<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------------------
FORM 10-QSB
[ x ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from ________________ to ______________
Commission File Number 0-24304
FORREST CITY FINANCIAL CORPORATION
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(Exact name of small business issuer as specified in its charter)
Delaware 71-0756156
- ---------------------------- ---------------
(State or other jurisdiction (IRS Employer
of incorporation or Identification
organization) Number)
715 North Washington Street, Forrest City, AR 72335
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(Address of principal executive offices)
(501) 633-1525
----------------
(Registrant's telephone number)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act 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 [ ]
State the number of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date: As of February 5, 1997, there
were 200,953 shares of the registrant's common stock issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ ]
<PAGE>
FORREST CITY FINANCIAL CORPORATION
AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION (unaudited) PAGE NO.
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Statements of Financial
Condition December 31, 1996 and June 30, 1996 3
Consolidated Condensed Statements of Operations
for the Three and Six Months Ended
December 31, 1996 and 1995 4
Consolidated Condensed Statements of Cash Flows
for the Six Months Ended December 31, 1996
and 1995 5
Notes to Consolidated Condensed
Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION 19
Signature Page 20
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<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
December 31, June 30,
1996 1996
------------ -----------
ASSETS
Cash and Cash Equivalents
Cash and amounts due from depository institution $ 228,482 $ 213,514
Interest-bearing deposits in other banks 1,508,414 1,039,850
----------- -----------
Total cash and cash equivalents $ 1,736,896 $ 1,253,364
Securities available for sale, at fair value 8,641,761 8,324,402
Securities held to maturity (fair value $8,561,866
at December 31, 1996 and $9,465,167 at
June 30, 1996) 8,773,568 9,759,519
Loans receivable, net 33,817,150 30,418,821
Office properties and equipment, net 480,550 458,577
Stock in FHLB and FRB, at cost 1,203,300 982,000
Accrued interest receivable 347,589 330,382
Foreclosed real estate, net 168,747 146,000
Other assets 177,792 227,711
----------- -----------
Total Assets $55,347,353 $51,900,776
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $29,343,672 $26,955,716
Borrowed Funds 19,924,663 19,311,770
Advances from borrowers for taxes and insurance 212,274 132,517
Accrued expenses and other liabilities 713,766 435,093
Income taxes 81,759 81,759
----------- -----------
Total Liabilities $50,276,134 $46,916,855
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 100,000
shares authorized; none issued $ - $ -
Common Stock, $.01 par value; 500,000 shares
authorized; 236,109 issued; 201,165 and
201,699 outstanding respectively 2,361 2,361
Additional Paid In Capital 3,217,493 3,217,493
Retained Earnings - substantially restricted 2,523,050 2,491,914
Unrealized loss on securities available-for-sale (372) (27,657)
Less common stock acquired by:
Employee Stock Ownership Plan (137,535) (165,042)
Management Recognition & Retention Plan ( 58,446) ( 68,760)
Treasury Stock - 33,570 and 33,036 shares, at cost (475,332) (466,388)
----------- -----------
Total Stockholders' Equity $ 5,071,219 $ 4,983,921
----------- -----------
Total Liabilities and Stockholders' Equity $55,347,353 $51,900,776
=========== ===========
See accompanying Notes to Consolidated Condensed Financial Statements.
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<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- -------------------------
1996 1995 1996 1995
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest on loans $ 734,727 $501,367 $1,420,547 $ 976,442
Interest on mortgage-backed securities 254,934 304,029 527,266 619,242
Interest on investment securities 68,509 64,780 132,590 131,526
---------- -------- ---------- ----------
Total interest income $1,058,170 $870,176 $2,080,403 $1,727,210
---------- -------- ---------- ----------
INTEREST EXPENSE
Savings and time deposits $ 324,366 $343,163 $ 654,557 $ 682,496
Borrowed Funds 298,079 233,416 592,350 460,676
---------- -------- ---------- ----------
Total interest expense $ 622,445 $576,579 $1,246,907 $1,143,172
---------- -------- ---------- ----------
Net interest income $ 435,725 $293,597 $ 833,496 $ 584,038
PROVISION FOR LOAN LOSSES - - 44,418 -
---------- -------- ---------- ----------
Net interest income after provision
for loan losses $ 435,725 $293,597 $ 789,078 $ 584,038
---------- -------- ---------- ----------
OTHER INCOME
Loan fees and service charges $ 19,044 $ 5,985 $ 33,506 $ 16,117
Gain on sale of securities - 23,926 7,841 23,926
Other operating income 67,782 21,274 106,344 34,546
---------- -------- ---------- ----------
Total other income $ 86,826 $ 51,185 $ 147,691 $ 74,589
---------- -------- ---------- ----------
OTHER EXPENSE
Compensation and benefits $ 156,759 $140,166 $ 314,561 $ 273,709
Occupancy expense 13,548 14,979 28,132 30,073
Federal insurance premiums 37,288 18,662 227,361 37,416
Data processing expense 21,643 17,114 46,058 31,722
Professional Fees 35,977 19,091 60,196 40,104
Net cost of operations of foreclosed
real estate (1,079) (1,296) (1,495) 209
Other operating expenses 72,898 54,210 134,320 91,304
---------- -------- ---------- ---------
Total other expense $ 337,034 $262,926 $ 809,133 $ 504,537
---------- -------- ---------- ---------
Income before income tax expense $ 185,517 $ 81,856 $ 127,636 $ 154,090
INCOME TAX EXPENSE 71,500 25,473 96,500 50,583
--------- -------- ---------- ---------
NET INCOME $ 114,017 $ 56,383 $ 31,136 $ 103,507
========== ======== ========== =========
Earnings per common share $ .56 $ .26 $ .15 $ .47
========== ======== ========== =========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
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<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
FORREST CITY, ARKANSAS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 31,136 $ 103,507
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 16,542 17,742
Amortization of deferred compensation 37,821 37,821
Amortization of deferred loan fees (6,395) (30,992)
Premium amortization, net of discount accretion 20,481 34,469
Provision for losses on loans and real estate 44,418 -
Net realized gains on available for sale securities (7,841) (23,926)
Decrease (increase) in accrued interest (17,207) (20,249)
Decrease (increase) in other assets 61,134 13,894
Decrease (increase) in cash value life insurance (11,214) (11,214)
Increase (decrease) in accrued expenses 278,673 (21,050)
----------- -----------
Net cash provided by operating activities $ 447,548 $ 100,002
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans made to customers $(3,436,352) $(3,150,636)
Purchase of office property and equipment (38,515) (8,651)
Purchase of FHLB and FRB Stock (221,300) (345,200)
Purchase of held-to-maturity securities - (1,480,917)
Proceeds from maturities of held-to-maturity securities 932,140 2,500,307
Purchases of available-for-sale securities (1,733,381) (110,077)
Proceeds from sales of available-for-sale securities 587,018 2,669,018
Proceeds from maturities of available-for-sale securities 897,459 -
Investment in foreclosed real estate (22,747) -
----------- -----------
Net cash provided (used) in investing activities $(3,035,678) $ 73,844
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 2,387,956 $ 1,269,530
Net increase (decrease) in short-term from FHLB (4,500,000) 8,500,000
Net decrease in short-term borrowings of securities
sold under agreements to repurchase - (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 (387,107) (28,154)
Purchase of treasury stock (8,944) (146,988)
Net increase in advances from borrowers for taxes
and insurance 79,757 13,624
----------- -----------
Net cash provided by financing activities $ 3,071,662 $ 608,012
----------- -----------
Net increase in cash $ 483,532 $ 781,858
Cash - beginning of year 1,253,364 1,348,415
----------- -----------
Cash - end of year $ 1,736,896 $ 2,130,273
=========== ===========
CASH PAID DURING THE PERIOD FOR:
Interest $ 779,460 $ 684,757
Income Taxes 83,000 -
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Increase (decrease) in unrealized loss on
securities available-for-sale (27,285) 22,113
Acquisition of real estate in settlement of loans 141,335 -
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
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<PAGE>
FORREST CITY FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Forrest City Financial Corporation (the "Holding Corporation") and
its wholly-owned subsidiary, Forrest City Bank, FSB (the "Bank"). All
significant intercompany transactions have been eliminated in
consolidation. The accompanying financial statements for the interim
periods are unaudited. In the opinion of management, the accompanying
consolidated financial statements contain all adjustments (consisting
of normal recurring adjustments) which are necessary for a fair
presentation of the results of operations for such periods but should
not be considered as indicative of results for a full year.
2. CONVERSION
The Bank completed a conversion from a mutual to a stock savings and
loan association on July 28, 1994. Simultaneous with the conversion was
the formation of the Holding Corporation, incorporated in the State of
Delaware. The initial issuance of shares of common stock in the Holding
Corporation on July 28, 1994 was 229,233 shares at $15 per share,
resulting in net proceeds of $3,116,713 and was accomplished through a
subscription and community offering. Costs associated with the
conversion and stock offering amounted to $322,000 and was accounted
for as a reduction of the proceeds from the issuance of common stock of
the Holding Corporation. Upon closing of the stock offering, the
Holding Corporation purchased all common shares issued by the Bank.
This transaction was accounted for in a manner similar to the pooling
of interests method.
Federal regulations require that, upon conversion from a mutual to
stock form of ownership, a "liquidation account" be established by
restricting a portion of net worth for the benefit of eligible savings
account holders who maintain their savings accounts with the Bank after
conversion.
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<PAGE>
FORREST CITY FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
In the event of complete liquidation (and only in such event), each
savings account holder who continues to maintain his savings account
shall be entitled to receive a distribution from the liquidation
account after payment to all creditors, but before any liquidation
distribution with respect to capital stock. This account will be
proportionately reduced for any subsequent reduction in the eligible
holders' savings accounts.
Federal regulations imposes limitations on the payment of dividends and
other capital distributions, including, among other, that the Bank may
not declare or pay a cash dividend on any of its stock if the effect
thereof would cause the Bank's capital to be reduced below the amount
required for the liquidation account or the capital requirements
imposed by the Financial Institutions Reform Recovery and Enforcement
Act (FIRREA) and the Office of Thrift Supervision (the "OTS").
3. EMPLOYEE STOCK OWNERSHIP PLAN
The Holding Corporation has established an employee stock ownership
plan ("ESOP"). At the date of the conversion described in Note 2, the
ESOP purchased 18,338 shares of common stock of the Holding Corporation
financed by a loan to the ESOP from the Holding Corporation. The
balance of the loan was $138,000 at December 31, 1996 and is reflected
as a reduction of consolidated stockholders' equity although the
borrowing is not guaranteed by the Holding Corporation or the Bank and
does not constitute a legally binding contribution commitment. The
borrowing is payable in quarterly principal payments of $13,754 over a
five year period plus interest. All full-time employees are eligible to
participate in the ESOP after attaining age 21 and completing one year
of service during which they worked at least 1,000 hours.
4. MANAGEMENT RECOGNITION AND RETENTION PLAN
The Holding Corporation has established a Management Recognition and
Retention Plan ("MRP") as a method of providing key officers with a
proprietary interest in the Holding Corporation in a manner designed to
encourage such individuals to remain with the Holding Corporation or
- 7 -
<PAGE>
FORREST CITY FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Bank. The awards vest at a rate of 20% per year, with the
first installment vesting October 25, 1995, and annually
thereafter.
Pursuant to the MRP, restricted stock awards for shares of the
Corporation's common stock aggregating 3% or 6,876 shares of common
stock issued during conversion were reserved from authorized but
unissued shares. The Corporation has granted 6,102 shares as of
December 31, 1996. Consolidated stockholder's equity was reduced by the
unearned compensation in the amount of $103,140. The balance of the
unvested portion was approximately $58,000 at December 31, 1996.
5. EARNINGS PER COMMON SHARE
Earnings per share of common stock is computed by dividing the
weighted average number of shares of common stock and common stock
equivalents outstanding during the periods ended. The weighted average
number of shares used in the earnings per share computation were
201,165 and 201,377 for the three-month and six-month periods ended
December 31, 1996 respectively.
On October 25, 1994, shareholders of the Corporation ratified
the adoption of the Corporation's 1994 Stock Option and Incentive Plan.
Pursuant to the Stock Option and Incentive Plan, 22,923 shares of the
Corporation's common stock has been reserved for issuance from
authorized but unissued shares, of which the Corporation has granted
options on 20,629 shares at a price of $14 per share on 18,337 share
and $16 on 2,292 shares. As of December 31, 1996, options on 22,923
shares of the Corporation common stock remain unexercised.
- 8 -
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Forrest City Financial Corporation (the "Holding Corporation") was
incorporated under the laws of the State of Delaware to become a savings and
loan holding company with Forrest City Bank, FSB (the "Bank") as its subsidiary.
The Holding Corporation was incorporated at the direction of the Board of
Directors of the Bank and on July 28, 1994 acquired all of the capital stock of
the Bank upon its conversion from mutual to stock form (the "Conversion"). Prior
to the Conversion, the Holding Corporation did not engage in any material
operations and had no significant assets.
The Bank is principally engaged in the business of attracting retail
savings deposits from the general public and investing those funds in first
mortgage loans on owner occupied, single-family residential loans, multi-family
loans, investment and mortgage-backed securities. To a lesser extent, the Bank
offers secured consumer loans, including home equity loans, loans secured by
savings deposits and unsecured consumer credit. 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 December 31, 1996, approximately $114,000 of the consumer loan portfolio was
not performing. There can be no assurance that additional delinquencies will not
occur in the future.
The Corporation's results of operations are primarily dependent upon
the difference (or "spread") between the average yield earned on loans,
mortgage-backed securities and other investments and the average rate paid on
deposits and borrowings. The interest rate spread is affected by regulatory,
economic and competitive factors that influence interest rates, loan demand and
deposit flows. The Corporation had experienced a decline in this spread as a
result of increases in interest rates paid on interest-bearing liabilities as
compared to interest earned on interest-earning assets due to repricing. The
Corporation has seen recent improvement in the spread with the stabilization of
short-term rates and repricing of rate sensitive assets.
The Corporation commenced a stock repurchase program whereby the
Corporation may repurchase its common stock in the open market. At December 31,
1996, the Corporation had repurchased and held 33,570 shares as treasury stock
at a cost of $475,332.
- 9 -
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Effective January 1, 1997, Forrest City Bank, FSB converted to a
national-chartered bank and changed its name to Forrest City Bank, N.A. In
conjunction with this conversion, Forrest City Financial Corporation has
converted its charter to a national bank holding company.
FINANCIAL CONDITION
Total assets of the Corporation increased $3.4 million, or 6.6% to
$55.3 million at December 31, 1996 compared to $51.9 million at June 30, 1996.
This increase was primarily reflected in an increase in net loans receivable and
cash in banks.
Securities available for sale increased $.3 million, or .38% to $8.6
million at December 31, 1996 compared to $8.3 million at June 30, 1996. The net
increase results from purchases of $1.7 million offset by sales and maturities
of $1.4 million. Realized gains on sales was approximately $8,000 for the
quarter ended December 31, 1996.
Securities held to maturity decreased $1.0 million, or 10.1% to $8.7
million at December 31, 1996 compared to $9.7 million at June 30, 1996. This
decrease is due to maturities and principal payments received for assets in this
classification. There were no purchases of securities under the held to maturity
category for the quarter ended December 31, 1996.
Loans receivable increased $3.4 million, or 11.2% to $33.8 million at
December 31, 1996 compared to $30.4 million at June 30, 1996. This increase was
primarily due to an increase in first mortgage loans. Stock in the Federal Home
Loan and Federal Reserve Banks increased $221,300, or 22.5% to $1,203,300 at
December 31, 1996 compared to $982,000 at June 30, 1996. This increase is due to
required purchases as a result of increased borrowings and total assets.
Total deposits increased $2.3 million or 8.9% to $29.3 million at
December 31, 1996 compared to $27.0 million at June 30, 1996. Management
believes the increase in deposit base to be attributable to the stabilization of
interest rates in the market area and an increase in its efforts in checking
account services offered by the Bank. These factors have had a direct impact on
both the number of transaction accounts and the resulting increase in deposit
account balances.
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<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Borrowed funds increased $.6 million, or 3.2% to $19.9 million at
December 31, 1996 compared to $19.3 million at June 30, 1996. The increase in
borrowed funds was primarily used to fund the increased activity in mortgage
lending.
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1996
COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1995
Net income increased by $58,000 to $114,000 for the quarter ended
December 31, 1996 compared to $56,000 for the quarter ended December 31, 1995.
The increase was primarily due to a greater increase in net interest income and
account service fees over increases in other operating expenses for the quarter
ended December 31, 1996 as compared to the same period ended December 31, 1995.
Further discussion of changes in these and other items are discussed below.
Net Interest Income. Net interest income increased $142,000 or 48.4%
from $294,000 to $436,000 for the quarter ended December 31, 1996. This increase
reflects an improved interest rate spread and an increase in average interest
earning assets over interest bearing liabilities for the period. The impact of
repricing has also had a positive effect on the interest rate spread.
Interest Income. Interest income increased $188,000 or 21.6% to
$1,058,000 for the quarter ended December 31, 1996 compared to $870,000 for the
same period ended December 31, 1995. The increase was primarily due to increases
in interest earned on loans. Interest income on loans increased $233,000 for the
quarter ended December 31, 1996 compared to the quarter ended December 31, 1995.
The increases are attributable to both larger balances invested in the portfolio
and an overall increase in yield.
Interest Expense. Interest expense increased by $46,000 or 8.0% to
$622,000 for the quarter ended December 31, 1996 compared to $576,000 for the
quarter ended December 31, 1995. The increase was due to increased interest
expense on Federal Home Loan Bank borrowings during the quarter ended December
31, 1996 compared to the quarter ended December 31, 1995. Interest expense on
these borrowings totaled $298,000 compared to $233,000 for the quarters ended
December 31, 1996 and 1995, respectively. The increase in interest expense on
borrowed funds was slightly offset by a decrease in interest expense on savings
and time deposits. Interest expense on savings and time deposits decreased by
$19,000 or 5.5% to $324,000 for the quarter ended
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<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
December 31, 1996 compared to $343,000 for the quarter ended December 31, 1995.
Provision for Loan Losses. No additions to the provision for loan
losses were made for the quarters ended December 31, 1996 and 1995. Management
continues to monitor its allowance for loan losses and may make future additions
to the allowance through the provision for loan losses as economic and
regulatory conditions dictate. Although the Bank maintains its allowance for
loan losses at a level which it considers to be adequate to provide for
potential losses, there can be no assurance that future losses will not exceed
estimated amounts or that additional provisions for loan losses will not be
required in future periods. In addition, the Bank's determination as to the
amounts of the allowance for loan losses is subject to review by regulatory
agencies which can order the establishment of additional general or specific
allowances.
Non-Interest Income. Non-interest income increased $36,000 for the
quarter ended December 31, 1996 compared to the same period ended December 31,
1995. This increase was primarily due to an increase in service fee income
relative to the Bank's transaction account customers.
Non-Interest Expense. Non-interest expense increased $74,000 or 28.2%
to $337,000 for the three months ended December 31, 1996 compared to $263,000
for the three months ended December 31, 1995. Compensation and employee benefits
increased $17,000 as a result of added personnel to handle the increased
transaction volume of the Bank. Other operating expenses for office supplies,
postage, processing and service fees have increased due to the increase in
transaction volume and new accounts. Federal insurance premiums and assessments
increased by $18,000 for the quarter ended December 31, 1996 compared to the
same period ended December 31, 1995. Professional fees increased by $17,000 for
the quarter ended December 31, 1996 compared to December 31, 1995 as a result of
increased legal fees incurred relative to the Bank's conversion to a national
bank charter.
Income Tax Expense. Income tax expense was $72,000 for the quarter
ended December 31, 1996 compared to $25,000 for the quarter ended December 31,
1995. The current income tax expense represents estimated tax on an annualized
basis based on management's estimated earnings for the period.
- 12 -
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - SIX MONTHS ENDED DECEMBER 31, 1996
COMPARED TO SIX MONTHS ENDED DECEMBER 31, 1995.
Net income decreased by $72,000 to $31,000 for the six-month period
ended December 31, 1996 compared to $103,000 for the six-month period ended
December 31, 1995. The decrease was primarily due to the one-time charge to
recapitalize the Savings Association Insurance Fund during the first quarter of
the Bank's fiscal year of approximately $168,000. Further discussion of changes
of this and other items are discussed below.
Net Interest Income. Net interest income increased $249,000 or 42.7%
from $584,000 to $833,000 for the six-month period ended December 31, 1996. This
increase reflects an improved interest rate spread and an increase in average
interest earning assets over interest bearing liabilities for the period. The
impact of repricing has also had a positive effect on the interest rate spread.
Interest Income. Interest income increased $353,000 or 20.4% to
$2,080,000 for the six-month period ended December 31, 1996 compared to
$1,727,000 for the same period ended December 31, 1995. The increase was
primarily due to increases in interest earned on loans. Interest income on loans
increased $444,000 for the six-month period ended December 31, 1996 compared to
the six-month period ended December 31, 1995. The increases are attributable to
both larger balances invested in the portfolio and an overall increase in yield.
Interest Expense. Interest expense increased by $104,000 or 9.1% to
$1,247,000 for the six-month period ended December 31, 1996 compared to
$1,143,000 for the six-month period ended December 31, 1995. The increase was
due to increased interest expense on Federal Home Loan Bank borrowings during
the six-month period ended December 31, 1996 compared to the six-month period
ended December 31, 1995. Interest expense on these borrowings totaled $592,000
compared to $461,000 for the six-month periods ended December 31, 1996 and 1995,
respectively. The increase in interest expense on borrowed funds was slightly
offset by a decrease in interest on savings and time deposits. Interest expense
on savings and time deposits decreased by $28,000 or 4.1% to $654,000 for the
six-month period ended December 31, 1996 compared to $682,000 for the six-month
period ended December 31, 1995.
Provision for Loan Losses. The provision for loan
losses was $44,418 and $-0- for the six-month periods ended
- 13 -
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
December 31, 1996 and 1995, respectively. Management continues to monitor its
allowance for loan losses and may make future additions to the allowance through
the provision for loan losses as economic and regulatory conditions dictate.
Although the Bank maintains its allowance for loan losses at a level which it
considers to be adequate to provide for potential losses, there can be no
assurance that future losses will not exceed estimated amounts or that
additional provisions for loan losses will not be required in future periods. In
addition, the Bank's determination as to the amounts of the allowance for loan
losses is subject to review by regulatory agencies which can order the
establishment of additional general or specific allowances.
Non-Interest Income. Non-interest income increased $73,000 for the
six-month period ended December 31, 1996 compared to the same period ended
December 31, 1995. This increase was primarily due to an increase in service fee
income relative to the Bank's transaction account customers.
Non-Interest Expense. Non-interest expense increased $305,000 or 60.4%
to $809,000 for the six-month period ended December 31, 1996 compared to
$504,000 for the six-month period ended December 31, 1995. Compensation and
employee benefits increased $41,000 as a result of added personnel to handle the
increased transaction volume of the Bank. Other operating expenses for office
supplies, postage, processing and service fees have increased due to the
increase in transaction volume and new accounts. Federal insurance premiums and
assessments increased by $190,000 for the six-month period ended December 31,
1996 compared to the same period ended December 31, 1995. This increase was
primarily due to the special assessment of approximately $168,000. Professional
fees increased by $20,000 for the six-month period ended December 31, 1996
compared to December 31, 1995 as a result of increased legal fees incurred
relative to the Bank's conversion to a national bank charter.
Income Tax Expense. Income tax expense was $97,000 for the six-month
period ended December 31, 1996 compared to $51,000 for the six-month period
ended December 31, 1995. The current income tax expense represents estimated tax
on an annualized basis based on management's estimated earnings for the period.
- 14 -
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NON-PERFORMING ASSETS AND LOAN LOSS PROVISION
The allowance for loan losses was $298,000 or .88% of loans receivable,
net at December 31, 1996 as compared to .86% of loans receivable, net at June
30, 1996.
The ratio of non-performing assets to total assets is one indicator of the
exposure to credit risk. Non-performing assets of the Company may consist of
non-accruing loans, accruing loans delinquent 90 days or more and foreclosed
assets which have been acquired as a result of foreclosure, deed-in-lieu of
foreclosure or deemed foreclosed.
The table below sets forth the amounts and categories of non-performing
assets in the Bank's loan portfolio.
December 31, June 30,
1996 1996
-------- --------
Non-accruing loans:
One- to four-family $ 13,010 $ 124,209
Commercial 18,783 -
Consumer 114,213 186,369
-------- --------
Total $ 146,006 $ 310,578
-------- --------
Foreclosed assets:
One- to four-family $ 168,747 $ 69,500
Multi-family - -
Commercial real estate - 76,500
-------- --------
Total $ 168,747 $ 146,000
-------- --------
Total non-performing assets $ 314,753 $ 456,578
========= =========
Total as a percentage of total assets .57% .88%
==== ====
Total non-performing assets decreased to $314,753 or .57% of total
assets at December 31, 1996 from $456,578 or .88% of total assets at June 30,
1996. The decrease in non-performing assets was primarily due to a decrease in
non-accruing loans which were delinquent greater than 90 days at December 31,
1996 as compared to June 30, 1996.
OTHER LOANS OF CONCERN
In addition to the non-performing assets and foreclosed assets as of
December 31, 1996, there was also an aggregate
- 15 -
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
$221,000 in net book value of loans classified by Management 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 some doubts
as to the ability of the borrowers to comply with present loan repayment terms
and which my result in the future inclusion of such items in the non-performing
asset categories. The principal components of loans of concern are $182,000 of
special mention assets, all of which are performing and $39,000 of substandard
assets, primarily single-family loans that have exhibited poor payment
histories.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits and repayment of loans
and mortgage-backed securities and interest earned on investments. 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.
Federal regulations historically have required the Bank to maintain
minimum levels of liquid assets. The required percentage has varied from time to
time based upon economic conditions and savings flows and is currently 5% of net
withdrawable savings deposits and borrowings payable on demand or in one year or
less during the preceding calendar month. Liquid assets for purposes of this
ratio include cash, certain time deposits, U.S. Government, government agency
and corporate securities and other obligations generally having remaining
maturities of less than five years. The Bank has historically maintained its
liquidity ratio at levels in excess of those required. At December 31, 1996, the
Bank's liquidity ratio was 6.97%.
Other potential sources of funds available to the Bank include
borrowings from the Federal Home Loan Bank of Dallas. At December 31, 1996, the
Bank had $19.9 million of Federal Home Loan Bank borrowings 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 December 31, 1996, the Bank had
outstanding
- 16 -
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
commitments to extend credit amounting to approximately $1.9 million. Management
believes that loan repayments and other sources of funds will be adequate to
meet the Bank's foreseeable liquidity needs.
The Bank is required to maintain specific amounts of regulatory capital
pursuant to regulations of the Office of Thrift Supervision ("OTS"). The table
below presents the capital position at December 31, 1996 relative to the
regulatory capital requirements. Such requirements may increase if proposed
capital regulations are implemented. Management believes the Bank will meet the
requirements of the proposed capital regulations.
PERCENT OF
AMOUNT ASSETS (1)
------ ----------
(in thousands)
Tangible capital $ 3,964 7.28%
Tangible capital requirement 816 1.50
--------- -----
Excess $ 3,148 5.78%
========= =====
Core capital $ 3,964 7.28%
Core capital requirement 1,632 3.00
--------- -----
Excess $ 2,332 4.28%
--------- -----
Risk-based capital $ 4,208 14.70%
Risk-based capital requirement 2,291 8.00
--------- -----
Excess $ 1,917 6.70%
========= =====
(1) Based upon adjusted assets for purposes of the tangible capital and core
capital requirements, and risk-weighted assets for purposes of the risk-based
capital requirements.
- 17 -
<PAGE>
FORREST CITY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Under the Federal Deposit Insurance Corporation Improvement Act
("FDICIA"), all the federal banking agencies, including the OTS, must revise
their risk-based capital requirements to ensure that such requirements account
for interest rate risk, concentration of credit risk and the risks of
non-traditional activities, and that they reflect the actual performance of and
expected loss on multi-family loans. Such standards must be adopted within 18
months of the enactment of FDICIA.
The OTS has adopted a final rule that requires every savings bank with
more than normal interest rate risk to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings bank, greater than 2.0% of the present value of its assets,
based upon a hypothetical 200 basis point increase or decrease in interest rates
(whichever results in a greater decline). Net portfolio value is the present
value of expected cash flows from assets, liabilities and off-balance sheet
contracts. The rule provides for a two quarter lag between calculating interest
rate risk and recognizing any deduction from capital. Institutions are first
required to recognize any deduction on September 30, 1994, however, final rules
have not been implemented by the OTS and no deduction has been required as of
the December 1996 report. Any savings bank with less than $300 million in assets
and a total capital ratio in excess of 12% is exempt from this requirement
unless the OTS determines otherwise.
Pursuant to FDICIA, the federal banking agencies, including the OTS,
have also proposed regulations authorizing the agencies to require a depository
institution to maintain additional total capital to account for concentration of
credit risk and the risk of non-traditional activities. No assurance can be
given as to the final form of any such regulation.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against banks that fail to meet capital
requirements.
- 18 -
<PAGE>
FORREST CITY FINANCIAL CORPORATION
AND SUBSIDIARY
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
Not Applicable
Item 2: Changes in Securities
Not Applicable
Item 3: Defaults Upon Senior Securities
Not Applicable
Item 4: Submission of Matters to a Vote of Security Holders
(a) On October 29, 1996, Forrest City Financial
Corporation held its Third Annual Meeting of
Stockholders.
(b) At the meeting, Ted C. Parker and John R. Stipe
were elected as directors for terms to expire in 1999,
and Diana S. Arwood for a term to expire in 1997.
(c) Stockholders voted on the following matters:
(i) The election of the following three directors
of the Corporation;
For Withheld
--- --------
Ted C. Parker 157,102 16,459
John R. Stipe 157,102 16,459
Diana S. Arwood 157,052 16,509
(ii) The ratification of the appointment of
Frazee, Fox & Dodge, Ltd. as independent auditors
of the Corporation for the fiscal year ending June
30, 1997.
For Against Abstain
--- ------- -------
173,561 0 0
Item 5: Other Information
Not Applicable
Item 6: Exhibits and Reports on Form 8-K
Not Applicable
- 19 -
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FORREST CITY FINANCIAL CORPORATION
Registrant
Date: February 5, 1997 /s/ John R. Stipe
---------------- -----------------------------------
John R. Stipe
President & Chief Executive Officer
Date: February 5, 1997 /s/ Kevin S. Jumper
---------------- -----------------------------------
Kevin S. Jumper
Treasurer & Chief Financial Officer
- 20 -
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 228,482
<INT-BEARING-DEPOSITS> 1,508,414
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,641,761
<INVESTMENTS-CARRYING> 8,773,568
<INVESTMENTS-MARKET> 8,561,866
<LOANS> 33,817,150
<ALLOWANCE> 298,436
<TOTAL-ASSETS> 55,347,353
<DEPOSITS> 29,343,672
<SHORT-TERM> 10,000,000
<LIABILITIES-OTHER> 1,007,799
<LONG-TERM> 9,924,663
0
0
<COMMON> 2,361
<OTHER-SE> 5,068,858
<TOTAL-LIABILITIES-AND-EQUITY> 55,347,353
<INTEREST-LOAN> 1,420,547
<INTEREST-INVEST> 527,266
<INTEREST-OTHER> 132,590
<INTEREST-TOTAL> 2,080,403
<INTEREST-DEPOSIT> 654,557
<INTEREST-EXPENSE> 1,246,907
<INTEREST-INCOME-NET> 833,496
<LOAN-LOSSES> 44,418
<SECURITIES-GAINS> 7,841
<EXPENSE-OTHER> 809,133
<INCOME-PRETAX> 127,636
<INCOME-PRE-EXTRAORDINARY> 127,636
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,136
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
<YIELD-ACTUAL> 0
<LOANS-NON> 146,006
<LOANS-PAST> 146,006
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 263,249
<CHARGE-OFFS> 9,231
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 298,436
<ALLOWANCE-DOMESTIC> 298,436
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 243,636
</TABLE>
