<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------
(Mark One) FORM 10-KSB
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
[_] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File No. 0-23525
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NORTH ARKANSAS BANCSHARES, INC.
---------------------------------------------------------------
(NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
TENNESSEE 71-0800742
- - ---------------------------------- ---------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
200 OLIVIA DRIVE, NEWPORT, ARKANSAS 72112
- - ---------------------------------------- ------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (870) 523-3611
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NOT APPLICABLE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE, $.01 PER SHARE
---------------------------------------
Check whether the issuer: (1) filed all reports required by Section 13 or 15(d)
of the Exchange Act during the preceding 12 months (or such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No _______
-----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
Registrant's revenues for the fiscal year ended June 30, 1998: $2,809,362
As of September 15, 1998, the aggregate market value of the 280,676 shares of
Common Stock of the registrant issued and outstanding held by non-affiliates on
such date was approximately $2,876,929 based on the closing sales price of
$10.25 per share of the registrant's Common Stock on September 15, 1998 as
reported on the OTC Electronic Bulletin Board. For purposes of this
calculation, it is assumed that directors, executive officers and beneficial
owners of more than 10% of the registrant's outstanding voting stock are
affiliates.
Number of shares of Common Stock outstanding as of September 22, 1998: 370,300
Transitional Small Business Disclosure Format Yes ________ No X
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DOCUMENTS INCORPORATED BY REFERENCE
The following lists the documents incorporated by reference and the Part of the
Form 10-KSB into which the document is incorporated:
None
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
- - --------------------------------
GENERAL
THE COMPANY. North Arkansas Bancshares, Inc. (the "Company"), a Tennessee
corporation, was organized at the direction of the Board of Directors of Newport
Federal Savings Bank ("Newport Federal" or the "Bank") in September 1997 to
acquire all of the capital stock to be issued by the Bank in its conversion from
mutual to stock form (the "Conversion"). The Conversion was completed on
December 18, 1997, with the Company issuing 370,300 shares of its common stock,
par value $0.01 per share (the "Common Stock") to the public, and the Bank
issuing all of its issued and outstanding common stock to the Company. Prior to
the Conversion, the Company did not engage in any material operations. The
Company does not have any significant assets other than the outstanding capital
stock of the Bank, cash and investment securities and a note receivable from the
ESOP. The Company's principal business is the business of the Bank. At June
30, 1998, the Company had total assets of $43.7 million, deposits of $34.3
million, net loans receivable of $25.6 million and stockholders' equity of $5.3
million.
NEWPORT FEDERAL SAVINGS BANK. The Bank is a federal stock savings bank
operating through one office in Newport, Arkansas. Newport Federal was founded
in 1934 as a federally chartered institution and a member of the Federal Home
Loan Bank ("FHLB") System. The Bank's principal business consists of attracting
deposits from the general public and originating residential mortgage loans.
The Bank also offers various types of consumer loans and commercial business
loans. The Bank's deposits are insured up to applicable limits by the Federal
Deposit Insurance Corporation ("FDIC") under the SAIF.
Both the Company's and Newport Federal's executive offices are located at 200
Olivia Drive, Newport, Arkansas 72112 and its main telephone number is (870)
523-3611.
MARKET AREA
The Bank considers its primary market area to be Jackson County in Northern
Arkansas. The City of Newport, where the Bank is 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 the Bank's market area are Arkansas State University-
Beebe/Newport, which is located in Newport, two hospitals, also based in
Newport, Arkansas Steel and the Noranda Aluminum Rolling Plant. Two privately-
owned prisons opened in January 1998 which have added 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.
LENDING ACTIVITIES
Most of the Bank's loans are mortgage loans which are secured by one- to
four-family residences. The Bank also makes consumer, residential construction
and commercial real estate and commercial business loans. At June 30, 1998,
the Bank's gross loans totaled $25.8 million of which $18.0 million were
mortgage loans secured by one-to four-family residences. The Bank originates
both fixed rate mortgage and adjustable rate mortgage ("ARM") loans. Generally,
all of the consumer loans the Bank originates have fixed rates.
2
<PAGE>
The following table sets forth information concerning the types of loans
held by the Bank at the dates indicated. At June 30, 1998, the Bank did not
have any concentrations of loans exceeding 10% of total loans except as
disclosed below.
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------------------------
1998 1997
---------------- ----------------
AMOUNT % AMOUNT %
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family.......... $18,018 69.88% $17,479 70.06%
Multi-family................. 129 .50 136 .55
Non-residential.............. 3,128 12.13 3,613 14.48
------- ------ ------- ------
Total real estate loans... 21,275 82.51 21,228 85.09
Consumer loans:
Loans secured by deposits.... 694 2.69 443 1.78
Home improvement 517 2.01 666 2.67
Automobile 2,174 8.43 2,010 8.05
Other consumer 632 2.45 510 2.04
Commercial 492 1.91 93 .37
------- ------ ------- ------
Total loans............. 25,784 100.00% 24,950 100.00%
------- ====== ------- ======
Less:
Deferred fees and discounts.. 2 6
Allowance for losses......... 189 150
------- -------
Loan portfolio, net..... $25,593 $24,794
======= =======
</TABLE>
The following table sets forth the estimated maturity of the Bank's loan
portfolio at June 30, 1998. 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 AFTER
DUE WITHIN 1 THROUGH DUE AFTER
ONE YEAR AFTER 5 YEARS AFTER 5 YEARS AFTER
JUNE 30, 1998 JUNE 30, 1998 JUNE 30, 1998 TOTAL
-------------- ------------- ------------- -------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Real estate loans:
One- to four-family.............. $ 715 $3,646 $13,657 $18,018
Multi-family..................... -- -- 129 129
Non-residential.................. 350 1,789 989 3,128
Consumer loans:
Loans secured by deposits........ 605 89 -- 694
Home improvement................. 2 133 382 517
Automobile....................... 106 2,051 17 2,174
Other consumer................... 226 363 43 632
Commercial......................... 225 267 -- 492
------ ------ ------- -------
Total......................... $2,229 $8,338 $15,217 $25,784
====== ====== ======= =======
</TABLE>
3
<PAGE>
The next table shows at June 30, 1998, the dollar amount of all the Bank's
loans due one year or more after June 30, 1998 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......... $3,745 $13,557
Multi-family................ -- 129
Non-residential............. 1,900 879
Consumer loans:
Loans secured by deposits... 89 --
Home improvement............ 515 --
Automobile.................. 2,068 --
Other consumer.............. 406 --
Commercial...................... 267 --
------ -------
Total...................... $8,990 $14,565
====== =======
</TABLE>
Scheduled contractual principal repayments of loans do not necessarily reflect
the actual life of such assets. The average life of long-term loans is
substantially less than their contractual terms, due to prepayments. In
addition, the Bank's mortgage loans generally give the Bank the right to declare
a loan due and payable in the event, among other things, that a borrower sells
the real property subject to the mortgage and the loan is not repaid.
ONE- TO FOUR-FAMILY RESIDENTIAL LOANS. The Bank's primary lending activity
consists of the origination of one- to four-family residential mortgage loans
secured by property located in the Bank's primary market area. At June 30,
1998, $18.1 million, or 70.0% of the Bank's gross loan portfolio consisted of
residential mortgage loans. The Bank generally originates 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%. The Bank primarily originates and
retains 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.
The Bank also offers 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, 1998, approximately 78.4% of the
one- to four-family residential loans the Bank holds had adjustable rates of
interest.
Mortgage loans originated and held by the Bank generally include due-on-sale
clauses. This gives the Bank 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 the Bank's consent.
4
<PAGE>
RESIDENTIAL CONSTRUCTION LOANS. The Bank makes 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. Loan proceeds are disbursed according to a draw schedule and the
Bank inspects the progress of the construction before additional funds are
disbursed. The Bank charges a fixed rate of interest on the Bank's construction
loans. While the Bank occasionally agrees to convert the balance of
construction loans to a permanent mortgage upon completion of the construction
phase, the Bank 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 the Bank originates.
Construction lending is generally considered to involve a higher degree of
credit risk than long term financing of residential properties. The Bank's 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 proves to be
inaccurate, the Bank 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. The Bank's 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, 1998, the Bank's three largest commercial real estate loans consisted of a
loan to a nursing home which had a balance of $444,000 at June 30, 1998, a loan
to a funeral home which had a balance of $246,000 and a loan to a grocery store
which had a balance of $140,000 at June 30, 1998. At June 30, 1998, all three
of these loans were performing in accordance with their terms.
Multi-family and commercial real estate loans are made in amounts of up to 80%
of the appraised value of the property and may be on a fixed or adjustable rate
basis for terms of up to five years. Prior to committing to make a multi-family
or commercial real estate loan, the Bank requires that the prospective borrower
provide a cash flow statement indicating sufficient cash flow from the property
to service the loan. The Bank reviews any tenant leases and requires that the
payments under such leases be assigned to the Bank.
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, the Bank generally limits this type of lending to the Bank's market
area and to borrowers who are otherwise well known to us.
COMMERCIAL BUSINESS LOANS. The Bank offers commercial business loans to
benefit from the higher fees and interest rates and the shorter term to
maturity. The Bank's 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.
Commercial business loans are generally written for a term of five years or less
although they may be renewed by the Bank at maturity. Interest payments are
made at least semi-annually and the rate may be changed annually in accordance
with market rates.
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.
5
<PAGE>
CONSUMER LOANS. The Bank offers consumer loans in order to provide a wider
range of financial services to the Bank's customers. Consumer loans totaled
$4.0 million, or 15.6% of the Bank's total loans at June 30, 1998. The Bank's
consumer loans consist of automobile, home improvement, share account and
personal loans. The Bank's home improvement loans are primarily originated
under a program whereby the U.S. Government guarantees 90% of the principal
balance of such loans. The Bank began offering personal lines of credit in
1997. The Bank offers both unsecured lines of credit that are granted based
upon the borrower's financial strength and secured 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 SOLICITATION AND PROCESSING. Loan originations are derived from a number
of sources, including walk-in customers and referrals by realtors, depositors
and borrowers.
The Bank's President may approve all one-to four-family mortgage loans that
conform to all of the Bank's policy requirements up to $50,000, and may approve
all consumer loans. The Executive Committee of the Bank's board which consists
of three directors may approve loans with principal balances of up to $100,000.
All other loans require the approval of the Bank's 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.
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, 1998, commitments to cover originations of
mortgage loans were $180,000. The Bank believes that virtually all of the
Bank's commitments will be funded.
LOAN ORIGINATIONS, PURCHASES AND SALES. Most of the loans the Bank originates
are intended to be held in the Bank's portfolio rather than sold in the
secondary mortgage market. The Bank occasionally purchases 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 the Bank
has less control over the origination and subsequent administration of such
loans. At June 30, 1998, all of the Bank's participation loans were performing
in accordance with their terms.
LOANS TO ONE BORROWER. The maximum amount of loans which the Bank may make to
any one borrower may not exceed the greater of $500,000 or 15% of the Bank's
unimpaired capital and unimpaired surplus. The Bank may lend an additional 10%
of the Bank's unimpaired capital and unimpaired surplus if the loan is fully
secured by readily marketable collateral. The Bank's maximum loan-to-one
borrower limit was approximately $632,000 at June 30, 1998. At June 30, 1998,
the Bank's largest loan outstanding had a balance of $444,000. This loan was a
commercial real estate loan made to a nursing home.
LOAN DELINQUENCIES. Generally when a mortgage loan becomes 15 days past due,
a late charge is assessed. If, after 30 days, a payment is still delinquent,
the borrower will receive a computer-generated notice and a letter and/or
telephone call from the Bank and may receive a visit from one of the Bank's
representatives. If the loan continues in
6
<PAGE>
a delinquent status for 60 days, a letter is sent giving the borrower 10 days in
which to cure the delinquency or risk having the loan called. If no payment is
received after that 10 day period, the loan is called and appropriate legal or
foreclosure action is initiated. At June 30, 1998, the Bank's loans past due
between 30 and 89 days totaled $271,000.
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
the Bank's 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.
NONPERFORMING ASSETS. The following table sets forth information regarding
nonaccrual loans and real estate owned. As of the dates indicated, the Bank 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,
-------------------
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Loans accounted for on a non-accrual basis:
Real estate:
One- to four-family....................... $ 13 $ 67
Multi-family.............................. -- --
Non-residential........................... 23 --
----- -----
Total real estate loans................. 36 67
Consumer loans:
Loans secured by deposits................. -- --
Home improvement.......................... 11 7
Automobile................................ -- --
Other consumer............................ -- --
Commercial................................... -- --
----- -----
Total nonperforming loans............ 47 74
----- -----
Repossessed automobiles...................... 69 --
Foreclosed real estate....................... 536 --
----- -----
Total nonperforming assets................... 605 74
===== =====
Total nonperforming assets as a
percentage of total net loans.............. 2.36% .30%
===== =====
Total nonperforming assets as a
percentage of total assets................. 1.42% .21%
===== =====
</TABLE>
7
<PAGE>
During the year ended June 30, 1998, the Bank would have recorded additional
interest income of approximately $21,000 on nonaccrual loans if such loans had
been current throughout the period. The Bank did not include any income on
nonaccrual loans during the year. In addition, the Bank had $10,000 in loans
which were not classified as nonaccrual, 90 days past due or restructured, but
where known information causes the Bank to have serious concerns as to the
ability of these borrowers to comply with their current loan terms.
During the year ended June 30, 1998, the Bank's largest loan went into
delinquent status. This loan was a participation interest in a $5.8 million
loan which is secured by a 625-room hotel located in Oklahoma City. During the
third quarter of fiscal 1998, the lead lender reached a settlement with the
borrower and the guarantors which resulted in the lender accepting a deed in
lieu of foreclosure in March 1998. Based on an updated appraisal of the
property obtained in January, 1998 the Bank wrote down the value of its interest
to $536,000. The property was transferred to other real estate owned in
connection with the acceptance of the deed in lieu of foreclosure. The write
down in the value of the loan was charged against the allowance for loan losses.
While the property currently generates sufficient cash flow to cover the costs
of upkeep and is being marketed for sale there can be no assurance that further
write downs in connection with this property will not be required.
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, 1998, none of the Bank's assets were classified as special mention
or doubtful but the Bank had loans classified as substandard totaling $124,000.
In addition, the Bank's real estate owned and repossessed automobiles were also
classified as substandard.
FORECLOSED REAL ESTATE. Real estate acquired by the Bank 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, 1998, the Bank's only real estate owned consisted of its interest in a 625-
room hotel located in Oklahoma City. See " -- Nonperforming Assets."
ALLOWANCE FOR LOAN LOSSES. The Bank's policy is to provide for losses on
unidentified loans in the Bank's loan portfolio. A provision for loan losses is
charged to operations based on management's evaluation of the potential
8
<PAGE>
losses that may be incurred in the Bank's loan portfolio. The evaluation,
including a review of all loans on which full collectibility of interest and
principal may not be reasonably assured, considers: (i) the Bank's past loan
loss experience, (ii) known and inherent risks in the Bank's 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.
The Bank monitors its allowance for loan losses and makes additions to the
allowance as economic conditions dictate. Although the Bank maintains the
allowance for loan losses at a level that it considers adequate for the inherent
risk of loss in the Bank's 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, the Bank's 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 the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period........... $ 150 $ 73
------ -------
Charge-offs:
One-to-four-family..................... (5) (13)
Multi-family........................... -- --
Non-residential........................ (112) --
------ -------
Total real estate loans............. (117) (13)
Recoveries:
One-to-four-family..................... -- --
Multi-family........................... -- --
Non-residential........................ -- --
Net recoveries (charge-offs)............. (117) (13)
------ -------
Additions charged to operations.......... 156 90
------ -------
Balance at end of period................. 189 150
------ -------
Allowance for loan losses to total
Nonperforming assets at end of period.. 32.41% 202.70%
====== =======
Allowance for loan losses to net loans
at end of period....................... .74% .60%
====== =======
Ratio of net charge-offs to average
loans outstanding during the period.... .37% .05%
====== =======
</TABLE>
9
<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 the Bank's use of the allowance to absorb losses in other
loan categories.
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------------------
1998 1997
-------------------------- -------------------------
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............... $132 69.88% $105 70.06%
Multi-family...................... 1 .50 1 .55
Non-residential................... 23 12.13 22 14.48
---- ------ ---- ------
Total real estate loans........ 156 82.51 128 85.09
Consumer loans:
Loans secured by deposits......... 5 2.69 3 1.78
Home improvement.................. 4 2.01 4 2.67
Automobile........................ 16 8.43 12 8.05
Other consumer.................... 5 2.45 3 2.04
Commercial......................... 3 1.91 -- .37
---- ------ ---- ------
Total allowance for loan losses. $189 100.00% $150 100.00%
==== ====== ==== ======
</TABLE>
INVESTMENT ACTIVITIES
INVESTMENT SECURITIES. The Bank is 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." The level of liquid
assets varies depending upon several factors, including: (i) the yields on
investment alternatives, (ii) the Bank's judgment as to the attractiveness of
the yields then available in relation to other opportunities, (iii) expectation
of future yield levels, and (iv) the Bank's projections as to the short-term
demand for funds to be used in loan origination and other activities. The Bank
classifies all the Bank's investment securities as "held to maturity" in
accordance with SFAS No. 115. At June 30, 1998, the Bank's 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.
The Bank's investment securities at June 30, 1998 did not contain securities
of any issuer with an aggregate book value in excess of 10% of the Bank's
equity, excluding those issued by the United States Government or its agencies.
MORTGAGE BACKED SECURITIES. To supplement lending activities, the Bank has
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. The
Bank's 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
10
<PAGE>
certificates are guaranteed by those agencies only. The Bank's mortgage-backed
securities portfolio was classified as "held to maturity" at June 30, 1998.
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 actual maturity of a mortgage-backed security varies, depending on when
the mortgagors prepay or repay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the investment, thereby adversely
affecting its yield to maturity and the related market value of the mortgage-
backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security. Premiums and discounts on mortgage-backed securities
are amortized or accreted over the estimated term of the securities using the
interest method. The prepayment assumptions used to determine the amortization
period for premiums and discounts can significantly affect the yield of the
mortgage-backed security, and these assumptions are reviewed periodically to
reflect the actual prepayment. The actual prepayments of the underlying
mortgages depend on many factors, including the type of mortgage, the coupon
rate, the age of the mortgages, the geographical location of the underlying real
estate collateralizing the mortgages and general levels of market interest
rates. The difference between the interest rates on the underlying mortgages
and the prevailing mortgage interest rates is an important determinant in the
rate of prepayments. During periods of falling mortgage interest rates,
prepayments generally increase, and, conversely, during periods of rising
mortgage interest rates, prepayments generally decrease. If the coupon rate of
the underlying mortgage significantly exceeds the prevailing market interest
rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages. Prepayment experience
is more difficult to estimate for adjustable-rate mortgage-backed securities.
As a member of the FHLB of Dallas, the Bank is required to maintain an
investment in FHLB Stock. At June 30, 1998, the Bank investment in FHLB Stock
amounted to $301,000. No ready market exists for such stock and it has no
quoted market value.
The following table sets forth the carrying value of the Bank's investment
securities and mortgage-backed portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
-------------------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
U.S. Government agencies...... $ 3,000 $ 500
Mortgage-backed securities.... 7,895 5,077
Federal Home Loan Bank stock.. 301 283
Municipal securities.......... 48 63
------- ------
Total..................... $11,244 $5,923
======= ======
</TABLE>
11
<PAGE>
The following table sets forth the scheduled maturities, carrying
values, market values and average yields for the Bank's investment portfolio at
June 30, 1998.
<TABLE>
<CAPTION>
TOTAL
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS MORE THAN TEN YEARS INVESTMENT PORTFOLIO
------------------ ------------------- ------------------- --------------------- --------------------
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
-------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held to
maturity:
U.S. government and
agencies.............. $ -- --% $3,000 6.35% $ -- -- % $ -- -- % $ 3,000 6.35%
Mortgage-backed
securities (1)....... -- -- -- -- -- -- 7,895 7.39 7,895 7.39
Municipal securities... -- -- 8 9.50 12 9.50 28 9.50 48 9.50
-------- ------ -------- ------ ------
$ $3,008 $ 12 $7,923 $10,943
======== ====== ======== ======= =======
</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.
12
<PAGE>
SOURCES OF FUNDS
Deposits are the Bank's 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 the Bank's 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 the
Bank on deposits are set weekly at the direction of the Bank's senior
management. Interest rates are determined based on the Bank's liquidity
requirements, interest rates paid by the Bank's competitors, and the Bank's
growth goals and applicable regulatory restrictions and requirements.
Certificates of deposit in amounts of $100,000 or more totaled $4.2 million
or 12.3% of the deposit portfolio. The majority of these certificates represent
deposits from long-standing customers. As of June 30, 1998, the Bank had no
brokered deposits.
At June 30, 1998, the Bank's 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>
3.00% None Passbook accounts $ 500 $ 1,938 5.65%
2.40 None NOW accounts 500 2,180 6.36
3.50 None Money market accounts 2,500 263 .77
-- None Other non-interest bearing 100 1,724 5.03
CERTIFICATES OF DEPOSIT
-----------------------
4.07 31 days Fixed-Term, Fixed-Rate 500 26 .08
4.50 91 days Fixed-Term, Fixed-Rate 500 193 .56
5.47 6 months Fixed-Term, Fixed-Rate 500 5,802 16.93
5.67 12 months Fixed-Term, Fixed-Rate 500 7,561 22.06
5.72 15 months Fixed-Term, Fixed-Rate 500 2,515 7.34
5.77 18 months Fixed-Term, Fixed-Rate 500 1,439 4.20
5.82 24 months Fixed-Term, Fixed-Rate 500 1,277 3.73
5.93 36 months Fixed-Term, Fixed-Rate 500 1,341 3.91
6.08 60 months Fixed-Term, Fixed-Rate 500 8,012 23.38
---------- ------
Total certificates of deposit 28,166 82.19
---------- ------
Total savings deposits $ 34,271 100.00%
========== ======
</TABLE>
- - -------------------------
(1) Indicates weighted average interest rate at June 30, 1998.
13
<PAGE>
The following table sets forth the Bank's time deposits classified by
interest rate at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
2 - 3.99%...................................... $ 178 $ --
4 - 5.99%...................................... 24,629 26,202
6 - 7.99%...................................... 3,359 --
------- -------
$28,166 $26,202
======= =======
</TABLE>
The following table sets forth the amount and maturities of the Bank's time
deposits at June 30, 1998.
<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%........ $ 178 $ -- $ -- $ -- $ 178
3 - 5.99%........ 19,850 1,741 527 2,511 24,629
6 - 7.99%........ 147 623 2,316 273 3,359
------- ------- ------ ------ -------
$20,175 $ 2,364 $2,843 $2,784 $28,166
======= ======= ====== ====== =======
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1998.
<TABLE>
<CAPTION>
CERTIFICATES
Maturity Period OF DEPOSIT
--------------- ------------
(IN THOUSANDS)
<S> <C>
Three months or less........................... $1,148
Over three through six months.................. 527
Over six through 12 months..................... 1,510
Over 12 months................................. 1,022
------
Total..................................... $4,207
======
</TABLE>
BORROWINGS. Advances (borrowings) may be obtained from the FHLB of Dallas
to supplement the Bank's supply of lendable funds. Advances from the FHLB of
Dallas are typically secured by a pledge of the Bank's stock in the FHLB of
Dallas, a portion of the Bank's 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, 1998, borrowings from the FHLB of Dallas
totaled $4.0 million and consisted of a short term advance of $900,000 which
matured on July 7, 1998 and three long term obligations.
14
<PAGE>
The following table sets forth certain information regarding the Bank's
borrowings.
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED JUNE 30,
------------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Amounts outstanding at end of period:
FHLB advances.............................. $3,970 $ 618
Weighted average rate paid on:
FHLB advances............................. 5.786% 5.58%
Maximum amount of borrowings outstanding
at any month end:
FHLB advances.............................. 4,008 2,175
Approximate average short-term borrowings
outstanding with respect to:
FHLB advances.............................. 783 889
Approximate weighted average rate paid on:
FHLB advances............................. 5.769% 5.49%
</TABLE>
PERFORMANCE RATIOS
The table below sets forth certain performance ratios of the Company at or
for the years indicated.
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED JUNE 30,
-----------------------
1998 1997
----------- ----------
<S> <C> <C>
Return on assets (net earnings divided by
average total assets)................................ .06% (.60)%
Return on average stockholders' equity (net earnings
divided by average stockholders' equity)............. .65 (8.41)
Dividend payout ratio (dividends declared per share
divided by net earnings per share).................. N/A N/A
Interest rate spread (combined weighted average
interest rate earned less combined weighted
average interest rate cost).......................... 3.31 2.54
Ratio of average interest-earning assets to
average interest-bearing liabilities................. 102.97 102.60
Ratio of noninterest expense to average total assets.. 2.74 3.73
</TABLE>
15
<PAGE>
COMPETITION
The Bank competes for deposits with other insured financial institutions
such as commercial banks, thrift institutions, credit unions, finance companies,
and multi-state regional banks in the Bank's market area. The Bank also competes
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. The Bank's competition
comes from commercial banks, thrift institutions, credit unions and mortgage
bankers, many of whom have greater resources than the Bank has.
PERSONNEL
At June 30, 1998, the Bank had 12 full-time and two part-time employees.
None of the Bank's employees are represented by a collective bargaining group.
The Bank believes that the Bank's relationship with its employees is good.
REGULATION OF THE COMPANY
GENERAL. The Company is a savings and loan holding company within the
meaning of the Home Owners' Loan Act, as amended ("HOLA"). As such the Company
is registered with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. As a subsidiary of a savings and loan
holding company, the Bank is subject to certain restrictions in its dealings
with the Company and affiliates thereof.
ACTIVITIES RESTRICTIONS. The Board of Directors of the Company presently
operates the Company as a unitary savings and loan holding company. There are
generally no restrictions on the activities of a unitary savings and loan
holding company. However, if the Director of OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness, or stability of its subsidiary savings association, the Director of
OTS may impose such restrictions as deemed necessary to address such risk
including limiting: (i) payment of dividends by the savings institution, (ii)
transactions between the savings institution and its affiliates; and (iii) any
activities of the savings institution that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet the Qualified
Thrift Lender ("QTL") Test, then such unitary holding company shall also
presently become subject to the activities restrictions applicable to multiple
holding companies and unless the savings association requalifies as a QTL within
one year thereafter, register as, and become subject to, the restrictions
applicable to a bank holding company. See "Regulation of the Bank -- Qualified
Thrift Lender Test."
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
Test, the activities of the Company and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions. Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings institution may commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity, upon prior notice
to, and no objection by the OTS, other than (i) furnishing or performing
management services for a subsidiary savings institution, (ii) conducting an
insurance agency or escrow business, (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution, (iv) holding
or managing properties used or occupied by a subsidiary savings institution, (v)
acting as trustee under deeds of trust, (vi) those activities previously
directly authorized by regulation as of March 5, 1987 to be engaged in by
multiple holding companies or (vii) those activities authorized by the Federal
Reserve Board as permissible for bank holding companies, unless the Director of
OTS by regulation prohibits or limits such activities for savings and loan
16
<PAGE>
holding companies. Those activities described in (vii) above must also be
approved by the Director of OTS prior to being engaged in by a multiple holding
company.
TRANSACTIONS WITH AFFILIATES. Transactions between savings institutions
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings institution is any company or entity which
controls, is controlled by or is under common control with the savings
institution. In a holding company context, the parent holding company of a
savings institution (such as the Company) and any companies which are controlled
by such parent holding company are affiliates of the savings institution.
Generally, Sections 23A and 23B (i) limit the extent to which the savings
institution or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable, to the institution or subsidiary as those provided to a non-
affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no savings institution may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings institution. Savings associations are
also subject to the anti-tying provisions of Section 106(b) of the Bank Holding
Company Act of 1956 ("BHCA") which prohibits a depository institution from
extending credit to or offering any other services, or fixing or varying the
consideration for such extension of credit or service, on the condition that the
customer obtain some additional service from the institution or certain of its
affiliates or not obtain services of a competitor of the institution, subject to
certain exceptions.
Savings institutions are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act on loans to executive officers,
directors and principal stockholders. Under Section 22(h), loans to an executive
officer and to a greater than 10% stockholder of a savings institution, and
certain affiliated entities of either, may not exceed, together with all other
outstanding loans to such person and affiliated entities the institution's loan
to one borrower limit (generally equal to 15% of the institution's unimpaired
capital and surplus and an additional 10% of such capital and surplus for loans
fully secured by certain readily marketable collateral) and all loans to such
persons may not exceed the institution's unimpaired capital and unimpaired
surplus unless the institution has less than $100 million in deposits in which
case the aggregate limit may be increased to no more than two times unimpaired
capital and surplus. Section 22(h) also prohibits loans, above amounts
prescribed by the appropriate federal banking agency, to directors, executive
officers and greater than 10% stockholders of a savings institution, and their
respective affiliates, unless such loan is approved in advance by a majority of
the board of directors of the institution with any "interested" director not
participating in the voting. The Federal Reserve Board has prescribed the loan
amount (which includes all other outstanding loans to such person), as to which
such prior board of director approval is required, as being the greater of
$25,000 or 5% of capital and surplus (up to $500,000). Further, the Federal
Reserve Board pursuant to Section 22(h) requires that loans to directors,
executive officers and principal stockholders be made on terms substantially the
same as offered in comparable transactions to other persons unless the loan is
made pursuant to a benefit or compensation plan that is widely available to
other employees and does not give preference to insiders. Section 22(h) also
generally prohibits a depository institution from paying the overdrafts of any
of its executive officers or directors.
Savings institutions are also subject to the requirements and restrictions
of Section 22(g) of the Federal Reserve Act and Regulation on loans to executive
officers and the restrictions of 12 U.S.C. ' 1972 on certain tying arrangements
and extensions of credit by correspondent banks. Section 22(g) of the Federal
Reserve Act requires that loans to executive officers of depository institutions
not be made on terms more favorable than those afforded to other borrowers,
requires approval for such extensions of credit by the board of directors of the
institution, and imposes reporting requirements for and additional restrictions
on the type, amount and terms of credits to such officers. Section 1972
prohibits (i) a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain
17
<PAGE>
exceptions, and (ii) extensions of credit to executive officers, directors, and
greater than 10% stockholders of a depository institution by any other
institution which has a correspondent banking relationship with the institution,
unless such extension of credit is on substantially the same terms as those
prevailing at the time for comparable transactions with other persons and does
not involve more than the normal risk of repayment or present other unfavorable
features.
RESTRICTIONS ON ACQUISITIONS. The HOLA generally prohibits savings and
loan holding companies from acquiring, without prior approval of the Director of
OTS, (i) control of any other savings institution or savings and loan holding
company or substantially all the assets thereof, or (ii) more than 5% of the
voting shares of a savings institution or holding company thereof which is not a
subsidiary. Under certain circumstances, a registered savings and loan holding
company is permitted to acquire, with the approval of the Director of OTS, up to
15% of the voting shares of an under-capitalized savings institution pursuant to
a "qualified stock issuance" without that savings institution being deemed
controlled by the holding company. In order for the shares acquired to
constitute a "qualified stock issuance," the shares must consist of previously
unissued stock or treasury shares, the shares must be acquired for cash, the
savings and loan holding company's other subsidiaries must have tangible capital
of at least 6-1/2% of total assets, there must not be more than one common
director or officer between the savings and loan holding company and the issuing
savings institution and transactions between the savings institution and the
savings and loan holding company and any of its affiliates must conform to
Sections 23A and 23B of the Federal Reserve Act. Except with the prior approval
of the Director of OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may also acquire control of any savings institution, other
than a subsidiary savings institution, or of any other savings and loan holding
company.
The Director of OTS may only approve acquisitions resulting 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).
The OTS regulations permit federal associations to branch in any state or
states of the United States and its territories. Except in supervisory cases or
when interstate branching is otherwise permitted by state law or other statutory
provision, a federal association may not establish an out-of-state branch unless
(i) the federal association qualifies as a "domestic building and loan
association" under '7701(a)(19) of the Code and the total assets attributable to
all branches of the association in the state would qualify such branches taken
as a whole for treatment as a domestic building and loan association and (ii)
such branch would not result in (a) formation of a prohibited multi-state
multiple savings and loan holding company or (b) a violation of certain
statutory restrictions on branching by savings association subsidiaries of
banking holding companies. Federal associations generally may not establish new
branches unless the association meets or exceeds minimum regulatory capital
requirements. The OTS will also consider the association's record of compliance
with the Community Reinvestment Act of 1977 in connection with any branch
application.
Under the BHCA, bank holding companies are specifically authorized to
acquire control of any savings association. Pursuant to rules promulgated by
the Federal Reserve Board, owning, controlling or operating a savings
institution is a permissible activity for bank holding companies, if the savings
institution engages only in deposit-taking activities and lending and other
activities that are permissible for bank holding companies. A bank holding
company that controls a savings institution may merge or consolidate the assets
and liabilities of the savings institution with, or transfer assets and
liabilities to, any subsidiary bank which is a member of the BIF with the
approval of the appropriate federal banking agency and the Federal Reserve
Board. The resulting bank will be required to continue to pay assessments to
the SAIF at the rates prescribed for SAIF members on the deposits attributable
to the merged savings institution plus an annual growth increment. In addition,
the transaction must comply with the restrictions on interstate acquisitions of
commercial banks under the BHCA.
18
<PAGE>
REGULATION OF THE BANK
GENERAL. As a federally chartered savings institution, Newport Federal is
subject to extensive regulation by the OTS. The lending activities and other
investments of Newport Federal must comply with various state and federal
regulatory requirements. The OTS periodically examines the Bank for compliance
with various regulatory requirements. The FDIC also has the authority to
conduct special examinations of the Bank because its deposits are insured by
SAIF. The Bank must file reports with these agencies describing its activities
and financial condition. The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board. This supervision and
regulation is intended primarily for the protection of depositors. Certain of
these regulatory requirements are referred to below or appear elsewhere herein.
REGULATORY CAPITAL REQUIREMENTS. Under OTS capital standards, savings
associations must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3.0% of adjusted total assets and a combination
of core and "supplementary" capital equal to 8.0% of "risk-weighted" assets. In
addition, the OTS has recently adopted regulations which impose certain
restrictions on savings associations that have a total risk-based capital ratio
that is 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% (or 3.0% if the institution is rated Composite 1 under the OTS
examination rating system). See " -- Prompt Corrective Regulatory Action." For
purposes of this regulation, Tier 1 capital has the same definition as core
capital which is defined as common shareholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Core capital is generally reduced by the amount of the savings
association's intangible assets for which no market exists. Limited exceptions
to the deduction of intangible assets are provided for purchased mortgage
servicing rights and qualifying supervisory goodwill. Tangible capital is given
the same definition as core capital but does not include an exception for
qualifying supervisory goodwill and is reduced by the amount of all the savings
association's intangible assets with only a limited exception for purchased
mortgage servicing rights and purchased credit card relationships. Both core
and tangible capital are further reduced by an amount equal to the savings
association's debt and equity investments in subsidiaries engaged in activities
not permissible to national banks other than subsidiaries engaged in activities
undertaken solely as an agent for customers or in mortgage banking activities
and subsidiary depository institutions or their holding companies. At June 30,
1998, Newport Federal had no such investments.
Adjusted total assets are a savings association's total assets as
determined under generally accepted accounting principles, adjusted for certain
goodwill amounts and increased by a pro rated portion of the assets of
subsidiaries in which the savings association holds a minority interest and
which are not engaged in activities for which the capital rules require
deduction of its debt and equity investments. Adjusted total assets are reduced
by the amount of assets that have been deducted from capital, the portion of the
savings association's investments in subsidiaries that must be netted against
capital under the capital rules and, for purposes of the core capital
requirement, qualifying supervisory goodwill.
In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
savings association's core capital. Supplementary capital is defined to include
certain preferred stock issues, nonwithdrawable accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments and a portion of the savings association's general
loss allowances. Total core and supplementary capital are reduced by the amount
of capital instruments held by other depository institutions pursuant to
reciprocal arrangements and by the savings association's high loan-to-value
ratio land loans and non-residential construction loans and equity investments
other than those deducted from core and tangible capital. At June 30, 1998, the
Bank had no high ratio land or nonresidential construction loans and had no
equity investments for which OTS regulations require deduction from total
capital.
The risk-based capital requirement is measured against risk-weighted assets
which equal the sum of each asset and the credit-equivalent amount of each off-
balance sheet item after being multiplied by an assigned risk weight.
19
<PAGE>
Under the OTS risk-weighting system, one- to four-family first mortgages not
more than 90 days past due with loan-to-value ratios under 80% are assigned a
risk weight of 50%. Consumer and residential construction loans are assigned a
risk weight of 100%. Mortgage-backed securities issued, or fully guaranteed as
to principal and interest, by FNMA and the FHLMC are assigned a 20% risk weight.
Cash and U.S. Government securities backed by the full faith and credit of the
U.S. Government are given a 0% risk weight. As of June 30, 1998, the Bank's
risk-weighted assets were approximately $20.7 million.
The table below presents the Bank's capital position relative to its
various regulatory capital requirements at June 30, 1998.
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
-------- -------------
(Dollars in Thousands)
<S> <C> <C>
Tangible capital...................................... $4,109 9.6%
Tangible capital requirement.......................... 643 1.5
------ ----
Excess.............................................. $3,466 8.1%
====== ====
Core capital.......................................... $4,109 9.6%
Core capital requirement.............................. 1,285 3.0
------ ----
Excess.............................................. $2,824 6.6%
====== ====
Total capital (i.e., core and supplementary capital).. $4,185 20.2%
Risk-based capital requirement........................ 1,660 8.0
------ ----
Excess.............................................. $2,525 12.2%
====== ====
</TABLE>
__________________
(1) Based upon adjusted total assets for purposes of the tangible, core and
Tier 1 capital requirements, and risk-weighted assets for purposes of the
risk-based capital requirements.
OTS regulations require savings institutions with more than a "normal"
level of interest rate risk to maintain additional total capital. A savings
institution's interest rate risk is 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. A savings
institution with a greater than normal interest rate risk is 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.
The OTS calculates the sensitivity of a savings 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 a savings institution's total capital is 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 will require any exempt
savings institution that it determines may have a high level of interest rate
risk exposure to file such schedule on a quarterly basis. The OTS has not yet
implemented these requirements. The Bank has determined that, on the basis of
current financial data, it will
20
<PAGE>
not be deemed to have more than normal level of interest rate risk under the new
rule and does not expect that it will be required to increase its total capital
as a result of the rule upon its implementation.
In addition to requiring generally applicable capital standards for savings
institutions, the OTS is authorized to establish the minimum level of capital
for a savings institution at such amount or at such ratio of capital-to-assets
as the OTS determines to be necessary or appropriate for such institution in
light of the particular circumstances of the institution. The OTS may treat the
failure of any savings institution to maintain capital at or above such level as
an unsafe or unsound practice and may issue a directive requiring any savings
institution which fails to maintain capital at or above the minimum level
required by the OTS to submit and adhere to a plan for increasing capital. Such
an order may be enforced in the same manner as an order issued by the FDIC.
PROMPT CORRECTIVE REGULATORY ACTION. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date it failed to comply with its capital restoration plan. A
"significantly undercapitalized" institution, as well as any undercapitalized
institution that did not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution. Any company controlling the
institution could also be required to divest the institution or the institution
could be required to divest subsidiaries. The senior executive officers of a
significantly undercapitalized institution may not receive bonuses or increases
in compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total
assets falls below a "critical capital level," the institution will be subject
to conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized. If a savings institution is in
compliance with an approved capital plan on the date of enactment of FDICIA,
however, it will not be required to submit a capital restoration plan if it is
undercapitalized or become subject to the statutory prompt corrective action
provisions applicable to significantly and critically undercapitalized
institutions prior to July 1, 1994.
The federal banking regulators, including the OTS, generally measure a
depository institution's capital adequacy on the basis of the institution's
total risk-based capital ratio (the ratio of its total capital to risk-weighted
assets), Tier 1 risk-based capital ratio (the ratio of its core capital to risk-
weighted assets) and leverage ratio (the ratio of its core capital to adjusted
total assets). Under the regulations, a savings institution that is not subject
to an order or written directive to meet or maintain a specific capital level
will be deemed "well capitalized" if it also has: (i) a total risk-based capital
ratio of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or
greater; and (iii) a leverage ratio of 5.0% or greater. An "adequately
capitalized" savings institution is a savings institution that does not meet the
definition of well capitalized and has: (i) a total risk-based capital ratio of
8.0% or greater; (ii) a Tier 1 capital risk-based
21
<PAGE>
ratio of 4.0% or greater; and (iii) a leverage ratio of 4.0% or greater (or 3.0%
or greater if the savings institution has a composite 1 CAMELS rating). An
"undercapitalized institution" is a savings institution that has (i) a total
risk-based capital ratio less than 8.0%; or (ii) a Tier 1 risk-based capital
ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0% (or 3.0% if
the institution has a composite 1 CAMELS rating). A "significantly
undercapitalized" institution is defined as a savings institution that has: (i)
a total risk-based capital ratio of less than 6.0%; or (ii) a Tier 1 risk-based
capital ratio of less than 3.0%; or (iii) a leverage ratio of less than 3.0%. A
"critically undercapitalized" savings institution is defined as a savings
institution that has a ratio of "tangible equity" to total assets of less than
2.0%. Tangible equity is defined as core capital plus cumulative perpetual
preferred stock (and related surplus) less all intangibles other than qualifying
supervisory goodwill and certain purchased mortgage servicing rights. The OTS
may reclassify a well capitalized savings institution as adequately capitalized
and may require an adequately capitalized or undercapitalized institution to
comply with the supervisory actions applicable to institutions in the next lower
capital category (but may not reclassify a significantly undercapitalized
institution as critically under-capitalized) if the OTS determines, after notice
and an opportunity for a hearing, that the savings institution is in an unsafe
or unsound condition or that the institution has received and not corrected a
less-than-satisfactory rating for any CAMELS rating category. The Bank is
classified as "well capitalized" under these regulations.
QUALIFIED THRIFT LENDER TEST. A savings institution that does not meet the
Qualified Thrift Lender test ("QTL Test") must either convert to a bank charter
or comply with the following restrictions on its operations: (i) the institution
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for a national
bank; (ii) the branching powers of the institution shall be restricted to those
of a national bank; (iii) the institution shall not be eligible to obtain any
advances from its FHLB; and (iv) payment of dividends by the institution shall
be subject to the rules regarding payment of dividends by a national bank. Upon
the expiration of three years from the date the institution ceases to be a QTL,
it must cease any activity, and not retain any investment not permissible for a
national bank and immediately repay any outstanding FHLB advances (subject to
safety and soundness considerations).
To qualify as a QTL, a savings institution must maintain at least 65% of
its "portfolio" assets in Qualified Thrift Investments. Portfolio assets are
defined as total assets less intangibles, property used by a savings institution
in its business and liquidity investments in an amount not exceeding 20% of
assets. Qualified Thrift Investments consist of: (i) loans, equity positions,
or securities related to domestic, residential real estate or manufactured
housing, and educational, small business and credit card loans; (ii) shares of
stock issued by an FHLB. Subject to a 20% of portfolio assets limit, however,
savings institutions are able to treat the following as Qualified Thrift
Investments: (i) 50% of the dollar amount of residential mortgage loans subject
to sale under certain conditions but do not include any intangible assets; (ii)
investments, both debt and equity, in the capital stock or obligations of and
any other security issued by a service corporation or operating subsidiary,
provided that such subsidiary derives at least 80% of its annual gross revenues
from activities directly related to purchasing, refinancing, constructing,
improving or repairing domestic residential housing or manufactured housing;
(iii) 200% of their investments in loans to finance "starter homes" and loans
for construction, development or improvement of housing and community service
facilities or for financing small businesses in "credit-needy" areas; (iv) loans
for the purchase, construction, development or improvement of community service
facilities, (v) loans for personal, family, household or educational purposes,
provided that the dollar amount treated as Qualified Thrift Investments may not
exceed 10% of the savings association's portfolio assets; and (vi) shares of
stock issued by FNMA or FHLMC.
A savings institution must maintain its status as a QTL on a monthly basis
in nine out of every 12 months. A savings institution that fails to maintain
Qualified Thrift Lender status will be permitted to requalify once, and if it
fails the QTL Test a second time, it will become immediately subject to all
penalties as if all time limits on such penalties had expired. Failure to
qualify as a QTL results in a number of sanctions, including the imposition of
certain operating restrictions imposed on national banks and a restriction on
obtaining additional advances from the FHLB System. Upon failure to qualify as
a QTL for two years, a savings association must convert to a commercial bank.
At June 30, 1998, approximately 83% of the Bank's assets were invested in
Qualified Thrift Investments.
22
<PAGE>
DIVIDEND LIMITATIONS. Under OTS regulations, the Bank is not permitted to
pay dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain depositors of the Bank at the time of its conversion
to stock form. In addition, savings institution subsidiaries of savings and
loan holding companies are required to give the OTS 30 days' prior notice of any
proposed declaration of dividends to the holding company.
Federal regulations impose limitations on the payment of dividends and
other capital distributions (including stock repurchases and cash mergers) by
the Bank. Under these regulations, a savings institution that, immediately
prior to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its fully phased-in capital requirements (a "Tier
1 Association") is generally permitted without OTS approval, after notice, to
make capital distributions during a calendar year in the amount equal to the
greater of (i) 75% of net income for the previous four quarters or (ii) up to
100% of its net income to date during the calendar year plus an amount that
would reduce by one-half the amount by which its capital-to-assets ratio
exceeded its fully phased-in capital requirement to assets ratio at the
beginning of the calendar year. A savings institution with total capital in
excess of current minimum capital requirements but not in excess of the fully
phased-in requirements (a "Tier 2 Association") is permitted, after notice, to
make capital distributions without OTS approval of up to 75% of its net income
for the previous four quarters, less dividends already paid for such period. A
savings institution that fails to meet current minimum capital requirements (a
"Tier 3 Association") is prohibited from making any capital distributions
without the prior approval of the OTS. Tier 1 Associations that have been
notified by the OTS that they are in need of more than normal supervision will
be treated as either a Tier 2 or Tier 3 Association. Unless the OTS determines
that the Bank is an institution requiring more than normal supervision, the Bank
is authorized to pay dividends in accordance with the provisions of the OTS
regulations discussed above as a Tier 1 Association.
Under the OTS' prompt corrective action regulations, the Bank is also
prohibited from making any capital distributions if after making the
distribution, the Bank would have: (i) a total risk-based capital ratio of less
than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0%. The OTS, after consultation with the FDIC,
however, may permit an otherwise prohibited stock repurchase if made in
connection with the issuance of additional shares in an equivalent amount and
the repurchase will reduce the institution's financial obligations or otherwise
improve the institution's financial condition.
SAFETY AND SOUNDNESS STANDARDS. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each Federal banking agency is required to establish safety and soundness
standards for institutions under its authority. The final rule and the
guidelines went into effect on August 9, 1995. The guidelines require savings
institutions to maintain internal controls and information systems and internal
audit systems that are appropriate for the size, nature and scope of the
institution's business. The guidelines also establish certain basic standards
for loan documentation, credit underwriting, interest rate risk exposure, and
asset growth. The guidelines further provide that savings institutions should
maintain safeguards to prevent the payment of compensation, fees and benefits
that are excessive or that could lead to material financial loss, and should
take into account factors such as comparable compensation practices at
comparable institutions. If the OTS determines that a savings institution is
not in compliance with the safety and soundness guidelines, it may require the
institution to submit an acceptable plan to achieve compliance with the
guidelines. A savings institution must submit an acceptable compliance plan to
the OTS within 30 days of receipt of a request for such a plan. Failure to
submit or implement a compliance plan may subject the institution to regulatory
sanctions. Management believes that the Bank already meets substantially all
the standards adopted in the interagency guidelines, and therefore does not
believe that implementation of these regulatory standards will materially affect
the Bank's operations.
Additionally, under FDICIA, as amended by the CDRI Act, the Federal banking
agencies are required to establish standards relating to the asset quality and
earnings that the agencies determine to be appropriate. On July 10, 1995, the
federal banking agencies, including the OTS, issued proposed guidelines relating
to asset quality and earnings. Under the proposed guidelines, a savings
institution should maintain systems, commensurate with its size and the nature
and scope of its operations, to identify problem assets and prevent
deterioration in those assets as well as to evaluate
23
<PAGE>
and monitor earnings and ensure that earnings are sufficient to maintain
adequate capital and reserves. Management believes that the asset quality and
earnings standards, in the form proposed by the banking agencies, would not have
a material effect on the Bank's operations.
DEPOSIT INSURANCE. The Bank is required to pay assessments based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
the FDIC through the SAIF. Under the Federal Deposit Insurance Act, the FDIC is
required to set semi-annual assessments for SAIF-insured institutions at a level
necessary to maintain the designated reserve ratio of the SAIF at 1.25% of
estimated insured deposits or at a higher percentage of estimated insured
deposits that the FDIC determines to be justified for that year by circumstances
indicating a significant risk of substantial future losses to the SAIF.
Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as under the prompt
corrective action regulations. See " -- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund.
The FDIC has adopted a new assessment schedule for SAIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest supervisory ratings has been reduced to zero and institutions in the
lowest risk assessment classification will be assessed at the rate of 0.27% of
insured deposits. Until December 31, 1999, however, SAIF-insured institutions,
will be required to pay assessments to the FDIC at the rate of 6.5 basis points
to help fund interest payments on certain bonds issued by the Financing
Corporation ("FICO") an agency of the federal government established to finance
takeovers of insolvent thrifts. During this period, BIF members will be
assessed for these obligations at the rate of 1.3 basis points. After December
31, 1999, both BIF and SAIF members will be assessed at the same rate for FICO
payments.
The FDIC has adopted a regulation which provides that any insured
depository institution with a ratio of Tier 1 capital to total assets of less
than 2% will be deemed to be operating in an unsafe or unsound condition, which
would constitute grounds for the initiation of termination of deposit insurance
proceedings. The FDIC, however, will not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, to increase its Tier 1 capital to such level as the FDIC deems
appropriate. Tier 1 capital is defined as the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other than certain purchased servicing rights and purchased credit card
receivables and qualifying supervisory goodwill eligible for inclusion in core
capital under OTS regulations and minus identified losses and investments in
certain securities subsidiaries. Insured depository institutions with Tier 1
capital equal to or greater than 2% of total assets may also be deemed to be
operating in an unsafe or unsound condition notwithstanding such capital level.
The regulation further provides that in considering applications that must be
submitted to it by savings institutions, the FDIC will take into account whether
the savings association is meeting the Tier 1 capital requirement for state non-
member banks of 4% of total assets.
LIQUIDITY REQUIREMENTS. The Bank is required to maintain average daily
balances of liquid assets (cash, certain time deposits, bankers' acceptances,
highly rated corporate debt and commercial paper, securities of certain mutual
funds, and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable savings deposits plus short-
term borrowings. The Bank is also required to maintain average daily balances
of short-term liquid assets at a specified percentage (currently 1%) of the
total of its net withdrawable savings accounts and borrowings payable in one
year or less.
24
<PAGE>
Monetary penalties may be imposed for failure to meet liquidity requirements.
The average daily and short-term liquidity ratios of the Bank for the month of
June 1998, were 12.45% and 4.37%, respectively.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB, which
consists of 12 Federal Home Loan Banks subject to supervision and regulation by
the Federal Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide
a central credit facility primarily for member institutions. As a member of the
FHLB of Dallas, the Bank is required to acquire and hold shares of capital stock
in the FHLB of Dallas in an amount at least equal to 1% of the aggregate unpaid
principal of its home mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, or 1/20 of its advances from the FHLB
of Dallas, whichever is greater. The Bank was in compliance with this
requirement with investment in FHLB of Dallas stock at June 30, 1998, of
$301,000. The FHLB of Dallas is funded primarily from proceeds derived from the
sale of consolidated obligations of the FHLB System. It makes advances to
members in accordance with policies and procedures established by the FHFB and
the Board of Directors of the FHLB of Dallas. As of June 30, 1998, the Bank had
$4.0 million in advances and other borrowings from the FHLB of Dallas. See
"Sources of Funds -- Borrowings."
FEDERAL RESERVE SYSTEM. Pursuant to regulations of the Federal Reserve
Board, a thrift institution must maintain average daily reserves equal to 3% on
the first $47.3 million of transaction accounts, plus 10% on the remainder.
This percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a non-
interest bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution's interest-earning
assets. As of June 30, 1998, the Bank met its reserve requirements.
TAXATION
The Bank is 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 the Bank's actual loss experience (the
"experience method") or as a percentage of the Bank's taxable income (the
"percentage of taxable income method"). Historically, the Bank used the method
that would allow the Bank 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, 1998, the Bank had $70,000 of post-1987
bad-debt reserves.
Earnings appropriated to the Bank's bad debt reserve and claimed as a tax
deduction including the Bank's 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 the Bank includes 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. Retained
earnings at June 30, 1998 included approximately $552,000 for which no deferred
federal income tax liability has been recognized. This amount represents such
allocation of income to bad debt deduction for income tax purposes.
25
<PAGE>
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 the Bank currently has 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, the Bank's AMTI is increased by an amount equal to 75% of the amount by
which the Bank's adjusted current earnings exceeds the Bank's 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, 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 the
Bank 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 the
Bank availed our self of the percentage of taxable income bad debt deduction
method.
The Bank's federal income tax returns have not been audited by the IRS.
STATE TAXATION
The Bank is 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.
ITEM 2. DESCRIPTION OF PROPERTY
- - ---------------------------------
The following table sets forth certain information regarding the Bank's
main office which is the Bank's only branch location.
<TABLE>
<CAPTION>
BOOK VALUE AT DEPOSITS AT
YEAR OWNED OR JUNE 30, APPROXIMATE JUNE 30,
OPENED LEASED 1998 (1) SQUARE FOOTAGE 1998
------ -------- -------------- -------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MAIN OFFICE: 1995 Owned $ 1,227 6,000 $34,271
</TABLE>
_______________
(1) Cost less accumulated depreciation and amortization.
The Bank also owns the property which used to serve as the Bank's main
office. Such location is currently rented. The book value of such property at
June 30, 1998 was approximately $225,000.
26
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
- - ---------------------------
The Bank is, from time to time, a party to legal proceedings arising
in the ordinary course of the Bank's business, including legal proceedings to
enforce the Bank's rights against borrowers. The Bank is not currently a party
to any legal proceedings which are expected to have a material adverse effect on
the Bank's financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - -------------------------------------------------------------
There were no matters submitted to a vote of the security holders
during the fourth quarter of fiscal year 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS'
- - -----------------------------------------------------------------------------
MATTERS
- - -------
The Common Stock is listed in the over-the-counter through the OTC
"Electronic Bulletin Board" under the symbol "NARK" There are currently 370,300
shares of the Common Stock outstanding. The number of registered holders of
Common Stock on August 31, 1998 was 164. The following table sets forth the
high and low bid prices for the Common Stock for each quarter since the issuance
of the Common Stock on December 18, 1997. No dividends have been declared or
paid on the Common Stock.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------------- ------ ------
<S> <C> <C>
December 31, 1997 $12.75 $12.25
March 31, 1998 $12.75 $12.50
June 30, 1998 $12.00 $10.00
</TABLE>
The income of the Company consists of interest on investment and related
securities and dividends which may periodically be declared and paid by the
Board of Directors of the Bank on the common shares of the Bank held by the
Company.
In addition to certain federal income tax considerations, OTS regulations
impose limitations on the payment of dividends and other capital distributions
by savings associations. Under OTS regulations applicable to converted savings
associations, the Bank is not permitted to pay a cash dividend on its common
shares if the Bank's regulatory capital would, as a result of the payment of
such dividend, be reduced below the amount required for the liquidation account
established in connection with the Conversion or applicable regulatory capital
requirements prescribed by the OTS.
OTS regulations applicable to all savings associations provide that a
savings association which immediately prior to, and on a pro forma basis after
giving effect to, a proposed capital distribution (including a dividend) has
total capital (as defined by OTS regulations) that is equal to or greater than
the amount of its capital requirements is generally permitted without OTS
approval (but subsequent to 30 days' prior notice to the OTS) to make capital
distributions, including dividends, during a calendar year in an amount not to
exceed the greater of (1) 100% of its net earnings to date during the calendar
year, plus an amount equal to one-half the amount by which its total capital to
assets ratio exceeded its required capital to assets ratio at the beginning of
the calendar year, or (2) 75% of its net earnings for the most recent four-
quarter period. Savings associations with total capital in excess of the
capital requirements that have been notified by the OTS that they are in need of
more than normal supervision will be subject to restrictions on dividends. A
savings association that fails to meet current minimum capital requirements is
prohibited from making any capital distributions without the prior approval of
the OTS.
27
<PAGE>
The Bank currently meets all of its regulatory requirements and, unless the
OTS determines that the Bank is an institution requiring more than normal
supervision, the Bank may pay dividends in accordance with the foregoing
provisions of the OTS regulations.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- - ------------------------------------------------------------------
The Company's principal business is that of the Bank. Therefore, this
discussion relates primarily to the Bank.
The profitability of the Bank depends primarily on its net interest income,
which is the difference between interest and dividend income on its interest-
earning assets, principally loans, mortgage-backed securities and investment
securities, and interest expense on its interest-bearing deposits and
borrowings. The Bank's net earnings also are dependent, to a lesser extent, on
the level of its noninterest income (including servicing fees and other fees)
and its noninterest expenses, such as compensation and benefits, occupancy and
equipment, insurance premiums, and miscellaneous other expenses, as well as
federal income tax expense.
YEAR 2000
Like most financial institutions, the Company's principal subsidiary relies
extensively on computers in conducting its business. It has been widely
reported that many computer programs currently in use were designed without
adequately considering the impact of the upcoming change in century on their
date codes. If these design flaws are not corrected, these computer
applications may malfunction in the year 2000. The Company's mission-critical
processing systems are provided by a third party. The third party provider is
converting its hardware to a new year 2000 compliant system. The service
provider is testing its new system at selected sites (not including the Bank)
which testing will be completed in September 1998. The Bank will be provided
with the results of such testing. In addition, the Bank will test this system
on premises in February 1999. The Bank is also in the process of developing a
contingency plan in the event its efforts to become year 2000 compliant are not
successful and anticipates that such contingency plan will be completed by
September 30, 1998. The Bank anticipates that its expenses associated with year
2000 will not exceed $10,000.
MARKET RISK DISCLOSURE
ASSET/LIABILITY MANAGEMENT. The Company's assets and liabilities may be
analyzed by examining the extent to which its 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 assets mature
or reprice more quickly or to a greater extent than liabilities, the Company's
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 assets mature or reprice more slowly or to a lesser
extent our liabilities, 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. The Company's 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 earnings to material and
prolonged changes in interest rates.
To manage the interest rate risk of this type of loan portfolio, the Bank
limits maturities of fixed-rate loans to no more than five years and emphasizes
the origination of ARM loans.
28
<PAGE>
NET PORTFOLIO VALUE. In recent years, the Bank has measured its 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
and decreases in market interest rates. The following table presents the
interest rate sensitivity of the Bank's NPV at June 30, 1998, as calculated by
the OTS, which is based upon quarterly information that the Bank voluntarily
provided to the OTS.
<TABLE>
<CAPTION>
CHANGE NET PORTFOLIO VALUE NPV AS % OF PORTFOLIO VALUE OF ASSETS
----------------------------- --------------------------------------
IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO BASIS POINT CHANGE
-------- -------- -------- --------- ---------- -----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+ 400 bp 4,748 (108) ( 2)% 11.34% 22 bp
+ 300 bp 4,920 64 1 11.60 47 bp
+ 200 bp 5,000 144 3 11.65 52 bp
+ 100 bp 4,979 123 3 11.49 37 bp
0 bp 4,856 -- -- 11.13 --
- 100 bp 4,711 (145) ( 3) 10.72 (41) bp
- 200 bp 4,540 (315) ( 6) 10.26 (87) bp
- 300 bp 4,421 (434) ( 9) 9.51 (122) bp
- 400 bp 4,330 (526) (11) 9.61 (152) bp
</TABLE>
While one cannot predict future interest rates or their effects on NPV or
net interest income, the Company does not expect current interest rates to have
a material adverse effect on its 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 Bank's board of directors reviews its 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 its asset and liability goals and strategies. The Bank expects that
its 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.
29
<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. The Company does 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,
---------------------------------------------------------
1998 1997
--------------------------- ---------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- --------- -------- ------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits.................. $ 4,063 $ 167 4.11% $ 1,767 $ 72 4.07%
Mortgage-backed securities................. 6,378 394 6.18 5,374 339 6.30
Investment securities...................... 1,599 89 5.57 976 71 7.28
Loans (1).................................. 25,259 2,092 8.28 24,249 2,011 8.29
------- ------- ------- -------
Total interest-earning assets................ 37,299 2,742 7.35 32,366 2,493 7.70
------- -------
Non-interest-earning assets.................. 2,374 1,745
------- -------
Total assets................................. $39,673 $34,111
======= =======
INTEREST-BEARING LIABILITIES:
Deposits................................... $32,504 $ 1,618 4.98% $29,684 $ 1,541 5.19%
FHLB advances.............................. 2,450 99 4.04 1,238 56 4.52
------- ------- ------- -------
Total interest-bearing liabilities........... 34,954 1,717 4.91 30,922 1,597 5.16
------- -------
Non-interest bearing liabilities............. 142 789
------- -------
Total liabilities............................ 35,096 31,711
Retained earnings............................ 4,577 2,400
------- -------
Total liabilities and retained earnings...... $39,673 $34,111
======= =======
Net interest income.......................... $ 1,025 $ 896
======= =======
Net interest rate spread (2)................. 2.44% 2.54%
==== ====
Net interest-earning assets.................. $ 2,345 $ 1,444
======= =======
Net interest margin (3)...................... 2.75% 2.77%
==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities....... 106.28% 104.67%
======= =======
</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.
30
<PAGE>
RATE/VOLUME ANALYSIS
The table shows certain information regarding changes in the Company's
interest income and interest expense 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,
--------------------------------------------------------------------------
1998 VS. 1997 1997 VS. 1996
----------------------------------------- -----------------------------
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............ $ 93 $ 1 $ 1 $ 95 $(39) $ (26) $ 8 $(57)
Mortgage-backed securities........... 63 (6) (2) 55 59 -- -- 59
Investment securities................ 45 (17) (10) 18 (24) (13) 3 (34)
Loans................................ 83 (1) (1) 81 (34) (4) 197
----- ---- ----- ----- ---- ----- ----
Total interest-earning assets...... 284 (23) (12) 249 231 (73) 7 165
----- ---- ----- ----- ---- ----- ---- ----
INTEREST-BEARING LIABILITIES:
Deposits............................. 146 (62) (7) 77 69 (43) (2) 24
FHLB advances........................ 55 (6) (6) 43 63 (2) (13) 48
----- ---- ----- ----- ---- ----- ---- ----
Total interest-bearing liabilities... 201 (68) (13) 120 132 (45) (15) 72
Increase (decrease) in net interest
income............................. $ 83 $ 45 $ 1 $ 129 $ 99 $ (28) $ 22 $ 93
===== ==== ===== ===== ==== ===== ==== ====
</TABLE>
31
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND JUNE 30, 1997
Total assets increased by $9.3 million, or 27.08%, from $34.4 million at
June 30, 1997 to $43.7 million at June 30, 1998. Asset growth during the year
was funded by a combination of the net proceeds from the Company's initial
public offering of $3.3 million, a $3.4 million increase in FHLB borrowings and
the additional funds received in the Bank's purchase of the Newport branch of
NationsBanc, N.A. The increase in assets for the period was primarily centered
in increased levels of cash and cash equivalents and investment securities. Cash
and certificates of deposit at other financial institutions totaled $4.1 million
at June 30, 1998 as compared to $1.6 million at June 30, 1997 for a net increase
of $2.5 million or 159.31%. Investment securities totaled $11.2 million at June
30, 1998, up from $5.9 million at June 30, 1997 for a net increase of $5.3
million or 89.83%. All of the Company's investment securities are classified as
held to maturity. At June 30, 1998, the Company's investment portfolio consisted
primarily of mortgage-backed securities and U.S. Government agency obligations.
Loans, net of allowance for loan losses, amounted to $25.6 million for a net
increase of $799,000 from June 30, 1997's level of $24.8 million. The growth in
the loan portfolio during fiscal 1998 consisted mainly of consumer loans which
amounted to $2.8 million at June 30, 1998 as compared to $2.5 million at June
30, 1997 and deposit-secured loans which amounted to $694,000 at June 30, 1998
up from $443,000 at June 30, 1997. First mortgage loans, while representing the
bulk of the loan portfolio, increased only marginally during the year from $21.2
million at June 30, 1997 to $21.3 million at June 30, 1998.
Total liabilities increased $6.3 million, or 19.46%, from $32.1 million at
June 30, 1997 to $38.4 million at June 30, 1998. Total deposits increased by
$3.2 million from June 30, 1997 to June 30, 1998. This increase resulted from
the Bank's branch purchase which was completed in January, 1998. The Bank
acquired the Newport branch of NationsBanc, N.A. Deposits assumed in the
transaction amounted to approximately $4.1 million. Upon consummation of the
transaction, the branch location was closed. FHLB advances also increased during
fiscal 1998 from $618,000 at June 30, 1997 to $4.0 million at June 30, 1998.
FHLB advances at June 30, 1998 consisted mainly of long term advances and were
used to purchase investment securities with similar maturities.
Total stockholders= equity amounted to $5.3 million at June 30, 1998, up
from $2.3 million at June 30, 1997. This $3.1 million or 135.02% increase
reflects the receipt of the net proceeds of $3.3 million from the Company's
initial public offering in December, 1997. A portion of the proceeds was used by
the Company to make a loan to the Company's employee stock ownership plan. Such
loan is to be repaid in 10 annual installments. The remaining balance of the
loan at June 30, 1998 amounted to $267,000 and is reflected as an offset to
stockholders' equity.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NET INCOME. Net income for the year ended June 30, 1998 increased by
$223,000 to $25,000 from a net loss of $199,000 for the year ended June 30,
1997. The increase was due primarily to the reduction of non interest expenses
and an increase in net interest income, offset in part by increases in the
provision for loan losses and income tax expense.
NET INTEREST INCOME. Net interest income increased by $128,000 from
$896,000 for the year ended June 30, 1997 to $1.0 million for the year ended
June 30, 1998. The Company's interest rate spread narrowed by 10 basis points
from 2.54% in fiscal year 1997 to 2.44% in fiscal year 1998 due primarily to a
decrease in the average yield on interest-earning assets, primarily investment
and mortgage-backed securities. The average cost of interest-bearing liabilities
also declined during the period reflecting decreases in the average rate paid on
deposits and FHLB advances. The ratio of average interest earning assets to
average interest-bearing liabilities increased from 104.67% for fiscal year 1997
to 106.28% for fiscal year 1998.
INTEREST INCOME. Interest income totaled $2.7 million for the year ended
June 30, 1998, an increase of $248,000, or 9.95%, from fiscal year 1997's level
of $2.5 million. The increase resulted from the increased volume of interest-
earning assets as the average yield on all interest-earning asset categories
declined during the period. Interest income from investment and mortgage-backed
securities and interest-bearing deposits accounted for most of the increase in
interest income reflecting the growth in those portfolios during the period.
32
<PAGE>
INTEREST EXPENSE. Total interest expense increased by $120,000, or 7.5%,
due primarily to increased average balances of both deposits and FHLB advances,
partially offset by a 25 basis point decline in the average rate paid on such
liabilities.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased by
$66,000, or 73.71% from $90,000 for the year ended June 30, 1997 to $156,000 for
the year ended June 30, 1998. The increased provision was deemed necessary by
the Bank due to the transfer to other real estate owned of the Bank's
participation interest in a $5.8 million loan secured by a 625-room hotel
located in Oklahoma City. A deed in lieu of foreclosure was accepted by the lead
lender on this loan during the third quarter of fiscal 1998. Based on an updated
appraisal of the property, the Bank wrote down the value of its interest with
such write-down being charged against the allowance for loan losses. The
additional provision was deemed necessary to replenish the reserve to a level
deemed adequate by management for the risk in its loan portfolio. There can be
no assurance, however, that additional provisions to the allowance for loan
losses will not be necessary in the future. The allowance for loan losses as a
percentage of net loans at fiscal year end 1998 was 0.74% as compared to 0.60%
at fiscal year end 1997.
NONINTEREST INCOME. Noninterest income totaled $68,000 for the year ended
June 30, 1998, an increase of $49,000, or 254.71%, from $19,000 for the year
ended June 30, 1997. The increase was primarily attributable to growth in
transaction accounts which generate additional fee income.
NONINTEREST EXPENSE. Noninterest expense decreased $258,000 or 22.31%, from
$1.2 million for the year ended June 30, 1997 to $899,000 for the year ended
June 30, 1998. Salaries and employee benefit expenses decreased by $193,000, or
29.84%, from $647,000 for fiscal year 1997 to $454,000 for fiscal year 1998.
During fiscal year 1997, the Bank adopted a Directors= Retirement Plan. In
connection with the adoption of such plan, the Bank incurred an expense of
$286,000 in fiscal 1997 for the plan's initial funding. The expense association
with that plan in fiscal 1998 amounted to $22,000. Deposit insurance premiums
amounted to $20,000 for fiscal year 1998 as compared to $217,000 for fiscal year
1997. The $198,000 decrease was primarily attributable to the absence of any
SAIF special assessment during the 1998 fiscal year. During fiscal year 1997,
all institutions with deposits insured by the SAIF were required to pay a
special assessment to recapitalize the SAIF. This assessment, which was
calculated based upon total deposits at March 31, 1995, amounted to $179,000 for
the Bank.
INCOME TAX EXPENSE. Income tax expense increased by $146,000 from a net
benefit of $133,000 for fiscal year 1997 to a net expense of $13,000 for fiscal
year 1998. The increase in income tax expense is due directly to the increased
level of earnings during fiscal year 1998. The effective tax rates for fiscal
years 1998 and 1997 were 34.0% and 40.1%, respectively. The variations in the
effective tax rate are attributable to the composition of the income base, the
amount of tax exempt income and timing differences related to the deferred
compensation arrangements.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which varies from time to time depending
upon economic conditions and deposit flows, is based upon a percentage of our
deposits and short-term borrowings. The required ratio currently is 4% and the
Bank's liquidity ratio for the month ended June 30, 1998 was 12.15%.
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 predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by the general level of interest rates,
economic conditions and competition. The Bank uses its 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.
33
<PAGE>
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.
The Bank is subject to federal regulations that impose certain minimum
capital requirements. At June 30, 1998 the Bank was in compliance with all
applicable capital requirements.
IMPACT OF INFLATION AND CHANGING PRICES
The Company' s 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 the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
RECENT PRONOUNCEMENTS
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 Company adopted SFAS No.
125 on January 1, 1997. There was no impact on its financial position, results
of operations or liquidity as a result 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 face 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 was effective for financial statements issued
for periods ending after December 15, 1997, including interim periods. SFAS No.
128 was adopted by the Company in the interim period ended December 31, 1997.
The adoption of SFAS No. 128 did not materially impact the Company's financial
position, results of operations or liquidity.
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,"
34
<PAGE>
and makes them applicable to all public and nonpublic 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 was effective
for financial statements for periods ending after December 15, 1997, and was
adopted by the Company in the interim period ended December 31, 1997. The
adoption of SFAS No. 128 did not materially impact the Company's financial
position, results of operations or liquidity.
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. The Company does not believe that adoption
of SFAS No. 130 will have a material adverse effect on its financial position,
results of operations or liquidity..
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. The Company does not
believe the impact of adopting SFAS No. 131 will be material to its financial
position, results of operations or liquidity.
FASB STATEMENT ON ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those assets at
fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment; a hedge of the
exposure to variable cash flows of forecasted transactions; or a hedge of the
exposure of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation of the derivative as a hedge. SFAS No. 133 is
effective for fiscal quarters beginning after June 30, 1999. The Company does
not believe that adoption of SFAS No. 133 will have a material impact on its
financial position, results of operations or liquidity.
35
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
- - -----------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors= Report.......................................................................... 37
Consolidated Statements of Financial Condition at June 30, 1998 and 1997.............................. 38
Consolidated Statements of Operations for the Years Ended June 30, 1998 and 1997...................... 39
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1998 and 1997............ 40
Consolidated Statements of Cash Flows for the Years Ended June 30, 1998 and 1997...................... 41
Notes to Consolidated Financial Statements............................................................ 43
</TABLE>
36
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
North Arkansas Bancshares, Inc.:
We have audited the accompanying consolidated statements of financial condition
of North Arkansas Bancshares, Inc. and subsidiary (the "Company") as of June 30,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of North
Arkansas Bancshares, Inc. and subsidiary as of June 30, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Little Rock, Arkansas
August 7, 1998
37
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Financial Condition
June 30, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------------ -------------------
<S> <C> <C>
Cash and amounts due from banks, includes interest
bearing deposits of $1,167,778 and $603,729 in 1998
and 1997, respectively $ 2,094,104 884,002
Certificates of deposit with other financial institutions 1,990,000 691,000
Investment securities held-to-maturity, at cost (notes 2 and 9) 11,243,627 5,922,956
Loans receivable, net (notes 3, 4 and 9) 25,592,938 24,794,194
Real estate acquired in settlement of loans, net 535,700 -
Office properties and equipment, net (note 6) 1,623,226 1,651,298
Accrued interest receivable (note 7) 313,422 227,356
Other assets (note 10) 295,608 207,760
----------- ----------
Total assets $43,688,625 34,378,566
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (notes 2 and 8) $34,270,664 31,072,533
Federal Home Loan Bank advances (note 9) 3,969,525 618,389
Other liabilities (notes 10 and 12) 122,202 421,375
----------- ----------
Total liabilities 38,362,391 32,112,297
Stockholders' equity (notes 13 and 15):
Preferred stock, $.01 par value per share. 3,000,000 shares
authorized, no shares issued or outstanding - -
Common stock, $.01 par value per share, 9,000,000 shares
authorized, 370,300 shares issued and outstanding at
June 30, 1998 (none at June 30, 1997) 3,703 -
Additional paid-in capital 3,298,267 -
Retained earnings - substantially restricted (note 10) 2,290,880 2,266,269
Loan to employee stock ownership plan (note 16) (266,616) -
----------- ----------
Total stockholders' equity 5,326,234 2,266,269
Commitments and contingencies (notes 11, 12 and 14)
----------- ----------
$43,688,625 34,378,566
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Operations
Years ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Interest income:
Loans receivable $2,091,614 2,011,121
Deposits in other financial institutions 167,336 72,337
Mortgage-backed securities 393,568 338,621
Investment securities 88,896 71,261
---------- ---------
Total interest income 2,741,414 2,493,340
---------- ---------
Interest expense:
Deposits (note 8) 1,617,847 1,540,820
Federal Home Loan advances 98,750 56,074
---------- ---------
Total interest expense 1,716,597 1,596,894
---------- ---------
Net interest income 1,024,817 896,446
Provision for loan losses (note 4) 156,341 90,000
---------- ---------
Net interest income after provision for loan losses 868,476 806,446
---------- ---------
Non-interest income - other 67,948 19,156
---------- ---------
Non-interest expenses:
Salaries and employee benefits (notes 12 and 16) 454,293 647,478
Legal and professional fees 73,723 12,032
Data processing fees 78,890 62,313
Federal insurance expense (note 13) 19,539 217,054
Furniture and equipment expense 48,325 32,953
Occupancy expense 57,678 58,516
Other expense 166,694 127,020
---------- ---------
899,142 1,157,366
---------- ---------
Income (loss) before income taxes 37,282 (331,764)
Income tax expense (benefit) (note 10) 12,671 (132,991)
---------- ---------
Net income (loss) $ 24,611 (198,773)
========== =========
Earnings per share - basic and diluted $.12 -
=== =====
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
LOAN TO
EMPLOYEE
ADDITIONAL STOCK TOTAL
COMMON PAID-IN RETAINED OWNERSHIP STOCKHOLDERS'
STOCK CAPITAL EARNINGS PLAN EQUITY
--------- ------------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $ - - 2,465,042 - 2,465,042
Net loss - - (198,773) - (198,773)
--------- ------------- ----------- ------------ ---------------
Balance at June 30, 1997 - - 2,266,269 - 2,266,269
Issuance of common stock, net
of conversion costs (note 15) 3,703 3,298,267 - - 3,301,970
Loan to employee stock ownership
plan (note 16) - - - (296,240) (296,240)
Loan principal repayment for
employee stock ownership plan - - - 29,624 29,624
Net income - - 24,611 - 24,611
--------- ------------- ----------- ------------ ---------------
Balance at June 30, 1998 $ 3,703 3,298,267 2,290,880 (266,616) 5,326,234
========= ============= =========== ============ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 24,611 (198,773)
Adjustments to reconcile net income (loss) to net cash (used)
provided by operating activities:
Depreciation and amortization 63,162 57,395
Loss on sale of real estate owned - 23,208
FHLB stock dividends - (15,800)
Net premium amortization on investments 15,893 10,752
Provision for loan losses 156,341 90,000
Increase in interest receivable (86,066) (361)
Increase in other assets (1,514) (109,428)
Increase (decrease) in other liabilities (255,911) 232,896
----------- ----------
Net cash (used) provided by operating activities (83,484) 89,889
----------- ----------
Cash flows from investing activities:
Purchase of held to maturity ("HTM") securities (7,126,295) (850,310)
Proceeds from maturities/principal repayments of
HTM securities 1,789,731 1,242,750
Net increase in loans receivable (1,365,785) (2,427,390)
Purchase of loans - (500,000)
Net (increase) decrease in certificates of deposit with
other financial institutions (1,299,000) 199,000
Purchase of office properties and equipment (33,847) (41,713)
Proceeds from sale of real estate owned - 105,926
----------- ----------
Net cash used in investing activities (8,035,196) (2,271,737)
----------- ----------
Cash flows from financing activities:
Net cash received for assumption of liabilities (note 5) 3,837,959 -
Net (decrease) increase in deposits and advances
from borrowers (895,667) 1,414,175
Net increase in Federal Home Loan advances 3,351,136 484,473
Cash received from stock issue (note 15) 3,703,000 -
Cash paid for cost of stock conversion (note 15) (401,030) -
Increase in loan to employee stock ownership plan (266,616) -
----------- ----------
Net cash provided by financing activities 9,328,782 1,898,648
----------- ----------
Net increase (decrease) in cash and amounts due from banks 1,210,102 (283,200)
Cash and amounts due from banks at beginning of year 884,002 1,167,202
----------- ----------
Cash and amounts due from banks at end of year $ 2,094,104 884,002
=========== ==========
(Continued)
</TABLE>
41
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Noncash investing activities:
Transfers from loans to real estate acquired
through foreclosure $ 535,700 25,304
Sale of properties and equipment in exchange for
loan receivable 125,000 -
Transfers from real estate acquired through
foreclosure to other assets - 20,000
Cash paid during the year:
Interest on deposits 1,601,733 1,544,363
Income taxes - 10,860
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
North Arkansas Bancshares, Inc. ("the Company" or "the Parent") was
incorporated on September, 1997 in connection with its wholly-owned
subsidiary's, Newport Federal Savings Bank ("the Bank"), conversion from a
Federally-chartered mutual saving bank to a Federally-chartered stock
savings bank, as approved by the Office of Thrift Supervision ("OTS") (note
15). 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 consolidated 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.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements
of the Company and the Bank. All significant intercompany balances and
transactions have been eliminated in consolidation.
(C) 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, 1998 and
1997.
(Continued)
43
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
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.
(D) ALLOWANCE FOR LOSSES
Management, considering current information and events regarding the
borrowers ability to repay their obligations in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 114, "ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN" as amended by SFAS No. 118, 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.
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 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.
(continued)
44
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
(E) 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. Losses of $89,000
and $12,000 were recognized at June 30, 1998 and 1997, respectively, to
write down real estate acquired in the settlement of loans to its
estimated net realizable value.
(F) LOAN ORIGINATION FEES AND RELATED COSTS
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.
(G) 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.
(H) GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the
expected periods to be benefited, generally 15 years. The Bank assesses
the recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation. The amount of goodwill impairment, if any, is measured based
on projected discounted future operating cash flows using a discount rate
reflecting the Bank's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating
cash flows are not achieved.
(I) 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.
(continued)
45
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
(J) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Long-lived assets and certain identifiable intangibles are 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.
(K) 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.
(L) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents are
defined as those amounts included in the consolidated statements of
financial condition caption "cash and amounts due from banks."
(M) EARNINGS PER SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "EARNINGS PER SHARE," on a retroactive basis, which
requires entities report both basic and diluted earnings per share for
1998 and all prior years. Because of the conversion from a Federally-
chartered mutual savings bank to a Federally-chartered stock savings bank
on December 18, 1997, there were no outstanding shares of common stock and
no earnings per share data for June 30, 1997, and the weighted average
shares outstanding at June 30, 1998 have been weighted for the time that
the common shares were outstanding to the total time in the 1998 year. A
reconciliation of the numerator and denominator of both basic and diluted
earnings per share is shown below:
<TABLE>
<CAPTION>
JUNE 30,
1998
----------
<S> <C>
Earnings per share:
Numerator (net earnings) $ 24,611
========
Dominator (weighted average shares
outstanding) $199,551
========
Earnings per share $ .12
========
</TABLE>
(continued)
46
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
(N) YEAR 2000
The Company has developed a plan to deal with the Year 2000 problems and
has begun converting its computer systems to be Year 2000 compliant. The
plan provides for the conversion efforts to be completed by December 1998.
The Year 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable year. The
total cost of the project is not expected to have a material impact on the
Company's consolidated financial position, results of operations or
liquidity.
(O) INTEREST RATE RISK
The Bank's asset base is exposed to risk including the risk resulting from
changes in interest rates and changes in the timing of cash flows.
Management monitors the effect of such risks by considering the mismatch
of the maturities of its assets and liabilities in the current interest
rate environment and the sensitivity of assets and liabilities to changes
in interest rates. The Bank has considered the effect of significant
increases and decreases in interest rates and believes such changes, if
they occurred, would be manageable and would not affect the ability of the
Bank to hold its assets as planned.
(P) 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 POLITICAL BACKED OTHER
AGENCIES SUBDIVISIONS SECURITIES SECURITIES TOTAL
--------------- -------------- ------------ ---------- ------------------
<S> <C> <C> <C> <C> <C>
Investments held to maturity:
June 30, 1998:
Carrying value $3,000,000 47,500 7,895,435 300,692 11,243,627
Unrealized gains 36 - 50,735 - 50,771
Unrealized losses (8,539) - (45,803) - (54,342)
---------- ------ --------- ------- ----------
Fair value $2,991,497 47,500 7,900,367 300,692 11,240,056
========== ====== ========= ======= ==========
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
========== ====== ========= ======= ==========
</TABLE>
(continued)
47
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
Mortgage-backed securities held by the Bank at June 30, 1998 and 1997 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 ($300,692 and $282,892 at June 30, 1998 and 1997,
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.
The amortized cost and estimated fair value of debt securities held to
maturity at June 30, 1998 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 2,007,500 2,003,689
Due after five years through ten years 12,500 12,500
Due after ten years 1,027,500 1,022,808
----------- ----------
3,047,500 3,038,997
Mortgage-backed securities 7,895,435 7,900,367
Other 300,692 300,692
----------- ----------
$11,243,627 11,240,056
=========== ==========
</TABLE>
Investment securities with a par value of approximately $1,665,200 and
$1,640,300 at June 30, 1998 and 1997, respectively, were pledged to secure
public deposits.
(3) LOANS RECEIVABLE
Loans receivable consist of the following at June 30:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
First mortgage loans $21,274,807 21,227,604
Loans to depositors, secured by savings 693,996 443,472
Property improvement loans 516,925 666,078
Consumer loans 2,806,855 2,520,014
Commercial loans 491,650 92,938
----------- ----------
25,784,233 24,950,106
Less:
Unearned discounts on loans purchased 2,294 5,780
Net deferred loan fees 132 337
Allowance for losses (note 4) 188,869 149,795
----------- ----------
$25,592,938 24,794,194
=========== ==========
</TABLE>
(continued)
48
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
Loans serviced for others at June 30, 1998 and 1997, were $179,083 and
$291,699, 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.
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, 1996 $ 662,914
Additions 193,207
Repayments (130,747)
---------
Balance at June 30, 1997 725,374
Additions 416,775
Repayments (202,452)
---------
Balance at June 30, 1998 $ 939,697
=========
</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, 1996 $ 73,000
Provision for losses 90,000
Charge-offs (13,205)
---------
Balance at June 30, 1997 149,795
Provision for losses 156,341
Charge-offs (117,267)
---------
Balance at June 30, 1998 $ 188,869
=========
</TABLE>
(5) ACQUISITIONS
Effective January 22, 1998, the Company purchased certain non-earning
assets and assumed certain deposit liabilities of the Newport, Arkansas
branch of NationsBank, N.A. ("Nations Branch"). In accordance with the
terms of the purchase and assumption agreement, the Company received cash
of $3,837,959 and assumed certain deposits and other liabilities of
$4,050,536. This acquisition has been accounted for under the purchase
method of accounting for business combinations. The results
(continued)
49
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
of operations of the Nations Branch acquisition has been consolidated into
the Company's results of operations from the acquisition date forward. The
allocation of the purchase price to assets acquired and liabilities assumed
in connection with this acquisition is as follows:
<TABLE>
<CAPTION>
NATIONS BRANCH
-----------------------------
<S> <C>
Assets acquired:
Cash $3,837,959
Net property and equipment 125,000
Goodwill 87,577
----------
$4,050,536
==========
Liabilities assumed:
Deposits $4,036,339
Other liabilities 14,197
----------
$4,050,536
==========
</TABLE>
The pro forma effects in 1998 and 1997 related to this acquisition have not
been presented because the effects of such were immaterial.
(6) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consist of the following at June 30:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Land $ 320,866 320,866
Buildings and improvements 1,375,257 1,375,257
Furniture and equipment 522,674 501,694
---------- ---------
2,218,797 2,197,817
Less accumulated depreciation (595,571) (546,519)
---------- ---------
$1,623,226 1,651,298
========== =========
</TABLE>
Included in office properties is land and a building with a book value of
approximately $225,000 that is being leased on a month-to-month basis.
(continued)
50
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
(7) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following at June 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Loans $198,578 180,934
Mortgage-backed securities 50,033 33,711
Investment securities 61,260 11,295
Certificates of deposit 3,551 1,416
-------- -------
$313,422 227,356
======== =======
</TABLE>
(8) DEPOSITS
Deposits consist of the following at June 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Money market $ 262,952 325,336
NOW accounts (2.40% in 1998 and 1997) 2,179,945 1,669,713
Passbook accounts (3.00% in 1998 and 1997) 1,937,762 1,892,596
Other noninterest bearing/checking 1,724,417 982,720
---------- ---------
6,105,076 4,870,365
Certificates:
3.00% to 3.99% 178,373 --
4.00% to 4.99% 876,409 83,631
5.00% to 5.99% 23,751,803 26,118,537
6.00% to 6.99% 3,359,003 --
---------- ----------
28,165,588 26,202,168
---------- ----------
Total $34,270,664 $31,072,533
========== ===========
Weighted average cost of deposits 4.9% 5.2%
=== ===
</TABLE>
The aggregate amount of certificates of deposit, each with a minimum
denomination of $100,000, was approximately $4,207,000 and $3,361,000 at
June 30, 1998 and 1997, 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, 1998 is approximately as
follows:
<TABLE>
<S> <C>
Less than one year $20,177,000
One to two years 2,364,000
Two to three years 2,841,000
Three to four years 1,460,000
Four to five years 1,324,000
-----------
$28,166,000
===========
</TABLE>
(continued)
51
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
Interest expense on deposits consists of the following at June 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Money Market $ 7,386 10,777
NOW accounts 44,457 37,390
Passbook accounts 58,072 47,738
Certificates 1,507,932 1,444,915
---------- ---------
$1,617,847 1,540,820
========== =========
</TABLE>
Some of the directors, officers, and employees of the Bank are also
customers. As such customers, at June 30, 1998 and 1997, the aggregate
deposits of those individuals were approximately $390,000 and $439,000,
respectively.
(9) FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank (FHLB) advances at June 30, 1998 and 1997 consist of
long-term obligations of $3,069,525 and $118,389, respectively, which have
maturity dates varying from August 2003 to March 2008 and are payable in
monthly installments including interest of approximately 5.8% with
principal and interest due at maturity. In addition, at June 30, 1998 and
1997, advances include a short-term obligation of $900,000 and $500,000,
respectively, with interest of approximately 5.6%. Pursuant to a collateral
agreement with the FHLB, advances are secured by certain investment
securities and qualifying first mortgage loans.
(10) INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current Federal income tax $ 3,633 (87,342)
Deferred 9,038 (45,649)
------- --------
Total $12,671 (132,991)
======= =======
</TABLE>
The actual tax expense (benefit) for 1998 and 1997 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>
1998 1997
---- ----
<S> <C> <C>
Income tax expense (benefit) "expected" rate $12,675 (112,800)
Increase (decrease) in taxes resulting from:
State income taxes, net of Federal
income tax benefit (1,732) (12,587)
Other, net 1,728 (7,604)
------- --------
$12,671 $(132,991)
======= =======
Effective tax rate 34.0% 40.1%
===== ====
</TABLE>
(continued)
52
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
Included in other assets are refundable Federal taxes of $93,912 and $115,771 at
June 30, 1998 and 1997, respectively. Included in other liabilities are net
deferred tax liabilities of $13,940 and $4,903 at June 30, 1998 and 1997,
respectively.
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at June 30, 1998 and 1997 are presented
below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 19,074 16,698
Contribution carryforwards 13,876 11,502
Allowance for losses on loans 36,644 35,239
Other 903 903
------- ------
Total gross deferred tax assets 70,497 64,342
------- ------
Deferred tax liabilities:
Property and equipment, due to
differences in depreciation (41,493) (33,109)
Prepaid insurance, expensed as
incurred for tax purposes (8,063) (8,000)
FHLB stock, primarily due to stock
dividends not recognized for tax
purposes (34,515) (27,867)
Other (366) (269)
------- -------
Total gross deferred tax liabilities (84,437) (69,245)
------- -------
Net deferred tax liability $(13,940) (4,903)
======= =======
</TABLE>
Based on the Company's historical ability to generate future taxable income
exclusive of reversing temporary differences, management believes it is more
likely than not that the Company will realize the benefits of the deferred tax
assets at June 30, 1998 in future periods.
At June 30, 1998 the Company has net operating loss carryforwards for state
income tax purposes of $293,445, which are available to offset future state
taxable income, if any, through 2003.
Retained earnings at June 30, 1998 includes approximately $552,000 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.
Reduction of amounts so allocated for purposes other than tax bad debt losses
may create income for tax purposes only, which would be subject to the then
current corporate income tax rate.
(continued)
53
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
(11) 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 1998 or 1997.
The Company, 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 Company's consolidated financial position and results of
operations.
(12) 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 Bank contributed $22,498 to the plan in
1998 based on a defined performance factor. In 1997, the plan awarded
benefits for past services rendered by each participant who was a director
on the effective date. The 1997 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.
(13) 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, 1998, that the Bank meets all capital adequacy requirements to
which it is subject.
As of June 30, 1998, 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 following table. There are no conditions or
events since that notification that management believes have changed the
Bank's regulatory capital category.
(continued)
54
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
The Bank's approximate 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, 1998:
Total capital (to Risk
Weighted Assets) $4,185,000 20.2% $1,660,000 8.0% $2,075,000 10.0%
Tier I Capital (to Risk
Weighted Assets) 4,109,000 19.8 830,000 4.0 1,245,000 6.0
Tier I Capital (to Adjusted
Total Assets) 4,109,000 9.6 1,714,000 4.0 2,142,000 5.0
Tangible Capital (to
Adjusted total Assets) 4,109,000 9.6 643,000 1.5 643,000 1.5
As of June 30, 1997:
Total capital (to Risk
Weighted Assets) 2,411,000 13.2 1,463,000 8.0 1,829,000 10.0
Tier I Capital (to Risk
Weighted Assets) 2,266,000 12.4 732,000 4.0 1,097,000 6.0
Tier I Capital (to Adjusted
Total Assets) 2,266,000 6.6 1,375,000 4.0 1,719,000 5.0
Tangible Capital (to
Adjusted Total Assets) 2,266,000 6.6 516,000 1.5 516,000 1.5
</TABLE>
Tier I and tangible capital differ from stockholders' equity under generally
accepted accounting principles by goodwill of approximately $76,000 at June
30, 1998. Total capital differs from retained earnings under generally
accepted accounting principles due to general allowances for loan losses of
approximately $184,000 and $145,000 at June 30, 1998 and 1997, respectively
and goodwill of approximately $76,000 at June 30, 1998.
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
consolidated statement of operations.
(continued)
55
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
(14) 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.
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)
56
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
The approximate stated and estimated fair value of financial instruments are
summarized below (in thousands of dollars):
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------------------
1998 1997
----------------------------- --------------------------
STATED ESTIMATED STATED ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and amounts due from banks $ 2,094,104 2,094,104 884,002 884,002
Certificates of deposit with other
financial institutions 1,990,000 1,990,000 691,000 691,000
Investment securities 11,243,627 11,240,056 5,922,956 5,951,010
Loans receivable, net 25,592,938 25,946,058 24,794,194 25,178,798
Accrued interest receivable 313,422 313,422 227,356 227,356
Financial liabilities:
Deposits:
Demand accounts 6,105,076 6,105,076 4,870,365 4,870,365
Certificate accounts 28,165,588 28,225,581 26,202,168 26,272,622
Federal Home Loan Bank advances 3,969,525 3,969,525 618,389 613,921
</TABLE>
The Bank had off-statement of financial condition financial commitments at
June 30, 1998 and 1997, which include approximately $180,000 and $253,000,
respectively, of commitments to originate and fund loans. Of these off-
statement of financial condition financial commitments, approximately
$97,000 were fixed rate commitments at June 30, 1998 with a stated interest
rate of approximately 7.1%. Of these off-statement of financial condition
financial commitments, approximately $4,000 were fixed rate commitments at
June 30, 1997 with a stated interest rate of approximately 11.5%.
(15) CONVERSION FROM MUTUAL TO STOCK ORGANIZATION
On December 18, 1997 the Bank converted from a Federally chartered mutual
savings bank to a Federally chartered stock savings bank. In connection
with this conversion, the Bank issued all of its stock to the Parent and
the Company issued 370,300 shares of common stock and received gross
proceeds of $3,703,000. Costs associated with the conversion of $401,030
were accounted for as a reduction of gross proceeds.
At the time of conversion, the Bank established a liquidation account,
which is 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 is 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.
(continued)
57
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
(16) EMPLOYEE STOCK OWNERSHIP PLAN
On October 31, 1997 the board of directors adopted an Employee Stock
Ownership Plan ("ESOP") to provide stock awards to eligible employees of
the Company. On December 18, 1997, the Company issued a promissory note to
the ESOP for $296,240 to purchase shares of the Company's common stock.
The ESOP will repay the note in annual payments of principal and interest
through June 30, 2007. The first payment was due on June 30, 1998.
The amount of the Company's annual contribution to the ESOP is at the
discretion of the Company's board of directors. At June 30, 1998, the
Company contributed approximately $45,000 to the ESOP which is included in
salaries and employee benefits expense at June 30, 1998.
58
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- - ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
- - --------------------------------------------------------------------------------
BOARD OF DIRECTORS
The following table sets forth the name of each director of the Company.
Also set forth is certain other information with respect to each person's age,
the year he first became a director of the Company's wholly owned subsidiary,
the Bank and the expiration of his term as a director. All of the individuals
were initially appointed as director of the Company in 1997 in connection with
the Company's incorporation, except Mr. McMinn who was appointed in September
1998 to fill the vacancy caused by the death of Director Holmes.
<TABLE>
<CAPTION>
YEAR FIRST
ELECTED AS
AGE AT DIRECTOR CURRENT TERM
NAME JUNE 30, 1998 OF THE BANK TO EXPIRE
- - ----- ------------- ----------- ------------
<S> <C> <C> <C>
O.E. Guinn, Jr. 69 1971 1999
Kaneaster Hodges, Jr. 59 1979 1999
John Minor 64 1971 2000
Brad Snider 38 1991 2000
J. C. McMinn 63 1998 (1) 1998
</TABLE>
______________
(1) Mr. McMinn was appointed to the Board of Director in September 1998 to fill
the vacancy left by the death of Director Holmes.
The principal occupation of each director of the Company for the last five
years is set forth below.
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.
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.
(continued)
59
<PAGE>
BRAD SNIDER has served as President and Chief Executive Officer and
Director since 1991. He has served 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.
J. C. MCMINN has served as Manager of Eldridge Supply Company, a farm
implement supply company based in Newport since 1987. He is a member of the
Newport Kiwanis Club. He served on the Newport Civil Service Commission, the
City Beautiful Commission, the American Legion Baseball Committee and the
Chamber of Commerce Agricultural Committee.
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE
Pursuant to regulations promulgated under the Exchange Act, the Company's
officers, directors and persons who own more than ten percent of the outstanding
Common Stock are required to file reports detailing their ownership and changes
of ownership in such Common Stock, and to furnish the Company with copies of all
such reports. Based on the Company's review of such reports which the Company
received during the last fiscal year, or written representations from such
persons that no annual report of change in beneficial ownership was required,
the Company believes that, during the last fiscal year, all persons subject to
such reporting requirements have complied with the reporting requirements.
ITEM 10. EXECUTIVE COMPENSATION
- - --------------------------------
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the cash and
non-cash compensation awarded to or earned by the Chief Executive Officer of the
Company and the Bank. No other employee earned in excess of $100,000 for the
year ended June 30, 1998.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------
OTHER ANNUAL ALL OTHER
NAME YEAR SALARY BONUS COMPENSATION(1) COMPENSATION(2)
- - -------------- ----- ------- ----- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Brad Snider 1998 $75,245 $ -- $10,500 $4,085
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).
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 6.5 years.
<TABLE>
<CAPTION>
YEARS OF SERVICE
-------------------------------------------
CAREER 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>
60
<PAGE>
EMPLOYMENT AGREEMENT. The Bank has entered into an employment agreement
with President, Brad Snider. Mr. Snider's base salary under the employment
agreement is $75,245. The employment agreement has a term of three years. The
agreement is terminable by the Bank for "just cause" as defined in the
agreement. If the Bank 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 the Bank,
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, 1998, such payments would have equaled
approximately $204,000. The aggregate payments that would have been made to Mr.
Snider would be an expense to the Bank, thereby reducing the Bank's net income
and the Bank's capital by that amount. The agreement may be renewed annually by
the 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
employees. If Mr. Snider's employment terminates for a reason other than just
cause, he will be entitled to purchase from the Bank family medical insurance
through any group health plan maintained by the Bank.
DIRECTOR'S COMPENSATION
Each of the directors is paid an annual fee of $10,500. Total aggregate
fees paid to the directors for the year ended June 30, 1998 were $52,500
(including $10,500 paid to Paul K. Holmes, Jr. who passed away).
DIRECTOR RETIREMENT PLAN. The Bank adopted the Newport Federal Savings
Bank Retirement Plan for Directors, effective May 29, 1997. On the effective
date, the Bank 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 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 the Bank 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 the Bank, 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 remained employed by the Bank 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, 1998, approximately $49,000 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 the Bank's
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.
61
<PAGE>
Any compensation accrued under the plan will be paid from the Bank's
general assets. The Bank has established a trust in order to hold assets with
which to pay compensation. Trust assets would be subject to claims of the
Bank's general creditors. In the event a participant prevails over the Bank 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, the Bank recognized compensation expense totaling $286,000 to provide for
participants= initial account balances.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- - ------------------------------------------------------------------------
Persons and groups owning in excess of 5% of the Common Stock are required
to file certain reports regarding such ownership pursuant to the Exchange Act
with the Company and the Securities and Exchange Commission ("SEC"). Based on
such reports (and certain other written information received by the Company),
management knows of no persons other than those set forth below who owned more
than 5% of the outstanding shares of Common Stock as of the Record Date. The
following table sets forth, as of August 31, 1998, certain information as to
those persons who were the beneficial owners of more than five percent (5%) of
the Company's outstanding shares of Common Stock and the shares of Common Stock
beneficially owned by each executive officer and director and by all executive
officers and directors of the Company as a group.
<TABLE>
<CAPTION>
PERCENT OF SHARES
NAME AND ADDRESS AMOUNT AND NATURE OF OF COMMON STOCK
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OUTSTANDING (2)
- - -------------------- ----------------------- -----------------
<S> <C> <C>
PRINCIPAL STOCKHOLDERS:
North Arkansas Bancshares, Inc. 29,624 (2) 8.00%
Employee Stock Ownership Plan
200 Olivia Drive
Newport, Arkansas 72112
Jeffrey L. Gendell 37,029 9.99%
200 Park Avenue, Suite 3900
New York, New York 10166
EXECUTIVE OFFICERS AND DIRECTORS:
O.E. Guinn, Jr. 9,204 2.49
Kaneaster Hodges, Jr. 9,784 2.64
John Minor 9,203 2.49
Brad Snider 9,882 (3) 2.67
J. C. McMinn 300 .08
All Executive Officers and Directors 38,373 (4) 10.36%
as a Group (5 persons)
</TABLE>
__________
(1) For purposes of this table, a person is deemed to be the beneficial owner
of any shares of Common Stock if he or she has or shares voting or
investment power with respect to such Common Stock or has a right to
acquire beneficial ownership at any time within 60 days from the Record
Date. As used herein, "voting power" is the power to vote or direct the
voting of shares and "investment power" is the power to dispose or direct
the disposition of shares. Except as otherwise noted, ownership is direct,
and the named persons exercise sole voting and investment power over the
shares of the Common Stock.
(2) These shares are held in a suspense account for future allocation among
participating employees as the loan used to purchase the shares is repaid.
The trustees of the North Arkansas Bancshares, Inc. Employee Stock
Ownership Plan (the "ESOP"), currently Directors Minor, Guinn and Hodges ,
vote all allocated shares in accordance with instructions of the
participants. Unallocated shares and shares for which no instructions have
been received generally are voted by the ESOP trustees in the same ratio as
participants direct the voting of allocated shares or, in the absence of
such direction, as directed by the Company's Board of Directors. As of
August 31, 1998 2,962 shares had been allocated.
62
<PAGE>
(3) Includes 882 shares allocated to Mr. Snider's account in the ESOP.
(4) Includes 882 shares which have been allocated to the accounts of executive
officers in the ESOP. Does not include 26,662 unallocated shares held by
the ESOP.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- - --------------------------------------------------------
The Bank offers loans to its directors, officers, and employees. These
loans currently are made in the ordinary course of business with the same
collateral, interest rates and underwriting criteria as those of comparable
transactions prevailing at the time and to not involve more than the normal risk
of collectibility or present other unfavorable features. Under current law, the
Bank's loans to directors and executive officers are required to be made on
substantially the same terms, including interest rates, as those prevailing for
comparable transactions and must not involve more than the normal risk of
repayment or present other unfavorable features. Furthermore, loans above the
greater of $25,000 or 5% of the Bank's capital and surplus (i.e., up to
$500,000) to such persons must be approved in advance by a disinterested
majority of the Board of Directors. At June 30, 1998, the Bank's loans to
directors and executive officers totaled $939,697, or 17.64% of the Company's
stockholders equity at that date.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.
- - -------------------------------------------------
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
----------------------------------------------
(1) Financial Statements. The following financial statements are
incorporated by reference from Item 7:
Independent Auditors' Report
Consolidated Statements of Financial Condition as of June 30,
1998 and 1997
Consolidated Statements of Operations for the Years Ended June
30, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended June
30, 1998 and 1997
Notes to Consolidated Financial Statements
(2) Exhibits. The following is a list of exhibits filed as part of this
Annual Report on Form 10-KSB and is also the Exhibit Index.
<TABLE>
<CAPTION>
Page in
Sequentially
No. Description Numbered Copy
---- ----------- -------------
<S> <C> <C>
3.1 Charter of North Arkansas Bancshares, Inc. *
3.2 Bylaws of North Arkansas Bancshares, Inc. *
4 Form of Common Stock Certificate of North Arkansas Bancshares, Inc. *
10.1 North Arkansas Bancshares, Inc. 1998 Stock Option and Incentive Plan *+
10.2 North Arkansas Bancshares, Inc. Management Recognition Plan and Trust Agreement *+
10.3 Newport Federal Savings Bank Retirement Plan for Directors *+
10.4 Employment Agreement between North Arkansas Bancshares, Inc. and Brad Snider *+
10.5 Guaranty Agreement between North Arkansas Bancshares, Inc. and Brad Snider *+
21 Subsidiaries of Registrant
27 Financial Data Schedule (EDGAR only)
</TABLE>
_____________
(*) Incorporated herein by reference from Registration Statement on Form SB-2
filed (File No. 333-35985).
(+) Management contract or compensatory plan or arrangement.
(B) REPORTS ON FORM 8-K. There were no Current Reports on Form 8-K filed
-------------------
by the Company during the fourth quarter of fiscal year 1998.
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTH ARKANSAS BANCSHARES, INC.
September 24, 1998 By: /s/ Brad Snider
-------------------------------------
Brad Snider
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Brad Snider September 24, 1998
- - -----------------------------------------
Brad Snider
President and Chief Executive Officer
(Director and Principal Executive Officer)
/s/ O. E. Guinn, Jr. September 24, 1998
- - -----------------------------------------
O.E. Guinn, Jr.
Vice Chairman of the Board
(Director)
/s/ Kaneaster Hodges, Jr. September 24, 1998
- - -----------------------------------------
Kaneaster Hodges, Jr.
(Director)
/s/ John Minor September 24, 1998
- - -----------------------------------------
John Minor
(Director)
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
- - ------
North Arkansas Bancshares, Inc.
State or Other Percentage
Subsidiaries (1) Jurisdiction of Incorporation Ownership
- - ---------------- ----------------------------- ---------
Newport Federal Savings Bank United States 100%
- - -------------------------
(1) The assets, liabilities and operations of the subsidiaries are included in
the consolidated financial statements contained in the financial statements
attached hereto as an exhibit.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 926,326
<INT-BEARING-DEPOSITS> 3,157,778
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 11,243,627
<INVESTMENTS-MARKET> 11,240,056
<LOANS> 25,784,233
<ALLOWANCE> 188,869
<TOTAL-ASSETS> 43,688,625
<DEPOSITS> 34,270,664
<SHORT-TERM> 900,000
<LIABILITIES-OTHER> 122,202
<LONG-TERM> 3,069,525
0
0
<COMMON> 3,703
<OTHER-SE> 5,322,531
<TOTAL-LIABILITIES-AND-EQUITY> 43,688,625
<INTEREST-LOAN> 2,091,614
<INTEREST-INVEST> 88,896
<INTEREST-OTHER> 560,904
<INTEREST-TOTAL> 2,741,414
<INTEREST-DEPOSIT> 1,617,847
<INTEREST-EXPENSE> 1,716,597
<INTEREST-INCOME-NET> 1,024,817
<LOAN-LOSSES> 156,341
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 899,142
<INCOME-PRETAX> 37,282
<INCOME-PRE-EXTRAORDINARY> 24,611
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,611
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
<YIELD-ACTUAL> 2.75
<LOANS-NON> 47,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 149,795
<CHARGE-OFFS> 117,267
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 188,869
<ALLOWANCE-DOMESTIC> 188,869
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
