June 30, 1997 and on a pro forma
basis after giving effect to the conversion and based upon the sale of the
number of shares shown below and the other assumptions set forth under "Pro
Forma Data." The definitions of the terms used in the table are those provided
in the capital regulations issued by the OTS. For a discussion of the capital
standards applicable to us, see "Regulation -- Regulation of the Bank --
Regulatory Capital Requirements."
<TABLE>
<CAPTION>
PRO FORMA AT JUNE 30, 1997 BASED ON THE SALE OF /(1)/:
------------------------------------------------------------------------------------------------------
MINIMUM OF MIDPOINT OF MAXIMUM OF MAXIMUM, AS ADJUSTED
238,000 SHARES 280,000 SHARES 322,000 SHARES 370,300 SHARES
HISTORICAL AT AT $10.00 AT $10.00 AT $10.00 AT $10.00
JUNE 30, 1997 PER SHARE PER SHARE PER SHARE PER SHARE
------------------- ------------------- ------------------- ------------------ -------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS (2)
------ ----------- ------ ----------- ------ ----------- ------ ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital under generally
accepted
accounting principles... $2,266 6.6% $3,146 8.9% $3,439 9.6% $3,733 10.3% $4,071 11.2%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
Tangible capital........... $2,266 6.6% $3,146 8.9% $3,439 9.6% $3,733 10.3% $4,071 11.2%
Tangible capital
requirement............... 516 1.5 532 1.5 537 1.5 542 1.5 547 1.5
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Excess.................. $1,750 5.1% $2,614 7.4% $2,902 8.1% $3,191 8.8% $3,524 9.7%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
Core capital............... $2,266 6.6% $3,146 8.9% $3,439 9.6% $3,733 10.3% $4,071 11.2%
Core capital requirement... 1,031 3.0 1,063 3.0 1,073 3.0 1,083 3.0 1,094 3.0
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Excess.................. $1,235 3.6% $2,083 5.9% $2,366 6.6% $2,650 7.3% $2,977 8.2%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
Total regulatory capital... $2,411 13.2% $3,294 17.6% $3,587 19.0% $3,881 20.4% $4,219 21.9%
Risk-based capital
requirement............... 1,451 8.0 1,496 8.0 1,510 8.0 1,524 8.0 1,540 8.0
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Excess.................. $ 963 5.3% $1,798 9.6% $2,077 11.0% $2,357 12.4% $2,679 13.9%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
- --------------------
</TABLE>
(1) Assumes that the Company will retain net proceeds of $815,000, $891,000,
$966,000 and $1.1 million, respectively, at the minimum, midpoint, maximum
and maximum, as adjusted, with the remainder to be used by the Company to
purchase all of our capital stock to be issued upon conversion. Assumes net
proceeds distributed to the Company or to us initially are invested in
short-term securities that carry a risk-weight equal to the ratio of risk-
weighted assets to total assets at June 30, 1997. Assumes the ESOP
purchases 8% of the shares to be sold in the conversion and borrows the
funds needed to purchase such shares from the Company. Although repayment of
such debt will be secured solely by the shares purchased by the ESOP, we
expect to make discretionary contributions to the ESOP in an amount at least
equal to the principal and interest payments on the ESOP debt. The
approximate amount expected to be borrowed by the ESOP is not reflected in
this table as borrowed funds but is reflected as a reduction of capital.
Assumes a number of issued and outstanding shares of common stock equal to
4% of the common stock to be sold in the conversion will be purchased by the
MRP after the conversion. The dollar amount of the common stock possibly to
be purchased by the MRP is based on the price per share in the conversion
and represents unearned compensation and is reflected as a reduction of
capital. Such amounts do not reflect possible increases or decreases in the
value of such stock relative to the price per share in the conversion. As
we accrue compensation expense to reflect the vesting of such shares
pursuant to the MRP, the charge against capital will be reduced accordingly.
Does not reflect a possible increase in capital upon the exercise of options
by participants in the Option Plan, under which directors, executive
officers and other employees could be granted options to purchase an
aggregate amount of common stock equal to 10% of the shares issued in the
conversion (28,000 shares at the midpoint of the Estimated Valuation Range)
at exercise prices equal to the market price of the common stock on the date
of grant. Under the MRP and the Option Plan, shares issued to participants
could be newly issued shares or, subject to regulatory restrictions, shares
repurchased in the market. The MRP and the Option Plan are required to be
approved by the Company's stockholders and will not be implemented until at
least six months after the conversion. See "Management of Newport Federal
Savings Bank -- Proposed Future Stock Benefit Plans."
(2) Based on our total assets determined under generally accepted accounting
principles for equity purposes ($34.4 million on for all scenarios),
adjusted total assets for the purposes of the tangible and core capital
requirements ($34.4 million, $35.4 million, $35.8 million, $36.1 million and
$36.5 million, respectively, at September 30, 1997 and on a pro forma basis
at the minimum, midpoint, maximum and maximum, as adjusted, of the Estimated
Valuation Range) and risk-weighted assets for the purpose of the risk-based
capital requirement ($18.1 million, $18.7 million, $19.0 million and $19.2
million, respectively, at September 30, 1997 and on a pro forma basis at the
minimum, midpoint, maximum and maximum, as adjusted, of the Estimated
Valuation Range).
11
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the common stock cannot be
determined until the conversion is completed. However, net proceeds are
currently estimated to be between $2.0 million and $3.3 million at the minimum
and maximum, as adjusted, of the Estimated Valuation Range, based upon the
following assumptions: (i) all of the shares will be sold in the Subscription or
Community Offering; (ii) expenses, including the marketing fee to be paid to
Trident Securities, will amount to $400,000.
The following table sets forth our historical net earnings and
stockholders' equity prior to the conversion and the pro forma consolidated net
income (loss) and stockholders' equity of the Company following the conversion.
Pro forma consolidated net income (loss) and stockholders' equity have been
calculated as if the common stock to be issued in the conversion had been sold
at July 1, 1996, and the estimated net proceeds had been invested at 5.65%,
which was approximately equal to the one-year U.S. Treasury bill rate at June
30, 1997. The one-year U.S. Treasury bill rate, rather than an arithmetic
average of the average yield on interest-earning assets and average rate paid on
deposits, has been used to estimate income on net proceeds because it is
believed that it is a more accurate estimate of the rate that would be obtained
on an investment of net proceeds from the offering. In calculating pro forma
income, an effective state and federal income tax rate of 36% has been assumed,
resulting in an after tax yield of 3.62%. Withdrawals from deposit accounts for
the purchase of shares are not reflected in the pro forma adjustments. As
discussed under "Use of Proceeds," the Company expects to retain a portion of
the net conversion proceeds, part of which will be lent to the ESOP to fund its
purchase of 8.0% of the shares issued in the conversion. No effect has been
given in the pro forma stockholders' equity calculation for the assumed earnings
on the net proceeds. Historical and pro forma per share amounts have been
calculated by dividing historical and pro forma amounts by the indicated number
of shares.
THE STOCKHOLDERS' EQUITY INFORMATION IS NOT INTENDED TO REPRESENT THE
FAIR MARKET VALUE OF THE COMMON STOCK, OR THE CURRENT VALUE OF OUR ASSETS OR
LIABILITIES, OR THE AMOUNTS, IF ANY, THAT WOULD BE AVAILABLE FOR DISTRIBUTION TO
STOCKHOLDERS IN THE EVENT OF LIQUIDATION. FOR ADDITIONAL INFORMATION REGARDING
THE LIQUIDATION ACCOUNT, SEE "THE CONVERSION -- EFFECTS OF CONVERSION TO STOCK
FORM ON DEPOSITORS AND BORROWERS OF NEWPORT FEDERAL SAVINGS BANK -- LIQUIDATION
ACCOUNT" AND NOTE 15 TO THE FINANCIAL STATEMENTS. THE PRO FORMA INCOME DERIVED
FROM THE ASSUMPTIONS SET FORTH ABOVE SHOULD NOT BE CONSIDERED INDICATIVE OF THE
ACTUAL RESULTS OF OUR OPERATIONS FOR ANY PERIOD. SUCH PRO FORMA DATA MAY BE
MATERIALLY AFFECTED BY A CHANGE IN THE PRICE PER SHARE OR NUMBER OF SHARES TO BE
ISSUED IN THE CONVERSION AND BY OTHER FACTORS.
12
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30, 1997
---------------------------------------------------------
MAXIMUM, AS
MINIMUM OF MIDPOINT OF MAXIMUM OF ADJUSTED, OF
238,000 280,000 322,000 370,300
SHARES SHARES SHARES SHARES
AT $10.00 AT $10.00 AT $10.00 AT $10.00
PER SHARE PER SHARE PER SHARE PER SHARE
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross offering proceeds............................... $ 2,380 $ 2,800 $ 3,220 $ 3,703
Less estimated offering expenses...................... (400) (400) (400) (400)
------------ ------------ ------------ ------------
Estimated net offering proceeds.................... $ 1,980 $ 2,400 $ 2,820 $ 3,303
============ ============ ============ ============
Less: Common stock acquired by ESOP.................. $ (190) $ (224) $ (258) $ (296)
Common stock acquired by MRP................... (95) (112) (129) (148)
------------ ------------ ------------ ------------
Estimated investable net proceeds.................. $ 1,694 $ 2,064 $ 2,434 $ 2,859
============ ============ ============ ============
Net income (loss):
Historical net income (loss)....................... $ (199) $ (199) $ (199) $ (199)
Pro forma income on net proceeds................... 61 75 88 103
Pro forma ESOP adjustment (1)...................... (12) (14) (16) (19)
Pro forma MRP adjustment (2)....................... (12) (14) (16) (19)
------------ ------------ ------------ ------------
Total.......................................... $ (162) $ (153) $ (144) $ (134)
============ ============ ============ ============
Net income (loss) per share:(3)
Historical net income (loss)....................... $ (0.90) $ (0.77) $ (0.67) $ (0.58)
Pro forma income on net proceeds................... 0.28 0.29 0.29 0.30
Pro forma ESOP adjustment (1)...................... (0.06) (0.06) (0.06) (0.06)
Pro forma MRP adjustment (2)....................... (0.06) (0.06) (0.06) (0.06)
------------ ------------ ------------ ------------
Total (3)...................................... $ (0.73) $ (0.59) $ (0.48) $ (0.39)
============ ============ ============ ============
Number of shares used in calculating
loss per share....................................... 220,864 259,840 298,816 343,638
============ ============ ============ ============
Stockholders' equity: (4)
Historical........................................ $ 2,266 $ 2,266 $ 2,266 $ 2,266
Estimated net offering proceeds (2) 1,980 2,400 2,820 3,303
Less: Common stock acquired by ESOP (1)........ (190) (224) (258) (296)
Common stock acquired by MRP (2)......... (95) (112) (129) (148)
------------ ------------ ------------ ------------
Total.......................................... $ 3,960 $ 4,330 $ 4,700 $ 5,125
============ ============ ============ ============
Stockholders' equity per share:(3)(4)
Historical......................................... $ 9.52 $ 8.09 $ 7.04 $ 6.12
Estimated net offering proceeds.................... 8.32 8.57 8.76 8.92
Less: Common stock acquired by ESOP (1)........ (0.80) (0.80) (0.80) (0.80)
Common stock acquired by MRP (2)......... (0.40) (0.40) (0.40) (0.40)
------------ ------------ ------------ ------------
Total.......................................... $ 16.64 $ 15.46 $ 14.60 $ 13.84
============ ============ ============ ============
Offering price as a percentage of pro
forma stockholders' equity per share(4).............. 60.1% 64.7% 68.5% 72.3%
============ ============ ============ ============
Ratio of offering price to pro forma
annualized net income per share(4)................. NA NA NA NA
============ ============ ============ ============
</TABLE>
(Footnotes on succeeding page)
13
<PAGE>
(footnotes continued from preceding page)
- ---------------------
(1) Assumes the ESOP purchases 8% of the shares sold in the conversion and
the Company lends the ESOP the funds to do so. The approximate amount
expected to be borrowed by the ESOP is reflected as a reduction of
capital. We intend to make annual contributions to the ESOP over a 10
year period in an amount at least equal to the principal and interest
requirement of the debt. The pro forma net income assumes: (i) the ESOP
loan is payable over 10 years, (ii) the average fair value of the ESOP
shares is $10.00 per share in accordance with Statement of Position
("SOP') 93-6 of the American Institute of Certified Public Accountants
("AICPA"), and (iii) the effective tax rate was 36% for such period. The
pro forma stockholders' equity per share calculation assumes all ESOP
shares were outstanding, regardless of whether such shares would have
been released. Because the Company will be providing the ESOP loan, only
principal payments on the ESOP loan are reflected as employee
compensation and benefits expense.
(2) Assumes the Company issues 4.0% of the shares sold in the offering to the
MRP and the purchase price for the shares purchased by the MRP was equal
to the purchase price of $10 per share and 20% of the amount contributed
was an amortized expense during such period. As we accrue compensation
expense to reflect the five-year vesting period of such shares pursuant
to the MRP, the charge against capital will be reduced accordingly. In
calculating the pro forma effect of the MRP, an effective state and
federal income tax rate of 36% has been assumed. Implementation of the
MRP within one year of conversion would require regulatory and
stockholder approval at a meeting of our stockholders to be held no
earlier than six months after the conversion. For purposes of this table,
it is assumed that the MRP will be adopted by the board of directors,
reviewed by the OTS, and approved by the stockholders, and that the MRP
will purchase the shares in the open market within the year following the
conversion. If the shares to be purchased by the MRP are assumed at July
1, 1996, to be newly issued shares purchased from the Company at the
minimum, midpoint, maximum and maximum, as adjusted, of the Estimated
Valuation Range, pro forma stockholders' equity per share would have been
$16.38, $15.25, $14.42, and $13.69 at June 30, 1997, respectively. As a
result of the MRP, stockholders' interests will be diluted by
approximately 3.8%. See "Management of Newport Federal Savings Bank -
Proposed Future Stock Benefit Plans -Management Recognition Plan."
(3) Per share data has been computed based on the assumed numbers of shares
sold in the conversion. This treatment is in accordance with SOP 93-6. No
effect has been given to shares to be reserved for issuance pursuant to
the Option Plan. Pro forma net loss per share calculations include the
number of shares assumed to be sold in the conversion and, in accordance
with SOP 93-6, exclude ESOP shares which would not have been released
during the period. Accordingly, 17,136, 20,160, 23,184 and 26,662 shares
have been subtracted from the shares assumed to be sold at the minimum,
midpoint, maximum, and maximum, as adjusted, of the Estimated Valuation
Range, respectively, and 220,864, 259,840, 298,816 and 343,638 shares are
assumed to be outstanding at the minimum, midpoint, maximum, and maximum,
as adjusted of the Estimated Valuation Range. See Note 1 above.
(4) Consolidated stockholders' equity represents the excess of the carrying
value of the assets of the over its liabilities. The calculations are
based upon the number of shares issued in the conversion, without giving
effect to SOP 93-6. The amounts shown do not reflect the federal income
tax consequences of the potential restoration to income of the tax bad
debt reserves for income tax purposes, which would be required in the
event of liquidation. The amounts shown also do not reflect the amounts
required to be distributed in the event of liquidation to eligible
depositors from the liquidation account which will be established upon
the consummation of the conversion. Pro forma stockholders' equity
information is not intended to represent the fair market value of the
shares, the current value of our assets or liabilities or the amounts, if
any, that would be available for distribution to stockholders in the
event of liquidation. Such pro forma data may be materially affected by a
change in the number of shares to be sold in the conversion and by other
factors.
14
<PAGE>
THE CONVERSION
THE OTS HAS APPROVED THE PLAN SUBJECT TO THE PLAN'S APPROVAL BY OUR
MEMBERS AT A SPECIAL MEETING OF MEMBERS, AND SUBJECT TO THE SATISFACTION OF
CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS IN ITS APPROVAL. OTS APPROVAL,
HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY THE
OTS.
GENERAL
On May 29, 1997, our board of directors adopted a plan of conversion,
pursuant to which we will convert from a federally chartered mutual savings bank
to a federally chartered stock savings bank and become a wholly owned subsidiary
of the Company. This plan was amended on October 31, 1997. The conversion will
include adoption of the proposed Federal Stock Charter and Bylaws which will
authorize the issuance of capital stock by us. Under the Plan, our capital
stock is being sold to the Company and the common stock of the Company is being
offered to our customers and then to the public.
The OTS has approved the Company's application to become a savings and
loan holding company and to acquire all of our capital stock to be issued in the
conversion. Pursuant to such OTS approval, the Company plans to retain a
portion of the net proceeds from the sale of shares of common stock and to use
the remainder to purchase all of the capital stock we will issue in the
conversion.
The shares are first being offered in a Subscription Offering to
holders of subscription rights. To the extent shares of common stock remain
available after the Subscription Offering, we may offer shares of common stock
in a Community Offering. The Community Offering, if any, may begin anytime
subsequent to the beginning of the Subscription Offering. Shares not subscribed
for in the Subscription and Community Offerings may be offered for sale by the
Company in a Syndicated Community Offering. We have the right, in our sole
discretion, to accept or reject, in whole or in part, any orders to purchase
shares of common stock received in the Community and Syndicated Community
Offering. See "-- Community Offering" and "-- Syndicated Community Offering."
We must sell common stock in an amount equal to our pro forma market
value as a stock savings institution in order for the conversion to become
effective. We must complete the Community Offering within 45 days after the
last day of the Subscription Offering, unless we extend such period and obtain
the approval of the OTS to do so. The Plan provides that the conversion must be
completed within 24 months after the date of the approval of the Plan by our
members.
In the event that we are unable to complete the sale of common stock
and effect the conversion within 45 days after the end of the Subscription
Offering, we may request an extension of the period by the OTS. We cannot
assure you that the extension would be granted if requested, nor can we assure
you that our valuation would not substantially change during any such
extension. If the Estimated Valuation Range of the shares must be amended, we
cannot assure that the OTS would
15
<PAGE>
approve such amended Estimated Valuation Range. Therefore, it is possible that
if the conversion cannot be completed within the requisite period of time, we
may not be permitted to complete the conversion. A substantial delay caused by
an extension of the period may also significantly increase the expense of the
conversion. We cannot sell any shares of common stock unless the Plan is
approved by our members.
The completion of the offering is subject to market conditions and
other factors beyond our control. We cannot give you any assurances as to the
length of time following approval of the Plan at the meeting of our members that
will be required to complete the Community Offering or other sale of the shares
being offered in the conversion. If we experience delays, our estimated pro
forma market value upon conversion could change significantly, together with
corresponding changes in the offering price and the net proceeds to be realized
by us from the sale of the shares. In the event we terminate the conversion, we
would be required to charge all conversion expenses against current income and
promptly return any funds collected by us in the offering to each potential
investor, plus interest at the prescribed rate.
EFFECTS OF CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF NEWPORT
FEDERAL SAVINGS BANK
VOTING RIGHTS. Currently in our mutual form, our depositor and
borrower members have voting rights and may vote for the election of directors.
Following the conversion, depositors and borrower members will cease to have
voting rights.
SAVINGS ACCOUNTS AND LOANS. The conversion will not affect the
balances, terms and FDIC insurance coverage of savings accounts, nor will the
amounts and terms of loans and obligations of the borrowers under their
individual contractual arrangements with us be affected.
TAX EFFECTS. We have received an opinion from our counsel, Housley
Kantarian & Bronstein, P.C. on the material federal tax consequences of the
conversion. We have filed the opinion as an exhibit to the registration
statement of which this prospectus is a part. The opinion provides, in part,
that,: (i) the conversion will qualify as a reorganization under Section
368(a)(1)(F) of the Code, and we will not recognize any taxable gain in either
our mutual form or our stock form as a result of the proposed conversion; (ii)
we will not recognize any taxable gain upon the receipt of money from the
Company for our stock, nor will the Company recognize any gain upon the receipt
of money for the common stock; (iii) our assets in either our mutual or our
stock form will have the same basis before and after the conversion; (iv) the
holding period of our assets will include the period during which the assets
were held by us in our mutual form prior to conversion; (v) no gain or loss will
be recognized by the Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members upon the issuance to them of withdrawable savings
accounts in us in the stock form in the same dollar amount as their savings
accounts in us in the mutual form plus an interest in the liquidation account of
us in the stock form in exchange for their savings accounts in us in the mutual
form; (vi) depositors will recognize gain or loss upon the receipt of
liquidation rights and the receipt of subscription rights in the conversion, to
the extent such liquidation rights
16
<PAGE>
and subscription rights are deemed to have value, as discussed below; (vii) the
basis of each account holder's savings accounts in us after the conversion will
be the same as the basis of his savings accounts in us prior to the conversion,
decreased by the fair market value of the nontransferable subscription rights
received and increased by the amount, if any, of gain recognized on the
exchange; (viii) the basis of each account holder's interest in the liquidation
account will be zero; and (ix) the holding period of the common stock acquired
through the exercise of subscription rights shall begin on the date on which the
subscription rights are exercised.
With respect to the subscription rights, we have received an opinion
of Ferguson which, based on certain assumptions, concludes that the subscription
rights to be received by Eligible Account Holders and other eligible subscribers
do not have any economic value at the time of distribution or at the time the
subscription rights are exercised, whether or not a public offering takes place.
Such opinion is based on the fact that such rights are: (i) acquired by the
recipients without payment therefor, (ii) non-transferable, (iii) of short
duration, and (iv) afford the recipients the right only to purchase shares at a
price equal to their estimated fair market value, which will be the same price
at which shares for which no subscription right is received in the Subscription
Offering will be offered in the Community Offering. If the subscription rights
granted to Eligible Account Holders or other eligible subscribers are deemed to
have an ascertainable value, receipt of such rights would be taxable only to
those Eligible Account Holders or other eligible subscribers who exercise the
subscription rights in an amount equal to such value (either as a capital gain
or ordinary income), and we could recognize gain on such distribution.
We are also subject to Arkansas income taxes and have received an
opinion from KPMG Peat Marwick LLP that the conversion will be treated for
Arkansas state tax purposes similar to the conversion's treatment for federal
tax purposes.
Unlike a private letter ruling, the opinions of Housley Kantarian &
Bronstein, P.C., Ferguson and KPMG Peat Marwick LLP have no binding effect or
official status, and we cannot give you any assurance that a court would sustain
the conclusions reached in any of those opinions if contested by the IRS or the
Arkansas tax authorities. WE ENCOURAGE ELIGIBLE ACCOUNT HOLDERS, SUPPLEMENTAL
ELIGIBLE ACCOUNT HOLDERS, AND OTHER MEMBERS TO CONSULT WITH THEIR OWN TAX
ADVISERS AS TO THE TAX CONSEQUENCES IN THE EVENT THE SUBSCRIPTION RIGHTS ARE
DEEMED TO HAVE AN ASCERTAINABLE VALUE.
LIQUIDATION ACCOUNT. In the unlikely event of our complete
liquidation in our present mutual form, each depositor is entitled to equal
distribution of any of our assets, pro rata to the value of his accounts,
remaining after payment of claims of all creditors (including the claims of all
depositors to the withdrawal value of their accounts). Each depositor's pro
rata share of such remaining assets would be in the same proportion as the value
of his deposit accounts was to the total value of all deposit accounts in us at
the time of liquidation.
Upon a complete liquidation after the conversion, each depositor would
have a claim, as a creditor, of the same general priority as the claims of all
other general creditors of ours. Therefore,
17
<PAGE>
except as described below, a depositor's claim would be solely in the amount of
the balance in his deposit account plus accrued interest. A depositor would not
have an interest in the residual value of our assets above that amount if any.
The Plan provides for the establishment, upon the completion of the
conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
our net worth as reflected in the latest statement of financial condition in the
Prospectus. Each Eligible Account Holder and Supplemental Eligible Account
Holder, if he continues to maintain his deposit account with us, would be
entitled on a complete liquidation of us after conversion, to an interest in the
liquidation account prior to any payment to stockholders. Each Eligible Account
Holder would have an initial interest in such liquidation account for each
deposit account held in us on the qualifying date, December 31, 1995. Each
Supplemental Eligible Account Holder would have a similar interest as of the
qualifying date, September 30, 1997. The interest as to each deposit account
would be in the same proportion of the total liquidation account as the balance
of the deposit account on the qualifying dates was to the aggregate balance in
all the deposit accounts of Eligible Account Holders and Supplemental Eligible
Account Holders on such qualifying dates. However, if the amount in the deposit
account on any annual closing date of ours is less than the amount in such
account on the respective qualifying dates, then the interest in this special
liquidation account would be reduced from time to time by an amount
proportionate to any such reduction, and the interest would cease to exist if
such deposit account were closed. The interest in the special liquidation
account will never be increased despite any increase in the related deposit
account after the respective qualifying dates.
No merger, consolidation, purchase of bulk assets with assumptions of
savings accounts and other liabilities, or similar transactions with another
insured institution in which transaction we, in our converted form, are not the
surviving institution shall be considered a complete liquidation. In such
transactions, the liquidation account shall be assumed by the surviving
institution.
SUBSCRIPTION RIGHTS AND THE SUBSCRIPTION OFFERING
In accordance with OTS regulations, non-transferable subscription
rights to purchase shares of the common stock have been granted to all persons
and entities entitled to purchase shares in the Subscription Offering under the
Plan. The number of shares which these parties may purchase will be determined,
in part, by the total number of shares to be issued and by the availability of
the shares for purchase under the categories set forth in the Plan. If the
Community Offering, as described below, extends beyond 45 days following the
completion of the Subscription Offering, we will resolicit subscribers and
permit them to increase, decrease or rescind their orders. Subscription
priorities have been established for the allocation of stock to the extent that
shares are available after satisfaction of all subscriptions of all persons
having prior rights and subject to the maximum and minimum purchase limitations
set forth in the Plan and as described below under " -- Limitations on Purchases
of Shares." The following priorities have been established:
18
<PAGE>
CATEGORY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder
(which collectively encompasses all names on a joint account) will receive non-
transferable subscription rights on a priority basis to purchase that number of
shares of common stock which is equal to 10,000 shares ($100,000). If there
are insufficient shares to satisfy the orders of all Eligible Account Holders,
shares shall be allocated among subscribing Eligible Account Holders so as to
permit each such account holder, to the extent possible, to purchase the lesser
of 100 shares or the total amount of his subscription. Any shares remaining
shall be allocated among the subscribing Eligible Account Holders on an
equitable basis, related to the amounts of their respective qualifying deposits
as compared to the total qualifying deposits of all subscribing Eligible Account
Holders. Subscription rights received by officers and directors in this
category based on their increased deposits in us in the one-year period
preceding December 31, 1995, are subordinated to the subscription rights of
other Eligible Account Holders. See " -- Limitations on Purchases and Transfer
of Shares."
CATEGORY 2: ESOP. The ESOP has been granted subscription rights to
purchase up to 10% of the total shares issued in the conversion.
Although the right of the ESOP to subscribe for shares is subordinate
to the right of the Eligible Account Holders, in the event the offering results
in the issuance of shares above the maximum of the Estimated Valuation Range
(i.e., more than 322,000 shares), the ESOP has a priority right to fill its
subscription. The ESOP currently intends to purchase up to 8.0% of the common
stock issued in the conversion. The ESOP may, however, determine to purchase
some or all of the shares covered by its subscription after the conversion in
the open market or, if approved by the OTS, out of authorized but unissued
shares in the event of an over subscription.
CATEGORY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each Supplemental
Eligible Account Holder (which collectively encompasses all names on a joint
account) who is not an Eligible Account Holder will receive non-transferable
subscription rights to purchase that number of shares which is equal to 10,000
shares ($100,000). If the allocation made in this paragraph results in an over
subscription, shares shall be allocated among subscribing Supplemental Eligible
Account Holders so as to permit each such account holder, to the extent
possible, to purchase the lesser of 100 shares or the total amount of his
subscription. Any shares not so allocated shall be allocated among the
subscribing Supplemental Eligible Account Holders on an equitable basis, related
to the amounts of their respective qualifying deposits as compared to the total
qualifying deposits of all subscribing Supplemental Eligible Account Holders.
See "-- Limitations on Purchases and Transfer of Shares."
The right of Supplemental Eligible Account Holders to subscribe for
shares is subordinate to the rights of the Eligible Account Holders and the ESOP
to subscribe for shares.
CATEGORY 4: OTHER MEMBERS. Each Other Member (which collectively
encompasses all names on a joint account) who is not an Eligible Account Holder
or Supplemental Eligible Account Holder, will receive non-transferable
subscription rights to purchase up to 10,000 shares ($100,000) to the extent
such shares are available following subscriptions by Eligible Account Holders,
the ESOP, and Supplemental Eligible Account Holders. In the event there are not
enough shares to fill
19
<PAGE>
the orders of the Other Members, the subscriptions of the Other Members will be
allocated so that each subscribing Other Member will be entitled to purchase the
lesser of 100 shares or the number of shares ordered. Any remaining shares will
be allocated among Other Members whose subscriptions remain unsatisfied on a
reasonable basis. See "-- Limitations on Purchases and Transfer of Shares."
MEMBERS IN NON-QUALIFIED STATES. We will make reasonable efforts to
comply with the securities laws of all states in the United States in which
persons entitled to subscribe for the shares pursuant to the Plan reside.
However, no person will be offered or allowed to purchase any shares under the
Plan if he resides in a foreign country or in a state with respect to which any
of the following apply: (i) a small number of persons otherwise eligible to
subscribe for shares under the Plan reside in that state or foreign country;
(ii) the granting of subscription rights or offer or sale of shares of common
stock to those persons would require either us, or our employees to register,
under the securities laws of that state or foreign country, as a broker or
dealer or to register or otherwise qualify our securities for sale in that state
or foreign country; or (iii) such registration or qualification would be
impracticable for reasons of cost or otherwise. We will not make any payment in
lieu of the granting of subscription rights to any person.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES. Persons
are prohibited from transferring or entering into any agreement or understanding
to transfer the legal or beneficial ownership of their subscription rights.
Only the person to whom they are granted may exercise subscription rights and
only for his account. Each person subscribing for shares will be required to
certify that he is purchasing shares solely for his own account and has not
entered into an agreement or understanding regarding the sale or transfer of
those shares. The regulations also prohibit any person from offering or making
an announcement of an offer or intent to make an offer to purchase subscription
rights or shares of common stock prior to the completion of the conversion.
We will pursue any and all legal and equitable remedies in the event
we become aware of the transfer of subscription rights and will not honor orders
believed by us to involve the transfer of subscription rights.
EXPIRATION DATE. The Subscription Offering will expire at 12:00 p.m.,
Central Time, on December 10, 1997. Subscription rights will become void if not
exercised prior to the Expiration Date.
COMMUNITY OFFERING
To the extent that shares remain available for purchase after filling
all orders received in the Subscription Offering, we may offer shares of common
stock to certain members of the general public residing in Arkansas and certain
other states with a preference to natural persons residing in Jackson County,
Arkansas under such terms and conditions as may be established by the board of
directors. In the Community Offering, the minimum purchase is 25 shares, and no
person, together
20
<PAGE>
with associates of and persons acting in concert with such persons, may purchase
more than 10,000 shares ($100,000).
WE MAY BEGIN THE COMMUNITY OFFERING AT ANY TIME AFTER THE SUBSCRIPTION
OFFERING HAS BEGUN. THE COMMUNITY OFFERING ONCE COMMENCED, MAY EXPIRE AT ANY
TIME WITHOUT NOTICE BUT NO LATER THAN 12:00 P.M., CENTRAL TIME, ON JANUARY 24,
1998 UNLESS WE EXTEND IT WITH THE PERMISSION OF THE OTS. PURCHASES OF SHARES IN
THE COMMUNITY OFFERING ARE SUBJECT TO OUR RIGHT IN OUR SOLE DISCRETION, TO
ACCEPT OR REJECT SUCH PURCHASES IN WHOLE OR IN PART EITHER AT THE TIME AND
RECEIPT OF AN ORDER, OR AS SOON AS PRACTICABLE FOLLOWING THE COMPLETION OF THE
COMMUNITY OFFERING.
In the event Community Offering orders are not filled, we will
promptly refund funds received by us with interest at our passbook rate. In the
event an insufficient number of shares are available to fill all orders in the
Community Offering, the available shares will be allocated on an equitable basis
determined by the board of directors, provided however that a preference will be
given to natural persons residing in Jackson County, Arkansas. If regulatory
approval is received to extend the Community Offering beyond 45 days following
the completion of the Subscription Offering, subscribers will be resolicited.
Shares sold in the Community Offering will be sold at $10.00 per share.
SYNDICATED COMMUNITY OFFERING
The Plan provides that, if necessary, we may offer shares of common
stock not purchased in the Subscription and Community Offerings for sale to the
general public in a Syndicated Community Offering through a syndicate of
selected dealers to be formed and managed by Trident Securities. No individual
purchaser together with any associate or group of persons acting in concert may
purchase more than 10,000 shares ($100,000). Neither Trident Securities nor any
registered broker-dealer will be obligated to take or purchase any shares in the
Syndicated Community Offering, although Trident Securities has agreed to use its
best efforts in the sales of shares in any Syndicated Community Offering. Shares
sold in the Syndicated Community Offering will be sold at the Purchase Price.
See "-- Stock Pricing, "
The Syndicated Community Offering will terminate no more than 45 days
following the Expiration Date, unless the Company extends it with the approval
of the OTS.
LIMITATIONS ON PURCHASES AND TRANSFER OF SHARES
The Plan provides for certain additional limitations to be placed upon
the purchase of the shares in the conversion. The minimum purchase is 25 shares.
No persons, together with associates, or group of persons acting in concert, may
purchase more than 15,000 shares ($150,000), except for the ESOP which may
purchase up to 10% of the shares sold. The OTS regulations governing the
conversion provide that officers and directors and their associates may not
purchase, in the aggregate, more than 35% of the shares issued pursuant to the
conversion.
21
<PAGE>
Depending on market conditions and the results of the offering, the
board of directors may increase or decrease any of the purchase limitations
without the approval of our members and without resoliciting subscribers. If the
maximum purchase limitation is increased, persons who ordered the maximum amount
will be given the first opportunity to increase their orders. In doing so the
preference categories in the offerings will be followed.
In the event of an increase in the total number of shares offered in
the conversion due to an increase in the Estimated Valuation Range of up to 15%
(the "Adjusted Maximum"), the additional shares will be allocated in the
following order of priority: (i) to fill the ESOP's subscription of up to 8% of
the Adjusted Maximum number of shares (the ESOP currently intends to subscribe
for 8%); (ii) in the event that there is an over subscription by Eligible
Account Holders, to fill unfulfilled subscriptions of Eligible Account Holders
exclusive of the Adjusted Maximum; (iii) in the event that there is an over
subscription by Supplemental Eligible Account Holders, to fill unfulfilled
subscriptions to Supplemental Eligible Account Holders exclusive of the Adjusted
Maximum; (iv) in the event that there is an over subscription by Other Members,
to fill unfulfilled subscriptions of Other Members exclusive of the Adjusted
Maximum; and (v) to fill unfulfilled subscriptions in the Community Offering to
the extent possible, exclusive of the Adjusted Maximum.
The term "associate" of a person means (i) any corporation or
organization (other than us or a majority-owned subsidiary of ours) of which
such person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity securities, (ii) any
trust or other estate in which such person has a substantial beneficial interest
or as to which such person serves as director or in a similar fiduciary capacity
(excluding tax-qualified employee stock benefit plans), and (iii) any relative
or spouse of such person or any relative of such spouse, who has the same home
as such person or who is a director or officer of us, or any of our
subsidiaries. For example, a corporation of which a person serves as an officer
would be an associate of that person, and therefore all shares purchased by that
corporation would be included with the number of shares which that person
individually could purchase under the above limitations.
The term "officer" may include our chairman of the board, president,
vice presidents in charge of principal business functions, Secretary and
Treasurer and any other person performing similar functions. All references
herein to an officer have the same meaning as used for an officer in the Plan.
The term "residing," as used in relation to the preference afforded
natural persons in Jackson County, Arkansas, means any natural person who
occupies a dwelling within Jackson County, has an intention to remain within
Jackson County (manifested by establishing a physical, on-going, non-transitory
presence within Jackson County), and continues to reside in Jackson County at
the time of the offering. We may utilize deposit or loan records or such other
evidence provided to us to make the determination whether a person is residing
in Jackson County. Such determination will be in our sole discretion.
22
<PAGE>
TO ORDER SHARES IN THE CONVERSION, PERSONS MUST CERTIFY THAT THEIR
PURCHASE DOES NOT CONFLICT WITH THE PURCHASE LIMITATIONS. IN THE EVENT THAT THE
PURCHASE LIMITATIONS ARE VIOLATED BY ANY PERSON (INCLUDING ANY ASSOCIATE OR
GROUP OF PERSONS AFFILIATED OR OTHERWISE ACTING IN CONCERT WITH SUCH PERSONS),
WE WILL HAVE THE RIGHT TO PURCHASE FROM THAT PERSON AT $10.00 PER SHARE ALL
SHARES ACQUIRED BY THAT PERSON IN EXCESS OF THE PURCHASE LIMITATIONS. IF THE
EXCESS SHARES HAVE BEEN SOLD BY THAT PERSON, WE MAY RECOVER THE PROFIT FROM THE
SALE OF THE SHARES BY THAT PERSON. WE MAY ASSIGN OUR RIGHT EITHER TO PURCHASE
THE EXCESS SHARES OR TO RECOVER THE PROFITS FROM THEIR SALE.
Shares of common stock purchased pursuant to the conversion will be
freely transferable, except for shares purchased by our directors and officers.
For certain restrictions on the shares purchased by directors and officers, see
" -- Restrictions on Sales and Purchases of Shares by Directors and Officers."
In addition, under guidelines of the NASD, members of the NASD and their
associates are subject to certain restrictions on the transfer of securities
purchased in accordance with subscription rights and to certain reporting
requirements upon purchase of such securities.
ORDERING AND RECEIVING SHARES
USE OF ORDER FORMS. Subscription rights to subscribe may only be
exercised by completion of an original order form. Persons ordering shares in
the Subscription Offering must deliver by mail or in person a properly completed
and executed original order form to us prior to the Expiration Date. Order forms
must be accompanied by full payment for all shares ordered. See "--Payment for
Shares." Subscription rights under the Plan will expire on the Expiration Date,
whether or not we have been able to locate each person entitled to subscription
rights. ONCE SUBMITTED, SUBSCRIPTION ORDERS CANNOT BE REVOKED WITHOUT OUR
CONSENT UNLESS THE CONVERSION IS NOT COMPLETED WITHIN 45 DAYS OF THE EXPIRATION
DATE.
Persons and entities not purchasing shares in the Subscription
Offering may, subject to availability, purchase shares in the Community Offering
by returning to us a completed and properly executed order form along with full
payment for the shares ordered.
In the event an order form (i) is not delivered and is returned to us
by the United States Postal Service or we are unable to locate the addressee,
(ii) is not received or is received after the Expiration Date, (iii) is
defectively completed or executed, or (iv) is not accompanied by full payment
for the shares subscribed for (including instances where a savings account or
certificate balance from which withdrawal is authorized is insufficient to fund
the amount of such required payment), the subscription rights for the person to
whom such rights have been granted will lapse as though that person failed to
return the completed order form within the time period specified. We may, but
will not be required to, waive any irregularity on any order form or require the
submission of corrected order forms or the remittance of full payment for
subscribed shares by such date as we specify. The waiver of an irregularity on
an order form in no way obligates us to waive any other irregularity on that, or
any irregularity on any other, order form. Waivers will be considered on a case
by case basis. Photocopies of order forms, payments from private third parties,
or electronic transfers of
23
<PAGE>
funds will not be accepted. Our interpretation of the terms and conditions of
the Plan and of the acceptability of the order forms will be final. We have the
right to investigate any irregularity on any order form.
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the order
form will confirm receipt or delivery in accordance with Rule 15c2-8. Order
forms will only be distributed with a prospectus.
PAYMENT FOR SHARES. Payment for shares of common stock may be made (i)
in cash, if delivered in person, (ii) by check or money order, or (iii) by
authorization of withdrawal from savings accounts (including certificates of
deposit) maintained with us or (iv) by an IRA not held by us. Appropriate means
by which such withdrawals may be authorized are provided in the order form. Once
such a withdrawal has been authorized, none of the designated withdrawal amount
may be used by the subscriber for any purpose other than to purchase the shares.
Where payment has been authorized to be made through withdrawal from a savings
account, the sum authorized for withdrawal will continue to earn interest at the
contract rate until the conversion has been completed or terminated. Interest
penalties for early withdrawal applicable to certificate accounts will not apply
to withdrawals authorized for the purchase of shares; however, if a partial
withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate evidencing the remaining
balance will earn interest at the passbook savings account rate subsequent to
the withdrawal. Payments made in cash or by check or money order, will be placed
in a segregated saving account and interest will be paid by us at our passbook
savings account rate from the date payment is received until the conversion is
completed or terminated. An executed order form, once received by us, may not be
modified, amended, or rescinded without our consent, unless the conversion is
not completed within 45 days after the conclusion of the Subscription Offering,
in which case subscribers may be given an opportunity to increase, decrease, or
rescind their order. In the event that the conversion is not consummated, all
funds submitted pursuant to the offering will be refunded promptly with
interest.
Owners of self-directed IRAs may use the assets of such IRAs to
purchase shares in the offering, provided that such IRSs are not maintained on
deposit with us Persons with IRAs maintained with us must have their accounts
transferred to an unaffiliated institution or broker to purchase shares in the
offering. The Stock Information Center can assist you in transferring your self-
directed IRA. Because of the paperwork involved, persons owning IRAs with us who
wish to use their IRA account to purchase stock in the Offering, must contact
the Stock Information Center no later than December 4, 1997.
DELIVERY OF STOCK CERTIFICATES. Certificates representing shares of
common stock issued in the conversion will be mailed to the person(s) at the
address noted on the order form, as soon as practicable following consummation
of the conversion. Any certificates returned as undeliverable
24
<PAGE>
will be held until properly claimed or otherwise disposed. Persons ordering
shares might not be able to sell their shares until they receive their stock
certificates.
FEDERAL REGULATIONS PROHIBIT US FROM LENDING FUNDS OR EXTENDING CREDIT
TO ANY PERSON TO PURCHASE SHARES IN THE CONVERSION.
MARKETING ARRANGEMENTS
We have engaged Trident Securities as our financial advisor in
connection with the offering. Trident Securities has agreed to exercise its best
efforts to assist us in the sale of the shares in the offering. As compensation,
Trident Securities will receive a fee in the amount of $105,000. If shares are
offered for sale in a Syndicated Community Offering, Trident Securities will
organize and manage the syndicate of selected broker-dealers. The commission to
be paid to any such selected broker-dealers will be at a rate to be agreed to
jointly by Trident Securities and us. Fees paid to Trident Securities and to any
other broker-dealer may be deemed to be underwriting fees, and Trident
Securities and such broker-dealers may be deemed to be underwriters. We have
agreed to indemnify Trident Securities for reasonable costs and expenses in
connection with certain claims or liabilities which might be asserted against
Trident Securities. This indemnification covers the investigation, preparation
of defense and defense of any action, proceeding or claim relating to
misrepresentation or breach of warranty of the written agreement among Trident
Securities and us or the omission or alleged omission of a material fact
required to be stated or necessary in the prospectus or other documents.
The shares will be offered principally by the distribution of this
document and through activities conducted at a Stock Information Center located
at our office. The Stock Information Center is expected to operate during our
normal business hours throughout the offering. A registered representative
employed by Trident Securities will be working at, and supervising the operation
of, the Stock Information Center. Trident Securities will assist us in
responding to questions regarding the conversion and the offering and processing
order forms. Our personnel will be present in the Stock Information Center to
assist Trident Securities with clerical matters and to answer questions related
solely to our business.
STOCK PRICING
We have retained Ferguson, an independent economic consulting and
appraisal firm, which is experienced in the evaluation and appraisal of business
entities, including savings institutions involved in the conversion process to
prepare an appraisal of our estimated pro forma market value. We will pay
Ferguson a fee of $15,000 for preparing the appraisal and will reimburse
Ferguson up to $3,000 for reasonable out-of-pocket expenses. We have agreed to
indemnify Ferguson under certain circumstances against liabilities and expenses
arising out of or based on any misstatement or untrue statement of a material
fact contained in the information supplied by us to Ferguson.
25
<PAGE>
Ferguson prepared the appraisal in reliance upon the information
contained herein, including the financial statements. The appraisal contains an
analysis of a number of factors including, but not limited to, our financial
condition and operating trends, the competitive environment within which we
operate, operating trends of certain savings institutions and savings and loan
holding companies, relevant economic conditions, both nationally and in the
state of Arkansas which affect the operations of savings institutions, and stock
market values of certain savings institutions. In addition, Ferguson has advised
us that it has considered the effect of the additional capital raised by the
sale of the shares on our estimated aggregate pro forma market value.
On the basis of the above, Ferguson has determined, in its opinion,
that as of September 2, 1997 our estimated aggregate pro forma market value was
$2,800,000. OTS regulations require, however, that the appraiser establish a
range of value for the stock to allow for fluctuations in the aggregate value of
the stock due to changing market conditions and other factors. Accordingly,
Ferguson has established the Estimated Valuation Range from $2,380,000 to
$3,220,000 for the offering. The Estimated Valuation Range will be updated prior
to consummation of the conversion and the Estimated Valuation Range may increase
to $3,703,000.
The board of directors has reviewed the independent appraisal,
including the stated methodology of the independent appraiser and the
assumptions used in the preparation of the independent appraisal. The board of
directors is relying upon the expertise, experience and independence of the
appraiser and is not qualified to determine the appropriateness of the
assumptions.
In order for stock sales to take place, Ferguson must confirm to the
OTS that, to the best of Ferguson's knowledge and judgment, nothing of a
material nature has occurred which would cause Ferguson to conclude that the
Purchase Price on an aggregate basis was incompatible with Ferguson's estimate
of our pro forma market value of us in converted form at the time of the sale.
If, however, the facts do not justify such a statement, an amended Estimated
Valuation Range may be established.
THE APPRAISAL IS NOT A RECOMMENDATION OF ANY KIND AS TO THE
ADVISABILITY OF PURCHASING THESE SHARES. IN PREPARING THE APPRAISAL, FERGUSON
HAS RELIED UPON AND ASSUMED THE ACCURACY AND COMPLETENESS OF FINANCIAL AND
STATISTICAL INFORMATION PROVIDED BY US. FERGUSON DID NOT INDEPENDENTLY VERIFY
THE FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED BY US, NOR DID FERGUSON
VALUE INDEPENDENTLY OUR ASSETS AND LIABILITIES. THE APPRAISAL CONSIDERS US ONLY
AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS OUR LIQUIDATION VALUE.
MOREOVER, BECAUSE THE APPRAISAL IS BASED UPON ESTIMATES AND PROJECTIONS OF A
NUMBER OF MATTERS WHICH ARE SUBJECT TO CHANGE, THE MARKET PRICE OF THE COMMON
STOCK COULD DECLINE BELOW $10.00.
CHANGE IN NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION
Depending on market and financial conditions at the time of the
completion of the Subscription and Community Offerings, we may significantly
increase or decrease the number of
26
<PAGE>
shares to be issued in the conversion. In the event of an increase in the
valuation, we may increase the total number of shares to be issued in the
conversion. An increase in the total number of shares to be issued in the
conversion would decrease a subscriber's percentage ownership interest and the
pro forma net worth (book value) per share and increase the pro forma net income
and net worth (book value) on an aggregate basis. In the event of a material
reduction in the valuation, we may decrease the number of shares to be issued to
reflect the reduced valuation. A decrease in the number of shares to be issued
in the conversion would increase a subscriber's percentage ownership interest
and the pro forma net worth (book value) per share and decrease pro forma net
income and net worth on an aggregate basis.
Persons ordering shares will not be permitted to modify or cancel
their orders unless the change in the number of shares to be issued in the
conversion results in an offering which is either less than $2,380,000 or more
than $3,703,000.
RESTRICTIONS ON REPURCHASE OF SHARES
Generally, during the first year following the conversion, the Company
may not repurchase its shares and during each of the second and third years
following the conversion, the Company may repurchase five percent of the
outstanding shares provided they are purchased in open-market transactions.
Repurchases must not cause us to become undercapitalized and at least 10 days
prior notice of the repurchase must be provided to the OTS. The OTS may
disapprove a repurchase program upon a determination that (1) the repurchase
program would adversely affect our financial condition, (2) the information
submitted is insufficient upon which to base a conclusion as to whether the
financial condition would be adversely affected, or (3) a valid business purpose
was not demonstrated. In addition, SEC rules also govern the method, time,
price, and number of shares of common stock that may be repurchased by the
Company and affiliated purchasers. If, in the future, the rules and regulations
regarding the repurchase of stock are liberalized, the Company may utilize the
rules and regulations then in effect.
RESTRICTIONS ON SALES AND PURCHASES OF SHARES BY DIRECTORS AND OFFICERS
Shares purchased by directors and officers of the Company may not be
sold for one year following completion of the conversion. An exception to this
rule is a disposition of shares in the event of the death of the director or
officer. Any shares issued to directors and officers as a stock dividend, stock
split, or otherwise with respect to restricted stock shall be subject to the
same restrictions.
For three years following the conversion, directors and officers may
purchase shares only through a registered broker or dealer. Exceptions are
available only if the OTS has approved the purchase or the purchase is an arm's
length transaction and involves more than one percent of the outstanding shares.
27
<PAGE>
INTERPRETATION AND AMENDMENT OF THE PLAN
We are authorized to interpret and amend the Plan. Our interpretations
are final. Amendments to the Plan after the receipt of member approval will not
need further member approval unless required by the OTS.
CONDITIONS AND TERMINATION
Completion of the conversion requires (i) the approval of the Plan by
the affirmative vote of not less than a majority of the total number of votes
eligible to be cast by our members; and (ii) completion of the sale of shares
within 24 months following approval of the Plan by our members. If these
conditions are not satisfied, the Plan will be terminated and we will continue
our business in the mutual form of organization. We may terminate the Plan at
any time prior to the meeting of members to vote on the Plan or at any time
thereafter with the approval of the OTS.
OTHER
ALL STATEMENTS MADE IN THIS DOCUMENT ARE HEREBY QUALIFIED BY THE
CONTENTS OF THE PLAN OF CONVERSION, THE MATERIAL TERMS OF WHICH ARE SET FORTH
HEREIN. THE PLAN OF CONVERSION IS ATTACHED TO THE PROXY STATEMENT. COPIES OF THE
PLAN ARE AVAILABLE FROM US AND WE SHOULD BE CONSULTED FOR FURTHER INFORMATION.
ADOPTION OF THE PLAN BY OUR MEMBERS AUTHORIZES US TO INTERPRET, AMEND OR
TERMINATE THE PLAN.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and
results of operations is intended to assist you in understanding our financial
condition and results of operations. The information in this section should also
be read with our Financial Statements and Notes to the Financial Statements
elsewhere in this document.
The Company has recently been formed and accordingly, has no results
of operations. The following discussion relates only to our financial condition
and results of operations
Our results of operations depend primarily on net interest income,
which is determined by (i) the difference between rates of interest we earn on
our interest-earning assets and the rates we pay on interest-bearing liabilities
(interest rate spread), and (ii) the relative amounts of interest-earning assets
and interest-bearing liabilities. Our results of operations are also affected by
non-interest expense, including primarily compensation and employee benefits,
federal deposit insurance premiums and office occupancy costs. Our results of
operations also are affected significantly by general and economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities, all of which are
beyond our control.
28
<PAGE>
Based on our review of our internal bookkeeping practices and our conferences
with our third party service companies, we do not expect to incur significant
additional bookkeeping, data processing or other expenses, and in particular we
do not expect to encounter significant difficulties with our data processing
service provider, in connection with issues related to the upcoming millennium.
Following the conversion, we believe there will be sufficient demand
in our market area to continue our policy of emphasizing lending in the one- to
four-family real estate loan area. In addition, we hope to experience continued
growth in our non-residential mortgage, consumer and commercial loan portfolios
by modest amounts; however, there is no assurance that we will be able to do so.
See "Risk Factors -- Risks Associated with Commercial Real Estate, Multi-Family
Real Estate and Consumer Lending" and "Business of Newport Federal Savings
Bank--Lending Activities."
MARKET RISK DISCLOSURE
ASSET/LIABILITY MANAGEMENT. Our assets and liabilities may be analyzed
by examining the extent to which our assets and liabilities are interest-rate
sensitive and by monitoring the expected effects of interest rate changes on our
net portfolio value.
An asset or liability is interest rate sensitive within a specific
time period if it will mature or reprice within that time period. If our assets
mature or reprice more quickly or to a greater extent than our liabilities, our
net portfolio value and net interest income would tend to increase during
periods of rising interest rates but decrease during periods of falling interest
rates. Conversely, if our assets mature or reprice more slowly or to a lesser
extent than our liabilities, our net portfolio value and net interest income
would tend to decrease during periods of rising interest rates but increase
during periods of falling interest rates. Our policy has been to mitigate the
interest rate risk inherent in the historical savings institution business of
originating long-term loans funded by short-term deposits by pursuing certain
strategies designed to decrease the vulnerability of our earnings to material
and prolonged changes in interest rates.
To manage the interest rate risk of this type of loan portfolio, we
limit maturities of fixed-rate loans to no more than five years and emphasize
the origination of ARM loans. At June 30, 1997, the average weighted term to
maturity of our mortgage loan portfolio was approximately 14 years and the
average weighted term of our deposits was slightly less than two years.
NET PORTFOLIO VALUE. In recent years, we have measured our interest
rate sensitivity by computing the "gap" between the assets and liabilities which
were expected to mature or reprice within certain time periods, based on
assumptions regarding loan prepayment and deposit decay rates formerly provided
by the OTS. However, the OTS now measures an institution's interest rate risk by
computing the amount by which the net present value of cash flow from assets,
liabilities and off balance sheet items (the institution's net portfolio value
or "NPV") would change in the event of a range of assumed changes in market
interest rates. These computations estimate the effect on an institution's NPV
from instantaneous and permanent 1% to 4% (100 to 400 basis points) increases
29
<PAGE>
and decreases in market interest rates. The following table presents the
interest rate sensitivity of our NPV at June 30, 1997, as calculated by the OTS,
which is based upon quarterly information that we voluntarily provided to the
OTS.
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE NPV AS % OF PORTFOLIO VALUE OF ASSETS
CHANGE ----------------------------- --------------------------------------
IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO BASIS POINT CHANGE
- -------- -------- -------- -------- --------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+ 400 bp 2,403 (669) (22)% 7.26% (151) bp
+ 300 bp 2,663 (408) (13) 7.91 (86) bp
+ 200 bp 2,873 (199) (6) 8.40 (37) bp
+ 100 bp 3,012 (59) (2) 8.70 (7) bp
0 bp 3,072 -- -- 8.77 --
- - 100 bp 3,051 (21) (1) 8.63 (14) bp
- - 200 bp 3,002 (69) (2) 8.42 (35) bp
- - 300 bp 2,993 (78) (3) 8.32 (45) bp
- - 400 bp 3,054 (18) (1) 8.38 (39) bp
</TABLE>
While we cannot predict future interest rates or their effects on our
NPV or net interest income, we do not expect current interest rates to have a
material adverse effect on our NPV or net interest income in the near future.
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, prepayments and deposit runoff and should not be relied upon as
indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar maturity
or periods of repricing, they may react at different times and in different
degrees to changes in the market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as ARM loans,
generally have features which restrict changes in interest rates on a short-term
basis and over the life of the loan. In the event of a change in interest rates,
prepayments and early withdrawal levels could deviate significantly from those
assumed in making calculations set forth above. Additionally, an increased
credit risk may result as the ability of many borrowers to service their debt
may decrease in the event of an interest rate increase.
The board of directors reviews our asset and liability policies. The
board of directors meets regularly to review interest rate risk and trends, as
well as liquidity and capital ratios and requirements. Management administers
the policies and determinations of the board of directors with respect to our
asset and liability goals and strategies. We expect that our asset and liability
policies and strategies will continue as described so long as competitive and
regulatory conditions in the financial institution industry and market interest
rates continue as they have in recent years.
30
<PAGE>
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
The following table sets forth certain information relating to our
average statement of financial condition and reflects the average yield on
assets and average cost of liabilities for the periods indicated and the average
yields earned and rates paid at the date and for the periods indicated. Such
yields and costs are derived by dividing income or expense by the average
monthly balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from quarter-end balances. We do not
believe that the use of quarter-end balances instead of daily balances has
caused any material difference in the information presented.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------------------------------
AT JUNE 30, 1997 1996
1997 ---------------------------- ---------------------------
--------------------- AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST
----------- -------- ------- --------- -------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits................... $ 1,295 5.56% $ 1,767 $ 72 4.07% $ 2,519 $ 129 5.12%
Mortgage-backed securities.................. 5,077 6.68 5,374 339 6.30 4,442 280 6.30
Investment securities....................... 846 8.39 976 71 7.28 1,266 105 8.29
Loans (1)................................... 24,794 8.11 24,249 2,011 8.20 21,470 1,814 8.45
------- ------- ------- ------- -------
Total interest-earning assets................ 32,012 7.79 32,366 2,493 7.70 29,697 2,328 7.84
------- -------
Non-interest-earning assets.................. 2,367 1,745 1,644
------- ------- -------
Total assets................................. $34,379 $34,111 $31,341
======= ======= =======
INTEREST-BEARING LIABILITIES:
Savings deposits............................ $30,090 5.12% $29,684 $ 1,541 5.19% $28,383 $ 1,517 5.34%
FHLB advances............................... 618 5.55 1,238 56 4.52 140 8 5.71
------- ------- ------- ------- -------
Total interest-bearing liabilities........... 30,708 5.20 30,922 1,597 5.16 28,523 1,525 5.35
------- -------
Non-interest bearing liabilities............. 1,405 789 351
------- ------- -------
Total liabilities............................ 32,113 31,711 28,874
Retained earnings............................ 2,266 2,400 2,467
------- ------- -------
Total liabilities and retained earnings...... $34,379 $34,111 $31,341
======= ======= =======
Net interest income.......................... $ 896 $ 803
======= =======
Net interest rate spread (2)................. 2.59% 2.54% 2.49%
==== ==== ====
Net interest-earning assets.................. $ 1,444 $ 1,174
======= =======
Net interest margin (3)...................... 2.77% 2.70%
==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities........ 104.66% 104.12%
======= =======
- --------------------
</TABLE>
(1) Includes nonaccrual loans.
(2) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average rate on interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
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<PAGE>
RATE/VOLUME ANALYSIS
The table shows certain information regarding changes in our interest
income and interest expense of the Bank for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to: (i) changes in volume (changes in volume
multiplied by old rate); and (ii) changes in rates (change in rate multiplied by
old volume); and (iii) change in rate-volume (changes in rate multiplied by the
changes in volume).
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------- --------------------------------
1997 VS. 1996 1996 VS. 1995
-------------------------------- --------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
-------------------------------- --------------------------------
RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
------- ------ ------- ------ ------- ------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits.................... $ (39) $(26) $ 8 $ (57) $(14) $ 26 $ (3) $ 9
Mortgage-backed securities................... 59 -- -- 59 (22) 51 (4) 25
Investment securities........................ (24) (13) 3 (34) (11) 16 (2) 3
Loans........................................ 235 (34) (4) 197 126 10 1 137
----- ---- ----- ----- ---- ---- ---- ----
Total interest-earning assets.............. 231 (73) 7 165 79 103 (8) 174
----- ---- ----- ----- ---- ---- ---- ----
INTEREST-BEARING LIABILITIES:
Deposits..................................... 69 (43) (2) 24 44 195 7 246
FHLB advances................................ 63 (2) (13) 48 (1) (1) -- (2)
----- ---- ----- ----- ---- ---- ---- ----
Total interest-bearing liabilities........... 132 (45) (15) 72 43 194 7 244
Increase (decrease) in net interest
income..................................... $ 99 $(28) $ 22 $ 93 $ 36 $(91) $(15) $(70)
===== ==== ===== ===== ==== ==== ==== ====
</TABLE>
32
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1997 AND JUNE 30, 1996
Total assets increased by $1.9 million or 5.96% from $32.4 million at
June 30, 1996 to $34.4 million at June 30, 1997. Total liabilities increased
$2.1 million or 7.1%, from $30.0 million at June 30, 1996 to $32.1 million at
June 30, 1997. The increase in assets for the period was primarily attributable
to the growth in our loan portfolio of $2.8 million which was the result of
increased loan demand generally. Loan growth was funded from a net increase in
deposits of $1.4 million, an increase in FHLB advances of $484,000, a net
reduction in cash and interest-earning deposits of $482,000 and net maturities
and repayments on investment and mortgage-backed securities of $387,000. Our
total deposits increased by $1.4 million from June 30, 1996 to June 30, 1997.
This increase resulted from our increased marketing efforts in connection with
the relocation of our office. Of this total increase, $634,000, or 44.77%, was
in non-interest-bearing demand deposits.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
NET INCOME. We incurred a net loss of $199,000 for the fiscal year
ended June 30, 1997 as compared to a net profit of $73,000 for the fiscal year
ended June 30, 1996. Our loss in the current fiscal year was primarily due to a
special assessment that all thrift institutions were required to pay in order to
recapitalize the SAIF, the FDIC fund that insures our deposits. The special
assessment amounted to $179,000 which we paid during the quarter ended December
31, 1996. In addition, we incurred an expense of $286,000 in connection with our
adoption of a Director Retirement Plan. We also increased our provision for loan
losses from $10,000 for fiscal year 1996 to $90,000 for fiscal year 1997.
NET INTEREST INCOME. Our net interest income, which is the difference
between our interest income and our interest expense, increased from $803,000
for fiscal year 1996 to $896,000 for fiscal year 1997. The $93,000 increase was
due to an increase in the level of interest income we received on our loan and
mortgage backed securities portfolios. Although the average yield on these
portfolios actually declined, the average balance of these assets rose which
accounted for the income growth. Total interest expense also increased during
the fiscal year by $72,000 due to an increase in our deposits and our FHLB
borrowings, our two main categories of interest-bearing liabilities. As with the
interest-earning assets, however, the average cost of these borrowings decreased
from fiscal year 1996 to fiscal year 1997.
PROVISION FOR LOAN LOSSES. Financial institutions are required to
establish an allowance for loan losses. The balance of such allowance for loan
losses depends on the risk in the institution's loan portfolio, its level of
problem loans and general economic conditions, among other factors. Loans which
cannot be collected are charged against the allowance and thereby reduce its
balance. An institution adds to the allowance by making a provision for loan
losses which is an expense item. During fiscal year 1997, we made a provision
for loan losses of $90,000 as compared to a $10,000 provision during the
previous fiscal year. Although at June 30, 1997 we had not experienced any
increase in the level of our problem loans, we determined that the higher
provision was necessary based on the increased risks associated with the growth
in our consumer loan portfolio. Our total
33
<PAGE>
consumer loans at June 30, 1997 were $3.6 million, which represented a doubling
of the portfolio as compared to the $1.8 million in consumer loans at June 30,
1996. Consumer loans entail greater risk than do single-family mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. We also believed the increased
provision was necessary due to the growth in our total loan portfolio which
increased by 13.0% from June 30, 1996 to June 30, 1997.
Subsequent to June 30, 1997, our largest loan was placed on nonaccrual
status due to the failure of the borrower to make the requisite payments. Based
on the information available to us as of the date hereof with respect to such
loan, we believe that our allowance for loan losses is adequate. We cannot
assure you, however, that such reserves are, or in the future will be, adequate
to absorb all loan losses or that regulators, in reviewing our assets, will not
make us increase our allowance for loan losses, thereby negatively affecting our
reported financial condition and results of operations.
NONINTEREST INCOME. Noninterest income (e.g, loan and deposit account
fees) does not represent a significant portion of our revenues. For fiscal year
1997, we earned $19,000 in noninterest income as compared to $11,000 in fiscal
year 1996.
NONINTEREST EXPENSE. Our noninterest expenses consist mainly of
salaries and employee benefits, federal deposit insurance premiums and the
expenses associated with our building and equipment. For fiscal year 1997, total
noninterest expenses were $1.2 million as compared to $726,000 for the prior
fiscal year 1996. The increased expense level was due mainly to the special SAIF
assessment of $179,000 and the costs associated with the adoption of the
director retirement plan of $286,000.
We anticipate our deposit insurance premium expense will be reduced in
future periods as the rate we have to pay for such insurance was significantly
reduced effective January 1, 1997. See "Regulation--Regulation of the Bank--
Deposit Insurance."
INCOME TAX EXPENSE. Our income tax expense for fiscal year 1997 was
significantly reduced due to the net loss for the year. We recognized a net
benefit of $133,000 for the year as compared to a net expense of $6,000 for the
prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
We are required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which varies from time to time depending
upon economic conditions and deposit flows, is based upon a percentage of our
deposits and short-term borrowings. The required ratio currently is 5% and our
liquidity ratio for the month ended June 30, 1997 was 5.14%. It is our belief
that upon completion of the conversion our liquidity ratio will increase due to
the additional funds we will receive.
34
<PAGE>
Our primary sources of funds are deposits, repayment of loans and
mortgage-backed securities, maturities of investments and interest-bearing
deposits, funds provided from operations and advances from the FHLB of Dallas.
While scheduled repayments of loans and mortgage-backed securities and
maturities of investment securities are predicable sources of funds, deposit
flows and loan prepayments are greatly influenced by the general level of
interest rates, economic conditions and competition. We use our liquidity
resources principally to fund existing and future loan commitments, to fund
maturing certificates of deposit and demand deposit withdrawals, to invest in
other interest-earning assets, to maintain liquidity, and to meet operating
expenses.
Liquidity may be adversely affected by unexpected deposit outflows,
higher interest rates paid by competitors, adverse publicity relating to the
savings and loan industry, and similar matters. Further, the disparity in FICO
Bond interest payments, as described herein, could result in us losing deposits
to BIF members that have lower costs of funds and, therefore, are able to pay
higher rates of interest on deposits. Management monitors projected liquidity
needs and determines the level desirable, based in part on our commitments to
make loans and management's assessment of our ability to generate funds.
We are subject to federal regulations that impose certain minimum
capital requirements. For a discussion on such capital levels, see "Historical
and Pro Forma Capital Compliance" and "Regulation -- Regulation of the Bank --
Regulatory Capital Requirements."
IMPACT OF INFLATION AND CHANGING PRICES
Our financial statements and the accompanying notes presented
elsewhere in this document, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
our operations. As a result, interest rates have a greater impact on our
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
RECENT PRONOUNCEMENTS
FASB STATEMENT ON ACCOUNTING FOR STOCK-BASED COMPENSATION. In October
1995, the FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based
method" of accounting for an employee stock option whereby compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period. FASB has encouraged all entities to adopt the fair
value based method, however, it will allow entities to continue the use of the
"intrinsic value based method" prescribed by Accounting Principles Board ("APB")
Opinion No. 25. Under the intrinsic value based method, compensation cost is the
excess of the market price of the stock at the grant date over the amount an
employee must pay to acquire the stock. However, most stock option plans have no
intrinsic value at the grant date and, as such, no compensation cost is
recognized under
35
<PAGE>
APB Opinion No. 25. Entities electing to continue use of the accounting
treatment of APB Opinion No. 25 must make certain pro forma disclosures as if
the fair value based method had been applied. The accounting requirements of
SFAS No. 123 are effective for transactions entered into in fiscal years
beginning after December 15, 1995. Pro forma disclosures must include the
effects of all awards granted in fiscal years beginnings after December 15,
1994. If the proposed Option Plan is adopted we will use the intrinsic value
method. Accordingly, there will be no impact as a result of our adoption of SFAS
No. 123.
FASB STATEMENT ON ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL
ASSETS AND EXTINGUISHMENTS OF LIABILITIES. In June 1996, FASB issued SFAS No.
125, which will be effective, on a prospective basis, for transfers and
servicing of financial assets and extinguishment of liabilities occurring after
December 31, 1996. SFAS No. 125 supersedes SFAS No. 122, Accounting for Mortgage
Servicing Rights. SFAS No. 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of liabilities
based on consistent application of a financial-components approach that focuses
on control. SFAS No. 125 extends the "available for sale" and "trading" approach
of SFAS No. 115 to non-security financial assets that can be contractually
prepaid or otherwise settled in such a way that the holder of the asset would
not recover substantially all of its recorded investment. In addition, SFAS No.
125 amends SFAS No. 115 to prevent a security from being classified as held to
maturity if the security can be prepaid or settled in such a manner that the
holder of the security would not recover substantially all of its recorded
investment. The extension of the SFAS No. 115 approach to certain non-security
financial assets and the amendment to SFAS No. 115 are effective for financial
assets held on or acquired after January 1, 1997. The FASB has proposed to defer
the effective date of SFAS No. 125 until January 1, 1998 for certain
transactions including repurchase agreements, dollar-roll, securities lending
and similar transactions. We adopted SFAS No. 125 on January 1, 1997. There was
no impact on our financial statements of such adoption.
FASB STATEMENT ON EARNINGS PER SHARE. In February 1997, the FASB
issued SFAS No. 128, "Earnings Per Share." SFAS 128 supersedes APB Opinion No.
15, "Earnings Per Share" and specifies the computation, presentation and
disclosure requirements for earnings per share for entities with publicly held
common stock or potential common stock. SFAS No. 128 replaces the presentation
of primary earnings per share with a presentation of basic earnings per share
and fully diluted earnings per share with diluted earnings per share. It also
requires dual presentation of basis and diluted earnings per share on the fact
of the income statement for all entities with complex capital structures and
requires the reconciliation of the numerator and denominator of the basic
earnings per share computation to the numerator and denominator of the diluted
earnings per share computation. This statement is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. SFAS No. 128 will be adopted by us in the initial period after December
15, 1997. We do not believe the impact of adopting SFAS No. 128 will be material
to our financial statements.
FASB STATEMENT ON DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE.
In February 1997, the FASB issued SFAS No. 129. The Statement incorporates the
disclosure requirements of APB Opinion No. 15, "Earnings per Share," and makes
them applicable to all public and nonpublic
36
<PAGE>
entities that have issued securities addressed by the Statement. APB Opinion No.
15 requires disclosure of descriptive information about securities that is not
necessarily related to the computation of earnings per share. The statement
continues the previous requirements to disclose certain information about an
entity's capital structure found in APB Opinion NO. 10, Omnibus Opinion - 1966
and No. 15, Earnings Per Share and FASB Statement No. 47, Disclosure of Long-
Term Obligations, for entities that were subject to the requirements of those
standards. This Statement eliminates the exemption of nonpublic entities from
certain disclosure requirements of Opinion 15 as provided by Statement No. 21,
Suspension of the Reporting of Earnings per Share and Segment Information for
Nonpublic Enterprises. It supersedes specific disclosure requirements of Opinion
10 and 15 and Statement 47 and consolidates them in this Statement for ease of
retrieval and for greater visibility to nonpublic entities. This Statement is
effective for financial statements for periods ending after December 15, 1997.
SFAS No. 129 will be adopted by us in the initial period after December 15,
1997. We do not believe the impact of adopting SFAS No. 129 will be material to
our financial statements.
FASB STATEMENT ON REPORTING COMPREHENSIVE INCOME. In June 1997, the
FASB issued SFAS No. 130, "Reporting Comprehensive Income," which requires
entities presenting a complete set of financial statements to include details of
comprehensive income that arise in the reporting period. Comprehensive income
consists of net income or loss for the current period and other comprehensive
income, expense, gains and losses that bypass the income statement and are
reported in a separate component of equity, i.e., unrealized gains and losses on
certain investment securities. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. We do not believe that adoption of SFAS No.
130 will have a material adverse effect on our financial position or results of
operations.
FASB STATEMENT ON DISCLOSURES REGARDING SEGMENTS. In June 1997, the
FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." Statement 131 establishes standards for the way public
enterprises are to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Statement 131
supersedes FASB Statement No. 14, "Financial Reporting for Segments of a
Business Enterprise" but retains the requirement to report information about
major customers. It amends Statement No. 94, "Consolidation of all Majority-
Owned Subsidiaries" to remove the special disclosure requirements for previously
unconsolidated subsidiaries. Statement 131 is effective for financial statements
for periods beginning after December 15, 1997. We do not believe the impact of
adopting SFAS No. 131 will be material to our financial statements.
BUSINESS OF NORTH ARKANSAS BANCSHARES, INC.
The Company is not an operating company and has not engaged in any
significant business to date. It was formed in September 1997 as a Tennessee-
chartered corporation to be the holding company for Newport Federal Savings
Bank. The holding company structure and retention of
37
<PAGE>
proceeds will facilitate: (i) diversification into non-banking activities, (ii)
acquisitions of other financial institutions, such as savings institutions,
(iii) expansion within existing and into new market areas and (iv) stock
repurchases without adverse tax consequences. There are no present plans
regarding diversification, acquisitions or expansion or stock repurchases.
Newport Federal have operated as an independent community oriented
savings institution since 1934. It is our intention to continue to operate as an
independent community oriented savings association following the conversion.
Since the Company will own only one savings association, it generally
will not be restricted in the types of business activities in which it may
engage, provided that we retain a specified percentage of our assets in housing-
related investments. The Company initially will not conduct any active business
and does not intend to employ any persons other than officers but will utilize
our support staff from time to time.
BUSINESS OF NEWPORT FEDERAL SAVINGS BANK
The principal sources of funds for our activities are deposits,
payments on loans and borrowings from the FHLB of Dallas. Our deposits totaled
$31.1 million at June 30, 1997. Funds are used principally for the origination
of loans secured by first mortgages on one- to four-family residences which are
located in our market area. Such loans totaled $17.5 million, or 70.06%, of our
total loans receivable portfolio at June 30, 1997. We also originate other types
of loans, including loans secured by commercial real estate and consumer loans,
and purchase investment and mortgage-backed securities. Our principal source of
revenue is interest received on loans and investments and our principal expense
is interest paid on deposits.
MARKET AREA
We consider our primary market area to be Jackson County in Northern
Arkansas. The City of Newport, where we are located, is the County Seat of
Jackson County. Jackson County is primarily rural in nature. According to 1990
Census data, approximately 26.6% of the households in Jackson County had incomes
below the poverty line. Median household income was estimated to be $16,641. The
unemployment rate calculated based on the 1990 Census data was 5.40%, slightly
below the average for all of Arkansas of 5.98% and the U.S. average of 6.24%.
Major employers in our market area are Arkansas State University-Beebe/Newport,
which is located in Newport, two hospitals, also based in Newport, Arkansas
Steel and the Norandal Aluminum Rolling Plant. Two privately-owned prisons are
also scheduled to open shortly which are expected to add approximately 284 new
jobs to the market area according to the companies that own the prisons. The
principal sources of employment in Jackson County as a whole are manufacturers,
trade, public administration and services.
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<PAGE>
BUSINESS STRATEGY
Historically, our principal business, like that of most other savings
institutions, has been that of accepting deposits from the general public and
investing those funds in one- to four-family mortgage loans. Our loans have
typically been secured by properties located within Jackson County.
During 1995, we decided to move our offices to our current location at
200 Olivia Drive. We believed that this location would give us more exposure to
our potential customer base because of the proximity of a number of recently-
built retail establishments and other businesses. Since we completed
construction and moved to the new location, our deposit base has grown from
$27.8 million at June 30, 1995 to $31.1 million at June 30, 1997. We also
decided to expand the types of loans we offered and have since significantly
increased our nonresidential loan portfolio.
While our new location has contributed to this growth and expansion,
the costs associated with its construction have caused us to experience
decreased earnings as compared to our peer institutions since we have a greater
percentage of our assets invested in non-earning fixed assets than do our peers.
This also limited our ability to grow in the future since our growth would have
to be financed to a large extent by deposits rather than capital. This factor
contributed to our decision to convert from mutual to stock form. We believe
that the proceeds we will receive from the offering will allow us to continue
our growth and diversification.
LENDING ACTIVITIES
Most of our loans are mortgage loans which are secured by one- to
four-family residences. We also make consumer, residential construction and
commercial real estate and commercial business loans. Following the conversion,
we believe there will be sufficient demand in our market area to continue our
policy of emphasizing lending in the one- to four- family real estate loan area.
In addition, we hope to continue our growth in our non-residential mortgage, and
consumer and commercial loan portfolios; however, there is no assurance that we
will be able to do so.
At June 30, 1997, our gross loans totaled $24.9 million of which $17.5
million were mortgage loans secured by one-to four-family residences. We
originate both fixed rate mortgage and ARM loans. Generally, all of the consumer
loans we originate have fixed rates.
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<PAGE>
The following table sets forth information concerning the types of
loans held by us at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
----------------------------------
1997 1996
---------------- ----------------
AMOUNT % AMOUNT %
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family........... $17,479 70.06% $17,486 79.25%
Multi-family.................. 136 .55 145 .66
Non-residential............... 3,613 14.48 2,628 11.91
------- ------ ------- ------
Total real estate loans.... 21,228 85.09 20,259 91.82
Consumer loans:
Loans secured by deposits..... 443 1.78 256 1.16
Home improvement.............. 666 2.67 763 3.46
Automobile.................... 2,010 8.05 649 2.94
Other consumer................ 510 2.04 138 .62
Commercial...................... 93 .37 -- --
------- ------ ------- ------
Total loans.............. 24,950 100.00% 22,065 100.00%
------- ====== ------- ======
Less:
Deferred fees and discounts... 6 10
Allowance for losses.......... 150 73
------- -------
Loan portfolio, net...... $24,794 $21,982
======= =======
</TABLE>
40
<PAGE>
The following table sets forth the estimated maturity of our loan
portfolio at June 30, 1997. The table does not include the effects of possible
prepayments or scheduled repayments. All mortgage loans are shown as maturing
based on the date of the last payment required by the loan agreement.
<TABLE>
<CAPTION>
DUE DURING THE YEAR ENDING DUE AFTER DUE AFTER DUE AFTER
JUNE 30, 3 THROUGH 5 THROUGH 10 THROUGH DUE AFTER 15
-------------------------- 5 YEARS AFTER 10 YEARS AFTER 15 YEARS AFTER YEARS AFTER
1998 1999 2000 JUNE 30, 1997 JUNE 30, 1997 JUNE 30, 1997 JUNE 30, 1997 TOTAL
------ ------ ------ ------------- -------------- -------------- ------------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family.. $ 816 $ 91 $ 923 $2,390 $3,192 $4,432 $5,635 $17,479
Multi-family......... -- -- -- -- -- 136 -- 136
Non-residential...... 838 24 836 764 275 798 78 3,613
Consumer loans:
Loans secured by
deposits........... 414 6 -- 23 -- -- -- 443
Home improvement..... 5 11 24 84 396 138 8 666
Automobile........... 103 57 195 1,618 37 -- -- 2,010
Other consumer....... 188 100 39 148 35 -- -- 510
Commercial............. 93 -- -- -- -- -- -- 93
------ ---- ------ ------ ------ ------ ------ -------
Total............. $2,457 $289 $2,017 $5,027 $3,935 $5,504 $5,721 $24,950
====== ==== ====== ====== ====== ====== ====== =======
</TABLE>
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<PAGE>
The next table shows at June 30, 1997, the dollar amount of all our
loans due one year or more after June 30, 1997 which have fixed interest rates
and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
FLOATING OR
FIXED RATE ADJUSTABLE RATES
----------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Real estate loans
One- to four-family....... $4,285 $12,378
Multi-family.............. -- 136
Non-residential........... 1,195 1,580
Consumer loans:
Loans secured by deposits.. 29 --
Home improvement........... 661 --
Automobile................. 1,907 --
Other consumer............. 322 --
Commercial.................. -- --
------ -------
Total.................... $8,399 $14,094
====== =======
</TABLE>
ONE- TO FOUR-FAMILY RESIDENTIAL LOANS. Our primary lending activity
consists of the origination of one- to four-family residential mortgage loans
secured by property located in our primary market area. We generally originate
one- to four-family residential mortgage loans in amounts up to 80% of the
lesser of the appraised value or purchase price, with private mortgage insurance
or additional collateral required on loans with a loan to-value ratio in excess
of 80%. The maximum loan-to-value ratio on mortgage loans secured by nonowner
occupied properties generally is limited to 80%. We primarily originate and
retain fixed-rate balloon loans having terms of up to five years, with principal
and interest payments calculated using up to a 25-year amortization period.
We also offer ARM loans. The interest rate on ARM loans is based on an
index plus a stated margin. ARM loans provide for periodic interest rate
adjustments upward or downward of up to 2% per year. The interest rate may not
increase above a "ceiling rate" established at the time the loan is originated
and may not decrease below the original interest rate. ARM loans typically
reprice every one, three or five years and provide for terms of up to 30 years
with most loans having terms of between 15 and 30 years.
ARM loans decrease the risk associated with changes in interest rates
by periodically repricing, but involve other risks because as interest rates
increase, the underlying payments by the borrower increase, thus increasing the
potential for default by the borrower. At the same time, the marketability of
the underlying collateral may be adversely affected by higher interest rates.
Upward adjustment of the contractual interest rate is also limited by the
maximum periodic and lifetime interest rate adjustment permitted by the loan
documents, and, therefore is potentially limited in effectiveness during periods
of rapidly rising interest rates. At June 30, 1997, approximately 71% of the
one- to four-family residential loans we hold had adjustable rates of interest.
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<PAGE>
Mortgage loans originated and held by us generally include due-on-sale
clauses. This gives us the right to deem the loan immediately due and payable in
the event the borrower transfers ownership of the property securing the mortgage
loan without our consent.
RESIDENTIAL CONSTRUCTION LOANS. We make a limited number of
residential construction loans on one- to four-family residential property to
the individuals who will be the owners and occupants upon completion of
construction. Borrowers are required to pay interest during the construction
period. Loan proceeds are disbursed according to a draw schedule and we inspect
the progress of the construction before additional funds are disbursed. We
charge a fixed rate of interest on our construction loans. While we occasionally
agree to convert the balance of construction loans to a permanent mortgage upon
completion of the construction phase, we will not commit to do so at the same
time as the construction loan is granted. Any permanent mortgage would be
granted on the same terms as other one-to four-family mortgage loans we
originate.
Construction lending is generally considered to involve a higher
degree of credit risk than long term financing of residential properties. Our
risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction and
the estimated cost of construction. If the estimate of construction cost and the
marketability of the property upon completion of the project prove to be
inaccurate, we may be compelled to advance additional funds to complete the
construction. Furthermore, if the final value of the completed property is less
than the estimated amount, the value of the property might not be sufficient to
assure the repayment of the loan.
COMMERCIAL AND MULTI-FAMILY LOANS. Our commercial real estate loans
are secured by churches, office buildings, and other commercial properties.
Multi-family loans are secured by apartment and condominium buildings. At June
30, 1997, our three largest commercial real estate loans consisted of a loan to
a hotel which had a balance of $625,000 at June 30, 1997, a loan to a nursing
home which had a balance of $491,000 at June 30, 1997 and a loan to a funeral
home which had a balance of $282,000. At June 30, 1997, all three of these loans
were performing in accordance with their terms. Subsequent to fiscal year end,
the hotel loan has become delinquent. See "--Nonperforming Assets."
Commercial and multifamily real estate lending entails significant
additional risks compared to residential property lending. These loans typically
involve large loan balances to single borrowers or groups of related borrowers.
The repayment of these loans typically is dependent on the successful operation
of the real estate project securing the loan. These risks can be significantly
affected by supply and demand conditions in the market for office and retail
space and may also be subject to adverse conditions in the economy. To minimize
these risks, we generally limit this type of lending to our market area and to
borrowers who are otherwise well known to us.
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<PAGE>
COMMERCIAL BUSINESS LOANS. We offer commercial business loans to
benefit from the higher fees and interest rates and the shorter term to
maturity. Our commercial business loans consist of equipment, lines of credit
and other business purpose loans, which generally are secured by either the
underlying properties or by the personal guarantees of the borrower.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself and the general economic environment.
CONSUMER LOANS. We offer consumer loans in order to provide a wider
range of financial services to our customers. Consumer loans totaled $3.6
million, or 14.55% of our total loans at June 30, 1997. Our consumer loans
consist of automobile, home improvement, share account and personal loans. Our
home improvement loans are primarily originated under a program whereby the U.S.
Government guarantees 90% of the principal balance of such loans. We have just
begun to offer personal lines of credit. We offer both unsecured lines of credit
that are granted based upon the borrower's financial strength and home equity
lines of credit.
Consumer loans may entail greater risk than residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that depreciate rapidly. Repossessed collateral for a defaulted
consumer loan may not be sufficient for repayment of the outstanding loan, and
the remaining deficiency may not be collectible.
LOAN APPROVAL AUTHORITY AND UNDERWRITING. Our President may approve
all one-to four-family mortgage loans that conform to all of our policy
requirements up to $50,000 and may approve all consumer loans. The Executive
Committee of our board which consists of three directors may approve loans with
principal balances of up to $100,000. All other loans require the approval of
our board of directors.
Upon receipt of a completed loan application from a prospective
borrower, a credit report is ordered. Income and certain other information is
verified. If necessary, additional financial information may be requested. An
appraisal or other estimate of value of the real estate intended to be used as
security for the proposed loan is obtained. Appraisals are prepared by outside
fee appraisers who are approved by the board of directors.
Either title insurance or a title opinion is generally required on all
real estate loans. Borrowers also must obtain fire and casualty insurance. Flood
insurance is also required on loans secured by property which is located in a
flood zone.
44
<PAGE>
LOAN ORIGINATIONS, PURCHASES AND SALES. The following table sets
forth certain information with respect to our loan originations and purchases
for the periods indicated. We did not sell any loans during the periods.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------
1997 1996
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Net loans, beginning of period..................................... $21,982 $20,152
Origination by type:
- -------------------
Real estate loans:
One- to four-family............................................. $ 4,515 $ 3,714
Multi-family.................................................... 55 43
Non-residential................................................. 936 561
------- -------
5,506 4,318
Consumer loans:
Loan secured by deposits........................................ 577 398
Home improvement................................................ 115 148
Automobile...................................................... 1,840 689
Other consumer.................................................. 699 221
Commercial......................................................... 93 --
------- -------
Total loans originated........................................ 8,830 5,774
------- -------
Purchases.......................................................... 500 1,005
------- -------
Total loans originated and purchased.......................... 9,330 6,779
------- -------
Repayments......................................................... 6,445 4,943
------- -------
Decrease (increase) in other items, net............................ (73) (6)
------- -------
Net increase (decrease) in loans receivable, net.............. 2,812 1,830
------- -------
Net loans, end of period........................................... $24,794 $21,982
======= =======
</TABLE>
Most of the loans we originate are intended to be held in our
portfolio rather than sold in the secondary mortgage market. We occasionally
purchase loan participations from other financial institutions. These
participation interest purchases are reflected in the above table. Generally,
the purchase of participation interests involves the same risks as would the
origination of the same types of loans as well as the additional risk that
results from the fact that we have less control over the origination and
subsequent administration of such loans. At June 30, 1997, all of our
participation loans were performing in accordance with their terms.
LOAN COMMITMENTS. Written commitments are given to prospective
borrowers on all approved real estate loans. Generally, the commitment requires
acceptance within 30 days of the date of issuance. At June 30, 1997, commitments
to cover originations of mortgage loans were $253,000. We believe that virtually
all of our commitments will be funded.
45
<PAGE>
LOANS TO ONE BORROWER. The maximum amount of loans which we may make
to any one borrower may not exceed the greater of $500,000 or 15% of our
unimpaired capital and unimpaired surplus. We may lend an additional 10% of our
unimpaired capital and unimpaired surplus if the loan is fully secured by
readily marketable collateral. Our maximum loan-to-one borrower limit was
approximately $500,000 at June 30, 1997. At June 30, 1997, our largest loan
outstanding had a balance of $625,000. This loan was originated prior to 1989
when we first became subject to the limitation on loans to one borrower
described above. Subsequent to June 30, 1997, payments on this loan have become
delinquent. See "-- Nonperforming Assets." As of its origination, this loan was
within lending limits then in effect.
NONPERFORMING AND PROBLEM ASSETS
LOAN DELINQUENCIES. Generally when a mortgage loan becomes 15 days
past due, a notice of nonpayment is sent to the borrower. If, after 20-30 days,
payment is still delinquent, the borrower will receive a letter and/or telephone
call from us and may receive a visit from one of our representatives. If the
loan continues in a delinquent status for 90 days past due and no repayment plan
is in effect, a notice of right to cure default is sent to the borrower giving
30 additional days to bring the loan current before foreclosure is commenced.
Our loan committee meets regularly to determine when foreclosure proceedings
should be initiated. The customer will be notified when foreclosure is
commenced. At June 30, 1997, our loans past due between 30 and 89 days totaled
$156,000.
Loans are reviewed on a monthly basis and are generally placed on a
non-accrual status when the loan becomes more than 90 days' delinquent or when,
in our opinion, the collection of additional interest is doubtful. Interest
accrued and unpaid at the time a loan is placed on nonaccrual status is charged
against interest income. Subsequent interest payments, if any, are either
applied to the outstanding principal balance or recorded as interest income,
depending on the assessment of the ultimate collectibility of the loan.
46
<PAGE>
NONPERFORMING ASSETS. The following table sets forth information
regarding nonaccrual loans and real estate owned. As of the dates indicated, we
had no loans categorized as troubled debt restructurings within the meaning of
SFAS 15 and no loans which were 90 days or more past due and still accruing
interest.
<TABLE>
<CAPTION>
AT JUNE 30,
-----------------
1997 1996
--------- ------
<S> <C> <C>
(IN THOUSANDS)
Loans accounted for on a non-accrual basis:
Real estate:
One- to four-family...................... $ 67 $ 30
Multi-family............................. -- --
Non-residential.......................... -- --
----- -----
Total real estate loans................. 67 30
Consumer loans:
Loans secured by deposits................. 7 --
Home improvement.......................... -- --
Automobile................................ -- --
Other consumer............................ -- --
Commercial................................... -- --
----- -----
Total nonperforming loans............ 74 30
----- -----
Foreclosed real estate....................... -- 124
----- -----
Total nonperforming assets................... 74 154
===== =====
Total nonperforming loans as a
percentage of total net loans.............. .30% .14%
===== =====
Total nonperforming assets as a
percentage of total assets................. .21% .47%
===== =====
</TABLE>
During the year ended June 30, 1997, we would have recorded additional
interest income of approximately $3,000 on nonaccrual loans if such loans had
been current throughout the period. We did not include any income on nonaccrual
loans during the year. In addition, we had $721,000 (which includes the $625,000
commercial real estate loan described below) in loans which were not classified
as nonaccrual, 90 days past due or restructured, but where known information
causes us to have serious concerns as to the ability of these borrowers to
comply with their current loan terms.
Subsequent to June 30, 1997, our largest loan went into delinquent
status. This loan is a participation interest in a $5.8 million loan which is
secured by a 625-room hotel located in Oklahoma City. Our participation interest
had a balance of $625,000 at June 30, 1997. The lead lender has demanded payment
on the loan. There can be no assurance that this delinquency will be cured or,
if the lead lender proceeds to foreclosure, that the underlying property can be
sold at a price sufficient to repay us in full. Based on the information
available to us as of the date hereof, with respect to such loan, we believe
that our allowance for loan losses is adequate. We cannot assure you, however,
that such reserves are, or in the future will be, adequate to absorb all loan
losses or that regulators, in reviewing our assets, will not make us increase
our allowance for loan losses, thereby negatively affecting our reported
financial condition and results of operations.
47
<PAGE>
CLASSIFIED ASSETS. OTS regulations provide for a classification system
for problem assets of savings associations which covers all problem assets.
Under this classification system, problem assets of savings associations such as
ours are classified as "substandard," "doubtful," or "loss." An asset is
considered substandard if it is inadequately protected by the current net worth
and paying capacity of the borrower or of the collateral pledged, if any.
Substandard assets include those characterized by the "distinct possibility"
that the savings association will sustain "some loss" if the deficiencies are
not corrected. Assets classified as doubtful have all of the weaknesses inherent
in those classified substandard, with the added characteristic that the
weaknesses present make "collection or liquidation in full, on the basis of
currently existing facts, conditions, and, values, "highly questionable and
improbable." Assets classified as loss are those considered "uncollectible" and
of such little value that their continuance as assets without the establishment
of a specific loss reserve is not warranted. Assets may be designated "special
mention" because of potential weakness that do not currently warrant
classification in one of the aforementioned categories.
When a savings association classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings association classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. A savings association's determination as to the classification
of its assets and the amount of its valuation allowances is subject to review by
the OTS, which may order the establishment of additional general or specific
loss allowances. A portion of general loss allowances established to cover
possible losses related to assets classified as substandard or doubtful may be
included in determining a savings association's regulatory capital. Specific
valuation allowances for loan losses generally do not qualify as regulatory
capital.
At June 30, 1997, none of our assets were classified as special
mention or doubtful but we had loans classified as substandard and loss in
amounts equal to $91,000 and $5,000, respectively. At June 30, 1997, a $5,000
specific reserve had been established for the amounts classified as loss.
FORECLOSED REAL ESTATE. Real estate acquired by us as a result of
foreclosure is recorded as "real estate owned" until such time as it is sold.
When real estate owned is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan or its fair value less estimated disposal
costs. Any write down of real estate owned is charged to operations. At June 30,
1997, we did not have any real estate owned.
ALLOWANCE FOR LOAN LOSSES. Our policy is to provide for losses on
unidentified loans in our loan portfolio. A provision for loan losses is charged
to operations based on management's evaluation of the potential losses that may
be incurred in our loan portfolio. The evaluation, including a review of all
loans on which full collectibility of interest and principal may not be
48
<PAGE>
reasonably assured, considers: (i) our past loan loss experience, (ii) known and
inherent risks in our portfolio, (iii) adverse situations that may affect the
borrower's ability to repay, (iv) the estimated value of any underlying
collateral, and (v) current economic conditions.
We monitor our allowance for loan losses and make additions to the
allowance as economic conditions dictate. Although we maintain our allowance for
loan losses at a level that we consider adequate for the inherent risk of loss
in our loan portfolio, actual losses could exceed the balance of the allowance
for loan losses and additional provisions for loan losses could be required. In
addition, our determination as to the amount of its allowance for loan losses is
subject to review by the OTS, as part of its examination process. After a review
of the information available, the OTS might require the establishment of an
additional allowance.
The following table sets forth an analysis of our allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Balance at beginning of period.................... $ 73 $ 63
------- -------
Charge-offs:
One- to four-family............................. (13) --
Multi-family.................................... -- --
Non-residential................................. -- --
------- -------
Total real estate loans...................... (13) --
Net recoveries (charge-offs)...................... (13) --
------- -------
Additions charged to operations................... 90 10
------- -------
Balance at end of period.......................... 150 73
------- -------
Allowance for loan losses to total
Nonperforming loans at end of period............ 202.70% 243.33%
======= =======
Allowance for loan losses to net loans
at end of period................................ .60% .33%
======= =======
Ratio of net charge-offs to average
loans outstanding during the period... .05% --%
======= =======
</TABLE>
49
<PAGE>
The following table illustrates the allocation of the allowance for
loan losses for each category of loan. The allocation of the allowance to each
category is not necessarily indicative of future loss in any particular category
and does not restrict our use of the allowance to absorb losses in other loan
categories.
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------------
1997 1996
------------------------- --------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
----------- ------------ ------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family..................... $ 105 70.06% $58 79.25%
Multi-family............................ 1 .55 -- .66
Non-residential......................... 22 14.48 9 11.91
----- ------ --- ------
Total real estate loans.............. 128 85.09 67 91.82
Consumer loans:
Loans secured by deposits.............. 3 1.78 1 1.16
Home improvement....................... 4 2.67 3 3.46
Automobile............................. 12 8.05 2 2.94
Other consumer......................... 3 2.04 -- .62
Commercial................................ -- .37 -- --
----- ------ --- ------
Total allowance for loan losses....... $ 150 100.00% $73 100.00%
===== ====== === ======
</TABLE>
INVESTMENT ACTIVITIES
INVESTMENT SECURITIES. We are required under federal regulations to
maintain a minimum amount of liquid assets which may be invested in specified
short-term securities and certain other investments. See "Regulation --
Regulation of the Bank -- Federal Home Loan Bank System" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." The level of liquid assets varies depending
upon several factors, including: (i) the yields on investment alternatives, (ii)
our judgment as to the attractiveness of the yields then available in relation
to other opportunities, (iii) expectation of future yield levels, and (iv) our
projections as to the short-term demand for funds to be used in loan origination
and other activities. We classify all our investment securities as "held to
maturity" in accordance with SFAS No. 115. At June 30, 1997, our investment
portfolio policy allowed investments in instruments such as: (i) U.S. Treasury
obligations, (ii) U.S. federal agency or federally sponsored agency obligations,
(iii) local municipal obligations, (iv) mortgage backed securities, (v) bankers'
acceptances, (vi) certificates of deposit, (vii) federal funds, including FHLB
overnight and term deposits (up to six months), and (viii) investment grade
corporate bonds, commercial paper and mortgage derivative products. See "--
Mortgage-backed Securities." The board of directors may authorize additional
investments.
Our investment securities at June 30, 1997 did not contain securities
of any issuer with an aggregate book value in excess of 10% of our equity,
excluding those issued by the United States Government or its agencies.
50
<PAGE>
MORTGAGE BACKED SECURITIES. To supplement lending activities, we have
invested in residential mortgage-backed securities. Mortgage backed securities
can serve as collateral for borrowings and, through repayments, as a source of
liquidity. Mortgage backed securities represent a participation interest in a
pool of single-family or other type of mortgages. Principal and interest
payments are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interests in the form of securities, to investors such as us. Our
mortgage backed securities portfolio consists of participations or pass-through
certificates issued by the Federal Home Loan Mortgage Corporation (the "FHLMC"),
the Federal National Mortgage Association ("FNMA") and the Government National
Mortgage Association ("GNMA"). GNMA certificates are guaranteed as to principal
and interest by the full faith and credit of the United States, while FHLMC and
FNMA certificates are guaranteed by those agencies only. Our mortgage backed
securities portfolio was classified as "held to maturity" at June 30, 1997.
Expected maturities will differ from contractual maturities due to
scheduled repayments and because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
Mortgage backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or adjustable
mortgage loans. Mortgage backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed-rate
or adjustable-rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the
life of the underlying mortgages.
The following table sets forth the carrying (i.e., amortized cost)
value of our investment securities and mortgage backed securities, at the dates
indicated. At June 30, 1997, the market value of our investment securities,
held to maturity, was $6.0 million.
The following table sets forth the carrying value of our investment
securities and mortgage-backed portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
--------------
1997 1996
------ ------
<S> <C> <C>
(IN THOUSANDS)
INVESTMENTS HELD TO MATURITY:
U.S. Government agencies.............. $ 500 $1,000
Mortgage-backed securities............ 5,077 4,963
Federal Home Loan Bank stock.......... 283 267
Municipal securities.................. 63 80
------ ------
Total............................. $5,923 $6,310
====== ======
</TABLE>
51
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for our investment portfolio at June 30, 1997.
<TABLE>
<CAPTION>
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS MORE THAN TEN YEARS TOTAL INVESTMENT PORTFOLIO
----------------- ----------------- ----------------- ------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
BOOK AVERAGE BOOK AVERAGE BOOK AVERAGE BOOK AVERAGE BOOK AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- ------- -------- -------- -------- --------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Securities held to
maturity:
U.S. government and
agencies................. $ -- -- $500 6.46% $ -- --% $ -- --% $ 500 6.46%
Mortgage-backed
securities (1).......... -- -- 53 12.15 5,024 6.83 -- -- 5,077 6.75
FHLB stock................ 283 5.84 -- -- -- -- -- -- 283 5.84
Municipal securities...... -- -- 9 9.46 13 9.46 41 9.46 63 9.46
-------- ------- -------- --------- --------
$ 283 $ 562 $ 5,037 $ 41 $ 5,923
======== ======= ======== ========= ========
</TABLE>
______________
(1) For purposes of the maturity table, mortgage backed securities, which are
not due at a single maturity date, have been allocated to maturity groups
based on the weighted average estimated life of the underlying collateral.
52
<PAGE>
SOURCES OF FUNDS
Deposits are our major external source of funds for lending and other
investment purposes. Funds are also derived from the receipt of payments on
loans and prepayment of loans and, to a much lesser extent, maturities of
investment securities and mortgage-backed securities, borrowings and operations.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are significantly
influenced by general interest rates and market conditions.
DEPOSITS. Consumer and commercial deposits are attracted principally
from within our primary market area through the offering of a selection of
deposit instruments including regular savings accounts, money market accounts,
and term certificate accounts. IRA accounts are also offered. Deposit account
terms vary according to the minimum balance required, the time period the funds
must remain on deposit, and the interest rate. The interest rates paid by us on
deposits are set weekly at the direction of our senior management. Interest
rates are determined based on our liquidity requirements, interest rates paid by
our competitors, and our growth goals and applicable regulatory restrictions and
requirements.
Certificates of deposit in amounts of $100,000 or more constituted
$3.4 million or 10.82% of the deposit portfolio. The majority of these
certificates represent deposits from long-standing customers. As of June 30,
1997, we had no brokered deposits.
At June 30, 1997, our deposits were represented by the various types
of savings programs described below.
<TABLE>
<CAPTION>
INTEREST MINIMUM MINIMUM BALANCES IN PERCENTAGE OF
RATE(1) TERM CATEGORY AMOUNT THOUSANDS TOTAL SAVINGS
- -------- ------- -------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C>
2.95% None Passbook accounts $ 500 $1,893 6.09%
-- None NOW accounts 500 1,670 5.37
-- None Super NOW accounts -- -- --
2.41 None Money market accounts 2,500 325 1.05
-- None Other non-interest bearing 100 983 3.16
CERTIFICATES OF DEPOSIT
-----------------------
4.00 31 days Fixed-Term, Fixed-Rate 500 49 .16
4.43 91 days Fixed-Term, Fixed-Rate 500 34 .11
5.47 6 months Fixed-Term, Fixed-Rate 500 5,204 16.75
5.67 12 months Fixed-Term, Fixed-Rate 500 6,106 19.65
5.60 15 months Fixed-Term, Fixed-Rate 500 3,013 9.69
5.77 18 months Fixed-Term, Fixed-Rate 500 1,282 4.13
5.82 24 months Fixed-Term, Fixed-Rate 500 979 3.15
5.93 36 months Fixed-Term, Fixed-Rate 500 942 3.03
6.08 60 months Fixed-Term, Fixed-Rate 500 8,593 27.66
------- ------
Total certificates of deposit 26,202 84.33
------- ------
Total savings deposits $31,073 100.00%
======= ======
- -----------------
</TABLE>
(1) Indicates weighted average interest rate at June 30, 1997.
53
<PAGE>
The following table sets forth our time deposits classified by interest
rate at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
----------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
2 - 3.99%................................................... $ -- $ 49
4 - 5.99%................................................... 26,202 16,666
6 - 7.99%................................................... -- 9,259
------- -------
$26,202 $25,974
======= =======
</TABLE>
The following table sets forth the amount and maturities of our time
deposits at June 30, 1997.
<TABLE>
<CAPTION>
AMOUNT DUE
--------------------------------------------------------
LESS THAN ONE TO TWO TO AFTER
RATE ONE YEAR TWO YEARS THREE YEARS THREE YEARS TOTAL
- ---- --------- --------- ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
2 - 3.99%......... $ -- $ -- $ -- $ -- $ --
4 - 5.99%......... 10,787 9,962 1,135 4,318 26,202
--------- --------- ----------- ----------- ---------
$ 10,787 $ 9,962 $ 1,135 $ 4,318 $ 26,202
========= ========= =========== =========== ===========
</TABLE>
The following table sets forth our savings activity for the periods
indicated:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
JUNE 30, % OF INCREASE JUNE 30, % OF
1997 DEPOSITS (DECREASE) 1996 DEPOSITS
----------- --------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NOW accounts.................. $ 1,670 5.37% $ 222 $ 1,448 4.88%
Money market deposit.......... 325 1.05 (200) 525 1.77
Savings deposits -- passbook.. 1,893 6.09 532 1,361 4.59
Certificates of deposit....... 22,841 73.51 121 22,720 76.61
Jumbo certificates............ 3,361 10.82 107 3,254 10.97
Other......................... 983 3.16 634 349 1.18
------- ------ ------- ------- ------
$31,073 100.00% $ 1,416 $29,657 100.00%
======= ====== ======= ======= ======
</TABLE>
54
<PAGE>
The following table indicates the amount of our certificates of deposit
of $100,000 or more by time remaining until maturity as of June 30, 1997.
<TABLE>
<CAPTION>
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
--------------- ------------
(IN THOUSANDS)
<S> <C>
Three months or less........... $ 575
Over three through six months.. 351
Over six through 12 months..... 1,058
Over 12 months................. 1,377
------
Total......................... $3,361
======
</TABLE>
BORROWINGS. Advances (borrowing) may be obtained from the FHLB of Dallas
to supplement our supply of lendable funds. Advances from the FHLB of Dallas are
typically secured by a pledge of our stock in the FHLB of Dallas, a portion of
our first mortgage loans and other assets. Each FHLB credit program has its own
interest rate, which may be fixed or adjustable, and range of maturities. At
June 30, 1997, borrowings from the FHLB of Dallas totaled $618,000 and consisted
of a short term advance of $500,000 which matured in July 1997 and a long term
obligation of $118,000 which is due in August 2003.
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED JUNE 30,
-------------------
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Amounts outstanding at end of period:
FHLB advances............................. $ 618 $ 134
Weighted average rate paid on:
FHLB advances............................. 5.58% 5.70%
Maximum amount of borrowings outstanding
at any month end:
FHLB advances............................. 2,175 147
Approximate average short-term borrowings
outstanding with respect to:
FHLB advances............................. 889 --
Approximate weighted average rate paid on:
FHLB advances............................. 5.49% 5.70%
</TABLE>
55
<PAGE>
COMPETITION
We compete for deposits with other insured financial institutions such
as commercial banks, thrift institutions, credit unions, finance companies, and
multi-state regional banks in our market area. We also compete for funds with
insurance products sold by local agents and investment products such as mutual
funds and other securities sold by local and regional brokers. Loan competition
varies depending upon market conditions. Our competition comes from commercial
banks, thrift institutions, credit unions and mortgage bankers, many of whom
have greater resources than we have.
PROPERTIES
The following table sets forth certain information regarding our main
office which is our only branch location.
<TABLE>
<CAPTION>
BOOK VALUE AT DEPOSITS AT
YEAR OWNED OR JUNE 30, APPROXIMATE JUNE 30,
OPENED LEASED 1997 (1) SQUARE FOOTAGE 1997
------------- -------- ------------ -------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MAIN OFFICE: 1995 Owned $ 1,257 6,000 $31,073
</TABLE>
____________
(1) Cost less accumulated depreciation and amortization.
We also own the property which used to serve as our main office. Such
location is currently rented. The book value of such property at June 30, 1997
was $230,000.
PERSONNEL
At June 30, 1997, we had 10 full-time and three part-time employees.
None of our employees are represented by a collective bargaining group. We
believe that our relationship with our employees is good.
LEGAL PROCEEDINGS
We are, from time to time, a party to legal proceedings arising in the
ordinary course of our business, including legal proceedings to enforce our
rights against borrowers. We are not currently a party to any legal proceedings
which are expected to have a material adverse effect on our financial
statements.
56
<PAGE>
REGULATION
Set forth below is a brief description of certain laws which relate to
us. The description is not complete and is qualified in its entirety by
references to applicable laws and regulations.
GENERAL
As a federally chartered, SAIF-insured savings institution, we are
subject to extensive regulation by the OTS and the FDIC. Our lending activities
and other investments must comply with various federal and state statutory and
regulatory requirements, and the OTS periodically examines us for compliance
with various regulatory requirements. The FDIC also has authority to conduct
periodic examinations of us. We must file reports with the OTS describing our
activities and our financial condition and we must obtain approvals from
regulatory authorities before entering into certain transactions such as the
conversion or mergers with other financial institutions. We are also subject to
certain reserve requirements promulgated by the Board of Governors of the
Federal Reserve System ("Federal Reserve System"). Our relationship with our
depositors and borrowers is also regulated to a great extent by federal and
state law, especially in such matters as the ownership of savings accounts and
the form and content of our mortgage documents. This supervision and regulation
are primarily intended to protect depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in regulations,
whether by the OTS, the FDIC or any other government agency, could have a
material adverse impact on our operations.
REGULATION OF THE BANK
INSURANCE OF DEPOSIT ACCOUNTS. The FDIC maintains two separate funds for
the insurance of deposits up to prescribed statutory limits. The Bank Insurance
Fund ("BIF") insures the deposits of commercial banks and the SAIF insures the
deposits of savings associations. We are a member of the SAIF, although the
deposits we will acquire through our purchase of the Newport branch of
NationsBank, N.A., assuming we obtain the requisite regulatory approval, will
continue to be insured by the BIF. The FDIC is authorized to establish separate
annual assessment rates for deposit insurance for members of the BIF and the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to its target level
within a reasonable time and may decrease such assessment rates if such target
level has been met. The FDIC has established a risk-based assessment system for
both SAIF and BIF members. Under this system, assessments are set within a
range, based on the risk the institution poses to its deposit insurance fund.
This risk level is determined based on the institution's capital level and the
FDIC's level of supervisory concern about the institution.
Because a significant portion of the assessments paid into the SAIF by
savings institutions were used to pay the cost of prior savings institution
failures, the reserves of the SAIF were below
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the level required by law. The BIF, however, met its required reserve level
during the third calendar quarter of 1995. As a result, deposit insurance
premiums for deposits insured by the BIF were substantially less than premiums
for deposits such as ours which are insured by the SAIF. On September 30, 1996,
President Clinton signed into law legislation which included provisions designed
to recapitalize the SAIF and to eliminate the significant premium disparity
between the BIF and the SAIF. Under this law, institutions with deposits insured
by the SAIF were required to pay a special assessment equal to $0.657 per $100
of SAIF-assessable deposits held at March 31, 1995. We recognized this special
assessment of $179,000 during the quarter ended September 30, 1996 and were
required to pay the assessment on November 27, 1996.
Beginning January 1, 1997, our annual deposit insurance premium was
reduced from 0.23% to 0.0644% of total assessable deposits. BIF institutions
still pay lower assessments than comparable SAIF institutions because BIF
institutions pay only 20% of the rate being paid by SAIF institutions on their
deposits with respect to obligations issued by the Financing Corp., a federally
chartered corporation which provided some of the financing required to resolve
the thrift crisis in the 1980s. Assuming we complete the acquisition of the
Newport branch of NationsBank, our overall deposit insurance expense will be
somewhat less than the minimum SAIF rate since the approximately $6 million in
deposits we expect to acquire will continue to be insured by the BIF.
The recapitalization plan also provides for the merger of the SAIF and
BIF effective January 1, 1999, assuming there are no savings institutions under
federal law. Under separate proposed legislation, Congress is considering the
elimination of the federal thrift charter and the separate federal regulation of
thrifts. As a result, we might have to convert to a different financial
institution charter and be regulated under federal law as a national bank or
under Arkansas law as a state chartered commercial bank, including being subject
to the more restrictive activity limitations imposed on national banks. We
cannot predict the impact of our conversion to, or regulation as, a bank until
the legislation requiring such change is enacted.
REGULATORY CAPITAL REQUIREMENTS. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to at
least 1.5 % of total adjusted assets, (2) core capital equal to at least 3.0% of
total adjusted assets, and (3) risk-based capital equal to at least 8.0% of
total risk-weighted assets. In addition, the OTS may require that a savings
institution that has a risk-based capital ratio less than 8.0%, a ratio of Tier
1 capital to risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital
to adjusted total assets of less than 4.0% (3.0% if the institution has received
the highest rating on its most recent examination) take certain actions to
increase its capital ratios. If the institution's capital is significantly below
the minimum required levels or if it is unsuccessful in increasing its capital
ratios, the OTS may significantly restrict its activities.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as common stockholders' equity
(including retained earnings), non-cumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries, certain
non-withdrawable accounts and pledged deposits of mutual savings associations
and qualifying
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supervisory goodwill, less non-qualifying intangible assets, certain mortgage
servicing rights and certain investments. Tier 1 has the same definition as core
capital.
Risk-based capital equals the sum of core capital plus supplementary
capital. The components of supplementary capital include, among other items,
cumulative perpetual preferred stock, perpetual subordinated debt, mandatory
convertible subordinated debt, intermediate-term preferred stock, and the
portion of the allowance for loan losses not designated for specific loan
losses. Overall, supplementary capital is limited to 100% of core capital. A
savings institution must calculate its risk-weighted assets by multiplying each
asset and off-balance sheet item by various risk factors as determined by the
OTS, which range from 0% for cash to 100% for delinquent loans, property
acquired through foreclosure, commercial loans, and other assets. At June 30,
1997, we were in compliance with all regulatory capital requirements as is shown
on the table below.
<TABLE>
<CAPTION>
PERCENT
AMOUNT OF ASSETS
------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Tangible capital....................... $2,266 6.59%
Tangible capital requirement........... 516 1.50
------ -----
Excess (deficit)..................... $1,750 5.09%
====== =====
Core capital........................... $2,266 6.59%
Core capital requirement............... 1,031 3.00
------ -----
Excess (deficit)..................... $1,235 3.59%
====== =====
Risk-based capital..................... $2,411 13.18%
Risk-based capital requirement......... 1,463 8.00
------ -----
Excess (deficit)..................... $ 948 5.18%
====== =====
</TABLE>
The risk-based capital standards of the OTS generally require savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. An institution's interest rate risk will be measured
in terms of the sensitivity of its "net portfolio value" to changes in interest
rates. Net portfolio value is defined, generally, as the present value of
expected cash inflows from existing assets and off-balance sheet contracts less
the present value of expected cash outflows from existing liabilities. A savings
institution will be considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. An institution with a greater than normal interest rate
risk will be required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets.
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The OTS calculates the sensitivity of an institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS. The amount of the interest rate risk component, if any, to
be deducted from an institution's total capital will be based on the
institution's Thrift Financial Report filed two quarters earlier. Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial Reports. However, the OTS may require any exempt
institution that it determines may have a high level of interest rate risk
exposure to file such schedule on a quarterly basis and may be subject to an
additional capital requirement based upon its level of interest rate risk as
compared to its peers. Due to our size and risk-based capital level, we are
exempt from the interest rate risk component.
DIVIDEND AND OTHER CAPITAL DISTRIBUTION LIMITATIONS. OTS regulations
require us to give the OTS 30 days advance notice of any proposed declaration of
dividends to the Company. The OTS may prohibit the payment of dividends by us to
the Company. In addition, we may not declare or pay a cash dividend on our
capital stock if the effect would be to reduce our regulatory capital below the
amount required for the liquidation account to be established at the time of the
conversion. See "The Conversion -- Effects of Conversion to Stock Form on
Depositors and Borrowers of Newport Federal Savings Bank -- Liquidation
Account."
OTS regulations limit upon all capital distributions by savings
institutions, such as cash dividends, payments to repurchase or otherwise
acquire its shares, payments to stockholders of another institution in a cash-
out merger, and other distributions charged against capital. The rule
establishes three tiers of institutions based primarily on an institution's
capital level. An institution that exceeds all of its fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100.0% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory notice. As of June
30, 1997, we qualified as a Tier 1 institution.
In the event our capital falls below our fully phased-in requirement or
the OTS notifies us that we are in need of more than normal supervision, we
would become a Tier 2 or Tier 3 institution and as a result, our ability to make
capital distributions could be restricted. Tier 2 institutions, which are
institutions that before and after the proposed distribution meet their current
minimum capital requirements, may only make capital distributions of up to 75%
of net income over the most recent four quarter period. Tier 3 institutions,
which are institutions that do not meet current minimum capital requirements and
propose to make a capital distribution, and Tier 2 institutions that propose to
make a capital distribution in excess of the noted safe harbor level, must
obtain OTS approval prior to making such distribution. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that
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such distribution would constitute an unsafe or unsound practice. The OTS has
proposed rules relaxing certain approval and notice requirements for well-
capitalized institutions.
A savings institution is prohibited from making a capital distribution
if, after making the distribution, the savings institution would be
undercapitalized (i.e., not meet any one of its minimum regulatory capital
requirements). Further, a savings institution cannot distribute regulatory
capital that is needed for its liquidation account.
QUALIFIED THRIFT LENDER TEST. Savings institutions must meet a Qualified
Thrift Lender test. We must maintain at least 65.0% of our portfolio assets
(total assets less intangible assets, property we use in conducting our business
and liquid assets in an amount not exceeding 20.0% of total assets) in Qualified
Thrift Investments to satisfy the test. Qualified Thrift Investments consist
primarily of residential mortgage loans and mortgage-backed and other securities
related to domestic, residential real estate or manufactured housing. The shares
of stock we own in the FHLB of Dallas also qualify as Qualified Thrift
Investments. Subject to an aggregate limit of 20.0% of portfolio assets, we may
also count the following as Qualified Thrift Investments: (i) 50.0% of the
dollar amount of residential mortgage loans originated for sale, (ii)
investments in the capital stock or obligations of any service corporation or
operating subsidiary as long as such subsidiary derives at least 80% of its
revenues from domestic housing related activities, (iii) 200% of the dollar
amount of loans and investments to purchase, construct or develop "starter
homes," subject to certain other restrictions, (iv) 200% of the dollar amount of
loans for the purchase, construction or development of domestic residential
housing or community centers in "credit needy" areas or loans for small
businesses located in such areas, (v) loans for the purchase, construction or
development of community centers, (vi) loans for personal, family, household or
educational purposes, subject to a maximum of 10% of portfolio assets, and (vii)
shares of FHLMC or FNMA stock.
If we satisfy the test, we will continue to enjoy full borrowing
privileges from the FHLB of Dallas. If we do not satisfy the test we may lose
our borrowing restrictions and be subject to activities and branching
restrictions applicable to national banks. Compliance with the Qualified Thrift
Lender test is determined on a monthly basis in nine out of every 12 months. As
of June 30, 1997, we were in compliance with our Qualified Thrift Lender
requirement with approximately 75.45% of our assets invested in Qualified Thrift
Investments.
TRANSACTIONS WITH AFFILIATES. Generally, transactions between a savings
institution and its affiliates are subject to certain limitations. Such
transactions must be on terms as favorable to the savings institution as
comparable transactions with non-affiliates. In addition, certain of these
transactions are restricted to an aggregate percentage of the savings
institution's capital. Collateral in specified amounts must usually be provided
by affiliates in order to receive loans from the savings institution. Our
affiliates include the Company and any company which would be under common
control with us. In addition, a savings institution may not extend credit to any
affiliate engaged in activities not permissible for a bank holding company or
acquire the securities of any affiliate that is not a subsidiary. The OTS has
the discretion to treat subsidiaries of savings institution as affiliates on a
case-by-case basis.
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LOANS TO DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS. Loans
from us to our directors, executive officers and, subsequent to the conversion,
our principal stockholders may not be made on terms more favorable than those
afforded to other borrowers. In addition, we cannot make loans in excess of
certain levels to directors, executive officers or 10% or greater stockholders
(or any of their affiliates) unless the loan is approved in advance by a
majority of our board of directors with any "interested" director not voting. We
are also prohibited from paying any overdraft of any of our executive officers
or directors. We are also subject to certain other restrictions on the amount
and type of loans to executive officers and directors and must annually report
such loans to our regulators.
LIQUIDITY REQUIREMENTS. All savings institutions are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At June 30, 1997, our required liquid asset
ratio was 5.0% and our actual ratio was 5.14%. Monetary penalties may be imposed
upon institution for violations of liquidity requirements.
FEDERAL HOME LOAN BANK SYSTEM. We are a member of the FHLB of Dallas,
which is one of 12 regional FHLBs. Each FHLB serves as a reserve or central bank
for its members within its assigned region. It is funded primarily from funds
deposited by savings institutions and proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB.
As a member, we are required to purchase and maintain stock in the FHLB
of Dallas in an amount equal to at least 1% of our aggregate unpaid residential
mortgage loans, home purchase contracts or similar obligations at the beginning
of each year, or 1/20 of our advances from the FHLB of Dallas, whichever is
greater. At June 30, 1997, we had $283,000 in FHLB stock, at cost, which was in
compliance with this requirement.
FEDERAL RESERVE SYSTEM. The Federal Reserve System requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve System may be used
to satisfy the liquidity requirements that are imposed by the OTS. At June 30,
1997, our reserve met the minimum level required by the Federal Reserve System.
HOLDING COMPANY REGULATION
GENERAL. The Company will be required to register and file reports with
the OTS and will be subject to regulation and examination by the OTS. In
addition, the OTS will have enforcement authority over the Company and any non-
savings institution subsidiaries. This will permit the OTS to restrict or
prohibit activities that it determines to be a serious risk to us. This
regulation is
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intended primarily for the protection of our depositors and not for the benefit
of you, as stockholders of the Company.
The Company will also be required to file certain reports with, and
comply with the rules and regulations of the SEC under the federal securities
laws.
ACTIVITIES RESTRICTIONS. Since the Company will only own one savings
institution, it will be able to diversify its operations into activities not
related to banking, but only so long as we satisfy the Qualified Thrift Lender
Test. If the Company controls more than one savings institution, it would lose
the ability to diversify its operations into non-banking related activities,
unless such other savings institutions each also qualify as a Qualified Thrift
Lender and were acquired in a supervised acquisition. See "-- Qualified Thrift
Lender Test."
RESTRICTIONS ON ACQUISITIONS. The Company must obtain approval from the
OTS before acquiring control of any other savings institution or savings and
loan holding company, substantially all the assets thereof or in excess of 5% of
the outstanding shares of another savings institution or savings and loan
holding company. The Company's directors and officers or persons owning or
controlling more than 25% of the Company's stock, must also obtain approval of
the OTS before acquiring control of any savings institution or savings and loan
holding company.
The OTS may only approve acquisitions that will result in the formation
of a multiple savings and loan holding company which controls savings
institutions in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
FEDERAL SECURITIES LAW. The Company has filed with the SEC a
Registration Statement under the Securities Act of 1933, as amended (the
"Securities Act"), for the registration of the common stock. Upon completion of
the conversion, the common stock will be registered with the SEC under the
Exchange Act and, under OTS regulations, generally may not be deregistered for
at least three years thereafter. The Company will be subject to the information,
proxy solicitation, insider trading restrictions and other requirements of the
Exchange Act.
The registration under the Securities Act of the common stock does not
cover the resale of such shares. Shares of the common stock purchased by persons
who are not affiliates of the Company may generally be resold without
registration. Shares purchased by an affiliate of the Company will be subject to
certain resale restrictions. As long as the Company meets the current public
information requirements, each affiliate of the Company who complies with the
other conditions would be able to sell a limited number of shares based upon the
number of shares outstanding and the average trading volume for the common
stock.
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TAXATION
FEDERAL TAXATION
We are subject to the provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), in the same general manner as other corporations.
However, prior to August 1996, savings institutions such as us, which met
certain definitional tests and certain other conditions prescribed by the Code
could benefit from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. The amount of the
bad debt deduction that a qualifying savings institution could claim for tax
purposes with respect to additions to its reserve for bad debts for "qualifying
real property loans" could be based upon our actual loss experience (the
"experience method") or as a percentage of our taxable income (the "percentage
of taxable income method"). Historically, we used the method that would allow us
to take the largest deduction.
In August 1996, the Code was revised to equalize the taxation of savings
institutions and banks. Savings institutions, such as us, no longer have a
choice between the percentage of taxable income method and the experience method
in determining additions to bad debt reserves. Thrifts with $500 million of
assets or less may still use the experience method, which is generally available
to small banks currently. Larger thrifts may only take a tax deduction when a
loan is actually charged off. Any reserve amounts added after 1987 will be taxed
over a six year period beginning in 1996; however, bad debt reserves set aside
through 1987 are generally not taxed. A savings institution may delay
recapturing into income its post-1987 bad debt reserves for an additional two
years if it meets a residential-lending test. This law is not expected to have a
material impact on us. At June 30, 1997, we had $70,000 of post-1987 bad-debt
reserves.
Earnings appropriated to our bad debt reserve and claimed as a tax
deduction including our supplemental reserves for losses will not be available
for the payment of cash dividends or for distribution (including distributions
made on dissolution or liquidation), unless we include the amount in income,
along with the amount deemed necessary to pay the resulting federal income tax.
If such amount is used for any purpose other than bad debt losses, including a
dividend distribution or a distribution in liquidation, it will be subject to
federal income tax at the then current rate.
The Code imposes a tax ("AMT") on alternative minimum taxable income
("AMTI") at a rate of 20%. AMTI is increased by certain preference items,
including the excess of the tax bad debt reserve deduction using the percentage
of taxable income method over the deduction that would have been allowable under
the experience method. Only 90% of AMTI can be offset by net operating loss
carryovers of which we currently have none. AMTI is also adjusted by determining
the tax treatment of certain items in a manner that negates the deferral of
income resulting from the regular tax treatment of those items. Thus, our AMTI
is increased by an amount equal to 75% of the amount by which our adjusted
current earnings exceeds our AMTI (determined without regard to this adjustment
and prior to reduction for net operating losses). In addition, for taxable years
beginning after December 31, 1986 and before January 1, 1996, an environmental
tax of 0.12% of the excess of AMTI (with certain modifications) over $2 million
is imposed on corporations, including us,
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whether or not an AMT is paid. Under pending legislation, the AMT rate would be
reduced to zero for taxable years beginning after December 31, 1994, but this
rate reduction would be suspended for taxable years beginning in 1995 and 1996
and the suspended amounts would be refunded as tax credits in subsequent years.
The Company may exclude from its income 100% of dividends received from
us as a member of the same affiliated group of corporations. A 70% dividends
received deduction generally applies with respect to dividends received from
corporations that are not members of such affiliated group, except that an 80%
dividends received deduction applies if the Company owns more than 20% of the
stock of a corporation paying a dividend. The above exclusion amounts, with the
exception of the affiliated group figure, were reduced in years in which we
availed our self of the percentage of taxable income bad debt deduction method.
Our federal income tax returns have not been audited by the IRS.
STATE TAXATION
We will continue to be subject to Arkansas corporation income tax which
is 6.5% of all taxable earnings when income exceeds $100,000. The Company is
incorporated under Tennessee law and qualified to do business in Arkansas as a
foreign corporation.
MANAGEMENT OF THE COMPANY
Our board of directors consists of the same individuals who serve as
directors of Newport Federal Savings Bank. Our charter and bylaws require that
directors be divided into three classes, as nearly equal in number as possible.
Each class of directors serves for a three-year period, with approximately one-
third of the directors elected each year. Our officers will be elected annually
by the board and serve at the board's discretion.
The following individuals will serve as executive officers of the
Company.
NAME POSITION(S) WITH THE COMPANY
---- ----------------------------
Paul K. Holmes Chairman
Brad Snider President and Chief Executive Officer and Treasurer
Pam Decker Secretary
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MANAGEMENT OF NEWPORT FEDERAL SAVINGS BANK
DIRECTORS AND EXECUTIVE OFFICERS
Our board of directors is composed of five members, each of whom serves
for a term of three years. Our proposed stock charter and bylaws require that
directors be divided into three classes, as nearly equal in number as possible.
Each class of directors serves for a three-year period, with approximately one-
third of the directors elected each year. Our officers are elected annually by
our board and serve at the board's discretion.
The following table sets forth information with respect to our directors
and executive officers, all of whom will continue to serve in the same
capacities after the conversion. We have no other executive officers.
<TABLE>
<CAPTION>
POSITION(S)
AGE AS OF WITH DIRECTOR TERM
NAME JUNE 30, 1997 THE BANK SINCE EXPIRES
- ------------------------------ ------------- ----------------------- -------- -------
<S> <C> <C> <C> <C>
Paul K. Holmes, Jr. 82 Chairman 1947 1998
O.E. Guinn, Jr. 68 Director 1971 1999
Kaneaster Hodges, Jr. 58 Director 1979 1999
John Minor 63 Director 1971 1997
Brad Snider 37 President and Chief 1991 1997
Executive Officer; Director
</TABLE>
All of the directors and executive officers live in Newport. The
business experience for the past five years of each of the directors and
executive officers is as follows:
PAUL K. HOLMES, JR. serves as our Chairman of the Board. He is currently
retired. Prior to his retirement, he was the owner of retain men's clothing
store. He is currently a Director of the Newport Chamber of Commerce and serves
as President of the Newport Industrial Development Association.
O.E. GUINN, JR. has been retired since 1994. Prior to his retirement, he
was self-employed as an insurance salesman specializing in fire and casualty
insurance. He is a member of the Chamber of Commerce and the Newport Lions Club.
KANEASTER HODGES, JR. is an attorney in private practice in Newport. He
is also involved in farming and real estate investments and operates a Newport-
based energy conservation firm, PSE, LLC. He is a member of the Newport Relief
Society, the Newport Levee District and the Walton Family Charitable Support
Foundation. He also serves on the White River Basin Study Commission and the
Arkansas State University-Beebe Charitable Foundation, Inc.
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JOHN MINOR is an insurance and real estate salesman in Newport. He is
Past President of the Arkansas Professional Insurance Agents' League, Past
President of the Lions Club, the Newport Booster Club and the Jackson County
Wildlife Federation. He is a former member of the Newport School Board.
BRAD SNIDER has served as our President and Chief Executive Officer and
Director since 1991. He currently serves as President of the Newport Area
Chamber of Commerce and serves on the boards of the United Way of Jackson
County, the Arkansas League of Savings, the Newport Industrial Development
Association and the Arkansas State University/Newport Foundation. He is also a
Commissioner of the Newport Housing Authority of the City of Newport and is a
member of the Rotary Club.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors conducts its business through meetings of the
board and through activities of its committees. During the year ended June 30,
1997, the board of directors held 16 regular meetings and two special meetings.
No director attended fewer than 75% of the total meetings of the board of
directors and committees on which such director served during the year ended
June 30, 1997.
DIRECTOR COMPENSATION
Each of the directors is paid an annual fee of $10,500. Total aggregate
fees paid to the current directors for the year ended June 30, 1997 were
$52,500.
DIRECTOR RETIREMENT PLAN. The Bank adopted the Newport Federal Savings
Bank Retirement Plan for Directors, effective May 29, 1997. On the effective
date, we established a bookkeeping account in the name of each non-employee
director, and credited each account with an amount equal to the product of (i)
$2,898, and (ii) the director's full years of service as a director, up to 20
years. On each fiscal year end, each participant who is then a director and has
20 or fewer years of service shall have his account credited with an amount
equal to the product of $2,898 and the safe performance factor, which is
determined based on our actual performance as compared to budgeted goals for
return on average equity, non-performing assets and composite regulatory rating,
provided that the safe performance factor may not exceed 1.2. Also on the
effective date, the account of Brad Snider was credited for $60,000. On each
June 30 during each of the years from 1998 until 2006, his account will be
credited with an additional amount equal to the product of $19,600 and the safe
performance factor. In the event Mr. Snider should die or become disabled, his
account will be credited with an amount equal to the difference (if any) between
(i) 50% of the present value of all benefits which would have been credited to
his account if he had otherwise remained employed by us to age 65, and (ii) the
benefits which are actually credited to his account at the time of his death or
disability. If his employment terminates in connection with or following a
"change in control" of us, his account will be credited with an amount equal to
the difference (if any) between (i) 100% of the present value of all benefits
which would have been credited to his account if he had otherwise
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remained employed by us to age 65, and (ii) the benefits which are actually
credited to his account at the time of his termination, subject to applicable
"golden parachute" limitations under federal income tax laws. At June 30, 1997,
$51,000 would have been credited to Mr. Snider's account had a change in control
occurred at such date and his employment agreement was also in effect. All
amounts credited to participants' accounts are fully vested at all times. Until
distributed in accordance with the terms of the plan, each participant's account
will be credited with a rate of return equal to our highest rate of interest
paid on certificates of deposit having a term of one year. Following the
conversion, each participant may prospectively elect to have the dividend-
adjusted rate of return on the common stock measure future appreciation.
Each participant may elect to receive plan benefits in a lump sum cash
payment or over a period shorter than ten years, and in the absence of an
election will receive payments in ten substantially equal installments. In the
event of a participant's death, the balance of his plan account will be paid in
a lump sum (unless the participant elects a distribution period up to ten years)
to his designated beneficiary, or if none, his estate.
Any compensation accrued under the plan will be paid from our general
assets. We have established a trust in order to hold assets with which to pay
compensation. Trust assets would be subject to claims of our general creditors.
In the event a participant prevails over us in a legal dispute as to the terms
or interpretation of the plan, he would be reimbursed for his legal and other
expenses. Upon the implementation of the plan, we recognized compensation
expense totaling $286,000 to provide for participants' initial account balances.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the cash and
non-cash compensation awarded to or earned by our chief executive officer at
June 30, 1997. No other employee earned in excess of $100,000 for the year ended
June 30, 1997.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------
OTHER ANNUAL ALL OTHER
NAME YEAR SALARY BONUS COMPENSATION(1) COMPENSATION(2)
- ---- ---- -------- ----- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Brad Snider 1997 $ 71,662 $ -- $ 10,500 $ 4,085
</TABLE>
___________
(1) Consists of director fees.
(2) Consists of premiums paid on behalf of Mr. Snider for split-dollar life
insurance ($2,465) and disability insurance ($1,620).
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PENSION PLAN TABLE. The following table indicates the annual retirement
benefit that would be payable under the plan upon retirement at age 65 to a
participant electing to receive his retirement benefit in the standard form of
benefit, assuming various specified levels of plan compensation and various
specified years of credited service. Mr. Snider's credited years of service
under the plan are 5.5 years.
<TABLE>
<CAPTION>
CAREER YEARS OF SERVICE
AVERAGE -------------------------------------------
COMPENSATION 15 20 25 30 35
------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$ 20,000 $ 4,500 $ 6,000 $ 7,500 $ 9,000 $10,500
40,000 9,000 12,000 15,000 18,000 21,000
60,000 13,500 18,000 22,500 27,000 31,500
80,000 18,000 24,000 30,000 36,000 42,000
100,000 22,500 30,000 27,500 45,000 52,500
</TABLE>
EMPLOYMENT AGREEMENT. We have entered into an employment agreement with
our President, Brad Snider. Mr. Snider's base salary under the employment
agreement is $71,662. The employment agreement has a term of three years. The
agreement is terminable by us for "just cause" as defined in the agreement. If
we terminate Mr. Snider without just cause or if Mr. Snider terminates his
employment for "good reason", Mr. Snider will be entitled to a continuation of
his salary from the date of termination through the remaining term of the
agreement, plus an additional 12 months. The employment agreement also contains
a provision stating that in the event of the termination of employment in
connection with any change in control of the Company or us, Mr. Snider will be
paid a lump sum amount equal to 2.99 times his five year average annual taxable
cash compensation. If such payments had been made under the agreement as of June
30, 1997, such payments would have equaled approximately $220,000. The aggregate
payments that would have been made to Mr. Snider would be an expense to us,
thereby reducing our net income and our capital by that amount. The agreement
may be renewed annually by our board of directors upon a determination of
satisfactory performance within the board's sole discretion. If Mr. Snider shall
become disabled during the term of the agreement, he shall continue to receive
payment of 100% of the base salary for a period of up to 180 days. Such payments
shall not be reduced by any other benefit payments made under other disability
program in effect for our employees. If Mr. Snider's employment terminates for a
reason other than just cause, he will be entitled to purchase from us family
medical insurance through any group health plan maintained by us.
EMPLOYEE STOCK OWNERSHIP PLAN. We have established the ESOP for the
exclusive benefit of participating employee of ours, to be implemented upon the
completion of the conversion. Participating employees are employees who have
completed one year of service with us (including at least 1,000 hours of
service) and have attained the age of 21. An application for a letter of
determination as to the tax-qualified status of the ESOP will be submitted to
the IRS. Although no assurances can be given, we expect that the ESOP will
receive a favorable letter of determination from the IRS.
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The ESOP is to be funded by contributions made by us in cash or common
stock. Benefits may be paid either in shares of the common stock or in cash.
In accordance with the Plan, the ESOP may borrow funds with which to acquire up
to 8.0% of the common stock to be issued in the conversion. The ESOP intends to
borrow funds from the Company. The loan is expected to be for a term of ten
years at an annual interest rate equal to the prime rate as published in The
---
Wall Street Journal. Presently it is anticipated that the ESOP will purchase up
- --------------------
to 8.0% of the common stock to be issued in the offering (22,400 shares based on
the midpoint of the Estimated Valuation Range). The loan will be secured by the
shares purchased and earnings of ESOP assets. Shares purchased with such loan
proceeds will be held in a suspense account for allocation among participants as
the loan is repaid. We anticipate contributing approximately $22,400 annually
(based on a 22,400 purchase) to the ESOP to meet principal obligations under the
ESOP loan, as proposed. It is anticipated that all such contributions will be
tax-deductible. This loan is expected to be fully repaid in approximately 10
years.
Shares sold above the maximum of the Estimated Valuation Range (i.e.,
more than 330,000 shares) may be sold to the ESOP before satisfying remaining
unfilled orders of Eligible Account Holders to fill the ESOP's subscription or
the ESOP may purchase some or all of the shares covered by its subscription
after the conversion in the open market.
Contributions to the ESOP and shares released from the suspense account
will be allocated among participants on the basis of total compensation,
excluding bonuses. All participants must be employed at least 500 hours in a
plan year in order to receive an allocation. Participants will become 20% vested
in their ESOP account balances for each year of service beginning with the
second year of service, up to a maximum of 100% for six years of service. Up to
five years of service prior to the adoption of the ESOP shall be credited for
the purposes of vesting. Vesting will be accelerated upon retirement, death,
disability, change in control of the Company, or termination of the ESOP.
Forfeitures will be reallocated to participants on the same basis as other
contributions in the plan year. Benefits may be payable in the form of a lump
sum upon retirement, death, disability or separation from service. Our
contributions to the ESOP are discretionary and may cause a reduction in other
forms of compensation. Therefore, benefits payable under the ESOP cannot be
estimated.
In the event of a change in control of us, the outstanding balance of
any loans used to finance the purchase of shares by the ESOP will be payed off
through a transfer or sale of shares held as collateral under such loan, with
any remaining shares allocated to participant accounts pro rata based on their
account balances. Participants terminating employment on or after the change in
control will be entitled to receive a cash payment from the Company equal to the
amount, if any, which would have been allocated to the participant's account
immediately following the change in control but was precluded from allocation
based on allocation limits applicable under federal tax laws.
The board of directors has appointed non-employee directors to the ESOP
Committee to administer the ESOP and to serve as the initial ESOP Trustees. The
board of directors or the ESOP Committee may instruct the ESOP Trustees
regarding investments of funds contributed to the ESOP.
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The ESOP Trustees must vote all allocated shares held in the ESOP in accordance
with the instructions of the participating employees. Unallocated shares and
allocated shares for which no timely direction is received will be voted by the
ESOP Trustees as directed by the board of directors or the ESOP Committee,
subject to the Trustees' fiduciary duties.
PROPOSED FUTURE STOCK BENEFIT PLANS
STOCK OPTION PLAN. We intend to adopt a stock option plan (the Option
Plan) following the conversion, subject to approval by you and the Company's
stockholders, at a stockholders' meeting to be held no sooner than six months
after the conversion. If the Option Plan is adopted during the first year
following the conversion, the Option Plan would be in compliance with the OTS
conversion regulations in effect. See "-- Restrictions on Stock Benefit Plans."
If the Option Plan is implemented more than one year after the conversion, the
Option Plan will comply with OTS regulations and policies that are applicable at
such time. If the Option Plan is implemented within one year after the
conversion, in accordance with OTS regulations, a number of shares equal to 10%
of the aggregate shares of common stock to be issued in the offering (i.e.,
28,000 shares based upon the sale of 280,000 shares at the midpoint of the
Estimated Valuation Range) would be reserved for issuance by the Company upon
exercise of stock options or stock appreciation rights ("SARs") to be granted to
our officers, directors and employees from time to time under the Option Plan.
The purpose of the Option Plan would be to provide additional performance and
retention incentives to certain officers, directors and employees by
facilitating their purchase of a stock interest in the Company. Under the OTS
conversion regulations, the Option Plan, would provide for a term of 10 years,
after which no awards could be made, unless earlier terminated by the board of
directors pursuant to the Option Plan and the options would vest over a five
year period (i.e., 20% per year), beginning one year after the date of grant of
the option. Options would expire no later than 10 years from the date granted
and would expire earlier if the Option Committee so determines or in the event
of termination of employment. Options would be granted based upon several
factors, including seniority, job duties and responsibilities, job performance,
our financial performance and a comparison of awards given by other savings
institutions converting from mutual to stock form.
The Company would receive no monetary consideration for the granting of
stock options or SARs under the Option Plan. It would receive the option price
for each share issued to optionees upon the exercise of such options. Shares
issued as a result of the exercise of options will be either authorized but
unissued shares or shares purchased in the open market by the Company. However,
no purchases in the open market will be made that would violate applicable
regulations restricting purchases by the Company. The exercise of options and
payment for the shares received would contribute to the equity of the Company.
MANAGEMENT RECOGNITION PLAN. We intend to adopt the MRP following the
conversion, the objective of which is to enable us to retain personnel and
directors of experience and ability in key positions of responsibility. The
Company expects to hold a stockholders' meeting no sooner than six months after
the conversion in order for stockholders to vote to approve the MRP. If the MRP
is implemented within one year after the conversion, in accordance with
applicable OTS regulations,
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<PAGE>
the shares granted under the MRP will be in the form of restricted stock vesting
over a five year period (i.e., 20% per year) beginning one year after the date
of grant of the award. Additionally, the number of shares to be granted could
not exceed 3% of the shares sold in the conversion (4% if we had tangible
capital of 10% or more) if the MRP is adopted during the first year following
conversion. If the MRP is implemented more than one year after the conversion,
the MRP will comply with such OTS regulations and policies that are applicable
at such time. Compensation expense in the amount of the fair market value of
the common stock granted will be recognized pro rata over the years during which
the shares are payable. Until they have vested, such shares may not be sold,
pledged or otherwise disposed of and are required to be held in escrow. Any
shares not so allocated would be voted by the MRP Trustees. Awards would be
granted based upon a number of factors, including seniority, job duties and
responsibilities, job performance, our performance and a comparison of awards
given by other institutions converting from mutual to stock form. The MRP would
be managed by a committee of non-employee directors (the "MRP Trustees"). The
MRP Trustees would have the responsibility to invest all funds contributed by us
to the trust created for the MRP (the "MRP Trust").
We expect to contribute sufficient funds to the MRP so that the MRP
Trust can purchase, in the aggregate, up to 4% of the amount of common stock
that is sold in the conversion. The shares purchased by the MRP would be
authorized but unissued shares or would be purchased in the open market. In the
event the market price of the common stock is greater than $10.00 per share, our
contribution of funds will be increased. Likewise, in the event the market price
is lower than $10.00 per share, our contribution will be decreased. In
recognition of their prior and expected services to us and the Company, as the
case may be, the officers, other employees and directors responsible for
implementation of the policies adopted by the board of directors and our
profitable operation will, without cost to them, be awarded stock under the MRP.
Based upon the sale of 280,000 shares of common stock in the offering at the
midpoint of the Estimated Valuation Range, the MRP Trust is expected to purchase
up to 11,200 shares of common stock.
RESTRICTIONS ON STOCK BENEFIT PLANS. OTS regulations provide that in the
event we implement stock option or management and/or employee stock benefit
plans within one year from the date of conversion, such plans must comply with
the following restrictions: (1) the plans must be fully disclosed in the
prospectus, (2) for stock option plans, the total number of shares for which
options may be granted may not exceed 10% of the shares issued in the
conversion, (3) for restricted stock plans such as the MRP, the shares may not
exceed 3% of the shares issued in the conversion (4% for institutions with 10%
or greater tangible capital), (4) the aggregate amount of stock purchased by the
ESOP in the conversion may not exceed 10% (12% for well-capitalized institutions
utilizing a 4% management recognition plan), (5) no individual employee may
receive more than 25% of the available awards under the Option Plan or the MRP,
(6) directors who are not employees may not receive more than 5% individually or
30% in the aggregate of the awards under any plan, (7) all plans must be
approved by a majority of the total votes eligible to be cast at any duly called
meeting of the Company's stockholders held no earlier than six months following
the conversion, (8) for stock option plans, the exercise price must be at least
equal to the market price of the stock at the time of grant, (9) for restricted
stock plans such as the MRP, no stock issued in a conversion may
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<PAGE>
be used to fund the plan, (10) neither stock option awards nor restricted stock
awards may vest earlier than 20% as of one year after the date of stockholder
approval and 20% per year thereafter, and vesting may be accelerated only in the
case of disability or death (or if not inconsistent with applicable OTS
regulations in effect at such time, in the event of a change in control), (11)
the proxy material must clearly state that the OTS in no way endorses or
approves of the plans, and (12) prior to implementing the plans, all plans must
be submitted to the Regional Director of the OTS within five days after
stockholder approval with a certification that the plans approved by the
stockholders are the same plans that were filed with and disclosed in the proxy
materials relating to the meeting at which stockholder approval was received.
We have not yet decided whether the Option Plan or the MRP will be
implemented during the first year after the conversion. If they are implemented
after the first anniversary of the conversion, the above-described limitations
and provisions will not apply.
CERTAIN RELATED TRANSACTIONS
During the year ended June 30, 1997, certain of our officers and
directors had loans from us in amounts exceeding $60,000. All of such loans were
made in the ordinary course of business, were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons and did not involve more than the
normal risk of collectibility or present other unfavorable features.
RESTRICTIONS ON ACQUISITIONS OF THE COMPANY
The following discussion is a general summary of the material provisions
of the charter and bylaws of the Company and certain other Tennessee corporate
law and regulatory provisions, which may be deemed to have such an anti-takeover
effect. The description of these provisions is necessarily general and we refer
you, in each case, to the charter and bylaws of the Company which are
incorporated herein by reference. See "Available Information" as to how to
obtain a copy of these documents.
While the board of directors is not aware of any effort that might be
made to obtain control of the Company after conversion, the board of directors
believes that it is appropriate to include certain provisions as part of the
Company's charter and bylaws to protect the interests of the Company and its
stockholders from hostile takeovers ("anti-takeover"provisions) which the board
of directors might conclude are not in the best interests of us or our
stockholders. These provisions may have the effect of discouraging a future
takeover attempt which is not approved by the board of directors but which
individual stockholders may deem to be in their best interests or in which
stockholders may receive a substantial premium for their shares over the current
market prices. As a result, stockholders who might desire to participate in such
a transaction may not have an opportunity to do so. Such provisions will also
render the removal of the current board of directors or management of the
Company more difficult.
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<PAGE>
PROVISIONS OF THE COMPANY'S CHARTER AND BYLAWS
RESTRICTION ON ACQUISITION OF COMMON STOCK; LIMITATIONS ON VOTING
RIGHTS. The charter of the Company provides that, for a period of five years
after completion of the conversion, no person may directly or indirectly,
acquire or offer to acquire beneficial ownership of more than 10% of any class
of equity security outstanding of the Company (the "Limit"), unless the
"continuing" board of directors has first approved by a two-thirds vote the
offer or acquisition. Any shares acquired in violation of this restriction will
not be counted as shares outstanding for voting purposes, nor will the holder be
entitled to vote such shares. After five years from the date of conversion,
should any party acquire the beneficial ownership of shares in excess of 10%,
the record holders of more than 10% of any outstanding class of equity security
of the Company who obtained such shares without the requisite approval would be
entitled to cast only one-hundredth (1/100) of a vote for each share owned in
excess of 10%, and the aggregate voting power of such holders shall be allocated
proportionately among such record holders. A person is a beneficial owner of a
security if he has the power to vote or direct the voting of all or part of the
voting rights of the security, or has the power to dispose of or direct the
disposition of the security. The charter of the Company further provide that
this provision limiting voting rights may only be amended upon the vote of 80%
of the outstanding shares of voting stock.
ELECTION OF DIRECTORS. The Company's charter provides that the board of
directors of the Company will be divided into three staggered classes, with
directors in each class elected for three-year terms. As a result of this
provision, it would take two annual elections to replace a majority of the
Company's board. The Company's charter provides that the size of the board of
directors may be increased or decreased only if two-thirds of the directors then
in office concur in such action. The charter also provides that any vacancy
occurring in the board of directors, including a vacancy created by an increase
in the number of directors, shall be filled for the remainder of the unexpired
term by a majority vote of the directors then in office. Finally, the charter
and the bylaws impose certain notice and information requirements in connection
with the nomination by stockholders of candidates for election to the board of
directors or the proposal by stockholders of business to be acted upon at an
annual meeting of stockholders.
The charter provides that a director may only be removed for cause by
the affirmative vote of at least 80% of the shares of the Company entitled to
vote generally in an election of directors cast at a meeting of stockholders
called for that purpose.
RESTRICTIONS ON CALL OF SPECIAL MEETING. The charter of the Company
provides that a special meeting of stockholders may be called only pursuant to a
resolution adopted by a majority of the board of directors, or a Committee of
the board.
ABSENCE OF CUMULATIVE VOTING. The Company's charter provides that
stockholders may not cumulate their votes in the election of directors.
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AUTHORIZED SHARES. The charter authorizes the issuance of 9,000,000
shares of common stock and 3,000,000 shares of Preferred Stock. The shares of
common stock and Preferred Stock were authorized in an amount greater than that
to be issued in the conversion to provide the Company's board of directors with
as much flexibility as possible to effect, among other transactions, financings,
acquisitions, stock dividends, stock splits and the exercise of stock options.
However, these additional authorized shares may also be used by the board of
directors consistent with its fiduciary duty to deter future attempts to gain
control of the Company. The board of directors also has sole authority to
determine the terms of any one or more series of Preferred Stock, including
voting rights, conversion rates, and liquidation preferences. As a result of the
ability to fix voting rights for a series of Preferred Stock, the board has the
power, to the extent consistent with its fiduciary duty, to issue a series of
Preferred Stock to persons friendly to management in order to attempt to block a
post-tender offer merger or other transaction by which a third party seeks
control, and thereby assist management to retain its position. The Company's
board currently has no plans for the issuance of additional shares, other than
the possible issuance of additional shares pursuant to stock benefit plans.
PROCEDURES FOR CERTAIN BUSINESS COMBINATIONS. The charter requires the
affirmative vote of at least 80% of the outstanding shares of the Company
entitled to vote in the election of director in order for the Company to engage
in or enter into certain "Business Combinations," as defined therein, with any
"Related Party" (as defined below) or any affiliates of the "Related Party",
unless the proposed transaction has been approved in advance by the Company's
board of directors, excluding those who were not directors prior to the time the
"Related Party" became the "Related Party." Absent this provision, only the
approval of a majority of the shares outstanding would be required.
The term "Related Party" is defined to include any person and the
affiliates and associates of the person (other than the Company or its
subsidiary) who beneficially owns, directly or indirectly, 10% or more of the
outstanding shares of voting stock of the Company. Any amendment to this
provision requires the affirmative vote of at least 80% of the shares of the
Company entitled to vote generally in an election of directors.
AMENDMENT TO CHARTER AND BYLAWS. Amendments to the Company's charter
must be approved by the Company's board of directors and also by a majority of
the outstanding shares of the Company's voting stock, provided, however, that
approval by at least 80% of the outstanding voting stock is generally required
for certain provisions (i.e., provisions relating to restrictions on the
acquisition and voting of greater than 10% of the common stock; number,
classification, election and removal of directors; amendment of Bylaws; call of
special stockholder meetings; director liability; certain business combinations;
power of indemnification; and amendments to provisions relating to the foregoing
in the charter).
The bylaws may be amended by a majority vote of the board of directors
or the affirmative vote of the holders of at least 80% of the outstanding shares
of the Company entitled to vote in the election of Directors cast at a meeting
called for that purpose.
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TENNESSEE BUSINESS CORPORATION ACT
The Tennessee Business Corporation Act contains several provisions
described below which may be applicable to the Company upon completion of the
conversion.
THE TENNESSEE CONTROL SHARE ACQUISITION ACT prohibits a person who
acquires over specified limits of shares of our holding company (that is, 20%,
33 1/3% or 50% of its outstanding shares) from voting those shares in excess of
each specified limit unless a majority of our holding company's disinterested
stockholders vote to approve voting rights for the excess shares. Pursuant to
the Control Share Acquisition Act, the provisions of such Act will only apply to
a Tennessee corporation if its charter or bylaws so provides and which has: (i)
100 or more stockholders; (ii) its principal place of business, its principal
office or substantial assets within Tennessee; and (iii) either (A) more than
10% of its stockholders reside in Tennessee, (B) more than 10% of its shares
owned by stockholders resident in Tennessee, or (C) 10,000 or more stockholders
resident in Tennessee. Neither the Company's charter nor its bylaws contains a
provision declaring that the Company will be subject to the provisions of the
Control Share Acquisition Act, although the Company could amend its charter or
bylaws in the future to include such a provision. The Company cannot determine
at this time whether it would otherwise meet the requirements to be subject to
the provisions of the Control Share Acquisition Act.
THE TENNESSEE BUSINESS COMBINATION ACT imposes conditions on a person
owning more than 10% of a "resident domestic corporation's" outstanding voting
stock (an "interested stockholder") in connection with business combinations
with the Company for a period of five years following the date such person
became an interested stockholder, unless such business combination is otherwise
approved in accordance with the terms of the statute. For purposes of the
Business Combination Act, the term "resident domestic corporation" is defined as
an issuer of voting stock which, as of the share acquisition date in question,
is organized under the laws of Tennessee and meets two or more of the following
requirements: (i) the corporation has more than 10,000 or 10% of its
stockholders resident in Tennessee or more than 10% of its shares held by
stockholders who are Tennessee residents; (ii) the corporation has its principal
office or place of business located in Tennessee; (iii) the corporation has the
principal office or place of business of a significant subsidiary, representing
not less than 25% of the corporation's consolidated net sales located in
Tennessee; (iv) the corporation employs more than 250 individuals in Tennessee
or has a combined annual payroll paid to Tennessee residents which is in excess
of $5.0 million; (v) the corporation produces goods and services in Tennessee
which result in annual gross receipts in excess of $10.0 million; or (vi) the
corporation has physical assets and/or deposits, including those of any
subsidiary located within Tennessee which exceed $10.0 million in value. The
Company does not expect that it will initially meet the definition of a resident
domestic corporation although it is possible that it will meet the definition in
the future and will be entitled to the anti-takeover protection afforded by the
Business Combination Act.
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THE TENNESSEE GREENMAIL ACT makes it unlawful, under certain specified
circumstances, for the Company to purchase any of its outstanding shares of a
certain class at a price above the market value of the shares from a stockholder
owning more than 3% of the shares to be purchased, if such person has held his
shares for less than two years, unless the purchase is approved by a majority of
the outstanding shares of that class or the Company makes a similar offer to all
stockholders of that class of securities.
THE TENNESSEE INVESTOR PROTECTION ACT imposes conditions on offerors
making a tender offer for an "offeree company" and requires such offeror to file
with the Tennessee Commissioner of Insurance a registration statement containing
information similar to that required by federal law, including any plans which
the offeror has in acquiring control of the company. For purposes of the
Investor Protection Act, an "offeree company" is defined as a corporation or
other issuer of equity securities which is incorporated or organized under the
laws of Tennessee or has its principal office in Tennessee, has substantial
assets located in Tennessee and which is or may be involved in a takeover offer
relating to any class of its equity securities.
The Investor Protection Act also prohibits any offeror from making a
takeover offer which is not made to the holders of record or beneficial owners
of the equity securities of an offeree company who reside in Tennessee on
substantially the same terms as the offer is made to holders residing elsewhere.
The Investor Protection Act also imposes certain other restrictions on takeover
offers involving offeree companies. Although the Company is a Tennessee
corporation, it is not anticipated at this time that the Company would satisfy
the requirement of having substantial assets located in Tennessee and,
therefore, would not be deemed an offeree company entitled to the protections of
the Investor Protection Act. It is possible that the Company could satisfy this
requirement in the future and parties seeking to make a takeover offer would be
subject to the requirements of the Investor Protection Act.
BENEFIT PLANS
In addition to the provisions of the Company's charter and bylaws
described above, certain benefit plans of ours adopted in connection with the
conversion contain provisions which also may discourage hostile takeover
attempts which the boards of directors might conclude are not in the best
interests for us or our stockholders. For a description of the benefit plans and
the provisions of such plans relating to changes in control, see "Management of
Newport Federal Savings Bank -- Proposed Future Stock Benefit Plans."
REGULATORY RESTRICTIONS
For three years following conversion, OTS regulations prohibit any
person, without the prior approval of the OTS, from acquiring or making an offer
to acquire more than 10% of the stock of any converted savings institution if
such person is, or after consummation of such acquisition would be, the
beneficial owner of more than 10% of such stock. In the event that any person,
directly or indirectly, violates this regulation, the securities beneficially
owned by such person in excess of 10%
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shall not be counted as shares entitled to vote and shall not be voted by any
person or counted as voting shares in connection with any matter submitted to a
vote of stockholders.
Federal law provides that no company, "directly or indirectly or acting
in concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. In addition, any
company that acquires such control becomes a "savings and loan holding company"
subject to registration, examination and regulation as a savings and loan
holding company. Control in this context means ownership of, control of, or
holding proxies representing more than 25% of the voting shares of a savings
association or the power to control in any manner the election of a majority of
the directors of such institution.
Federal law also provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
control of a savings association unless at least 60 days prior written notice
has been given to the OTS and the OTS has not objected to the proposed
acquisition. Control is defined for this purpose as the power, directly or
indirectly, to direct the management or policies of a savings association or to
vote more than 25% of any class of voting securities of a savings association.
Under federal law (as well as the regulations referred to below) the term
"savings association" includes state-chartered and federally chartered SAIF-
insured institutions, federally chartered savings and loans and savings banks
whose accounts are insured by the FDIC and holding companies thereof.
Federal regulations require that, prior to obtaining control of an
insured institution, a person, other than a company, must give 60 days notice to
the OTS and have received no OTS objection to such acquisition of control, and a
company must apply for and receive OTS approval of the acquisition. Control,
involves a 25% voting stock test, control in any manner of the election of a
majority of the institution's directors, or a determination by the OTS that the
acquiror has the power to direct, or directly or indirectly to exercise a
controlling influence over, the management or policies of the institution.
Acquisition of more than 10% of an institution's voting stock, if the acquiror
also is subject to any one of either "control factors," constitutes a rebuttable
determination of control under the regulations. The determination of control may
be rebutted by submission to the OTS, prior to the acquisition of stock or the
occurrence of any other circumstances giving rise to such determination, of a
statement setting forth facts and circumstances which would support a finding
that no control relationship will exist and containing certain undertakings. The
regulations provide that persons or companies which acquire beneficial ownership
exceeding 10% or more of any class of a savings association's stock after the
effective date of the regulations must file with the OTS a certification that
the holder is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
78
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 9,000,000 shares of the common stock,
$0.01 par value per share, and 3,000,000 shares of preferred stock, $0.01 par
value per share. The Company currently expects to issue up to 370,300 shares of
common stock in the conversion. The Company does not intend to issue any shares
of preferred stock in the conversion, nor are there any present plans to issue
such preferred stock following the conversion. Each share of common stock will
have the same relative rights as, and will be identical in all respects with,
each other share of common stock. THE COMMON STOCK OF THE COMPANY WILL REPRESENT
NONWITHDRAWABLE CAPITAL AND WILL NOT BE INSURED BY US, THE FDIC, OR ANY OTHER
GOVERNMENT AGENCY.
COMMON STOCK
VOTING RIGHTS. Each share of the common stock will have the same
relative rights and will be identical in all respects with every other share of
the common stock. The holders of the common stock will possess exclusive voting
rights in the Company, except to the extent that shares of Preferred Stock
issued in the future may have voting rights, if any. Each holder of the common
stock will be entitled to only one vote for each share held of record on all
matters submitted to a vote of holders of the common stock and will not be
permitted to cumulate their votes in the election of the Company's directors.
LIQUIDATION. In the unlikely event of the complete liquidation or
dissolution of the Company, the holders of the common stock will be entitled to
receive all assets of the Company available for distribution in cash or in kind,
after payment or provision for payment of (i) all debts and liabilities of the
Company (including all deposits with us and accrued interest thereon); (ii) any
accrued dividend claims; (iii) liquidation preferences of any Preferred Stock
which may be issued in the future; and (iv) any interests in the liquidation
account established upon the conversion for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders who continue to have their
deposits with us.
DIVIDENDS. From time to time, dividends may be declared and paid to the
holders of the common stock, who will share equally in any such dividends. For
information about cash dividends, see "Dividends" and "Taxation."
RESTRICTIONS ON ACQUISITION OF THE COMMON STOCK. See "Restrictions on
Acquisition of the Company" for a discussion of the limitations on acquisition
of shares of the common stock.
OTHER CHARACTERISTICS. Holders of the common stock will not have
preemptive rights with respect to any additional shares of the common stock
which may be issued. Therefore, the board of directors may sell shares of
capital stock of the Company without first offering such shares to existing
stockholders of the Company. The common stock is not subject to call for
redemption, and the outstanding shares of common stock when issued and upon
receipt by the Company of the full purchase price therefor will be fully paid
and non-assessable.
79
<PAGE>
SERIAL PREFERRED STOCK
None of the 3,000,000 authorized shares of preferred stock of the
Company will be issued in the conversion. After the conversion is completed, the
board of directors of the Company will be authorized to issue serial preferred
stock and to fix and state voting powers, designations, preferences or other
special rights of such shares and the qualifications, limitations and
restrictions thereof, subject to regulatory approval but without stockholder
approval. If and when issued, the serial preferred stock is likely to rank prior
to the common stock as to dividend rights, liquidation preferences, or both, and
may have full or limited voting rights. The board of directors, without
stockholder approval, can issue serial preferred stock with voting and
conversion rights which could adversely affect the voting power of the holders
of the common stock. The board of directors has no present intention to issue
any of the serial preferred stock.
LEGAL AND TAX MATTERS
The legality of the common stock has been passed upon for us by Housley
Kantarian & Bronstein, P.C., Washington, D.C. Certain legal matters for Trident
Securities may be passed upon by Silver Freedman & Taff, L.L.P., Washington,
D.C. The federal income tax consequences of the conversion have been passed upon
for us by Housley Kantarian & Bronstein, P.C., Washington, D.C. The Arkansas
income tax consequences of the conversion have been passed upon for us by KPMG
Peat Marwick LLP.
EXPERTS
The financial statements of Newport Federal Savings Bank as of June 30,
1997 and 1996, and for the years then ended, have been included herein in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon authority of said firm as
experts in accounting and auditing.
Ferguson has consented to the publication herein of a summary of its
letters to us setting forth its opinion as to the estimated pro forma market
value of us in the converted form and its opinion setting forth the value of
subscription rights and to the use of its name and statements with respect to it
appearing in this document.
80
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement on Form SB-2
under the Securities Act of 1933, as amended, with respect to the common stock
offered in this document. As permitted by the rules and regulations of the SEC,
this document does not contain all the information set forth in the registration
statement. Such information can be examined without charge at the public
reference facilities of the SEC located at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of such material can be obtained from the SEC at
prescribed rates. The SEC also maintains an internet address ("Web site") that
contains reports, proxy and information statements and other information
regarding registrants, including the Company, that file electronically with the
SEC. The address for this Web site is " http: //www. sec. gov. " The statements
contained in this document as to the contents of any contract or other document
filed as an exhibit to the Form SB-2 describe the material features of such
contract or document but are, of necessity, brief descriptions and are not
necessarily complete; each such statement is qualified by reference to such
contract or document.
Newport Federal Savings Bank has filed an Application for conversion
with the OTS with respect to the conversion. Pursuant to the rules and
regulations of the OTS, this document omits certain information contained in
that Application. The Application may be examined at the principal office of the
OTS, 1700 G Street, N.W., Washington, D.C. 20552 and at the Midwest Regional
Office of the OTS, 122 W. John Carpenter Freeway, Suite 600, Irving, Texas 75039
without charge.
A copy of the Charter and the Bylaws of the Company are available
without charge from Newport Federal Savings Bank.
81
<PAGE>
NEWPORT FEDERAL SAVINGS BANK
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report F-1
Statements of Financial Condition as of June 30, 1997 and 1996 F-2
Statements of Operations for the Years Ended June 30, 1997 and 1996 F-3
Statements of Retained Earnings for the Years Ended June 30, 1997 and 1996 F-4
Statements of Cash Flows for the Years Ended June 30, 1997 and 1996 F-5
Notes to Financial Statements F-6
</TABLE>
All schedules are omitted because the required information is either not
applicable or is included in the financial statements or related notes.
Separate financial statements for the Company have not been included since it
will not engage in material transactions until after the conversion. The
Company, which has been inactive to date, has no significant assets,
liabilities, revenues, expenses or contingent liabilities.
82
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Newport Federal Savings Bank:
We have audited the accompanying statements of financial condition of Newport
Federal Savings Bank as of June 30, 1997 and 1996, and the related statements of
operations, retained earnings, and cash flows for the years then ended. These
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Newport Federal Savings Bank as
of June 30, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
August 8, 1997
F-1
<PAGE>
NEWPORT FEDERAL SAVINGS BANK
Statements of Financial Condition
June 30, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ---- ----
<S> <C> <C>
Cash and amounts due from banks, includes interest
bearing deposits of $603,729 and $917,745 in 1997
and 1996, respectively $ 884,002 1,167,202
Certificates of deposit with other financial institutions 691,000 890,000
Investment securities held-to-maturity, at cost (notes 2 and 8) 5,922,956 6,310,348
Loans receivable, net (notes 3, 4 and 8) 24,794,194 21,982,108
Real estate acquired in settlement of loans, net - 123,830
Office properties and equipment, net (note 5) 1,651,298 1,666,980
Accrued interest receivable (note 6) 227,356 226,995
Other assets (note 9) 207,760 78,332
------------ ------------
Total assets $ 34,378,566 32,445,795
============ =============
LIABILITIES AND RETAINED EARNINGS
---------------------------------
Deposits (notes 2 and 7) $ 31,072,533 29,657,098
Federal Home Loan Bank advances (note 8) 618,389 133,916
Advances from borrowers for taxes and insurance 57,459 58,719
Other liabilities (notes 9 and 11) 363,916 131,020
------------ ------------
Total liabilities 32,112,297 29,980,753
Retained earnings - substantially restricted (notes 9, 12 and 15) 2,266,269 2,465,042
Commitments and contingencies (notes 3, 10, 11, 12, 14 and 15)
------------ ------------
Total liabilities and retained earnings $ 34,378,566 32,445,795
============ =============
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
NEWPORT FEDERAL SAVINGS BANK
Statements of Operations
Years ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interest income:
Loans receivable $ 2,011,121 1,814,100
Deposits in other financial institutions 72,337 128,764
Mortgage-backed securities 338,621 280,201
Investment securities 71,261 105,499
--------- ---------
Total interest income 2,493,340 2,328,564
--------- ---------
Interest expense:
Deposits 1,540,820 1,517,090
Federal Home Loan advances 56,074 8,081
--------- ---------
Total interest expense 1,596,894 1,525,171
--------- ---------
Net interest income 896,446 803,393
Provision for loan losses (note 4) 90,000 10,000
--------- ---------
Net interest income after provision
for loan losses 806,446 793,393
--------- ---------
Non-interest income - other 19,156 10,758
--------- ---------
Non-interest expenses:
Salaries and employee benefits (note 11) 647,478 346,550
Legal and professional fees 12,032 16,050
Data processing fees 62,313 59,685
Federal insurance expense (note 12) 217,054 62,739
Furniture and equipment expense 32,953 20,783
Occupancy expense 58,516 39,456
Other expense 127,020 180,469
--------- ---------
1,157,366 725,732
--------- ---------
Income (loss) before income taxes (331,764) 78,419
Income tax expense (benefit) (note 9) (132,991) 5,571
--------- ---------
Net income (loss) (198,773) 72,848
========= =========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
NEWPORT FEDERAL SAVINGS BANK
Statement of Retained Earnings
Years ended June 30, 1997 and 1996
Balance at June 30, 1995 $2,392,194
Net Income 72,848
----------
Balance at June 30, 1996 2,465,042
Net Loss (198,773)
----------
Balance at June 30, 1997 $2,266,269
==========
See accompanying notes to financial statements.
F-4
<PAGE>
NEWPORT FEDERAL SAVINGS BANK
Statements of Cash Flows
Years ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (198,773) 72,848
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 57,395 15,916
Loss on sale of real estate owned 23,208 -
FHLB stock dividends (15,800) (15,792)
Net premium amortization on investments 10,752 23,256
Provision for loan losses 90,000 10,000
Increase in interest receivable (361) (13,992)
Increase in other assets (109,428) (28,164)
Increase in other liabilities 232,896 16,902
--------- ---------
Net cash provided by operating
Activities 89,889 80,974
--------- ---------
Cash flows from investing activities:
Purchase of held to maturity ("HTM") securities (850,310) (2,020,830)
Proceeds from maturities/principal repayments
of HTM securities 1,242,750 2,245,363
Net increase in loans receivable (2,427,390) (855,164)
Purchase of loans (500,000) (1,005,000)
Net decrease in certificates of deposit with
other financial institutions 199,000 196,000
Purchase of office properties and equipment (41,713) (758,676)
Proceeds from sale of real estate owned 105,926 -
--------- ---------
Net cash used in investing
Activities (2,271,737) (2,198,307)
--------- ---------
Cash flows from financing activities:
Net increase in deposits and advances from
Borrowers 1,414,175 1,913,688
Net increase (decrease) in Federal Home Loan
advances 484,473 (14,670)
--------- ---------
Net cash provided by financing
Activities 1,898,648 1,899,018
--------- ---------
Net decrease in cash and amounts due
from banks (283,200) (218,315)
Cash and amounts due from banks at beginning of year 1,167,202 1,385,517
--------- ---------
Cash and amounts due from banks at end of year $ 884,002 1,167,202
========= =========
Supplemental disclosures of cash flow information: Noncash
investing and financing activities:
Transfers from loans to real estate acquired
through foreclosure $ 25,304 20,224
Transfers from real estate acquired through
foreclosure to other assets 20,000 -
Cash paid during the year:
Interest on deposits 1,544,363 1,525,446
Income taxes 10,860 17,660
========= =========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
NEWPORT FEDERAL SAVINGS BANK
Notes to Financial Statements
June 30, 1997 and 1996
(1) Summary of Significant Accounting Policies
------------------------------------------
Newport Federal Savings Bank ("Bank") is a federally-chartered mutual
savings bank. The accounting principles used and methods of applying
them conform with generally accepted accounting principles and
practices within the savings and loan industry. The following are
descriptions of the more significant of the accounting and reporting
policies.
(a) Basis of Financial Statement Presentation
-----------------------------------------
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the statement of financial
condition and revenues and expenses for the period. Material
estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan
losses. Actual results could differ significantly from those
estimates.
Management believes that the allowance for losses on loans is adequate.
While management uses available information to recognize losses on
loans and real estate owned, future additions to the allowance may be
necessary based on changes in economic conditions. In addition,
regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for losses on
loans. Such agencies may require the Bank to recognize additions to
the allowance based on their judgments about information available to
them at the time of their examination.
The Bank adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF," in
fiscal 1997. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. Adoption of this Statement had no
impact on the Bank's financial condition or results of operations.
(b) Investment Securities
---------------------
Investment securities consist of mortgage-backed, U.S. Government
agency and state and political subdivision securities. The Bank
classifies its investment securities into one of three categories:
trading, available-for-sale, or held-to-maturity. Trading securities
are bought and held principally for the purpose of selling them in
the near term. Held-to-maturity securities are those securities in
which the Bank has the ability and intent to hold the security until
maturity. All other securities not included in trading or held-to-
maturity are classified as available-for-sale. All investment
securities were classified as held-to-maturity at June 30, 1997 and
1996.
(Continued)
F-6
<PAGE>
NEWPORT FEDERAL SAVINGS BANK
Notes to Financial Statements
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted
for the amortization or accretion of premiums or discounts.
Unrealized holding gains and losses on trading securities are
included in earnings. Unrealized holding gains and losses, net of the
related tax effect, on available-for-sale securities are excluded
from earnings and are reported as a separate component of equity
until realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific
identification basis.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed to be other than
temporary results in a reduction in carrying amount to fair value.
The impairment is charged to earnings and a new cost basis for the
security is established. Premiums and discounts are amortized or
accreted over the life of the related held-to-maturity security as an
adjustment to yield using the effective interest method. Dividend and
interest income are recognized when earned.
(c) Allowance for Losses
--------------------
Effective July 1, 1995, the Bank adopted SFAS No. 114, "ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN," as amended by SFAS No. 118
(collectively, "Statement 114"). Statement 114 addresses the
accounting treatment of certain impaired loans and amends SFAS No.'s
5 and 15. Statement 114 does not apply to large groups of
smaller-balance homogeneous loans unless they have been involved in a
restructuring. The adoption of Statement 114 had no effect on 1996
earnings.
Management, considering current information and events regarding the
borrowers ability to repay their obligations, considers a note to be
impaired when it is probable that the Bank will be unable to collect
all amounts due according to the contractual terms of the note
agreement. When a loan is considered to be impaired, the amount of
the impairment is measured using discounted cash flows, except when
it is determined that the sole (remaining) source of repayment for
the loans is the operation or liquidation of the underlying
collateral. In such case, the current fair value of the collateral,
reduced by costs to sell, will be used in place of discounted cash
flows. If the measurement of the impaired loan is less than the
recorded investment in the loan (including accrued interest),
impairment is recognized by creating or adjusting an existing
allocation of the allowance for loan losses. Statement 114 does not
change the timing of charge-offs of loans to reflect the amount
ultimately expected to be collected.
The accrual of interest on a loan is discontinued when, in management's
judgment, the interest will not be collectible in the normal course
of business. Also, in accordance with regulatory guidelines, a loan
is placed on nonaccrual status when it becomes 90 days past due
(although said loan would not necessarily be considered impaired).
When interest is discontinued, all interest previously accrued in the
current year, but not collected, is reversed against interest income.
Any interest accrued in prior years is charged against the allowance
for loan losses. Subsequent cash receipts are generally applied to
reduce the unpaid principal balance. A loan is returned to accrual
status and is no longer considered to be impaired when it becomes
current as to principal and interest or demonstrates a period of
performance under the contractual terms. The Bank did not change its
method of recognizing interest income on impaired loans upon adoption
of Statement 114.
(Continued)
F-7
<PAGE>
NEWPORT FEDERAL SAVINGS BANK
Notes to Financial Statements
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based upon the Bank's
past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may effect the borrower's ability to repay,
the estimated value of any underlying collateral, and current
economic conditions.
(d) Real Estate Acquired in Settlement of Loans
-------------------------------------------
Real estate properties acquired through loan foreclosure are initially
recorded at the lower of the related loan balance, less any specific
allowance for loss, or fair value at the date of foreclosure less
estimated costs to sell. Costs relating to development and
improvement of property are capitalized, whereas costs relating to
holding property are expensed.
Valuations are periodically performed by management and an allowance for
losses is established by a charge to operations if the carrying value
of a property exceeds its estimated net realizable value.
(e) Loan Origination Fees and Related Cost
--------------------------------------
Loan fees are accounted for in accordance with SFAS No. 91. Loan fees
and certain direct loan origination costs are deferred, and the net
fee or cost is recognized in income over the contractual life of the
loan, adjusted for estimated prepayments, using the level-yield
method.
(f) Interest Income
---------------
Discounts and premiums on investment securities and loans are
accreted/amortized over the estimated remaining lives of the
securities and loans using a method which approximates the level
yield method. Interest income on loans is recognized under the
interest method, a basis which approximates a level rate of return
over the term of the loan.
(g) Office Properties and Equipment
-------------------------------
Office properties and equipment are carried at cost less accumulated
depreciation. Depreciation is computed under the straight-line method
over a period of 5 to 30 years. Maintenance and repairs are charged
to expense as incurred.
(h) Income Taxes
------------
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
(Continued)
F-8
<PAGE>
NEWPORT FEDERAL SAVINGS BANK
Notes to Financial Statements
(i) Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents are
defined as those amounts included in the statement of financial
condition caption "cash and amounts due from banks."
(j) Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to current
year presentation.
(2) Investment Securities
---------------------
The carrying value, unrealized gains, unrealized losses and estimated fair
value of held to maturity investment securities are as follows:
<TABLE>
<CAPTION>
Obligations
U.S. of states Mortgage-
Government And backed Other
political
Agencies Subdivisions securities securities Total
-------- ------------ ---------- ---------- -----
<S> <C> <C> <C> <C> <C>
Investments held to maturity:
June 30, 1997:
Carrying value $ 500,000 62,500 5,076,965 283,491 5,922,956
Unrealized gains - - 82,837 - 82,837
Unrealized losses (289) - (54,494) - (54,783)
----------- ------- ----------- --------- -----------
Fair value $ 499,711 62,500 5,105,308 283,491 5,951,010
=========== ======= =========== ========= ===========
Investments held to maturity:
June 30, 1996:
Carrying value $ 1,000,000 80,000 4,962,656 267,692 6,310,348
Unrealized gains - - 39,016 - 39,016
Unrealized losses (7,650) - (61,225) - (68,875)
----------- ------- ----------- --------- -----------
Fair value $ 992,350 80,000 4,940,447 267,692 6,280,489
=========== ======= =========== ========= ===========
</TABLE>
Mortgage-backed securities held by the Bank at June 30, 1997 and 1996 were
issued by the Government National Mortgage Association, the Federal
National Mortgage Association or the Federal Home Loan Mortgage
Corporation.
As a member of the Federal Home Loan Bank System, the Bank is required to
maintain an investment ($282,892 and $267,092 at June 30, 1997 and 1996,
respectively, and included in other held to maturity securities) in the
capital stock of the Federal Home Loan Bank in an amount equal to 1% of
its outstanding home loans. No ready market exists for such stock and it
has no quoted market value.
(Continued)
F-9
<PAGE>
NEWPORT FEDERAL SAVINGS BANK
Notes to Financial Statements
The amortized cost and estimated fair value of debt securities held to
maturity at June 30, 1997 by contractual maturity are shown below.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties:
<TABLE>
<CAPTION>
Amortized Estimated
cost fair value
---- ----------
<S> <C> <C>
Due in one year or less $ - -
Due after one year through five years 508,750 508,461
Due after five years through ten years 12,500 12,500
Due after ten years 41,250 41,250
--------- ---------
562,500 562,211
Mortgage-backed securities 5,076,965 5,105,308
Other 283,491 283,491
--------- ---------
$ 5,922,956 5,951,010
========= =========
</TABLE>
Investment securities with a par value of approximately $1,640,300 and
$394,700 at June 30, 1997 and 1996, respectively, were pledged to secure
public deposits.
(3) Loans Receivable
----------------
Loans receivable consist of the following at June 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
First mortgage loans $ 21,227,604 20,259,315
Loans to depositors, secured by savings 443,472 256,208
Property improvement loans 666,078 762,789
Automobile loans 2,009,779 648,895
Other consumer loans 510,235 137,686
Commercial loans 92,938 -
---------- ----------
24,950,106 22,064,843
Less:
Unearned discounts on loans purchased 5,780 9,266
Net deferred loan fees 337 469
Allowance for losses (note 4) 149,795 73,000
---------- ----------
$ 24,794,194 21,982,108
========== ==========
</TABLE>
Loans serviced for others at June 30, 1997 and 1996, were $291,699 and
$423,231, respectively.
Approximately 65% of the Bank's loans are first mortgage loans on 1-to-4
family residences located in Jackson County, Arkansas, which is the Bank's
primary operating territory. These loans are expected to be repaid from the
borrower's personal income or proceeds from the sale of the residence. The
Bank's normal collateral policy is to require an initial loan to collateral
value ratio of 80% or less.
(Continued)
F-10
<PAGE>
NEWPORT FEDERAL SAVINGS BANK
Notes to Financial Statements
Loans to executive officers and directors are, in the opinion of management,
made in the ordinary course of business and at substantially the same
terms, including interest rates and collateral, as those prevailing at the
time for comparable loans of like qualities and risk of collectibility.
The aggregate indebtedness of these individuals to
the Bank is summarized as follows:
<TABLE>
<S> <C>
Balance at June 30, 1995 $ 504,327
----------
Additions 371,125
Repayments (212,538)
----------
Balance at June 30, 1996 662,914
----------
Additions 193,207
Repayments (130,747)
----------
Balance at June 30, 1997 $ 725,374
==========
</TABLE>
(4) Allowance for Losses on Loans
-----------------------------
The following summarizes the activity in the allowance for losses on loans:
<TABLE>
<S> <C>
Balance at June 30, 1995 $ 63,000
Provision for losses 10,000
-------
Balance at June 30, 1996 73,000
Provision for losses 90,000
Charge-offs (13,205)
-------
Balance at June 30, 1997 $ 149,795
=======
</TABLE>
(5) Office Properties and Equipment
-------------------------------
Office properties and equipment consist of the following at June 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 320,866 320,866
Buildings and improvements 1,375,257 1,375,040
Furniture and equipment 501,694 460,198
--------- ---------
2,197,817 2,156,104
Less accumulated depreciation (546,519) (489,124)
--------- ---------
$ 1,651,298 1,666,980
========= =========
</TABLE>
Included in office properties is land and a building with a book value of
approximately $230,000 that is being leased on a month-to-month basis.
(Continued)
F-11
<PAGE>
NEWPORT FEDERAL SAVINGS BANK
Notes to Financial Statements
(6) Accrued Interest Receivable
---------------------------
Accrued interest receivable consists of the following at June 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Loans $ 180,934 168,572
Mortgage-backed securities 33,711 34,786
Investment securities 11,295 21,585
Certificates of deposit 1,416 2,052
------- -------
$ 227,356 226,995
======= =======
</TABLE>
(7) Deposits
--------
Deposits consist of the following at June 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C>
Money market $ 325,336 524,861
NOW accounts (2.40% in 1997 and 1996) 1,669,713 1,447,854
Passbook accounts (3.00% in 1997 and 1996) 1,892,596 1,360,861
Other noninterest bearing/checking 982,720 349,016
---------- ----------
4,870,365 3,682,592
Certificates:
3.00% to 3.99% - 49,647
4.00% to 4.99% 83,631 -
5.00% to 5.99% 26,118,537 16,666,108
6.00% to 6.99% - 9,258,751
---------- ----------
26,202,168 25,974,506
---------- ----------
Total $ 31,072,533 29,657,098
========== ==========
Weighted average cost of deposits 5.19% 5.24%
==== ====
</TABLE>
The aggregate amount of certificates of deposit, each with a minimum
denomination of $100,000, was approximately $3,360,700 and $3,254,400 at
June 30, 1997 and 1996, respectively. The amount of an individual deposit
exceeding $100,000 is not insured by the Federal Deposit Insurance
Corporation.
A summary of certificates by maturity at June 30, 1997 is approximately as
follows:
<TABLE>
<S> <C>
Less than one year $ 10,787,000
One to two years 9,962,000
Two to three years 1,135,000
Three to four years 2,684,000
Four to five years 1,634,000
----------
$ 26,202,000
==========
</TABLE>
Interest expense on deposits consists of the following at June 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C>
Money market $ 10,777 $ 14,700
NOW accounts 37,390 32,254
Passbook accounts 47,738 36,274
Certificates 1,444,915 1,433,862
---------- ----------
$ 1,540,820 $ 1,517,090
</TABLE>
(Continued)
F-12
<PAGE>
NEWPORT FEDERAL SAVINGS BANK
Notes to Financial Statements
Some of the directors, officers, and employees of the Bank are also
customers. As such customers, at June 30, 1997 and 1996, the aggregate
deposits of those individuals were approximately $439,000 and $243,000,
respectively.
(8) Federal Home Loan Bank Advances
-------------------------------
Federal Home Loan Bank (FHLB) advances at June 30, 1997 and 1996 consist of
a long-term obligation of $118,389 and $133,916, respectively, which has
a maturity date of August, 2003 and is payable in monthly installments
of approximately $1,900, including interest at 5.7%. In addition, at
June 30, 1997 advances include a short-term obligation of $500,000 with
interest of 5.53% due July 1997. There were no short-term obligations of
FHLB advances at June 30, 1996. Pursuant to a collateral agreement with
the FHLB, advances are secured by certain investment securities and
qualifying first mortgage loans.
(9) Income Taxes
------------
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current Federal income tax $ (87,342) 1,406
Current state income tax - (1,866)
Deferred (45,649) 6,031
-------- -----
Total $ (132,991) 5,571
======= =====
</TABLE>
The actual tax expense (benefit) for 1997 and 1996 differs from the
"expected" tax expense (benefit) for those years (computed by applying
the U.S. Federal corporate tax rate of 34% to income (loss) before
income taxes) as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Income tax expense (benefit) "expected" rate $ (112,800) 26,662
Increase (decrease) in taxes resulting from:
State income taxes, net of Federal
income tax benefit (12,587) (988)
Adjustment for graduated rates - (14,900)
Other, net (7,604) (5,203)
------- ------
$ (132,991) 5,571
======= ======
Effective tax rate 40.1% 7.1%
======= ======
</TABLE>
(Continued)
F-13
<PAGE>
NEWPORT FEDERAL SAVINGS BANK
Notes to Financial Statements
Included in other assets are refundable Federal taxes of $115,771 and
$26,189 at June 30, 1997 and 1996, respectively. Included in other
liabilities are net deferred tax liabilities of $4,903 and $50,552 at
June 30, 1997 and 1996, respectively.
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at June 30, 1997 and
1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 16,698 -
Contribution carryforwards 11,502 6,343
Allowance for losses on loans 35,239 806
Other 903 903
------ ------
Total gross deferred tax assets 64,342 8,052
------ ------
Deferred tax liabilities:
Property and equipment, due to
differences in depreciation (33,109) (25,180)
Prepaid insurance, expensed as
incurred for tax purposes (8,000) (11,453)
FHLBB stock, primarily due to stock
dividends not recognized for tax
Purposes (27,867) (21,721)
Other (269) (250)
------ --------
Total gross deferred tax liabilities (69,245) (58,604)
Net deferred tax liability (included
in other liabilities) $ (4,903) (50,552)
====== ======
</TABLE>
Based on the Bank's historical ability to generate future taxable income
exclusive of reversing temporary differences, management believes it is
more likely than not that the Bank will realize the benefits of the
deferred tax assets at June 30, 1997 in future periods.
At June 30, 1997 the Bank has net operating loss carryforwards for state
income tax purposes of $256,888, which are available to offset future
state taxable income, if any, through 2002.
Retained earnings at June 30, 1997 includes approximately $550,000 for
which no deferred Federal income tax liability has been recognized. This
amount represents an allocation of income to bad debt deductions for tax
purposes only. Reductions of amounts so allocated for purposes other
than tax bad debt losses may create income for tax purposes only, which
would be subject to then current corporate income tax rates.
(Continued)
F-14
<PAGE>
NEWPORT FEDERAL SAVINGS BANK
Notes to Financial Statements
(10) Commitments and Contingencies
-----------------------------
The Bank is a participant in a trusteed multi-employer retirement plan.
The defined-benefit plan has noncontributory and contributory features
and covers substantially all employees. Because this plan is a multi-
employer plan, separate actuarial valuations are not available for each
employer. The retirement plan's actuarial value is such that no
contributions were required in 1997 or 1996.
The Bank, from time to time, is involved in various legal actions arising
in the ordinary course of business. In the opinion of management the
ultimate disposition of these matters will not have a material adverse
effect on the Bank's financial statements.
(11) Director's Retirement Plan
--------------------------
Effective May 29, 1997 the Bank adopted a retirement plan for directors.
Participants in the plan are individuals who serve on the Bank's board
on or after the effective date. The plan awarded benefits for past
services rendered by each participant who was a director on the
effective date. The funding for past services totaled $286,047 and is
included in other liabilities at June 30, 1997. The Bank will contribute
additional amounts to the plan each year based on a defined performance
factor.
(12) Regulatory Matters
------------------
The Bank is subject to various regulatory capital requirements
administered by the federal agencies. Failure to meet minimum
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-statement of financial condition items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 and
tangible capital (as defined) to adjusted total assets (as defined).
Management believes, as of June 30, 1997, that the Bank meets all
capital adequacy requirements to which it is subject.
As of June 30, 1997 and 1996, the most recent notification from the Office
of Thrift Supervision ("OTS") categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum total
capital (to risk weighted assets), Tier I capital (to risk weighted
assets), Tier I capital (to adjusted total assets) and tangible capital
(to adjusted total assets) ratios as set forth in the table. There are
no conditions or events since that notification that management believes
have changed the Bank's regulatory capital category.
(Continued)
F-15
<PAGE>
NEWPORT FEDERAL SAVINGS BANK
Notes to Financial Statements
The Bank's actual capital amounts and ratios are presented in the
following table.
<TABLE>
<CAPTION>
Minimum required
to be well
Minimum required capitalized under
for capital prompt corrective
Actual adequacy purposes action provisions
----------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1997:
Total capital (to Risk
Weighted Assets) $ 2,411,064 13.2% $ 1,463,360 8.0% $ 1,829,200 10.0%
Tier I Capital (to Risk
Weighted Assets) 2,266,269 12.4 731,880 4.0 1,097,820 6.0
Tier I Capital (to Adjusted
Total Assets) 2,266,269 6.6 1,375,143 4.0 1,718,928 5.0
Tangible Capital (to
Adjusted Total Assets) 2,266,269 6.6 515,678 1.5 515,678 1.5
As of June 30, 1996:
Total capital (to Risk
Weighted Assets) 2,523,042 15.7 1,288,400 8.0 1,610,500 10.0
Tier I Capital (to Risk
Weighted Assets) 2,465,042 15.3 644,800 4.0 967,200 6.0
Tier I Capital (to Adjusted
Total Assets) 2,465,042 7.6 1,297,832 4.0 1,622,290 5.0
Tangible Capital (to
Adjusted total Assets) 2,465,042 7.6 486,687 1.5 486,687 1.5
</TABLE>
Tier I and tangible capital do not differ from retained earnings under
generally accepted accounting principles. Total capital differs from
retained earnings under generally accepted accounting principles due to
general allowances for loan losses of $144,795 and $58,000 at June 30,
1997 and 1996, respectively.
The Bank pays annual assessments to the Savings Association Insurance Fund
(SAIF). A one time SAIF assessment of $179,129 was recorded in
September, 1996 and is included as Federal insurance expense in the
accompanying 1997 statement of operations.
(13) Financial Instruments
---------------------
SFAS No. 107, "DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS"
("SFAS 107"), requires disclosure of fair value information about
financial instruments, whether or not recognized in the statement of
financial condition, for which it is practicable to estimate that value.
The following methods and assumptions were used by the Bank in
estimating its fair value disclosures for financial instruments:
CASH AND AMOUNTS DUE FROM BANKS - The carrying amount of such
-------------------------------
instruments is deemed to be a reasonable estimate of fair value.
(Continued)
F-16
<PAGE>
NEWPORT FEDERAL SAVINGS BANK
Notes to Financial Statements
CERTIFICATES OF DEPOSIT WITH OTHER FINANCIAL INSTITUTIONS - The estimated
---------------------------------------------------------
fair value of such instruments is based on discounted amounts receivable
using current market rates for certificates with similar maturities.
INVESTMENT SECURITIES - Fair values for investment securities are based on
---------------------
quoted market prices.
LOANS RECEIVABLE - Fair values are estimated for portfolios of loans with
----------------
similar financial characteristics. Loans are segregated by type such as
real estate, commercial and consumer which are also segmented into fixed
and adjustable rate interest terms and by performing and nonperforming
loans.
The fair value of performing loans is calculated by discounting scheduled
cash flows through the estimated maturity using estimated market discount
rates that reflect the credit and interest rate risk inherent in the loan.
The estimate of maturity is based on the Bank's historical experience with
repayments for each loan classification, modified, as required, by an
estimate of the effect of current economic and lending conditions.
Fair value for any significant nonperforming secured loans is based on
recent external appraisals. If appraisals are not available or the loan is
unsecured, estimated cash flows are discounted using a rate commensurate
with the risk associated with the estimated cash flows. Assumptions
regarding credit risk, cash flows, and discount rates are judgmentally
determined using available market information and specific borrower
information.
ACCRUED INTEREST RECEIVABLE - The carrying amounts of accrued interest
---------------------------
approximate their fair values.
DEPOSITS - The fair values disclosed for demand deposits are, as required
--------
by SFAS 107, equal to the amounts payable on demand at the reporting date
(i.e., their stated amounts). The fair value of certificates of deposit are
estimated by discounting the amounts payable at the certificate rates using
the rates currently offered for deposits of similar remaining maturities.
FEDERAL HOME LOAN BANK ADVANCES - The estimated fair value of advances from
-------------------------------
the FHLB is based on discounting amounts payable at contractual rates using
current market rates for advances with similar maturities.
(Continued)
F-17
<PAGE>
NEWPORT FEDERAL SAVINGS BANK
Notes to Financial Statements
The approximate stated and estimated fair value of financial instruments
are summarized below (in thousands of dollars):
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------
1997 1996
---------------------------- ---------------------------
Stated Estimated Stated Estimated
Amount fair value amount fair value
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and amounts due from banks $ 884,002 884,002 1,167,202 1,167,202
Certificates of deposit with other
financial institutions 691,000 691,000 890,000 890,000
Investment securities 5,922,956 5,951,010 6,310,348 6,280,489
Loans receivable, net 24,794,194 25,178,798 21,982,108 22,350,256
Accrued interest receivable 227,356 227,356 226,995 226,995
Financial liabilities:
Deposits:
Demand accounts 4,870,365 4,870,365 3,682,592 3,682,592
Certificate accounts 26,202,168 26,272,622 25,974,506 25,956,816
Federal Home Loan Bank advances 618,389 613,921 133,916 127,146
</TABLE>
The Bank had off-statement of financial condition financial commitments at
June 30, 1997 and 1996, which include approximately $253,000 and
$11,000, respectively, of commitments to originate and fund loans. Of
these off-statement of financial condition financial commitments, $4,000
were fixed rate commitments at June 30, 1997 with a stated interest rate
of 11.5%. No commitments at June 30, 1996 were fixed rate commitments.
Since these commitments are based on current market rates, the
commitment amount is considered to be a reasonable estimate of fair
market value.
(14) Pending Acquisition
-------------------
In August 1997, the Bank entered into an agreement to purchase
deposits of approximately $6,000,000 from another institution. The
transaction is expected to close in January 1998.
(15) Plan of Conversion
------------------
On May 29, 1997, the Bank's Board of Directors formally approved a plan
("Plan") to convert from a federally-chartered mutual savings bank to a
federally-chartered stock savings bank subject to approval by the Bank's
members as of a still-to-be determined future voting record date. The
Plan, which includes formation of a holding company, is subject to
approval by the OTS and includes the filing of a registration statement
with the Securities and Exchange Commission. As of June 30, 1997, the
Bank had incurred conversion costs of approximately $14,000 which have
been deferred. If the conversion is ultimately successful, actual
conversion costs will be accounted for as a reduction in gross proceeds.
If the conversion is unsuccessful, the conversion costs will be
expensed.
(Continued)
F-18
<PAGE>
NEWPORT FEDERAL SAVINGS BANK
Notes to Financial Statements
The Plan calls for the common stock of the Bank to be purchased by a
holding company and for the common stock of the holding company to be
offered to various parties in a subscription offering at a price based
on an independent appraisal. It is anticipated that any shares not
purchased in the subscription offering will be offered in a direct
community offering, and then any remaining shares offered to the general
public in a solicited offering.
The stockholders of the holding company will be asked to approve a proposed
stock option plan and a proposed restricted stock plan at a meeting of
the stockholders after the conversion. Shares issued to directors and
employees under these plans may be from authorized but unissued shares
of common stock or they may be purchased in the open market. In the
event that options or shares are issued under these plans, such
issuances will be included in the earnings per share calculation; thus,
the interests of existing stockholders would be diluted.
The Bank may not declare or pay a cash dividend if the effect thereof would
cause its net worth to be reduced below either the amounts required for
the liquidation account discussed below or the regulatory capital
requirements imposed by federal regulations.
At the time of conversion, the Bank will establish a liquidation account,
which will be a memorandum account that does not appear on the statement
of financial condition, in an amount equal to its retained earnings as
reflected in the latest statement of financial condition used in the
final conversion prospectus. The liquidation account will be maintained
for the benefit of eligible account holders who continue to maintain
their deposit accounts in the Bank after conversion. In the event of a
complete liquidation of the Bank (and only in such an event), eligible
depositors who continue to maintain accounts shall be entitled to
receive a distribution from the liquidation account before any
liquidation may be made with respect to common stock.
F-19
<PAGE>
GLOSSARY
ARM Loan Adjustable-rate mortgage loan.
BIF Bank Insurance Fund of the FDIC
Common Stock The common stock, $.01 par value per share, of North
Arkansas Bancshares, Inc.
Community Offering Offering for sale to certain members of the general
public of any shares of common stock not subscribed for
in the Subscription Offering, including the possible
offering of common stock in a Syndicated Community
Offering
Company North Arkansas Bancshares, Inc.
Conversion Simultaneous conversion of Newport Federal Savings Bank,
to stock form, the issuance of the Newport Federal
Savings Bank's outstanding capital stock to the Company
and the Company's offer and sale of common stock
Eligible Account
Holders Savings account holders of Newport Federal Savings Bank
with account balances of at least $50 as of the close of
business on December 31, 1995
ERISA Employee Retirement Income Security of 1974, as amended
ESOP Employee Stock Ownership Plan
Estimated
Valuation Range Estimated pro forma market value of the common stock
ranging from $2,380,000 to $3,220,000
Exchange Act Securities Exchange Act of 1934, as amended
Expiration Date 12:00 p.m., Central time, on December 10, 1997
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
A-1
<PAGE>
Federal Reserve System The Board of Governors of the Federal Reserve
System
Ferguson Ferguson & Company
FHLB Federal Home Loan Bank
FHLMC Federal Home Loan Mortgage Corporation
FNMA Federal National Mortgage Association
IRA Individual retirement account or arrangement
IRS Internal Revenue Service
MRP Management recognition plan to be adopted no
earlier than six months after the conversion
NASD National Association of Securities Dealers, Inc.
NOW account Negotiable order of withdrawal account
NPV Net portfolio value
Offering Subscription, Community and Syndicated Community
offerings, collectively
Option Plan Stock option plan to be adopted within one year
of the conversion
Order Form Form for ordering stock accompanied by a
certification concerning certain matters
Other Members Savings account holders (other than eligible
account holders and supplemental eligible
account holders) and certain borrowers
(borrowers whose loans were outstanding on
August 21, 1997 and continue to be outstanding)
who are entitled to vote at the Special Meeting
due to the existence of a savings account or a
borrowing, respectively, on the Voting Record
Date for the Special Meeting
OTC Bulletin Board An electronic stock data system operated by
Nasdaq
OTS Office of Thrift Supervision
A-2
<PAGE>
Plan of Conversion Plan of Newport Federal Savings Bank to convert from a
federally chartered mutual savings bank to a federally
chartered stock savings bank and the issuance of all of
Newport Federal Savings Bank's outstanding capital stock
to the Company and the issuance of the Company's stock
to the public
Purchase Price $10.00 per share price of the common stock
SAIF Savings Association Insurance Fund of the FDIC
SEC Securities and Exchange Commission
Securities Act Securities Act of 1933, as amended
SFAS Statement of Financial Accounting Standards adopted by
FASB
Special Meeting Special Meeting of members of Newport Federal Savings
Bank called for the purpose of approving the Plan
Subscription Offering Offering of non-transferable rights to subscribe for the
common stock, in order of priority, to Eligible Account
Holders, tax-qualified employee plans, Supplemental
Eligible Account Holders and Other Members
Supplemental Eligible
Account Holders Depositors, who are not Eligible Account Holders of
Newport Federal Savings Bank, with account balances of
at least $50 on September 30, 1997.
Syndicated Community
Offering Offering of shares of common stock remaining after the
Subscription Offering and undertaken prior to the end
and as part of the Community Offering, and which may, at
our discretion be made to the general public on a best
efforts basis by a selling group of broker-dealers.
Trident Securities Trident Securities, Inc.
Voting Record Date The close of business on November 7, 1997, the date for
determining members entitled to vote at the Special
Meeting.
A-3
<PAGE>
No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this document In connection with
the offering made hereby, and, ff given or made, such information or
representations must not be relied upon as having been authorized by Newport
Federal Savings Bank, the Company, or Trident Securities. This document does
not constitute an offer to sell, or the solicitation of an offer to buy, any of
the securities offered hereby to any person in any jurisdiction In which such
offer or solicitation would be unlawful. Neither the delivery of this document
by Newport Federal Savings Bank, the Company, or Trident Securities nor any sale
made hereunder shall in any circumstances create an implication that there has
been no change in the of Newport Federal Savings Bank or the Company, since any
of the dates as of which information is furnished herein or since the date
hereof.
NORTH ARKANSAS BANCSHARES, INC.
UP TO 370,300 SHARES
COMMON STOCK
PROSPECTUS
TRIDENT SECURITIES, INC.
DATED NOVEMBER 10, 1997
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
UNTIL THE LATER OF FEBRUARY 8, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS THAT BUY, SELL OR TRADE THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING M UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
