<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, 2000
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 5,244,757 shares of Common Stock ($0.10 par value) issued and
outstanding as of June 30, 2000.
<PAGE>
POCAHONTAS BANCORP, INC.
TABLE OF CONTENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statements of Financial Condition at June 30, 2000
(unaudited) and September 30, 1999 1
Condensed Consolidated Statements of Income and Comprehensive Income for
the Three and Nine Months Ended June 30, 2000 and 1999 (unaudited) 2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
June 30, 2000 and 1999 (unaudited) 3
Notes to Condensed Consolidated Financial Statements (unaudited) 4
Independent Accountants' Report 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
PART II. OTHER INFORMATION 11
</TABLE>
<PAGE>
Item 1
POCAHONTAS BANCORP, INC.
CONSENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
June 30, 2000 September 30, 1999
<S> <C> <C>
ASSETS
Cash $ 6,981,219 $ 8,622,050
Cash surrender value of life insurance 6,109,704 5,964,588
Investment securities - trading 679,913 1,429,196
Investment securities - held to maturity 9,459,457 9,482,122
Investment securities - available for sale 116,107,924 216,492,192
Loans receivable, net 227,629,208 217,709,933
Accrued interest receivable 2,766,692 3,165,427
Premises and equipment, net 3,799,166 4,018,157
Federal Home Loan Bank Stock, at cost 5,416,500 10,981,300
Core deposit premium 2,225,645 2,440,187
Other assets 4,036,171 1,825,710
------------- -------------
TOTAL ASSETS $385,211,599 $482,130,862
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $230,192,263 $211,890,791
Federal Home Loan Bank advances 102,825,000 213,105,000
Securities sold under agreements to repurchase 875,000 2,075,000
Deferred compensation 3,229,438 3,357,890
Accrued expenses and other liabilities 2,309,831 3,669,743
------------- -------------
Total liabilities 339,431,532 434,098,424
STOCKHOLDERS' EQUITY:
Common stock 69,468 69,468
Additional paid-in capital 51,460,896 51,439,643
Unearned ESOP Shares (2,443,525) (2,443,525)
Unearned RRP Shares (339,364) (524,476)
Accumulated other comprehensive income (loss) (1,853,143) 407,950
Retained earnings 12,543,849 10,965,600
------------- -------------
59,438,181 59,914,660
Treasury stock, at cost (13,658,114) (11,882,222)
------------- -------------
Total stockholders' equity 45,780,067 48,032,438
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $385,211,599 $482,130,862
============= =============
See notes to condensed consolidated financial statements.
</TABLE>
1
<PAGE>
POCAHONTAS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, 2000 June 30, 2000
--------------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable $ 4,387,132 $4,022,195 $12,996,869 $11,941,336
Investment securities 3,027,907 2,757,983 9,893,549 8,345,154
----------- ---------- ----------- -----------
Total interest income 7,415,039 6,780,178 22,890,418 20,286,490
INTEREST EXPENSE:
Deposits 2,696,717 2,196,645 7,565,869 6,635,914
Borrowed funds 2,284,200 1,995,834 7,250,382 5,722,888
----------- ---------- ----------- -----------
Total interest expense 4,980,917 4,192,479 14,816,251 12,358,802
NET INTEREST INCOME 2,434,122 2,587,699 8,074,167 7,927,688
PROVISION FOR LOAN LOSSES
- - - -
----------- ---------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,434,122 2,587,699 8,074,167 7,927,688
OTHER INCOME:
Dividends 258,221 145,737 555,011 441,928
Fees and service charges 393,494 162,610 1,164,308 514,197
Trading gain (losses) (16,669) 46,569 (12,323) 52,797
Gain on sale of investment securities 183,255 155,486 449,947 191,391
Other 60,426 53,483 183,505 260,351
----------- ---------- ----------- -----------
Total other income 878,727 563,885 2,340,448 1,460,664
----------- ---------- ----------- -----------
OPERATING EXPENSE:
Compensation and benefits 1,173,061 1,150,673 3,454,847 6,456,617
Occupancy and equipment 249,998 256,780 733,858 880,487
Deposit insurance premium 11,413 30,028 52,792 88,584
Professional fees 91,154 92,788 285,478 230,889
Data processing 107,656 95,898 301,486 323,551
Advertising 134,546 122,257 460,523 240,998
OTS assessment 24,291 21,253 69,914 66,613
Other 333,419 307,845 1,046,554 833,905
----------- ---------- ----------- -----------
Total operating expense 2,125,538 2,077,522 6,405,452 9,121,644
----------- ---------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,187,311 1,074,062 4,009,163 266,708
INCOME TAX PROVISON 441,193 371,942 1,414,605 90,831
----------- ---------- ----------- --------
NET INCOME 746,117 702,120 2,594,558 175,877
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Unrealized holding loss on available
for sale securities arising during period (1,371,104) (47,725) (3,420,666) (805,532)
---------- ---------- ----------- -----------
COMPREHENSIVE INCOME (LOSS) $ (624,987) $ 654,395 $ (826,108) $ (629,655)
=========== ========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.14 $ 0.13 $ 0.49 $ 0.03
=========== ========== =========== ===========
DILUTED EARNINGS PER SHARE $ 0.14 $ 0.12 $ 0.49 $ 0.03
=========== ========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
POCAHONTAS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,594,558 $ 175,877
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation of premises and equipment 358,352 354,588
Amortization of deferred loan fees (49,612) (94,684)
Amortization of premiums and discounts, net (169,643) (209,047)
Net gain on sales of assets (475,697) (30,030)
Increase in cash surrender value of life insurance policies (145,116) (188,091)
Amortization of core deposit premium 214,542
65,366
Change in operating assets and liabilities:
Trading securities 749,283 (120,356)
Accrued interest receivable 398,735
68,354
Other assets (2,633,465) (1,354,504)
Deferred compensation (128,452) 2,640,640
Accrued expenses and other liabilities (1,359,912) (1,429,055)
------------ ------------
Net cash used by operating activities (646,427) (172,221)
------------ ------------
INVESTING ACTIVITIES:
Loan repayments, originations, and purchases, net (9,867,278) (17,588,545)
Net change in FHLB Stock 5,564,800 (419,400)
Purchase of investment securities (4,000,000) (37,164,622)
Proceeds from Sale of REO 448,757 -
Proceeds from maturities, sales and principal repayments
of investment securities 102,763,042 42,548,897
Purchases of premises and equipment (139,361) (1,015,451)
------------ ------------
Net cash (used) provided by investing activities 94,769,960 (13,639,121)
------------ ------------
FINANCING ACTIVITIES:
Net increase in deposits 18,301,472 6,200,429
Repayments of repurchase agreements, net (1,200,000) (622,645)
Net increase (decrease) in FHLB advances (110,280,000) 21,895,000
Purchase of treasury stock (1,775,892) (9,335,608)
Issuance of RRPs 185,112 146,544
Proceeds from exercise of stock options 21,253 530,234
Dividends paid (1,016,309) (1,082,876)
------------ ------------
Net cash (used) provided by financing activities (95,764,364) 17,731,078
------------ ------------
NET INCREASE (DECREASE) IN CASH (1,640,831) 3,971,015
CASH AT BEGINNING OF PERIOD 8,622,050 3,781,077
------------ ------------
CASH AT END OF PERIOD $ 6,981,219 $ 7,752,092
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
POCAHONTAS BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited 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 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, 2000, 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, 1999. 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 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, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Total basic shares outstanding 5,251,081 5,599,443 5,284,598 5,923,282
Add dilutive effect of unexercised options 6,712 82,931 6,712 82,931
--------- --------- --------- ---------
Total weighted average shares outstanding
for dilutive earnings per share calculation 5,257,793 5,682,374 5,291,310 6,006,213
========= ========= ========= =========
</TABLE>
3. DECLARATION OF DIVIDENDS
On May 10, 2000, the Board of Directors declared a $.065 per share
quarterly dividend for holders of record June 15, 2000.
4
<PAGE>
4. BENEFIT PLANS
Stock Option Plan - The Company's stockholders approved the 1998 Stock
Option Plan ("SOP") on October 23, 1998. The SOP provides for a committee
of the Company's Board of Directors to award incentive stock options,
non-qualified or compensatory stock options to purchase 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,
or following a change in control of the Company. Outstanding stock options
can be exercised over a ten-year period. Under the SOP, options have been
granted to directors and key employees of the Company. The exercise price
in each case equals the fair market value of the Company's stock at the
date of grant. The Company granted 350,000 options on October 23, 1998,
which have an exercise price of $9.00 per share.
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 nine months ended June 30, 2000, would have been as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, 2000 Ended June 30, 2000
------------------------------- -----------------------------
As Reported Pro forma As Reported Pro forma
<S> <C> <C> <C> <C>
Net income in thousands $ 746 $ 674 $ 2,595 $ 2,523
Earnings per share:
Basic $ 0.14 $ 0.13 $ 0.49 $ 0.48
Diluted $ 0.14 $ 0.13 $ 0.49 $ 0.48
</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%.
* * * * * *
5
<PAGE>
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, 2000, and the related condensed consolidated statements of income and
comprehensive income for the three-month and nine-month periods ended June 30,
2000 and 1999, and of cash flows for the nine-month periods ended June 30, 2000
and 1999. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated statement of
financial condition of Pocahontas Bancorp, Inc. and subsidiaries as of September
30, 1999, and the related consolidated statements of income and comprehensive
income, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated November 1, 1999, 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, 1999, is fairly stated, in all
material respects, in relation to the consolidated statement of financial
condition from which it has been derived.
/s/ Deloitte & Touche LLP
Little Rock, Arkansas
August 4, 2000
6
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Financial Condition at June 30, 2000, as compared to September 30, 1999.
General. The Company's total assets decreased $96.9 million or 20.1% to $385.2
million at June 30, 2000, as compared to $482.1 million at September 30, 1999.
This decrease was based on a strategy by management to restructure the balance
sheet to decrease interest rate risk exposure.
This quarterly report on Form 10-Q contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes", "anticipates", "plans", "expects" and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those contemplated by such forward-looking statements.
These important factors include, without limitation, the Bank's continued
ability to originate quality loans, fluctuation of interest rates, real estate
market conditions in the Bank's lending areas, general and local economic
conditions, the Bank's continued ability to attract and retain deposits, the
Company's ability to control costs, new accounting pronouncements and changing
regulatory requirements.
Loans receivable, net. Net loans receivable increased by $9.9 million or 4.5% to
$227.6 million at June 30, 2000, from $217.7 million as of September 30, 1999.
Growth in the loan portfolio was due to loan demand in the Company's local
market. Management expects that loan growth within the Company's local market
will remain flat given the current interest rate environment. Therefore,
management is continuing to explore lending opportunities outside its current
market area.
Investment securities available for sale. Investment securities available for
sale decreased $100.4 million, or 46.4%, to $116.1 million at June 30, 2000,
from $216.5 million at September 30, 1999. This decrease was primarily due to
the sale of $91.6 million of available for sale investment securities. Such
securities were sold in order to reduce the Company's sensitivity to interest
rate risk as calculated using the Office of Thrift Supervision's net present
value model. Management anticipates that the sale of the securities will have a
negative impact on earnings in future periods.
Trading securities. Trading securities decreased to $0.7 million, or 50.0% at
June 30, 2000, from $1.4 million at September 30, 1999 due to sales of trading
account securities.
Other assets. Other assets increased to $4.0 million at June 30, 2000, from $1.8
million at September 30, 1999, primarily due to an increase in deferred income
taxes on the unrealized holding losses on available for sale securities.
Deposits. Deposits increased $18.3 million or 8.6% to $230.2 million at June 30,
2000, from $211.9 million at September 30, 1999, primarily due to continued
growth within the Company's market area. Competition for deposit continues to
increase and is expected to result in higher cost of funds.
Deferred compensation. Deferred compensation decreased $0.2 million or 5.9% to
$3.2 million from $3.4 million at September 30, 1999. The decrease was due to
regularly scheduled payments to retired directors.
7
<PAGE>
Accrued expenses and other liabilities. Accrued expenses and other liabilities
decreased $1.4 million, or 37.8%, to $2.3 million at June 30, 2000, from $3.7
million at September 30, 1999. This decrease was primarily due to the decrease
in deferred income taxes for the unrealized gain/loss on available for sale
securities.
On September 30, 1999, the Company had a deferred income tax liability of
$247,865. At June 30, 2000, the Company had a deferred income tax asset of
$1,037,692, which is included in other assets.
Federal Home Loan Bank advances. FHLB advances decreased $110.3 million or 51.8%
to $102.8 million at June 30, 2000, from $213.1 million at September 30, 1999.
This decrease was due to the increase in deposits and the sale of investment
securities available for sale.
Stockholders' equity. Stockholders' equity decreased $2.2 million or 4.6% to
$45.8 million at June 30, 2000, from $48.0 million at September 30, 1999. The
change in stockholders' equity was due to the repurchase of 274,400 shares of
stock at a total price of $1.8 million, net income of $2.6 million, dividends of
$1.0 million and an increase in unrealized loss on available for sale securities
of $2.3 million.
Comparison of Results of Operations for the Three and Nine Months Ended June 30,
2000 and 1999
Overview. Net income was $746,117 for the quarter ended June 30, 2000, compared
to $702,120, for the quarter ended June 30, 1999, an increase of $43,998 or
6.3%. Basic and diluted earnings per share were $0.14 compared to basic and
diluted earning per share, of $0.13 and $0.12, respectively for the same period
last year.
Net income for the nine month period ended June 30, 2000 was $2,594,558 compared
to $2,115,142 excluding one time charges, for the same period ended June 30,
1999, an increase of $479,416 or 22.7%. Basic and diluted earnings per share for
the nine-month period were $0.49 compared to basic and diluted earnings per
share, excluding one-time charges, of $0.34 and $0.33, respectively, for the
same period last year. The net income for the nine-month period ended June 30,
1999 including one-time charges was $175,877 or $0.03 per share basic and
diluted.
Net interest income. Net interest income after provision for loan losses for the
quarter ended June 30, 2000 was $2,434,122 compared to $2,587,699 for the
quarter ended June 30, 1999, a decrease of $153,577 or 5.9%. The decrease in net
interest income was due to tightening of interest rate spreads and the sale of
securities in order to improve the Bank's interest rate risk sensitivity.
Management expects interest rate spreads to continue tightening.
Net interest income after provision for loan losses for the nine month period
ended June 30, 2000 was $8,074,167 compared to $7,927,688 for the nine month
period ended June 30, 1999, an increase of $146,479 or 1.8%.
Non-Interest income. Non-interest income increased to $878,727 for the
three-month period ended June 30, 2000 compared to $563,885 for the quarter
ended June 30, 1999, an increase of $314,842 or 55.8%. The increase in
non-interest income was primarily due to an increase in fees and service charges
resulting from the Company's checking account marketing program and an increase
in dividends received. Fees and service charges increased $230,884, or 142.0%,
to 393,494 for the three months ended June 30, 2000, compared to $162,610, for
the three month period ended June 30, 1999. The increase in fee income is due to
the Bank's aggressive checking account marketing program and the corresponding
increase in checking accounts. Management expects the number of checking
accounts to continue to increase and the consequently fee income is expected to
increase. However, management does anticipate that the rate of increase will
decline. Dividend income increased $112,484, or 77.2%, to $258,221 for the three
month period ended June 30, 2000
8
<PAGE>
compared to $145,737 for the three months ended June 30, 1999, the increase in
dividends was primarily due a special dividend from the FHLB of approximately
$130,000. Management anticipates that dividends will be lower in the future due
to average balance on FHLB stock and lower dividend rate from the FHLB.
Non-interest income increased to $2,340,448 for the nine month period ended June
30, 2000 compared to $1,460,664 for the nine month period ended June 30, 1999,
an increase of $879,784 or 60.2%. The increase in non-interest income for the
nine-month period ended June 30, 2000 was primarily the result of an increase in
fees and service charges resulting from an aggressive checking account marketing
program, increases in dividend income and an increase in other income. Dividend
income increased $113,083, or 25.6%, to $555,011 for the nine-month period ended
June 30, 2000, compared to $441,928 for the nine-month period ended June 30,
1999. The increase in dividends was primarily the result of a special dividend
of approximately $130,000 from the FHLB. Fees and service charges increased
$650,111, or 126.4%, to $1,164,308 for the nine-months ended June 30, 2000 from
$514,197 for the nine-month period ended June 30, 1999. The gain on sale of
investments securities increased $258,556, or 135% to $449,947 for the
nine-month period ended June 30, 2000 due to the sale of $91.6 million of
available for sale securities during the nine-months ended June 30, 2000. Other
income decreased $76,846, or 30%, to, $183,505 for the nine-months ended June
30, 2000 from $260,351 for the nine-month period ended June 30, 1999.
Operating expense. Total operating expenses were $2,125,538 for the three months
ended June 30, 2000 compared to $2,077,522 for the three months ended June 30,
1999, an increase of $48,016 or 2.3%.
Total operating expenses increased to $6.4 million for the nine-month period
ended June 30, 2000, compared to $6.1 million, excluding one-time charges, for
the nine-month period ended June 30, 1999, an increase of $0.3 million or 4.9%.
The one time charges in the nine-month period ended June 30, 1999, were related
to Mr. Martin's retirement and totaled approximately $3.0 million.
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
appropriate allowances. No provision for loan losses was made during the three
or nine month periods ended June 30, 2000 and 1999. Management believes that the
current allowance for loan loss is adequate to absorb possible loan losses in
the existing portfolio and appropriate considering the credit profile and
history of the 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.
9
<PAGE>
<TABLE>
<CAPTION>
June 30, 2000 September 30, 1999
------------- ------------------
(Dollars in Thousands)
<S> <C> <C>
Delinquent loans:
Single family mortgage $ 972 $ 1,302
Other mortgage loans 371 10
Other loans 106 66
------- -------
Total delinquent loans 1,449 1,378
Total real estate owned (1) 666 261
------- -------
Total non-performing assets $ 2,115 $ 1,639
======= =======
Total loans delinquent 90 days or more to net
loans receivable 0.64% 0.63%
Total loans delinquent 90 days or more to total assets 0.38% 0.28%
Total nonperforming loans and REO to total assets 0.55% 0.34%
</TABLE>
-----------------
(1) Net of valuation allowances
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. Delinquent loans 90 days or more
past due increased $71,000 or 5.15 % between September 30, 1999 and June 30,
2000.
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 longer 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, 2000.
At June 30, 2000, 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, 2000, the Bank's capital to assets ratio exceeded all regulatory
requirements.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. It is the objective of the Company to minimize, to the degree prudently
possible, its exposure to interest rate risk, while maintaining an acceptable
interest rate spread. Interest rate spread is the difference between the
Company's yield on its interest-earning assets and its cost of interest-bearing
liabilities. Interest rate risk is generally understood to be the sensitivity of
the Company's earnings, net asset values, and stockholders' equity to changes in
market interest rates.
Changes in interest rates affect the Company's earnings. The effect on earnings
of changes in interest rates generally depends on how quickly the Company's
yield on interest-earnings assets and cost of interest-bearing liabilities react
to the changes in market rates of interest. If the Company's cost of deposit
accounts reacts more quickly to changes in market interest rates than the yield
on the Company's mortgage loans and other interest-earnings assets, then an
increasing interest rate environment is likely to adversely affect the Company's
earnings and a decreasing interest rate environment is likely to favorably
affect the Company's
10
<PAGE>
earnings. On the other hand, if the Company's yield on its mortgage loans and
other interest-earnings assets reacts more quickly to changes in market interest
rates than the Company's cost of deposit accounts, then an increasing rate
environment is likely to favorably affect the Company's earnings and a
decreasing interest rate environment is likely to adversely affect the Company's
earnings.
Net Portfolio Value. The value of the Company's loan and investment portfolio
will change as interest rates change. Rising interest rates will generally
decrease the Company's net portfolio value ("NPV"), while falling interest rates
will generally increase the value of that portfolio. The following table sets
forth, quantitatively, as of June 30, 2000, the estimate of the projected
changes in NPV in the event of a 100, 200, and 300 basis point instantaneous and
permanent increase and decrease in market interest rates:
<TABLE>
<CAPTION>
Changes in Change in NPV
Interest Ratess Net Portfolio Value as a Percentage of
in Basis Points ----------------------- Estimated Market
(Rate Shock) Amount $ Change % Change Ratio Value of Assets
--------------- ------- -------- ---------- ------- --------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+300 bp $ 12,318 $ (26,366)18 -68% 3.56% (675)bp
+200 bp 21,916 (16,768) -43% 6.15% (416)bp
+100 bp 30,422 (8,262) -21% 8.31% (200)bp
0 bp 38,684 10.31%
-100 bp 45,581 6,897 18% 11.89% 159 bp
-200 bp 50,538 11,854 31% 12.98% 267 bp
-300 bp 55,116 16,432 42% 13.95% 365 bp
</TABLE>
Computations of prospective effects of hypothetical interest rate changes are
calculated by the bank's internal interest rate risk model and are based on
numerous assumptions, including relative levels of market interest rates, loan
repayments and deposit runoffs, and should not be relied upon as indicative of
actual results. Further, the computations do not contemplate any actions the
Company may undertake in response to changes in interest rates.
Management cannot predict future interest rates or their effect on the Company's
NPV in the future. Certain shortcomings are inherent in the method of analysis
presented in the computation of NPV. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in differing degrees to changes in market interest rates. Additionally, certain
assets, such as adjustable rate loans, which represent the Company's primary
loan product, have features that restrict changes in interest rates during the
initial term and over the remaining life of the asset. In addition, the
proportion of adjustable rate loans in the Company's portfolio could decrease in
future periods due to refinancing activity if market rates decrease. Further, in
the event of a change in interest rates, prepayment and early withdrawal levels
could deviate significantly from those assumed in the table. Finally, the
ability of many borrowers to service their adjustable-rate debt may decrease in
the event of an interest rate increase.
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.
11
<PAGE>
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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
12
<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: 8/10/00 /s/ James Edington
------- -------------------------------------
James Edington
President and Chief Executive Officer
Date: 8/10/00 /s/ Dwayne Powell
------- -------------------------------------
Dwayne Powell
Chief Financial Officer
13
