<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE # 0-23969
POCAHONTAS BANCORP, INC.
State of Incorporation
----------------------
DELAWARE IRS Employer Identification
No. 71-0806097
Address Telephone Number
------- ----------------
203 West Broadway (870) 892-4595
Pocahontas, Arkansas 72455
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
There were 5,814,617 shares of Common Stock ($.01 par value) issued and
outstanding as of August 6, 1999.
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POCAHONTAS BANCORP, INC.
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statements of Financial Condition at June 30, 1999
(unaudited) and September 30, 1998 1
Condensed Consolidated Statements of Income and Comprehensive Income for
the Three and Nine Months Ended June 30, 1999 and 1998 (unaudited) 2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
June 30, 1999 and 1998 (unaudited) 3
Notes to Condensed Consolidated Financial Statements (unaudited) 4
Independent Accountants' Report 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II. OTHER INFORMATION 13
</TABLE>
<PAGE>
Item 1
POCAHONTAS BANCORP, INC.
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ------------------------------------------------------------------------------------------------------------------------
(Unaudited)
June 30, 1999 September 30, 1998
ASSETS
<S> <C> <C>
Cash $ 7,752,092 $ 3,781,077
Cash surrender value of life insurance 6,009,891 5,821,800
Equity investments, at fair value 1,708,897 1,588,535
Investment securities - held to maturity 9,512,891 9,425,080
Investment securities - available for sale 177,048,261 173,626,023
Loans receivable, net 211,440,923 193,727,664
Accrued interest receivable 2,338,919 2,407,273
Premises and equipment, net 3,987,939 3,327,076
Federal Home Loan Bank Stock, at cost 10,479,300 10,059,900
Core deposit premium 2,511,542 2,576,908
Other assets 2,473,193 639,762
------------- -------------
TOTAL ASSETS $ 435,263,848 $ 406,981,098
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 201,737,137 $ 195,536,708
Federal Home Loan Bank advances 165,565,000 143,670,000
Securities sold under agreements to repurchase 1,485,000 2,107,645
Deferred compensation 3,358,366 717,726
Accrued expenses and other liabilities 12,443,981 4,382,221
------------- -------------
Total liabilities 384,589,484 346,414,300
STOCKHOLDERS' EQUITY:
Common stock 70,614 66,853
Additional paid-in capital 50,767,478 50,094,461
Reduction for ESOP debt guaranty (2,377,673) (2,856,600)
Treasury stock (9,335,608) --
Retained earnings 10,549,440 11,456,439
Accumulated other comprehensive income:
Unrealized gain on available for sale securities, net of tax 1,000,113 1,805,645
------------- -------------
Total stockholders' equity 50,674,364 60,566,798
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 435,263,848 $ 406,981,098
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
1
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POCAHONTAS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME (UNAUDITED)
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable $ 4,022,195 $ 3,643,303 $ 11,941,336 $ 10,430,673
Investment securities 2,757,983 3,417,091 8,345,154 10,445,547
------------ ------------ ------------ ------------
Total interest income 6,780,178 7,060,394 20,286,490 20,876,220
INTEREST EXPENSE:
Deposits 2,196,645 1,977,883 6,635,914 5,842,348
Borrowed funds 1,995,834 2,289,319 5,722,888 8,141,525
------------ ------------ ------------ ------------
Total interest expense 4,192,479 4,267,202 12,358,802 13,983,873
NET INTEREST INCOME 2,587,699 2,793,192 7,927,688 6,892,347
PROVISION FOR LOAN LOSSES -- -- -- --
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,587,699 2,793,192 7,927,688 6,892,347
OTHER INCOME:
Dividends 145,737 146,560 441,928 464,029
Fees and service charges 162,610 127,908 514,197 347,080
Trading gains (losses) 46,569 (44,933) 52,797 (44,933)
Other 208,969 40,766 451,742 177,175
------------ ------------ ------------ ------------
Total other income 563,885 270,301 1,460,664 943,351
------------ ------------ ------------ ------------
OPERATING EXPENSE:
Compensation and benefits 1,150,673 998,750 6,456,617 2,798,108
Occupancy and equipment 256,780 164,258 880,487 433,787
Deposit insurance premium 30,028 23,094 88,584 68,462
Professional fees 92,788 46,995 230,889 171,780
Data processing 95,898 76,611 323,551 213,701
Advertising 122,257 62,017 240,998 173,768
OTS assessment 21,253 23,326 66,613 69,519
Other 307,845 224,308 833,905 508,356
------------ ------------ ------------ ------------
Total operating expense 2,077,522 1,619,359 9,121,644 4,437,481
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,074,062 1,444,134 266,708 3,398,217
INCOME TAXES 371,942 512,891 90,831 1,220,620
------------ ------------ ------------ ------------
NET INCOME 702,120 931,243 175,877 2,177,597
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Unrealized holding loss on available for sale
securities arising during period (47,725) -- (805,532) --
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 654,395 $ 931,243 $ (629,655) $ 2,177,597
============ ============ ============ ============
BASIC EARNINGS PER SHARE: $ 0.13 $ 0.15 $ 0.03 $ 0.35
============ ============ ============ ============
DILUTED EARNINGS PER SHARE $ 0.12 $ 0.14 $ 0.03 $ 0.33
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 5,599,443 6,388,891 5,923,282 6,385,294
============ ============ ============ ============
DIVIDENDS PER SHARE $ 0.06 $ 0.06 $ 0.18 $ 0.17
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
2
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POCAHONTAS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30 (UNAUDITED)
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<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 175,877 $ 2,177,597
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation of premises and equipment 354,588 256,544
Amortization of deferred loan fees (94,684) 83,041
Amortization of premiums and discounts, net (209,047) (193,433)
Amortization of core deposit premium 65,366 --
Net gain on sales of assets (30,030) (60,597)
Cash surrender value of life insurance policies (188,091) (152,640)
Trading securities (120,356) (1,955,067)
Accrued interest receivable 68,354 (172,338)
Other assets (1,354,504) (654,386)
Deferred compensation 2,640,640 (232,529)
Other liabilities (1,429,055) (274,090)
------------ ------------
Net cash used by operating activities (120,942) (1,177,898)
------------ ------------
INVESTING ACTIVITIES:
Loan repayments, originations, and purchases, net (17,588,545) (27,601,207)
Purchase of FHLB stock (419,400) (1,863,236)
Purchase of investment securities (37,164,622) (4,418,337)
Proceeds from maturities and principal repayments
of investment securities 42,548,897 17,789,978
Purchases of premises and equipment (1,015,451) (1,104,178)
------------ ------------
Net cash used by investing activities (13,639,121) (17,196,980)
------------ ------------
FINANCING ACTIVITIES:
Net increase in deposits 6,200,429 28,032,266
Repayments of repurchase agreements, net (622,645) (19,435,000)
Net increase (decrease) in FHLB advances 21,895,000 (21,006,038)
Proceeds from issuance of common stock -- 32,639,004
Purchase of treasury stock (9,335,608) --
Issuance of recognition and retention plan shares 146,544 --
Proceeds from exercise of stock options 530,234 40,000
Dividends paid (1,082,876) (752,379)
------------ ------------
Net cash provided by financing activities 17,731,078 19,517,853
------------ ------------
NET INCREASE IN CASH 3,971,015 1,142,975
CASH AT BEGINNING OF PERIOD 3,781,077 2,805,273
------------ ------------
CASH AT END OF PERIOD $ 7,752,092 $ 3,948,248
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
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POCAHONTAS BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
were prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions for Form 10-Q
and Article 10 of Regulation 10 of Regulation S-X. Certain information
required for a complete presentation in accordance with generally accepted
accounting principles has been omitted. All adjustments that are, in the
opinion of management, necessary for a fair presentation of the interim
financial statements have been included. The results of operations for the
three and nine months ended June 30, 1999, are not necessarily indicative
of the results that may be expected for the entire fiscal year or any
interim period.
The interim financial information should be read in conjunction with the
consolidated financial statements and notes of Pocahontas Bancorp, Inc.
(the "Company"), including a summary of significant accounting policies
followed by the Company, included in the Annual Report for the fiscal year
ended September 30, 1998. The accompanying unaudited consolidated
financial statements include the accounts of the Company and Pocahontas
Federal Savings and Loan Association (the "Bank"), its wholly owned
subsidiary. The intercompany accounts of the Company and the Bank have
been eliminated in consolidation.
2. EARNINGS PER COMMON SHARE
The earnings per share amounts were computed using the weighted average
number of shares outstanding during the periods presented. In accordance
with Statement of Position No. 93-6, Employers' Accounting for Employee
Stock Ownership Plans, issued by the American Institute of Certified
Public Accountants, shares owned by the Company's Employee Stock Ownership
Plan that have not been committed to be released are not considered to be
outstanding for the purpose of computing earnings per share.
The weighted average number of shares used in the basic and diluted
earnings per share calculation are set out in the table below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------- --------------------------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average basic shares outstanding 5,599,443 6,388,891 5,923,282 6,385,294
Add dilutive effect of unexercised options 82,931 146,162 82,931 146,162
----------- ----------- ----------- -----------
Total weighted average shares outstanding
for diluted earnings per share calculation 5,682,374 6,535,053 6,006,213 6,531,456
=========== =========== =========== ===========
</TABLE>
3. DECLARATION OF DIVIDENDS
On April 14, 1999, the Board of Directors declared a $.06 per share
quarterly dividend for holders of record June 15, 1999.
4
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4. BENEFIT PLANS
Stock Option Plan - The Company's stockholders adopted the 1998 Stock
Option Plan ("SOP") on October 23, 1998. The SOP provides for a committee
of the Company's Board of Directors to award incentive stock options, non-
qualified or compensatory stock options representing up to 357,075 shares
of Company Common Stock. The options will vest in equal amounts over five
years with the first vesting date on October 23, 1999. Options granted
vest immediately in the event of retirement, disability, or death.
Outstanding stock options can be exercised over a ten-year period. Under
the SOP, options have been granted to directors and key employees of the
Company. The exercise price in each case equals the fair market value of
the Company's stock at the date of grant. The Company granted 352,500
options on October 23, 1998, which have an exercise price of $9.00 per
share. No options from the 1998 SOP are exercisable as of June 30, 1999.
The Company applies the provisions of APB 25 in accounting for its stock
options plans, as allowed under SFAS 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation cost has been recognized for
the options granted to employees or directors. Had compensation cost for
these been determined on the fair value at the grant dates for awards
under those plans consistent with the methods of SFAS No. 123, the
Company's pro forma net income and pro forma earnings per share for the
three and six months ended June 30, 1999, would have been as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, 1999 Ended June 30, 1999
------------------------------- ----------------------------
As Reported Pro forma As Reported Pro forma
<S> <C> <C> <C> <C>
Net income in thousands $ 702 $ 644 $ 176 $ 2
Earnings per share:
Basic $ 0.13 $ 0.12 $ 0.03 $ 0.00
Diluted $ 0.12 $ 0.11 $ 0.03 $ 0.00
</TABLE>
In determining the above pro forma disclosure, the fair value of options
granted during the year was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected volatility - 37%, expected life of grant - 6.5
years, risk free interest rate 5.25%, and expected dividend rate of 2.5%.
The weighted average fair value of options granted during the nine month
period ended June 30, 1999, was $4.25 per share.
Management Recognition and Retention Plan - The 1998 Management
Recognition and Retention Plan ("MRP") provides for a committee of the
Company's Board of Directors to award restricted stock to key officers as
well as non-employee directors. The MRP authorizes the Company to grant up
to 142,830 shares of the Company's common stock. The Committee granted
142,830 shares to key officers and non-employee directors on October 23,
1998. Compensation expense is being recognized based on the fair market
value of the shares on the grant date of $9.00 over the vesting period.
The shares will vest immediately in the event of disability or death.
Approximately $330,000 and $109,000 in compensation expense was recognized
for the nine months and three months ended June 30, 1999, respectively.
5. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
On July 1, 1998, the Company adopted FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as "derivatives"), and for hedging activities.
It requires that an entity
5
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recognize all derivatives as either assets or liabilities in the statement
of financial condition and measure those instruments at fair value. The
adoption of SFAS 133 has not had a material effect on the Company's
consolidated financial statements.
Recently Issued Accounting Standards - In October 1998, the FASB issued
Statement No. 134, Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise ("SFAS 134"). This statement amends SFAS 65 to require that
after the securitization of mortgage loans held for sale, an entity engaged
in mortgage banking activities classify the resulting mortgage-backed
securities or other retained interests based on its ability and intent to
sell or hold those investments. This statement conforms the subsequent
accounting for securities retained after the securitization of mortgage
loans by a mortgage banking enterprise with the subsequent accounting for
securities retained after the securitization of other types of assets by a
nonmortgage banking enterprise. The adoption of SFAS No. 134 is not
expected to have a material effect on the Company's consolidated financial
statements.
* * * * * *
6
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INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors and Stockholders of
Pocahontas Bancorp, Inc.
Pocahontas, Arkansas
We have reviewed the accompanying condensed consolidated statement of financial
condition of Pocahontas Bancorp, Inc. and subsidiaries (the "Company") as of
June 30, 1999, and the related condensed consolidated statements of income and
comprehensive income for the three-month and nine-month periods ended June 30,
1999 and 1998, and of cash flows for the nine-month periods ended June 30, 1999
and 1998. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial condition of Pocahontas
Bancorp, Inc. and subsidiaries as of September 30, 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended (not presented herein); and in our report dated November 11,
1998, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated statement of financial condition as of September 30,
1998, is fairly stated, in all material respects, in relation to the
consolidated statement of financial condition from which it has been derived.
/s/ Deloitte & Touche LLP
Little Rock, Arkansas
August 11, 1999
7
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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Financial Condition at June 30, 1999, as compared to September 30, 1998
General. The Company's total assets increased $28.3 million or 7.0% to $435.3
million at June 30, 1999, as compared to $407.0 million at September 30, 1998.
Loans receivable, net. Net loans receivable increased by $17.7 million or 9.1%
to $211.4 million at June 30, 1999, from $193.7 million as of September 30,
1998. Growth in the loan portfolio was due to loan demand in the Company's local
market and the purchase of approximately $9.4 million of single family
residential loans in the Southeastern United States.
Investment securities held to maturity. Investment securities held to maturity
increased $0.1 million, or 0.9% to $9.5 million at June 30, 1999, from $9.4
million at September 30, 1998. The increase in the Company's held to maturity
investment portfolio was due to accretion of discounts.
Investment securities available for sale. Investment securities available for
sale increased $3.5 million, or 2.0%, to $177.1 million at June 30, 1999, from
$173.6 million at September 30, 1998. The increase in investment securities
available for sale was primarily due to the purchase of approximately $47.2
million of investment securities net of sales of investments of $13.3 million
and prepayments due to the relatively low interest rate environment. Average
balance of investment securities decreased for the nine month period ended June
30, 1999 to $171.5 million from $196.5 million for the same period last year.
Trading securities. Trading securities increased $0.1 million, or 6.25% to $1.7
million at June 30, 1999 from $1.6 million at September 30, 1998.
Other assets. Other assets increased $1.9 million to $2.5 million at June 30,
1999, from $0.6 million at September 30, 1998, primarily due to an increase in
deferred income taxes.
Deposits. Deposits increased $6.2 million or 3.2% to $201.7 million at June 30,
1999, from $195.5 million at September 30, 1998, primarily due to continued
growth within the Company's market area.
Deferred compensation. Deferred compensation increased primarily due to the
retirement of the Company's President and CEO, Skip Martin. A liability of
approximately $2.7 million was recorded in connection with his retirement.
Accrued expenses and other liabilities. Accrued expenses and other liabilities
increased $8.0 million, or 181.8%, to $12.4 million at June 30, 1999, from $4.4
million at September 30, 1998. The increase was primarily related to the
purchase of $10.0 million of investment securities for which settlement date had
not occurred as of June 30, 1999.
Federal Home Loan Bank advances and securities sold under agreements to
repurchase. FHLB advances increased $21.9 million or 15.2% to $165.6 million at
June 30, 1999, from $143.7 million at September 30, 1998. The Average balance in
FHLB advances decreased to $146.4 million, for the nine month Period ended June
30, 1999, from $179.1 million for the same period in the prior year .
Stockholders' equity. Stockholders' equity decreased $9.9 million or 16.3% to
$50.7 million at June 30, 1999, from $60.6 million at September 30, 1998. Such
decrease was primarily due to the repurchase of
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1,083,972 shares of the Company's common stock at a total cost of $9.3 million
and dividends of $1.1 million, which was partially offset by net income of $0.2
million.
Comparison of Results of Operations for the Three and Nine Months Ended June 30,
1999 and 1998
Overview. In connection with the retirement of the Company's Chief Executive
Officer (the "CEO"), the Company, the Bank and the CEO entered into an
Employment Separation Agreement and Release (the "Agreement"). The Agreement
provides, among other things, for the payment by the Company to the CEO of $2.75
million, in installments of not less than $150,000 annually, with the entire
unpaid amount, if any, due upon the CEO's death. The Agreement provides that the
CEO will be entitled to an additional pay out equal to $550,000 should there be
a change in control of the Company or the Bank on or before April 30, 2003.
Pursuant to the Agreement, the CEO forfeited all shares of restricted stock
awarded to him under the Company's current Recognition and Retention Plan and
will forego any additional benefits accruals or contributions under the
Company's Restated Supplemental Executive Retirement Agreement. Also, pursuant
to the Agreement, the CEO's previous employment agreement was terminated (except
for certain specified provisions) and no further payouts under the Employment
Agreement will be due to him. The Company has recognized a charge to earnings to
give effect to the provisions of the Agreement. This charge to earnings totals
approximately $1.94 million net of tax, or $.33 and $.32 per share basic and
diluted, respectively, for the nine month period ended June 30, 1999.
The net income for the quarter ended June 30, 1999, was $702,120 or $0.13 and
$0.12 per share basic and diluted, respectively.
The net income for the nine month period ended June 30, 1999, including the
one-time charge was $175,877 or $0.03 per share basic and diluted. Net income
for the nine month period ended June 30, 1999, excluding the one-time charge
would have been $2,115,142 compared to $2,177,597 for the same period ended June
30, 1998, a decrease of $62,455 or 2.9%. Basic and diluted earnings per share
for the nine month period, excluding one-time charges would have been $0.36 and
$0.35, respectively compared to basic and diluted earnings per share of $0.34
and $0.33, respectively for the same period last year.
Net interest income. Net interest income after provision for loan losses for the
quarter ended June 30, 1999, was $2,587,699 compared to $2,793,192 for the
quarter ended June 30, 1998, a decrease of $205,493 or 7.4%. Net interest income
after provision for loan losses for the nine-month period ended June 30, 1999,
was $7,927,688 compared to $6,892,347 for the nine-month period ended June 30,
1998, an increase of $1,035,341 or 15.03%. The increase in net interest income
for the nine month period ended June 30, 1999 was due to increase in net loans
receivable, increase in investment securities, increase in deposits.
Operating expense. Total operating expenses, excluding the one-time charge,
would have been $6.1 million, for the nine-month period ended June 30, 1999,
compared to $4.4 million for the nine-month period ended June 30, 1998, for the
Quarter ended June 30, 1999 an increase of $1.7 or 38.6%. Total operating
expenses were $2.1 million compared to $1.6 million for the quarter ended June
30, 1998, an increase of $0.5 million 31.3%, which is primarily due to the
addition of six new branches. The increase in operating expenses is related to
the increase in the number of branches. At the beginning of the nine-month
period ended June 30, 1998, the Bank had 6 operating branches; at the end of the
nine-month period ended June 30, 1999, the Bank had 14 operating branches.
9
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Non-performing Loans and Loan Loss Provisions
The allowance for loan losses is established through a provision for loan losses
based on management's quarterly asset classification review and evaluation of
the risk inherent in its loan portfolio and changes in the nature and volume of
its loan activity. Such evaluation, which includes a review of all loans of
which full collection may not be reasonably assured, considers among other
matters, the estimated value of collateral, cash flow analysis, historical loan
loss experience, and other factors that warrant recognition in providing
adequate allowances. No provision for loan losses was made during the three or
nine month periods ending June 30, 1999 and 1998. Management believes that the
current allowance for loan losses is adequate to absorb possible loan losses in
the existing portfolio. However, future reviews may require additional
provisions.
The following table sets forth information regarding loans delinquent for 90
days or more and real estate owned by the Bank on the dates indicated.
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
------------- -------------
(Dollars in Thousands)
<S> <C> <C>
Delinquent loans:
Single family mortgage $1,660 $ 955
Other mortgage loans 323 0
Other loans 52 69
------ ------
Total delinquent loans 2,035 1,024
Total real estate owned (1) 341 18
------ ------
Total non-performing assets 2,376 1,042
Total loans delinquent 90 days or more to net
loans receivable 0.96% 0.54%
Total loans delinquent 90 days or more to total assets 0.47% 0.25%
Total nonperforming loans and REO to total assets 0.55% 0.26%
(1) Net of valuation allowances
</TABLE>
It is the policy of the Bank to place loans 90 days or more past due on a
non-accrual status by establishing a specific interest reserve that provides for
a corresponding reduction in interest income.
Year 2000 ("Y2K") Compliance
Changing from the year 1999 to 2000 has the potential to cause problems in data
processing and other date-sensitive systems, a problem known as the Year 2000 or
Y2K dilemma. The Year 2000 date change can affect any system that uses computer
software programs or computer chips, including automated equipment and
machinery. For example, many software programs or computer chips store calendar
dates as two-digits rather than four-digit numbers. These software programs
record the year 1998 as "98." This approach will work until the Year 2000 when
"00" may be read as 1900 instead of 2000.
Regarding the Company, computer systems are used to perform financial
calculations, track deposits and loan payments, transfer funds and make direct
deposits. The processing of the Company's loan and deposit transactions is
outsourced to a third-party data processing vendor. Computer software and
computer chips also are used to run security systems, vaults, communications
networks and other essential bank equipment.
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Because of its reliance on these systems (including those used by its
third-party data processing vendor), the Company is following a comprehensive
process to ensure that such systems are ready for the Year 2000 date change.
To become Y2K compliant, the Company is following a five-step process suggested
by federal bank regulatory agencies. A description of each of the steps and the
status of the Company's efforts in completing the steps is as follows:
Step 1. Awareness and Understanding of the Problem. The Company has formed
a Year 2000 team that has investigated the problem and its potential
impact on the Company's systems. This phase also includes education of the
Company's employees and customers about Y2K issues. The awareness and
understanding phase of this step has been completed. Training and
communication has taken place and will continue through 1999.
Step 2. Identification of All Potentially Affected Systems. This step has
included a review of all major information technology ("IT") and
non-information technology ("non-IT") systems to determine how they are
impacted by Y2K issues. An inventory has been prepared of all vendors who
render IT and non-IT services to the Company. This step is considered
complete.
Step 3. Assessment and Planning. The Year 2000 team has completed its
assessment of which systems and equipment are most prone to placing the
Company at risk if they are not Y2K compliant. The project team has
developed an inventory of its vendors, an inventory of actions to be
taken, identification of the team members responsible for completion of
each action, a completion timetable and a project tracking methodology.
Significant vendors have been requested to advise the Company in writing
of their Y2K readiness, including actions to become compliant if they are
not already compliant. A plan has been developed to repair or replace
systems and equipment not currently Y2K compliant. This step is considered
complete.
Step 4. Correction and Testing. The Company's third party data processing
services as well as vendors who provide significant technology-related
services have modified their systems to become Y2K compliant. It has also
arranged for repair or replacement of equipment programs affected by Y2K
issues. The testing and corrections have taken place.
Step 5. Implementation. This step includes repair or replacement of
systems and computer equipment and the development of contingency plans.
The repair and replacement phase is completed. Contingency plans for how
the Company would resume business if unanticipated problems arise from
non-performance by IT and non-IT vendors has been completed but the
Company will continue to monitor and test the contingency plan.
The Company's efforts to become Y2K compliant are being monitored by its federal
banking regulators. Failure to be Y2K compliant could subject the Company to
formal supervisory or enforcement actions.
The Company's expenses related to Y2K have not been material. The Company
expects to incur additional costs to become Y2K compliant. It does not expect
such costs to be material to the operating expenses of the Company. Some of the
costs are not expected to be incremental to the Company, but rather represent
new equipment and software that would otherwise be purchased in the normal
course of the Company's business. The Company presently believes the Y2K issue
will not pose significant operating problems for the
11
<PAGE>
Company. However, if implementation and testing plans are not completed in a
satisfactory and timely manner, in particular by third parties on which the
Company is dependent, or other unforeseen problems arise, the Y2K issue could
have a material adverse effect on the operations of the Company.
Liquidity and Capital Resources
Regulatory liquidity is defined as a percentage of the institution's average
daily balance of net withdrawable deposits and current borrowings, invested with
final maturities no long than five years. The Office of Thrift Supervision
requires 1.0% total liquidity. The Bank met all liquidity requirements during
the nine-months ended June 30, 1999.
At June 30, 1999, the Company had various commitments arising in the normal
course of business. Such commitments were not material and are not expected to
have a material adverse impact on the operations of the Company.
At June 30, 1999, the Bank's capital to assets ratios exceeded all regulatory
requirements.
Forward-Looking Statements
This form 10-Q contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of management as well as
assumptions made by and information currently available to management. In
addition, in those and other portions of this document, the words "anticipate,"
"believe," "estimate," "except," "intend," "should" and similar expressions, or
the negative thereof, as they relate to the Company or the Company's management,
are intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future looking events and are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize or should underlying assumptions prove
incorrect, actual results may vary from those described herein as anticipated,
believed, estimated, expected or intended. The Company does not intend to update
these forward-looking statements.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See discussion of qualitative and quantitative risks in the September 30, 1998,
annual report. There have been no material changes in the market risk of the
Company in the intervening nine-month period.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings to which the Pocahontas Bancorp, Inc. or
the Bank is a party or to which any of their property is subject. From
time-to-time, the Bank is a party to various legal proceedings incident to its
business.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
The Bank convened its 1998 Annual Meeting of Stockholders on April 21, 1999. At
the meeting, the stockholders of the Bank considered and voted on:
1. The election as directors of nominees listed below:
2. The ratification of the appointment of Deloitte & Touche, LLP as
auditors for the Bank for the fiscal year ending September 30, 1999.
The results of the election of directors are as follows:
For Withheld
--- --------
James Edington 4,806,286 84,427
Robert Rainwater 4,808,700 82,013
The ratification of the engagement of Deloitte & Touche LLP was approved by a
vote of 4,889,163 votes for, 500 against and 1,050 abstaining.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27
13
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
POCAHONTAS BANCORP, INC.
Date: August 11, 1999 /s/ James Edington
-------------------------------------
James Edington
President and Chief Executive Officer
Date: August 11, 1999 /s/ Dwayne Powell
-------------------------------------
Dwayne Powell
Chief Financial Officer
14
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