<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
------------------ -----------------
Commission file number 0-24304
FORREST CITY FINANCIAL CORPORATION
- ------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 71-0756156
- --------------------------------------------- ---------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
715 North Washington, Forrest City, Arkansas 72335-2859
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (870) 633-1525
-------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
---------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 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 .
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
State the issuer's revenues for its most recent fiscal year:
$4,441,019.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the bid and ask
price of such stock as of September 16, 1997, was approximately $3.2 million.
(The exclusion from such amount of the market value of the shares owned by any
person shall not be deemed an admission by the registrant that such person is
an affiliate of the registrant.)
As of September 16, 1997, there were 194,677 shares issued and
outstanding of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-KSB - Annual Report to Stockholders for the fiscal
year ended June 30, 1997.
Part III of Form 10-KSB - Proxy Statement for 1997 Annual Meeting of
Stockholders.
<PAGE>
PART I
Item 1. Description of Business
-----------------------
General
The Company. Forrest City Financial Corporation (the "Company") a
Delaware corporation, was formed in April 1994 to act as the holding company
for Forrest City Savings and Loan Association, F.A. (the "Association") upon
the completion of the Association's conversion from the mutual to the stock
form (the "Conversion"). The Company received approval from the Office of
Thrift Supervision (the "OTS") to acquire all of the common stock of the
Association to be outstanding upon completion of the Conversion. The
Conversion was completed on July 28, 1994. During fiscal 1995, the Association
changed its name to Forrest City Bank, FSB and in fiscal 1996 converted from a
federal savings bank to a national bank under the title "Forrest City Bank,
National Association. ("Forrest City" or the "Bank").
At June 30, 1997, the Company had $55.8 million of assets and
stockholders' equity of $5.1 million (or 9.2% of total assets).
The executive offices of the Company are located at 715 North
Washington, Forrest City, Arkansas 72335-2859, and its telephone number at
that address is (501) 633-1525.
The activities of the Corporation itself have been limited to
investments in U.S. Treasury Bills, corporate debt, municipals and
interest-bearing deposits at financial institutions. The net results of its
operations do not yet have a significant impact on the consolidated results.
Unless otherwise indicated, all activities discussed below are of the Bank.
The Bank. The Bank is a nationally chartered bank headquartered in
Forrest City, Arkansas. Its deposits are insured up to applicable limits, by
the Federal Deposit Insurance Corporation (the "FDIC"), which is backed by the
full faith and credit of the United States. The Bank's primary market area is
St. Francis County, Arkansas, which is serviced through its office in Forrest
City, Arkansas.
The principal business of the Bank consists of attracting retail
deposits from the general public and investing those funds primarily in
one-to-four family residential mortgage and, to a lesser extent, commercial
real estate and multi-family loans. The Bank also makes secured and unsecured
consumer loans. The Bank also invests in mortgage-backed and related
securities, investment securities and other permissible investments. At June
30, 1997, substantially all of the Bank's real estate mortgage loans were
secured by properties located in the Bank's market area.
1
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Currently, the Company's revenues are derived primarily from interest
on mortgage loans, mortgage-backed securities and investments, income from
service charges and loan originations.
The Company offers a variety of accounts having a wide range of
interest rates and terms. The Company's deposits include passbook accounts,
money market savings accounts, NOW, commercial demand and certificate accounts
with terms of three months to 84 months. Currently, the Company only solicits
deposits in its primary market area and does not accept brokered deposits.
Lending Activities
Market Area. The office of the Bank is located at 715 North
Washington, Forrest City, Arkansas, which is located in St. Francis County.
The Bank considers its primary market area to comprise St. Francis County. St.
Francis County is located in Eastern Arkansas approximately 90 miles east of
Little Rock and 50 miles west of Memphis, Tennessee. Major industries in St.
Francis County include primarily agriculture, with an increasing presence of
manufacturing and service industries. There is located in Forrest City, East
Arkansas Community College and Crowley Ridge Technical Institute which provide
higher education and vocational training for residents of St. Francis and
surrounding counties. Baptist Memorial Hospital, a regional medical facility,
is located in Forrest City. The Forrest City Federal Correctional Institute
opened in the spring of 1997. It now has 304 employees. The major industrial
employers in St. Francis County include Airtherm Products, Inc. - 150
employees, Boars Head Provision Company, Inc. - 150 employees, Lambert of
Arkansas, Inc. - 75 employees, Mulay Plastics, Inc. - 160 employees, Rubatex
Corporation - 445 employees, Sanyo Manufacturing Corporation - 825 employees,
Thorne Apple Valley, Inc. - Dixie Food Division - 265 employees, Yale Hoists -
440 employees, and Forrest City Grocery, a regional service company, has 260
employees. Other employers with less than 100 employees would include
Claireson & Company, Inc., Foam Fabricators, LTD., Forrest City Machine Works,
Inc., Sukup Manufacturing, Trak America, and Young Lumber Company. The
unemployment rate for St. Francis County is 8.0%. This reflects an improvement
over the past ten years when it was as high as 26%.
General. Historically, the Bank has originated fixed-rate,
one-to-four family mortgage loans. In 1986, the Bank began to focus on the
origination of adjustable-rate mortgage loans ("ARMs"), in order to increase
the percentage of loans in its portfolio with more frequent repricing than
fixed-rate mortgage loans. In 1995, the Bank began making consumer type loans,
both secured and unsecured, which are of a shorter maturity, normally one to
five years, than the mortgage loans. These loans consist of 14.09% of the
total loans outstanding.
While the Bank primarily focuses its lending activities on the
origination of loans secured by first mortgages on owner-occupied one-to-four
family residences, it also originates multi-family and commercial real estate
loans as well as consumer loans in its primary market area. At June 30, 1997,
the Bank's net loan portfolio totaled $35.5 million, substantially all of
which constituted loans made in the State of Arkansas.
2
<PAGE>
The aggregate amount of loans that the Bank is permitted to make
under applicable federal regulations to any one borrower, including related
entities, or the aggregate amount that the Bank could have invested in any one
real estate project is generally the greater of 15% of unimpaired capital and
surplus, or $500,000. See "Regulation - Federal Regulation of Savings
Associations." At June 30, 1997, the maximum amount which the Bank could have
lent to any one borrower and the borrower's related entities was $625,000. At
June 30, 1997, except for the loans described below, the Bank had no loans or
series of loans which exceeded this amount. At that date, the Bank's largest
loan to one borrower totaled $1.31 million and consisted of four loans which
are secured by apartment houses and a personal residence. The Bank's next
largest lending relationship consisted of three loans which totaled $530,000
secured by a personal residence and a motel. At June 30, 1997, each of these
loans was performing in accordance with its respective repayment terms. At
that date, there were no other loans or lending relationships in excess of
$625,000. The Bank is in compliance with its loan to one borrower requirement.
Loan Portfolio Composition. The following information presents the
composition of the Bank's loan portfolio in dollar amounts and in percentages
(before deductions for loans in process, deferred fees and discounts and
allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------------------
1997 1996 1995
------------------------- ---------------------- --------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans:
<S> <C> <C> <C> <C> <C> <C>
One- to four-family............................. 25,629 70.45% $22,846 72.75% $17,084 80.29%
Multi-family.................................... 1,090 3.00 1,091 3.47 973 4.57
Commercial real estate.......................... 1,619 4.45 2,010 6.40 2,136 10.04
Participations purchased ....................... 2,913 8.01 2,524 8.04 --- ---
-------- ------ ------- ------ -------- -------
Total real estate loans .................... 31,251 85.91 28,471 90.66 20,193 94.90
-------- ------ ------- ------ -------- -------
Consumer Loans:
Deposit account................................ 114 .31 90 .28 46 .22
Home equity.................................... 1,624 4.46 1,178 3.75 738 3.46
Other ......................................... 3,389 9.32 1,666 5.31 302 1.42
-------- ------ ------- ------ -------- -------
Total consumer loans........................ 5,127 14.09 2,934 9.34 1,086 5.10
-------- ------ ------- ------ -------- -------
Total loans................................. $36,378 100.00% $31,405 100.00% $21,279 100.00%
======== ====== ======= ====== ======== =======
Less:
Loans in process................................ 539 669 358
Deferred fees and discounts..................... 70 54 63
Allowance for losses............................ 263 263 244
-------- ------- --------
Total loans receivable, net..................... $35,506 $30,419 $20,164
======== ======= ========
</TABLE>
3
<PAGE>
The following table shows the composition of the Bank's loan
portfolio by fixed and adjustable rate at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------------------
1997 1996 1995
------------------------ ----------------------- -------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Fixed Rate Loans:
Real estate:
<S> <C> <C> <C> <C> <C> <C>
One- to four-family .......... $11,472 31.54% $10,345 32.94% $ 8,659 40.69%
Commercial real estate ....... 198 .54 267 .85 319 1.50
Multi-family ................. -- -- 135 .43 -- --
Participations purchased ..... 2,913 8.01 2,524 8.04 -- --
------- ------ ------- ------ ------- -------
Total real estate loans ... 14,583 40.09 13,271 42.26 8,978 42.19
------- ------ ------- ------ ------- -------
Consumer ..................... 5,105 14.03 2,907 9.25 1,058 4.97
------- ------ ------- ------ ------- -------
Total fixed-rate loans .... 19,688 54.12 16,178 51.51 10,036 47.16
------- ------ ------- ------ ------- -------
Adjustable Rate Loans:
Real estate:
One- to four-family .......... 14,157 38.92 12,501 39.81 8,425 39.60
Commercial real estate ....... 1,421 3.91 1,743 5.55 1,817 8.54
Multi-family ................. 1,090 2.99 956 3.04 973 4.57
------- ------ ------- ------ ------- -------
Total real estate loans .. 16,668 45.82 15,200 48.40 11,215 52.71
Consumer .................... 22 .06 27 .09 28 .13
------- ------ ------- ------ ------- -------
Total adjustable-rate loans 16,690 45.88 15,227 48.49 11,243 52.84
------- ------ ------- ------ ------- -------
Total loans ............... 36,378 100.00% $31,405 100.00% 21,279 100.00%
------- ====== ------- ====== ------- =======
Less:
Loans in process .............. 539 669 358
Deferred fees and discounts ... 70 54 63
Allowance for loan losses ..... 263 263 244
------- ------- -------
Total loans receivable, net $35,506 $30,419 $20,614
======= ======= =======
</TABLE>
4
<PAGE>
The following schedule illustrates the interest rate sensitivity of
the Bank's loan portfolio at June 30, 1997. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which
the contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
------------------------------------------
Multi-family,
Participations
and Commercial Real
One- to four-family Real Estate Consumer Total
------------------- ------------------ ------------------- ----------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During Periods
Ending June 30,
------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Through 1 year................ $ 1,074 9.72% $1,425 8.89% $1,191 9.74% $ 3,690 9.41%
Over 1 through 2 years........ 95 8.98 --- --- 412 9.73 507 9.59
Over 2 through 3 years........ 64 9.04 727 8.58 922 8.96 1,713 8.80
Over 3 through 5 years........ 329 9.42 1,271 9.27 1,011 9.65 2,611 9.44
Over 5 through 10 years....... 2,598 8.91 658 9.59 491 9.51 3,747 9.11
Over 10 through 15 years...... 4,757 7.99 --- --- 1,049 9.78 5,806 8.31
Over 15 years................. 16,712 8.21 1,541 9.90 51 10.72 18,304 8.36
</TABLE>
One-to-four family Residential Mortgage Lending. Residential loan
originations of this type are generated by the Bank's marketing efforts, its
present customers, walk-in customers and referrals from real estate agents.
The Bank focuses its lending efforts primarily on the origination of loans
secured by first mortgages on owner-occupied, one-to-four family residences.
At June 30, 1997, the Bank's one-to-four family residential mortgage loans
totaled $25.6 million, or approximately 70.45% of the Bank's total gross loan
portfolio.
The Bank currently offers fixed-rate mortgage and ARM loans. During
the year ended June 30, 1997, the Bank originated $5.48 million of
adjustable-rate real estate loans which were secured by one-to-four family
residential real estate. During the same periods, the Bank originated $4.10
million of fixed-rate real estate loans, all of which were secured by
one-to-four family residential real estate. The Bank's one-to-four family
residential mortgage originations are primarily in its market and surrounding
areas.
The Bank currently originates up to a maximum of 30-year, fixed-rate,
one-to-four family residential mortgage loans in amounts up to 95% of the
appraised value of the security property up to a maximum amount of $500,000,
provided that private mortgage insurance is obtained in an amount sufficient
to reduce the Bank's exposure to at or below the 80% loan-to-value level.
5
<PAGE>
The Bank also currently offers up to maximum 30-year amortization ARM
loans with interest rate adjustments occurring after one and five year terms
with an interest rate margin generally 300 basis points over one and five year
Treasury rates, respectively. These loans have a fixed-rate for the stated
period and, thereafter, such loans adjust periodically, pursuant to the
contractual term. These loans provide for up to a 200 basis point annual cap
and a lifetime cap of 600 basis points over the initial rate although some of
the Bank's ARMs were originated with one hundred and five hundred basis point
caps. As a consequence of using an initial fixed-rate and caps, the interest
rates on these loans may not be as rate sensitive as is the Bank's cost of
funds. The Bank's ARMs do not permit negative amortization of principal. The
Bank generally qualifies borrowers at 200 basis points above the initial rate
in conformity with secondary market standard.
In underwriting one-to-four family residential real estate loans,
Forrest City evaluates, among other things, both the borrower's ability to
make monthly payments and the value of the property securing the loan.
Currently, virtually all properties securing real estate loans made by Forrest
City are appraised by independent fee appraisers approved by the Board of
Directors. Forrest City generally requires borrowers to obtain title
insurance, and fire and property insurance (including flood insurance, if
necessary) in an amount not less than the amount of the loan.
Commercial Real Estate and Multi-Family Lending. The Bank has also
engaged in commercial real estate and multi-family lending in its market area.
At June 30, 1997, the Bank had $2.7 million of commercial real estate and
multi-family loans, which represented 7.45% of the Bank's gross loan
portfolio. This percentage has declined steadily from 28% of the gross loan
portfolio at June 30, 1991, and management currently expects this trend to
continue. All of the Bank's multi-family and commercial real estate loans were
secured by properties located in Arkansas.
Loans secured by commercial real estate and multi-family properties
are generally larger and involve a greater degree of credit risk than one-
to-four family residential mortgage loans. Because payments on loans secured
by commercial real estate properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject to adverse conditions in the real estate market or the economy. If the
cash flow from the project is reduced (for example, if leases are not obtained
or renewed), the borrower's ability to repay the loan may be impaired.
The Bank's commercial real estate and multi-family loan portfolio is
secured primarily by apartments, motels, and, to a lesser extent, small
offices. Multi-family loans generally have terms not to exceed 30 years.
Commercial real estate loans generally have terms that do not exceed 20 years.
The Bank has a variety of rate adjustment features and other terms in its
commercial real estate and multi-family loan portfolio. Generally, the loans
are made in amounts up to 80% of the appraised value of the security property.
Multi-family and commercial real estate loans generally provide for a 350 to
500 basis point margin over the Federal discount rate. The Bank currently
analyzes the financial condition of the borrower, the borrower's credit
history, and the reliability and predictability of the cash flow generated by
the property securing the loan. The Bank
6
<PAGE>
generally requires personal guaranties of the borrowers. Appraisals on
properties securing commercial real estate loans originated by the Bank are
performed by independent appraisers.
The following table breaks out the Bank's commercial real estate and
multi-family loan portfolio by type of loan.
June 30,
---------------------------
1997 1996 1995
------ ------ ------
(In Thousands)
Multi-family.............................. $1,090 $1,091 $ 973
Hotel/Motel............................... 749 930 996
Commercial Buildings...................... 516 691 699
Churches.................................. 354 389 441
------ ------ ------
Total................................ $2,709 $3,101 $3,109
====== ====== ======
Participation and Whole Loans Purchased. In order to defuse the
concentration of credit in one area and to enhance the earnings of the Bank,
in 1996, the Bank began looking for whole loans to purchase or in which to
participate with other lending institutions. These loans would be secured by
real estate to creditworthy original borrowers in areas where the local
economy would be better than the St. Francis County area. These loans, whether
participations or outright purchases, would satisfy the same underwriting
requirements as loans originated by the Bank. The performance of these loans
will be monitored and reported to the Board along with other loans originated
by the Bank. At June 30, 1997, the Bank had $2.9 million, or 8.01% of total
loans outstanding.
Consumer Lending. The Bank offers secured consumer loans, including
home equity loans, loans secured by savings deposits and unsecured consumer
credit. At June 30, 1997, the Bank's consumer loan portfolio totaled $5.1
million, or 14.09% of its total gross loan portfolio. The Bank currently
originates all of its consumer loans in its primary market area. The Bank
originates consumer loans on a direct basis by extending credit directly to
the borrower. At June 30, 1997, approximately $77,000 or 1.50% of the consumer
loan portfolio was not performing. There can be no assurance that additional
delinquencies will not occur in the future.
The largest component of Forrest City's consumer loan portfolio
consists of secured and unsecured consumer loans. At June 30, 1997, such loans
totaled $3.4 million, or approximately 9.32%, of the Bank's gross loan
portfolio. Home equity loans (loans secured by second mortgages) totaled $1.6
million or approximately 4.46% of the Bank's gross loan portfolio and are
limited to 90% of the value of the property securing the loan up to a maximum
loan amount of $50,000. Generally, such loans have a maximum term of up to 10
years.
7
<PAGE>
The underwriting standards employed by the Bank for consumer loans,
other than loans secured by deposits, include an application, a determination
of the applicant's payment history on other debts and an assessment of ability
to meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is a primary consideration, the underwriting
process also includes a comparison of the value of the security in relation to
the proposed loan amount. The Bank intends to expand its consumer lending. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in the Company's Annual Report attached hereto as
Exhibit 13.
Originations, Purchases and Sales of Loans and Mortgage-Backed Securities
Real estate loans are generally originated by Forrest City's staff of
salaried loan officers. Loan applications are taken and processed in the
Bank's office. While the Bank originates both adjustable-rate and fixed-rate
loans, its ability to originate loans is dependent upon the relative customer
demand for loans in its market.
In fiscal 1997, the Bank originated $13.52 million of loans, compared
to $13.45 million and $6.26 million in fiscal 1996 and 1995, respectively.
Management attributes the increase in originations to sustained low interest
rates during fiscal 1997 and increased activity in the local housing market.
The Bank has purchased loans and mortgage-backed securities in order
to supplement loan demand and for investment purposes. For the years ended
June 30, 1997 and 1996, the Bank purchased $3.7 million and $6.2 million,
respectively, of mortgage-backed securities and loans. See "- Investment
Activities." The purchase of mortgage-backed securities in fiscal 1997
consisted primarily of intermediate adjustable rate securities. During fiscal
1997, the Bank purchased participation loans totaling $1.2 million. The
underlying collateral for these participations include both commercial and
residential properties located in Arkansas or neighboring states.
In periods of economic uncertainty, the ability of financial
institutions, including Forrest City, to originate large dollar volumes of
real estate loans may be substantially reduced or restricted, with a resultant
decrease in related loan origination fees, other fee income and operating
earnings.
At June 30, 1997, the Bank had loan commitments outstanding of $3.1
million, consisting of $1.3 million in fixed-rate commitments and $1.8 million
of adjustable-rate loans. The Bank did not have any commitments to sell loans
at that date. See Note 14 of Notes to Consolidated Financial Statements
contained in the Company's Annual Report attached hereto as Exhibit 13.
8
<PAGE>
The following table shows the loan origination, purchase and
repayment activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------
1997 1996 1995
-------- ------- -------
(In Thousands)
Originations by type:
Adjustable rate:
<S> <C> <C> <C>
Real estate - one- to four-family................ $ 4,504 $ 7,493 $ 2,689
- commercial real estate........... 973 --- ---
Non-real estate - consumer....................... --- --- 28
-------- ------- -------
Total adjustable-rate..................... 5,477 7,493 2,717
-------- ------- -------
Fixed rate:
Real estate - one- to four-family................ 4,104 2,866 2,501
- commercial....................... 360 291 ---
Non-real estate - consumer....................... 3,579 2,953 1,044
-------- ------- -------
Total fixed-rate........................... 8,043 5,954 3,545
-------- ------- -------
Total loans originated................... 13,520 13,447 6,262
-------- ------- -------
Purchases:
Participations................................... 1,484 2,596 ---
Mortgage-backed securities....................... 2,444 3,657 8,423
-------- ------- -------
Total purchases.......................... 3,928 6,253 8,423
-------- ------- -------
Sales and Repayments:
Real estate - one- to four-family................ 1,154 692 547
Mortgage-backed securities....................... 1,255 2,658 ---
-------- ------- -------
Total sales............................... 2,409 3,350 547
-------- ------- -------
Principal repayments............................. 11,229 7,709 5,065
-------- ------- -------
Total reductions.......................... 13,638 11,059 5,612
-------- ------- -------
Increase (decrease) in other items, net............ (344) (1,618) (523)
-------- ------- -------
Net increase.............................. $3,466 $ 7,023 $8,550
======== ======= =======
</TABLE>
Non-Performing Assets and Classified Assets
When a borrower fails to make a required payment on real estate
secured loans and consumer loans, a late notice is sent at seventeen days
after the payment is due. At 30 days after the payment is due, the Bank mails
another delinquency notice. If the loan remains delinquent, stronger follow-up
measures are taken, including notification of pending foreclosure. If a loan
has been delinquent for more than 90 days, satisfactory payment arrangements
must be adhered to or the Bank will generally initiate foreclosure or
repossession.
9
<PAGE>
When a loan becomes delinquent 90 days or more, the Bank will place
the loan on non-accrual status and, as a result, previously accrued interest
income on the loan is taken out of current income. The loan will remain on a
non-accrual status as long as the loan is 90 days delinquent.
The following table sets forth information concerning delinquent mortgage
and other loans at June 30, 1997. The amounts presented represent the total
remaining principal balances of the related loans, rather than the actual
payment amounts which are overdue.
<TABLE>
<CAPTION>
Loans Delinquent For:
-------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over
------------------------- ------------------------- ---------------------------
Number Amount Percent Number Amount Percent Number Amount Percent
------ ------ ------- ------ ------ ------- ------ ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family............ 12 $427 83% 1 $ 9 14% 1 $ 5 6%
Consumer......................... 16 88 17 11 56 86 14 77 94
--- ---- --- --- ---- ---- ---- ---- ----
Total........................ 28 $515 100% 12 $ 65 100% 15 $ 82 100%
=== ==== === === ==== === === ==== ===
</TABLE>
The table below sets forth the amounts and categories of
non-performing assets in the Bank's loan portfolio. Loans are placed on
non-accrual status when the collection of principal and/or interest become
doubtful. Foreclosed assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
At June 30,
---------------------------
1997 1996 1995
----- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
One- to four-family....................... $ 5 $124 $ 42
Consumer.................................. 77 186 5
----- ---- ----
Total.................................. 82 310 47
----- ---- ----
Foreclosed assets:
One- to four-family....................... 217 70 72
Commercial real estate.................... --- 76 76
----- ---- ----
Total.................................. 217 146 148
----- ---- ----
Total non-performing assets................. $ 299 $456 $195
===== ==== ====
Total as a percentage of total assets....... .54% .88% .43%
===== ==== ====
</TABLE>
10
<PAGE>
For the years ended June 30, 1997 and June 30, 1996, gross interest
income which would have been recorded had the non-accruing loans been current
totaled $21,200 and $22,300, respectively. Amounts that were included in
interest income on such loans were $25,300 and $14,900, respectively, for the
year ended June 30, 1997 and 1996.
Non-Performing Assets. At June 30, 1997, non-accruing loans included
one loan totaling $5,000 secured by one- to four-family real estate located in
St. Francis County and fourteen unsecured consumer loans totaling $77,000 on
such date. Foreclosed assets included two homes located in St. Francis County
totaling $217,283. The allowance for real estate losses totaled $0, $17,652
and $15,459 at June 30, 1997, 1996 and 1995, respectively. See "Allowance for
Loan Losses and Real Estate Acquired in the Settlement of Loans."
Other Loans of Concern. In addition to the non-performing assets and
foreclosed assets set forth in the preceding table, as of June 30, 1997 there
was also an aggregate of $438,000 in net book value of loans classified by the
Bank with respect to the majority of which known information about the
possible credit problems of the borrowers or the cash flows of the security
properties have caused management to have some doubts as to the ability of the
borrowers to comply with present loan repayment terms and which may result in
the future inclusion of such items in the non-performing asset categories. The
principal components of loans of concern are $320,000 of special mention
assets, all of which are performing and $118,000 of substandard assets,
primarily consumer loans which borrowers have exhibited poor payment
histories.
As of June 30, 1997, there were no other loans not included on the
table or discussed above where known information about the possible credit
problems of borrowers caused management to have doubts as to the ability of
the borrower to comply with present loan repayment terms and which may result
in disclosure of such loans in future.
Classified Assets. Federal regulations provide for the classification
of loans and other assets such as debt and equity securities considered to be
of lesser quality 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 obligor 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 which do not
currently expose the Bank to sufficient risk to warrant classification in one
of the aforementioned categories, but possess weaknesses, are designated
"Special Mention" by management.
11
<PAGE>
When the Bank classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances
which have been established to recognize the inherent risk associated with
lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When the Bank classifies problem
assets as "loss," it establishes a specific allowance for losses equal to 100%
of that portion of the asset so classified or to charge-off such amount. The
Bank's determination as to the classification of its assets and the amount of
its valuation allowances is subject to review by the OCC, who may order the
establishment of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS
and in accordance with its classification of assets policy, the Bank regularly
reviews the loans in its portfolio to determine whether any loans require
classification in accordance with applicable regulations. On the basis of
management's review of its assets, at June 30, 1997, the Bank had classified a
total of $393,000 of its assets as substandard.
At June 30, 1997, total classified assets, including $325,000 of
special mention assets, comprised $717,000, or 13.9% of the Bank's capital, or
1.3% of the Bank's total assets.
Allowance for Loan Losses and Real Estate Acquired in Settlement of
Loans. The allowance for loan losses is established through a provision for
loan losses based on management's 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 loans for which full collectibility may
not be reasonably assured, considers among other matters, the estimated fair
value of the underlying collateral, economic conditions, historical loan loss
experience and other factors that warrant recognition in providing for an
adequate loan allowance.
Real estate properties acquired through foreclosure are recorded at
fair value. If fair value at the date of foreclosure is lower than the balance
of the related loan, the difference will be charged-off to the allowance at
the time of transfer. Valuations are periodically updated by management and if
the value declines, a specific provision for losses on such property is
established by a charge to operations.
Although management believes that it uses the best information
available to determine the allowances, unforeseen market conditions could
result in adjustments and net earnings could be significantly affected if
circumstances differ substantially from the assumptions used in making the
final determination. Future additions to the Bank's allowances will be the
result of periodic loan, property and collateral reviews and thus cannot be
predicted in advance. At June 30, 1997, the Bank had a total allowance for
loan losses of approximately $263,000, or .74% of loans receivable, net. See
Notes 3 and 6 of the Notes to Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in the Company's Annual Report attached as Exhibit 13
hereto.
12
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------
1997 1996 1995
----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period......................... $ 263 $ 244 $ 249
----- ----- -----
Charge-offs:
One- to four-family.................................. (108) --- (34)
Recoveries:
One- to four-family.................................. 13 --- 17
----- ----- -----
Net charge-offs........................................ (95) --- (17)
Additions charged to operations........................ 95 19 12
----- ----- -----
Balance at end of period............................... $ 263 $ 263 $ 244
===== ===== =====
Ratio of net charge-offs during the period to
average loans outstanding during the period........... .28% ---% .09%
===== ===== =====
Ratio of net charge-offs during the period to
average non-performing assets......................... 25.17% ---% 6.99%
===== ===== =====
</TABLE>
The distribution of the Bank's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------
1997 1996 1995
----------------- ------------------ -----------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family........ $ 77 70.45% $ 55 72.75% $ 55 80.29%
Consumer................... 20 9.32 --- --- --- ---
Unallocated................ 166 --- 208 --- 189 ---
---- ------ ---- ------ ---- ------
Total................. $263 79.77% $263 72.75% $244 80.29%
==== ====== ==== ====== ==== ======
</TABLE>
For information concerning valuation allowances for foreclosed real
estate, see Note 6 of Notes to Consolidated Financial Statements contained in
the Company's Annual Report attached hereto as Exhibit 13.
Investment Activities
Generally, the investment policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Bank's need
for liquidity, to achieve a balance between its desire to minimize risk and
maximize yield, to provide collateral for borrowings, and to fulfill the
Bank's asset/liability management policies.
13
<PAGE>
At June 30, 1997, the Bank had no securities of a single issuer,
except for U.S. Treasury or agency obligations, which exceeded 10% of the
Bank's stockholders' equity, and Lee County School District post-dated
warrants of $28,000, which are guaranteed as to principal and interest by the
State of Arkansas.
At June 30, 1997, Forrest City's investment securities, including
FHLB and FRB stock, totaled $3.07 million, or 5.5% of total assets. It is the
Bank's general policy to purchase investment securities which are federal
agency or municipal obligations or other obligations guaranteed by the State.
At June 30, 1997, the weighted average term to maturity or repricing of the
investment securities portfolio, excluding FHLB stock, was two years.
The Company has a substantial portfolio of fixed-rate and
adjustable-rate mortgage-backed securities. Such mortgage-backed securities
can serve as collateral for borrowings and, through repayments, as a source of
liquidity.
Mortgage-backed securities generally yield less than the loans that
underlie such securities, because of the cost of payment guarantees or credit
enhancements that result in reduced credit risk. However, mortgage-backed
securities are more liquid than individual mortgage loans. In addition,
mortgage-backed securities issued or guaranteed by the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation
("FHLMC") are generally weighted at no more than 20% for risk-based capital
purposes, and mortgage-backed securities issued or guaranteed by the
Government National Mortgage Association ("GNMA") are weighted at 0% for
risked-based capital purposes, as compared to an assigned risk weighting of
50% to 100% for whole residential mortgage loans. See "Regulation." These
types of securities thus allow the Company to optimize regulatory capital to a
greater extent than non-securitized whole loans.
While mortgage-backed securities carry a reduced credit risk as
compared to whole loans, such securities are subject to the same risk as whole
loans in that a fluctuating interest rate environment, along with other
factors such as the geographic distribution of the underlying mortgage loans,
may alter the prepayment rate of such mortgage loans and thereby affect both
the prepayment speed and value of such securities. The adjustable rate and/or
short term to maturity of the Company's portfolio is designed to reduce that
risk. At June 30, 1997, mortgage-backed securities totaled $14.6 million, or
29.1% of the Bank's total loan and mortgage-backed securities portfolio.
Adjustable-rate mortgage-backed securities at June 30, 1997 totaled $12.8
million or 87.7% of the Company's total mortgage-backed securities.
14
<PAGE>
The following table sets forth the book value of the Company's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-----------------------------
1997 1996 1995
------- ------- --------
(In Thousands)
<S> <C> <C> <C>
Issuers:
Federal Home Loan Mortgage Corporation............. $ 3,777 $ 4,223 $ 5,305
Federal National Mortgage Association.............. 6,096 5,288 9,461
Government National Mortgage Association........... 2,207 3,395 2,784
Other mortgage-backed securities................... 2,509 3,190 1,579
------- ------- --------
Total......................................... $14,589 $16,096 $19,129
======= ======= =======
</TABLE>
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities at June 30, 1997.
<TABLE>
<CAPTION>
At
June 30,
1997 Due in
---------- ------------------------------
Balance 3 to 5 5 to 10 Over 10
Outstanding Years Years Years
----------- ----- ----- -----
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation.............. $ 3,777 $ --- $ 9 $ 3,768
Federal National Mortgage Association............... 6,096 556 1,287 4,253
Government National Mortgage Association............ 2,207 91 13 2,103
Other mortgage-backed securities.................... 2,509 --- --- 2,509
-------- ----- ------- --------
Total............................................. $14,589 $647 $1,309 $12,633
======= ==== ====== =======
</TABLE>
The OTS has issued guidelines regarding management oversight and
accounting treatment for securities, including investment securities,
mortgage-backed securities and derivative securities. The guidelines require
thrift institutions to reduce the carrying value of securities to market value
unless it can be demonstrated that a class of securities is intended to be
held to maturity. At June 30, 1997, these securities had a market value of
$16.2 million and a book value of $16.4 million. If interest rates increase,
the market value of these securities will decrease.
15
<PAGE>
The following table sets forth the composition of the Company's
investment securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------
1997 1996 1995
------------------- -------------- ---------------
Book % of Book % of Book % of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
Federal agency obligations.............................. $1,373 44.77% $ 1,561 52.58% $ 1,948 69.87%
Equity securities....................................... 374 12.19 316 10.64 --- ---
Other obligations....................................... 84 2.74 110 3.70 301 10.80
------ ------ ------- ------ ------- ------
Subtotal............................................. $1,831 59.70 $ 1,987 66.92% $ 2,249 80.67%
FHLB and FRB stock........................................ 1,236 40.30 982 33.08 539 19.33
------ ------- ------- ------ ------- ------
Total investment securities , FHLB and FRB stock..... $3,067 100.00% $ 2,969 100.00% $ 2,788 100.00%
====== ====== ======= ====== ======= ======
Other Interest-Earning Assets:
Interest-bearing deposits with banks.................... $1,076 100.00% $ 1,040 100.00% $ 1,216 100.00%
------ ------ ------- ------ ------- ------
Total................................................ $1,076 100.00% $ 1,040 100.00% $ 1,216 100.00%
====== ====== ======= ====== ======= ======
Average remaining life or term to repricing
of investment securities and other interest-
earning assets, excluding FHLB and FRB stock............. 2 years 3 years 2 years
</TABLE>
The composition and maturities of the investment securities
portfolio, excluding equity securities, FHLB and FRB stock, are indicated in
the following table.
<TABLE>
<CAPTION>
At June 30, 1997
---------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Total Investment
1 Year Years Years Securities
---------- ---------- ---------- --------------------------
Book Value Book Value Book Value Book Value Market Value
---------- ---------- ---------- ---------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
State and local government
obligations..................... $ 28 $ 38 $ 18 $ 84 $ 84
Federal agency obligations........ 200 1,173 --- 1,373 1,377
----- ------- ----- ------- ------
Total investment securities....... $228 $1,211 $ 18 $1,457 $1,461
==== ====== ==== ====== ======
Weighted average yield............ 6.15% 5.89% 5.00% 5.92%
</TABLE>
Sources of Funds
General. The Bank's primary sources of funds are deposits,
borrowings, repayment of loan principal, maturing investments in certificates
of deposit, and funds provided from operations.
Borrowings, consisting of FHLB advances, may be used at times to
compensate for seasonal reductions in deposits or deposit inflows at less than
projected levels, and may be used on a longer-term basis to support expanded
lending activities.
Deposits. Forrest City offers a variety of deposit accounts having a
wide range of interest rates and terms. The Bank's deposits consist of
passbook savings accounts, NOW accounts,
16
<PAGE>
money market accounts and commercial demand accounts and certificate accounts
ranging in terms from three months to 84 months. The Bank only solicits
deposits from its market area and does not currently use brokers to obtain
deposits. The Bank relies primarily on competitive pricing policies,
advertising and customer service to attract and retain these deposits. The
flow of deposits is influenced significantly by general economic conditions,
changes in money market and prevailing interest rates, and competition.
The variety of deposit accounts offered by the Bank has allowed it to
be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Bank has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The Bank endeavors to manage the pricing of its deposits in keeping
with its asset/liability management and profitability objectives. The ability
of the Bank to attract and maintain certificates of deposit accounts and the
rates paid on these deposits has been and will continue to be significantly
affected by market conditions.
In 1991, the Bank instituted a program in which a purchaser of a
certificate of deposit may increase the interest rate currently prevailing on
an existing certificate for the remainder of the term. Certificates currently
outstanding under this program, which continues, total approximately $74,000.
Effective May 1, 1994, the Bank discontinued this program.
The following table sets forth the savings flows at the Bank during the
periods indicated.
Year Ended June 30,
-------------------------------------
1997 1996 1995
--------- -------- --------
(Dollars in Thousands)
Opening balance..................... $26,956 $25,452 $ 26,920
Deposits............................ 81,565 51,314 27,926
Withdrawals......................... 77,864 50,723 30,210
Interest credited................... 977 913 816
------- ------- -------
Ending balance...................... $31,634 $26,956 $ 25,452
======= ======= =======
Net increase (decrease)............. $ 4,678 $ 1,504 $ (1,468)
======= ======= =======
Percent increase (decrease)......... 17.3% 5.91% (5.45)%
==== ==== =====
17
<PAGE>
The following table sets forth the dollar amount of savings deposits
in the various types of deposit programs offered by the Bank for the periods
indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------
1997 1996 1995
------------------ ----------------- ----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
Commercial Demand ....................... $ 1,741 5.50% $ 74 .27% $ 31 .12%
Passbook Accounts ....................... 2,053 6.47 1,661 6.15 1,354 5.30
NOW Accounts ............................ 2,898 9.14 2,331 8.63 1,040 4.08
Money Market Accounts ................... 2,072 6.53 2,147 7.94 2,184 8.56
------- ------- ------- ------ ------- ------
Total Non-Certificates................... 8,764 27.64 6,213 22.99 4,609 18.06
------- ------- ------- ------ ------- ------
Certificates:
0.00 - 3.50%........................... --- --- 4 .01 16 .06
3.51 - 5.50%........................... 16,749 52.83 13,858 51.29 7,662 30.02
5.51 - 7.50%........................... 6,121 19.31 6,777 25.08 13,059 51.17
7.51% and above......................... --- --- 104 .39 106 .42
------- ------- ------- ------ ------- ------
Total Certificates....................... 22,870 72.14 20,743 76.77 20,843 81.67
------- ------- ------- ------ ------- ------
Accrued Interest......................... 69 .22 65 .24 70 .27
------- ------- ------- ------ ------- ------
Total Deposits........................... $31,703 100.00% $27,021 100.00% $25,522 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
The following table shows rate and maturity information for the
Bank's certificates of deposit as of June 30, 1997.
3.76- 5.76- Percent
5.75% 7.75% Total of Total
----- ----- ----- --------
(Dollars in Thousands)
Certificate accounts maturing
in quarter ending:
- -----------------
September 30, 1997............... $ 5,328 $ 114 $ 5,442 23.80%
December 31, 1997................ 4,038 116 4,154 18.16
March 31, 1998................... 4,252 140 4,392 19.20
June 30, 1998.................... 2,201 334 2,535 11.09
September 30, 1998............... 258 17 275 1.20
December 31, 1998................ 359 65 424 1.85
March 31, 1999................... 319 310 629 2.75
June 30, 1999.................... 509 52 561 2.45
September 30, 1999............... 251 464 715 3.13
December 31, 1999................ 334 6 340 1.49
March 31, 2000................... 412 65 477 2.09
June 30, 2000.................... 401 540 941 4.11
Thereafter....................... 693 1,292 1,985 8.68
--------- ------- -------- -------
Total......................... $19,355 $3,515 $22,870 100.00%
======== ====== ======= ======
Percent of total.............. 84.63% 15.37% 100.00%
====== ====== ======
18
<PAGE>
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of June 30,
1997.
<TABLE>
<CAPTION>
Maturity
------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
------- ------ ------ --------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000............. $3,785 $3,125 $5,570 $5,183 $17,663
Certificates of deposit of $100,000 or more............ 887 791 941 1,164 3,783
Public funds(1)........................................ 770 238 416 --- 1,424
------- -------- ------- -------- --------
Total certificates of deposit...................... $5,442 $4,154 $6,927 $6,347 $22,870
====== ====== ====== ====== =======
</TABLE>
- ---------------
(1) Deposits from governmental and other public entities.
Borrowings. Although deposits are the Bank's primary source of funds,
the Bank's policy has been to utilize borrowings when they are a less costly
source of funds, can be invested at a positive interest rate spread or when
the Bank desires additional capacity to fund loan demand.
Forrest City's borrowings historically have consisted of advances
from the FHLB of Dallas upon the security of a blanket collateral agreement of
a percentage of unencumbered loans as well as a pledge of mortgage-backed
securities. See Notes 2 and 8 to Notes to Consolidated Financial Statements
contained in the Company's Annual Report attached hereto as Exhibit 13. Such
advances can be made pursuant to several different credit programs, each of
which has its own interest rate and range of maturities. At June 30, 1997, the
Bank had $18.3 million in advances from the FHLB.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances, securities sold under agreements to
repurchase and other borrowings for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances...................................... $21,535 $16,000 $12,000
Securities sold under agreements to repurchase..... --- 15,500 14,200
Average Balance:
FHLB advances...................................... $19,220 $11,867 $ 4,075
Securities sold under agreements to repurchase..... --- 1,813 7,625
</TABLE>
As the Bank has experienced an outflow of deposits, it has increased
its reliance on advances and other financing arrangements with the FHLB. See
"Management's Discussion and Analysis of Financial Condition and Result of
Operations" contained in the Company's Annual Report attached hereto as
Exhibit 13.
19
<PAGE>
Subsidiary Activities
The Bank is permitted by OCC regulations to invest unlimited amounts
in subsidiaries that are engaged in activities in which the parent bank may
engage. In addition, a national bank may invest limited amounts in
subsidiaries that provide banking services, such as data processing, to other
financial institutions. At June 30, 1997, the Bank had no subsidiaries.
REGULATION
General. The Company is a registered bank holding company, subject to
broad federal regulation and oversight by the FRB. The Bank is a national
bank, the deposits of which are federally insured and backed by the full faith
and credit of the United States Government. Accordingly, the Bank is subject
to broad federal regulation and oversight extending to all its operations by
the OCC, the FDIC and the FRB. The Bank is also a member of the FHLB of
Dallas. The Bank is a member of the SAIF and the deposits of the Bank are
insured by the FDIC.
Certain of these regulatory requirements and restrictions are
discussed below or elsewhere in this document.
Federal Regulation of National Banks
The OCC has extensive authority over the operations of national
banks. As part of this authority, the Bank is required to file periodic
reports with the OCC and is subject to periodic examinations by the OCC. All
national banks are subject to a semi-annual assessment, based upon the bank's
total assets, to fund the operations of the OCC.
The OCC also has extensive enforcement authority over all national
banks, including the Bank. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease-and-desist
or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations
and unsafe or unsound practices. Other actions or inactions may provide the
basis for enforcement action, including misleading or untimely reports filed
with the OCC. Except under certain circumstances, public disclosure of final
enforcement actions by the OCC is required.
The Bank's loans-to-one borrower limit is generally limited to the
greater of 15% of unimpaired capital and surplus or $500,000. At June 30,
1997, the maximum amount which the Bank could have lent under this limit to
any one borrower and the borrower's related entities was approximately
$625,000. At June 30, 1997, the Bank had no loans or groups of loans to
related borrowers with outstanding balances in excess of this amount, except
as described under "Lending Activities."
20
<PAGE>
The OCC, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any
institution which fails to comply with these standards must submit a
compliance plan. A failure to submit a plan or to comply with an approved plan
will subject the institution to further enforcement action. The OCC and the
other federal banking agencies have also proposed additional guidelines on
asset quality and earnings standards. No assurance can be given as to whether
or in what form the proposed regulations will be adopted.
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the United States Government. As
insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any
activity the FDIC determines by regulation or order to pose a serious risk to
the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings associations, after giving the OTS an opportunity to take such
action, and may terminate the deposit insurance if it determines that the
institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The FDIC's deposit insurance premiums are assessed through a
risk-based system under which all insured depository institutions are placed
into one of nine categories and assessed insurance premiums based upon their
level of capital and supervisory evaluation. Under the system, institutions
classified as well capitalized (i.e., a core capital ratio of at least 5%, a
ratio of Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based
capital") of at least 6% and a risk-based capital ratio of at least 10%) and
considered healthy pay the lowest premium while institutions that are less
than adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of
less than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern pay the highest premium. Risk classification
of all insured institutions will be made by the FDIC for each semi-annual
assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than
the designated reserve ratio of 1.25% of SAIF insured deposits. In setting
these increased assessments, the FDIC must seek to restore the reserve ratio
to that designated reserve level, or such higher reserve ratio as established
by the FDIC. The FDIC may also impose special assessments on SAIF members to
repay amounts borrowed from the United States Treasury or for any other reason
deemed necessary by the FDIC.
On September 30, 1996, federal legislation was enacted that required
the SAIF to be recapitalized with a one-time assessment on virtually all
SAIF-insured institutions, such as the Bank, equal to 65.7 basis points on
SAIF-insured deposits maintained by those institutions as of March 31, 1995.
The SAIF special assessment applicable to the Bank, which was paid to the FDIC
in November 1996, was approximately $168,000. This amount was accrued by the
Company at September 30, 1996 by a charge to earnings.
21
<PAGE>
As a result of the SAIF recapitalization, the FDIC has amended its
regulation concerning the insurance premiums payable by SAIF-insured
institutions. For the period October 1, 1996 through December 31, 1996, the
SAIF insurance premium for all SAIF-insured institutions that are required to
pay the Financing Corporation ("FICO") obligation, such as the Bank, was
reduced to a range of 18 to 27 basis points from 23 to 31 basis points per
$100 of domestic deposits. The FDIC further reduced the SAIF insurance premium
to a range of 0 to 27 basis points per $100 of domestic deposits, effective
January 1, 1997. The Bank qualifies for the minimum SAIF assessment.
Additionally, the FDIC has imposed a FICO assessment on SAIF-
assessable deposits for the first semi-annual period of 1997 equal to 6.48
basis points per $100 of domestic deposits, as compared to a FICO assessment
on BIF-assessable deposits for that same period equal to 1.30 basis points per
$100 of domestic deposits.
National Banks. The Bank is subject to the capital regulations of the
OCC. The OCC's regulations establish two capital standards for national banks:
a leverage requirement and a risk-based capital requirement. In addition, the
OCC may, on a case-by-case basis, establish individual minimum capital
requirements for a national bank that vary from the requirements which would
otherwise apply under OCC regulations. A national bank that fails to satisfy
the capital requirements established under the OCC's regulations will be
subject to such administrative action or sanctions as the OCC deems
appropriate.
The leverage ratio adopted by the OCC requires a minimum ratio of
"Tier 1 capital" to adjusted total assets of 3% for national banks rated
composite 1 under the CAMEL rating system for banks. National banks not rated
composite 1 under the CAMEL rating system for banks are required to maintain a
minimum ratio of Tier 1 capital to adjusted total assets of 4% to 5%,
depending upon the level and nature of risks of their operations. For purposes
of the OCC's leverage requirement, Tier 1 capital generally consists of common
stockholders' equity and retained income and certain non-cumulative perpetual
preferred stock and related income, except that no intangibles and certain
purchased mortgage servicing rights and purchased credit card relationships
may be included in capital.
The risk-based capital requirements established by the OCC's
regulations require national banks to maintain "total capital" equal to at
least 8% of total risk-weighted assets. For purposes of the risk-based capital
requirement, "total capital" means Tier 1 capital (as described above) plus
"Tier 2 capital," provided that the amount of Tier 2 capital may not exceed
the amount of Tier 1 capital, less certain assets. The components of Tier 2
capital include certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances
up to a maximum of 1.25% of risk-weighted assets.
The OCC has revised its risk-based capital requirements to permit the
OCC to require higher levels of capital for an institution in light of its
interest rate risk. In addition, the OCC has proposed that a bank's interest
rate risk exposure would be quantified using either the measurement system set
forth in the proposal or the institution's internal model for measuring such
exposure, if such model is determined to be adequate by the institution's
examiner. Small institutions that are highly capitalized and have minimal
interest rate risk, such as the Bank, would
22
<PAGE>
be exempt from the rule unless otherwise determined by the OCC. Management of
the Bank has not determined what effect, if any, the OCC's proposed interest
rate risk component would have on the Bank's capital if adopted as proposed.
Prompt Corrective Action. The OCC is authorized and, under certain
circumstances required, to take certain actions against national banks that
fail to meet their capital requirements. The OCC is generally required to take
action to restrict the activities of an "undercapitalized association"
(generally defined to be one with less than either a 4% core capital ratio, a
4% Tier 1 risked-based capital ratio or an 8% risk-based capital ratio). Any
such association must submit a capital restoration plan and until such plan is
approved by the OCC may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OCC is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized
associations.
Any national banking association that fails to comply with its
capital plan or is "significantly undercapitalized" (i.e., Tier 1 risk-based
or core capital ratios of less than 3% or a risk-based capital ratio of less
than 6%) must be made subject to one or more of additional specified actions
and operating restrictions which may cover all aspects of its operations and
include a forced merger or acquisition of the Bank. An association that
becomes "critically undercapitalized" (i.e., a tangible capital ratio of 2% or
less) is subject to further mandatory restrictions on its activities in
addition to those applicable to significantly undercapitalized associations.
In addition, the OCC must appoint a receiver (or conservator with the
concurrence of the FDIC) for an association, with certain limited exceptions,
within 90 days after it becomes critically undercapitalized. Any
undercapitalized association is also subject to the general enforcement
authority of the OCC, including the appointment of a conservator or a
receiver.
The OCC is also generally authorized to reclassify an association
into a lower capital category and impose the restrictions applicable to such
category if the institution is engaged in unsafe or unsound practices or is in
an unsafe or unsound condition.
The imposition by the OCC of any of these measures on The Bank may
have a substantial adverse effect on the Bank's operations and profitability
and the value of the Company's Common Stock. Such issuance may result in the
dilution in the percentage of ownership of those persons owning the Company's
Common Stock since shareholders do not have preemptive rights.
Limitations on Dividends and Other Capital Distributions
The Bank's ability to pay dividends is governed by the National Bank
Act and OCC regulations. Under such statute and regulations, all dividends by
a national bank must be paid out of current or retained net profits, after
deducting reserves for losses and bad debts. The National Bank Act further
restricts the payment of dividends out of net profits by prohibiting a
national bank from declaring a dividend on its shares of common stock until
the surplus fund equals the amount of capital stock or, if the surplus fund
does not equal the amount of capital stock, until one-tenth of the Bank's net
profits for the preceding half year in the case of quarterly or semi-annual
dividends, or the preceding two half-year periods in the case of annual
dividends, are
23
<PAGE>
transferred to the surplus fund. In addition, the prior approval of the OCC is
required for the payment of a dividend if the total of all dividends declared
by a national bank in any calendar year would exceed the total of its net
profits for the year combined with its net profits for the two preceding
years, less any required transfers to surplus or a fund for the retirement of
any preferred stock.
The OCC has the authority to prohibit the payment of dividends by a
national bank when it determines such payment to be an unsafe and unsound
banking practice. In addition, the Bank would be prohibited by federal statute
and the OCC's prompt corrective action regulations from making any capital
distribution if, after giving effect to the distribution, the Bank would be
classified as "undercapitalized" under the OCC's regulations. See "-- Prompt
Corrective Action." Finally, the Bank would not be able to pay dividends on
its capital stock if its capital would thereby be reduced below the remaining
balance of the liquidation account established in connection with the
Association's Conversion.
Accounting
The OCC requires that investment activities of a national bank be in
compliance with approved and documented investment policies and strategies,
and must be accounted for in accordance with generally accepted accounting
principles ("GAAP"). Accordingly, management must support its classification
of and accounting for loans and securities (i.e., whether held for investment,
sale or trading) with appropriate documentation. The Bank is in compliance
with these requirements.
Federal Securities Law
The stock of the Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company
is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal shareholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System
The FRB requires all depository institutions to maintain non-interest
bearing reserves at specified levels against their transaction accounts
(primarily checking, NOW and Super NOW checking accounts). At June 30, 1997,
the Bank had $93,500 FRB stock, which was in compliance with these reserve
requirements.
24
<PAGE>
National banks are authorized to borrow from the Federal Reserve Bank
"discount window," but FRB regulations require associations to exhaust other
reasonable alternative sources of funds, including FHLB borrowings, before
borrowing from the Federal Reserve Bank.
The Bank is a member of the Federal Reserve System.
Federal Home Loan Bank System
Forrest City is a member of the FHLB of Dallas, which is one of 12
regional FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures
established by the board of directors of the FHLB. These policies and
procedures are subject to the regulation and oversight of the Federal Housing
Finance Board. All advances from the FHLB are required to be fully secured by
sufficient collateral as determined by the FHLB. In addition, all long-term
advances are required to provide funds for residential home financing.
As a member, Forrest City is required to purchase and maintain stock
in the FHLB of Dallas. At June 30, 1997, Forrest City had $1,142,400 in FHLB
stock, which was in compliance with this requirement. In past years, the Bank
has received substantial dividends on its FHLB stock. Over the past five
fiscal years such dividends have averaged 5.06% and were 5.88% for fiscal year
1997.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low and
moderately priced housing programs through direct loans or interest subsidies
on advances targeted for community investment and low- and moderate-income
housing projects. These contributions have affected adversely the level of
FHLB dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of FHLB stock in
the future. A reduction in value of Forrest City's FHLB stock may result in a
corresponding reduction in the Bank's capital.
For the year ended June 30, 1997, dividends paid by the FHLB of
Dallas to Forrest City totaled $64,497, which constitute a $12,787 increase
over the amount of dividends received in fiscal 1996. The $16,866 dividend
received for the quarter ended June 30, 1997 reflects an annualized rate of
6.01%, or .13% above the rate for fiscal 1997.
Federal and State Taxation
Federal Taxation. In addition to the regular income tax,
corporations, including the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum
25
<PAGE>
taxable income. For taxable years beginning after 1986 and before 1996,
corporations, such as the Bank, are also subject to an environmental tax equal
to 0.12% of the excess of alternative minimum taxable income for the taxable
year (determined without regard to net operating losses and the deduction for
the environmental tax) over $2 million.
The Bank files federal income tax returns on a fiscal year basis
using the cash method of accounting. The Company intends to file consolidated
federal income tax returns with the Bank and its subsidiaries.
The Bank has not been audited by the IRS with respect to federal
income within the past three years. With respect to years examined by the IRS,
either all deficiencies have been satisfied or sufficient reserves have been
established to satisfy asserted deficiencies. In the opinion of management,
any examination of still open returns would not result in a deficiency which
could have a material adverse effect on the financial condition of the Bank.
Arkansas Taxation. Forrest City is also subject to the State of
Arkansas income taxation. Net income for purposes of the state corporate
income tax is similar to that for the computation of net income for federal
income tax purposes with certain modifications. Arkansas corporate tax rates
are based on graduated amounts equal to $940 on the first $25,000 of taxable
income, 6% on taxable income above $25,000 and up to $100,000. Should taxable
income exceed $100,000, then the tax is calculated at a rate of 6.5% of the
entire amount.
Arkansas law does not permit net operating loss carrybacks. However,
the period for which net operating losses may be carried forward under the
Arkansas taxation is limited to five years.
Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is
also subject to an annual franchise tax imposed by the State of Delaware.
Competition
Forrest City faces strong competition, both in originating real
estate and other loans and in attracting deposits. Competition in originating
real estate loans comes primarily from commercial banks making loans secured
by real estate located in the Bank's market area. The Bank competes for real
estate and other loans principally on the basis of the quality of services it
provides to borrowers, and loan fees it charges, and the types of loans it
originates.
The Bank attracts all of its deposits through its retail banking
office, primarily from the communities in which that retail banking office is
located; therefore, competition for those deposits is principally from
commercial banks and credit unions located in the same communities. The Bank
competes for these deposits by offering a variety of deposit accounts at
competitive rates and convenient business hours.
26
<PAGE>
The Bank's primary concentration is St. Francis County, Arkansas.
There are five commercial banks and two credit unions in the Bank's market
area. The Bank estimates its share of the savings market in its primary market
area to be approximately 15%.
Employees
At June 30, 1997, the Bank had a total of 19 employees. The Bank's
employees are not represented by any collective bargaining group. Management
considers its employee relations to be good.
Executive Officers of the Company and the Bank Who Are Not Directors
The following table sets forth certain information regarding the
executive officers of the Company and the Bank who are not also a director.
Name Age(1) Position Held With Association and Company
- ---- ------ ------------------------------------------
Kevin S. Jumper 30 Chief Financial Officer, Treasurer and Cashier
Sharon K. Eason 48 Corporate Secretary
John King Casbeer 25 Vice President/Credit
- ---------
(1) At June 30, 1997.
The business experience of the executive officer who is not also a
director is set forth below.
Kevin S. Jumper, age 30, is the Company's and the Bank's Chief
Financial Officer. Prior to joining the Bank he was a Staff Accountant with a
Crittenden, Arkansas, accounting firm from 1989 to 1993, a Controller for an
agricultural equipment sales company from 1994 to 1995, and an Audit Manager
with a Lee, Arkansas accounting firm from 1995 until joining the Bank.
Sharon K. Eason, age 48, is Corporate Secretary of the Company and
the Bank. Ms. Eason has held that position since October 25, 1994. Ms. Eason
has been with the Bank since August, 1989 and is also Secretary to the
President.
John King Casbeer, age 25, is the Company's and the Bank's Vice
President/Credit. Mr. Casbeer was a mortgage loan originator with Federal
Savings Bank in Fayetteville, Arkansas from 1995 until prior to joining the
Bank in February 1997.
Item 2. Description of Properties
The Bank conducts its business at its main office location in its
primary market area. The Bank owns its main office located at 715 North
Washington, Forrest City, Arkansas. This office has total square footage of
6,020 and a book value of $381,000. The total net book value of the Bank's
premises and equipment (including land, building and leasehold improvements
and furniture, fixtures and equipment) at June 30, 1997 was $486,000.
27
<PAGE>
The Bank conducts its data processing through a service bureau. The
net book value of the data processing and computer equipment utilized by the
Bank at June 30, 1997 was $37,000.
Item 3. Legal Proceedings
Forrest City is involved from time to time as plaintiff or defendant
in various legal actions arising in the normal course of its business. While
the ultimate outcome of these proceedings cannot be predicted with certainty,
it is the opinion of management, after consultation with counsel representing
Forrest City in the proceedings, that the resolution of these proceedings
should not have a material effect on Forrest City's financial position or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the year ended June 30, 1997.
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters
Page 52 of the attached 1997 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operation
Pages 4 through 19 of the attached 1997 Annual Report to Stockholders
are herein incorporated by reference.
Item 7. Financial Statements
The following information appearing in the Bank's Annual Report to
Stockholders for the year ended June 30, 1997, is incorporated by reference in
this Annual Report on Form 10-KSB as Exhibit 13.
28
<PAGE>
<TABLE>
<CAPTION>
Pages in
Annual
Annual Report Section Report
- --------------------- ------
<S> <C>
Report of Independent Auditors........................................................................ 20
Consolidated Statements of Financial Condition as of June 30, 1997 and 1996........................... 21
Consolidated Statements of Income for the Years Ended June 30, 1997, 1996 and 1995.................... 22
Consolidated Statements of Changes in Stockholders' Equity for
Years Ended June 30, 1997, 1996 and 1995............................................................. 23
Consolidated Statements of Cash Flows for Years Ended June 30, 1997, 1996 and 1995.................... 24
Notes to Consolidated Financial Statements............................................................ 25 to 51
</TABLE>
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended June 30, 1997, is not deemed
filed as part of this Annual Report on Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change
of accountants and/or reporting disagreements on any matter of accounting
principle or financial statement disclosure.
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act
Directors
Information concerning Directors of the Company is incorporated
herein by reference from the definitive Proxy Statement for the Annual Meeting
of Stockholders to be held in 1997, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
29
<PAGE>
Executive Officers
Information regarding the business experience of the executive
officers of the Company and the Bank contained in Part I of this Form 10-KSB
is incorporated herein by reference.
Compliance with Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10%
of a registered class of the Bank's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of Common
Stock and other equity securities of the Company. Officers, directors and
greater than 10% stockholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no
other reports were required, during the fiscal year ended June 30, 1997, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10 percent beneficial owners were complied with.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein
by reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial
Owners and Management
Information concerning security ownership of certain beneficial
owners and management is incorporated herein by reference from the definitive
Proxy Statement for the Annual Meeting of Stockholders to be held in 1997, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for
the Annual Meeting of Stockholders to be held in 1997, a copy of which will be
filed not later than 120 days after the close of the fiscal year.
30
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Reference to
Prior Filing
or Exhibit
Regulation Number
S-B Exhibit Attached
Number Document Hereto
------ -------- ------
<S> <C> <C>
3(i) Articles of Incorporation, including *
amendments thereto
3(ii) By-Laws *
4 Instruments defining the rights of *
security holders, including debentures
9 Voting Trust Agreement None
10 Executive Compensation Plans and
Arrangements
(a) Employment Contract between *
John R. Stipe and the Bank
(b) 1994 Stock Option and Incentive Plan **
(c) Management Recognition and **
Retention Plan
(d) Employment Contract between
Frankie L. Pratt and the Bank 10(d)
11 Statement re: computation of per None
share earnings
13 Annual Report to Security Holders 13
16 Letter re: change in certifying accountants None
18 Letter re: change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to None
vote of security holders
23 Consents of Experts and Counsel 23
24 Power of Attorney Not required
27 Financial Data Schedule 27
28 Information from reports None
furnished to state insurance
regulatory authorities
99 Additional Exhibits None
</TABLE>
31
<PAGE>
- ---------
* Filed as exhibits to the Company's Form S-1 registration statement filed
on April 25, 1994 (File No. 33-78146) pursuant to Section 5 of the
Securities Act of 1933. All of such previously filed documents are hereby
incorporated herein by reference in accordance with Item 601 of
Regulation S-K.
** Filed as exhibits to Pre-effective Amendment No. Two to the Company's
Form S-1 registration statement filed on June 13, 1994 (File No.
33-78146) pursuant to Section 5 of the Securities Act of 1933. All of
such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three-month period ended
June 30, 1997.
32
<PAGE>
SIGNATURES
In accordance with Section 13 of 15(d) of the Exchange Act, the
Issuer caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FORREST CITY FINANCIAL CORPORATION
Date: September 26, 1997 By: /s/ John R. Stipe
------------------------------ --------------------------------
John R. Stipe
(Duly Authorized Representative)
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the Issuer and in the capacities
and on the dates indicated.
By: /s/ Ted C. Parker By: /s/ John R. Stipe
------------------------------ --------------------------------
Ted C. Parker, Chairman of the John R. Stipe, President, Chief
Board Executive Officer and Director
(Principal Executive and
Operating Officer)
Date: September 26, 1997 Date: September 26, 1997
------------------------------ --------------------------------
By: /s/ Billy M. Cline By: /s/ John C. Beane, Jr.
------------------------------ --------------------------------
Billy M. Cline, Director John C. Beane, Jr., Director
Date: September 26, 1997 Date: September 26, 1997
------------------------------ --------------------------------
By: /s/ Steven K. Cranford By: /s/ Diana S. Arwood
------------------------------ --------------------------------
Steven K. Cranford, Director Diana S. Arwood, Director
Date: September 26, 1997 Date: September 26, 1997
------------------------------ --------------------------------
By: /s/ Kevin S. Jumper By: /s/ Frankie L. Pratt
------------------------------ --------------------------------
Kevin S. Jumper, Chief Financial Frankie L. Pratt, Director and
Officer and Treasurer Executive Vice President
(Chief Financial and Accounting
Officer)
Date: September 26, 1997 Date: September 26, 1997
------------------------------ --------------------------------
33
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this 7th day of February, 1997, by and between FORREST CITY BANK, NA, 715
North Washington, Forrest City, Arkansas (hereinafter referred to as the
"Bank"), and Frankie L. Pratt (the "Employee").
WHEREAS, the Employee has been employed as Executive Vice President.
WHEREAS, the Board of Directors of the Bank recognizes that, as is the
case with publicly held corporations generally, the possibility of a change in
control of Forrest City Financial Corporation (the "Holding Company") and/or
the bank may exist and that such possibility, and the uncertainty and
questions which it may raise among management, may result in the departure or
distraction of key management personnel to the detriment of the Bank, the
Holding Company and its stockholder; and
WHEREAS, the Board of Directors of the Bank believes it is in the best
interest of the Bank to enter into this Agreement with the Employee in order
to assure continuity of management of the Bank and to reinforce and encourage
the continued attention and dedication of the Employee to his assigned duties
without distraction in the face of potentially disruptive circumstances
arising from the possibility of a change in control of the Holding Company,
although no such change is now contemplated; and
WHEREAS, the Board of Directors of the Bank has approved and authorized
the execution of this Agreement with the Employee to take effect as stated in
Section 4 hereof;
NOW THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. Employment. The Employee is employed as the Executive Vice President
of the Bank. As Executive Vice President, Employee shall render administrative
and management services as are customarily performed by persons situated in
similar executive capacities, and shall have other powers and duties as may
from time to time be prescribed by the Board, provided that such duties are
consistent with the Employee's position as Executive Vice President. The
Employee shall continue to devote his best efforts and substantially all his
business time and attention to the business and affairs of the Bank and its
subsidiaries and affiliated companies.
2. Compensation.
a. Salary. The Bank agrees to pay the Employee during the term of
this Agreement a salary established by the Board of Directors. The salary
hereunder as of the Commencement Date (as defined in Section 4 hereof) shall
be $65,000 per year. The Employee's salary shall be payable not less
frequently than monthly and not later than the tenth day following the
expiration of the month in question. The amount of the Employee's salary shall
be reviewed by the Board of Directors not less often than annually, beginning
not later than the date one year after the Commencement Date (as defined in
Section 4 hereof). Any adjustments in salary or other compensation shall in no
way limit or reduce any other obligation of the Bank hereunder. The Employee's
salary in effect hereunder from time to time shall not thereafter be reduced.
b. Discretionary Bonuses. The Employee shall be entitled to
participate in an equitable manner with all other executive officers of the
Bank in discretionary bonuses as authorized and declared by the Board of
Directors of the Bank to its executive employees. No other compensation
provided for in this Agreement shall be deemed a substitute for the Employee's
right to participate in such bonuses when and as declared by the Board of
Directors.
<PAGE>
c. Expenses. During the term of his employment hereunder, the
Employee shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by him (in accordance with policies and procedures at least
as favorable to the Employee as those presently applicable to the senior
executive officers of the Bank) in performing services hereunder, provided
that the Employee properly accounts therefor in accordance with Bank policy.
3. Benefits.
(a) Participation in Retirement and Employee Benefit Plans. The
Employee shall be entitled while employed hereunder to participate in, and
receive benefits under, all plans relating to pension, thrift, profit-sharing,
group life insurance, medical coverage, education, cash bonuses, and other
retirement or employee benefits or combinations thereof, that are maintained
for the benefit of the Bank's executive employees or for its employees
generally.
(b) Fringe Benefits. The Employee shall be eligible while employed
hereunder to participate in, and receive benefits under, any other fringe
benefit plans which are or may become applicable to the Bank's executive
employees or to its employees generally.
(c) Term. The term of employment under this Agreement shall be a
period of three years. Beginning on the first anniversary of the Commencement
Date, and on each anniversary thereafter, the term of employment under this
Agreement shall be extended for a period of one year in addition to the then-
remaining term of employment under this Agreement, unless either the Bank or
the Employee gives contrary written notice to the other not less than 90 days
in advance of the date on which the term of employment under this Agreement
would otherwise be extended, provided that such term will not be automatically
extended unless, prior thereto, the Board of Directors of the Bank reviews a
formal performance evaluation of the Employee performed by disinterested
members of the Board of Directors of the Bank and reflected in the minutes of
the Board of Directors. Reference herein to the term of employment under this
Agreement shall refer to both such initial term and such extended terms.
5. Vacations. The Employee shall be entitled, without loss of pay, to
absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time, provided
that:
(a) the Employee shall be entitled to an annual vacation of not less
than two (2) weeks per year;
(b) the timing of vacations shall be scheduled in a reasonable manner
by the Employer; and
(c) solely at the Employee's request, the Board of Directors shall be
entitled to grant to the Employee a leave or leaves of absence with or without
pay at such time or times and upon such terms and conditions as the Board, in
its discretion, may determine.
6. Termination of Employment; Death.
(a) The Bank's Board of Directors may terminate the Employee's
employment at any time, but any termination by the Bank's Board of Directors
other than termination for cause, shall not prejudice the Employee's right to
compensation or other benefits under this Agreement. If the employment of the
Employee is involuntarily terminated, other than for "cause" as provided in
this Section 6(a) or pursuant to any of Sections 6(d) through 6(g), or by
reason of death or disability as provided in Sections 6(c) or 7, the Employee
shall be entitled to (i) his then applicable salary for the then-remaining
term of the Agreement as calculated in accordance with Section 4 hereof,
payable in such manner and at such times as such salary would have been
payable to the Employee under Section 2 had he remained in the employ of the
Bank, and (ii) health insurance benefits as maintained by the Bank for the
benefit of its senior
<PAGE>
executive employees or its employees generally over the then-remaining term of
the Agreement as calculated in accordance with Section 4 hereof.
The terms "termination" or "involuntarily terminated" in this Agreement
shall refer to the termination of the employment of Employee without his
express written consent. In addition, a material diminution of or interference
with the Employee's duties, responsibilities and benefits as Executive Vice
President of the Bank shall be deemed and shall constitute an involuntary
termination of employment to the same extent as express notice of such
involuntary termination. Any of the following actions shall constitute such
diminution or interference unless consented to in writing by the Employee: (1)
a change in the principal workplace of the Employee to a location outside of a
30 mile radius from the Bank's headquarters office as of the date hereof; (2)
a material demotion of the Employee, a material reduction in the number of
seniority of other Bank personnel reporting to the Employee, or a material
reduction in the frequency with which, or in the nature of the matters with
respect to which, such personnel are to report to the Employee, other than as
part of a Bank or Holding Company-wide reduction in staff; (3) a reduction or
adverse change int he salary, perquisites, benefits, contingent benefits or
vacation time which had theretofore been provided to the Employee, other than
as part of an overall program applied uniformly and with equitable effect to
all members of the senior management of the Bank or the Holding Company; and
(4) material increase in the required hours of work or the workload of the
Employee.
In case of termination of the Employee's employment for cause, the
Bank shall pay the Employee his salary through the date of termination, and
the Bank shall have no further obligation to the Employee under this
Agreement. For purposes of this Agreement, termination for "cause" shall
include termination for personal dishonesty, incompetence, willful misconduct,
breach of a fiduciary duty involving personal profit, intentional failure to
perform stated duties, willful violation of any law, rule, or regulation
(other than traffic violations or similar offenses) or final cease-and-desist
order, or material breach of any provision of this Agreement. Notwithstanding
the foregoing, the Employee shall not be deemed to have been terminated for
cause unless and until there shall have been delivered to the Employee a copy
of a resolution, duly adopted by the affirmative vote of not less than a
majority of the entire membership of the Board of Directors of the Bank at a
meeting of the Board called and held for such purpose (after reasonable notice
to the Employee and an opportunity for the Employee, together with the
Employee's counsel, to be heard before the Board), stating that in the good
faith opinion of the Board the Employee as guilty of conduct constituting
"cause" as set forth above and specifying the particulars thereof in detail.
(b) The Employee's employment may be voluntarily terminated by the
Employee at any time upon 90 days written notice to the Bank or upon such
shorter period as may be agreed upon between the Employee and the Board of
Directors of the Bank. In the event of such voluntary termination, the Bank
shall be obligated to continue to pay the Employee his salary and benefits
only through the date of termination, at the time such payments are due, and
the Bank shall have no further obligation to the Employee under this
Agreement.
(c) In the event of the death of the Employee during the term of
employment under this Agreement and prior to any termination hereunder, the
Employee's estate, or such person as the Employee may have previously
designated in writing, shall be entitled to receive from the Bank the salary
of the Employee through the last day of the calendar month in which is death
shall have occurred, and the term of employment under this Agreement shall end
on such last day of the month.
(d) If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA"), 12
U.S.C. ss. 1818(e)(3) and (g)(1), the Bank's obligations under this Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings.
<PAGE>
If the charges in the notice are dismissed, the Bank may in its discretion (i)
pay the Employee all or part of the compensation withheld while its
obligations under this Agreement were suspended and (ii) reinstate in whole or
in part any of its obligations which were suspended.
(e) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the FDIA, 12 U.S.C. ss. 1818(e)(4) and (g)(1),
all obligations of the Bank under this Agreement shall terminate as of the
effective date of the order, but vested rights of the contracting parties
shall not be affected.
(f) If the Bank is in default (as defined in Section 3(x)(1) of the
FDIA), all obligations under this Agreement shall terminate as of the date of
default, but this provision shall not affect any vested rights of the
contracting parties.
(g) All obligations under this Agreement shall be terminated, except
to the extent determined that continuation of this Agreement is necessary for
the continued operation of the Bank: (i) by the Director of the Office of the
Comptroller of the Currency (the "Director") or his or her designee, at the
time the Federal Deposit Insurance Corporation ("FDIC") enters into an
agreement to provide assistance to or on behalf of the Bank under the
authority contained in Section 13(c) of the FDIA; or (ii) by the Director or
his or her designee, at the time the Director or his or her designee approves
a supervisory merger to resolve problems related to operation of the Bank or
when the Bank determined by the Director to be in an unsafe or unsound
condition. Any rights of the parties that have already vested, however, shall
not be affected by any such action.
(h) In the event the Bank purports to terminate the Employee for
cause, but it is determined by a court of competent jurisdiction or by an
arbitrator pursuant to Section 17 that cause did not exist for such
termination, or if in any event it is determined by an such court or
arbitrator that the Bank has failed to make timely payment of any amounts owed
to the Employee under this Agreement, the Employee shall be entitled to
reimbursement for all reasonable costs, including attorney's fees, incurred in
challenging such termination or collecting such amounts. Such reimbursement
shall be in addition to all rights to which the Employee is otherwise entitled
under this Agreement.
7. Disability. If the Employee shall become disabled as defined in the
Bank's then current disability plan or if the Employee shall be otherwise
unable to serve as Executive Vice President, the Employee shall be entitled to
receive group and other disability income benefits of the type then provided
by the Bank for other executive employees.
8. Change in Control.
(a) Involuntary Termination. If the Employee's employment is
voluntarily terminated (other than for cause or pursuant to any of Sections
6(c) through 6(g) or Section 7 of this Agreement) in connection with or within
12 months after a change in control which occurs at any time during the term
of employment under this Agreement, in addition to its obligations under
Section 6(a) of this Agreement, the Bank shall pay to the Employee in a lump
sum in cash within 25 business days after the Date of Termination (as
hereinafter defined) of employment an amount equal to 299% of the Employee's
"base amount" of compensation as defined in Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), subject to reduction under
Section 9 of this Agreement.
(b) Definitions. For purposes of Section 8, 9 and 11 of this
Agreement, "Date of Termination" means the earlier of (i) the date upon which
the Bank gives notice to the Employee of the termination of his employment
with the Bank or (ii) the date upon which the Employee ceases to serve as an
Employee of the Bank and "change in control" is defined solely as any
acquisition of control (by a trustee or other fiduciary holding securities
under an employee benefit
<PAGE>
plan of the Holding Company or a subsidiary of the Holding Company), as
defined in 12 C.F.R. ss. 574.4, or any successor regulation, of the Bank or
Holding Company which would require the filing of an application for
acquisition of control or notice of change in control in a manner as set forth
in 12 C.F.R. ss. 574.3, or any successor regulation.
9. Certain Reduction of Payments by the Bank
(a) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any payment or distribution by the Bank
to or for the benefit of the Employee (whether paid or payable or distributed
or distributable pursuant to the terms of this Agreement or otherwise) (a
"Payment") would be nondeductible (in whole or in part) by the Bank for
Federal income tax purposes because of Section 280G of the Code, then the
aggregate present value of amounts payable or distributable to or for the
benefit of the Employee pursuant to this Agreement (such amounts payable or
distributable pursuant to this Agreement are hereinafter referred to as
"Agreement Payments") shall be reduced to the Reduced Amount. The "Reduced
Amount" shall be an amount, not less than zero, expressed in present value
which maximizes the aggregate present value of Agreement Payments without
causing any Payment to be nondeductible by the Bank because of Section 280G of
the Code. For purposes of this Section 9, present value shall be determined in
accordance with Section 280G(d)(4) of the Code.
(b) All determinations required to be made under this Section 9 shall
be made by the Bank's independent auditors, or at the election of such
auditors by such other firm or individuals of recognized expertise as such
auditors may select (such auditors or, if applicable, such other firm or
individual, are hereinafter referred to as the "Advisory Firm"). The Advisory
Firm shall within ten business days of the Date of Termination, or at such
earlier time as is requested by the Bank, provide to both the Bank and the
Employee an opinion (and detailed supporting calculations) that the Bank has
substantial authority to deduct for federal income tax purposes the full
amount of the Agreement Payments and that the Employee has substantial
authority not to report on his federal income tax return any excise tax
imposed by Section 4999 of the Code with respect to the Agreement Payments.
Any such determination and opinion by the Advisory Firm shall be binding upon
the Bank and the Employee. The Employee shall determine which and how much, if
any, of the Agreement Payments shall be eliminated or reduced consistent with
the requirements of this Section 9, provided that, if the Employee does not
make such determination within ten business days of the receipt of the
calculations made by the Advisory Firm, the Bank shall elect which and how
much, if any, of the Agreement Payments shall be eliminated or reduced
consistent with the requirements of this Section 9 and shall notify the
Employee promptly of such election. Within five business days of the earlier
of (i) the Bank's receipt of the Employee's determination pursuant to the
immediately preceding sentence of this Agreement or (ii) the Bank's election
in lieu of such determination, the Bank shall pay to or distribute to or for
the benefit of the Employee such amounts as are then due the Employee under
this Agreement. The Bank and the Employee shall cooperate fully with the
Advisory Firm, including without limitation providing to the Advisory Firm all
information and materials reasonably requested by it, in connection with the
making of the determinations required under this Section 9.
(c) As a result of uncertainty in application of Section 280G of the
Code at the time of the initial determination by the Advisory Firm hereunder,
it is possible that Agreement Payments will have been made by the Bank which
should not have been made ("Overpayment") or that additional Agreement
Payments will not have been made by the Bank which should have been made
("Underpayment"), in each case, consistent with the calculations required to
be made hereunder. In the event that the Advisory Firm, based upon the
assertion by the Internal Revenue Service against the Employee of a deficiency
which the Advisory Firm believes has a high probability of success determines
that an Overpayment has been made, any such Overpayment paid or distributed by
the Bank to or for the benefit of Employee shall be treated for all purposes
as a loan ab initio which the Employee shall repay to the Bank together with
interest at the applicable federal rate
<PAGE>
provided for in Section 7872(f)(2) of the Code; provided, however, that no
such loan shall be deemed to have been made and no amount shall be payable by
the Employee to the Bank if and to the extent such deemed loan and payment
would not either reduce the amount on which the Employee is subject to tax
under Section 1 and Section 4999 of the Code or generate a refund of such
taxes. In the event that the Advisory Firm, based upon controlling precedent
or other substantial authority, determines that an Underpayment has occurred,
any such Underpayments shall be promptly paid by the Bank to or for the
benefit of the Employee together with interest at the applicable federal rate
provided for in Section 7872(f)(2) of the Code.
(d) The total of payments to the Employee under Section 6(a) and
Section 8(a) shall not exceed three times his average compensation from the
Bank over the five most recent taxable years (or, if employed by the Bank for
a shorter period, over the period of his employment by the Bank).
(e) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
1828(k) and any regulations promulgated thereunder.
10. No Mitigation. The Employee shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this
Agreement by seeking other employment or otherwise, nor shall the amount of
any payment or benefit provided for in this Agreement be reduced by any
compensation earned by the Employee as the result of employment by another
employer, by retirement benefits after the date of termination or otherwise.
11. No Assignments.
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations
hereunder without first obtaining the written consent of the other party;
provided, however, that the Bank will require any successor or assign (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Bank, by an assumption
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Bank would be required to perform it if no such succession or
assignment had taken place. Failure of the Bank to obtain such an assumption
agreement prior to the effectiveness of any such succession or assignment
shall be a breach of this Agreement and shall entitle the Employee to
compensation from the Bank in the same amount and on the same terms as the
compensation pursuant to Section 8(a) hereof. For purposes of implementing the
provisions of this Section 11(a), the date on which any such succession
becomes effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall
insure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Employee should die while any
amounts would still be payable to the Employee hereunder if the Employee had
continued to live, all such amounts unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Employee's devisee,
legatee or other designee or if there is no such designee, to the Employee's
estate.
12. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid. All notices to the Bank shall
be sent to its home office, directed to the attention of the Board of
Directors of the Bank, with a copy to the Secretary of the Bank. All notices
to the Employee shall be sent to the home or other address he has most
recently provided in writing to the Bank.
<PAGE>
13. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein
otherwise provided. The parties hereto agree to amend this Agreement to comply
with any required provisions of 12 C.F.R. ss. 563.39(b), as the same may be
amended.
14. Paragraph Headings. The paragraph headings used in this Agreement are
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
15. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State
of Arkansas.
17. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED
BY THE PARTIES.
FORREST CITY BANK, NA
BY:/s/ Ted C. Parker
--------------------------
Ted C. Parker, Chairman
EMPLOYEE:
/s/ Frankie L. Pratt
--------------------------
Frankie L. Pratt
<PAGE>
- -------------------------------------------------------------------------------
1997 ANNUAL REPORT
- -------------------------------------------------------------------------------
FORREST CITY FINANCIAL CORPORATION
<PAGE>
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
President's and Chairman's Message............................... 1
Selected Financial Information................................... 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 4
Independent Auditor's Report.....................................20
Financial Statements.............................................21
Stockholder Information..........................................52
Corporate Information............................................53
i
<PAGE>
[FORREST CITY FINANCIAL CORPORATION LETTERHEAD]
September 26, 1997
Dear Stockholder:
We are pleased to present to you the Company's results for the year
ended June 30, 1997, during which assets increased by almost $3.9 million to
$55.8 million, or 7.5% loans receivable increased to $35.5 million, or 16.8%,
and net interest income increased $374,000 to $1.64 million compared to $1.27
million fiscal 1996.
Another milestone for the Company was the one-time assessment levied
by the Savings Association Fund on all its members nationwide. This assessment
cost the Bank $168,000; absent the assessment the Company's net income would
have been $301,000, as opposed to $230,000. However, since the assessment was
imposed, the Bank's insurance premiums have decreased substantially, paving
the way for improvements on a going-forward basis.
Your Board and management are committed to continue building value in
the Company. We completed the charter conversion of our subsidiary thrift,
Forrest City Bank, to a national bank during fiscal 1997. As a result, the
Board and management believe that the Company is now in a better position to
continue to be an organization which builds family financial relationships and
demonstrates commitment to our customers and to the communities we serve.
On behalf of all of us at the Company and Forrest City Bank, National
Association, we thank you for your support of and your investment in Forrest
City Financial Corporation.
Sincerely,
John R. Stipe Ted C. Parker
President and Chief Executive Officer Chairman of the Board
1
<PAGE>
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets............................................... $55,800 $51,901 $45,019 $ 35,119 $ 33,943
Loans receivable, net...................................... 35,506 30,419 20,614 18,410 16,406
Cash and cash equivalents.................................. 1,356 1,253 1,348 1,142 1,276
Securities available for sale.............................. 6,089 8,324 --- --- ---
Securities held to maturity................................ 8,331 9,760 21,378 14,039 15,015
Deposits................................................... 31,634 26,956 25,452 26,920 28,252
Total borrowings........................................... 18,271 19,312 14,000 5,700 3,400
Stockholders' equity - substantially restricted............ 5,147 4,984 5,008 2,091 1,932
Year Ended June 30,
------------------------------------------------------
1997 1996 1995 1994 1993
------- ------ ------- ------ -----
(Dollars in Thousands)
Selected Operations Data:
Total interest income................................................. $4,150 $3,539 $2,821 $2,263 $ 2,375
Total interest expense................................................ 2,505 2,268 1,801 1,305 1,447
------ ------ ------- ------- -------
Net interest income................................................. 1,645 1,271 1,020 958 928
Provision for loan losses............................................. 95 19 12 18 16
------- ------- ------- -------- --------
Net interest income after provision for loan losses................. 1,550 1,252 1,007 940 912
Non-interest income:
Loan fees and service charges....................................... $ 234 $ 116 $ 62 $ 57 $ 49
Gain (loss) on sales of loans, mortgage-
backed securities and investment securities........................ 10 26 --- --- ---
Other non-interest income........................................... 47 4 9 18 44
-------- -------- -------- -------- --------
Total non-interest income......................................... 291 146 71 75 93
-------- ------- -------- ------- --------
Total non-interest expense........................................ 1,450 1,034 885 756 678
------- ------ -------- ------- --------
Income (loss) before income taxes................................... 391 364 194 259 327
Income tax expense (benefit)........................................ 161 110 47 100 86
-------- ------ -------- ------- -------
Net income (loss)................................................... $ 230 $ 254 $ 147 $ 159 $ 241
======= ====== ======= ======= =======
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
1997(3) 1996 1995 1994(3) 1993(3)
--------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total assets)............. .43% .52% .37% .46% .72%
Interest rate spread information:
Average during period..................................................... 2.67 2.26 2.02 2.65 2.71
End of period............................................................. 2.93 2.62 1.84 2.61 3.07
Net interest margin(1)..................................................... 3.10 2.73 2.51 2.85 2.86
Ratio of operating expense to average total assets......................... 2.69 2.13 2.21 2.19 2.00
Return on stockholders' equity (ratio of net income to average equity)..... 4.54 5.07 4.14 7.92 13.30
Quality Ratios:
Non-performing assets to total assets, at end of period(2).................. .54 .88 .43 .83 .53
Allowance for loan losses to non-performing loans........................... 319.34 84.76 518.04 174.14 255.61
Capital Ratios:
Retained earnings to total assets, at end of year........................... 9.22 9.60 11.13 5.95 5.69
Average retained earnings to average assets................................. 9.41 10.31 8.86 5.83 5.44
Ratio of average interest-earning assets to
average interest-bearing liabilities....................................... 110.30 110.03 107.65 103.92 103.18
Number of full-service offices............................................... 1 1 1 1 1
</TABLE>
- ------------------
(1) Net interest income divided by average interest-earning assets.
(2) Non-performing assets consist of non-accruing loans, accruing loans
past-due 90 or more days and real estate owned.
(3) Does not reflect proceeds from the Bank's conversion to stock form and
stock issuance by Forrest City Financial Corporation which was completed
on July 28, 1994. For further information, see Note 13 of the Notes to
Financial Statements.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forrest City Financial Corporation (the "Company") was formed in April
1994 by Forrest City Savings and Loan Association (the "Association") to
become the thrift institution holding company of the Association. The
acquisition of the Association by the Company was consummated on July 28, 1994
in connection with the Association's conversion from the mutual to the stock
form (the "Conversion"), which occurred after the end of the Association's
fiscal year on June 30, 1994. During fiscal 1995, the Association changed its
name to Forrest City Bank, FSB. During fiscal 1997, the Bank converted its
charter from a federal savings bank to a national bank under the title
"Forrest City Bank, National Association" (the "Bank").
The Bank's results of operations are primarily dependent upon the
difference (or "spread") between the average yield earned on loans,
mortgage-backed securities and investments and the average rate paid on
deposits and borrowings (if any), as well as the relative amounts of such
assets and liabilities. The interest rate spread is affected by regulatory,
economic and competitive factors that influence interest rates, loan demand
and deposit flows. The Bank, like other thrift institutions, is subject to
interest-rate risk to the degree that its interest-earning assets mature or
reprice at different times, or on a different basis, than its interest-bearing
liabilities.
The Bank's results of operation are also affected by, among other things,
provision for loan losses, loan servicing income and other service charges,
subsidiary income, operating expenses (including real estate operations) and
income taxes. The Bank's operating expenses principally consist of employee
compensation and benefits, occupancy expenses, federal deposit insurance
premiums and other general and administrative expenses.
The Bank is significantly affected by prevailing economic conditions
including federal monetary and fiscal policies as well as by federal
regulation of financial institutions. Deposit balances are influenced by a
number of factors including interest rates paid on competing personal
investments and the level of personal income and savings within the
institution's market area. In addition, deposit balances are influenced by the
perceptions of customers regarding the stability of the financial services
industry. Lending activities are influenced by the demand for housing as well
as competition from other lending institutions. The primary sources of funds
for lending activities include deposits, loan payments, borrowings and funds
provided from operations.
Financial Condition
June 30, 1997 compared to June 30, 1996. Total assets of the Bank
increased by approximately $3.9 million or 7.5% in the fiscal year ending June
30, 1997 from $51.9 million in fiscal 1996 to $55.8 million in fiscal 1997.
The increase was primarily reflective in increases in loans receivable of $5.1
million and Federal Home Loan Bank and Federal Reserve Bank stock of $253,000
offset by a decrease in investment securities of $1.7 million.
4
<PAGE>
Liabilities increased $3.7 million or 8.0% from $46.9 million at June 30,
1996 to $50.7 million at June 30, 1997. During the period, there was a net
increase in deposits of $4.7 million or 17.4% from $26.9 million at June 30,
1996 to $31.6 million at June 30, 1997 and were primarily used to fund the
Bank's origination of loans and purchase of participations. Borrowed funds
decreased $1.0 million or 5.4% from $19.3 million at June 30, 1996 to $18.3
million at June 30, 1997.
Stockholders' equity increased by $163,000 from fiscal 1996 to fiscal
1997. The increase was primarily attributable to the Company's earnings net of
treasury stock acquired through the stock repurchase program.
Total loan originations increased by $100,000 to $13.5 million in fiscal
1997 compared to $13.4 million in fiscal 1996. Purchases of mortgage-backed
securities totaled $2.4 million in fiscal 1997 compared to $3.6 million in
fiscal 1996. Purchase of participations and whole loans purchased were $1.2
million in fiscal 1997 compared to $2.6 million in fiscal 1996. Principal
repayments on mortgage-backed securities totaled $2.7 million in fiscal 1997
compared to $4.1 million in fiscal 1996. There was a net increase in loans,
participations, and mortgage-backed securities of $3.5 million in fiscal 1997
compared to a net increase of $7.0 million in fiscal 1996. Overall, the Bank
realized an decrease in mortgage loan originations of $700,000 in fiscal 1997
compared to fiscal 1996 and an increase in consumer lending of $600,000 for
the same period. The Bank has increased its efforts in the consumer lending
area through several lending programs. Increased activity in consumer lending
is expected to increase interest margins as the rate charged on these types of
loans are generally higher and with shorter maturities than mortgage lending.
June 30, 1996 compared to June 30, 1995. Total assets of the Bank
increased by approximately $6.9 million or 15.3% in the fiscal year ending
June 30, 1996 from $45.0 million in fiscal 1995 to $51.9 million in fiscal
1996. The increase was primarily reflective in increases in loans receivable
of $9.8 million and Federal Home Loan Bank stock of $443,000 offset by a
decrease in investment securities of $3.2 million.
Liabilities increased $6.9 million or 17.2% from $40.0 million at June 30,
1995 to $46.9 million at June 30, 1996. During the period, there was a net
increase in deposits of $1.5 million or 5.9% from $25.4 million at June 30,
1995 to $26.9 million at June 30, 1996. Borrowed funds increased $5.3 million
or 37.9% from $14.0 million at June 30, 1995 to $19.3 million at June 30, 1996
and were primarily used to fund the Bank's origination of loans and purchase
of participations.
Stockholders' equity decreased by $24,400 from fiscal 1995 to fiscal 1996.
The decrease was primarily attributable to the Company's stock repurchase
program.
Total loan originations increased by $7.2 million to $13.4 million in
fiscal 1996 compared to $6.2 million in fiscal 1995. Purchases of
mortgage-backed securities totaled $3.6 million in fiscal 1996 compared to
$8.4 million in fiscal 1995. Purchase of participations and whole loans
purchased were $2.6 million in fiscal 1996 compared to none in fiscal 1995.
Principal repayments on mortgage-backed securities totaled $4.1 million in
fiscal 1996 compared to $2.0 million in fiscal 1995. There was a net increase
in loans, participations, and mortgage-backed securities of $7.0 million in
fiscal 1996 compared to a net increase of $8.5 million in fiscal 1995.
Overall, the Bank realized an increase in mortgage loan originations of $5.4
million in fiscal 1996 compared to fiscal 1995 and an increase
5
<PAGE>
in consumer lending of $1.9 million for the same period. The Bank has
increased its efforts in the consumer lending area through several lending
programs. Increased activity in consumer lending is expected to increase
interest margins as the rate charged on these types of loans are generally
higher and with shorter maturities than mortgage lending.
Results of Operation
The Bank's results of operations depend primarily on the level of its net
interest income and non-interest income and its control of operating expenses.
Net interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
The Bank's non-interest income consists primarily of fees charged on
transaction accounts and the origination of loans which help to offset the
costs associated with establishing and maintaining these deposits and loan
accounts.
Comparison of Fiscal Years Ended June 30, 1997 and June 30, 1996
General. The Bank had net income of $230,000 or $1.16 per share, for the
year ended June 30, 1997, as compared with $254,000 or $1.25 per share, for
the same period ended June 30, 1996. The decrease in the Company's net income
was attributable primarily to the payment by the Company of the one-time
assessment imposed by the Savings Association Insurance Fund. Absent this
payment of $168,000, the Company's net income, adjusted for taxes, would have
been $301,000, or $1.52 per share. Interest income increased by $611,000 or
17.3% to $4.1 million in fiscal 1997 compared to $3.5 million in fiscal 1996.
Interest expense increased by $237,000 or 10.4% to $2.5 million in fiscal 1997
compared to $2.3 million in fiscal 1996. As a result of a greater increase in
yields on average interest earning assets compared to a decrease in yields on
interest bearing liabilities, net interest income reported by the Bank
increased.
Net Interest Income. Net interest income totaled $1.64 million for the
year ended June 30, 1997, compared to $1.27 million for the year ended June
30, 1996, or an increase of $374,000, or 29.4%. The yield on average
interest-earning assets increased .23% to 7.82% in fiscal 1997 compared to
7.59% in fiscal 1996 while the yield on average interest bearing liabilities
decreased .18% to 5.15% in fiscal 1997 compared to 5.33% in fiscal 1996. The
greater increase in yields on interest earning assets over the decrease in
yield on interest bearing liabilities resulted in an increase in the net
interest rate spread. In addition to this increase, net average interest
earning assets were $4.4 million during fiscal 1997 compared to $4.10 million
in fiscal 1996 or an increase of $.3 million or 7.6%. The increase in interest
income was primarily attributable to an increase in the volume of
interest-earning assets, while the lesser increase in interest expense was
also primarily attributable to an increase in the volume of interest-bearing
liabilities.
Interest income on loans increased to $2.88 million during the year ended
June 30, 1997 from $2.14 million for the same period ended June 30, 1996. The
increase is primarily due to an increase in the average loan portfolio balance
for fiscal 1997 compared to fiscal 1996 which was enhanced by an increase in
average yields of 8.79% in fiscal 1997 compared to 8.72% in fiscal 1996.
6
<PAGE>
Interest income on mortgage-backed securities decreased to $1.01 million
from $1.14 million for the years ended June 30, 1997 and 1996, respectively.
The decrease was primarily due to a decrease in average outstanding balances
of $2.3 million for these securities in fiscal 1997 compared to fiscal 1996
offset by a slight increase of .08% in average yield for the period.
Interest expense increased $237,000, or 10.4%, from $2.27 million for the
year ended June 30, 1996, to $2.50 million for the year ended June 30, 1997.
This increase was primarily due to increased borrowings during fiscal 1997
compared to 1996. The average outstanding balance of the Bank's borrowings
increased from $16.0 million in fiscal 1996 to $19.2 million in fiscal 1997.
These borrowings were principally used to fund the Bank's lending activities.
The cost of funds remained stable at an average of 5.80% to 5.79% in fiscal
1996 and 1997, respectively. The Bank experienced an increase in deposit
balances during the fiscal year 1997. The average balance of deposit accounts
were $29.44 million and $26.47 million for fiscal years 1997 and 1996,
respectively. The average cost of deposits decreased to 4.72% for the year
ended June 30, 1997 compared to 5.06% for the year ended June 30, 1996. The
volume increase and rate decrease resulted in an increase in interest expense
on deposit accounts of $53,000 to $1.39 million for the year ended June 30,
1997 compared to $1.34 million for the year ended June 30, 1996.
Net interest income increased $374,000, or 29.4%, for the year ended June
30, 1997, as compared to the year ended June 30, 1996. The increase was
primarily a result of a greater increase in average interest earning assets
than interest bearing liabilities.
Provision for Loan Losses. The Bank's provision for loan losses was
$94,800 for the year ended June 30, 1997 as compared to $19,300 in 1996.
The Bank continues to monitor and adjust its allowance for loan losses as
management's analysis of its loan portfolio and economic conditions dictate.
The Bank believes it has taken an appropriate approach toward reserve levels,
consistent with the Bank's loss experiences and considering, among other
factors, the composition of the Bank's loan portfolio, the level of it's
classified and non-performing assets and their estimated value. Future
additions to the Bank's allowance for loan losses and any change in the
related ratio of the allowance for loan losses to non-performing loans are
dependent upon the economy, changes in real estate values and interest rates.
In addition, federal agencies may require additional reserves as a result of
their examination of the Bank. The allowance for loan losses reflects what the
Bank currently believes is an adequate level of reserves, although there can
be no assurance that future losses will not exceed the estimated amounts,
thereby adversely affecting future results of operations.
Non-performing assets decreased to $299,000, or .54%, of total assets at
June 30, 1997 compared to $456,000, or .88%, of total assets at June 30, 1996.
The decrease in non-performing loans was a result of an decrease in
non-accrual loans over 90 days delinquent at June 30, 1997. The allowance for
loan losses was $263,000, or .74%, of loans receivable, net at June 30, 1997
compared to $263,000, or .86%, of loans receivable, net at June 30, 1996.
Non-interest Income. The Bank's sources of non-interest income include
loan service fees and charges for deposit services, gain or loss from disposal
of loans or real estate owned and revenue from nonrecurring sources.
Non-interest income increased from $147,000 for the year ended
7
<PAGE>
June 30, 1996 to $291,000 for the year ended June 30, 1997. The increase was
primarily due to an increase in loans fees and charges of $45,000, and an
increase in fees and charges on deposit accounts of $73,000.
Non-interest Expenses. The principal component of the Bank's non-interest
expense has been, and continues to be, compensation and benefits. Other
components of non-interest expense include occupancy and equipment, data
processing, federal deposit insurance premiums, marketing and professional
services, telephone, supplies, and real estate owned operations. Non-interest
expense totaled $1,450,000 and $1,034,000 for the years ended June 30, 1997
and 1996, respectively. Increases of $112,000, $140,000 and $91,000 for
compensation, federal insurance premiums and other operating expenses,
respectively, accounted for most of the increases in non-interest expense for
the year ended June 30, 1997 compared to June 30, 1996.
Income Tax Expense. Income tax expense was $161,000 for the year ended
June 30, 1997 as compared to $111,000 for 1996. The increase was primarily the
result of an increase in income for fiscal 1997 compared to fiscal 1996. The
Bank's effective federal tax rates were 41.2% and 30.3% for the fiscal years
ended June 30, 1997 and 1996, respectively.
Comparison of Fiscal Years Ended June 30, 1996 and June 30, 1995
General. The Bank had net income of $254,000 for the year ended June 30,
1996, as compared with $147,000 for the same period ended June 30, 1995. The
increase in the Bank's earnings is primarily due to a greater increase in
interest income over related increases in interest expense and other operating
expense. Interest income increased by $718,000 or 25.4% to $3.5 million in
fiscal 1996 compared to $2.8 million in fiscal 1995. Interest expense
increased by $466,000 or 25.9% to $2.3 million in fiscal 1996 compared to $1.8
million in fiscal 1995. As a result of a greater increase in yields on average
interest earning assets compared to the increase in yields on interest bearing
liabilities net income reported by the Bank increased.
Net Interest Income. Net interest income totaled $1.27 million for the
year ended June 30, 1996, compared to $1.02 million for the year ended June
30, 1995, or an increase of $251,000, or 24.6%. The yield on average
interest-earning assets increased .66% to 7.59% in fiscal 1996 compared to
6.93% in fiscal 1995 while the yield on average interest bearing liabilities
increased .42% to 5.33% in fiscal 1996 compared to 4.91% in fiscal 1995. The
greater increase in yield on interest earning assets over the increase in
yield on interest bearing liabilities resulted in an increase in the net
interest rate spread. In addition to this increase, net average interest
earning assets were $4.10 million during fiscal 1996 compared to $4.01 million
in fiscal 1995 or an increase of $.09 million or 2.2%.
Interest income on loans increased to $2.14 million during the year ended
June 30, 1996 from $1.60 million for the same period ended June 30, 1995. The
increase is primarily due to an increase in the average loan portfolio balance
for fiscal 1996 compared to fiscal 1995 which was enhanced by an increase in
average yields of 8.72% in fiscal 1996 compared to 8.23% in fiscal 1995.
Interest income on mortgage-backed securities increased to $1.14 million
from $1.01 million for the years ended June 30, 1996 and 1995, respectively.
The increase was primarily due to a slight
8
<PAGE>
increase in average outstanding balances of $362,000 for these securities in
fiscal 1996 compared to fiscal 1995 and an increase of .65% in average yield
for the period.
Interest expense increased $466,000, or 25.9%, from $1.80 million for the
year ended June 30, 1995, to $2.27 million for the year ended June 30, 1996.
This increase was primarily due to increased borrowings during fiscal 1996
compared to 1995. The average outstanding balance of the Bank's borrowings
increased from $10.7 million in fiscal 1995 to $16.0 million in fiscal 1996.
These borrowings were principally used to fund the Bank's lending activities.
The cost of funds also increased from an average of 5.63% to 5.80% in fiscal
1995 and 1996, respectively. The Bank experienced an increase in deposit
balances during the fiscal year 1996. The average balance of deposit accounts
were $26.47 million and $25.95 million for fiscal years 1996 and 1995,
respectively. The average cost of deposits increased to 5.06% for the year
ended June 30, 1996 compared to 4.61% for the year ended June 30, 1995. The
volume and rate increase resulted in an increase in interest expense on
deposit accounts of $140,000 to $1.34 million for the year ended June 30, 1996
compared to $1.20 million for the year ended June 30, 1995.
Net interest income increased $251,000, or 24.6%, for the year ended June
30, 1996, as compared to the year ended June 30, 1995. The increase was
primarily a result of greater average interest earning assets in excess of
average interest bearing liabilities.
Provision for Loan Losses. The Bank's provision for loan losses was
$19,300 for the year ended June 30, 1996 as compared to $12,200 in 1995.
The Bank continues to monitor and adjust its allowance for loan losses as
management's analysis of its loan portfolio and economic conditions dictate.
The Bank believes it has taken an appropriate approach toward reserve levels,
consistent with the Bank's loss experiences and considering, among other
factors, the composition of the Bank's loan portfolio, the level of it's
classified and non-performing assets and their estimated value. Future
additions to the Bank's allowance for loan losses and any change in the
related ratio of the allowance for loan losses to non-performing loans are
dependent upon the economy, changes in real estate values and interest rates.
In addition, federal agencies may require additional reserves as a result of
their examination of the Bank. The allowance for loan losses reflects what the
Bank currently believes is an adequate level of reserves, although there can
be no assurance that future losses will not exceed the estimated amounts,
thereby adversely affecting future results of operations.
Non-performing assets increased to $456,000, or .88%, of total assets at
June 30, 1996 compared to $195,000, or .43%, of total assets at June 30, 1995.
The increase in non-performing loans was a result of an increase in
non-accrual loans over 90 days delinquent at June 30, 1996. The allowance for
loan losses was $263,000, or .86%, of loans receivable, net at June 30, 1996
compared to $244,000, or 1.18%, of loans receivable, net at June 30, 1995.
Non-interest Income. The Bank's sources of non-interest income include
loan service fees and charges for deposit services, gain or loss from disposal
of loans or real estate owned and revenue from nonrecurring sources.
Non-interest income increased from $71,000 for the year ended June 30, 1995 to
$147,000 for the year ended June 30, 1996. The increase was primarily due to
an increase
9
<PAGE>
in profit on sale of investments of $26,000, and an increase in fees and
charges on deposit accounts of $49,000.
Non-interest Expenses. The principal component of the Bank's non-interest
expense has been, and continues to be, compensation and benefits. Other
components of non-interest expense include occupancy and equipment, data
processing, federal deposit insurance premiums, marketing and professional
services, telephone, supplies, and real estate owned operations. Non-interest
expense totaled $1,034,000 and $884,000 for the years ended June 30, 1996 and
1995, respectively. Increases of $80,000, $17,000 and $71,000 for
compensation, data processing services and other operating expenses,
respectively, accounted for most of the increases in non-interest expense for
the year ended June 30, 1996 compared to June 30, 1995.
Income Tax Expense. Income tax expense was $111,000 for the year ended
June 30, 1996 as compared to $47,000 for 1995. The increase was primarily the
result of an increase in income for fiscal 1996 compared to fiscal 1995. The
Bank's effective federal tax rates were 30.3% and 24.0% for the fiscal years
ended June 30, 1996 and 1995, respectively.
10
<PAGE>
Average Balances, Interest Rates and Yields
The following table presents for the periods indicated the total dollar
amount of interest income from average interest earning assets and the
resultant yields, as well as the interest expense on average interest bearing
liabilities, expressed both in dollars and rates. No tax equivalent
adjustments were made. All average balances are monthly average balances.
Non-accruing loans have been included in the table as loans carrying a zero
yield.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------------------------------
1997 1996 1995
------ ------ -----
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- -------- ------ ----------- -------- ------ ----------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1)..... $32,783 $2,883 8.79% $24,612 $2,145 8.72% $19,431 $1,600 8.23%
Mortgage-backed
securities............. 15,509 1,007 6.49 17,839 1,144 6.41 17,477 1,008 5.76
Investment securities... 1,840 114 6.20 1,913 124 6.48 2,271 129 5.68
Bank Deposits........... 1,794 80 4.46 1,404 74 5.27 1,029 55 5.34
FHLB and FRB stock...... 1,145 66 5.76 840 52 6.19 485 29 5.97
------- ------- ------- ------ ------- ------
Total interest-earning
assets(1)............. $53,071 4,150 7.82 $46,608 3,539 7.59 $40,693 2,821 6.93
======= ------- ======= ------ ======= -------
Interest-Bearing Liabilities:
Time deposits........... $21,921 1,192 5.43 $20,814 1,184 5.69 $20,782 1,048 5.04
Demand and NOW
deposits............... 7,519 199 2.65 5,659 154 2.72 5,169 149 2.88
Borrowings.............. 19,220 1,114 5.79 16,037 930 5.80 10,732 604 5.63
------- ------- ------- ------ ------- ------
Total interest-bearing
liabilities.......... $48,660 2,505 5.15 $42,510 2,268 5.33 $36,683 1,801 4.91
======= ------- ======= ------ ======= -------
Net interest income...... $ 1,645 $1,271 $ 1,020
======= ====== =======
Net interest rate spread. 2.67% 2.26% 2.02%
==== ==== ====
Net earning assets....... $ 4,411 $ 4,098 $ 4,010
========= ======= =======
Net yield on average
interest-earning assets. 3.10% 2.73% 2.51%
==== ==== ====
Average interest-earning
assets to average
interest-bearing
liabilities............. 109.06x 109.24x 110.93x
====== ====== ======
</TABLE>
- --------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
11
<PAGE>
Rate/Volume Analysis
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets
and interest-bearing liabilities. It distinguishes between the increase
related to higher outstanding balances and that due to the levels and
volatility of interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to (i) changes in volume (i.e., changes in volume multiplied by old rate) and
(ii) changes in rate (i.e., changes in rate multiplied by old volume). For
purposes of this table, changes attributable to both rate and volume, which
cannot be segregated have been allocated proportionately to the change due to
volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
---------------------------------- --------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Due to
----------------- -----------------
Total Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-------- ------ ---------- -------- ------ ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable............................. $ 696 $ 42 $ 738 $497 $ 47 $544
Mortgage-backed securities................... (144) 7 (137) 32 105 137
Investments securities....................... 4 1 5 (17) (2) (19)
Other........................................ 4 1 5 66 (10) 56
------ ----- ----- ---- ---- ----
Total interest-earning assets.............. $ 560 $ 51 $ 611 $578 $140 $718
====== ===== ----- ==== ==== ----
Interest-bearing liabilities:
Time deposits................................ 63 (55) 8 2 133 135
Demand and NOW accounts...................... 50 (5) 45 15 (9) 6
Borrowings................................... 186 (2) 184 308 18 326
------ ----- ----- --- ----- ----
Total interest-bearing liabilities......... $ 299 $(62) $ 237 $325 $142 $467
====== ===== ----- ==== ==== ----
Net interest income........................... $ 374 $251
===== ====
</TABLE>
Interest Rate Spread
The Bank's results of operations are determined primarily by net interest
income and, to a lesser extent, fee income, miscellaneous income and operating
expenses. Net interest income is determined by the interest rate spread
between the yields earned on its interest-earning assets and the rates paid on
interest-bearing liabilities and by the relative amounts of interest earning
assets and interest-bearing liabilities.
12
<PAGE>
The following table sets forth the weighted average effective interest
rate earned by the Bank on its loan and investment portfolios, the weighted
average effective cost of the Bank's deposits and borrowings, the interest
rate spread of the Bank, and the net yield on weighted average
interest-earning assets for the periods and as of the dates shown.
At June 30,
------------------------------
1997 1996 1995
------ ------ ------
Weighted average yield on:
Loans receivable....................... 8.67% 8.50% 8.29%
Mortgage-backed securities............. 6.93 6.90 6.49
Investment securities.................. 5.95 5.93 6.07
Other interest-earning assets.......... 5.97 5.56 6.35
Combined weighted average
yield on interest-earning
assets.............................. 8.00 7.77 7.33
Weighted average rate paid on:
Savings deposits....................... 3.00 3.26 3.27
Demand and NOW deposits................ 2.27 2.70 2.95
Time deposits.......................... 5.44 5.47 5.71
Borrowings............................. 5.88 5.56 6.01
Combined weighted average
rate paid on interest-
bearing liabilities................. 5.07 5.15 5.49
Spread.................................. 2.93 2.62 1.84
Asset/Liability Management
The Company voluntarily measures its interest rate risk ("IRR") into
its internal risk-based capital calculation. The IRR component is a dollar
amount that measures the terms of the sensitivity of the Company's net
portfolio value ("NPV") to changes in interest rates. NPV is the difference
between incoming and outgoing discounted cash flows from assets, liabilities,
and off-balance sheet contracts. The Company measures the change to its NPV as
a result of a hypothetical 200 basis point ("bp") change in market interest
rates. Management reviews the IRR measurements on a quarterly basis. In
addition to monitoring selected measures on NPV, management also monitors
effects on net interest income resulting from increases or decreases in rates.
This measure is used in conjunction with NPV measures to identify excessive
interest rate risk. The following table presents the Company's NPV at June 30,
1997, as calculated by the Company.
13
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1997
-------------------------------------------------------------------------------------------
Net Portfolio Value NPV as % of PV of Assets
------------------------------------------------------------ ---------------------------
Change in
Rate $ Amount $ Change % Change NPV Ratio BP Change
---------- -------- -------- -------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
+200bp $3,835 $(544) (12.4)% 7.24% (74)bp
+150 3,992 (387) (8.8) 7.47 (51)
+100 4,136 (243) (5.5) 7.67 (31)
0 4,379 7.98
-100 4,532 153 3.5 8.14 16
-150 4,555 176 4.0 8.12 14
-200 4,546 167 3.8 8.05 7
</TABLE>
In the above table, the first column on the left presents the basis
point increments of yield curve shifts. The second column presents the overall
dollar amount of NPV at each basis point increment. The third and fourth
columns present the Company's actual position in dollar change and percentage
change in NPV at each basis point increment. The remaining columns present the
Company's percentage change and basis point change in its NPV as a percentage
of portfolio value of assets.
At June 30, 1997 total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing in the same period by $508,000, representing a negative cumulative
one-year gap ratio of .92% of total interest-bearing liabilities.
The Bank focuses lending efforts toward offering adjustable-rate loan
products as an alternative to more traditional fixed-rate mortgage loans. At
June 30, 1997, the Bank had $16.69 million of adjustable-rate loans which
comprised 45.9% of the Bank's loan portfolio. The Bank has not historically
sold any of its loans.
The primary objective of the Bank's investment strategy is to provide
liquidity necessary to meet funding needs as well as to address daily,
cyclical and long-term changes in the asset/liability mix, while contributing
to profitability by providing a stable flow of dependable earnings.
Investments generally include interest-bearing deposits in other federally
insured financial institutions, FHLB stock and U.S. Government securities.
Generally, the investment policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Bank's need
for liquidity, to achieve the proper balance between its desire to minimize
risk and maximize yield, to provide collateral for borrowings, and to fulfill
the Bank's asset/liability management policies.
14
<PAGE>
The Bank's cost of funds responds to changes in interest rates due to
the relatively short-term nature of its deposit portfolio. Consequently, the
results of operations are influenced by the levels of short-term interest
rates. The Bank offers a range of maturities on its deposit products at
competitive rates and monitors the maturities on an ongoing basis.
The following table sets forth the scheduled repricing or maturity of
the Bank's assets and liabilities as of June 30, 1997, based on the following
assumptions:
1. Fixed rate certificate accounts will not be withdrawn prior
to maturity.
2. Deposit accounts, other than certificate accounts, are
scheduled for repricing in six months or less:
3. Adjustable rate mortgage loans on one-to-four family
residential properties, multi-family and commercial real
estate and consumer loans are calculated at the earlier of
maturity or the contractual repricing date.
4. Certificates having one-time adjustment options with
remaining terms to maturity greater than one year are
included in the six month or less category.
The effect of these assumptions is to quantify the dollar amount of
items that are interest-sensitive and which can be repriced within each of the
periods specified. Such repricing can occur in one of three ways: (1) the rate
of interest to be paid on an asset or liability may adjust periodically on the
basis of an interest rate index; (2) an asset or liability such as a mortgage
loan may amortize, permitting reinvestment of cash flows at the
then-prevailing interest rates; or (3) an asset or liability may mature, at
which time the proceeds can be reinvested at the current market rates.
15
<PAGE>
The following table sets forth the interest rate sensitivity of the
Bank's assets and liabilities and certain associated weighted average yields
and costs at June 30, 1997 on the basis of the above-described assumptions.
<TABLE>
<CAPTION>
Maturing or Repricing
---------------------------------------------------------------------------------
Over 6
6 Months Months Within Over 1-3 Over 3-5 Over
or Less to 1 Year One Year Years Years 5 Years Total
----------- ----------- ---------- --------- --------- --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate one- to four-family,
multi-family (including
mortgage-backed securities)
and commercial real estate................. $ 944 $ 356 $ 1,300 $ 124 $ 904 $ 12,423 $ 14,751
Adjustable rate one- to
four-family, multi-family (including
mortgage-backed securities) and
commercial real estate..................... 14,269 12,402 26,671 724 275 506 28,176
Participation loans......................... 458 1,261 1,719 893 --- 301 2,913
Consumer loans.............................. 710 530 1,240 1,324 1,004 1,559 5,127
Investment securities and other............. 2,918 11 2,929 221 990 18 4,158
------- ------- ------- --------- -------- -------- --------
Total interest-earning assets........... 19,299 14,560 33,859 3,286 3,173 14,807 55,125
------- ------- ------- --------- -------- -------- --------
MMA deposits................................ 2,072 --- 2,072 --- --- --- 2,072
Savings deposits............................ 2,053 --- 2,053 --- --- --- 2,053
Demand and NOW deposits..................... 3,466 --- 3,466 --- --- --- 3,466
Certificates................................ 9,596 6,927 16,523 4,362 1,844 141 22,870
Borrowings.................................. 9,561 692 10,253 2,993 2,536 2,489 18,271
------- ------ ------- --------- -------- --------- --------
Total interest-bearing liabilities....... 26,748 7,619 34,367 7,355 4,380 2,630 48,732
------- ------ ------- --------- -------- --------- --------
Interest-earning assets less
interest-bearing liabilities............... $(7,479) $ 6,941 $ (508) $(4,069) $(1,207) $12,177 $ 6,393
======= ====== ======== ======= ======= ======= ========
Cumulative interest-rate
sensitivity gap............................ $(7,479) $ (508) $ (508) $(4,577) $(5,784) $ 6,393 $ 6,393
======= ======= ======== ======= ======= ======= ========
Cumulative interest-rate gap as a
percentage of assets....................... (13.51)% (.92)% (.92)% (8.30)% (10.49)% 11.60% 11.60%
====== ==== ==== ===== ====== ===== =====
</TABLE>
Certain shortcomings are inherent in the method of analysis presented
in the foregoing tables. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in
different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Additionally, certain assets, such as
adjustable-rate mortgage loans, have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Further,
in the event of a change in interest rates, prepayment and early withdrawal
levels would likely deviate significantly from those assumed in calculating
the table. Finally, the ability of many borrowers to service their debt may
decrease in the event of an interest rate increase.
16
<PAGE>
In addition, the previous tables do not necessarily indicate the
impact of general interest rate movements on the Bank's net interest income
because the repricing of certain categories of assets and liabilities is
subject to competitive and other pressures beyond the Bank's control. As a
result, certain assets and liabilities indicated as maturing or otherwise
repricing within a stated period may in fact mature or reprice at different
times and at different volumes.
Liquidity and Capital Resources
The Bank's principal sources of funds are deposits and prepayment of
loans and mortgage-backed securities, interest earned on investments and
borrowings, primarily FHLB advances. While scheduled loan repayments and
maturing investments are relatively predictable, deposit flows and early loan
repayments are more influenced by interest rates, general economic conditions
and competition. The Bank has been selective with regard to deposit rates on
certain savings products, and, when necessary, has supplemented deposits with
longer term and/or less expensive alternative sources of funds.
The Bank's primary sources of funds consist of deposits, loan and
mortgage-backed securities repayments and interest earned on investments.
Other potential sources of funds available to the Bank include borrowings from
the FHLB of Dallas. At June 30, 1997 the Bank had $18.3 million of FHLB
advances outstanding. The Bank uses its liquid resources principally to meet
on-going commitments, to fund maturing certificates of deposit and deposit
withdrawals, to invest, to fund existing and future loan commitments, to
maintain liquidity and to meet operating expenses. The Bank anticipates that
it will have sufficient funds available to meet current loan commitments. At
June 30, 1997, the Bank had outstanding commitments to extend credit which
amount to $3.1 million (including $534,000 in available lines of credit).
Management believes that loan repayments and other sources of funds will be
adequate to meet the Bank's foreseeable liquidity needs.
The primary investing activity of the Bank is the origination of
loans and the purchase of investment securities. During the years ended June
30, 1997 and 1996 the Bank originated loans totaling $13.5 million and $13.4
million, respectively. The Bank purchased $1.5 million loans during 1997 and
$2.6 million in 1996. To supplement adjustable-rate loan products,
adjustable-rate mortgage-backed securities are utilized from time to time as a
secondary investing activity. The Bank purchased $2.4 million to
mortgage-backed securities in fiscal 1997 compared to $3.6 million in fiscal
1996.
The primary financing activity of the Bank is deposits. For the years
ended June 30, 1997 and 1996, deposit accounts increased $4.7 million and $1.5
million, respectively. For the year ended June 30, 1995, a net decrease in
deposit accounts used $1.5 million
Liquidity management is both a daily and long-term responsibility of
management. The Bank adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-bearing deposits and (iv) the
objectives of its asset/liability management program. Excess liquidity is
invested generally in interest-bearing overnight deposits and other short-term
government and agency obligations. If the Bank requires additional funds
beyond its internal ability to generate, it has additional borrowing capacity
with the FHLB of Dallas.
17
<PAGE>
Certificates of deposit scheduled to mature in one year or less at
June 30, 1997 totaled approximately $16.5 million or 72.2% of the Bank's total
time deposits, reflecting consumer preference for short-term investments as a
result of the currently low interest rate environment. Based on historical
experience, management believes that a significant portion of such deposits
will remain with the Bank. At June 30, 1997, the Bank had a $18.3 million in
advances from the FHLB. Of this amount, $9.0 million is in short term
advances.
Federally insured financial institutions, such as the Bank, are
required to maintain a minimum level of regulatory capital. The regulations
issued by the Office of the Comptroller of the Currency ("OCC") establish two
capital standards for national banks: a leverage requirement and a risk-based
capital requirement. In addition, the OCC may, on a case-by-case basis,
establish individual minimum capital requirements for a national bank that
vary from the requirements which would otherwise apply under OCC regulations.
The Bank currently exceeds all of its regulatory capital
requirements. At June 30, 1997, the Bank had a leverage ratio of $4.2 million,
or 7.58% of adjusted total assets, which is approximately $2.51 million above
the minimum requirement of 3.0% of adjusted total assets. Also, on June 30,
1997, the Bank had $4.4 million available for risk-based capital, or 14.36% of
risk-weighted assets of $30.8 million, which was approximately $1.96 million
above the 8.0% in effect on that date.
Impact of Inflation and Changing Prices
The Financial Statements and Notes thereto presented herein 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 due to inflation. The impact of inflation
is reflected in the increased cost of the Bank's operations. Unlike most
industrial companies, however, nearly all the assets and liabilities of the
Bank are monetary in nature. As a result, interest rates have a greater impact
on the Bank'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.
Impact of New Accounting Standards
Statement of Financial Accounting Standards No. 115 (SFAS 115),
"Accounting for Certain Investments in Debt and Equity Securities," was issued
in May 1993 and is effective for fiscal years beginning after December 15,
1993. SFAS 115 addresses accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments
in debt securities. Such securities would be classified as held for trading,
available for sale or held for investment. Securities held for trading would
be carried at estimated market value with the adjustment, if any, reflected in
the statement of operations. Securities classified as available for sale would
also be carried at estimated market value, however, the adjustment, if any,
would be reflected as a separate component of retained earnings. Securities
held for investment would continue to be carried at amortized cost. The
adoption of this statement did not have a material effect on the financial
position or results of operations of the Bank.
18
<PAGE>
In June 1993, the FASB issued SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan." SFAS No. 114 states that impaired loans will be
recorded at the present value of future principal and interest expected to be
collected using the loan's contractual interest rate adjusted for deferred
fees and unamortized premium/discounts. SFAS No. 114 is effective for the Bank
in its fiscal year ending June 30, 1997 and may be adopted early. Based on the
Bank's current portfolio, this accounting change, when implemented, is not
expected to have a material adverse impact on the financial condition or net
income of the Bank.
In November 1993, AICPA issued SOP 93-6 ("Employers' Accounting for
Employee Stock Ownership Plans") which addresses the accounting for shares of
stock issued to employees by an employee stock ownership plan ("Employee
Plan"). SOP 93-6 requires that the employer record compensation expense in an
amount equal to the fair value of shares committed to be released to employees
from the Employee Plan to employees. SOP 93-6 is effective for fiscal years
beginning after December 15, 1993 and relates to shares purchased by an
Employee Plan after December 31, 1992. Assuming shares of Company common stock
appreciate in value over time, the adoption of SOP 93-6 may significantly
increase compensation expense relative to the Employee Plan as compared with
prior guidance which required the recognition of compensation expense based on
the cost of shares acquired by the Employee Plan. However, the amount of the
increase has not been determined as the expense will be based on the fair
value of the shares committed to be released to employees.
Statement of Financial Accounting Standards No. 122 (SFAS 122)
"Accounting for Mortgage Servicing Rights" amends FASB 65 to require that a
mortgage banking enterprise recognize as separate assets rights to service
mortgage loans for others, however, those service rights are acquired. The
effective date of this standard is for fiscal years beginning after December
15, 1995. The adoption of this statement did not have material effect on the
financial position or results of operations of the Bank.
Statement of Financial Accounting Standards No. 123 (SFAS 123)
"Accounting for Stock-Based Compensation" establishes financial accounting and
reporting standards for stock-based compensation plans. This statement defines
a fair value based method of accounting for all employee stock compensation
plans. However, it also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees".
The accounting requirements of SFAS 123 are effective for transactions entered
into in fiscal years that begin after December 15, 1995. The Company has
elected to follow Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," (APB 25) and related Interpretations in accounting
for its employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
19
<PAGE>
[FRAZEE, FOX & DODGE, LTD. LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Forrest City Financial Corporation
Forrest City, Arkansas 72335
We have audited the accompanying consolidated statements of financial
condition of Forrest City Financial Corporation and Subsidiary as of June 30,
1997 and 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditng
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 Forrest
City Financial Corporation and Subsidiary at June 30, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended June 30, 1997 in conformity with generally accepted
accounting principles.
FRAZEE, FOX & DODGE, LTD.
/s/ Frazee, Fox & Dodge, Ltd.
----------------------------------
Certified Public Accountants
Little Rock, Arkansas
August 1, 1997
20
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
--------------- ----------------
<S> <C> <C>
Cash and cash equivalents:
Cash and amounts due from depository institution......................................... $279,536 $213,514
Interest-bearing deposits in other banks................................................. 1,076,087 1,039,850
--------------- ----------------
Total cash and cash equivalents..................................................... $1,355,623 $1,253,364
Securities available for sale (Note 2)................................................... 8,089,367 8,324,402
Securities held to maturity (Note 2)..................................................... 8,331,062 9,759,519
Loans receivable, net (Note 3)........................................................... 35,505,539 30,418,821
Office properties and equipment, net (Note 5)............................................ 486,398 458,577
Stock in FHLB and FRB, at cost........................................................... 1,235,900 982,000
Accrued interest receivable (Note 4)..................................................... 377,934 330,382
Foreclosed real estate, net (Note 6)..................................................... 217,283 146,000
Other assets ............................................................................ 201,271 227,711
--------------- ----------------
Total assets..................................................................... $55,800,377 $51,900,776
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 7)........................................................................ $31,633,909 $26,955,716
Borrowed Funds (Note 8).................................................................. 18,270,673 19,311,770
Advances from borrowers for taxes and insurance.......................................... 140,875 132,517
Accrued expenses and other liabilities................................................... 515,778 435,093
Income taxes (Note 9).................................................................... 92,100 81,759
--------------- ----------------
Total liabilities................................................................... $50,653,335 $46,916,855
--------------- ----------------
Commitments (Notes 9 and 14)
Preferred stock, $.01 par value; 100,000 shares authorized;
none issued......................................................................... $ --- $ ---
Common stock, $.01 par value; 500,000 shares authorized;
236,109 issued and outstanding...................................................... 2,361 2,361
Additional paid in capital............................................................... 3,215,529 3,217,493
Retained earnings - substantially restricted............................................. 2,721,959 2,491,914
Unrealized gain (loss) on securities available for sale.................................. 13,924 (27,657)
Less common stock acquired by:
Employee Stock Ownership Plan......................................................... (110,028) (165,042)
Management Recognition and Retention Plan............................................. (48,132) (68,760)
Treasury stock - 41,432 and 33,036 shares, at cost.................................... (648,571) (466,388)
--------------- ----------------
Total stockholders' equity.......................................................... $5,147,042 $4,983,921
--------------- ----------------
Total liabilities and stockholders' equity....................................... $55,800,377 $51,900,776
=============== ================
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
21
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME
Interest on loans........................................................ $2,882,594 $2,144,658 $1,600,188
Interest on mortgage-backed securities................................... 1,007,387 1,144,475 1,007,961
Interest and dividends on investment securities.......................... 259,762 249,468 212,866
------------- ------------ ------------
Total interest income................................................. $4,149,743 $3,538,601 $2,821,015
------------- ------------ ------------
INTEREST EXPENSE
Savings and time deposits, net of penalties for early withdrawal......... $1,390,919 $1,338,084 $1,197,646
Interest on borrowed funds............................................... 1,113,731 929,704 603,775
------------- ------------ ------------
Total interest expense................................................ $2,504,650 $2,267,788 $1,801,421
------------- ------------ ------------
Net interest income................................................... $1,645,093 $1,270,813 $1,019,594
PROVISION FOR LOAN LOSSES.................................................. 94,854 19,309 12,238
------------- ------------ ------------
Net interest income after provision for loan losses...................... $1,550,239 $1,251,504 $1,007,356
------------- ------------ ------------
OTHER INCOME
Loan fees and charges.................................................... $75,609 $30,458 $25,976
Service charges on deposit accounts...................................... 158,307 85,497 35,780
Gain on sale of investments.............................................. 9,911 26,222 ---
Profit on sale of foreclosed real estate................................. 2,355 137 3,793
Other operating income................................................... 45,094 4,288 5,198
------------- ------------ ------------
Total other income.................................................... $291,276 $146,602 $70,747
------------- ------------ ------------
OTHER EXPENSE
Compensation and benefits................................................ $676,108 $564,569 $484,567
Occupancy expense........................................................ 60,527 61,764 65,523
Federal insurance premiums............................................... 217,511 77,059 74,203
Data processing expense.................................................. 95,370 70,792 53,498
Professional fees........................................................ 116,683 62,935 76,027
Net cost of operations of foreclosed real estate......................... 1,741 5,917 10,507
Other operating expenses................................................. 282,530 191,059 120,228
------------- ------------ ------------
Total other expense................................................... $1,450,470 $1,034,095 $884,553
------------- ------------ ------------
Income before income taxes............................................ $391,045 $364,011 $193,550
INCOME TAX EXPENSE (Note 9)................................................ 161,000 110,501 46,500
------------- ------------ ------------
NET INCOME............................................................ $230,045 $253,510 $147,050
============= ============ ============
EARNINGS PER COMMON SHARE.................................................. $1.16 $1.25 $.67
============= ============ ============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
22
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
Common Common gain (loss)
Additional Stock Stock on securities
Common Paid-in Acquired by Acquired Treasury Retained available for
Stock Capital ESOP by MRP Stock Earnings sale
------------ --------------- -------------- ------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
June 30, 1994.... $ --- $ --- $ --- $ --- $ --- $2,091,354 $ ---
Proceeds from sale
of common stock..... 2,361 3,217,493 (275,070) (103,140) --- --- ---
Amortization
of ESOP............ --- --- 55,014 --- --- --- ---
Amortization
of MRP.............. --- --- --- 13,752 --- --- ---
Purchase of
treasury stock...... --- --- --- --- (140,410) --- ---
Net income............ --- --- --- --- --- 147,050 ---
--------- -------------- ------------- ------------- ------------- ---------- ----------
Balance at
June 30, 1995.... $2,361 $3,217,493 ($220,056) ($89,388) ($140,410) $2,238,404 $ ---
Amortization
of ESOP............ --- --- 55,014 --- --- --- ---
Amortization
of MRP.............. --- --- --- 20,628 --- --- ---
Purchase of
treasury stock...... --- --- --- --- (325,978) --- ---
Change in
unrealized loss
on securities
available for
sale, net.......... --- --- --- --- --- --- (27,657)
Net income............ --- --- --- --- --- 253,510 ---
--------- -------------- ------------- ------------- ------------- ---------- ----------
Balance at
June 30, 1996.... $2,361 $3,217,493 ($165,042) ($68,760) ($466,388) $2,491,914 ($27,657)
Amortization
of ESOP............ --- --- 55,014 --- --- --- ---
Amortization
of MRP............. --- --- --- 20,628 --- --- ---
Purchase of
treasury stock..... --- --- --- --- (206,603) --- ---
Issuance of
treasury stock..... --- (1,964) --- --- 24,420 --- ---
Change in
unrealized gain
on securities
available for
sale, net.......... --- --- --- --- --- --- 41,581
Net income............ --- --- --- --- --- 230,045 ---
--------- -------------- ------------- ------------- ------------- ---------- ----------
Balance at
June 30, 1997... $2,361 $3,215,529 ($110,028) ($48,132) ($648,571) $2,721,959 $13,924
========= ============== ============= ============= ============= ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total Stock-
Holders'
Equity
--------------
<S> <C>
Balance at
June 30, 1994....
Proceeds from sale $2,091,354
of common stock.....
Amortization 2,841,644
of ESOP............
Amortization 55,014
of MRP..............
Purchase of 13,752
treasury stock......
Net income............ (140,410)
147,050
----------
Balance at
June 30, 1995....
Amortization $5,008,404
of ESOP............
Amortization 55,014
of MRP..............
Purchase of 20,628
treasury stock......
Change in (325,978)
unrealized loss
on securities
available for
sale, net..........
Net income............ (27,657)
253,510
----------
Balance at
June 30, 1996....
Amortization $4,983,921
of ESOP............
Amortization 55,014
of MRP.............
Purchase of 20,628
treasury stock.....
Issuance of (206,603)
treasury stock.....
Change in 22,456
unrealized gain
on securities
available for
sale, net..........
Net income............ 41,581
230,045
----------
Balance at
June 30, 1997... $5,147,042
==========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
23
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................... $230,045 $253,510 $147,050
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation................................................. 36,688 36,765 40,956
Amortization of deferred compensation........................ 75,642 75,642 68,766
Amortization of deferred loan fees........................... (36,541) (42,949) (31,707)
Premium amortization, net of discount accretion.............. 36,805 65,603 40,749
Provision for losses on loans and real estate................ 94,854 21,502 12,238
Gain on sale of foreclosed real estate....................... (2,355) (137) (3,793)
Net realized gains on available for sale securities.......... (9,911) (26,222) ---
Increase in deferred income taxes............................ 10,341 18,075 3,145
Decrease (increase) in accrued interest...................... (47,552) (46,632) (84,049)
Decrease (increase) in other assets.......................... 46,999 25,311 11,514
Decrease (increase) in prepaid stock conversion expense...... --- --- 176,366
Decrease (increase) in cash value life insurance............. (20,559) (22,428) (26,044)
Increase (decrease) in accrued expenses...................... 83,040 113,142 118,479
------------- ------------- -------------
Net cash provided by operating activities.................. $497,496 $471,182 $473,670
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans made to customers....................... ($5,196,161) ($9,781,569) ($2,183,871)
Proceeds from sale of foreclosed real estate.................. 13,450 --- 67,500
Investment in foreclosed real estate.......................... (33,603) --- (61,000)
Purchase of office property and equipment..................... (64,509) (18,819) (24,084)
Purchase of FHLB and FRB stock................................ (253,900) (443,300) (244,200)
Purchase of held-to-maturity securities....................... --- --- (9,826,327)
Proceeds from maturities of held-to-maturity securities....... 1,405,546 3,466,864 2,445,608
Purchases of available-for-sale securities.................... (2,724,456) (5,044,724) ---
Proceeds from sales of available-for-sale securities.......... 1,488,205 2,669,018 ---
Proceeds from maturities of available-for-sale securities..... 1,508,884 2,136,640 ---
------------- ------------- -------------
Net cash used in investing activities....................... ($3,856,544) ($7,015,890) ($9,826,374)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits........................... $4,678,193 $1,503,635 $ (1,467,533)
Net increase (decrease) in short-term advances from FHLB...... (5,500,000) 14,500,000 (5,700,000)
Net increase (decrease) in short-term borrowings of securities
sold under agreements to repurchase........................ --- (14,000,000) 14,000,000
Proceeds from long-term Federal Home Loan Bank advances....... 5,500,000 5,000,000 ---
Payment on long-term Federal Home Loan Bank advances.......... (1,041,097) (188,230) ---
Net proceeds from issuance of common stock.................... --- --- 2,841,644
Purchase of treasury stock.................................... (206,603) (325,978) (140,410)
Proceeds from reissuance of treasury stock.................... 22,456 --- ---
Net increase (decrease) in advances from borrowers for taxes
and insurance............................................... 8,358 (39,770) 25,355
------------- ------------- -------------
Net cash provided by financing activities................... $3,461,307 $6,449,657 $9,559,056
------------- ------------- -------------
Net increase (decrease) in cash............................. $102,259 ($95,051) $206,352
Cash - beginning of year.................................... 1,253,364 1,348,415 1,142,063
------------- ------------- -------------
Cash - end of year.......................................... $1,355,623 $1,253,364 $1,348,415
============= ============= =============
CASH PAID DURING PERIOD FOR
Interest...................................................... $1,528,379 $1,359,237 $954,904
Income taxes.................................................. 218,000 13,000 65,793
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES
Acquisition of real estate in settlement of loans............. 187,771 --- 76,511
Stock issued to Recognition and Retention Plan................ --- --- 103,140
Increase (decrease) in unrealized gain on securities
available for sale.......................................... 41,581 (27,657) ---
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
24
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 1: Significant Accounting Policies
The Bank provides a variety of financial services to individuals and corporate
customers, and is subject to competition from other financial institutions in
Eastern Arkansas. The Bank's primary deposit products are interest-bearing
checking accounts and certificates of deposit. Its primary lending products
are residential loans, consumer loans and, to a lesser extent, commercial
loans. The Bank is also subject to the regulations of certain Federal agencies
and undergoes periodic examinations by those regulatory authorities. A summary
of significant accounting policies are as follows:
(a) Cash Equivalents
For purposes of the statements of cash flows, the Bank considers highly liquid
debt instruments with original maturities when purchased of three months or
less to be cash equivalents.
(b) Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of
Forrest City Financial Corporation (the "Company") and its wholly-owned
subsidiary Forrest City Bank, NA (the "Bank") - formerly Forrest City Savings
and Loan Association. All significant intercompany transactions have been
eliminated in consolidation. Forrest City Financial Corporation was
established in April, 1994 for the purpose of becoming a holding company for
the shares of the Bank, upon its conversion to a federal stock savings and
loan. Effective January 1, 1997, the Bank converted to a national bank with
the Company simultaneously converting its charter to a national bank holding
company.
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the statement of
financial conditions and revenues and expenses for the year. Actual results
could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans 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 losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
25
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 1: Significant Accounting Policies (continued)
A substantial portion of the Bank's loans are secured by real estate in local
markets. In addition, foreclosed real estate is located in this same market.
Accordingly, the ultimate collectibility of a substantial portion of the
Bank's loan portfolio and the recovery of a substantial portion of the
carrying amount of foreclosed real estate are susceptible to changes in local
market conditions.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically
review the Bank's allowances for losses on loans and foreclosed real estate.
Such agencies may require the Bank to recognize additions to the allowances
based on their judgements about information available to them at the time of
their examination.
(c) Trading Securities
Investment securities held principally for resale in the near term are
classified as trading account securities and recorded at their fair values.
Unrealized gains and losses on trading account securities are included
immediately in income.
(d) Securities Held to Maturity
Bonds, notes and debentures for which the Bank has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method
over the period to maturity.
(e) Securities Available for Sale
Available-for-sale securities consist of bonds, notes, debentures and certain
equity securities not classified as trading securities nor as held-to-maturity
securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of
shareholders' equity until realized.
Gains and losses on the sale of available-for-sale securities are determined
using the specific-identification method.
26
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 1: Significant Accounting Policies (continued)
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary
have resulted in write-downs of the individual securities to their fair value.
The related write-downs have been included in earnings as realized losses.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
(f) Loans Receivable
Loans receivable are stated at unpaid principal balances adjusted for
allowances for loan losses and net deferred loan origination fees and
discounts. Discounts on mortgage loans, when applicable, are amortized to
income using the interest method over the remaining period to contractual
maturity and adjusted for prepayments.
The allowance for loan losses is increased by charges to income and decreased
by charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loss experience, known
and inherent risks in the portfolio, prevailing market conditions and the
estimated value of the underlying collateral as well as the borrowers ability
to repay.
Management has established an allowance for uncollectible interest on loans
that are contractually more than 90 days past due. The allowance is
established by a charge to interest income equal to all interest previously
accrued.
(g) Loan Origination and Commitment Fees
A portion of loan origination fees and certain direct costs of underwriting
and closing loans is deferred. Such fees are amortized to interest income over
the life of the mortgage loans using the interest method. The Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 91 ("SFAS No. 91") setting forth requirements regarding accounting for
non-refundable fees and costs associated with originating and acquiring loans.
27
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 1: Significant Accounting Policies (continued)
Fees received for a commitment to originate or purchase loans are deferred
and, if the commitment is exercised, recognized over the life of the loan as
an adjustment of yield, or, if the commitment expires unexercised, recognized
in income upon expiration of the commitment. Other loan fees such as
prepayment penalties, late charges and release fees, are recorded as income
when collected.
(h) Office Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method based upon estimated useful lives for financial
accounting purposes. The Bank utilizes accelerated methods for income tax
reporting purposes. Maintenance and repairs are charged to expense as
incurred.
(i) Income Taxes
Income taxes are provided for the tax effects of the transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the allowance for loan losses,
allowance for losses on foreclosed real estate, accumulated depreciation and
accrued employee benefits for financial and income tax reporting. The deferred
tax assets and liabilities represent the future tax return consequences of
those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled.
(j) Advertising
The Company expenses advertising costs as they are incurred.
(k) Changes in Presentation
Certain amounts and items appearing in the 1996 and 1995 statements have been
reclassified to conform with the 1997 presentation.
(l) Earnings Per Share
Earnings per common share is computed by dividing net income by the weighted
average number of common shares outstanding for each period presented.
28
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 1: Significant Accounting Policies (continued)
(m) New Accounting Pronouncements
Statement of Financial Accounting Statements No. 107, "Disclosures about Fair
Value of Financial Instruments," was effective for the fiscal year beginning
July 1, 1995 and requires disclosure of the fair value of financial
instruments for both assets and liabilities recognized and not recognized in
the statements of financial condition, for which it is practical to estimate
the fair value.
Statement of Financial Accounting Standards No. 122 (SFAS 122) "Accounting for
Mortgage Servicing Rights" amends FASB 65 to require that a mortgage banking
enterprise recognize as separate assets rights to service mortgage loans for
others, however those service rights are acquired. The effective date of this
standard is for fiscal years beginning after December 15, 1995. The adoption
of this statement did not have a material effect on the financial position or
results of operations of the Bank.
Statement of Financial Accounting Standards No. 123 (SFAS 123) "Accounting for
Stock-Based Compensation" establishes financial accounting and reporting
standards for stock-based compensation plans. This statement defines a fair
value based method of accounting for all employee stock compensation plans.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees". The accounting
requirements of SFAS 123 are effective for transactions entered into in fiscal
years that begin after December 15, 1995. The Company has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," (APB 25) and related Interpretations in accounting for its
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Statement of Financial Accounting Standards No. 125 ("SFAS 125"), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," provides new accounting and disclosure rules for the sale,
securitization and servicing of receivables and other financial assets. SFAS
125 provides guidance for establishing whether a transfer of financial assets
is a sale or a financing. Under SFAS 125, the seller would be required to use
the "financial components" approach to measure the gain or loss on the
transaction. Under this approach, the seller would record at fair value
whatever new instruments it obtains and would derecognize financial assets for
which control has been surrendered based on the relative fair value of the
29
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 1: Significant Accounting Policies (continued)
components transferred and those retained. SFAS 125 is effective for
transactions occurring after December 31, 1996, regardless of the company's
fiscal year end or when the securitization was originally established. The
adoption of SFAS 125 effective January 1, 1997 will be applied prospectively
from the date of adoption. The adoption of this statement did not have a
material effect on the financial position or results of operations.
(n) Fair Values of Financial Instruments
The following methods and assumptions were used by the Bank in estimating fair
values of financial instruments as disclosed herein:
Cash and short-term instruments. The carrying amounts of cash and short-term
instruments approximate their fair value.
Trading securities. Fair values for trading account securities, which also are
the amounts recognized in the consolidated balance sheet, are based on quoted
market prices, where available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable instruments.
Available-for-sale and held-to-maturity securities. Fair values for
securities, excluding restricted equity securities, are based on quoted market
prices. The carrying values of restricted equity securities approximate fair
values.
30
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 1: Significant Accounting Policies (continued)
Loans receivable. For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying values.
Fair values for certain mortgage loans, consumer loans and commercial loans
are estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. Fair values for impaired loans are estimated using discounted
cash flow analyses or underlying collateral values, where applicable.
Deposit liabilities. The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of variable-rate, fixed-term
money-market accounts and certificates of deposit (CDs) approximate their fair
values at the reporting date. Fair values for fixed-rate CDs are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
Short-term borrowings. The carrying amounts of short-term borrowings maturing
within 90 days approximate their fair values. Fair values of other short-term
borrowings are estimated using discounted cash flow analyses based on the
Bank's current incremental borrowing rates for similar types of borrowing
arrangements.
Long-term debt. The fair values of the Bank's long-term debt are estimated
using discounted cash flow analyses based on the Bank's current incremental
borrowing rates for similar types of borrowing arrangements.
Accrued interest. The carrying amounts of accrued interest approximate their
fair values.
Off-balance-sheet instruments. Fair values for off-balance-sheet lending
commitments are based on rates currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standings.
31
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 2: Investment Securities
Debt and equity securities have been classified in the consolidated statements
of financial condition according to management's intent. The carrying amount
of securities and their approximate fair values at June 30, follow.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
<S> <C> <C> <C>
Available-for-sale securities:
June 30, 1997:
Equity securities............................ $372,862 $929 $ --- $373,791
US government and
agency securities......................... 5,210,864 36,557 (40,596) 5,206,825
Other securities............................. 2,491,718 17,748 (715) 2,508,75
---------- ----------- ----------- ----------
$8,075,444 $55,234 ($41,311) $8,089,367
========== =========== =========== ==========
June 30, 1996:
Equity securities............................ $318,034 $ --- ($1,748) $316,286
US government and
agency securities......................... 4,858,384 28,411 (68,828) 4,817,967
Other securities............................. 3,175,641 16,700 (2,192) 3,190,149
---------- ----------- ----------- ----------
$8,352,059 $45,111 ($72,768) $8,324,402
========== =========== =========== ==========
Held-to-maturity securities:
June 30, 1997:
US government and
agency securities......................... $8,247,252 $13,038 ($211,570) $8,048,720
State and municipal securities............... 56,000 --- --- 56,000
Other securities............................. 27,810 --- --- 27,810
---------- ----------- ----------- ----------
$8,331,062 $13,038 ($211,570) $8,132,530
========== =========== =========== ==========
June 30, 1996:
US government and
agency securities......................... $9,649,033 $5,583 ($299,935) $9,354,681
State and municipal securities............... 63,000 --- --- 63,000
Other securities............................. 47,486 --- --- 47,486
---------- ----------- ----------- ----------
$9,759,519 $5,583 ($299,935) $9,465,167
========== =========== =========== ==========
</TABLE>
32
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 2: Investment Securities (continued)
The scheduled maturities of securities held-to-maturity and securities (other
than equity securities) available-for-sale as of June 30, 1997, were as
follows:
<TABLE>
<CAPTION>
Securities Held-To- Securities Available-For-
Maturity Sale
----------------------------- ------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Amounts maturing in:
One year or less................................... $227,683 $227,683 $ --- $ ---
After one year through five years.................. 237,351 240,877 1,000,000 974,046
After five years through ten years................. 18,000 18,000 --- ---
After ten years.................................... --- --- --- ---
---------- ---------- ---------- ----------
$483,034 $486,560 $1,000,000 $974,046
Mortgage-backed securities......................... 7,848,028 7,645,970 6,702,582 6,741,530
---------- ---------- ---------- ----------
$8,331,062 $8,132,530 $7,702,582 $7,715,576
========== ========== ========== ==========
</TABLE>
During the year ended June 30, 1997, the Bank sold securities available for
sale for total proceeds of approximately $1,283,000, resulting in gross
realized gains of approximately $9,900.
During the year ended June 30, 1996, the Bank sold securities available for
sale for total proceeds of approximately $2,669,000, resulting in gross
realized gains of approximately $27,000 and gross realized losses of
approximately $900. There were no sales of available-for-sale securities for
the years ended 1995. In 1996, debt securities with an amortized cost of
$8,539,467 were transferred from held-to-maturity to available-for-sale. This
transfer was part of a reassessment program by management in response to the
Financial Accounting Standards Board temporary waiver of the reporting
requirements of FASB 115 as previously discussed in Note 1. At the time of the
transfer, the securities had gross unrealized gains and losses of
approximately $62,000 and $16,000, respectively.
Investment securities having a carrying value of $13,614,000 and $15,979,000
at June 30, 1997 and 1996, respectively, were pledged to secure certain
deposits and borrowings as required or permitted by law.
33
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 3: Loans Receivable
Loans receivable at June 30, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
First Mortgage Loans (principally conventional)
Principal balances:
Secured by one- to four-family residences................................... $23,839,248 $21,338,320
Secured by other properties................................................. 2,709,694 3,100,979
Participations and whole loans purchased.................................... 2,913,445 2,523,994
Residential construction.................................................... 1,788,099 1,507,743
Less:
Undisbursed loan funds...................................................... (539,192) (668,527)
Unearned discounts.......................................................... (25,753) (9,822)
Net deferred loan origination fees.......................................... (44,400) (44,485)
----------------- -----------------
Total first mortgage loans............................................... $30,641,141 $27,748,202
----------------- -----------------
Consumer and Other Loans
Principal balances:
Home equity and second mortgages............................................ $1,623,761 $1,178,217
Other....................................................................... 3,503,437 1,755,650
Total consumer and other loans........................................... $5,127,198 $2,933,867
----------------- -----------------
Total.................................................................... $35,768,339 $30,682,069
Less allowance for loan losses................................................ (262,800) (263,248)
----------------- -----------------
$35,505,539 $30,418,821
================= =================
</TABLE>
The composite yield on loans was approximately 8.67% and 8.50% at June 30,
1997 and 1996, respectively.
The Bank's business activity is with customers located primarily in St.
Francis County Arkansas. Therefore, economic conditions in the area could
ultimately have an effect on the debtor's ability to honor their contract.
Included in total loans receivable were commercial and multi-family loans
totaling approximately $2,710,000 at June 30, 1997. Approximately 68% of this
balance is concentrated in hotel and apartment complex industries, however, no
industry comprises greater than 10% of total loans outstanding.
34
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 3: Loans Receivable (continued)
An analysis of the changes in the allowance for loan losses for the years
ended June 30, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
For the Years Ended June 30,
----------------------------------------------
1997 1996 1995
------------- -------------- -------------
<S> <C> <C> <C>
Balance at beginning of year.................................. $263,248 $243,939 $249,382
Provision charged to income................................... 94,854 19,309 12,238
Charge-offs and recoveries, net............................... (95,302) --- (17,681)
------------- -------------- -------------
Total...................................................... $262,800 $263,248 $243,939
============= ============== =============
</TABLE>
NOTE 4: Accrued Interest Receivable
Interest receivable is summarized as follows:
June 30,
---------------------------
1997 1996
------------ ------------
Loans receivable.................................... $238,825 $177,946
Mortgage-backed securities.......................... 102,675 110,034
Investment securities and other..................... 36,434 42,402
------------ ------------
Total............................................ $377,934 $330,382
============ ============
NOTE 5: Office Properties and Equipment
A summary of office properties and equipment is as follows:
June 30,
---------------------------
1997 1996
------------ ------------
Office building and improvements.................... $492,530 $484,440
Furniture, fixtures and equipment................... 338,589 284,077
Land................................................ 110,134 110,134
------------ ------------
Total............................................ $941,253 $878,651
Less accumulated depreciation....................... 454,855 420,074
------------ ------------
Office properties and equipment, net............. $486,398 $458,577
============ ============
35
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 6: Foreclosed Real Estate
Foreclosed real estate is carried at the lower of fair value minus estimated
costs to sell or cost (the fair value of the foreclosed asset at the time of
foreclosure). Costs of holding foreclosed property are charged to expense in
the current period, except for significant property improvements, which are
capitalized to the extent that carrying value does not exceed estimated fair
market value. Valuations are periodically performed by management, and an
allowance for losses is established by a charge to earnings. Gains on sales of
such real estate are taken into income based on the buyer's initial and
continuing investment in the property.
Real estate owned is summarized as follows:
June 30,
-------------------------------
1997 1996
--------------- -------------
Real estate acquired through foreclosure....... $217,283 $163,652
Valuation allowance............................ --- (17,652)
--------------- -------------
Foreclosed real estate, net................. $217,283 $146,000
=============== =============
The following is a summary of activity in the valuation allowance for real
estate acquired in settlement of loans.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year..................................... $17,652 $15,459 $15,459
Provision charged to income...................................... --- 2,193 ---
Charge-offs and recoveries, net.................................. (17,652) --- ---
------------ ------------ ------------
Total......................................................... $0 $17,652 $15,459
============ ============ ============
</TABLE>
36
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 7: Deposits
Deposits by type and range of rates at June 30, 1997 and 1996 are summarized
as follows:
<TABLE>
<CAPTION>
Weighted
Average June 30,
Rate at -----------------------------------------------
June 30, 1997 1997 1996
------------- ---- ----
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Demand and NOW accounts................... 2.27 $3,465,756 10.9% $1,773,970 6.6%
Passbook savings.......................... 3.00 2,053,335 6.5 1,660,808 6.1
Money market.............................. 3.25 2,071,956 6.6 2,146,590 8.0
Non-interest bearing accounts............. 1,172,607 3.7 631,817 2.3
---------- ---- ---------- ----
Total.................................. $8,763,654 27.7 $6,213,185 23.0
---------- ---- ---------- ----
Certificates of Deposits
2.76 to 3.75%.......................... $425 0.0 $181,547 0.7
3.76 to 4.75%.......................... 296,357 .9 866,517 3.2
4.76 to 5.75%.......................... 19,058,112 60.3 14,529,711 53.9
5.76 to 6.75%.......................... 3,219,678 10.2 4,153,901 15.4
6.76 to 7.75%.......................... 295,683 .9 1,006,883 3.7
7.76 to 8.75%.......................... --- 0.0 3,972 0.1
^ ---------- ---- ---------- ----
Total................................. $22,870,255 72.3 $20,742,531 77.0
---------- ---- ---------- ----
$31,633,909 100.0% $26,955,716 100.0%
========== ====== ========== ======
</TABLE>
The weighted average rate on deposits at June 30, 1997 and 1996 was 4.61% and
4.88%, respectively. The Bank pays compounded interest on some savings and
certificates except money markets; therefore, the effective rate is generally
higher.
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 at June 30, 1997 and 1996 was $5,206,658 and $4,424,552,
respectively.
Interest on deposit accounts is net of interest forfeited by depositor on
early withdrawal of certificate accounts of $4,114, $2,697 and $5,414 for the
years ended June 30, 1997, 1996 and 1995, respectively.
37
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 7: Deposits (continued)
At June 30, 1997, scheduled maturities of certificates of deposit by rate and
year were as follows:
<TABLE>
<CAPTION>
Year Ending June 30,
-------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
2.76 to 3.75%...... $ --- $ 425 $ --- $ --- $ --- $ --- $ 425
3.76 to 4.75%...... 245,110 50,662 --- 585 --- --- 296,357
4.76 to 5.75%...... 15,574,121 1,393,827 1,397,913 190,898 493,824 7,529 19,058,112
5.76 to 6.75%...... 488,647 372,622 1,070,456 802,824 351,661 133,468 3,219,678
6.76 to 7.75%...... 215,582 71,101 5,000 4,000 --- --- 295,683
----------- ---------- ---------- -------- -------- --------- -----------
Total............ $16,523,460 $1,888,637 $2,473,369 $998,307 $845,485 $ 140,997 $22,870,255
=========== ========== ========== ======== ======== ========= ===========
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------
1997 1996 1995
---------------- ----------------- -----------------
<S> <C> <C> <C>
Demand and money market............................... $141,409 $116,616 $104,127
Passbook savings...................................... 57,464 37,739 44,998
Certificates.......................................... 1,192,046 1,183,729 1,048,521
---------------- ----------------- -----------------
Total.............................................. $1,390,919 $1,338,084 $1,197,646
================ ================= =================
</TABLE>
38
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 8: Borrowed Funds
Other borrowed funds are as follows:
<TABLE>
<CAPTION>
June 30,
------------------------------------------
1997 1996
------------------ ------------------
<S> <C> <C>
Federal Home Loan Bank Advances
Due 07/15/96 at 5.340%............................................... $ --- $13,500,000
Due 07/15/96 at 5.360%............................................... --- 1,000,000
Due 07/02/97 at 5.540%............................................... 9,000,000 ---
Due 11/01/05 at 6.354%............................................... 1,311,104 1,426,827
Due 01/02/06 at 6.056%............................................... 885,670 963,035
Due 01/02/06 at 6.113%............................................... 885,977 963,145
Due 11/01/10 at 6.220%............................................... 1,393,620 1,458,763
Due 08/01/01 at 6.417%............................................... 1,259,692 ---
Due 10/01/01 at 6.230%............................................... 869,070 ---
Due 11/01/01 at 6.216%............................................... 1,767,789 ---
Due 12/03/01 at 5.832%............................................... 897,751 ---
------------------ ------------------
$18,270,673 $19,311,770
================== ==================
</TABLE>
The weighted average interest rate for all FHLB advances was 5.88% at June 30,
1997. Pursuant to collateral agreements with the FHLB, assets of the Bank are
subject to a blanket pledge agreement to collateralize the advances. Scheduled
maturities of advances from FHLB as of June 30, 1997 were as follows:
June 30, 1998...................... $10,252,835
June 30, 1999...................... 1,450,287
June 30, 2000...................... 1,542,901
June 30, 2001...................... 1,641,429
June 30, 2002...................... 894,501
Thereafter......................... 2,488,720
-----------
$18,270,673
===========
39
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 8: Borrowed Funds (continued)
An analysis of securities sold under agreements to repurchase is as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------------
1997 1996
--------------- ----------------
<S> <C> <C>
Highest month-end balance..................................................$ --- $15,500,000
Average balance during the year............................................ --- 1,812,500
Weighted-average interest rate at end of year.............................. --- N/A
Weighted-average interest rate during the year............................. --- 5.85%
</TABLE>
Interest expense on borrowed funds is as follows:
<TABLE>
<CAPTION>
June 30,
----------------------------------------------
1997 1996 1995
-------------- ------------ -------------
<S> <C> <C> <C>
FHLB advances short-term........................................ $568,300 $623,010 $195,445
FHLB advances long-term......................................... 545,431 196,171 ---
Repurchase agreements........................................... --- 110,523 408,330
-------------- ------------ -------------
Total........................................................ $1,113,731 $929,704 $603,775
============== ============ =============
</TABLE>
NOTE 9: Income Taxes
The Bank qualifies under provisions of the Internal Revenue Code and similar
provisions of the state tax laws which permit it to deduct from taxable income
an allowance for bad debts based on specified experience formulas. If
utilized, the maximum allowable deduction under the percentage of taxable
income method was 8% for the years ended June 30, 1996 and 1995. Appropriated
retained earnings at June 30, 1997, includes earnings of approximately
$520,000 representing such bad debt deductions, for which no provision for
federal income taxes has been made. If, in the future, this portion of
appropriated retained earnings is used for any purpose other than absorbing
bad debt losses, federal and state income taxes may be imposed at the then
applicable rates. It is not contemplated that tax bad debt reserves will be
used in a manner which will create a federal tax liability. However, if at
June 30, 1997, the total appropriations had been used other than to absorb
losses, this liability would have been approximately $182,000.
40
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 9: Income Taxes (continued)
The Bank adopted Statement of Financial Accounting Standards No. 109 ("SFAS
No. 109"), "Accounting for Income Taxes" effective July 1, 1993. This
statement supersedes the method used by the Bank in prior years and, among
other things, changes the criteria for the recognition and measurement of
deferred tax assets. The adoption of SFAS No. 109 had no material effect on
the fiscal year ended June 30, 1994 and prior years' net income. Therefore,
the Bank has not restated prior years' results and no adjustment to fiscal
1995 income or retained earnings is required to reflect the change.
As stated in Note 1, the Bank's income tax expense differs from the tax
expense computed by applying the statutory federal income tax rate primarily
due to timing differences for reporting accelerated depreciation methods used
for tax purposes, cash basis reporting for tax purposes compared to accrual
basis for financial and allowable bad debt methods for income tax purposes.
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
June 30,
----------------------------------------------
1997 1996 1995
-------------- ------------- ------------
<S> <C> <C> <C>
Current income tax expense...................................... $150,659 $92,426 $43,355
Deferred income tax expense..................................... 10,341 18,075 3,145
-------------- ------------- ------------
Total........................................................ $161,000 $110,501 $46,500
============== ============= ============
</TABLE>
The Bank's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------
1997 1996
------------ -----------
<S> <C> <C>
Deferred tax assets:
Bad debt reserves.............................................................. $105,120 $106,616
Deferred compensation.......................................................... 110,517 86,376
Other.......................................................................... 6,179 10,617
------------- -------------
$221,816 $203,609
------------- -------------
Deferred tax liabilities:
Depreciation................................................................... $73,334 $70,327
FHLB stock dividends........................................................... 98,080 73,265
Deferred fees.................................................................. 131,071 126,535
Other.......................................................................... 11,431 15,241
------------- -------------
$313,916 $285,368
------------- -------------
Net deferred tax liability.................................................... ($92,100) ($81,759)
============= =============
</TABLE>
41
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 9: Income Taxes (continued)
The provision for income taxes is less than that computed by applying the
statutory rates as indicated below:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Tax expense based on statutory rate.................................. $132,955 $123,764 $65,807
Increase (reduction) in taxes resulting from:
State tax, net of federal benefit.................................. 17,160 7,524 3,233
Effect of tax bad debt deduction net of preference tax............. 3,810 (8,229) (5,460)
Accrual to cash conversion for tax purposes........................ (5,283) (8,432) (8,911)
Difference between financial statement gain and
tax basis on sale of real estate owned........................... (800) (47) (1,461)
Effect of tax exempt income........................................ (1,598) (2,176) ---
Other.............................................................. 14,756 (1,903) (6,708)
----------- ------------ ------------
Total........................................................... $161,000 $110,501 $46,500
=========== ============ ============
</TABLE>
NOTE 10: Related Party Transactions
Directors, officers and employees of the Bank were customers of, and had other
transactions with, the Bank in the ordinary course of business. Transactions
with these related parties were made on substantially the same terms as those
prevailing at the time made for comparable transactions to other persons and
did not involve more than normal risk of collectibility or present unfavorable
features. Directors fees totaled $42,987, $30,602 and $23,052 for the years
ended June 30, 1997, 1996 and 1995, respectively. Aggregate savings deposits
of related parties were approximately $532,000 and $543,000 at June 30, 1997
and 1996, respectively.
An analysis of activity with respect to aggregate loans receivable for the
year then ended is as follows:
June 30,
-----------------------------
1997 1996
------------- -------------
Beginning balance............................. $523,069 $200,470
Additions.................................. 322,534 340,950
Repayments................................. (213,366) (18,351)
------------- -------------
Ending balance................................ $632,237 $523,069
============= =============
42
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 11: Employee Benefits
Simplified Employee Pension Plan. The Bank maintains a qualified Simplified
Employee Pension Plan. To qualify, an employee must be 18 years old and have
been employed for a period of time during one of the previous five years.
Discretionary contributions to the plan are determined by the board of
directors. No contribution was made for the year ended June 30, 1997. Plan
contributions totaled $1,011 and $12,926 for the years ended June 30, 1996 and
1995, respectively.
Stock Option Plan. Pursuant to the Bank's 1994 Stock Option and Incentive
Plan, 22,923 shares of the Bank's common stock has been reserved for issuance
from authorized but unissued shares. Options granted have ten year terms and
vest at a rate of 20% per year beginning one year after the date of grant.
There was no material dilutive effect on earnings per share from outstanding
stock options for the three years in the period ended June 30, 1997.
Presented below is the activity in the Plan for the three years in the period
ended June 30, 1997.
<TABLE>
<CAPTION>
Weighted
Shares Average
Under Exercise
Option Price Total
------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Outstanding July 1, 1994.............. --- --- $ ---
Granted............................. 18,337 $14.00 256,718
Exercised........................... --- --- ---
Forfeited........................... --- --- ---
------------------ -----------------
Outstanding June 30, 1995............. 18,337 $14.00 $256,718
Granted............................. --- --- ---
Exercised........................... --- --- ---
Forfeited........................... --- --- ---
------------------ -----------------
Outstanding June 30, 1996............. 18,337 $14.00 $256,718
Granted............................. 2,146 $16.70 35,838
Exercised........................... (1,604) $14.00 (22,456)
Forfeited........................... (2,292) $14.00 (32,088)
------------------ -----------------
Outstanding June 30, 1997............. 16,587 $14.35 $238,012
================== =================
</TABLE>
43
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 11: Employee Benefits (continued)
The information concerning currently outstanding and exercisable options at
June 30, 1997 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------- ---------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Price Outstanding Life (in years) Price Exercisable Price
- -------------- ----------------- ------------------- --------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
$14.00 14,441 7.3 $14.00 5,776 $14.00
$16.00 1,146 9.1 16.00 --- 16.00
$17.50 1,000 9.6 17.50 --- 17.50
----------------- ------------------
16,587 5,776
================= ==================
</TABLE>
Directors and other key officers have been granted options to purchase the
Company's common shares under the Company's 1994 Stock Option and Incentive
Plan. The Company has authorized 22,923 shares for issuance under the plan.
All options granted have ten-year terms and vest ratably over a five-year
period.
Proforma information regarding net income and earnings per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a
Black-Scholes option pricing model. For grants during fiscal 1997, the
weighted-average assumptions were: risk-free interest rate of 6.30%; dividend
yields of -0-%; volatility factors of the expected market price of the
Company's common stock of .30; and a weighted average expected life of the
option of 7 years. The weighted-average fair value of options granted during
fiscal 1997 is estimated at $7.20. No options were granted during fiscal 1996.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
44
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 11: Employee Benefits (continued)
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of proforma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The proforma effect
on net income for June 30, 1997 is not indicative of the proforma effect on
net income in future years because it does not take into consideration
proforma compensation expense related to grants made prior to June 30, 1996.
The options granted subsequent to the effective date of SFAS 123, as described
in Note 1, are not exercisable. Therefore, proforma effects on net income
would not be applicable.
Employee Stock Ownership Plan. Upon completion of the conversion and
ratification by stockholders, the Bank established an employee stock ownership
plan ("ESOP") for the benefit of participating employees.
All full-time employees are eligible to participate in the ESOP after they
have attained the age of twenty-one and completed one year of service during
which they work at least 1,000 hours. All years of service completed by an
employee, including prior year service completed before the effective date of
the plan, shall be counted in determining the employee's vested interest in
the plan. A participant shall be 100% vested in the plan after completion of
five or more years of service. Contributions to the plan are discretionary as
determined by the board of directors. Contributions to the ESOP will be
allocated among participants on the basis of total compensation. Forfeitures
will be reallocated to participants on the same basis as other contributions.
Benefits become payable upon a participant's retirement, death or disability.
Contributions to the plan were $55,014 for each of the years ended June 30,
1997, 1996 and 1995.
The ESOP borrowed $275,000 from the Company to purchase 18,338 shares of the
Company's common stock. The loan is secured solely by the common stock and is
to be repaid in equal quarterly installments of principal payable through May
31, 1999 at 6.70% interest rate. Shares committed to be released based on the
principal reductions totaled 11,026 shares with the remaining 6,767 shares
held in suspense. Based on a fair value of $21.10 per share, the total fair
value of unsecured ESOP shares was $142,784 at June 30, 1997.
45
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 12: Regulatory Matters
The Company and its subsidiary bank are 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 Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company must meet specific capital guidelines that involve
quantitative measures of the Company's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Company'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 Company to maintain minimum amounts and ratios as set forth in the
accompanying table. Management believes, as of June 30, 1997, that the Company
meets all capital adequacy requirements to which it is subject.
As of June 30, 1997, the most recent notification from the regulators
categorized the Company and its subsidiary bank as adequately capitalized
under the regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes have
changed the Company's or its subsidiary bank's category.
The Bank's capital ratios and amounts (in thousands) are shown below.
<TABLE>
<CAPTION>
Forrest City Bank, N.A.
Regulatory -------------------------------------
Minimum Amount Ratio
------------------ ------------- -------------
<S> <C> <C> <C>
Leverage ratio................................. 4.00% $4,155 7.58%
Tier I risk-based capital ratio................ 4.00% 4,155 13.50%
Total risk-based capital ratio................. 8.00% 4,418 14.36%
</TABLE>
46
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 13: Corporate Reorganization and Conversion to Stock Form
On July 28, 1994, Forrest City Bank completed its conversion from a mutual to
stock form and became a wholly-owned subsidiary of a newly-formed Delaware
holding company, Forrest City Financial Corporation. The Bank issued 229,233
shares of common stock at $15.00 per share in conjunction with the offering
and an additional 6,876 shares of common stock were granted under the
Management Recognition and Retention Plan ("MRP"). Net proceeds from the
offering were $2,841,644 after deduction of conversion costs of $321,781 and
unearned compensation related to the shares issued to the MRP and Employee
Stock Ownership Plan. The Company retained 50% of the net conversion proceeds
to purchase all of the stock of the Bank in the conversion.
Deposit account holders and borrowers will not have voting rights in the Bank.
Voting rights were vested exclusively with the stockholders of the Holding
Company. Deposit account holders will continue to be insured by the SAIF. A
liquidation account was established at the time of conversion in an amount
equal to the capital of the Bank as of the date of the latest balance sheet
contained in the final prospectus. Each eligible account holder or
supplemental eligible account holder is entitled to a proportionate share of
this account in the event of a complete liquidation of the Bank, and only in
such event. This share will be reduced if the account holder's or supplemental
eligible account holder's deposit balance falls below the amounts on the date
of record and will cease to exist if the account is closed. The liquidation
account will never be increased despite any increase in the related deposit
balance.
Regulations do not permit the Bank to pay dividends on its common stock if its
regulatory net worth would be reduced below the level required by regulations
or the amount required for the liquidation account. In addition, capital
distribution regulations limit the Bank's ability to make capital
distributions which include dividends, stock redemptions or repurchases,
cash-out mergers, interest payments on certain convertible debt and other
transactions charged to the capital account based on the Bank's capital level
and supervisory condition.
47
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 14: Financial Instruments
The Bank is a party to financial instruments with off-balance-sheet risk of
loss as part of its normal business operations to meet the financing needs of
its customers by providing commitments to extend credit. These instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the balance sheets. The contract amount of
these instruments reflects the extent of involvement the Bank has in this
class of financial instruments.
Exposure to credit loss in the event of non-performance by the other party to
the financial instrument for commitments to extend credit is represented by
the contract amount of those instruments. The Bank uses the same credit
policies in making commitments as it does for on-balance-sheet instruments.
Unless noted otherwise, the Bank does not require collateral or other security
to support financial instruments with credit risk.
Real estate loan commitments whose contract amounts represent credit risk were
approximately $3,137,000 at June 30, 1997, consisting of fixed rate loans of
approximately $1,297,000 and variable rate loans of $1,840,000. Loan
commitments at June 30, 1996 were $2,401,000, consisting of fixed rate loans
of approximately $621,000 and variable rate loans of $1,780,000.
The estimated fair values of the Bank's financial instruments are as follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
--------------------------------------- ------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------------- ---------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks................... $1,356,000 $1,356,000 $1,253,000 $1,253,000
Securities available for sale............. 8,089,000 8,089,000 8,324,000 8,324,000
Securities held to maturity............... 8,331,000 8,133,000 9,760,000 9,465,000
Loans receivable.......................... 35,506,000 35,563,000 30,419,000 30,739,000
Accrued interest receivable............... 378,000 378,000 330,000 330,000
Financial liabilities:
Deposit liabilities....................... 31,634,000 31,660,000 26,956,000 26,921,000
Short-term borrowings..................... 9,000,000 9,000,000 14,500,000 14,500,000
Long-term borrowings...................... 9,271,000 8,865,000 4,812,000 4,470,000
Off-balance-sheet liabilities
Commitments to extend credit.............. --- 3,137,000 --- 2,401,000
</TABLE>
48
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 15: Condensed Parent Company Only Financial Statements
The following condensed balance sheets as of June 30, 1997 and 1996 and
condensed statements of income and cash flows for the periods ended June 30,
1997, 1996 and 1995 for Forrest City Financial Corporation should be read in
conjunction with the consolidated financial statements and the notes thereto.
<TABLE>
<CAPTION>
BALANCE SHEET
June 30,
----------------------------------------
1997 1996
----------------- -----------------
ASSETS
<S> <C> <C>
Cash and cash equivalents................................................ $204,660 $168,597
Investment securities.................................................... 773,015 914,626
Accrued interest receivable.............................................. 13,770 20,158
Other assets............................................................. 7,300 7,300
Equity in net assets of the Bank......................................... 4,167,997 3,892,940
----------------- -----------------
Total assets........................................................ $5,166,742 $5,003,621
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities........................................................ $ --- $ ---
Accrued income taxes..................................................... 19,700 19,700
----------------- -----------------
Total liabilities................................................... $19,700 $19,700
----------------- -----------------
Common stock............................................................. $2,361 $2,361
Additional paid-in capital............................................... 3,215,529 3,217,493
Retained earnings........................................................ 2,734,954 2,466,005
Unrealized gain (loss) on securities held for sale....................... 929 (1,748)
Common stock acquired by ESOP............................................ (110,028) (165,042)
Common stock acquired by MRP............................................. (48,132) (68,760)
Treasury stock........................................................... (648,571) (466,388)
----------------- -----------------
Total stockholders' equity.......................................... $5,147,042 $4,983,921
----------------- -----------------
Total liabilities and stockholders' equity.......................... $5,166,742 $5,003,621
================= =================
</TABLE>
49
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 15: Condensed Parent Company Only Financial Statements (continued)
<TABLE>
<CAPTION>
STATEMENT OF INCOME
For the Periods Ending June 30,
-----------------------------------------------------------------
1997 1996 1995
----------------- ----------------- ------------------
<S> <C> <C> <C>
Equity in earnings of the Bank......................... $236,153 $238,138 $131,000
Interest income........................................ 71,957 85,986 88,393
Dividend income from Forrest City Bank................. --- 25,000 75,000
Gain on sale of investments............................ --- 3,162 ---
Other expenses......................................... (78,065) (63,776) (69,943)
Income taxes........................................... --- (10,000) (2,400)
----------------- ----------------- ------------------
Net earnings...................................... $230,045 $278,510 $222,050
================= ================= ==================
</TABLE>
50
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
Notes to Consolidated Financial Statements
NOTE 15: Condensed Parent Company Only Financial Statements (continued)
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
For the Periods Ending June 30,
------------------------------------------------------------------
1997 1996 1995
----------------- ----------------- -------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $230,045 $278,510 $222,050
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization.............................................. 19,744 22,959 19,462
Gain on sale of investment securities..................... --- (3,162) ---
Equity in earnings of Bank................................ (236,153) (238,138) (131,000)
Decrease in accrued interest receivable................... 6,388 15,659 (35,817)
Increase in other assets.................................. --- --- (110,440)
Increase (decrease) in other liabilities.................. --- (8,000) 8,000
Increase in accrued income taxes.......................... --- 10,000 9,700
----------------- ----------------- -------------------
Net cash provided (used) by operating activities........ $20,024 $77,828 ($18,045)
----------------- ----------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on loan to ESOP....................... $55,014 $55,014 $55,014
Loan to ESOP.............................................. --- --- (275,070)
Purchase of investment securities......................... (54,828) (318,034) (1,403,219)
Purchase of common stock of Bank.......................... --- --- (1,558,357)
Proceeds from maturities of investment securities......... 200,000 600,000 200,000
----------------- ----------------- -------------------
Net cash provided (used) by investing activities........ $200,186 $336,980 ($2,981,632)
----------------- ----------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock........................ $ --- $ --- $3,219,854
Proceeds from sale of treasury stock...................... 22,456 --- ---
Purchase of treasury stock................................ (206,603) (325,978) (140,410)
----------------- ----------------- -------------------
Net cash provided (used) by financing activities........ ($184,147) ($325,978) $3,079,444
----------------- ----------------- -------------------
Net increase in cash and cash equivalents..................... $36,063 $88,830 $79,767
Cash and cash equivalents - beginning of period............... 168,597 79,767 ---
----------------- ----------------- -------------------
Cash and cash equivalents - end of period..................... $204,660 $168,597 $79,767
================= ================= ===================
</TABLE>
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
STOCKHOLDER INFORMATION
ANNUAL MEETING
The annual meeting of stockholders will be held at 8:30 a.m., Tuesday, October
28, 1997, at the main office of the Company located at 715 North Washington
Street, Forrest City, Arkansas.
STOCK LISTING
The Company's stock is traded on the "pink sheets" published by the National
Quotation Bureau, Inc.
PRICE RANGE OF COMMON STOCK
The following tables sets forth the high and low bid prices of the Common
Stock in fiscal 1997 and 1996. These prices do not represent actual
transactions and do not include retail mark-ups, mark-downs or commissions.
Fiscal 1997 High Low
- ----------- ------ ---
First Quarter.......................................... $17.00 $16.00
Second Quarter......................................... 16.75 16.75
Third Quarter.......................................... 21.60 17.50
Fourth Quarter......................................... 21.13 21.13
Fiscal 1996 High Low
- ----------- ------- ---
First Quarter.......................................... $14.00 $12.00
Second Quarter......................................... 13.25 12.00
Third Quarter.......................................... 16.75 13.25
Fourth Quarter......................................... 16.75 16.25
The Company has not declared any dividends on its Common Stock. Dividend
payment decisions are made with consideration of a variety of factors
including earnings, financial condition, market considerations and regulatory
restrictions. Restrictions on dividend payments are described in Note 13 of
the Notes to Financial Statements included in this report.
As of September 16, 1997, the Company had approximately 71 stockholders of
record and 194,677 outstanding shares of common stock.
SHAREHOLDERS AND GENERAL INQUIRIES TRANSFER AGENT
John R. Stipe, President Registrar and Transfer Company
Forrest City Financial Corporation 10 Commerce Drive
715 N. Washington, P.O. Box 1935 Cranford, New Jersey 07016
Forrest City, Arkansas 72336-1935 (908) 272-8511
(870) 633-1525
ANNUAL AND OTHER REPORTS
The Company is required to file an annual report on Form 10-KSB for its fiscal
year ended June 30, 1997, with the Securities and Exchange Commission. Copies
of the Form 10-KSB annual report and the Company's quarterly reports may be
obtained without charge by contacting:
John R. Stipe, President
Forrest City Financial Corporation
715 N. Washington, P.O. Box 1935
Forrest City, Arkansas 72336-1935
(870) 633-1525
52
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
CORPORATE INFORMATION
<TABLE>
<CAPTION>
COMPANY AND BANK ADDRESS
<S> <C>
715 N. Washington Telephone: (870) 633-1525
P.O. Box 1935 Fax: (870) 633-8212
Forrest City, Arkansas 72336-1935
DIRECTORS OF THE BOARD
Ted C. Parker John R. Stipe
Chairman of the Board President, Chief Executive Officer and Director
Forrest City Financial Corporation Forrest City Financial Corporation
Forrest City, Arkansas Forrest City, Arkansas
Billy M. Cline John C. Beane, Jr.
Executive Director of the Arkansas Board Retired Practicing Optometrist
of Registration for Professional Forrest City, Arkansas
Engineers and Land Surveyors
North Little Rock, Arkansas Diana S. Arwood
Retired Senior Vice President, Chief
Steven K. Cranford Financial Officer and Treasurer of
Farmer Forrest City Bank, FSB
Forrest City, Arkansas Forrest City, Arkansas
Frankie L. Pratt
Executive Vice President
Forrest City Financial Corporation
Forrest City, Arkansas
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY OFFICERS
Ted C. Parker John R. Stipe
Chairman of the Board President and Chief Executive Officer
Kevin S. Jumper Frankie L. Pratt
Chief Financial Officer and Treasurer Executive Vice President
Sharon K. Eason John King Casbeer
Corporate Secretary Vice President/Credit
INDEPENDENT CORPORATE SPECIAL
AUDITORS COUNSEL COUNSEL
Frazee, Fox & Dodge, Ltd. Easley, Hickey, Cline & Hudson Silver, Freedman & Taff, L.L.P.
221 West Second Street, Suite 701 510 E. Cross Street 1100 New York Avenue, N.W.
Little Rock, Arkansas 72201 Forrest City, Arkansas 72335 Washington, D.C. 20005
</TABLE>
53
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Subsidiary or Percent of State of
Parent Organization Ownership Incorporation
------ ------------ --------- -------------
<S> <C> <C> <C>
Forrest City Financial Forrest City Bank, N.A. 100% Federal
Corporation
</TABLE>
<PAGE>
EXHIBIT 23
[FRAZEE, FOX & DODGE, LTD. LETTERHEAD]
CONSENT AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference of our report
dated August 1, 1997, relating to the consolidated financial statements of
Forrest City Financial Corporation which appear in the Annual Report to
stockholders and Form 10-KSB for the year ended June 30, 1997 and Forrest City
Financial Corporation's previously filed registration statements #33-96322 and
#33-96324.
FRAZEE, FOX & DODGE, LTD.
/s/ Frazee, Fox & Dodge, Ltd.
-----------------------------
Certified Public Accounts
September 25, 1997
Little Rock, Arkansas
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 279,536
<INT-BEARING-DEPOSITS> 1,076,087
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,089,367
<INVESTMENTS-CARRYING> 8,331,062
<INVESTMENTS-MARKET> 8,132,530
<LOANS> 35,505,539
<ALLOWANCE> (262,800)
<TOTAL-ASSETS> 55,800,377
<DEPOSITS> 31,633,909
<SHORT-TERM> 10,252,835
<LIABILITIES-OTHER> 748,753
<LONG-TERM> 8,017,838
0
0
<COMMON> 2,361
<OTHER-SE> 5,147,042
<TOTAL-LIABILITIES-AND-EQUITY> 55,800,377
<INTEREST-LOAN> 2,882,594
<INTEREST-INVEST> 1,007,387
<INTEREST-OTHER> 259,762
<INTEREST-TOTAL> 4,149,743
<INTEREST-DEPOSIT> 1,390,919
<INTEREST-EXPENSE> 2,504,650
<INTEREST-INCOME-NET> 1,645,093
<LOAN-LOSSES> 94,854
<SECURITIES-GAINS> 9,911
<EXPENSE-OTHER> 1,450,470
<INCOME-PRETAX> 391,045
<INCOME-PRE-EXTRAORDINARY> 391,045
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 230,045
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.16
<YIELD-ACTUAL> 0
<LOANS-NON> 82,296
<LOANS-PAST> 82,296
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (263,249)
<CHARGE-OFFS> (108,492)
<RECOVERIES> 13,189
<ALLOWANCE-CLOSE> (262,800)
<ALLOWANCE-DOMESTIC> (262,800)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> (166,000)
</TABLE>
