SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______
(Mark One) FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
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Commission File No. 0-23525
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NORTH ARKANSAS BANCSHARES, INC.
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(NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
TENNESSEE 71-0800742
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
200 OLIVIA DRIVE, NEWPORT, ARKANSAS 72112
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(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. [ ]
Registrant's revenues for the fiscal year ended June 30, 2000: $3,317,022
As of September 20, 2000, the aggregate market value of the 234,026 shares of
Common Stock of the registrant issued and outstanding held by non-affiliates on
such date was approximately $1,638,182 based on the closing sales price of
$7.00 per share of the registrant's Common Stock on September 20, 2000 as
reported on the OTC Electronic Bulletin Board. For purposes of this calculation,
it is assumed that directors, executive officers and the ESOP are affiliates.
Number of shares of Common Stock outstanding as of September 20, 2000: 299,943
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:
1. Portions of Proxy Statement for the 2000 Annual Meeting of
Stockholders. (Part III)
<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,
2000, the Company had total assets of $45.4 million, deposits of $30.1 million,
net loans receivable of $28.3 million and stockholders' equity of $4.9 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 is 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 Savings Association Insurance Fund
("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.
FINANCIAL MODERNIZATION LEGISLATION
On November 12, 1999, President Clinton signed legislation which could have
a far-reaching impact on the financial services industry. The Gramm-Leach-Bliley
("G-L-B") Act authorizes affiliations between banking, securities and insurance
firms and authorizes bank holding companies and national banks to engage in a
variety of new financial activities. Among the new activities that will be
permitted to bank holding companies are securities and insurance brokerage,
securities underwriting, insurance underwriting and merchant banking. The
Federal Reserve Board, in consultation with the Secretary of the Treasury, may
approve additional financial activities. The G-L-B Act, however, prohibits
future acquisitions of existing unitary savings and loan holding companies, like
the Company, by firms which are engaged in commercial activities and limits the
permissible activities of unitary holding companies formed after May 4, 1999.
The G-L-B Act imposes new requirements on financial institutions with
respect to customer privacy. The G-L-B Act generally prohibits disclosure of
customer information to non-affiliated third parties unless the customer has
been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies
to customers annually. Financial institutions, however, will be required to
comply with state law if it is more protective of customer privacy than the
G-L-B Act. The G-L-B Act directs the federal banking agencies, the National
Credit Union Administration, the Secretary of the Treasury, the Securities and
Exchange Commission and the Federal Trade Commission, after consultation with
the National Association of Insurance Commissioners, to promulgate implementing
regulations within six months of enactment. The privacy provisions will become
effective in November 2000, with full compliance required by July 1, 2001.
The G-L-B Act contains significant revisions to the FHLB System. The G-L-B
Act imposes new capital requirements on the FHLBs and authorizes them to issue
two classes of stock with differing dividend rates and redemption requirements.
The G-L-B Act deletes the current requirement that the FHLBs annually contribute
$300 million to pay interest on certain government obligations in favor of a 20%
of net earnings formula. The G-L-B Act expands the permissible uses of FHLB
advances by community financial institutions (under $500 million in assets)
2
<PAGE>
to include funding loans to small businesses, small farms and small
agri-businesses. The G-L-B Act makes membership in the FHLB voluntary for
federal savings associations.
The G-L-B Act contains a variety of other provisions including a
prohibition against ATM surcharges unless the customer has first been provided
notice of the imposition and amount of the fee. The G-L-B Act reduces the
frequency of Community Reinvestment Act examinations for smaller institutions
and imposes certain reporting requirements on depository institutions that make
payments to non-governmental entities in connection with the Community
Reinvestment Act. The G-L-B Act eliminates the SAIF special reserve and
authorizes a federal savings association that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.
The Company is unable to predict the impact of the G-L-B Act on its
operations at this time. Although the G-L-B Act reduces the range of companies
with which may acquire control of the Company, it may facilitate affiliations
with companies in the financial services industry.
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, 2000, the
Bank's gross loans totaled $28.4 million of which $20.5 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.
3
<PAGE>
The following table sets forth information concerning the types of loans
held by the Bank at the dates indicated. At June 30, 2000, the Bank did not have
any concentrations of loans exceeding 10% of total loans except as disclosed
below.
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------------------
2000 1999
----------------------- --------------------------
AMOUNT % AMOUNT %
------ ----- ------ ---
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family.................. $ 20,537 72.42% $ 21,712 73.24%
Multi-family......................... 275 .97 123 .41
Non-residential...................... 3,436 12.12 3,578 12.08
---------- ------ --------- ------
Total real estate loans........... 24,248 85.51 25,413 85.73
Consumer loans:
Loans secured by deposits............ 604 2.13 746 2.51
Home improvement..................... 331 1.17 382 1.29
Automobile........................... 1,827 6.44 1,918 6.47
Other consumer....................... 634 2.24 597 2.01
Commercial............................. 713 2.51 590 1.99
---------- ------ --------- ------
Total loans..................... 28,357 100.00% 29,646 100.00%
---------- ====== --------- ======
Less:
Deferred fees and discounts.......... 4 1
Allowance for losses................. 101 105
---------- ---------
Loan portfolio, net............. $ 28,252 $ 29,540
========== =========
</TABLE>
The following table sets forth the estimated maturity of the Bank's loan
portfolio at June 30, 2000. 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 1
DUE WITHIN ONE THROUGH 5 DUE AFTER 5
YEAR AFTER YEARS AFTER YEARS AFTER
JUNE 30, 2000 JUNE 30, 2000 JUNE 30, 2000 TOTAL
------------- ------------- ------------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family............$ 929 $ 2,711 $ 16,897 $ 20,537
Multi-family................... -- 159 116 275
Non-residential................ 453 2,257 726 3,436
Consumer loans:
Loans secured by deposits...... 551 53 -- 604
Home improvement............... 2 113 216 331
Automobile..................... 282 1,476 69 1,827
Other consumer................. 205 417 12 634
Commercial....................... 439 -- 274 713
----------- --------- ---------- --------
Total.......................$ 2,861 $ 7,186 $ 18,310 $ 28,357
=========== ========= ========== ========
</TABLE>
4
<PAGE>
The next table shows at June 30, 2000, the dollar amount of all the Bank's
loans due one year or more after June 30, 2000 which have fixed interest rates
and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
FLOATING OR
FIXED RATE ADJUSTABLE RATES
----------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Real estate loans:
One- to four-family.......................... $ 4,596 $ 15,012
Multi-family................................. 159 116
Non-residential.............................. 2,097 886
Consumer loans:
Loans secured by deposits.................... 53 --
Home improvement............................. 329 --
Automobile................................... 1,545 --
Other consumer .............................. 429 --
Commercial ..................................... 274 --
----------- ---------
Total ................................... $ 9,482 $ 16,014
=========== =========
</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, 2000,
$20.5 million, or 72.42% 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, 2000, approximately 73.09% 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.
RESIDENTIAL CONSTRUCTION LOANS. The Bank makes a limited number of
residential construction loans on one- to four-family residential properties 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
5
<PAGE>
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, 2000, the Bank's three largest commercial real estate loans consisted of a
loan on a commercial office building which had a balance of $485,000 at June 30,
2000, a loan to a nursing home which had a balance of $356,000 and a loan to a
doctors' office building which had a balance of $228,000 at June 30, 2000. At
June 30, 2000, 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 multi-family 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 the Bank.
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.
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 $3.4
million, or 11.98% of the Bank's total loans at June 30, 2000. 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 also offers personal lines of credit. The Bank offers both
unsecured lines of credit that are granted based upon the borrower's financial
strength and secured lines of credit.
6
<PAGE>
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, 2000, commitments to cover originations of
mortgage loans were $55,000. 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, 2000, 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 $662,000 at June 30, 2000. At June 30, 2000,
the Bank's largest loan outstanding had a balance of $485,000. This loan was
secured by a commercial office building.
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 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, 2000, the Bank's loans past due between 30 and 89 days
totaled $277,000.
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.
7
<PAGE>
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 $47,000 in loans which were 90 days or more past due and still accruing
interest.
<TABLE>
<CAPTION>
AT JUNE 30,
----------------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Loans accounted for on a non-accrual basis:
Real estate:
One- to four-family........................................$ 5 $ 36
Multi-family............................................... -- --
Non-residential............................................ -- --
---------- ---------
Total real estate loans................................... 5 36
Consumer loans:
Loans secured by deposits................................... -- --
Home improvement............................................ 5 1
Automobile.................................................. -- --
Other consumer.............................................. -- --
Commercial..................................................... -- --
---------- ---------
Total nonperforming loans.............................. 10 37
---------- ---------
Repossessed automobiles........................................ -- --
Foreclosed real estate......................................... 26 379
---------- ---------
Total nonperforming assets.....................................$ 36 $ 416
========== =========
Total nonperforming assets as a
percentage of total net loans................................ .13% 1.41%
========== ========
Total nonperforming assets as a
percentage of total assets................................... .07% .867%
========== =========
</TABLE>
During the year ended June 30, 2000, the Bank would have recorded
additional interest income of approximately $1,000 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 no 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.
Foreclosed real estate of $26,000 at June 30, 2000 consisted of one single
family residential property. During fiscal year 2000, a 625-room hotel located
in Oklahoma City in which the Bank had acquired an interest through foreclosure
was sold. This property had been held as real estate owned since 1998.
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 the
Bank's 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,
8
<PAGE>
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, 2000, $30,000 of the Bank's assets were classified as doubtful
and loans classified as substandard totaled $205,000. In addition, the Bank's
real estate owned of $26,000 was also classified as substandard. There were no
loans classified as special mention.
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,
2000, the Bank's only real estate owned consisted of one single family property.
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 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.
9
<PAGE>
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.
YEAR ENDED JUNE 30,
-----------------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of period..............$ 105 $ 189
---------- ---------
Charge-offs:
One-to-four-family........................ -- --
Multi-family.............................. -- --
Non-residential........................... -- (107)
---------- ---------
Total real estate loans................... -- (107)
Consumer loans............................ (14) (41)
Recoveries:
One-to-four-family........................ -- --
Multi-family.............................. -- --
Non-residential........................... -- --
---------- ---------
Net recoveries (charge-offs)................ (14) (148)
---------- ---------
Additions charged to operations............. 10 64
---------- ---------
Balance at end of period....................$ 101 $ 105
========== =========
Allowance for loan losses to total
nonperforming assets at end of period..... 280.56% 25.24%
========== =========
Allowance for loan losses to net loans
at end of period.......................... .36% .36%
========== =========
Ratio of net charge-offs to average
loans outstanding during the period....... .05% .55%
========== =========
10
<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,
----------------------------------------------------------
2000 1999
--------------------------- ----------------------------
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.............................. $ 73 72.42% $ 77 73.24%
Multi-family..................................... 1 .97 1 .41
Non-residential.................................. 12 12.12 13 12.08
------- -------- ------- ------
Total real estate loans....................... 86 85.51 91 85.73
Consumer loans:
Loans secured by deposits....................... 2 2.13 2 2.51
Home improvement................................ 1 1.17 1 1.29
Automobile...................................... 7 6.44 7 6.47
Other consumer.................................. 2 2.24 2 2.01
Commercial......................................... 3 2.51 2 1.99
------- -------- ------- ------
Total allowance for loan losses................ $ 101 100.00% $ 105 100.00%
======= ====== ======= ======
</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, 2000, 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, 2000 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 certificates are guaranteed by those
agencies only. The Bank's mortgage-backed securities portfolio was classified as
"held to maturity" at June 30, 2000.
11
<PAGE>
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-rate 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, 2000, the Bank's investment in FHLB stock
amounted to $515,692. No ready market exists for such stock and it has no quoted
market value.
The following table sets forth the carrying value of the Bank's investment
securities and mortgage-backed portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
----------------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
U.S. Government agencies...................$ 2,725 $ 2,725
Mortgage-backed securities................. 9,489 10,852
Federal Home Loan Bank stock............... 516 435
Municipal securities....................... 12 30
---------- ---------
Total..................................$ 12,742 $ 14,042
========== =========
</TABLE>
12
<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,
2000.
<TABLE>
<CAPTION>
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS
---------------- -------------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
BOOK AVERAGE BOOK AVERAGE BOOK AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
----- ----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Securities held to maturity:
U.S. Government and agencies.......... $ -- --% $ -- --% $ 725 6.08%
Mortgage-backed securities (1)....... -- -- -- -- -- --
Municipal securities.................. 2 9.50 10 9.50 -- --
-------- -------- -------
Total.............................. $ 2 $ 10 $ 725
======== ======== =======
<CAPTION>
MORE THAN TEN YEARS TOTAL INVESTMENT PORTFOLIO
------------------- --------------------------
WEIGHTED WEIGHTED
BOOK AVERAGE BOOK AVERAGE
VALUE YIELD VALUE YIELD
----- ----- ----- -----
<S> <C> <C> <C> <C>
Securities held to maturity:
U.S. Government and agencies.......... $ 2,000 6.75% $ 2,725 6.51%
Mortgage-backed securities (1)....... 9,489 7.21 9,489 7.21
Municipal securities.................. -- -- 12 9.50
-------- -------
Total.............................. $ 11,489 $12,226
======== =======
</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.
13
<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 $3.3 million
or 10.80% of the deposit portfolio. The majority of these certificates represent
deposits from long-standing customers. As of June 30, 2000, the Bank had no
brokered deposits.
At June 30, 2000, 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 DEPOSITS
------- ---- -------- ------ --------- --------------
<S> <C> <C> <C> <C> <C>
2.78% None Passbook accounts $ 500 $ 2,027 6.73%
2.37 None NOW accounts 500 2,276 7.56
2.52 None Money market accounts 2,500 272 .90
None Other non-interest bearing 100 1,450 4.81
CERTIFICATES OF DEPOSIT
-----------------------
4.07 31 days Fixed-Term, Fixed-Rate 500 81 .27
4.58 91 days Fixed-Term, Fixed-Rate 500 40 .13
6.11 5 months Fixed-Term, Fixed-Rate 500 2,270 7.54
5.83 6 months Fixed-Term, Fixed-Rate 500 3,991 13.24
6.14 12 months Fixed-Term, Fixed-Rate 500 5,419 17.99
6.66 13 months Fixed-Term, Fixed-Rate 500 711 2.36
6.19 15 months Fixed-Term, Fixed-Rate 500 1,420 4.71
6.24 18 months Fixed-Term, Fixed-Rate 500 818 2.72
6.35 24 months Fixed-Term, Fixed-Rate 500 791 2.62
6.56 36 months Fixed-Term, Fixed-Rate 500 1,355 4.50
6.66 60 months Fixed-Term, Fixed-Rate 500 7,205 23.92
-------- ------
Total certificates of deposit 24,101 80.00
-------- ------
Total deposits $ 30,126 100.00%
======== ======
<FN>
__________________
(1) Indicates weighted average interest rate at June 30, 2000.
</FN>
</TABLE>
14
<PAGE>
The following table sets forth the Bank's time deposits classified by
interest rate at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
----------------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
2 - 3.99%................................ $ 27 $ 369
4 - 5.99%................................ 17,408 25,098
6 - 7.99%................................ 6,666 3,108
---------- ----------
Total ............................... $ 24,101 $ 28,575
=========== ==========
</TABLE>
The following table sets forth the amount and maturities of the Bank's time
deposits at June 30, 2000.
<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%..................... $ 27 $ -- $ -- $ -- $ 27
4 - 5.99%..................... 11,964 2,074 1,198 2,172 17,408
6 - 7.99%..................... 5,167 867 95 537 6,666
--------- ---------- ---------- ---------- ----------
$ 17,158 $ 2,941 $ 1,293 $ 2,709 $ 24,101
========= ========== ========== ========== ==========
</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,
2000.
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
--------------- ----------
(IN THOUSANDS)
Three months or less....................... $ 477
Over three through six months.............. 898
Over six through 12 months................. 1,062
Over 12 months............................. 816
----------
Total................................ $ 3,253
==========
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, 2000, borrowings from the FHLB of Dallas
totaled $10.2 million and consisted of five long-term obligations and two
short-term obligations totaling $5.7 million and $4.5 million, respectively.
15
<PAGE>
The following table sets forth certain information regarding the Bank's
borrowings.
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED JUNE 30,
----------------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Amounts outstanding at end of period:
FHLB advances................................................$ 10,159 $ 8,090
Weighted average rate paid on:
FHLB advances................................................ 6.217% 5.645%
Maximum amount of borrowings outstanding at any month end:
FHLB advances................................................ 10,159 8,090
Approximate average short-term borrowings outstanding with
respect to:
FHLB advances................................................ 1,448 1,073
Approximate weighted average rate paid on:
FHLB advances ............................................... 5.880% 5.739%
</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,
----------------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Return on assets (net earnings divided by
average total assets).................................... .3% * %
Return on average stockholders' equity (net earnings
divided by average stockholders' equity)................. 2.85 .02
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).............................. 2.39 2.11
Ratio of average interest-earning assets to
average interest-bearing liabilities..................... 106.24 105.92
Ratio of non-interest expense to average total assets....... 2.35 2.41
<FN>
---------
* = Not meaningful.
</FN>
</TABLE>
16
<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, 2000, the Bank had 11 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
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
17
<PAGE>
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 Section 106(b) of the BHCA 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
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
18
<PAGE>
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 undercapitalized 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 ss.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.
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.
19
<PAGE>
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 4.0% (or 3.0% if the association is rated
composite 1 CAMELS under the OTS examination rating system) 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 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 CAMELS 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. 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, 2000, 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, a portion of the savings association's general loss
allowances and up to 45% of unrealized gains on equity securities. Total core
and supplementary capital are reduced by the amount of capital instruments held
by other depository institutions pursuant to reciprocal arrangements, all equity
investments and that portion of the association's land loans and non-residential
construction loans in excess of an 80% loan-to-value ratio. At June 30, 2000,
the Bank had no high ratio land or non-residential 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. Under
the OTS risk-weighting system, one- to four-family first mortgages not more than
90 days past due with loan-to-value ratios at origination not exceeding 80% are
assigned a risk weight of 50%. Consumer and non-qualifying single family,
multi-family 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 and the book value of FHLB stock 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,
2000, 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, 2000.
20
<PAGE>
PERCENT OF
AMOUNT ASSETS (1)
------ ----------
(DOLLARS IN THOUSANDS)
Tangible capital............................ $ 4,245 9.43%
Tangible capital requirement................ 675 1.50
--------- -------
Excess...................................... $ 3,570 7.93%
========= =======
Core capital................................ $ 4,245 9.43%
Core capital requirement.................... 1,801 4.00
--------- -------
Excess...................................... $ 2,444 5.43%
========= =======
Total capital (i.e., core and
supplementary capital) ................... $ 4,341 20.97%
Risk-based capital requirement.............. 1,656 8.00
--------- -------
Excess...................................... $ 2,685 12.97%
========= =======
________________
(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 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 FDICIA, the federal banking
regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements,
including a leverage limit, a risk-based capital requirement, and any other
measure deemed appropriate by the federal banking regulators for measuring the
capital adequacy of an insured depository institution. All institutions,
regardless of their capital levels, are restricted from making any capital
distribution or paying any
21
<PAGE>
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 does 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 may 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 provisions. If an institution's ratio
of tangible capital to total assets falls below the "critical capital level"
established by the appropriate federal banking regulator, the institution will
be subject to conservatorship or receivership within specified time periods.
Under the implementing regulations, the federal banking regulators,
including the OTS, generally measure an institution's capital adequacy on the
basis of its 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). The following table shows the capital ratios
required for the various prompt corrective action categories.
<TABLE>
<CAPTION>
ADEQUATELY SIGNIFICANTLY
WELL CAPITALIZED CAPITALIZED UNDERCAPITALIZED UNDERCAPITALIZED
---------------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total risk-based
capital ratio 10.0% or more 8.0% or more Less than 8.0% Less than 6.0%
Tier 1 risk-based
capital ratio 6.0% or more 4.0% or more Less than 4.0% Less than 3.0%
Leverage ratio 5.0% or more 4.0% or more * Less than 4.0% * Less than 3.0%
<FN>
-----------
* 3.0% if institution has a composite 1 CAMELS rating.
</FN>
</TABLE>
A "critically undercapitalized" savings institution is defined as an 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 undercapitalized) 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.
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
22
<PAGE>
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 either qualify as a
"domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio" assets in Qualified Thrift Investments.
Portfolio assets are defined as total assets less intangibles, the value of
property used by a savings institution in its business and liquidity investments
in an amount not exceeding 20% of total 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 or household purposes; 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, 2000, approximately 83.65% of the Bank's assets were invested in
Qualified Thrift Investments.
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. 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.
OTS regulations require that savings institutions submit notice to the OTS
prior to making a capital distribution if (a) they would not be well-capitalized
after the distribution, (b) the distribution would result in the retirement of
any of the institution's common or preferred stock or debt counted as its
regulatory capital, or (c) the institution is a subsidiary of a holding company.
A savings institution must make application to the OTS to pay a capital
distribution if (x) the institution would not be adequately capitalized
following the distribution, (y) the institution's total distributions for the
calendar year exceeds the institution's net income for the calendar year to date
plus its net income (less distributions) for the preceding two years, or (z) the
distribution would otherwise violate applicable law or regulation or an
agreement with or condition imposed by the OTS. If neither the savings
institution nor the proposed capital distribution meet any of the foregoing
criteria, then no notice or application is required to be filed with the OTS
before making a capital distribution. The OTS may disapprove or deny a capital
distribution if in the view of the OTS, the capital distribution would
constitute an unsafe or unsound practice.
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
23
<PAGE>
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 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 an assessment schedule for SAIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest supervisory ratings is zero and institutions in the lowest risk
assessment classification are assessed at the rate of 0.27% of insured deposits.
Until December 31, 1999, SAIF-insured institutions, were 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 were assessed for these obligations at
the rate of 1.3 basis points. Since December 31, 1999, both BIF and SAIF members
are being 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
24
<PAGE>
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, deposits maintained pursuant to the Federal
Reserve Board requirements, time and savings deposits in certain institutions,
obligations of states and political subdivisions thereof, shares in mutual funds
with certain restricted investment policies, highly rated corporate debt and
mortgage loans and mortgage-related securities with less than one year to
maturity or subject to purchase within one year) in each calendar quarter of not
less than a specified percentage (currently 4%) of its net withdrawable savings
deposits plus the average daily balance of short-term borrowings during the
preceding calendar quarter. Monetary penalties may be imposed for failure to
meet liquidity requirements. The average daily liquidity ratio of the Bank for
the month of June 2000 was 25.71%.
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, 2000, of
$516,000. 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, 2000, the Bank had
$10.2 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
transaction accounts up to $44.3 million, 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, 2000, 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 the Bank, 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 the Bank. At June 30, 2000, the Bank had no post-1987
bad-debt reserves.
25
<PAGE>
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, 2000 included approximately $552,435 for which no deferred
Federal income tax liability has been recognized. This amount represents such
allocation of income to tax bad debt deduction for income tax purposes.
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. The Company is not subject to AMT
if it has average gross receipts of $5,000,000 or less for the three-year period
beginning after December 31, 1994 and average gross receipts for the latest
three-year period thereafter of $7,500,000 or less.
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 it 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 at increasing rates
up to 6.5% of all taxable earnings in excess of $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 2000 (1) SQUARE FOOTAGE 2000
------ ------ ------------ -------------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Main Office: 1995 Owned $1,175 6,000 $30,125
<FN>
________________
(1) Cost less accumulated depreciation and amortization.
</FN>
</TABLE>
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 2000.
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 299,943
shares of the Common Stock outstanding. The number of registered holders of
Common Stock on September 15, 2000 was 145. The following table sets forth the
high and low sales prices for the Common Stock for each quarter during the past
two fiscal years. The source for this information was MSN Money Central.
QUARTER ENDED HIGH LOW
------------- ---- ---
September 30, 1998 $12.25 $ 9.50
December 31, 1998 $10.00 $ 9.250
March 31, 1999 $10.938 $ 9.313
June 30, 1999 $10.375 $ 8.313
September 30, 1999 $ 8.625 $ 7.00
December 31, 1999 $ 8.625 $ 6.250
March 31, 2000 $ 8.750 $ 6.78
June 30, 2000 $ 8.750 $ 7.50
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 institutions. Under OTS regulations applicable to converted savings
institutions, 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 require that savings institutions submit notice to the OTS
prior to making a capital distribution if (a) they would not be well-capitalized
after the distribution, (b) the distribution would result in the retirement of
any of the institution's common or preferred stock or debt counted as its
regulatory capital, or (c) the institution is a subsidiary of a holding company.
A savings institution must make application to the OTS to pay a capital
distribution if (x) the institution would not be adequately capitalized
following the distribution, (y) the institution's total distributions for the
calendar year exceeds the institution's net income for the calendar year to date
plus its net income (less distributions) for the preceding two years, or (z) the
distribution would otherwise violate
27
<PAGE>
applicable law or regulation or an agreement with or condition imposed by the
OTS. If neither the savings institution nor the proposed capital distribution
meet any of the foregoing criteria, then no notice or application is required to
be filed with the OTS before making a capital distribution. The OTS may
disapprove or deny a capital distribution if in the view of the OTS, the capital
distribution would constitute an unsafe or unsound practice.
The Bank currently meets all of its regulatory requirements and therefore,
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 non-interest income (including servicing fees and other fees)
and its non-interest expenses, such as compensation and benefits, occupancy and
equipment, insurance premiums, and miscellaneous other expenses, as well as
federal income tax expense.
FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Company's operations and the
Company's actual results could differ significantly from those discussed in the
forward-looking statements. Some of the factors that could cause or contribute
to such differences are discussed herein but also include changes in the economy
and interest rates in the nation and the Company's market area generally. Some
of the forward-looking statements included herein are the statements regarding
management's determination of the amount and adequacy of the allowance for
losses on loans and the effect of certain recent accounting pronouncements.
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 the Company's 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 than
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 3% (100 to 300 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, 2000, as calculated by
the OTS, which is based upon quarterly information that the Bank voluntarily
provided to the OTS.
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE NPV AS % OF PORTFOLIO VALUE OF ASSETS
CHANGE --------------------------------------- -------------------------------------
IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO BASIS POINT CHANGE
-------- -------- -------- -------- --------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+ 300 bp $ 3,861 $ (984) (20)% 9.0 % (174)bp
+ 200 bp 4,261 (585) (12) 9.8 (99)
+ 100 bp 4,590 (255) (5) 10.4 (41)
0 bp 4,846 -- -- 10.77 --
- 100 bp 5,034 188 4 11.0 26
- 200 bp 5,146 300 6 11.1 37
- 300 bp 5,287 442 9 11.3 52
</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 the
Company's average statement of financial condition and reflects the average
yield on assets and average cost of liabilities 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,
-----------------------------------------------------------------------
2000 1999
-------------------------------- ---------------------------------
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........................ $ 2,171 $ 98 4.51% $ 3,116 $ 215 6.90%
Mortgage-backed securities....................... 9,925 644 6.49 11,698 686 5.86
Investment securities............................ 3,226 214 6.63 2,278 138 6.06
Loans (1)........................................ 28,561 2,218 7.77 27,050 2,091 7.73
---------- ---------- ---------- ----------
Total interest-earning assets ..................... 43,883 3,174 7.24 44,142 3,130 7.09
---------- ----------
Non-interest-earning assets........................ 2,564 2,903
---------- ----------
Total assets....................................... $ 46,447 $ 47,045
========== ==========
INTEREST-BEARING LIABILITIES:
Deposits......................................... $ 32,616 $ 1,519 4.66 $ 34,588 $ 1,684 4.87
FHLB advances.................................... 8,691 483 5.56 7,086 390 5.50
---------- ---------- ---------- ----------
Total interest-bearing liabilities................. 41,307 2,002 4.85 41,674 2,074 4.98
---------- ----------
Non-interest bearing liabilities................... 186 208
---------- ----------
Total liabilities.................................. 41,493 41,882
Stockholders' equity............................... 4,954 5,163
---------- ----------
Total liabilities and stockholders' equity......... $ 46,447 $ 47,045
========== ==========
Net interest income ............................... $ 1,172 $ 1,056
========== ==========
Net interest rate spread (2)....................... 2.39% 2.11%
===== =======
Net interest-earning assets........................ $ 2,576 $ 2,468
========== ==========
Net interest margin (3) ........................... 2.67% 2.39%
===== =======
Ratio of average interest-earning assets to
average interest-bearing liabilities............. 106.24% 105.92%
========== ==========
<FN>
--------------------
(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.
</FN>
</TABLE>
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. The changes in
interest rate and volume have been allocated to changes in average volume and
changes in average rates, in proportion to the relationship of absolute dollar
amounts of the changes in rates and volume. Changes due to mix (both volume and
rate) have been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts to the changes in each.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------------------------------
2000 VS. 1999 1999 VS. 1998
---------------------------------- -------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
---------------------------------- -------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- ------- ------- ------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits..............$ (55) $ (62) $ (117) $ (46) $ 94 $ 48
Mortgage-backed securities............. (110) 68 (42) 313 (21) 292
Investment securities.................. 62 14 76 40 9 49
Loans.................................. 117 10 127 143 (144) (1)
-------- ------- ------- ------- ------ --------
Total interest-earning assets...... 14 30 44 450 (62) 388
-------- ------- ------- ------- ------ --------
INTEREST-BEARING LIABILITIES:
Deposits............................... (94) (71) (165) 102 (36) 66
FHLB advances.......................... 89 4 93 244 47 291
-------- ------- ------- ------- ------ --------
Total interest-bearing
liabilities .................... (5) (67) (72) 346 11 357
-------- ------- ------- ------- ------ --------
Increase (decrease) in net interest
income...............................$ 19 $ 97 $ 116 $ 104 $ (73) $ 31
======== ======= ======= ======= ====== ========
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2000 AND JUNE 30, 1999
Total assets decreased by $2.6 million, or 5.43%, from $47.9 million at
June 30, 1999 to $45.4 million at June 30, 2000. The decrease in total assets
was primarily due to the $1.3 million, or 9.26%, decrease in held-to-maturity
securities, the $1.3 million, or 4.36%, decrease in net loans receivable, the
$500,000, or 29.45%, decrease in certificates of deposit at other institutions
and the $352,000 decrease in foreclosed real estate, partially offset by a
$929,000, or 301.59%, increase in cash and cash equivalents.
Net loans at June 30, 2000 amounted to $28.3 million, a decrease of $1.3
million from $29.5 million at June 30, 1999. The decrease was attributable to
slower than normal loan originations coupled with several large loan payoffs.
During the year ended June 30, 2000, the Bank originated $3.7 million in
mortgage loans and $1.5 million in consumer loans. The decrease in the
held-to-maturity securities portfolio reflects maturities and principal
repayments on such securities. The decreased balance of certificates of deposit
at other institutions reflects the Company's decision not to renew certain
certificates upon maturity due to the Company's higher than normal cash needs as
a result of a decrease in deposits.
Total liabilities decreased by $2.5 million, or 5.89%, from $43.0 million
at June 30, 1999 to $40.5 million at June 30, 2000 with the decrease
attributable primarily to the $4.6 million decrease in deposits, partially
offset by the $2.1 million increase in FHLB advances. The decrease in deposits
was primarily attributable to a decrease in certificate of deposit accounts.
Deposits in checking and other transactional accounts were comparable year to
year. FHLB advances at June 30, 2000 totaled $10.2 million as compared to $8.1
million at June 30, 1999 with the $2.1 million, or 25.58%, increase used to fund
loan originations.
Total stockholders' equity amounted to $4.9 million at June 30, 2000, a
$69,000 or 1.40% decrease from June 30, 1999. This decrease was attributable to
the approximately $249,000 used to repurchase
31
<PAGE>
30,200 shares of the outstanding shares of Common Stock during the fiscal year,
offset by the retention of earnings from the period.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
NET INCOME. Net income for the year ended June 30, 2000 increased by
$140,000 to $141,000 from net income of $1,000 for the year ended June 30, 1999.
The increase was due primarily to the combined effects of an increase in net
interest income and decreases in the provision for loan losses and non-interest
expense.
NET INTEREST INCOME. Net interest income increased by $117,000, or 11.04%,
from $1.0 million for the year ended June 30, 1999 to $1.1 million for the year
ended June 30, 2000 with the increase attributable to an increase in the average
yield on interest-earning assets and a decrease in the average cost of
interest-bearing liabilities, partially offset by a decrease in the average
balance of interest-earning assets. The Company's interest rate spread widened
by 28 basis points from 2.11% in fiscal year 1999 to 2.39% in fiscal year 2000
due to the combined effects of a 15 basis point increase in the average yield on
interest-earning assets and a 13 basis point decrease in the average cost of
interest-bearing liabilities. The increased asset yield was primarily due to an
increased yield on the Company's adjustable rate mortgage-backed securities
portfolio with the 63 basis point increase attributable to higher rates as a
result of interest rate increases. The decrease in the average cost of
interest-bearing liabilities reflected decreases in deposit rates, partially
offset by higher borrowing costs on FHLB advances. Average interest earning
assets during fiscal year 2000 amounted to $43.9 million as compared to $44.1
million for fiscal year 1999 with the decrease primarily centered in
mortgage-backed securities and, to a lesser extent, interest-bearing deposits at
other institutions. Average interest bearing liabilities during fiscal year 2000
amounted to $41.3 million, down from $41.7 million during fiscal year 1999 as
the Company utilized FHLB advances to fund loan originations. The ratio of
average interest earning assets to average interest-bearing liabilities
increased from 105.92% for fiscal year 1999 to 106.24% for fiscal year 2000.
INTEREST INCOME. Interest income totaled $3.2 million for the year ended
June 30, 2000, an increase of $45,000, or 1.44%, from fiscal year 1999's level
of $3.1 million. The increase resulted primarily from the increased yield from
interest-earning assets (in particular, loans and investment securities). The
average yield on the Bank's loan portfolio increased by four basis points from
7.73% in fiscal year 1999 to 7.77% in fiscal year 2000 while the average balance
of the loan portfolio increased by $1.5 million from $27.1 million in fiscal
year 1999 to $28.6 million in fiscal year 2000. Interest income from
mortgage-backed securities and interest bearing deposits declined year to year
due to a decrease in the average balance of these investments and, to a lesser
extent, a decrease in the average yield on interest-bearing deposits.
INTEREST EXPENSE. Total interest expense decreased by $71,000, or 3.45%,
due to the combined effects of a decreased average balance of deposits and a
decrease in the average deposit rate paid, partially offset by increases in the
average balance of FHLB advances and a six basis point increase in the average
rate paid on such liabilities. Overall, average interest-bearing liabilities
decreased by $367,000 from $41.7 million for fiscal 1999 to $41.3 million for
fiscal 2000. Interest expense on deposits declined by $164,000 from $1.7 million
in fiscal year 1999 to $1.5 million in fiscal year 2000 reflecting the $2.0
million decrease in the average balance of deposits.
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased by
$54,000, or 84.35% from $64,000 for the year ended June 30, 1999 to $10,000 for
the year ended June 30, 2000. While management believes that the allowance for
loan losses is adequate, 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
2000 was .36% comparable to fiscal year end 1999.
NON-INTEREST INCOME. Non-interest income totaled $143,000 for the year
ended June 30, 2000, a decrease of $5,000, or 3.52%, from $148,000 for the year
ended June 30, 1999.
NON-INTEREST EXPENSE. Non-interest expense decreased by $42,000 or 3.73%,
from the prior year. Decreased levels of other expenses, legal and professional
fees and federal deposit insurance premiums, partially offset by increases in
salaries and employee benefit, furniture and equipment expense and data
processing fees accounted for the net decrease. Other expense totaled $211,000
for fiscal year 2000, down from $276,000 for fiscal year 1999, for a decrease of
$65,000.
32
<PAGE>
The decrease was primarily attributable to the absence of certain nonrecurring
expense items in fiscal year 2000. Other expense for fiscal year 1999 had
included a $55,000 write-down in the carrying value of the remaining piece of
the real estate on which the Bank's former headquarters had been located. During
the second quarter of fiscal 1999, the Bank sold the property that had formerly
housed its main office but retained an adjacent lot. During the third quarter of
fiscal 1999, the Bank accepted an offer to purchase the lot at a price below its
then carrying value. Although such purchase was ultimately not consummated, the
Bank reduced its carrying value to the offer price to reflect the market value.
Such reduction in value amounted to $55,000. In fiscal year 1999, the Bank also
recorded an additional reduction in the carrying value of its interest in a
piece of real estate owned acquired through foreclosure by an additional $50,000
to reflect further reductions in the estimated market value of the property.
This property was sold in the last quarter of fiscal year 2000 and resulted in a
loss of $43,000. Legal and professional fees decreased by $12,000, or 8.94%,
from $129,000 in fiscal year 1999 to $117,000 in fiscal year 2000. The higher
level of legal and accounting expenses in fiscal year 1999 reflected additional
professional fees incurred as a result of the termination of the Company's
former accountant and the appointment of a successor. Salaries and employee
benefit expenses increased by $17,000, or 3.64%, from $469,000 for fiscal year
1999 to $486,000 for fiscal year 2000 reflecting general salary increases.
INCOME TAX EXPENSE. Income tax expense increased by $68,000 from $5,000 for
fiscal year 1999 to $73,000 for fiscal year 2000. The increase in income tax
expense is due directly to the increased level of earnings during fiscal year
2000. The effective tax rates for fiscal years 2000 and 1999 were 34.02% and
86.75%, respectively. The variations in the effective tax rate are attributable
to the composition of the income base, the amount of tax exempt income,
non-deductible expenses and the related impact of these items relative to net
income.
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 the
Bank's deposits and short-term borrowings. The required ratio currently is 4%
and the Bank's liquidity ratio for the month ended June 30, 2000 was 25.71%.
The 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.
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. Management monitors projected liquidity
needs and determines the level desirable, based in part on the Company's
commitments to make loans and management's assessment of the Company's ability
to generate funds.
The Bank is subject to federal regulations that impose certain minimum
capital requirements. At June 30, 2000 the Bank was in compliance with all
applicable capital requirements.
33
<PAGE>
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
the Company's 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
The FASB recently adopted SFAS 133, "Accounting for Derivative Financial
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000,
may be adopted early for periods beginning after issuance of the Statement and
may not be adopted retroactively. The Company did not adopt SFAS 133 early.
Management believes that the adoption of SFAS 133 will not have a material
impact on the Company's financial statements.
SEGMENT INFORMATION
The principal business of the Company is overseeing the business of the
Bank. The Company has no significant assets other than its investments in the
Bank and certificates of deposit in other financial institutions. The banking
operation is the Company's only reportable segment. The banking segment is
principally engaged in the business of originating mortgage loans secured by
one- to four-family residences and, to a lesser extent, multi-family,
construction and commercial real estate loans and consumer loans. These loans
are funded primarily through the attraction of deposits from the general public
and borrowings from the FHLB. Selected information is not presented separately
for the Company's reportable segment, as there is no material difference between
that information and the corresponding information in the consolidated financial
statements.
34
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
-----------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Accountants' Reports...........................36
Consolidated Financial Statements
Balance Sheets....................................37
Statements of Income..............................38
Statements of Changes in Stockholders' Equity.....39
Statements of Cash Flows..........................40
Notes to Consolidated Financial Statements........41
35
<PAGE>
[LETTERHEAD OF BAIRD, KURTZ & DOBSON]
Independent Accountants' Report
-------------------------------
Board of Directors
North Arkansas Bancshares, Inc.
Newport, Arkansas
We have audited the accompanying consolidated balance sheets of NORTH
ARKANSAS BANCSHARES, INC. as of June 30, 2000 and 1999, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NORTH
ARKANSAS BANCSHARES, INC. as of June 30, 2000 and 1999, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ Baird, Kurtz & Dobson
Little Rock, Arkansas
July 28, 2000
36
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
ASSETS
2000 1999
---- ----
<S> <C> <C>
Cash and due from banks $ 140,300 $ 224,093
Interest bearing deposits in other financial institutions 1,096,221 83,814
-------------- --------------
Cash and cash equivalents 1,236,521 307,907
Certificates of deposit in other financial institutions 1,198,000 1,698,000
Held-to-maturity securities 12,741,700 14,042,074
Loans receivable, net 28,251,774 29,539,448
Premises and equipment, net 1,368,767 1,412,301
Foreclosed assets held for sale, net 26,322 378,560
Interest receivable 321,787 330,729
Other assets 214,230 253,078
-------------- --------------
Total Assets $ 45,359,101 $ 47,962,097
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 30,125,720 $ 34,679,628
Federal Home Loan Bank advances 10,158,957 8,089,501
Accrued interest and other liabilities 200,804 249,961
-------------- --------------
Total Liabilities 40,485,481 43,019,090
-------------- --------------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 a share, authorized
9,000,000 shares; 303,100 and 333,270 shares issued
and outstanding at June 30, 2000 and 1999, respectively 3,031 3,333
Additional paid-in capital 2,656,357 2,907,754
Retained earnings, substantially restricted 2,432,418 2,291,647
Unearned ESOP shares (207,368) (236,992)
-------------- --------------
4,884,438 4,965,742
Unearned MRP Shares, 2000 - 1,136 shares; 1999 - 2,271 shares (10,818) (22,735)
-------------- --------------
Total Stockholders' Equity 4,873,620 4,943,007
-------------- --------------
Total Liabilities and Stockholders' Equity $ 45,359,101 $ 47,962,097
============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
37
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
INTEREST INCOME
Loans $ 2,218,925 $ 2,090,860
Deposits in other financial institutions 97,838 215,099
Mortgage-backed securities 643,512 685,895
Investment securities 214,207 137,526
------------ ------------
Total Interest Income 3,174,482 3,129,380
------------ ------------
INTEREST EXPENSE
Deposits 1,519,475 1,683,603
Federal Home Loan Bank advances 482,615 389,930
------------ ------------
Total Interest Expense 2,002,090 2,073,533
------------ ------------
NET INTEREST INCOME 1,172,392 1,055,847
PROVISION FOR LOAN LOSSES 10,000 63,887
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES
1,162,392 991,960
------------ ------------
NON-INTEREST INCOME - OTHER 142,540 147,746
------------ ------------
NON-INTEREST EXPENSE
Salaries and employee benefits 486,315 469,253
Legal and professional fees 117,264 128,775
Data processing fees 134,773 125,624
Federal insurance expense 16,398 19,518
Occupancy expense 79,954 78,558
Furniture and equipment expense 45,824 36,069
Other expense 211,047 276,120
------------ ------------
Total Non-Interest Expense 1,091,575 1,133,917
------------ ------------
INCOME BEFORE INCOME TAXES 213,357 5,789
PROVISION FOR INCOME TAXES 72,586 5,022
------------ ------------
NET INCOME $ 140,771 $ 767
============ ============
BASIC AND DILUTED EARNINGS PER COMMON
SHARE $ .47 $ .00
=========== ============
</TABLE>
See Notes to Consolidated Financial Statements
38
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
Additional Unearned
Common Paid- Retained ESOP Unearned
Stock In Capital Earnings Shares MRP Shares Total
--------- ---------- -------- --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1998 $ 3,703 $ 3,298,267 $ 2,290,880 $(266,616) $ $ 5,326,234
LOAN PRINCIPAL
REPAYMENT FOR
EMPLOYEE STOCK
OWNERSHIP PLAN 29,624 29,624
REPURCHASE 37,030 SHARES
OF COMMON STOCK (370) (389,657) (390,027)
REPURCHASE OF 3,300
SHARES UNDER MRP PLAN (34,653) (34,653)
ISSUANCE OF 1,135 SHARES
UNDER MRP PLAN (856) 11,918 11,062
NET INCOME 767 767
----------- ----------- ----------- --------- ----------- -----------
BALANCE, JUNE 30, 1999 3,333 2,907,754 2,291,647 (236,992) (22,735) 4,943,007
----------- ----------- ----------- --------- ----------- -----------
LOAN PRINCIPAL
REPAYMENT FOR
EMPLOYEE STOCK
OWNERSHIP PLAN 29,624 29,624
REPURCHASE 30,200 SHARES
OF COMMON STOCK (302) (248,843) (249,145)
ISSUANCE OF 1,135 SHARES
UNDER MRP PLAN (2,554) 11,917 9,363
NET INCOME 140,771 140,771
----------- ----------- ----------- --------- ----------- -----------
BALANCE, JUNE 30, 2000 $ 3,031 $ 2,656,357 $ 2,432,418 $(207,368)$ $ (10,818) $ 4,873,620
=========== =========== =========== ========= =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
39
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 140,771 $ 767
Items not requiring (providing) cash:
Depreciation and amortization 61,842 65,729
Amortization of premiums and discounts on securities 33,988 37,787
Loss (gain) on sale of real estate owned 42,989 (79)
Loss on sale of premises and equipment 5,946
Provision for loan losses 10,000 63,887
FHLB stock dividends (34,000) (19,700)
Changes in:
Deferred income taxes 40,479 (45,725)
Provision for foreclosed asset 50,000
Impairment loss on premises and equipment 54,988
Management recognition plan expense 9,363 11,062
Release of unearned ESOP shares 29,624 29,624
Interest receivable 8,942 (17,307)
Other assets 2,091 83,883
Accrued interest and other liabilities (57,851) 127,759
----------- -----------
Net cash provided by operating activities 288,238 448,621
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net repayments (originations) of loans 1,251,352 (1,790,957)
Purchase of premises and equipment (13,336) (5,766)
Proceeds from the sale of foreclosed assets 335,571
Proceeds from maturities and principal repayments of held-to-
maturity securities 1,347,586 6,612,344
Purchases of held-to-maturity securities (47,200) (9,429,478)
Net decrease in certificates of deposit in other financial
institutions 500,000 292,000
Purchase of loans (2,017,221)
----------- -----------
Net cash provided by (used in) investing activities 3,373,973 (6,339,078)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand, NOW, and savings accounts (4,553,908) 408,964
Net increase in FHLB advances 2,069,456 4,119,976
Repurchase of common stock (249,145) (390,027)
Repurchase of common stock under MRP Plan (34,653)
Net cash (used in) provided by financing activities (2,733,597) 4,104,260
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 928,614 (1,786,197)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 307,907 2,094,104
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,236,521 $ 307,907
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
40
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
--------------------
North Arkansas Bancshares, Inc. (the "Company"), through its wholly-owned
subsidiary (Newport Federal Savings Bank, Newport, Arkansas) (the "Bank"),
provides a full range of banking and mortgage services to individual and
corporate customers in Northeast Arkansas. The Bank is subject to competition
from other financial institutions. The Company and Bank are also subject to the
regulation of certain federal agencies and undergo periodic examinations by
those regulatory authorities.
The Company was incorporated in September 1997, in connection with the
Bank's conversion from a federally chartered mutual savings bank to a federally
chartered stock savings bank.
USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan losses
and the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and the valuation of foreclosed assets held for sale, management
obtains independent appraisals for significant properties.
Management believes that the allowances for losses on loans and valuation
of foreclosed assets held for sale are adequate. While management uses available
information to recognize losses on loans and foreclosed assets held for sale,
changes in economic conditions may necessitate revision of these estimates in
future years. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for
losses on loans and valuation of foreclosed assets held for sale. Such agencies
may require the Company to recognize additional losses based on their judgments
of information available to them at the time of their examination.
41
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, the Bank. Significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH EQUIVALENTS
----------------
The Company considers all liquid interest-bearing deposits in other
financial institutions with original maturities of three months or less to be
cash equivalents.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
-----------------------------------------
Held-to-maturity securities, which include any security for which the
Company has the positive intent and ability to hold until maturity are carried
at historical cost adjusted for amortization of premiums and accretion of
discounts. Premiums and discounts are amortized and accreted, respectively, to
interest income using the level-yield method over the period to maturity.
Interest and dividends on investments in debt and equity securities are
included in income when earned.
LOANS
-----
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-offs are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses and any deferred fees or costs on originated loans and unamortized
premiums and discounts on purchased loans.
ALLOWANCE FOR LOAN LOSSES
-------------------------
The allowance for loan losses is increased by provisions charged to expense
and reduced by loans charged off, net of recoveries. The allowance is maintained
at a level considered adequate to provide for potential loan losses, based on
management's evaluation of the loan portfolio, as well as on prevailing and
anticipated economic conditions and historical losses by loan category. General
allowances have been established, based upon the aforementioned factors, and
allocated to the individual loan categories. Allowances are accrued on specific
loans evaluated for impairment for which the basis of each loan, including
accrued interest, exceeds the discounted amount of expected future collections
of interest and principal or, alternatively, the fair value of collateral.
42
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
ALLOWANCE FOR LOAN LOSSES (CONTINUED)
------------------------------------
A loan is considered impaired when it is probable that the Company will not
receive all amounts due according to the contractual terms. This includes loans
that are delinquent 90 days or more (nonaccrual loans) and certain other loans
identified by management. Accrual of interest is discontinued, and interest
accrued and unpaid is removed, at the time such amounts are delinquent 90 days.
Interest is recognized for nonaccrual loans only upon receipt, and only after
all principal amounts are current according to the terms of the contract.
FEE INCOME
----------
Loan origination fees, net of direct origination costs, are recognized as
income using the level-yield method over the term of the loans.
PREMISES AND EQUIPMENT
----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is charged to expense using the straight-line method over the
estimated useful lives of the assets.
FORECLOSED ASSETS HELD FOR SALE
-------------------------------
Assets acquired by foreclosure or in settlement of debt and held for sale
are valued at estimated fair value as of the date of foreclosure, and a related
valuation allowance is provided for estimated costs to sell the assets.
Management evaluates the value of foreclosed assets held for sale periodically
and increases the valuation allowance for any subsequent declines in estimated
fair value. Changes in the valuation allowance and gain/losses on sales are
included in non-interest expense, net.
Activity in the allowance for losses on foreclosed assets was as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Balance, beginning of year $ 50,000 $
Provision charged to expense 50,000
Charge-offs, net of recoveries (50,000)
---------- -----------
Balance, end of year $ 0 $ 50,000
========== ==========
</TABLE>
43
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES
------------
Deferred tax liabilities and assets are recognized for the tax effect of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
EARNINGS PER SHARE
------------------
Basic earnings per share is computed based on the weighted average number
of shares outstanding during each year. Diluted earnings per share is computed
using the weighted average common shares and all potential dilutive common
shares outstanding during the period. The weighted average shares outstanding in
June 30, 2000 and 1999, have been adjusted for weighted average unearned ESOP
shares of 23,700 and 26,662, respectively.
The computation of per share earnings is as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net Income $ 140,771 $ 767
============ ============
Average common shares outstanding 297,898 332,354
------------ ------------
Effect of dilutive securities
Stock options -- --
MRP shares -- --
Average diluted common shares 297,898 332,354
============ ============
Basic earnings per share $ .47 $ .00
============ ============
Diluted earnings per share $ .47 $ .00
============ ============
</TABLE>
44
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
------------------------------------------
The FASB recently adopted SFAS 133, "Accounting for Derivative Financial
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities SFAS 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000,
may be adopted early for periods beginning after issuance of the Statement and
may not be adopted retroactively. The Company did not adopt SFAS 133 early.
Management believes that the adoption of SFAS 133 will not have a material
impact on the Company's financial statements.
SEGMENT INFORMATION
-------------------
The principal business of the Company is overseeing the business of the
Bank. The Company has no significant assets other than its investment in the
Bank and certificates of deposit in other financial institutions. The banking
operation is the Company's only reportable segment. The banking segment is
principally engaged in the business of originating mortgage loans secured by
one-to-four family residences and, to a lesser extent, multi-family,
construction and commercial real estate loans and consumer loans. These loans
are funded primarily through the attraction of deposits from the general public
and borrowings from the Federal Home Loan Bank. Selected information is not
presented separately for the Company's reportable segment, as there is no
material difference between that information and the corresponding information
in the consolidated financial statements.
45
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 2: INVESTMENT SECURITIES
The amortized cost and approximate fair value of held-to-maturity
securities are as follows:
<TABLE>
<CAPTION>
June 30, 2000
--------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Government Agencies $ 2,725,000 $ $ (206,632) $ 2,518,368
State and Political Subdivisions 12,500 12,500
Mortgage-backed securities 9,488,508 18,924 (411,531) 9,095,901
Other securities 515,692 515,692
--------------- ---------- ------------ ---------------
$ 12,741,700 $ 18,924 $ (618,163) $ 12,142,461
=============== ========== ============= ===============
<CAPTION>
June 30, 1999
------------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Government Agencies $ 2,725,000 $ $ (110,019) $ 2,614,981
State and Political Subdivisions 30,000 30,000
Mortgage-backed securities 10,852,582 24,421 (311,043) 10,565,960
Other securities 434,492 434,492
--------------- ---------- ------------ ---------------
$ 14,042,074 $ 24,421 $ (421,062) $ 13,645,433
=============== ========== ============ ===============
</TABLE>
46
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 2: INVESTMENT SECURITIES (CONTINUED)
Maturities of held-to-maturity securities at June 30, 2000:
<TABLE>
<CAPTION>
Approximate
Amortized Fair
Cost Value
--------- ------------
<S> <C> <C>
One year or less $ 2,500 $ 2,500
After one year through five years 10,000 10,000
After five years through ten years 725,000 686,488
After ten years 2,000,000 1,831,880
Mortgage-backed securities not due on a single 9,488,508 9,095,901
maturity date
Other 515,692 515,692
-------------- --------------
$ 12,741,700 $ 12,142,461
============== ==============
</TABLE>
The book value of securities pledged as collateral, to secure public
deposits and for other purposes, amounted to $995,000 at June 30, 2000 and 1999.
The fair value of these securities approximated book value.
As a member of the Federal Home Loan Bank System ("FHLB"), the Company is
required to maintain an investment ($515,692 and $434,492 at June 30, 2000 and
1999, respectively, 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 approximate fair values of held-to-maturity
mortgage-backed securites are as follows as of June 30, 2000.
<TABLE>
<CAPTION>
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -----------
<S> <C> <C> <C>
GNMA $ 5,429,263 $ $ (217,258) $ 5,212,005
FHLMC 1,559,341 12,055 (71,001) 1,500,395
FNMA 2,499,904 6,869 (123,272) 2,383,501
-------------- ---------- ----------- --------------
$ 9,488,508 $ 18,924 $ (411,531) $ 9,095,901
============== ========== =========== ==============
</TABLE>
47
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES
Categories of loans at June 30, 2000 and 1999, include:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
First mortgage loans $ 24,248,886 $ 25,413,251
Loans to depositors, secured by savings 603,719 746,294
Property improvement loans 331,278 381,595
Consumer loans 2,460,561 2,514,784
Commercial loans 712,973 589,479
-------------- --------------
Total loans 28,357,417 29,645,403
Less: Unearned discounts on loans purchased 4,678 1,192
Net deferred loan fees 147 28
Allowance for loan losses 100,818 104,735
-------------- --------------
Net Loans $ 28,251,774 $ 29,539,448
============== ==============
</TABLE>
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Balance, beginning of year $ 104,735 $ 188,869
Losses charged off (13,917) (148,021)
Provision for loan losses 10,000 63,887
----------- -----------
Balance, end of year $ 100,818 $ 104,735
=========== ===========
</TABLE>
Impaired loans totaled $261,300 and $144,640 at June 30, 2000 and 1999,
respectively. An allowance for loan losses of $32,857 and $20,224 relates to
impaired loans of $261,300 and $144,640 at June 30, 2000 and 1999, respectively.
Interest of $19,430 and $9,176 was recognized and received on average
impaired loans of $244,084 and $145,705 for 2000 and 1999.
48
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 4: PREMISES AND EQUIPMENT
Major classifications of premises and equipment, stated at cost, are as
follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Land $ 225,578 $ 225,578
Buildings and improvements 1,153,802 1,153,802
Furniture, fixtures and equipment 236,580 223,244
------------- -------------
1,615,960 1,602,624
Less accumulated depreciation 247,193 190,323
------------- -------------
Net premises and equipment $ 1,368,767 $ 1,412,301
============= =============
</TABLE>
During 1999, the Company sold real property that was formerly being
utilized as their main bank location and recognized a loss of $5,946. In
addition, the Company obtained an option to sell an adjacent lot for $95,000
with a net book value of $149,988. An impairment loss of $54,988 was recognized
during 1999 and is included in other non-interest expense on the income
statement.
NOTE 5: DEPOSITS
Deposits consist of the following at June 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Money market $ 271,450 $ 260,857
NOW accounts (2.34% and 2.35% in 2000 and 1999,
respectively) 2,276,084 2,438,592
Passbook accounts (2.74% and 2.75% in 2000 and 1999,
respectively) 2,027,256 2,100,624
Other non-interest bearing/checking 1,450,113 1,304,572
------------- -------------
6,024,903 6,104,645
------------- -------------
Certificates
3.00% to 3.99% 27,095 368,862
4.00% to 4.99% 5,594,423 12,336,392
5.00% to 5.99% 11,813,185 12,761,889
6.00% to 6.99% 6,666,114 3,107,840
------------- -------------
24,100,817 28,574,983
------------- -------------
Total $ 30,125,720 $ 34,679,628
============= =============
Weighted average cost of deposits 4.8% 4.6%
======= =======
</TABLE>
49
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 5: DEPOSITS (CONTINUED)
Interest bearing time deposits in denominations of $100,000 or more were
$3,253,000 on June 30, 2000, and $4,339,000 on June 30, 1999.
At June 30, 2000 the scheduled maturities of certificates of deposit are
approximately as follows:
2000
----
2001 $ 17,157,344
2002 2,941,286
2003 1,292,917
2004 1,721,704
2005 and thereafter 987,566
---------------
$ 24,100,817
===============
NOTE 6: FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank advances consist of the following:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
FHLB note, 5.07%, demand $ $ 2,200,000
FHLB note, 5.70%, due August 1, 2003 65,732 84,609
FHLB note, 5.84%, due August 13, 2003 1,466,507 1,485,871
FHLB note, 5.89%, due August 13, 2003 1,466,354 1,486,003
FHLB note, 5.86%, due March 1, 2008 1,234,513 1,356,827
FHLB note, 5.86%, due February 24, 2003 1,455,851 1,476,191
FHLB note, 6.67%, demand 4,220,000
FHLB note, 6.68%, demand 250,000
-------------- -------------
Total FHLB advances $ 10,158,957 $ 8,089,501
============== =============
</TABLE>
50
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 6: FEDERAL HOME LOAN BANK ADVANCES (CONTINUED)
Aggregate annual maturities of FHLB advances at June 30, 2000 are:
Year Amount
---- ------
2001 $ 4,683,048
2002 225,354
2003 1,626,073
2004 2,957,426
2005 163,838
Thereafter 503,218
---------------
$ 10,158,957
===============
FHLB requires the Company to maintain collateral equal to outstanding
balances of advances. FHLB values mortgage loans free of other pledges, liens
and encumbrances at 80% of their fair value, and investment securities free of
other pledges, liens and encumbrances at 95% of their fair value.
NOTE 7: REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory--and possibly additional discretionary--actions
by regulators that, if undertaken, could have a direct material effect on the
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-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of June 30, 2000, that the Bank
meets all capital adequacy requirements to which it is subject.
51
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 7: REGULATORY MATTERS (CONTINUED)
As of June 30, 2000, the most recent notification from the Office of Thrift
Supervision 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 risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category.
The Bank's actual capital amounts and ratios as of June 30, 2000 and 1999,
are also presented in the table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
------ ----------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 2000:
Total Capital (to Risk
Weighted Assets) $ 4,341,000 21.0% $ 1,656,000 8.0% $ 2,070,000 10.0%
Tier I Capital (to Risk
Weighted Assets) 4,245,000 20.5% 828,000 4.0% 1,242,000 6.0%
Tier I Capital (to Average
Assets) 4,245,000 9.4% 1,801,000 4.0% 2,251,000 5.0%
As of June 30, 1999:
Total Capital (to Risk
Weighted Assets) $ 4,207,000 19.4% $ 1,733,000 8.0% $ 2,166,000 10.0%
Tier I Capital (to Risk
Weighted Assets) 4,102,000 18.9% 866,000 4.0% 1,300,000 6.0%
Tier I Capital (to Average
Assets) 4,102,000 8.8% 1,858,000 4.0% 2,322,000 5.0%
</TABLE>
52
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 7: REGULATORY MATTERS (CONTINUED)
The Bank's risk-based capital amounts at June 30, 2000 and 1999 are
presented below.
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Tier 1 capital
Stockholders' equity $ 4,311,000 $ 4,173,000
Intangible assets (66,000) (71,000)
-------------- --------------
Total Tier 1 capital 4,245,000 4,102,000
-------------- --------------
Tier 2 capital
Qualifying allowance for loan losses 96,000 105,000
-------------- --------------
Total Tier 2 capital 96,000 105,000
-------------- --------------
Total risk-based capital $ 4,341,000 $ 4,207,000
============== ==============
Risk weighted assets $ 20,704,000 $ 21,660,000
============== ==============
</TABLE>
The Bank is subject to certain restrictions on the amount of dividends that
it may declare without prior regulatory approval. At June 30, 2000, $138,000 of
retained earnings were available for dividend declaration without prior
regulatory approval.
NOTE 8: INCOME TAXES
The Company files a consolidated federal income tax return. In computing
federal income taxes for taxable years prior to July 1, 1986, the Bank has been
allowed an 8% deduction from otherwise taxable income as a statutory bad debt
deduction, subject to limitations based on aggregate loans and savings balances.
In August 1996, this statutory bad debt deduction was repealed and is no longer
available for thrifts. In addition, bad debt reserves accumulated after 1987,
which are presently included as a component of the net deferred tax liability,
must be recaptured in future years. The amount of bad debt reserves accumulated
since 1987 in excess of the statutory bad debt reserve was zero at June 30,
2000.
As of June 30, 2000, and 1999, retained earnings included approximately
$552,435 for which no deferred 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 or adjustments arising from carryback of net operating losses would
create income for tax purposes only, which would be subject to the then current
corporate income tax rate. The unrecorded deferred income tax liability on the
above amount was approximately $211,527 at June 30, 2000 and 1999.
53
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 8: INCOME TAXES (CONTINUED)
The provision for income taxes consists of:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Taxes currently payable $ 32,107 $ 50,747
Deferred income taxes 40,479 (45,725)
-------- --------
$ 72,586 $ 5,022
======== ========
</TABLE>
The tax effects of temporary differences related to deferred taxes included
in other liabilities and other assets on the June 30, 2000 and 1999, balance
sheets are:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards-state $ 15,607 $ 19,074
Contribution carryforwards 5,993 9,323
Allowance for losses on loans 38,603 40,103
Valuation of foreclosed assets 19,145
Impairment of premises and equipment 20,970 21,055
Deferred compensation 4,237
Other 903 903
--------- ---------
82,076 113,840
--------- ---------
Deferred tax liabilities:
Accumulated depreciation (27,276) (29,600)
Prepaid insurance (7,949) (9,973)
FHLB stock dividends (55,077) (42,059)
Other (468) (423)
--------- ---------
(90,770) (82,055)
--------- ---------
Net deferred tax asset (liability) $ (8,694) $ 31,785
========= =========
</TABLE>
54
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 8: INCOME TAXES (CONTINUED)
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Computed at the statutory rate (34%) $ 72,541 $ 1,968
Increase (decrease) resulting from:
State income taxes - net of federal tax benefit 3,437
Non-deductible expenses 785 328
Other 6,459 2,726
Graduated rates (10,636)
-------- --------
Actual tax provision $ 72,586 $ 5,022
======== ========
</TABLE>
NOTE 9: TRANSACTIONS WITH RELATED PARTIES
At June 30, 2000 and 1999, the Company had loans outstanding to executive
officers, directors and companies in which the Company's executive officers or
directors were principal owners, in the amount of $693,634 and $954,848,
respectively.
A reconciliation of the activity in these loans for the years ended June
30, 2000 and 1999, is as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Balance, beginning of year $ 954,848 $ 939,697
Loans originated 152,300 197,915
Loans paid (413,514) (182,764)
--------- ---------
Balance, end of year $ 693,634 $ 954,848
========= =========
</TABLE>
In management's opinion, such loans and other extensions of credit and
deposits were made in the ordinary course of business and were made on
substantially the same terms (including interest rates and collateral) as those
prevailing at the time for comparable transactions with other persons. Further,
in management's opinion, these loans did not involve more than normal risk of
collectibility or present other unfavorable features.
55
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 10: ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Noncash Investing and Financing Activities
------------------------------------------
Sale and financing of foreclosed assets $ $ 8,597
Real estate acquired in settlement of loans 26,322 8,518
Sale and financing of premises and equipment 95,000
Additional Cash Payment Information
-----------------------------------
Interest paid 2,005,759 2,053,791
Income taxes paid (received) 75,353 (66,406)
</TABLE>
NOTE 11: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Estimates related to the allowance for loan losses are reflected in the footnote
regarding loans. Current vulnerabilities due to certain concentrations of credit
risk are discussed in the footnote on commitments and credit risk.
NOTE 12: COMMITMENTS AND CREDIT RISK
The Company grants commercial, residential and consumer loans to customers
in Northeast Arkansas. Although the Company has a diversified loan portfolio,
first mortgage loans on 1-4 family residences in Jackson County, Arkansas
comprised approximately 73% and 76% of the loan portfolio as of June 30, 2000
and 1999, respectively.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since a portion of the commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Each customer's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed
necessary, is based on management's credit evaluation of the counterparty.
Collateral held varies, but may include accounts receivable, inventory,
property, plant and equipment, commercial real estate and residential real
estate.
56
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 12: COMMITMENTS AND CREDIT RISK (CONTINUED)
At June 30, 2000 and 1999, the Bank had outstanding commitments to
originate loans aggregating approximately $55,000 and $350,000, respectively.
The commitment extended over varying periods of time with the majority being
disbursed within a one-year period. Loan commitments at fixed rates of interest
amounted to zero and $218,000 at June 30, 2000 and 1999, respectively, with the
remainder at floating market rates.
Lines of credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Lines of credit
generally have fixed expiration dates. Since a portion of the line may expire
without being drawn upon, the total unused lines do not necessarily represent
future cash requirements. Each customer's credit worthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is
based on management's credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, property, plant and
equipment, commercial real estate and residential real estate. Management used
the same credit policies in granting lines of credit as those for
on-balance-sheet instruments.
The Company had granted unused lines of credit to borrowers aggregating
approximately $263,636 and $83,554 for commercial and open-end consumer lines at
June 30, 2000 and 1999, respectively.
NOTE 13: BENEFIT PLANS
PENSION PLAN
------------
The Company is a participant in a multi-employer pension plan covering
substantially all employees. As a member of a multi-employer pension plan,
disclosures of plan assets and liabilities for individual employers are not
required or practicable. The retirement plan's actuarial value is such that no
contributions were required in 2000 or 1999.
DIRECTOR'S RETIREMENT PLAN
--------------------------
Effective May 29, 1997, the Company adopted a retirement plan for directors.
Participants in the plan are individuals who serve on the Company's board on or
after the effective date. The Company contributed $22,498 and zero to the plan
in 2000 and 1999, respectively, based on a defined performance factor. The
Company plans to contribute additional amounts to the plan each year based on a
defined performance factor. During 1999, the Plan was amended to eliminate the
1999 contribution.
57
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 13: BENEFIT PLANS (CONTINUED)
MANAGEMENT RECOGNITION PLAN
---------------------------
In December 1998, the Company established a Management Recognition Plan
(MRP) for the benefit of directors, officers and employees of the Company. The
MRP provides directors, officers and employees of the Company with a proprietary
interest in the Company in a manner designed to encourage these individuals to
remain with the Company.
A committee consisting of members of the Company's Board of Directors
administers the Plan. Under the Plan, the committee can award up to 7,406 shares
of the Company's common stock to selected directors, officers and employees. As
of June 30, 2000, 3,406 shares have been awarded. The awards vest 33 1/3% on the
effective date with the remaining awards vesting at 33 1/3% each of the two
years of service after that date. Compensation expense is recognized based on
the Company's stock price on the date the shares were vested. The Company
recognized $9,363 and $11,062, of expense under the MRP in 2000 and 1999,
respectively. During 1999, 3,300 shares to be issued under the MRP were
purchased on the open market by the Company for $34,653.
STOCK OPTION AND INCENTIVE PLAN
-------------------------------
In December 1998, the Company established the 1998 Stock Option and
Incentive Plan for the benefit of certain directors, officers and employees of
the Company. The Plan is administered by the Company's Stock Option Committee.
Under the Plan, the Stock Option Committee may grant stock options or awards of
up to 44,436 shares of the Company's common stock.
The stock options may be either incentive stock options or nonqualified
stock options. Incentive stock options can be granted only to participants who
are employees of the Company. The option price must not be less than the market
value of the Company stock on the date of grant. All options expire no later
than ten years from the date of grant. The options vest at the date granted.
58
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 13: BENEFIT PLANS (CONTINUED)
STOCK OPTION AND INCENTIVE PLAN (CONTINUED)
-------------------------------------------
The table below summarizes transactions under the Company's stock option
plan:
<TABLE>
<CAPTION>
2000 1999
------------------------- ---------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Outstanding, Beginning of Year 20,442 $ 9.75
Granted 20,442 $ 9.75
Exercised
Forfeited
-------- ----- -------- -----
Outstanding, End of Year 20,442 $ 9.75 20,442 $ 9.75
======== ===== ======== =====
Options Exercisable, End of Year 20,442 $ 9.75 20,442 $ 9.75
======== ===== ======== =====
</TABLE>
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Dividends per share N/A $ 0.00
Risk-free interest rate 6.00
Expected life of options 10 years
Expected stock price volatility 15.00%
Weighted-average fair value of options
Granted during year $ 4.52
</TABLE>
59
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 13: BENEFIT PLANS (CONTINUED)
STOCK OPTION AND INCENTIVE PLAN (CONTINUED)
-------------------------------------------
The following table summarizes information about stock options under the
Plan outstanding at June 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ------------------------------------
Weighted Average Weighted Average
Range of Exercise Number Remaining Number Exercise
Prices Outstanding Contractual Life Exercisable Price
-------------------- ----------- ---------------- ----------- -----
<S> <C> <C> <C> <C>
$ 9.75 20,442 9 years 20,442 $ 9.75
</TABLE>
The Company applies APB Opinion 25 and related interpretations in
accounting for the plans, and no compensation cost has been recognized. If the
Company had elected to recognize compensation cost based on the fair value of
the options granted, net income and earnings per share would have been reduced
as indicated below:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net income - as reported N/A 767
Net income (loss) - proforma (56,252)
Diluted earnings per share - as reported .00
Diluted earnings (loss) per share - proforma (.17)
</TABLE>
The above proforma amounts include only the effect of 2000 and 1999 option
grants and therefore may not be representative of the proforma impact in future
years.
60
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 13: BENEFIT PLANS (CONTINUED)
EMPLOYEE STOCK OWNERSHIP PLAN
-----------------------------
On October 31, 1997, the Company established an internally-leveraged
Employee Stock Ownership Plan (ESOP) to provide stock awards to eligible
employees of the Company. The ESOP borrowed $296,240 from the Company and
purchased 29,624 shares of the common stock of the Company. The ESOP debt is
secured by shares of the Company. The loan will be repaid from contributions to
the ESOP as approved annually by the Company's Board of Directors. As the debt
is repaid, shares are released from collateral and allocated to employees'
accounts. The shares pledged as collateral are reported as unearned ESOP shares
in the consolidated balance sheet. When shares are released from collateral, the
shares become outstanding for Earnings Per Share computations. Dividends on
allocated ESOP shares are recorded as a reduction of retained earnings and may
be paid directly to participants or credited to their account; dividends on
unallocated ESOP shares are recorded as a reduction of the unearned ESOP shares
and accrued interest. Compensation expense is recognized ratably based on the
average fair value of shares committed to be released. Compensation expense
attributed to the ESOP was $29,624 for the year ended June 30, 2000 and 1999.
The following is a summary of ESOP shares at June 30, 2000:
Allocated shares 5,924
Shares released for allocation 2,962
Unreleased shares 20,738
--------
Total ESOP shares 29,624
========
Fair value of unreleased shares $155,535
========
NOTE 14: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH AND CASH EQUIVALENTS
-------------------------
For these short-term instruments, the carrying amount approximates fair
value.
61
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 14: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
INVESTMENT SECURITIES
---------------------
Fair values for investment securities equal quoted market prices, if
available. If quoted market prices are not available, fair values are estimated
based on quoted market prices of similar securities.
LOANS
-----
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit rating and for the same remaining maturities. Loans with similar
characteristics were aggregated for purposes of calculations. The carrying
amount of accrued interest approximates its fair value.
DEPOSITS
--------
The fair value of demand deposits, savings accounts, NOW accounts, and
certain money market deposits is the amount payable on demand at the reporting
date (i.e., their carrying amount). The fair value of fixed-maturity time
deposits is estimated using a discounted cash flow calculation that applies the
rates currently offered for deposits of similar remaining maturities. The
carrying amount of accrued interest payable approximates its fair value.
FEDERAL HOME LOAN BANK ADVANCES
-------------------------------
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
COMMITMENTS TO EXTEND CREDIT, LETTERS OF CREDIT AND LINES OF CREDIT
-------------------------------------------------------------------
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
letters of credit and lines of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate or otherwise settle the
obligations with the counterparties at the reporting date.
62
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 14: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table presents estimated fair values of the Company's
financial instruments. The fair values of certain of these instruments were
calculated by discounting expected cash flows, a method which involves
significant judgments by management and uncertainties. Fair value is the
estimated amount at which financial assets or liabilities could be exchanged in
a current transaction between willing parties, other than in a forced or
liquidation sale. Because no market exists for certain of these financial
instruments and because management does not intend to sell these financial
instruments, the Company does not know whether the fair values shown below
represent values at which the respective financial instruments could be sold
individually or in the aggregate.
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
------------- -------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ ------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 1,236,521 $ 1,236,521 $ 307,907 $ 307,907
Certificates of deposit in other financial
institutions 1,198,000 1,198,000 1,698,000 1,698,000
Investment securities 12,741,700 12,142,461 14,042,074 13,645,433
Interest receivable 28,251,774 27,842,000 330,729 330,729
Loans, net of allowance for loan losses 321,787 321,787 29,539,448 29,929,000
Financial liabilities:
Deposits 30,125,720 29,776,000 34,679,628 34,600,000
FHLB advances 10,158,957 9,893,000 8,089,501 7,960,000
Interest payable 85,387 85,387 89,056 89,056
</TABLE>
The fair value of commitments to extend credit and letters of credit is not
presented since management believes the fair value to be insignificant.
63
<PAGE>
NORTH ARKANSAS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 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.
NOTE 16: SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of the year ended June 30, 1999, the Company
recorded adjustments to increase the allowance for loan losses and certain other
accrued expenses that in the aggregate reduced net income $99,309, net of income
taxes.
64
<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
-------------------------------------------------
The information required by this item is incorporated by reference to
"Proposal I -- Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement.
The only executive officer of the Company is Brad Snider who serves as
President and Chief Executive Officer and a Director. Biographical information
is incorporated by reference to "Proposal I -- Election of Directors" is the
Proxy Statement.
ITEM 10. EXECUTIVE COMPENSATION
--------------------------------
The information required by this item is incorporated by reference to
"Executive Compensation" in the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------
The information required by this item is incorporated by reference to
"Voting Securities and Principal Holders Thereof" and "Proposal I -- Election of
Directors" in the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Transactions with Management" in the Proxy Statement.
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 hereof:
Independent Accountants' Report
Consolidated Financial Statements
Balance Sheets
Statements of Income
Statements of Changes in Stockholders' Equity
Statements of Cash Flows
Notes to Consolidated Financial Statements
65
<PAGE>
(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>
No. Description
--- -----------
<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
23 Consent of Baird, Kurtz & Dobson, Certified Public Accountants
27 Financial Data Schedule (EDGAR only)
<FN>
________________
(*) Incorporated herein by reference from Registration Statement on Form SB-2 filed (File No. 333-35985).
(+) Management contract or compensatory plan or arrangement.
</FN>
</TABLE>
(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 2000.
66
<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 27, 2000 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 27, 2000
--------------------------------------
Brad Snider
President and Chief Executive Officer
(Director and Principal Executive Officer)
/s/ O. E. Guinn, Jr. September 27, 2000
--------------------------------------
O. E. Guinn, Jr.
Vice Chairman of the Board
(Director)
September __, 2000
--------------------------------------
Kaneaster Hodges, Jr.
(Director)
/s/ John Minor September 27, 2000
--------------------------------------
John Minor
(Director)
/s/ J. C. McMinn September 27, 2000
--------------------------------------
J. C. McMinn
(Director)
