OFFICE OF THRIFT SUPERVISION
Washington, D.C. 20552
FORM 10-KSB
__X__ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _______________
OTS Docket No.: 3606
Homestead Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Louisiana 72-1416514
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
195 North Sixth Street
Ponchatoula, Louisiana 70454
(Address) (Zip Code)
Registrant's telephone number, including area code: (504) 386-3379
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act
Common Stock (par value $.01 per share)
Title of Class
Indicate by check mark whether the Registrant (1) has filed all
reports required by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 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 _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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__
Revenues for the year ended December 31, 1998: $5.2 million.
As of March 29, 1999, the aggregate value of the 1,320,139 shares of
Common Stock of the Registrant issued and outstanding on such date,
which excludes 57,740 shares held by all directors and officers of the
Registrant as a group was approximately $10,561,112. This figure is
based on the last known sales price of $8.00 per share.
Number of shares of Common Stock outstanding as of March 29, 1999:
1,377,879.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following document incorporated by reference and
the Part of the Form 10-KSB into which the document is incorporated.
(1) Portions of the Annual Report to Stockholders for the year ended
December 31, 1998 are incorporated into Part II, Items 5 through 8 and
Part III, Item 13 of this Form 10-KSB.
(2) Portions of the definitive proxy statement for the 1999 Annual
Meeting of Stockholders are incorporated into Part III, Items 9 through
13 of this Form 10-KSB.
<PAGE>
PART I
Item 1. Business.
General
On February 5, 1998, Ponchatoula Homestead Savings, F.A. (the
"Association") incorporated Homestead Bancorp, Inc. (the "Company") to
facilitate the conversion of Homestead Mutual Holding Company (the
"MHC") from mutual to stock form (the Conversion). In connection with
the Conversion, the Company offered its common stock to the depositors
and borrowers of the Association as of specified dates, to an employee
stock ownership plan and to members of the general public. Upon
consummation of the Conversion on July 17, 1998, the MHC merged into
the Association, the Association then merged with an interim
subsidiary of the Company (with the Association as the surviving
entity). All of the Association's outstanding common stock (other
than shares held by the MHC, which were canceled) was exchanged for
common stock of the Company, and the Company became the holding
company for the Association and issued shares of common stock to the
general public.
The Company filed a Form SB-2 with the Securities and Exchange
Commission ("SEC") on April 2, 1998, which as amended was declared
effective by the SEC on May 14, 1998. The Association filed a Form AC
with the Office of Thrift Supervision ("OTS") on April 2, 1998. The
Form AC and related offering and proxy materials, as amended, were
conditionally approved by the OTS letter dated May 14, 1998. The
Company also filed on Application H(e)1-S with the OTS on April 17,
1998, which was conditionally approved by the OTS letter dated May 26,
1998. The members of the MHC and the stockholders of the Association
approved the Plan at special meetings held on July 1, 1998, and the
subscription and community offerings closed on June 23, 1998.
In connection with the incorporation of the Company, the Company
issued 100 shares of common stock to the Association. The shares
were canceled upon consummation of the Conversion, and the Conversion
was accounted for under the pooling of interests method of accounting.
The Company sold 1,119, 543 shares of common stock in the subscription
offering at a price of $10.00 per share, for aggregate gross proceeds
of $11,195,430. In addition, a total of 358,402 shares of common
stock were issued by the Company in exchange for all of the 152,635
shares of common stock of the Association outstanding prior to
consummation of the Conversion (excluding the 453,710 shares held by
the MHC, which were canceled), based upon an exchange ratio of 2.34810
shares of Company common stock for each share of Association common
stock.
The Company is a federally chartered savings association which
conducts business through two full-service offices located in
Ponchatoula and Amite, Louisiana. At December 31, 1998, the Company
had $88.8 million of total assets, $72.9 million of total liabilities,
including $39.8 million of deposits, and $15.9 million of
stockholders' equity, including $3.9 million of retained earnings.
<PAGE>
The Company is primarily engaged in attracting deposits from the
general public through its offices and using such funds to originate
loans secured by single-family residences located primarily in
Tangipahoa, Livingston and St. Helena Parishes, Louisiana and to
purchase mortgage-backed securities. The Company's single-family
residential loans amounted to $40.7 million or 71.1% of the Company's
total loan and lease portfolio (including loans held for sale) and
45.8% of total assets at December 31, 1998, and mortgage-backed
securities amounted to $27.4 million or 30.9% of total assets at
December 31, 1998. To a much lesser extent, the Company originates
construction loans secured by single-family residential real estate,
which amounted to $7.2 million or 12.8% of the total loan and lease
portfolio (including loans held for sale) at December 31, 1998, as
well as consumer loans, which amounted to $8.3 million or 14.7% of the
total loan and lease portfolio (including loans held for sale) at such
date. The Company also originates commercial real estate loans and
land loans to a limited extent and invests in interest-bearing
deposits in other financial institutions and U.S. Government and
federal agency obligations.
The Company's leases are bond for deed contracts in which it retains
title to the property until all payments are made on the contract, at
which time it transfers the title to the lessee. Total leases
amounted to $274,000 at December 31, 1998, and no new leases have been
originated since 1995.
The Company is subject to extensive regulation, supervision and
examination by the Office of Thrift Supervision ("OTS"), its primary
federal regulator, and by the Federal Deposit Insurance Corporation
("FDIC"), which insures its deposits up to applicable limits. Such
regulation and supervision establishes a comprehensive framework of
activities in which an association may engage and is intended
primarily for the protection of depositors and the Savings Association
Insurance Fund ("SAIF") administered by the FDIC. The Company is also
a member of the Federal Home Loan Bank ("FHLB") of Dallas, which is
one of the 12 banks which comprise the FHLB System. The Company is
further subject to regulations of the Board of Governors of the
Federal Reserve System ("Federal Reserve Board") governing reserves
required to be maintained against deposits and certain other matters.
Lending Activities
General. At December 31, 1998, the Company's net loans and leases
receivable (including loans classified as held for sale) totaled $52.6
million, which represented 59.2% of the Company's $88.8 million of
total assets at that date. The principal lending activity of the
Company is the origination of single-family residential loans,
consumer loans and, to a lesser extent, construction loans. At
December 31, 1998, $40.7 million or 71.7% of the Company's total
loans and leases (including loans held for sale) consisted of
single-family residential loans. Consumer loans totaled $8.3 million
at such date, representing 14.7% of the total loan and lease portfolio
and 9.3% of total assets. Commercial real estate loans and unimproved
land loans aggregated $199,000 at December 31, 1998.
<PAGE>
The types of loans that the Company may originate are subject to
federal and state laws and regulations. Interest rates charged by the
Company on loans are affected principally by the demand for such loans
and the supply of money available for lending purposes and the rates
offered by its competitors. These factors are, in turn, affected by
general and economic conditions, the monetary policy of the federal
government, including the Federal Reserve Board, legislative and tax
policies, and governmental budgetary matters.
A federal savings institution generally may not make loans to one
borrower and related entities in an amount which exceeds 15% of its
unimpaired capital and surplus, although loans in an amount equal to
an additional 10% of unimpaired capital and surplus may be made to a
borrower if the loans are fully secured by readily marketable
securities. At December 31, 1998, the Company's limit on loans-to-one
borrower was $1.6 million and its five largest loans or groups of
loans-to-one borrower, including related entities, aggregated
$478,000, $427,000, $373,000, $371,000 and $324,000. All of the
Company's five largest loans or groups of loans were performing in
accordance with their terms at December 31, 1998. The $478,000
borrowing relationship consists of 14 loans, including a $157,000 loan
secured by the borrower's personal residence and $321,000 of loans
secured by 13 single-family rental properties.
<PAGE>
Loan and Lease Portfolio Composition. The following table sets forth the
composition of the Company's loan and lease portfolio by type of loan at
the dates indicated.
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
Amount % Amount % Amount %
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family residential(1) $ 40,675 71.7% $20,111 63.9% $19,159 62.9%
Construction(2) 7,241 12.8 3,228 10.3 3,820 12.5
Commercial real estate 116 .2 521 1.6 52 .2
Land 83 .1 126 .4 158 .5
-------- ------ ------- ------ ------- -----
Total real estate loans 48,115 84.8 23,986 76.2 23,189 76.1
-------- ------ ------- ------ ------- -----
Consumer loans:
Home equity and improvement 5,915 10.4 4,411 14.0 4,275 14.0
Loans secured by savings accounts 549 1.0 824 2.6 841 2.8
Automobile 445 .8 611 2.0 414 1.4
Mobile home 164 .3 257 .8 182 .6
Other 1,275 2.2 1,072 3.4 1,100 3.6
-------- ------ ------- ------ ------- -----
Total consumer loans 8,348 14.7 7,175 22.8 6,812 22.4
-------- ------ ------- ------ ------- -----
Total loans 56,463 99.5 31,161 99.0 30,001 98.5
-------- ------ ------- ------ ------- -----
Leases receivable(3):
Single-family residential leases 199 .4 224 .7 380 1.2
Commercial real estate leases 75 .1 77 .3 79 .3
-------- ------ ------- ------ ------- -----
Total leases 274 .5 301 1.0 459 1.5
-------- ------ ------- ------ ------- -----
Total loans and leases 56,737 100.0% 31,462 100.0% 30,460 100.0%
Less: ====== ====== ======
Loans in process 3,788 1,706 1,721
Deferred loan origination fees 7 8 17
Allowance for loan and lease losses 302 265 282
-------- ------- -------
Net loans and leases $ 52,640 $29,483 $28,440
======== ======= =======
(1) At December 31, 1998, 1997 and 1996, includes $274,000, $318,000 and $699,000 of loans classified as
held for sale, respectively, and second mortgages of $408,000, $164,000 and $317,000, respectively.
(2) At December 31, 1998, 1997 and 1996, includes $-0-, $1.1 million and $1.6 million of loans classified
as held for sale, respectively. Consists solely of single-family residential construction loans.
(3) Consists of bond for deed contracts in which the Association retains title to the property until all
payments are made on the contract.
</TABLE>
<PAGE>
Contractual Terms to Final Maturities. The following table sets forth
certain information at December 31, 1997 regarding the dollar amount of loans
and leases maturing in the Company's portfolio, based on the contractual date
of the loan's or lease's final maturity, before giving effect to net items.
Demand loans, line of credit loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due in one
year or less. Amounts shown below do not reflect normal principal
amortization; rather, the balance of each loan or lease outstanding at
December 31, 1998 is shown in the appropriate year of the loan's or
lease's final maturity.
<TABLE>
<CAPTION>
Due 3-5 Due 5-10 Due 10-15 Due More
Years Years Years Than 15
After After After Years After
1999 2000 2001 12/31/98 12/31/98 12/31/98 12/31/98 Total
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family residential
loans $ 2,309 $ 73 $ 57 $ 682 $1,776 $16,116 $19,662 $40,675
Single-family residential
leases 2 -- -- 28 97 12 135 274
Commercial real estate
loans and leases -- -- -- -- 42 -- 74 116
Construction loans 7,241 -- -- -- -- -- -- 7,241
Land loans -- 4 2 37 40 -- -- 83
Consumer loans 1,008 323 357 1,509 1,321 684 3,146 8,348
------- ---- ---- ------ ------ ------- ------- -------
Total(1) $10,560 $400 $416 $2,256 $3,276 $16,812 $23,017 $56,737
======= ==== ==== ====== ====== ======= ======= =======
(1) Gross of loans in process, deferred loan origination fees and the allowance for loan and lease losses.
</TABLE>
<PAGE>
The following table sets forth the dollar amount of all loans and leases,
before net items, due after one year from December 31, 1998 as shown in the
preceding table, which have fixed interest rates or which have floating or
adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates Total
(In Thousands)
Single-family residential
loans $ 31,595 $ 6,771 $38,366
Single-family residential
leases 222 50 272
Commercial real estate
loans and leases 42 74 116
Land loans -- 83 83
Consumer loans 7,116 224 7,340
------- ------- -------
Total $38,975 $ 7,202 $46,177
======= ======= =======
Scheduled contractual maturities of loans do not reflect the actual
expected term of the Company's loan and lease portfolio. The average
life of loans and leases is substantially less than their average
contractual terms because of prepayments and due-on-sale clauses, which
give the Company the right to declare a conventional loan immediately
due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase when
current mortgage loans rates are higher than rates on existing mortgage
loans and, conversely, decrease when rates on existing mortgage loans
are lower than current mortgage loan rates (due to refinancing of
adjustable-rate and fixed-rate loans at lower rates). Under the latter
circumstance, the weighted average yield on loans decreases as higher
yielding loans are repaid or refinanced at lower rates.
Origination, Purchase and Sale of Loans. The lending activities of
the Company are subject to the written, non-discriminatory,
underwriting standards and loan origination procedures established by
the Company's Board of Directors and management. Loan originations
are obtained by a variety of sources, including referrals from real
estate brokers, developers, builders, existing customers, newspaper,
radio and walk-in customers. Loan applications are taken by lending
personnel, and the loan department supervises the procurement of
credit reports, appraisals and other documentation involved with a
loan. Property valuations are generally performed by independent
outside appraisers approved by the Company's Board of Directors.
Title and hazard insurance are required on all security property.
The Company's loan approval process is intended to assess the
borrower's ability to repay the loan, the viability of the loan and
the adequacy of the value of the property that will secure the loan.
A loan application file is first reviewed by a loan officer. If the
mortgage loan is to be retained in the Company's portfolio, it must
be approved by either the Board of Directors or the Executive
<PAGE>
Committee. If the mortgage loan is being originated for sale into
the secondary market, the manager of the mortgage loan department may
approve the loan after obtaining a written commitment from an
investor in the secondary market to purchase the loan upon
origination. With respect to consumer loans, the consumer loan
manager has the authority to approve unsecured loans up to $10,000
and secured loans up to $50,000. Consumer loans in excess of these
amounts must be approved by either the Board of Directors or the
Executive Committee.
Historically, prior to 1990, the Company had originated substantially
all of the loans in its portfolio and held them until maturity.
However, beginning in October 1990, the Company began selling all of
its newly-originated fixed-rate residential mortgage loans in the
secondary market in order to manage its interest rate risk. The
residential loans are generally made on terms, conditions and
documentation which permit the sale to the Federal Home Loan Mortgage
Corporation ("FHLMC"), the Federal National Mortgage Association
("FNMA"), the Government National Mortgage Association ("GNMA") and
other institutional investors in the secondary market. Loans
originated with the intention of being sold are accounted for as
"loans held for sale" and are carried on the statement of financial
condition at the lower of cost or estimated market value in the
aggregate. The amount of loans sold totaled $2.3 million, $8.7
million, and $9.9 million in 1998, 1997 and 1996, respectively. At
December 31, 1998, the amount of loans held for sale was $274,000.
Because the Company has decided to retain at least a portion of newly
originated, 30-year fixed-rate mortgages commencing February 1998,
the amount of loans sold or held for sale have declined.
The Company has entered into agreements with outside third parties to
sell loans that it originates on a servicing released basis. The
origination of the loans are not approved by the Company until it has
obtained a written commitment from a third party to purchase the loan
when it is originated. The Company may be required to repurchase a
loan if it becomes 60 days or more delinquent within four to six
months following the date of sale, as specified in the agreement, or
if any representations and warranties regarding the loans are not
accurate. The total amount of loans sold with recourse to the
Company pursuant to these agreements totaled $2.4 million at December
31, 1998. As of December 31, 1998, the Company has not been required
to repurchase any of the loans sold with recourse, and as a result no
allowance for losses has been established with respect to these
loans.
The Company has not sold loans on a servicing retained basis since
1984, when it sold loans to the FHLMC. At December 31, 1998, the
Company was servicing $24,000 of loans for others.
Historically, the Company has not purchased loans or participation
interests in loans (excluding mortgage-backed securities), and does
not currently intend to become an active purchaser of loans in the
foreseeable future.
<PAGE>
Single-Family Residential Real Estate Loans. Historically, the
Company has concentrated its lending activities on the origination of
loans secured primarily by first mortgage liens on existing
single-family residences. At December 31, 1998, $40.7 million or 71.7% of
the Company's total loan and lease portfolio consisted of such loans
(including loans held for sale but excluding leases receivable and
construction loans). In addition, single-family residential loans
included $408,000 of second mortgages at December 31, 1998,
representing .7% of the total loan and lease portfolio at such date.
The Company originates long-term, fixed-rate single-family residential
loans in order to provide a full range of products to its customers,
but generally only under terms, conditions and documentation which
permit the sale thereof in the secondary market. From 1982 to 1994,
all of the newly-originated, fixed-rate single-family residential
loans were classified as held for sale. The amount of such
originations totaled $1.1 million, $7.8 million, and $10.5 million in
1998, 1997 and 1996, respectively, and the amount of such loans sold
totaled $2.3 million, $8.7 million, and $9.9 million in 1998, 1997
and 1996, respectively. At December 31, 1998, approximately $31.6
million or 78.2% of the permanent single-family residential loans in
Ponchatoula's loan portfolio (including loans held for sale)
consisted of loans which provide for fixed rates of interest.
Although these loans provide for repayments of principal over a fixed
period of up to 30 years, it is the Company's experience that such
loans remain outstanding for a substantially shorter period of time.
In 1995, the Company began offering 15-year fixed-rate residential
mortgage loans for retention in its portfolio. These fixed-rate
loans retained in the portfolio have interest rates of 8% or above as
of December 31, 1998 and a loan-to-value ("LTV") ratio of 80% or
below. Commencing February 1998, the Company amended its policy to
provide for the retention of 30-year, fixed-rate residential mortgage
loans, with such loans to be funded with long-term FHLB advances.
From 1982 to 1994, the Company emphasized for its portfolio
single-family residential mortgage loans which provide for periodic
adjustments to the interest rate. The loans emphasized by the
Company during this period had 15- to 30-year terms and an interest
rate which adjusts every year in accordance with a designated index
(currently the weekly average yield on U.S. Treasury securities
adjusted to a constant comparable maturity of one year, as made
available by the Federal Reserve Board). The Company generally does
not offer discounted interest rates on its ARMs. There is a cap on
the amount of any increase or decrease in the interest rate per year,
and various caps, depending on when the loan was originated, on the
amount which the interest rate can increase or decrease over the life
of the loan. The Company's adjustable-rate loans currently being
originated are not assumable and do not contain prepayment penalties.
The Company has not engaged in the practice of using a cap on the
payments that could allow the loan balance to increase rather than
decrease, resulting in negative amortization, although it has on a
limited basis extended the maturity of the loan. Approximately $8.9
million or 21.8% of the permanent single-family residential loans in
the Company's loan and lease portfolio at December 31, 1998
(including loans held for sale) had adjustable interest rates.
<PAGE>
The demand for adjustable-rate loans in the Company's primary market
area has been a function of several factors, including the level of
interest rates, the expectations of changes in the level of interest
rates and the difference between the interest rates and loan fees
offered for fixed-rate loans and adjustable-rate loans. The relative
amount of fixed-rate and adjustable-rate residential loans that can
be originated at any time is largely determined by the demand for
each in a competitive environment. Due to the generally lower rates
of interest prevailing in recent periods, the Company's originations
of adjustable-rate, single-family residential loans decreased as
consumer preference for fixed-rate loans increased.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest
rates rise, the payment by the borrower rises to the extent permitted
by the terms of the loan, thereby increasing the potential for
default. At the same time, the marketability of the underlying
property may be adversely affected by higher interest rates. The
Company believes that these risks, which have not had a material
adverse effect on the Company to date, generally are less than the
risks associated with holding fixed-rate loans in an increasing
interest rate environment. In addition, the Company minimizes the
credit risks associated with ARMs by (I) imposing a maximum LTV ratio
of 75% on such loans and (ii) requiring that the borrower's payments
based on the initial interest rate not exceed 20% of the borrower's
income.
The Company is permitted to lend up to 100% of the appraised value of
the real property securing a residential loan; however, if the amount
of a residential loan originated or refinanced exceeds 90% of the
appraised value, the Company is required by federal regulations to
obtain private mortgage insurance on the portion of the principal
amount that exceeds 80% of the appraised value of the security
property. Pursuant to underwriting guidelines adopted by the Board
of Directors, the Company will lend up to 95% of the appraised value
of the property securing a fixed-rate, single-family residential loan
which is being originated for sale, and generally requires borrowers
to obtain private mortgage insurance on the portion of the principal
amount of the loan that exceeds 80% of the appraised value of the
security property. The maximum LTV ratio for ARMs is 75% of the
appraised value of the property.
The Company generally requires title insurance insuring the priority
and validity of its mortgage lien, as well as fire and extended
coverage casualty insurance in order to protect the properties
securing its residential and other mortgage loans. Borrowers may be
required to advance funds, with each monthly payment of principal and
interest, to a loan escrow account from which the Company makes
disbursements for items such as real estate taxes, hazard insurance
premiums and mortgage insurance premiums as they become due. The
properties securing all of the Company's mortgage loans are appraised
by independent appraisers approved by the Board of Directors.
Construction Loans. The Company makes construction loans to
individuals for the construction of their residences, provided that
the borrower has also been approved for permanent financing in
accordance with the Company's underwriting policies for single-family
residential loans. The funds are disbursed as various phases of the
construction are completed, subject to written approval of on-site
inspections by building inspectors. Upon completion of the
<PAGE>
construction, the loan is transferred to permanent financing status.
If the permanent financing is at a fixed interest rate, the loan is
generally sold into the secondary market upon completion of the
construction pursuant to a written commitment obtained prior to
origination of the construction loan. At December 31, 1998,
construction loans amounted to $7.2 million or 12.8% of the Company's
total loan and lease portfolio (including loans held for sale).
Construction lending is generally limited to the Company's primary
lending area. Construction loans are structured to be converted to
permanent loans at the end of the construction phase, which typically
does not exceed six months. Construction loans have rates and terms
which generally match the non-construction loans then offered by the
Company, except that during the construction phase the borrower only
pays interest on the loan. Advances are made on a percentage of
completion basis. Construction loans are underwritten pursuant to
the same general guidelines used for originating permanent loans.
Construction financing is generally considered to involve a higher
degree of risk of loss than long-term financing on improved,
owner-occupied real estate because of the uncertainties of construction,
including the possibility of costs exceeding the initial estimates
and the need to obtain a tenant or purchaser if the property will not
be owner-occupied. The Company generally attempts to mitigate the
risks associated with construction lending by, among other things,
lending primarily in its market area and using low loan-to-value
ratios in the underwriting process.
Consumer Loans. Subject to restrictions contained in applicable
federal laws and regulations, the Company is authorized to make loans
for a wide variety of personal or consumer purposes. At December 31,
1998, $8.3 million or 14.7% of the Company's total loan and lease
portfolio (including loans held for sale) consisted of consumer
loans.
The Company originates consumer loans in order to provide a full range
of financial services to its customers and because such loans
generally have shorter terms and higher interest rates than
residential mortgage loans. The consumer loans offered by the
Company include home equity and improvement loans, loans secured by
deposit accounts in the Company, automobile loans, mobile home loans
and other miscellaneous loans. In addition, the Company began
offering home equity lines of credit in November 1995.
Home equity and improvement loans are originated by the Company for up
to 80% of the appraised value, less the amount of any existing prior
liens on the property. The Company secures the loan with a mortgage
on the property (generally a second mortgage) and will originate the
loan even if another institution holds the first mortgage. Second
mortgages originated through the consumer loan department generally
have fixed interest rates and shorter terms than the second mortgages
originated through the mortgage loan department, which are included
in single-family residential loans. The loans have a maximum term of
12 years. The Company has increased its emphasis on these loans in
recent years. The home equity lines of credit have a 10-year term
and an interest rate equal to the prime rate published in the Wall
Street Journal plus 1%, adjustable monthly. At December 31, 1998,
home equity and improvement loans totaled $5.9 million or 10.4% of
the Company's total loan and lease portfolio (including loans held
for sale).
<PAGE>
The Company offers loans secured by deposit accounts in the Company,
which amounted to $549,000 or 1.0% of the Company's total loan and
lease portfolio (including loans held for sale) at December 31, 1998.
Such loans are originated for up to 100% of the account balance, with
a hold placed on the account restricting the withdrawal of the
account balance. The interest rate on the loan is equal to the
interest rate paid on the account plus 2.5%.
The Company offers automobile loans on both new and used vehicles,
with most of the loans secured by used vehicles. The automobile
loans have terms of up to five years and have fixed interest rates.
Automobile loans amounted to $445,000 or .8% of the total loan and
lease portfolio (including loans held for sale) at December 31, 1998,
compared to $611,000 at December 31, 1997.
The Company originates mobile home loans, which have decreased from
the prior year to $164,000 or .3% of the total loan and lease
portfolio (including loans classified as held for sale) at December
31, 1998 from $257,000 or .8% of the total loan and lease portfolio
(including loans held for sale) at December 31, 1997.
Other consumer loans primarily consist of unsecured loans and loans
secured by personal property. These loans amounted to $1.3 million
or 2.2% of the total loan and lease portfolio (including loans held
for sale) at December 31, 1998.
Consumer loans generally have shorter terms and higher interest rates
than mortgage loans but generally involve more credit risk than
mortgage loans because of the type and nature of the collateral and,
in certain cases, the absence of collateral. In addition, consumer
lending collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness and personal bankruptcy. In
most cases, any repossessed collateral for a defaulted consumer loan
will not provide an adequate source of repayment of the outstanding
loan balance because of improper repair and maintenance of the
underlying security. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower. The
Company believes that the generally higher yields earned on consumer
loans compensate for the increased credit risk associated with such
loans and that consumer loans are important to its efforts to
increase rate sensitivity, shorten the average maturity of its loan
portfolio and provide a full range of services to its customers.
Commercial Real Estate and Land Loans. At December 31, 1998 and 1997,
$116,000 or .2% and $521,000 or 1.6% of the Company's total loan and
lease portfolio (including loans held for sale) consisted of
commercial real estate loans and land loans, respectively. At
December 31, 1998, the Company's commercial real estate loan
portfolio consisted of three loans secured by real estate located
within the Company's market area, consisting of a health club, a
church and a retail establishment. The loans secured by the health
club and church are fixed-rate loans, and the loan secured by the
retail establishment has an interest rate which adjusts annually. At
December 31, 1998, the Company had 14 land loans secured by
unimproved property located within the Company's market area.
<PAGE>
Commercial real estate lending is generally considered to involve a
higher degree of risk than single-family residential lending. Such
lending typically involves large loan balances concentrated in a
single borrower or groups of related borrowers. In addition, the
payment experience on loans secured by income-producing properties is
typically dependent on the successful operation of the related real
estate project and thus may be subject to a greater extent to adverse
conditions in the real estate market or in the economy generally.
Leases Receivable. At December 31, 1998, the Company had leases
totaling $274,000 or .5% of the total loan and lease portfolio
(including loans held for sale), a decrease of $27,000 from
December 31, 1997. The leases receivable are bond for deed contracts
in which the Company retains title to the property until all payments
are made on the contract, at which time the Company transfers the
title to the lessee. The lease terms range from 15 to 30 years, and
the leases are classified as sales-type leases. During 1996, with
respect to bond for deed contracts which met the Company's lending
requirements, the Company offered the lessees the option of
converting their leases to contract deed loans at which time title
passed to the mortgagee. The Company has not originated any leases
since 1995.
All of the Company's leases receivable were originated in connection
with the sale of real estate owned by the Company. Of the $274,000
of leases at December 31, 1998, $199,000 72.6% of the total leases
were on single-family residences. The remaining amount consisted of
one commercial real estate lease totaling $75,000 at December 31,
1998, which was originated more than 10 years ago. In order to
facilitate the sale of the real estate owned, the Company offers up
to 100% financing on the leases to qualified borrowers. At December
31, 1998, no leases were delinquent 90 days or more.
From the lessee's standpoint, the lease receivable is very similar to
a mortgage on the property, except that the title to the property is
retained by the Company during the term of the lease. The lessee is
responsible for the payment of property taxes and insurance on the
property. The advantage of a lease receivable to the Company is that
if the lessee defaults on the payments, the Company does not have to
institute foreclosure proceedings to obtain title to the property.
Loan Origination and Other Fees. In addition to interest earned on
loans, the Company receives loan origination fees or "points" for
originating loans. Loan points are a percentage of the principal
amount of the mortgage loan and are charged to the borrower in
connection with the origination of the loan.
In accordance with SFAS No. 91, which deals with the accounting for
non-refundable fees and costs associated with originating or
acquiring loans, the Company's loan origination fees and certain
related direct loan origination costs are offset, and the resulting
net amount is deferred and amortized as interest income over the
contractual life of the related loans as an adjustment to the yield
of such loans. At December 31, 1998, the Company had $7,000 of loan
fees which had been deferred and are being recognized as income over
the contractual maturities of the related loans.
<PAGE>
Asset Quality
General. When a borrower fails to make a required payment on a loan,
the Company attempts to cure the deficiency by contacting the
borrower and seeking payment. Late charges are generally imposed
following the tenth day after a payment is due. In most cases,
deficiencies are cured promptly. If a delinquency extends beyond 30
days, the loan and payment history is reviewed and efforts are made
to collect the loan. While the Company generally prefers to work
with borrowers to resolve such problems, when the account becomes 90
days delinquent, the Company institutes foreclosure or other
proceedings, as necessary, to minimize any potential loss.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on
non-accrual status, previously accrued but unpaid interest is
deducted from interest income. As a matter of policy, the Company
discontinues the accrual of interest income when the loan becomes 90
days past due as to principal or interest.
Real estate acquired by the Company as a result of foreclosure or by
deed-in-lieu of foreclosure and loans deemed to be in-substance
foreclosed under generally accepted accounting principles are
classified as real estate owned until sold. Pursuant to a statement
of position ("SOP 92-3") issued by the AICPA in April 1992, which
provides guidance on determining the balance sheet treatment of
foreclosed assets in annual financial statements for periods ending
on or after December 15, 1992, there is a rebuttable presumption that
foreclosed assets are held for sale and such assets are recommended
to be carried at the lower of fair value minus estimated costs to
sell the property, or cost (generally the balance of the loan on the
property at the date of acquisition). After the date of acquisition,
all costs incurred in maintaining the property are expensed and costs
incurred for the improvement or development of such property are
capitalized up to the extent of their net realizable value. The
Company's accounting for its real estate owned complies with the
guidance set forth in SOP 92-3.
Delinquent Loans and Leases. The following table sets forth
information concerning delinquent loans and leases at December 31,
1998, in dollar amount and as a percentage of the Company's total
loan and lease portfolio. The amounts presented represent the total
outstanding principal balances of the related loans and leases,
rather than the actual payment amounts which are past due. At
December 31, 1998, the Company had no commercial real estate loans,
construction loans or land loans which were delinquent 30 or more
days.
<PAGE>
<TABLE>
<CAPTION>
Single-Family
Residential Consumer Total
---------------- --------------- --------------
Amount % Amount % Amount %
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans and leases
delinquent for:
30 - 59 days $ 529 .9% $116 .2% $ 645 1.1%
60 - 89 days 322 .6 15 -- 337 .6
90 days and over 379 .7 4 -- 383 .7
------ ---- ---- ---- ------- ----
Total delinquent loans
and leases $1,230 2.2% $135 .2% $1,365 2.4%
____________________ ====== ==== ==== ==== ====== ====
</TABLE>
Non-Performing Assets. The following table sets forth the amounts and
categories of the Company's non-performing assets at the dates indicated.
The Company did not have any accruing loans 90 days or more delinquent or
troubled debt restructurings at any of the dates presented.
December 31,
1998 1997 1996
(Dollars in Thousands)
Non-accruing loans and leases:
Single-family residential(1) $ 379 $169 $350
Consumer 4 4 15
----- ---- ----
Total non-accruing loans
and leases 383 173 365
Real estate owned -- -- 141
----- ---- ----
Total non-performing assets $ 383 $173 $506
===== ==== ====
Total non-performing loans and
leases as a percentage of total
loans and leases .68% .55% 1.38%
===== ==== ====
Total non-performing assets as a
percentage of total assets .43% .29% .83%
===== ==== ====
__________________________
(1) Includes $-0-, $-0-, and $62,000 of single-family residential leases
at December 31, 1998, 1997 and 1996, respectively.
<PAGE>
Classified Assets. Federal regulations require that each insured
savings institution classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions,
federal examiners have authority to identify problem assets and, if
appropriate, classify them. There are three classifications for
problem assets: "substandard," "doubtful" and "loss." Substandard
assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain
some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in
full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset
classified loss is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted.
Another category designated "special mention" also must be established
and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification
as substandard, doubtful or loss. Assets classified as substandard or
doubtful require the institution to establish general allowances for
loan and lease losses. If an asset or portion thereof is classified
loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the
asset classified loss, or charge-off such amount. General loss
allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances
for loan and lease losses do not qualify as regulatory capital.
Federal examiners may disagree with an insured institution's
classifications and amounts reserved.
Exclusive of assets classified loss which have been fully reserved or
charged-off, the Company's classified assets at December 31, 1998
consisted of $379,000 of assets classified as substandard, which
represented .4% of total assets.
Allowance for Loan and Lease Losses. The Company's loan and lease
portfolio consists primarily of one-to-four family residential loans
and, to a lesser extent, consumer loans, construction loans, and
commercial real estate loans. The Company believes that there are no
material elements of risk in its loan portfolio, and total
nonperforming assets are closely monitored. The classification of
assets policy is reviewed periodically by the Board of Directors. The
loan loss allowance is maintained by management at a level considered
adequate to cover possible losses that are currently anticipated based
on the past three-year loan loss experience, known and inherent risks
in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral,
general economic conditions, and other factors and estimates which are
subject to change over time. Although management believes that it
uses the best information available to make such determinations,
future adjustments to allowances may be necessary, and net income
could be significantly affected, if circumstances differ substantially
from the assumptions used in making the initial determinations.
<PAGE>
The following table sets forth an analysis of the Company's allowance
for loan and lease losses during the periods indicated.
Year Ended December 31,
1998 1997 1996
(Dollars in Thousands)
Total loans and leases
outstanding at end of period(1) $56,737 $31,462 $30,460
======= ======= =======
Average loans and leases
outstanding(1) $39,360 $28,403 $27,597
======= ======= =======
Balance at beginning of period 265 282 280
Charge-offs 17 1 1
Recoveries -- -- --
Net charge-offs 17 1 1
Provision (Recovery) of allowance for 54 (16) 3
losses
Balance at end of period $ 302 $ 265 $ 282
======= ======= =======
Allowance for loan and lease
losses as a percent of total loans
and leases outstanding .53% .84% .93%
======= ======= =======
Ratio of net charge-offs to
average loans and leases
outstanding .04% .00% .00%
======= ======= =======
(1) Total and average loans outstanding include loans classified as
held for sale at or during the respective dates or periods.
<PAGE>
The following table presents the allocation of the Company's allowance
for loan losses by type of loan at each of the dates indicated.
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
---------------------- ------------------------ ------------------------
Loan Loan Loan
Category Category Category
Amount as a % Amount as a % Amount as a %
of of Total of of Total of of Total
Allowance Loans Allowance Loans Allowance Loans
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family residential $299 71.7% $262 63.9% $279 62.9%
Construction -- 12.8 -- 10.3 -- 12.5
Commercial real estate -- .2 -- 1.6 -- .2
Land -- .1 -- .4 -- .5
Consumer 3 14.7 3 22.8 3 22.4
Lease -- .5 -- 1.0 -- 1.5
----- ------ ----- ------ ----- ------
Total $302 100.0% $265 100.0% $282 100.0%
===== ====== ===== ====== ===== ======
</TABLE>
Mortgage-Backed Securities
Mortgage-backed securities represent a participation interest in a
pool of single-family or multi-family mortgages, the principal and
interest payments on which are passed from the mortgage originators,
through intermediaries (generally U.S. Government agencies and
government-sponsored enterprises) that pool and repackage the
participation interests in the form of securities, to investors such
as the Company. Such U.S. Government agencies and
government-sponsored enterprises, which guarantee the payment of
principal and interest to investors, primarily include the FHLMC, the
FNMA and the GNMA.
The FHLMC, which is a corporation chartered by the U.S. Government,
issues participation certificates backed principally by conventional
mortgage loans. The FHLMC guarantees the timely payment of interest
and the ultimate return of principal on participation certificates.
The FNMA is a private corporation chartered by the U.S. Congress with
a mandate to establish a secondary market for mortgage loans. The
FNMA guarantees the timely payment of principal and interest on FNMA
securities. The GNMA is a government agency within the Department of
Housing and Urban Development which is intended to help finance
government-assisted housing programs. GNMA securities are backed by
FHA-insured and VA-guaranteed loans, and the timely payment of
principal and interest on GNMA securities are guaranteed by the GNMA
and backed by the full faith and credit of the U.S. Government.
Because the FHLMC, the FNMA and the GNMA were established to provide
support for low- and middle-income housing, there are limits to the
maximum size of loans that qualify for these programs. For example,
the FNMA and the FHLMC currently limit their loans secured by a
single-family, owner-occupied residence to $227,000. To accommodate
larger-sized loans, and loans that, for other reasons, do not conform
to the agency programs, a number of private institutions have
established their own home-loan origination and securitization
programs.
<PAGE>
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that
have loans with interest rates that are within a range and have
varying maturities. The underlying pool of mortgages, i.e., fixed-rate
or adjustable-rate, as well as prepayment risk, are passed on to
the certificate holder. The life of a mortgage-backed pass-through
security thus approximates the life of the underlying mortgages.
At December 31, 1998, the carrying value of the Company's mortgage-backed
securities amounted to $27.4 million, which represented 30.9%
of the Company's $88.8 million of total assets at that date. All of
the Company's $27.4 million of mortgage-backed securities at
December 31, 1998 were insured or guaranteed by the GNMA, the FHLMC,
FNMA, or SBA and all of the mortgage-backed securities had adjustable
rates of interest at December 31, 1998. The amortized cost of
mortgage-backed securities being held to maturity at December 31,
1998 was $10.2 million with a fair value of $10.1 million. The
amortized cost of mortgage-backed securities available for sale at
December 31, 1998 was $17.2 million with a fair value of $17.2
million.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or
credit enhancements which offer nominal credit risk. In addition,
mortgage-backed securities are more liquid than individual mortgage
loans and may be used to collateralize borrowings or other
obligations of the Company.
The following table sets forth the composition of the Company's
mortgage-backed securities portfolio at each of the dates indicated.
December 31,
1998 1997 1996
(In Thousands)
Mortgage-backed securities held to maturity:
FNMA $ 6,101 $ 6,712 $ 6,931
FHLMC 1,658 2,543 3,323
GNMA 2,444 1,046 --
------- ------- -------
Subtotal 10,203 10,301 10,254
------- ------- -------
Mortgage-backed securities available for sale:
FNMA 6,772 7,115 7,908
FHLMC 4,999 6,911 8,278
GNMA 2,980 235 286
SBA 2,459 -- --
------- ------- -------
Subtotal 17,210 14,261 16,472
------- ------- -------
Total $27,413 $24,562 $26,726
======= ======= =======
<PAGE>
Investment Securities
The Company has authority to invest in various types of liquid assets,
including United States Treasury obligations, securities of various
federal agencies and of state and municipal governments, certificates
of deposit at federally-insured banks and savings institutions,
certain bankers' acceptances and federal funds. Each purchase of an
investment security is approved by the Board of Directors. The
Company's investment securities are carried in accordance with
generally accepted accounting principles. All of the Company's
investment securities were available for sale at December 31, 1998.
The following table sets forth certain information relating to the
Company's investment securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
------------------ -------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. agency securities $2,300 $2,315 $2,595 $2,605 $2,396 $2,399
</TABLE>
The following table sets forth the amount of the Company's investment
securities which mature during each of the periods indicated and the
weighted average yields for each range of maturities at December 31,
1998. None of the investments mature after five years.
At December 31, 1998
One Year Weighted Over One Weighted
or Average Year Through Average
Less Yield Five Years Yield
(Dollars in Thousands)
U.S. agency securities $1,400 5.95% $ 900 5.36%
<PAGE>
Sources of Funds
General. Deposits are the primary source of the Company's funds for
lending and other investment purposes. In addition to deposits, the
Company derives funds from principal and interest payments on loans
and mortgage-backed securities. Loan repayments are a relatively
stable source of funds, while deposits inflows and outflows are
significantly influenced by general interest rates and money market
conditions. Borrowings may be used on a short-term basis to
compensate for reductions in the availability of funds from other
sources. They may also be used on a longer term basis for general
business purposes.
Deposits. The Company's deposit products include a broad selection of
deposit instruments, including NOW accounts, money market accounts,
passbook accounts and term certificate accounts. Deposit account
terms vary, with the principal differences being the minimum balance
required, the time periods the funds must remain on deposit and the
interest rate.
The Company's deposits are obtained primarily from residents of
Tangipahoa and Livingston Parishes and, to a lesser extent, St.
Helena Parish. Management of the Company estimates that less than 1%
of the Company's deposits are obtained from customers residing
outside of Louisiana. The Company does not pay fees to brokers to
solicit funds for deposit with the Company or actively solicit
negotiable-rate certificates of deposit with balances of $100,000 or
more.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Company on a periodic basis.
Determination of rates and terms are predicated on funds acquisition
and liquidity requirements, rates paid by competitors, growth goals
and federal and state regulations.
The following table sets forth the dollar amount of deposits in the
various types of deposit programs offered by the Company at the dates
indicated.
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
Amount % Amount % Amount %
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
2.00% - 3.99% $ 270 .7% $ 285 .7 $ 551 1.2%
4.00% - 5.99% 28,330 71.1 30,031 71.4 30,686 69.1
6.00% - 7.99% 1,512 3.8 1,117 2.6 882 2.0
8.00% - 9.99% -- -- -- -- 42 1
------- ------ ------- ------ ------- ------
Total certificate
accounts 30,112 75.6 31,433 74.7 32,161 72.4
------- ------ ------- ------ ------- ------
Transaction accounts:
Passbook accounts 7,243 18.2 8,253 19.6 9,592 21.6
Money market
accounts 802 2.0 93,432 2.2 1,032 2.3
NOW accounts 1,672 4.2 1,491 3.5 1,642 3.7
------- ------ ------- ------ ------- ------
Total transaction
accounts 9,717 24.4 10,678 25.3 12,266 27.6
------- ------ ------- ------ ------- ------
Total deposits $39,829 100.0% $42,111 100.0% $44,427 100.0%
======= ====== ======= ====== ======= ======
</TABLE>
<PAGE>
The following table presents the average balance of each type of deposit
and the average rate paid on each type of deposit for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook savings accounts $ 8,620 2.48% $ 8,866 2.67% $ 9,931 3.00%
Demand and NOW accounts 1,431 2.23 1,741 2.34 1,585 3.00
MMDAs 846 2.23 979 2.34 1,137 3.00
Certificates of deposit 30,474 5.17 32,021 5.24 32,080 5.50
------- ----- ------- ----- ------- -----
Total interest-bearing
deposits $41,371 4.45% $43,607 4.52% $44,733 4.82%
======= ===== ======= ===== ======= =====
</TABLE>
The following table shows the interest rate and maturity information for
the Company's certificates of deposit at December 31, 1998.
<TABLE>
<CAPTION>
Maturity Date
One Year Over 1 Over 2 Over
or Less to 2 Years to 3 Years 3 Years Total
(In Thousands)
<S> <C> <C> <C> <C> <C>
2.00% - 3.99% $ 238 $ -- $ -- $ 32 $ 270
4.00% - 5.99% 25,106 3,036 83 105 28,330
6.00% - 7.99% 497 233 -- 782 1,512
------- ------- ------ ---- --------
Total $25,841 $ 3,269 $ 83 $919 $ 30,112
======= ======= ====== ====
</TABLE>
The following table sets forth the maturities of the Company's
certificates of deposit having principal amounts of $100,000 or more
at December 31, 1998.
Certificates of deposit maturing
in quarter ending: Amount
(In Thousands)
March 31, 1999 $1,280
June 30, 1999 529
September 30, 1999 1003
December 31, 1999 333
After December 31, 1999 407
------
Total certificates of deposit with
balances of $100,000 or more $3,552
======
<PAGE>
Borrowings. The Company may obtain advances from the FHLB of Dallas
upon the security of the common stock it owns in that bank, certain of
its residential mortgage loans and mortgage-backed securities,
provided certain standards related to creditworthiness have been met.
Such advances are made pursuant to several credit programs, each of
which has its own interest rate and range of maturities. Such
advances are generally available to meet seasonal and other
withdrawals of deposit accounts and to permit increased lending. See
"Regulation - The Association - Federal Home Loan Bank System."
The Company had $32.8 million of FHLB advances outstanding at
December 31, 1998, compared to $11.5 million and $10.7 million at
December 31, 1997 and 1996, respectively. Specific mortgage-backed
securities, with a fair value of approximately $6.1 million and a
carrying value of $6.0 million at December 31, 1998, were pledged to
the FHLB as collateral for the advances. In addition, the performing
single family loans are pledged under a blanket lien as collateral
securing these advances.
The following table sets forth certain information regarding
borrowings at or for the dates indicated:
At or for the Year Ended December 31,
1998 1997 1996
(Dollars in Thousands)
FHLB advances:
Average balance outstanding $21,336 $ 9,755 $ 7,630
Maximum amount outstanding
at any month-end during
the year $32,765 $11,500 $10,700
Balance outstanding at end
of year $32,765 $11,500 $10,700
Average interest rate
during the year 5.59% 5.58% 5.67%
Weighted average interest
rate at end of year 5.63% 5.85% 5.48%
Employees
The Company had 22 full-time employees and no part-time employees at
December 31, 1998. None of these employees is represented by a
collective bargaining agent, and the Company believes that it enjoys
good relations with its personnel.
Competition
The Company faces strong competition both in attracting deposits and
in making real estate loans. Its most direct competition for deposits
has historically come from other savings institutions, credit unions
and commercial banks located in Tangipahoa Parish, Louisiana,
including many large financial institutions which have greater
financial and marketing resources available to them. In addition, The
<PAGE>
Company has faced additional significant competition for investors'
funds from short-term money market securities, mutual funds and other
corporate and government securities. The ability of the Company to
attract and retain savings deposits depends on its ability to
generally provide a rate of return, liquidity and risk comparable to
that offered by competing investment opportunities.
The Company experiences strong competition for loans principally from
other savings institutions, commercial banks, credit unions and
mortgage banking companies. The Company competes for loans
principally through the interest rates and loan fees it charges and
the efficiency and quality of services it provides borrowers.
Competition may increase as a result of the continuing reduction of
restrictions on the interstate operations of financial institutions
and the anticipated slowing of the refinancing activity.
REGULATION
Set forth below is a brief description of certain laws and regulations
which are applicable to the Company and the Association. The
description of these laws and regulations, as well as descriptions of
laws and regulations contained elsewhere herein, does not purport to
be complete and is qualified in its entirety by reference to the
applicable laws and regulations.
General
The Association, as a federally chartered savings institution, is
subject to federal regulation and oversight by the OTS extending to
all aspects of its operations. The Association also is subject to
regulation and examination by the FDIC, which insures the deposits of
the Association to the maximum extent permitted by law, and
requirements established by the Federal Reserve Board. Federally-
chartered savings institutions are required to file periodic reports
with the OTS and are subject to periodic examinations by the OTS and
the FDIC. The investment and lending authority of savings
institutions are prescribed by federal laws and regulations, and such
institutions are prohibited from engaging in any activities not
permitted by such laws and regulations. Such regulation and
supervision is primarily intended for the protection of depositors and
not for the purpose of protecting stockholders.
The OTS' enforcement authority over all savings institutions and their
holding companies 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 OTS.
The Company
Holding Company Acquisitions. Upon consummation of the Conversion,
the Company became a savings and loan holding company within the
meaning of the Home Owners' Loan Act, as amended ("HOLA"), and
registered with the OTS. The HOLA and OTS regulations generally
<PAGE>
prohibit a savings and loan holding company, without prior OTS
approval, from acquiring, directly or indirectly, the ownership or
control of any other savings institution or savings and loan holding
company, or all, or substantially all, of the assets or more than 5%
of the voting shares thereof. These provisions also prohibit, among
other things, any director or officer of a savings and loan holding
company, or any individual who owns or controls more than 25% of the
voting shares of such holding company, from acquiring control of any
savings institution not a subsidiary of such savings and loan holding
company, unless the acquisition is approved by the OTS.
Holding Company Activities. The Company operates as a unitary savings
and loan holding company. Generally, there are limited restrictions on
the activities of a unitary savings and loan holding company and its
non-savings institution subsidiaries. However, if the Director of the
OTS determines that there is reasonable cause to believe that the
continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings institution, the Director may
impose such restrictions as deemed necessary to address such risk,
including limiting (I) payment of dividends by the savings
institution; (ii) transactions between the savings institution and its
affiliates; and (iii) any activities of the savings institution that
might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings institution.
Notwithstanding the above rules as to permissible business activities
of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet the QTL
test, as discussed under "-The Association - Qualified Thrift Lender
Test," then such unitary holding company also shall become subject to
the activities restrictions applicable to multiple savings and loan
holding companies and, unless the savings institution requalifies as a
QTL within one year thereafter, shall register as, and become subject
to the restrictions applicable to, a bank holding company. See "- The
Association - Qualified Thrift Lender Test."
The HOLA requires every savings institution subsidiary of a savings
and loan holding company to give the OTS at least 30 days' advance
notice of any proposed dividends to be made on its guarantee,
permanent or other non-withdrawable stock, or else such dividend will
be invalid. See "- The Association - Capital Distribution Regulation."
Affiliate Restrictions. Transactions between a savings institution
and its "affiliates" are subject to quantitative and qualitative
restrictions under Sections 23A and 23B of the Federal Reserve Act and
OTS regulations. Affiliates of a savings institution include, among
other entities, the savings institution's holding company and
companies that are controlled by or under common control with the
savings institution.
In general, Sections 23A and 23B and OTS regulations issued in
connection therewith limit the extent to which a savings institution
or its subsidiaries may engage in certain "covered transactions" with
affiliates to an amount equal to 10% of the institution's capital and
surplus, in the case of covered transactions with any one affiliate,
and to an amount equal to 20% of such capital and surplus, in the case
of covered transactions with all affiliates. In addition, a savings
institution and its subsidiaries may engage in covered transactions
and certain other transactions only on terms and under circumstances
that are substantially the same, or at least as favorable to the
savings institution or its subsidiary, as those prevailing at the time
<PAGE>
for comparable transactions with nonaffiliated companies. A "covered
transaction" is defined to include a loan or extension of credit to an
affiliate; a purchase of investment securities issued by an affiliate;
a purchase of assets from an affiliate, with certain exceptions; the
acceptance of securities issued by an affiliate as collateral for a
loan or extension of credit to any party; or the issuance of a
guarantee, acceptance or letter of credit on behalf of an affiliate.
In addition, under the OTS regulations, a savings institution may not
make a loan or extension of credit to an affiliate unless the
affiliate is engaged only in activities permissible for bank holding
companies; a savings institution may not purchase or invest in
securities of an affiliate other than shares of a subsidiary; a
savings institution and its subsidiaries may not purchase a low-quality
asset from an affiliate; and covered transactions and certain
other transactions between a savings institution or its subsidiaries
and an affiliate must be on terms and conditions that are consistent
with safe and sound banking practices. With certain exceptions, each
loan or extension of credit by a savings institution to an affiliate
must be secured by collateral with a market value ranging from 100% to
130% (depending on the type of collateral) of the amount of the loan
or extension of credit.
The OTS regulation generally excludes all non-bank and non-savings
institution subsidiaries of savings institutions from treatment as
affiliates, except to the extent that the OTS or the Federal Reserve
Board decides to treat such subsidiaries as affiliates. The regulation
also requires savings institutions to make and retain records that
reflect affiliate transactions in reasonable detail, and provides that
certain classes of savings institutions may be required to give the
OTS prior notice of affiliate transactions.
The Association
Insurance of Accounts. The deposits of the Association are insured to
the maximum extent permitted by the SAIF, which is administered by the
FDIC, and are backed by the full faith and credit of the U.S.
Government. As insurer, the FDIC 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 threat to the FDIC. The FDIC also has the authority to
initiate enforcement actions against savings institutions, after
giving the OTS an opportunity to take such action.
Under current FDIC regulations, SAIF-insured institutions are assigned
to one of three capital groups which are based solely on the level of
an institution's capital--"well capitalized," "adequately
capitalized," and "undercapitalized"--which are defined in the same
manner as the regulations establishing the prompt corrective action
system discussed below. These three groups are then divided into
three subgroups which reflect varying levels of supervisory concern,
from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. The matrix so
created results in nine assessment risk classifications, with rates
ranging prior to September 30, 1996 from .23% for well capitalized,
healthy institutions to .31% for undercapitalized institutions with
substantial supervisory concerns. The insurance premiums for the
Association for 1994, 1995 and the first nine months of 1996 were .23%
(per annum) of insured deposits.
<PAGE>
The deposits of the Association are currently insured by the SAIF.
Both the SAIF and the BIF are required by law to attain and thereafter
maintain a reserve ratio of 1.25% of insured deposits. The BIF
achieved a fully funded status first, and therefore as discussed
below, effective January 1, 1996 the FDIC substantially reduced the
average deposit insurance premium paid by BIF-insured banks. On
November 14, 1995, the FDIC approved a final rule regarding deposit
insurance premiums. The final rule reduced deposit insurance premiums
for BIF member institutions to zero basis points (subject to a $2,000
minimum) for institutions in the lowest risk category, while holding
deposit insurance premiums for SAIF members at their then current
levels (23 basis points for institutions in the lowest risk category).
The reduction was effective with respect to the semiannual premium
assessment beginning January 1, 1996.
On September 30, 1996, President Clinton signed into law legislation
which eliminated the premium differential between SAIF-insured
institutions and BIF-insured institutions by recapitalizing the SAIF's
reserves to the required ratio. The legislation required all SAIF
member institutions to pay a one-time special assessment to
recapitalize the SAIF, with the aggregate amount to be sufficient to
bring the reserve ratio to 1.25% of insured deposits. The legislation
also provided for the merger of the BIF and the SAIF, with such merger
being conditioned upon the prior elimination of the thrift charter.
Implementing FDIC regulations imposed a one-time special assessment
equal to 65.7 basis points for all SAIF-assessable deposits as of
March 31, 1995, which was accrued as an expense on September 30, 1996.
The Association's one-time special assessment amounted to $284,000.
Net of related tax benefits, the one-time special assessment amounted
to $187,000. The payment of the special assessment had the effect of
immediately reducing the Association's capital by such amount.
However, management does not believe that this one-time special
assessment had a material adverse effect on the Association's
financial condition.
In the fourth quarter of 1996, the FDIC lowered the assessment rates
for SAIF members to reduce the disparity in the assessment rates paid
by BIF and SAIF members. Beginning October 1, 1996, effective SAIF
rates generally range from zero basis points to 27 basis points,
except that during the fourth quarter of 1996, the rates for SAIF
members ranged from 18 to 27 basis points in order to include
assessments paid to the Financing Corporation ("FICO"). From 1997
through 1999, SAIF members will pay 6.4 basis points to fund the FICO,
while BIF member institutions will pay approximately 1.3 basis points.
The Association's insurance premiums, which had amounted to 23 basis
points, were thus reduced to 6.4 basis points effective January 1,
1997.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Association, if it determines after a
hearing that the institution has engaged or is engaging in unsafe or
unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may
suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the
accounts at the institution at the time of the termination, less
subsequent withdrawals, shall continue to be insured for a period of
six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances which would result in termination
of the Association's deposit insurance.
<PAGE>
Regulatory Capital Requirements. Federally insured savings
institutions are required to maintain minimum levels of regulatory
capital. The OTS has established capital standards applicable to all
savings institutions. These standards generally must be as stringent
as the comparable capital requirements imposed on national banks. The
OTS also is authorized to impose capital requirements in excess of
these standards on individual institutions on a case-by-case basis.
At December 31, 1998, the Association exceeded all of its regulatory
capital requirements. The following table sets forth the
Association's compliance with each of the capital requirements as of
December 31, 1998.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
------------------ -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk
Weighted Assets) $ 11,014 30.44% $ 2,894 >/= 8.0% $ 3,618 >/= 10.0%
Tier I Capital (to Risk
Weighted Assets) $ 10,744 29.70% $ 1,447 >/= 4.0% $ 2,170 >/= 6.0%
Tier I Capital (to Average
Assets) $ 10,744 12.52% $ 3,434 >/= 4.0% $ 4,292 >/= 5.0%
</TABLE>
Any savings institution that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such
actions could include a capital directive, a cease and desist order,
civil money penalties, the establishment of restrictions on the
institution's operations, termination of federal deposit insurance and
the appointment of a conservator or receiver. The OTS' capital
regulation provides that such actions, through enforcement proceedings
or otherwise, could require one or more of a variety of corrective
actions.
Prompt Corrective Action. Under the prompt corrective action
regulations of the OTS, an institution is deemed to be (i) "well
capitalized" if it has total risk-based capital of 10.0% or more, has
a Tier 1 risk-based capital ratio of 6.0% or more, has a Tier 1
leverage capital ratio of 5.0% or more and is not subject to any order
or final capital directive to meet and maintain a specific capital
level for any capital measure, (ii) "adequately capitalized" if it has
a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based
capital ratio of 4.0% or more and a Tier 1 leverage capital ratio of
4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized," (iii) "undercapitalized" if it has a
total risk-based capital ratio that is less than 8.0%, a Tier 1
risk-based capital ratio that is less than 4.0% or a Tier 1 leverage
capital ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier 1
risk-based capital ratio that is less than 3.0% or a Tier 1 leverage
capital ratio that is less than 3.0%, and (v) "critically
<PAGE>
undercapitalized" if it has a ratio of tangible equity to total assets
that is equal to or less than 2.0%. Under specified circumstances, a
federal banking agency may reclassify a well capitalized institution
as adequately capitalized and may require an adequately capitalized
institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except
that the FDIC may not reclassify a significantly undercapitalized
institution as critically undercapitalized).
An institution generally must file a written capital restoration plan
which meets specified requirements with its appropriate federal
banking agency within 45 days of the date that the institution
receives notice or is deemed to have notice that it is
undercapitalized, significantly undercapitalized or critically
undercapitalized. A federal banking agency must provide the
institution with written notice of approval or disapproval within 60
days after receiving a capital restoration plan, subject to extensions
by the agency. An institution which is required to submit a capital
restoration plan must concurrently submit a performance guaranty by
each company that controls the institution. In addition,
undercapitalized institutions are subject to various regulatory
restrictions, and the appropriate federal banking agency also may take
any number of discretionary supervisory actions.
At December 31, 1998, the Association was deemed a well capitalized
institution for purposes of the above regulations and as such is not
subject to the above mentioned restrictions.
Safety and Soundness Guidelines. The OTS and the other federal
banking agencies have established guidelines for safety and soundness,
addressing operational and managerial standards, as well as
compensation matters for insured financial institutions. Institutions
failing to meet these standards are required to submit compliance
plans to their appropriate federal regulators. The OTS and the other
agencies have also established guidelines regarding asset quality and
earnings standards for insured institutions. The Company believes
that the Association is in compliance with these guidelines and
standards.
Liquidity Requirements. All savings institutions are required to
maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. The
liquidity requirement may vary from time to time (between 4% and 10%)
depending upon economic conditions and savings flows of all savings
institutions. At the present time, the required minimum liquid asset
ratio is 4%. At December 31, 1998, the Association's liquidity ratio
was 55.2%.
Capital Distributions. OTS regulations govern capital distributions
by savings institutions, which include cash dividends, stock
redemptions or repurchases, and other transactions charged to the
capital account of a savings institution to make capital
distributions. Generally, through March 31, 1999, a savings
institution that before and after the proposed distribution meets or
exceeds its fully phased-in capital requirements (Tier 1 institutions)
may make capital distributions during any calendar year equal to the
higher of (i) 100% of net income for the calendar year-to-date plus
50% of its "surplus capital ratio" at the beginning of the calendar
year or (ii) 75% of net income over the most recent four-quarter
period. The "surplus capital ratio" is defined to mean the percentage
by which the institution's tangible, core or risk-based capital ratio
exceeds its tangible, core or risk-based capital requirement. At
December 31, 1998, the Company was a Tier 1 institution for purposes
of this regulation.
<PAGE>
New capital distribution regulations take effect April 1, 1999. Under
the new regulations, a savings institution must file an application
for OTS approval of the capital distribution if either (1) the total
capital distributions for the applicable calendar year exceed the sum
of the institution's net income for that year to date plus the
institution's retained net income for the preceding two years, (2) the
institution would not be at least adequately capitalized following the
distribution, (3) the distribution would violate any applicable
statute, regulation, agreement or OTS-imposed condition, or (4) the
institution is not eligible for expedited treatment of its filings.
If an application is not required to be filed, savings institutions
which are a subsidiary of a holding company (as well as certain other
institutions) must still file a notice with the OTS at least 30 days
before the board of directors declares a dividend or approves a
capital distribution.
Branching by Federal Savings Institutions. OTS policy permits
interstate branching to the full extent permitted by statute (which is
essentially unlimited). Generally, federal law prohibits federal
savings institutions from establishing, retaining or operating a
branch outside the state in which the federal institution has its home
office unless the institution meets the IRS' domestic building and
loan test (generally, 60% of a thrift's assets must be housing-related)
("IRS Test"). The IRS Test requirement does not apply if:
(i) the branch(es) result(s) from an emergency acquisition of a
troubled savings institution (however, if the troubled savings
institution is acquired by a bank holding company, does not have its
home office in the state of the bank holding company bank subsidiary
and does not qualify under the IRS Test, its branching is limited to
the branching laws for state-chartered banks in the state where the
savings institution is located); (ii) the law of the state where the
branch would be located would permit the branch to be established if
the federal savings institution were chartered by the state in which
its home office is located; or (iii) the branch was operated lawfully
as a branch under state law prior to the savings institution's
conversion to a federal charter.
Furthermore, the OTS will evaluate a branching applicant's record of
compliance with the Community Reinvestment Act of 1977 ("CRA"). An
unsatisfactory CRA record may be the basis for denial of a branching
application.
Community Reinvestment Act and the Fair Lending Laws. Savings
institutions have a responsibility under the CRA and related
regulations of the OTS to help meet the credit needs of their
communities, including low- and moderate-income neighborhoods. In
addition, the Equal Credit Opportunity Act and the Fair Housing Act
(together, the "Fair Lending Laws") prohibit lenders from
discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure
to comply with the provisions of CRA could, at a minimum, result in
regulatory restrictions on its activities, and failure to comply with
the Fair Lending Laws could result in enforcement actions by the OTS,
as well as other federal regulatory agencies and the Department of
Justice.
Qualified Thrift Lender Test. All savings institutions are required
to meet a QTL test to avoid certain restrictions on their operations.
Under Section 2303 of the Economic Growth and Regulatory Paperwork
Reduction Act of 1996, a savings institution can comply with the QTL
test by either qualifying as a domestic building and loan association
as defined in Section 7701(a)(19) of the Code or meeting the second
prong of the QTL test set forth in Section 10(m) of the HOLA. A
<PAGE>
savings institution that does not meet the QTL test must either
convert to a bank charter or comply with the following restrictions on
its operations: (i) the institution may not engage in any new activity
or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the
branching powers of the institution shall be restricted to those of a
national bank; (iii) the institution shall not be eligible to obtain
any new advances from its FHLB, other than special liquidity advances
with the approval of the OTS; and (iv) payment of dividends by the
institution shall be subject to the rules regarding payment of
dividends by a national bank. Upon the expiration of three years from
the date the savings institution ceases to be a QTL, it must cease any
activity and not retain any investment not permissible for a national
bank and immediately repay any outstanding FHLB advances (subject to
safety and soundness considerations).
Currently, the prong of the QTL test that is not based on the Code
requires that 65% of an institution's "portfolio assets" (as defined)
consist of certain housing and consumer-related assets on a monthly
average basis in nine out of every 12 months. Assets that qualify
without limit for inclusion as part of the 65% requirement are loans
made to purchase, refinance, construct, improve or repair domestic
residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by
domestic residential housing or manufactured housing); stock issued by
the FHLB of Dallas; and direct or indirect obligations of the FDIC.
In addition, the following assets, among others, may be included in
meeting the test subject to an overall limit of 20% of the savings
institution's portfolio assets: 50% of residential mortgage loans
originated and sold within 90 days of origination; 100% of consumer
and educational loans (limited to 10% of total portfolio assets); and
stock issued by the FHLMC or the FNMA. Portfolio assets consist of
total assets minus the sum of (I) goodwill and other intangible
assets, (ii) property used by the savings institution to conduct its
business, and (iii) liquid assets up to 20% of the institution's total
assets. At December 31, 1998, the qualified thrift investments of the
Association were approximately 88.9% of its portfolio assets.
Federal Home Loan Bank System. The Association is a member of the
FHLB of Dallas, which is one of 12 regional FHLBs that administers the
home financing credit function of savings institutions. 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. At
December 31, 1998, the Association had $32.8 million of FHLB advances.
See Note 9 to the Consolidated Financial Statements included in the
1998 Annual Report to Stockholders.
As a member, the Association is required to purchase and maintain
stock in the FHLB of Dallas in an amount equal to at least 1% of its
aggregate unpaid residential mortgage loans, home purchase contracts
or similar obligations at the beginning of each year. At December 31,
1998, the Association had $1.7 million in FHLB stock, which was in
compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs
through direct loans or interest subsidies on advances targeted for
community investment and low- and moderate-income housing projects.
These contributions have adversely affected the level of FHLB
dividends paid and could continue to do so in the future. These
contributions also could have an adverse effect on the value of FHLB
stock in the future. The dividend yield on the Association's FHLB
stock was 5.91% in 1998 compared to 5.66% in 1997 and 5.40% in 1996.
<PAGE>
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain reserves against their transaction
accounts (primarily NOW and Super NOW checking accounts) and non-personal
time deposits. As of December 31, 1998, no reserves were
required to be maintained on the first $4.7 million of transaction
accounts, reserves of 3% were required to be maintained against the
next $47.8 million of net transaction accounts (with such dollar
amounts subject to adjustment by the Federal Reserve Board), and a
reserve of 10% (which is subject to adjustment by the Federal Reserve
Board to a level between 8% and 14%) against all remaining net transaction
accounts. Because required reserves must be maintained in the form of
vault cash or a noninterest-bearing account at a Federal Reserve Bank,
the effect of this reserve requirement is to reduce an institution's
earning assets.
Thrift Charter. Congress has been considering legislation in various
forms that would require federal thrifts, such as the Company, to
convert their charters to national or state bank charters. Recent
legislation required the Treasury Department to prepare for Congress a
comprehensive study on the development of a common charter for federal
savings institutions and commercial banks; and, in the event that the
thrift charter had been eliminated by January 1, 1999, would have
required the merger of the BIF and the SAIF into a single Deposit
Insurance Fund on that date. The Company cannot determine whether, or
in what form, such legislation may eventually be enacted and there can
be no assurance that any legislation that is enacted would not
adversely affect the Company or the Association.
TAXATION
Federal Taxation
General. The Company and the Association are subject to the generally
applicable corporate tax provisions of the Code, and the Association
is subject to certain additional provisions of the Code which apply to
thrifts and other types of financial institutions. The following
discussion of federal taxation is intended only to summarize certain
pertinent federal income tax matters and is not a comprehensive
discussion of the tax rules applicable to the Company and the
Association.
Fiscal Year. The Company and the Association will file federal income
tax returns on the basis of a calendar year ending on December 31.
Separate returns were filed for 1998, and it is expected that separate
returns will be filed for 1999.
Bad Debt Reserves. In August 1996, legislation was enacted that
repealed the reserve method of accounting (including the percentage of
taxable income method) previously used by many savings institutions to
calculate their bad debt reserve for federal income tax purposes.
Savings institutions with $500 million or less in assets may, however,
<PAGE>
continue to use the experience method. As a result, the Association
must recapture that portion of its reserve which exceeds the amount
that could have been taken under the experience method for post-1987
tax years. At December 31, 1995, the Company's post-1987 excess
reserves amounted to approximately $68,000. The recapture will occur
over a six-year period, the commencement of which was January 1, 1996.
The legislation also requires savings institutions to account for bad
debts for federal income tax purposes on the same basis as commercial
banks for tax years beginning after December 31, 1995. This change in
accounting method and reversal and excess bad debt reserves is
adequately provided for in the Association's deferred tax liability.
At December 31, 1998, the federal income tax reserves of the Company
included $1.0 million for which no federal income tax has been
provided. Because of these federal income tax reserves and the
liquidation account established for the benefit of certain depositors
of the Company in connection with the Conversion, the retained
earnings of the Company are substantially restricted.
Distributions. If the Association were to distribute cash or property
to its sole stockholder, and the distribution was treated as being
from its accumulated bad debt reserves, the distribution would cause
the Association to have additional taxable income. A distribution is
deemed to have been made from accumulated bad debt reserves to the
extent that (a) the reserves exceed the amount that would have been
accumulated on the basis of actual loss experience, and (b) the
distribution is a "non-qualified distribution." A distribution with
respect to stock is a non-qualified distribution to the extent that,
for federal income tax purposes, (I) it is in redemption of shares,
(ii) it is pursuant to a liquidation of the institution, or (iii) in
the case of a current distribution, together with all other such
distributions during the taxable year, it exceeds the institution's
current and post-1951 accumulated earnings and profits. The amount of
additional taxable income created by a non-qualified distribution is
an amount that when reduced by the tax attributable to it is equal to
the amount of the distribution.
Minimum Tax. The Code imposes an alternative minimum tax at a rate of
20%. The alternative minimum tax generally applies to a base of
regular taxable income plus certain tax preferences ("alternative
minimum taxable income" or "AMTI") and is payable to the extent such
AMTI is in excess of an exemption amount. The Code provides that an
item of tax preference is the excess of the bad debt deduction
allowable for a taxable year pursuant to the percentage of taxable
income method over the amount allowable under the experience method.
Other items of tax preference that constitute AMTI include (a)
depreciation and (b) 75% of the excess (if any) of (I) adjusted
current earnings as defined in the Code, over (ii) AMTI (determined
without regard to this preference and prior to reduction by net
operating losses).
Net Operating Loss Carryovers. A financial institution may carry back
net operating losses ("NOLs") to the preceding two taxable years and
forward to the succeeding 15 taxable years. At December 31, 1998,
neither the Company nor the Association had any NOL carryforwards for
federal income tax purposes.
Capital Gains and Corporate Dividends-Received Deduction. Corporate
net capital gains are taxed at a maximum rate of 35%. Corporations
which own 20% or more of the stock of a corporation distributing a
dividend may deduct 80% of the dividends received. Corporations which
own less than 20% of the stock of a corporation distributing a
dividend may deduct 70% of the dividends received. However, a
corporation that receives dividends from a member of the same
affiliated group of corporations may deduct 100% of the dividends
received.
<PAGE>
Other Matters. Federal legislation is introduced from time to time
that would limit the ability of individuals to deduct interest paid on
mortgage loans. Individuals are currently not permitted to deduct
interest on consumer loans. Significant increases in tax rates or
further restrictions on the deductibility of mortgage interest could
adversely affect the Association.
The Association's federal income tax returns for the tax years ended
1996, 1997 and 1998 are open under the statute of limitations and are
subject to review by the IRS.
State Taxation
The Company is subject to the Louisiana Corporation Income Tax based
on its Louisiana taxable income. The Corporation Income Tax applies
at graduated rates from 4% upon the first $25,000 of Louisiana taxable
income to 8% on all Louisiana taxable income in excess of $200,000.
For these purposes, "Louisiana taxable income" means net income which
is earned within or derived from sources within the State of
Louisiana, after adjustments permitted under Louisiana law, including
a federal income tax deduction. In addition, the Association is
subject to the Louisiana Shares Tax which is imposed on the assessed
value of a company's stock. The formula for deriving the assessed
value is to calculate 15% of the sum of (a) 20% of a company's
capitalized earnings, plus (b) 80% of the company's taxable
stockholders' equity, and to subtract from that figure 50% of the
company's real and personal property assessment. Various items may
also be subtracted in calculating a company's capitalized earnings.
The Louisiana Shares Tax amounted to $30,000 for 1998.
Item 2. Description of Property.
At December 31, 1998, the Company conducted its business from its
headquarters at 195 North Sixth Street, Ponchatoula, Louisiana 70454
and one branch office. The estimated net book value of the electronic
data processing and other office equipment owned by the Company was
$70,000 at December 31, 1998. The following table sets forth certain
information with respect to the offices of the Company at December 31,
1998.
Net Book Value
Description/Address Leased/Owned of Property Deposits
(In Thousands)
Home Office:
195 North Sixth Street
Ponchatoula, LA 70454 Owned $380 $33,112
Branch Office:
111 North Bay Street
Amite, LA 70422 Owned $ 98 $ 6,717
<PAGE>
Item 3. Legal Proceedings.
The Company and Association are involved in routine legal proceedings
occurring in the ordinary course of business which, in the aggregate,
are believed by management to be immaterial to the financial condition
of the Company and Association.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II.
Item 5. Market for Common Equity and Related Stockholder Matters.
The information required herein is incorporated by reference from page
46 of the Company's 1998 Annual Report to Stockholders, which is
included herein as Exhibit 13 ("Annual Report").
Item 6. Management's Discussion and Analysis or Plan of Operation.
The information required herein is incorporated by reference from
pages 32 to 44 of the Company's Annual Report.
Item 7. Financial Statements.
The information required herein is incorporated by reference from
pages 2 to 37 of the Company's Annual Report.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
Not applicable.
PART III.
Item 9. Directors' and Executive Officers' Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act.
The information required herein is incorporated by reference from
pages 2 to 5 and 7 of the Company's definitive proxy statement for the
1999 Annual Meeting of Stockholders ("Proxy Statement").
<PAGE>
Item 10. Executive Compensation
The information required herein is incorporated by reference from
pages 8 to 12 of the Company's Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
The information required herein is incorporated by reference from
pages 5 to 7 of the Company's Proxy Statement.
Item 12. Certain Relationships and Related Transactions.
The information required herein is incorporated by reference from
pages 12 to 13 of the Company's Proxy Statement.
Item 13. Exhibits, List and Reports on Form 8-K.
(a) Documents filed as part of this Report
(1) The following financial statements are incorporated by reference
from Item 8 hereof (see Exhibit 13 attached hereto):
Consolidated Report of Independent Auditors
Consolidated Statements of Financial Condition as of December
31, 1998 and 1997
Consolidated Statements of Income for the Years Ended December
31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996
Notes to the Consolidated Financial Statements
(2) All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
are omitted because of the absence of conditions under which
they are required or because the required information is
included in the consolidated financial statements and related
notes thereto.
<PAGE>
(3) The following exhibits are filed as part of this Form 10-KSB and
this list includes the Exhibit Index.
No. Exhibits
2.1* Plan of Conversion and Agreement and Plan of Reorganization
3.1* Articles of Incorporation of Homestead Bancorp, Inc.
3.2* Bylaws of Homestead Bankcorp, Inc.
4.1* Form of Stock Certificate of Homestead Bancorp, Inc.
10.1* 1996 Stock Incentive Plan
10.2* 1996 Directors' Stock Option Plan
10.3* 1996 Management Recognition Plan - Directors
10.4* 1996 Management Recognition Plan - Officers
10.5* Form of Employment Agreement among Homestead Bancorp, Inc.,
Ponchatoula Homestead Savings, F.A. and Lawrence C.
Caldwell, Jr., dated July 17, 1998
10.6* Form of Employment Agreement among Homestead
Bancorp, Inc., Ponchatoula Homestead Savings,
F.A. and Barbara B. Theriot, dated July 17, 1998
13.1 1998 Annual Report to Stockholders
21.1 Subsidiary of Registrant
Ponchatoula Homestead Savings, F.A. was incorporated
under the laws of the State of Louisiana
27.1 Financial Data Schedule
(*) Incorporated herein by reference from the Company's Registration
Statement on Form SB-2 (Registration No. 333-49277) filed by the
Company with the SEC on April 2, 1998, as subsequently amended.
(b) The Company did not file any reports on Form 8-K during the quarter
ended December 31, 1998.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
HOMESTEAD BANCORP, INC.
By: /s/ Lawrence C. Caldwell, Jr.
Lawrence C. Caldwell, Jr.
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ Lawrence C. Caldwell, Jr. March 29, 1999
Lawrence C. Caldwell, Jr.
Director, President and Chief
Executive Officer
/s/ Barbara B. Theriot March 29, 1999
Barbara B. Theriot
Director, Secretary and Treasurer
/s/ Kelly Morse March 29, 1999
Kelly Morse
Comptroller/Chief Financial Officer
/s/ Milton J. Schanzbach March 29, 1999
Milton J. Schanzbach
Director, Chairman of the Board
/s/ John C. Bohning March 29, 1999
John C. Bohning
Director
/s/ Allen B. Pierson March 29, 1999
Allen B. Pierson, Jr.
Director
/s/ Dennis James March 29, 1999
Dennis James
Director
/s/ Robert H. Gabriel March 29, 1999
Robert H. Gabriel
Director
HOMESTEAD BANCORP, INC.
1998 ANNUAL REPORT
<PAGE>
HOMESTEAD BANCORP, INC. AND SUBSIDIARY
CONTENTS
Financial Highlights Page 1
Independent Auditor's Report 2
Consolidated Statements of Financial Condition
as of December 31, 1998 and 1997 3
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 4
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1998, 1997 and 1996 5 - 6
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996 7 - 8
Notes to the Consolidated Financial Statements
December 31, 1998, 1997 and 1996 9 - 31
Management's Discussion and Analysis of Financial
Condition and Results of Operations 32 - 44
<PAGE>
A MESSAGE TO SHAREHOLDERS
During 1998, the conversion of Ponchatoula Homestead Association from
the mutual to the stock form of ownership came full circle. The
conversion began in 1994 when Ponchatoula Homestead Association
converted from mutual to mutual holding company ownership form.
During this conversion the association converted from a state to a
federal thrift charter and the name was changed to Ponchatoula
Homestead Savings. The mutual holding company, Homestead Mutual
Holding Company, was formed. Based on the 1994 appraisal, the company
placed approximately 25% of the stock issued into public ownership.
The remaining 75% was held by the mutual holding company. On July
17, 1998, Ponchatoula Homestead Savings completed a second step
conversion. During this conversion Homestead Mutual Holding Company
was dissolved and a new stock holding company, Homestead Bancorp, Inc.
was formed. The public stockholders of Ponchatoula Homestead Savings
exchanged existing shares for shares of the new Homestead Bancorp,
Inc. at an exchange ratio of 2.3481. Based on the $10.00 per share IPO
price, the original stockholders realized a $23.48 value for each
share of the original stock. The remaining stock was then sold to
public stockholders. The stock sale exceeded the super-maximum
allowed, and the company was forced to returned over $2 million of
stock orders. The Board and Management consider both the exchange
ratio received by original stockholders and the level of investment by
new stockholders to be indicators of a successful conversion.
Prior to the completion of the conversion, the Board of Directors and
Management developed a plan to improve shareholder value. The plan
consisted of multiple objectives. The first two objectives were to
grow the fixed-rate single family first mortgage loan portfolio
funded with long-term fixed-rate Federal Home Loan Bank Advances and
to initiate and grow an adjustable rate real estate secured line of
credit portfolio funded with deposits. On February 28, 1999,
approximately one year after the plan was initiated, the single
family first mortgage loan portfolio reached $50.3 million. This
represents a $27.1 million or 117% net increase . During the same
period, $4.1 million in real estate secured lines of credit were
established. By February 28, 1999, $2.3 million of these lines were
used. These lines are monthly adjustable and tied to the wall street
prime rate plus 1%. All lines are secured by second mortgages with
loan-to-value ratios of 95% or less when aggregated with the first
mortgage balances. The above objectives were also selected because
all systems and personnel were already in place to handle the
increased business. No additional employees were added and only
minimal additional cost were experienced. The plans therefore
leveraged existing overhead and greatly improved the association's
efficiency ratio. The results of both plans exceeded the one year
goals set by the Board and Management.
The third objective of the plan has more recently been achieved.
This objective was to obtain regulatory approval for a stock
repurchase program as soon as possible. Federal regulatory policy
would not allow stock repurchases during the first six months after
conversion; however, on February 9, 1999 the association was granted
approval to repurchase up to 15% of the outstanding common stock
(221,683 shares). To date the association has repurchased 120,000
shares, all under the IPO price. The association will repurchase the
remainder of the shares approved for repurchase over the next several
months.
<PAGE>
Future Board and Management plans to improve shareholder value will
become more diversified. The economy of the institution's targeted
market continues to show favorable growth potential. Assuming a
stable interest rate environment, the demand for single family
residential financing will remain strong. The institution will
continue to place emphasis on the residential mortgage loan product.
The origination of new mortgage loans creates increased potential to
originate real estate secured lines of credit. Increased emphasis
will be placed on cross-selling the line of credit and other consumer
loan products to existing qualified mortgage loan customers.
Programs designed to grow the core customer deposit base are in the
planning stages. Emphasis will be placed on cross-selling demand
deposit accounts to new and existing mortgage loan customers.
Management now estimates that more than 95% of existing mortgage loan
customers have checking accounts at other financial institutions.
Local commercial bank mergers and consolidations with regional and
super-regional commercial banks will have a positive influence on
increasing the core demand deposit account base. The Board and
Management realize that superb individual customer service in the
delivery of all products to both new and existing institution
customers will be the main marketing attribute of the company. A
reputation of superb customer service will enhance the success of the
institution as it expands its market area through future branch
expansion.
The common stock issued in the conversion trades on the NASDAQ Small
Cap Market under the symbol "HSTD". Since the conversion closing on
July 17, 1998, the general trend of the market has not been friendly
to the institution. The stock has consistently traded below the IPO
price of $10.00 per share. The Board and Management of the
institution realize they cannot control the general trends of the
market; however, they will remain focused on the one main objective
they can control. That objective will be to continue to increase the
book value and earnings per share of common stock outstanding through
various plans of growth, increased profitability, and stock
repurchases. If the plans are successful and the objective is
attained, over time the market will realize the value of the
institution. The loyal, patient investor will be rewarded.
In closing this message to you, the shareholders, we express our
thanks for investing in the future of this company. We are very
proud of our past. We take pride in being the oldest operating
financial institution in our entire three parish market area.
Organized in 1911, we have been continuously operating for 88 years.
Our predecessors were successful in structuring a strong, reputable,
local community bank. The current directors and staff of the bank
are dedicated to continuing this tradition. The future of our
community, and communities like ours throughout this nation, will
depend on the success of our bank and other local community
institutions. The mega banks now being created will not be
successful in meeting the financial needs of this nation.
Our sincere thanks,
/s/ L. C. Caldwell, Jr.
L. C. Caldwell, Jr.
President/CEO
<PAGE>
<TABLE>
HOMESTEAD BANCORP, INC. AND SUBSIDIARY
FINANCIAL HIGHLIGHTS
(Dollars in thousands)
<CAPTION>
DECEMBER 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Selected Financial
Condition and Other Data:
Total assets $ 88,819 $ 59,580 $ 60,691 $ 56,876 $ 50,146
Cash and cash equivalents (1) 3,703 1,254 1,298 2,244 920
Securities available for sale 19,525 16,866 18,871 19,207 17,671
Securities held to maturity 10,203 10,301 10,254 6,259 3,114
Loans held for sale 267 1,414 2,290 1,766 1,275
Loans and leases receivable, net 52,373 28,069 26,150 25,860 25,471
Real estate owned, net - - 141 - 63
Deposits 39,829 42,111 44,427 44,889 41,961
Stockholders' Equity 15,942 5,735 5,443 5,484 4,779
Full service offices 2 2 2 2 2
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
Selected Operating Data:
Total interest income $ 5,161 $ 4,247 $ 4,276 $ 3,988 $ 3,147
Total interest expense 3,041 2,515 2,591 2,342 1,518
-------- -------- -------- -------- --------
Net interest income 2,120 1,732 1,685 1,646 1,629
Provision for (recovery of)
loan and lease losses 54 (16) 3 (6) (7)
-------- -------- -------- -------- --------
Net interest income after provision for
(recovery of) losses 2,066 1,748 1,682 1,652 1,636
Noninterest income 493 373 434 378 417
Noninterest expenses 1,890 1,620 1,910 1,571 1,423
-------- -------- -------- -------- --------
Income before provision for income taxes 669 501 206 459 630
Income taxes 245 185 60 150 184
-------- -------- -------- -------- --------
Net Income $ 424 $ 316 $ 146 $ 309 $ 446
======== ======== ======== ======== ========
AT or FOR YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
Selected Ratios (2):
Return on average assets .56% 0.53% 0.25% 0.57% 0.92%
Return on average equity 3.41 5.67 2.63 5.85 11.04
Average equity to average assets 16.47 9.40 9.50 9.78 8.29
Equity to assets at end of period 17.95 9.63 8.97 9.64 9.53
Dividend payout ratio (3) 92.21 134.49 211.64 77.67 13.45
(1) Includes cash and due from banks as well as interest-bearing deposits in other institutions.
(2) With the exception of end of period ratios, all ratios are based on average monthly balances
during 1998, 1997 and 1996 and average quarterly balances during the prior years.
(3) Ratio based upon total dividends declared, including dividends waived by Homestead Mutual Holding
Company.
</TABLE>
1
<PAGE>
Independent Auditor's Report
To the Shareholders and Board of Directors of
Homestead Bancorp, Inc. and Subsidiary
Ponchatoula, Louisiana
We have audited the Consolidated Statements of Financial Condition of
Homestead Bancorp, Inc. and Subsidiary as of December 31, 1998 and 1997,
and the related Consolidated Statements of Income, Stockholders'
Equity and Cash Flows for the years ended December 31, 1998, 1997
and 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Homestead
Bancorp, Inc. and Subsidiary as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years ended
December 31, 1998, 1997 and 1996 in conformity with generally accepted
accounting principles.
Respectfully submitted,
/s/ Hannis T. Bourgeois, L.L.P.
HANNIS T. BOURGEOIS, L.L.P.
Baton Rouge, Louisiana
January 15, 1999
2
<PAGE>
<TABLE>
HOMESTEAD BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
as of December 31, 1998 and 1997
<CAPTION>
ASSETS
1998 1997
(In Thousands)
<S> <C> <C>
Cash $ 609 $ 609
Interest-Bearing Deposits in Other Institutions 3,094 645
Securities:
Investment Securities Available for Sale
(Amortized Cost of $2.3 million and $2.6 million) 2,315 2,605
Mortgage-Backed Securities Available for Sale
(Amortized Cost of $17.2 million and $14.3 million) 17,210 14,261
Mortgage-Backed Securities Held to Maturity
(Fair Value of $10.1 million and $10.4 million) 10,203 10,301
Federal Home Loan Bank Stock, at Cost 1,665 584
Total Securities 31,393 27,751
Loans Held for Sale 267 1,414
Loans Receivable 52,401 28,033
Leases Receivable 274 301
---------- ----------
Total Loans and Leases Receivable 52,675 28,334
Less: Allowance for Loan and Lease Losses (302) (265)
---------- ----------
Net Loans and Lease Receivables 52,373 28,069
Premises and Equipment, Net 547 545
Accrued Interest Receivable 483 420
Other Assets 53 127
---------- ----------
Total Assets $ 88,819 $ 59,580
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 39,829 $ 42,111
Advances from Borrowers for Taxes and Insurance 51 32
Advances from Federal Home Loan Bank 32,765 11,500
Income Taxes Payable 141 162
Other Liabilities 91 40
---------- ----------
Total Liabilities 72,877 53,845
---------- ----------
Commitments and Contingencies
Stockholders' Equity:
Common Stock - $0.01 Par Value; 10,000,000 Shares
Authorized, 1,477,870 Shares Issued and Outstanding
in 1998 and 1,423,759 Shares Issued and Outstanding
in 1997 15 14
Paid-in Capital in Excess of Par 12,942 2,064
Retained Earnings - Substantially Restricted 3,875 3,734
Accumulated Other Comprehensive Income (6) (35)
---------- ----------
16,826 5,777
Unearned ESOP Shares (851) -
Common Stock acquired by Management Recognition Plans (33) (42)
---------- ----------
Total Stockholders' Equity 15,942 5,735
---------- ----------
Total Liabilities and Stockholders' Equity $ 88,819 $ 59,580
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
3
<PAGE>
<TABLE>
HOMESTEAD BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1998, 1997 and 1996
<CAPTION>
1998 1997 1996
(In Thousands, except
per share data)
<S> <C> <C> <C>
Interest Income:
Loans and Leases $ 3,214 $ 2,429 $ 2,384
Investment Securities 209 145 155
Mortgage-Backed Securities 1,454 1,576 1,621
Other 284 97 116
-------- --------- ---------
Total Interest Income 5,161 4,247 4,276
-------- --------- ---------
Interest Expense:
Deposits 1,840 1,971 2,158
Borrowings 1,201 544 433
-------- --------- ---------
Total Interest Expense 3,041 2,515 2,591
-------- --------- ---------
Net Interest Income 2,120 1,732 1,685
Provision for (Recovery of) Loan and Lease Losses 54 (16) 3
-------- --------- ---------
Net Interest Income After Provision for
(Recovery of) Loan and Lease Losses 2,066 1,748 1,682
-------- --------- ---------
Noninterest Income:
Gain on Sale of Loans 137 167 240
Loan Fees and Service Charges 323 189 186
Other Income 33 17 8
-------- --------- ---------
Total Noninterest Income 493 373 434
-------- --------- ---------
Noninterest Expenses:
Compensation and Benefits 967 869 818
Occupancy and Equipment Expense 177 140 151
Federal Insurance Premium 27 23 92
Special SAIF Assessment - - 284
Net Real Estate Owned Expense (Income) - 27 (3)
Other Expenses 719 561 568
-------- --------- ---------
Total Noninterest Expenses 1,890 1,620 1,910
-------- --------- ---------
Income Before Provision for Income Taxes 669 501 206
Income Taxes 245 185 60
-------- --------- ---------
Net Income $ 424 $ 316 $ 146
======== ========= =========
Per Share:
Earnings Per Common Share $ .29 $ .22 $ .10
======== ========= =========
Earnings Per Common Share - Assuming Dilution $ .28 $ .22 $ .10
======== ========= =========
Cash Dividends Declared $ .27 $ .30 $ .22
======== ========= =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
4
<PAGE>
<TABLE>
HOMESTEAD BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1998, 1997 and 1996
<CAPTION>
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Common Stock:
Balance - Beginning of Year $ 14 $ 14 $ 60
Restatement due to Conversion - - (46)
---------- ---------- ----------
Balance - Beginning of Year as Restated 14 14 14
Cancellation of Mutual Stock (10) - -
Issuance of Stock 11 - -
---------- ---------- ----------
Balance - End of Year $ 15 $ 14 $ 14
========== ========== ==========
Paid-In Capital In Excess of Par:
Balance - Beginning of Year $ 2,064 $ 1,744 $ 1,402
Restatement due to Conversion - - 46
---------- ---------- ----------
Balance - Beginning of Year as Restated 2,064 1,744 1,448
Exercise of Stock Options 26 - 62
Dividends Declared and Waived by Holding Company 182 320 234
Management Recognition Plans Distribution 12 - -
Cancellation of Mutual Stock 10 - -
Issuance of Stock (Net of Conversion Costs) 10,652 - -
Allocation of ESOP Shares (4) - -
---------- ---------- ----------
Balance - End of Year $ 12,942 $ 2,064 $ 1,744
========== ========== ==========
Retained Earnings:
Balance - Beginning of Year $ 3,734 $ 3,843 $ 4,006
Net Income 424 316 146
Cash Dividends Declared and Paid (209) (105) (75)
Dividends Declared and Waived by Holding Company (182) (320) (234)
Transfer Retained Earnings of Mutual Holding Company 100 - -
Dividends on ESOP Shares 8 - -
---------- ---------- ----------
Balance - End of Year $ 3,875 $ 3,734 $ 3,843
========== ========== ==========
Accumulated Other Comprehensive Income:
Balance - Beginning of Year $ (35) $ (101) $ 16
Net Change in Unrealized Gain (Loss) 29 66 (117)
---------- ---------- ----------
Balance - End of Year $ (6) $ (35) $ (101)
========== ========== ==========
Unearned Employee Stock Ownership Plan Shares:
Balance - Beginning of Year $ - $ - $ -
Establishment of ESOP (895) - -
Shares Released for Allocation 44 - -
---------- ---------- ----------
Balance - End of Year $ (851) $ - $ -
========== ========== ==========
</TABLE>
(CONTINUED)
5
<PAGE>
<TABLE>
HOMESTEAD BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(CONTINUED)
for the years ended December 31, 1998, 1997 and 1996
<CAPTION>
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Director and Management Recognition Plans:
Balance - Beginning of Year $ (42) $ (57) $ -
Shares of Common Stock Earned 9 15 -
Issuance of Common Stock - - (57)
---------- -------- ---------
Balance - End of Year $ (33) $ (42) $ (57)
========== ======== ==========
Comprehensive Income:
Net Income $ 424 $ 316 $ 146
Other Comprehensive Income, Net of Tax:
Unrealized Gains (Losses) on Securities
Available for Sale (6) (35) (101)
---------- -------- ---------
Total Comprehensive Income $ 418 $ 281 $ 45
========== ======== =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
6
<PAGE>
<TABLE>
HOMESTEAD BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1998, 1997 and 1996
<CAPTION>
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 424 $ 316 $ 146
Adjustments to Reconcile Net Income to Net Cash
Provided by (Used in) Operating Activities:
Depreciation 37 29 43
Provision for Deferred Income Taxes 15 31 10
Provision for (Recovery of) Loan and Lease Losses 54 (16) 3
Loss on Sale of Real Estate Owned - 27 -
Loss on Sale of Property 3 - -
Provision for (Recovery of) Real Estate Losses - (4) 4
Net Amortization of Premiums on Securities 99 57 42
Loss on Call of Mortgage-Backed Securities - 1 -
Stock Dividends on Federal Home Loan Bank Stock (64) (41) (58)
Loans Originated for Sale (1,147) (7,835) (10,464)
Sale of Loans 2,294 8,711 9,940
Changes in Assets and Liabilities:
(Increase) Decrease in Interest Receivable (63) 43 (19)
(Increase) Decrease in Other Assets 94 (40) (46)
Increase (Decrease) in Income Taxes Payable (36) 131 -
Increase (Decrease) in Other Liabilities 57 (26) (74)
--------- --------- ----------
Net Cash Provided by (Used in) Operating Activities 1,767 1,384 (473)
--------- --------- ----------
Cash Flows From Investing Activities:
Purchase of Property and Equipment (43) (32) (15)
Maturities of Investment Securities 1,200 1,200 1,200
Purchases of Investment Securities (900) (1,400) (1,195)
Proceeds from Call or Maturities of Mortgage-Backed Securities 6,421 4,444 3,999
Purchases of Mortgage-Backed Securities (9,336) (2,244) (7,884)
Net Increase in Loans and Leases Receivable (24,358) (1,844) (432)
Proceeds from Sales of Real Estate Owned - 61 -
Proceeds from Sale of Equipment 1 - -
Purchases of Real Estate Owned - (1) -
--------- --------- ----------
Net Cash Provided by (Used in) Investing Activities (27,015) 184 (4,327)
--------- --------- ----------
Cash Flows From Financing Activities:
Net Proceeds from Issuance of Common Stock 9,912 - -
Net Increase (Decrease) in Money Market Accounts,
NOW Accounts and Savings Accounts (961) (1,588) (685)
Net Increase (Decrease) in Certificates of Deposit (1,321) (728) 223
Increase (Decrease) in Advances from
Borrowers for Taxes and Insurance 19 (6) (9)
</TABLE>
(CONTINUED)
7
<PAGE>
<TABLE>
HOMESTEAD BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
for the years ended December 31, 1998, 1997 and 1996
<CAPTION>
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Proceeds from Federal Home Loan Bank Advances 21,265 800 4,400
Dividends Paid on Common Stock (209) (105) (75)
Purchase of Federal Home Loan Bank Stock (1,017) - -
MRP Shares Earned 9 15 -
-------- --------- --------
Net Cash Provided by (Used in) Financing Activities 27,697 (1,612) 3,854
-------- --------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 2,449 (44) (946)
Cash and Cash Equivalents - Beginning of Year 1,254 1,298 2,244
-------- --------- --------
Cash and Cash Equivalents - End of Year $ 3,703 $ 1,254 $ 1,298
======== ========= ========
Supplemental Disclosures of Cash Flow Information:
Cash Payments for:
Interest Paid to Depositors $ 1,840 $ 1,971 $ 2,158
======== ========= ========
Interest Paid on Advances $ 1,201 $ 544 $ 433
======== ========= ========
Income Taxes $ 232 $ - $ 91
======== ========= ========
Supplemental Schedules of Noncash Investing
and Financing Activities:
Real Estate Acquired in Settlement of
Loans and Leases $ - $ 88 $ 145
======== ========= ========
Loans and Leases to Facilitate the Sale of
Real Estate Owned $ - $ 147 $ -
======== ========= ========
Increase in Unrealized Gain (Loss) on Securities
Available for Sale $ 65 $ 100 $ (178)
======== ========= ========
Increase (Decrease) in Deferred Tax Effect on Unrealized
Gain (Loss) on Securities Available for Sale $ (15) $ (34) $ 61
======== ========= ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
8
<PAGE>
HOMESTEAD BANCORP, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
Note 1 - Summary of Significant Accounting Policies -
The accounting principles followed by Homestead Bancorp, Inc. (the
"Company") and its wholly-owned subsidiary, Ponchatoula Homestead
Savings, F.A. (the "Association") are those which are generally
practiced within the savings and loan industry. The methods of
applying those principles conform with generally accepted accounting
principles and have been applied on a consistent basis. The
principles which significantly affect the determination of financial
position, results of operations, changes in stockholders' equity and
cash flows are summarized below.
Organization and Principles of Consolidation
The consolidated financial statements include the accounts of
Homestead Bancorp. Inc. and its wholly owned subsidiary, Ponchatoula
Homestead Savings, F.A. All significant intercompany balances and
transactions have been eliminated.
On February 5, 1998, Ponchatoula Homestead Savings, F.A. (the
"Association") incorporated Homestead Bancorp, Inc. (the "Company")
to facilitate the conversion of Homestead Mutual Holding Company
(the "MHC") from mutual to stock form (the Conversion). In
connection with the Conversion, the Company offered its common stock
to the depositors and borrowers of the Association as of specified
dates, to an employee stock ownership plan and to members of the
general public. Upon consummation of the Conversion on July 17,
1998, the MHC merged into the Association, the Association then
merged with an interim subsidiary of the Company (with the
Association as the surviving entity). All of the Association's
outstanding common stock (other than shares held by the MHC, which
were canceled) was exchanged for common stock of the Company, and
the Company became the holding company for the Association and
issued shares of common stock to the general public.
The Company filed a Form SB-2 with the Securities and Exchange
Commission ("SEC") on April 2, 1998, which as amended was declared
effective by the SEC on May 14, 1998. The Association filed a Form
AC with the Office of Thrift Supervision ("OTS") on April 2, 1998.
The Form AC and related offering and proxy materials, as amended,
were conditionally approved by the OTS letter dated May 14, 1998.
The Company also filed on Application H(e)1-S with the OTS on April
17, 1998, which was conditionally approved by the OTS letter dated
May 26, 1998. The members of the MHC and the stockholders of the
Association approved the Plan at special meetings held on July 1,
1998, and the subscription and community offerings closed on June
23, 1998.
In connection with the incorporation of the Company, the Company
issued 100 shares of common stock to the Association. The shares
were canceled upon consummation of the Conversion, and the
Conversion was accounted for under the pooling of interests method
of accounting.
The Company sold 1,119, 543 shares of common stock in the
subscription offering at a price of $10.00 per share, for aggregate
gross proceeds of $11,195,430. In addition, a total of 358,402
shares of common stock were issued by the Company in exchange for
all of the 152,635 shares of common stock of the Association
outstanding prior to consummation of the Conversion (excluding the
453,710 shares held by the MHC, which were canceled), based upon an
exchange ratio of 2.34810 shares of Company common stock for each
share of Association common stock.
9
<PAGE>
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The determination of the adequacy of the allowance for loan losses
is based on estimates that are particularly susceptible to
significant changes in the economic environment and market
conditions. In connection with the determination of the estimated
losses on loans, management obtains independent appraisals for
significant collateral. The Association's loans are generally
secured by specific items of collateral including real property,
consumer assets, and business assets. Although the Association has
a diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent on local economic
conditions in the area. While management uses available information
to recognize losses on loans, further reductions in the carrying
amounts of loans 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 estimated
losses on loans. Such agencies may require the Association to
recognize additional losses based on their judgments about
information available to them at the time of their examination.
Because of these factors, it is reasonably possible that the
estimated losses on loans may change materially in the near term.
However, the amount of the change that is reasonably possible cannot
be estimated.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, certificates of
deposit, and funds due from banks. For purposes of the Statements
of Cash Flows, the Company and the Association considers all highly
liquid debt instruments with original maturities when purchased of
three months or less to be cash equivalents. In addition, the
Company and the Association reports their loans and certificates of
deposit on a net basis.
Investment and Mortgage-Backed Securities
Management determines the appropriate classification of debt
securities (Held to Maturity, Available for Sale, or Trading) at the
time of purchase and re-evaluates this classification periodically.
Securities that management has both the intent and ability to hold
to maturity regardless of changes in market conditions, liquidity
needs or changes in general economic conditions are classified as
securities held to maturity. These securities are carried at cost
adjusted for amortization of premium and accretion of discount, com-
puted by the interest method over their contractual lives.
Securities classified as available for sale are those securities
that the Company and the Association intends to hold for an
indefinite period of time but not necessarily to maturity. Any
decision to sell a security classified as available for sale would
be based on various factors, including significant movements in
interest rates, changes in the maturity mix of their assets and
liabilities, liquidity needs, regulatory capital considerations, and
other similar factors. Securities available for sale are carried at
fair value. Unrealized gains or losses are reported as increases or
decreases in stockholders' equity, net of related income tax
effects. Realized gains or losses, determined on the basis of the
cost of specific securities sold, are included in earnings. The
Company and the Association do not engage in trading activities.
10
<PAGE>
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary
market are carried at the lower of cost or estimated fair value in
the aggregate. Net unrealized losses are recognized in a valuation
allowance by charges to income. Gains on sales of loans are
recognized when the proceeds from the loan sales are received by the
Association.
Loans Receivable
Loans receivable are stated at unpaid principal balances, less the
allowance for loan losses, and net deferred loan origination fees.
Interest on mortgage and consumer loans is accrued based on the
principal outstanding.
Impaired loans are measured on the present value of expected future
cash flows discounted at the loan's effective interest
rate, or as an expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral
dependent. A loan is impaired when it is probable the creditor will
be unable to collect all contractual principal and interest payments
due in accordance with the terms of the loan agreement.
The Association discontinues the accrual of interest income when a
loan becomes 90 days past due as to principal or interest. At that
time, a reserve is recorded equal to the amount of delinquent inter-
est. If the delinquent interest is subsequently collected, it is
credited to income in the period collected. Interest on impaired
loans is discontinued when, in management's opinion, the borrower
may be unable to meet payments as they become due.
Allowance for Losses
The allowance for loan and lease losses is maintained at a level
which in management's judgment is adequate to absorb credit losses
inherent in the loan and lease portfolio. The allowance for loan
and lease losses is based upon management's review and evaluation of
the loan portfolio. Factors considered in the establishment of the
allowance for loan and lease losses include management's evaluation
of specific loans; the level and composition of classified loans;
historical loss experience; results of examinations by regulatory
agencies; an internal asset review process; expectations of fu-
ture economic conditions and their impact on particular borrowers;
and other judgmental factors. Allowances for impaired loans are
generally determined based on collateral values or the present
value of estimated cash flows. Although management uses available
information to recognize losses on loans and leases, because of
uncertainties associated with local economic conditions, collateral
values, and future cash flows on impaired loans, it is reasonably
possible that a material change could occur in the allowance for
loan and lease losses in the near term. However, the amount of the
change that is reasonably possible cannot be estimated.
The allowance for loan and lease losses is based on estimates of
potential future losses, and ultimate losses may vary from the
current estimates. These estimates are reviewed periodically and as
adjustments become necessary, the effect of the change in estimate
is charged to operating expenses in the period incurred. All losses
are charged to the allowance for loan and lease losses when the loss
actually occurs or when management believes that the
collectibility of the principal is unlikely. Recoveries are
credited to the allowance at the time of recovery.
Loan Fees
Loan fees and certain direct loan origination costs are deferred,
and the net fee or cost is recognized as interest income using the
level yield method over the contractual life of the loan.
11
<PAGE>
Leasing Activities
The Association's leasing operations consist of the leasing of
various real estate properties owned. The leases are classified as
sales-type leases. The lease terms range from 15 to 30 years.
Under the sales-type method of accounting for leases, the total net
rentals receivable under the lease contracts, including accrued
interest, are recorded as a lease sale receivable. The interest is
recognized each month as it is earned so as to produce a constant
periodic rate of return on the unrecovered investment.
Valuations are periodically performed by management and an allowance
for losses is established by a charge to operations if the carrying
value of the property exceeds its estimated net realizable value.
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank ("FHLB") System, the
Association is required to purchase and maintain stock in the FHLB
of Dallas in an amount equal to the greater of 1% of the aggregate
unpaid balance of loans and securities secured by single family and
multi-family properties, .3% of total assets, or 5% of total FHLB
advances. FHLB stock is redeemable at par value at the discretion
of the FHLB of Dallas and is used to collateralize FHLB advances.
Property and Equipment
Property and equipment are recorded at cost less accumulated depre-
ciation. Expenditures for maintenance and repairs are charged to
operations as incurred. Costs of major additions and improvements
are capitalized.
The Association computes depreciation generally on the straight-line
and accelerated methods for financial reporting. The accelerated
methods used do not differ materially from results obtained using
the straight-line method. Depreciation is based on the estimated
service lives of the assets. The estimated service lives for
buildings is twenty to thirty nine years and for furniture, fixtures
and equipment is five to ten years.
The costs of assets retired or otherwise disposed of and the related
accumulated depreciation are eliminated from the accounts in the
year of disposal and the resulting gains or losses are included in
current operations.
Income Taxes
The provision for income taxes is based on income as reported in the
financial statements and consist of taxes currently due plus
deferred taxes. Deferred income taxes are provided on differences
between income reported for financial reporting and income tax
purposes as explained more fully in Note 10. Deferred taxes are
provided on a liability method whereby deferred tax assets and
liabilities are recognized for the future tax consequences attribut-
able to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
12
<PAGE>
Earnings Per Common Share
In February 1997, Statement of Financial Accounting Standard No. 128
"Earnings Per Share" ("SFAS No. 128") was issued which establishes
standards for computing and presenting earnings per share (EPS).
Under SFAS No. 128, primary EPS is replaced with basic EPS. Basic
EPS is computed by dividing income applicable to common shares by
the weighted average shares outstanding; no dilution for any
potentially convertible shares is included in the calculation.
Fully diluted EPS, now called diluted EPS, reflects the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the Company. Earnings per share for the prior years
have been restated to reflect the transactions of the conversion.
Comprehensive Income
The Financial Accounting Standards Board ("FASB") issued Statement
No. 130 "Reporting Comprehensive Income," which became effective for
fiscal years beginning after December 15, 1997. This statement
establishes standards for reporting and display of comprehensive
income and its components which are revenues, expenses, gains, and
losses that under GAAP are included in comprehensive income but
excluded from net income. The Company adopted this statement in
1998. The components of comprehensive income are disclosed in the
statements of changes in stockholders' equity for all periods
presented.
Current Accounting Developments
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which
establishes standards for the reporting of financial information
from operating segments in annual and interim financial statements.
SFAS No. 131 requires that financial information be reported on the
same basis that it is reported internally for evaluating segment
performance and allocating resources to segments. The adoption of
this statement had no effect on the financial statements as of
December 31, 1998.
In February 1998, the FASB issued Statement No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits. FASB
Statement No. 132 revises employers' disclosures about pension and
other postretirement benefit plans. It does not change the
measurement or recognition of those plans. It standardizes the
disclosure requirements for pensions and other postretirement
benefits. The adoption of this statement in 1998 had no material
impact on the Company's financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The provisions of
this statement will be effective for the Company's year ending
December 31, 1999. Management does not believe that the impact of
adopting this statement will have a material impact on the Company's
financial position or results of operations.
In early 1998, the AICPA issued Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" ("SOP"). The SOP is
effective for fiscal years beginning after December 15, 1998 and
will require costs of start-up activities and organization costs to
be expenses as incurred. Any such unamortized costs on the date of
adoption of the new standard will be written off and reflected as a
cumulative effect of a change in accounting principle. The adoption
of this statement in 1999 should not have an material impact on the
financial statements of the Company.
13
<PAGE>
Note 2 - Securities -
The amortized cost and fair values of securities being held to maturity
as of December 31, 1998 and 1997 are summarized as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In Thousands)
December 31, 1998
Mortgage-Backed Securities $10,203 $ 15 $ (128) $10,090
======= ======= ======= =======
December 31, 1997
Mortgage-Backed Securities $10,301 $ 135 $ (21) $10,415
======= ======= ======= =======
The amortized cost and fair values of securities being held to maturity may
differ from contractual maturities in mortgage-backed securities because the
mortgages underlying the securities may be called or repaid without any
penalties. Therefore, these securities are not included in maturity
categories.
The amortized cost and fair values of securities available for
sale as of December 31, 1998 and 1997 are summarized as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In Thousands)
December 31, 1998
Securities of U.S.
Government Agencies $ 2,300 $ 15 $ - $ 2,315
======= ======= ======= =======
Mortgage-Backed Securities $17,234 $ 72 $ (96) $17,210
======= ======= ======= =======
December 31, 1997
Securities of U.S.
Government Agencies $ 2,595 $ 10 $ - $ 2,605
======= ======= ======= =======
Mortgage-Backed Securities $14,324 $ 74 $ (137) $14,261
======= ======= ======= =======
The amortized cost and fair values of securities available for sale as of
December 31, 1998 by contractual maturity are shown below. Actual
maturities may differ from contractual maturities in mortgage-backed
securities because the mortgages underlying the securities may be called
or repaid without any penalties. Therefore these securities are not
included in the maturity categories in the following maturity summary.
AMORTIZED FAIR
COST VALUE
(In Thousands)
Within One Year $ 1,400 $ 1,409
One to Five Years 900 906
-------- ---------
2,300 2,315
Mortgage-backed Securities 17,234 17,210
-------- ---------
Total $ 19,534 $ 19,525
======== =========
14
<PAGE>
There were no sales of securities during 1998, 1997 or 1996.
Securities available for sale with a carrying value of $2.0
million and $1.6 million at December 31, 1998 and 1997,
respectively, were pledged as collateral on public deposits. At
December 31, 1998 and 1997, securities with carrying values
totaling $6.0 million and $10.0 million and fair values totaling
$6.1 million and $10.3, respectively were used to collateralize
FHLB advances.
Ponchatoula has invested in FHLB stock which is carried at cost
which approximates market.
Note 3 - Loans and Leases Receivable -
Loans and leases receivable at December 31, 1998 and 1997 consisted
of the following:
1998 1997
(In Thousands)
First Mortgage Loans $ 40,083 $ 19,500
Second Mortgage Loans 408 164
Construction Loans 7,241 968
Consumer Loans 8,348 7,175
Commercial Loans 116 521
-------- ---------
56,196 28,328
Less:
Undisbursed Portion of Mortgage Loans (3,788) (287)
Deferred Loan Fees (7) (8)
-------- ---------
Net Loans Receivable 52,401 28,033
Leases Receivable 274 301
Less:
Allowance for Loan and Lease Losses (302) (265)
-------- ---------
52,373 28,069
Loans Held for Sale 267 1,414
-------- ---------
Net Loans and Leases $ 52,640 $ 29,483
======== =========
The performing single family loans are pledged, under a blanket lien,
as collateral securing advances from the FHLB at December 31, 1998
and 1997.
Ponchatoula had loans 90 days or more past due totaling approximately
$383,000 and $173,000 at December 31, 1998 and 1997, respectively.
There were no impaired loans at December 31, 1998 which were required
to be recorded in conformity with SFAS No. 114 as amended by SFAS No.
118.
Ponchatoula is permitted to make extensions of credit to its officers
and directors in the ordinary course of business. The loans are made
on substantially the same terms as those prevailing at the time for
comparable loans with other parties. The total of such indebtedness
outstanding at December 31, 1998 and 1997 was $440,000 and $403,000,
respectively. An analysis of the aggregate of these loans for 1998
is as follows:
15
<PAGE>
(In Thousands)
Balance - Beginning of Year $ 403
New Loans 236
Repayments (199)
--------
Balance - End of Year $ 440
========
Following is a summary of the activity in the allowance for losses
for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996
(In Thousands)
Balance - Beginning of Year $ 265 $ 282 $ 280
Provision for (Recovery of) Loan Losses 54 (16) 3
Charge Offs (17) (1) (1)
------- ------- -------
Balance - End of Year $ 302 $ 265 $ 282
====== ======= ========
Note 4 - Leases Receivable -
The composition of the sales-type lease receivables as of December 31,
1998 and 1997 is as follows:
1998 1997
(In Thousands)
Total Minimum Lease Payments To Be Received $ 469 $ 529
Less: Unearned Income (195) (228)
------- ---------
Net Lease Receivable $ 274 $ 301
======== =========
At December 31, 1998, the total minimum future lease payments
receivable is due as follows:
(In Thousands)
1999 $ 19
2000 18
2001 19
2002 21
2003 21
Thereafter 176
---------
$ 274
=========
Note 5 - Loan Servicing -
Mortgage loans serviced for others are not included in the accompanying
Statements of Financial Condition. The unpaid principal balances of
these loans serviced for FHLMC at December 31, 1998, 1997
and 1996 amounted to $24,000, $91,000 and $271,000, respectively.
Custodial escrow balances maintained in connection with the foregoing
loan servicing were approximately $100, $300 and $3,000 at December
31, 1998, 1997 and 1996, respectively.
16
<PAGE>
Note 6 - Premises and Equipment -
Office properties and equipment at December 31, 1998 and 1997 consisted
of the following:
1998 1997
(In Thousands)
Land $ 53 $ 53
Buildings 680 680
Furniture, Fixtures and Equipment 388 357
-------- --------
1,121 1,090
Less: Accumulated Depreciation (574) (545)
-------- --------
$ 547 $ 545
======== ========
The provision for depreciation charged to expense was $37,000,
$29,000 and $43,000, respectively, for the years ended December 31,
1998, 1997 and 1996.
Note 7 - Accrued Interest Receivable -
Accrued Interest Receivable at December 31, 1998 and 1997 consisted
of the following:
1998 1997
(In Thousands)
Investment Securities $ 24 $ 39
Mortgage-Backed Securities 182 178
Loans 277 203
-------- ---------
$ 483 $ 420
======== =========
Note 8 - Deposits -
An analysis of the deposit accounts at December 31, 1998 and 1997 is
as follows:
1998 1997
---------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT % RATE AMOUNT %
(Dollars In Thousands)
Money Market 2.02% $ 802 2% 2.27% $ 934 2%
NOW Accounts 2.02% 1,672 4 2.05% 1,491 3
Passbook Savings 2.28% 7,243 18 2.52% 8,253 20
------- ---- -------- ----
9,717 24 10,678 25
Certificates:
2.00-3.99% 3.02% 270 1 3.03% 285 1
4.00-5.99% 5.10% 28,330 71 5.22% 30,031 71
6.00-7.99% 6.09% 1,512 4 6.28% 1,117 3
------- ---- -------- ----
30,112 76 31,433 75
------- ---- -------- ----
$39,829 100% $ 42,111 100%
======= ==== ======== ====
The aggregate amount of deposits with a minimum balance of $100,000
was approximately $5.7 million at December 31, 1998 and $4.8
million at December 31, 1997. Deposit amounts in excess of
$100,000 are not federally insured.
17
<PAGE>
A summary of certificates of deposit by maturity at December 31,
1998 and 1997 is as follows:
1998 1997
(In Thousands)
1998 $ - $28,608
1999 25,840 2,062
2000 3,269 359
2001 83 97
2002 276 307
2003 644 -
------- -------
$30,112 $31,433
======= ========
Interest expense on deposits is summarized as follows:
1998 1997 1996
(In Thousands)
NOW and Money Market 47 $ 59 $ 72
Passbook Savings 211 228 294
Certificates of Deposit 1,582 1,684 1,792
------- ------- -------
$ 1,840 $ 1,971 $ 2,158
======== ======= =======
Note 9 - Advances from Federal Home Loan Bank -
Ponchatoula had outstanding advances from the Federal Home Loan
Bank (FHLB) of $32.8 million and $11.5 million at December 31,
1998 and 1997, respectively. Specific mortgage-backed securities,
with a fair value of approximately $6.1 million and $10.3 million and
a carrying value of $6.0 million and $10.0 million at December 31,
1998 and 1997, respectively, were pledged to the FHLB as collateral
securing the advances. In addition, the performing single family
loans are pledged under a blanket lien as collateral securing these
advances. Interest expense on advances from the FHLB totaled $1.2
million, $544,000, and $433,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
The following schedule provides certain information about the
advances at December 31, 1998 and 1997:
1998 1997
(Dollars In Thousands)
Borrowing at End of Year $32.8 million $11.5 million
Rate at End of Year 5.51% 5.85%
Maximum Borrowing during Year $32.8 million $11.5 million
Average Borrowing during Year $22.2 million $ 9.8 million
Weighted Average Rate 5.59% 5.53%
18
<PAGE>
The aggregate amounts of principle maturities for FHLB advances for
the years indicated were as follows:
1998 1997
AMOUNT AMOUNT
(Dollars In Thousands)
1998 $ - $ 11,500
1999 10,639 -
2000 1,417 -
2001 1,500 -
2002 1,587 -
Thereafter 17,622 -
----------- ------------
$ 32,765 $ 11,500
=========== ============
Note 10 - Income Taxes -
The Company and the Association each file a separate federal and
state income tax return on a calendar year basis.
The total provision for income taxes charged to income amounted to
$245,000, $185,000, and $60,000 for 1998, 1997, and 1996,
respectively.
Following is a reconciliation between income tax expense based on the
federal statutory tax rates and income taxes reported in the
Consolidated Statements of Income:
1998 1997 1996
(In Thousands)
Tax at Statutory Rate - (34%) $ 227 $ 170 $ 70
Bad Debt Recovery 4 8 -
Other 14 7 (10)
------- ------- ---------
Provision for Federal Income Taxes $ 245 $ 185 $ 60
======== ======== =========
Effective Tax Rate 36.62% 36.93% 29.13%
======== ======== =========
The components of income tax expense are as follows:
1998 1997 1996
(In Thousands)
Provision for Current Taxes $ 235 $ 154 $ 50
Provision for Deferred Taxes 10 31 10
------- ------- --------
$ 245 $ 185 $ 60
======== ======== =========
19
<PAGE>
The deferred tax provision (benefit) consists of the following timing
differences:
1998 1997 1996
(In Thousands)
Bad Debt Deduction for Tax Reporting in
Excess of Amount for Financial Reporting $ (13) $ (9) $ 10
Depreciation 6 7 -
Stock Dividends 22 33 -
ESOP Shares Distributed (5) - -
------- ------ ------
$ 10 $ 31 $ 10
======= ====== ======
The net deferred tax asset or liability consists of the following
components at December 31, 1998, 1997, and 1996:
1998 1997 1996
(In Thousands)
Deferred Compensation-ESOP Shares $ 5 $ - $ -
Depreciation (13) (7) -
Stock Dividends (55) (33) -
Provision for Loan Losses (6) (19) (29)
Unrealized (Gain) Loss on Securities
Available for Sale 3 18 52
------- ------ ------
Total Deferred Tax Asset (Liability) $ (66) $ (41) $ 23
======= ====== ======
The reserve method of accounting for bad debt utilized by qualified
thrift institutions pursuant to Code Section 593 was repealed for tax
years beginning after December 31, 1995. The $68,000 of excess
reserves of the Association is being taken into income ratably over
a six-year period beginning January 1, 1996. This change in
accounting method and reversal of excess bad debt reserves is
adequately provided for in the Association's deferred tax liability.
Note 11 - Other General and Administrative Expenses -
An analysis of other general and administrative expenses for the
years ended December 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996
(In Thousands)
Data Processing Fees $ 66 $ 47 $ 67
Professional Fees 309 214 242
Postage and Supplies 40 44 40
Insurance 27 28 27
Other 277 228 192
------ ----- ------
$ 719 $ 561 $ 568
====== ===== ======
Note 12 - Profit Sharing Plan -
The Association established a noncontributory profit sharing plan
during the year ended December 31, 1986. The plan is a defined
contribution plan and covers all employees after a specified period of
employment and within specified age brackets. The profit sharing
expense for the years ended December 31, 1998, 1997 and 1996
amounted to $54,000, $77,000 and $74,000, respectively. The
20
<PAGE>
Board of Directors of the Association had determined that it's
liability was computed each year based on fifteen percent of eligible
wages. The Plan was amended effective April 1, 1998 to incorporate a
401(k) feature, pursuant to which employees are permitted to
contribute up to 7.5% of their annual base salary (excluding
incentive bonuses, stock benefit plans and any other form of
compensation) with the annual contribution not to exceed $10,000 in
1998. The Association will make matching contributions equal to 100%
of each employee's contribution up to 7.5% of the employee's annual
base salary. As of April 1, 1998 the investment alternative
available to participants includes nine different mutual funds, the
Company's common stock, deposit accounts and whole life insurance.
An independent third party administrator administers the amended
plan.
Note 13 - Stock Option and Management Recognition Plans -
1996 Stock Incentive Plan
This program was designed to attract and retain qualified personnel
in key positions, provide key employees with a proprietary interest
in the Association an incentive to contribute to the success of the
Association and reward key employees for outstanding performance.
An aggregate of 10,782 shares of authorized but unissued Common Stock
of the Association was reserved for issuance under the Plan, which
is equal to 7.5% of Common Stock issued to the public in connection
with the formation of the mutual holding company ("the offering").
The exercise price of each option equals the market price of the
Association's stock on the date of grant and an option's maximum term
is 10 years. Options are granted and vested at the discretion of the
Compensation Committee. Ninety percent of the options were granted on
July 10, 1996. Subsequent to the conversion on July 19, 1998, the
total number of shares outstanding in the Plan were increased to
reflect the exchange ratio. At December 31, 1998, shares available
for grant under this plan including exchange shares amounted to 3,926
shares.
1996 Directors' Stock Option Plan
In order to attract and retain qualified directors for the
Association, the Board of Directors and stockholders of the
Association have adopted the 1996 Directors' Stock Option Plan. An
aggregate of 3,594 shares of authorized but unissued Common Stock of
the Association was reserved for issuance under the Directors' Stock
Option Plan, which is equal to 2.5% of the Common Stock of the
Association issued in the offering. The exercise price of each
option equals the market price of the Association's stock on the
date of grant and an option's maximum term is 10 years. Ninety
percent of the options were granted on the date the Plan was approved
by the stockholders of the Association, which was April 10, 1996.
The options become exercisable after six months from the grant date.
The remaining ten percent were granted one year after approval by
stockholders, which was April 10, 1997. All options were exercised
prior to July 19, 1998.
1996 Management Recognition Plan for Officers
The objective of this plan is to enable the Association to provide
officers and key employees with a proprietary interest in the
Association as compensation for their contributions to the
Association and as an incentive to contribute to the Association's
future success. An aggregate of 4,312 shares of authorized Common
Stock of Ponchatoula was issued to the Management Recognition Plan
for Officers, which is equal to 3.0% of the Common Stock of the
Association issued in the offering. The awards are allocated at the
discretion of the Committee. Shares vest at the rate of 20% on each
annual anniversary date. Subsequent to the conversion on July 19,
1998, the total number of granted but unvested shares were increased
to reflect the exchange ratio.
1996 Management Recognition Plan for Directors
The objective of this plan is to enable the Association to provide
non-employee directors with a proprietary interest in the
Association as compensation for their contributions to the
Association and
21
<PAGE>
as an incentive to contribute to the Association's future
success. An aggregate of 1,434 shares of authorized Common Stock
of the Association was issued to the Management Recognition Plan
for Directors, which is equal to 1.0% of the Common Stock of the
Association issued in the offering. Ninety percent of the awards
were granted on the date the Plan was approved by the stockholders
of the Association, which was April 10, 1996. The remaining 144
shares were granted April 10, 1997. Shares vest at the rate of 20%
on each annual anniversary date. Subsequent to the conversion on
July 19, 1998, the total number of granted but unvested shares were
increased to reflect the exchange ratio.
The tables below summarize the activity in the Plans during 1997 and
1998.
1996 Stock Incentive Plan
Remaining
Contractual Price Range
Shares Life Per Share
Outstanding, December 31, 1996 9,812 9.5 Years $ 10.00
Granted -
Forfeited (613)
-------
Outstanding, December 31, 1997 9,199 8.5 Years 10.00 - 10.50
Exercised (134)
Forfeited (89)
Exchange Shares 12,101
-------
Outstanding, December 31, 1998 21,077 7.5 Years 8.125 - 10.50
=======
Exercisable, December 31, 1998 8,209 8.125 - 10.50
=======
1996 Directors Stock Option Plan
Weighted
Average
Remaining
Contractual Price Range
Shares Life Per Share
Outstanding, December 31, 1996 2,695 9.4 Years $ 10.00
Granted 839
Exercised (60)
Forfeited (1,078)
-------
Outstanding and Exercisable,
December 31, 1997 2,396 8.8 Years 10.00 - 10.50
Exercised (2,396)
-------
Outstanding, December 31, 1998 - - -
=======
22
<PAGE>
1996 Management Recognition Plan for Officers
Remaining
Contractual Price Range
Shares Life Per Share
Outstanding, December 31, 1996 4,312 9.5 Years $ 10.00
Forfeited (206)
Earned (893)
------
Outstanding, December 31, 1997 3,213 8.5 Years 10.00 - 10.50
Forfeited (36)
Earned (784)
Exchange Shares 3,226
------
Outstanding, December 31, 1998 5,619 7.5 Years 8.125 - 10.50
======
Vested, December 31, 1998 3,937 8.125 - 10.50
======
1996 Management Recognition Plan for Directors
Remaining
Contractual Price Range
Shares Life Per Share
Outstanding, December 31, 1996 1,290 9.5 Years $ 10.00
Granted 144
Earned (602)
------
Outstanding, December 31, 1997 832 8.5 Years 10.00 - 10.50
Earned (197)
Exchange Shares 856
------
Outstanding, December 31, 1998 1,491 7.5 Years 8.125 - 10.50
======
Vested, December 31, 1998 1,876 8.125 - 10.50
======
Ponchatoula applies APB Opinion 25 and related interpretations in
accounting for its stock option and management recognition plans.
Had compensation cost for Ponchatoula's stock-based compensation
plans been determined based on the fair value of the grant dates for
awards under those plans consistent with the methods of SFAS No. 123,
Ponchatoula's net income and earnings per common share would have
been reduced to the proforma amounts indicated below:
1998 1997
(Dollars In Thousands)
Net Income As Reported $424 $ 316
Proforma $412 $ 316
Earnings Per Common
Share As Reported $ .29 $ .22
Proforma $ .28 $ .22
23
<PAGE>
Compensation cost recognized under SFAS No. 123 was estimated using the
Black-Scholes model with the following assumptions: dividend yield of
7%, an expected life of the options of 7 years, expected volatility of
19% and a risk free interest rate of 7.0%.
Note 14 - Employee Stock Ownership Plan -
The Company sponsors a leveraged employee stock ownership plan (ESOP)
that covers all employees who have completed six months of service
and have attained age 20. The Company makes contributions to the
ESOP to fund the ESOP's debt service. All dividends received by the
ESOP are used to pay debt service. As the debt is repaid, shares are
released from collateral and allocated to active employees, based on
the proportion of debt service paid in the year. For purposes of
calculating earnings per share ESOP shares that have been committed
to be released are considered outstanding shares.
The note payable referred to in the preceding paragraph requires
quarterly principal payments plus interest at 8.5%. Future principle
payments are due as follows:
(Dollars in Thousands)
1999 $ 61
2000 67
2001 73
2002 79
2003 86
Due Thereafter 501
The Company accounts for the ESOP in accordance with Statement of
Position 93-6, "Employers' Accounting for Employee Stock Ownership
Plans." Accordingly, the debt of the ESOP is recorded as debt of the
Association and the shares pledged as collateral are reported as
unearned compensation in equity. The Company's loan asset and the
Association's debt liability eliminates in consolidation. As shares
are released from collateral, the Company reports compensation
expense equal to the current market price of the shares and the
shares become outstanding for earnings-per-share computations.
Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings; dividends on unallocated ESOP shares are recorded
as a reduction of debt and accrued interest. ESOP compensation
expense was $36,000 for the year ended December 31, 1998.
Shares of the Company held by the ESOP at December 31, 1998 is as
follows:
1998
(In Thousands)
Allocated Shares 5
Shares Released for Allocation -
Unreleased Shares 85
------
90
======
Fair Value of Unreleased Shares $ 691
======
Note 15 - Regulatory Capital Requirements -
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory---and
possible additional discretionary---actions by regulators that, if
undertaken, could have a direct material effect on the Association's
financial statements. Under capital adequacy guidelines and the
regulatory framework
24
<PAGE>
for prompt corrective action, the Association must meet specific
capital guidelines that involve quantitative measures of the
Association's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The
Association'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 Association to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets (as defined), and
of Tier 1 capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1998, that the Association
meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification categorized the
Association as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the
Association must maintain minimum total risk-based, Tier I risk
based, and Tier I leverage ratios as set forth in the table. There
are no conditions or events since that notification that management
believes have changed the institution's category.
The Association's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets) $ 11,014 30.44% $ 2,894 >/= 8.0% $ 3,618 >/= 10.0%
Tier I Capital (to Risk
Weighted Assets) $ 10,744 29.70% $ 1,447 >/= 4.0% $ 2,170 >/= 6.0%
Tier I Capital (to Average
Assets) $ 10,744 12.52% $ 3,434 >/= 4.0% $ 4,292 >/= 5.0%
</TABLE>
Note 16 - Dividends -
The Association declared quarterly dividends of $.20 per share in the
first and second quarters of 1998. Homestead Mutual Holding Company
waived receipt of dividends for the first and second quarters on all
shares owned; the amounts waived were recorded by the Association as
additional paid-in capital. The Company declared a dividend of $.05
per share for the third and fourth quarters subsequent to the
conversion. Under Federal regulations, the Company may not declare
or pay a cash dividend on its capital stock if the effect thereof
would cause the Association's regulatory capital to be reduced below
the amount required for liquidity.
Note 17 - Earnings Per Share -
The following illustrates the reconciliation of the numerators and
denominators of the basic and diluted eps computations after
restatement of shares due to the pooling of interest:
25
<PAGE>
<TABLE>
<CAPTION>
1998 1997
------------------------------------- ---------------------------------------
PER - PER -
INCOME SHARES SHARE INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
(Dollars in Thousands
except per share data)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to
common stock-
holders $ 424 1,477,870 $.29 $316 1,423,759 $.22
==== ====
Effect of Dilutive
Securities:
Stock Options 21,077 27,226
--------- ---------
Diluted EPS
Income available to
common stock-
holders + assumed
conversions $ 424 1,498,947 $.28 $316 1,450,985 $.22
======= ========= ==== ==== ========= ====
</TABLE>
1996
----------------------------------------------
PER -
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
(Dollars in Thousands
except per share data)
Basic EPS
Income available to
common stock-
holders $ 146 1,423,618 $ .10
Effective Dilutive
Securities:
Stock Options 29,368
---------
Diluted EPS
Income available to
common stock-
holders + assumed
conversions $ 146 1,452,986 $ .10
===== ========= =====
26
<PAGE>
Note 18 - Off-Balance Sheet Instruments -
The Association is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs
of its customers. These financial instruments include commitments to
extend credit. Those instruments involve, to varying degrees, elements
of credit risk in excess of the amount recognized in the Statements of
Financial Condition.
The Association's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend
credit is represented by the contractual amount of those instruments.
The Association uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
In the normal course of business, the Association has made commitments
to extend credit of $2.6 million and $463,000 at December 31, 1998 and
1997, respectively. These amounts include unfunded loan commitments and
lines of credit with rates adjusting at Wall Street Prime + 1 1/2%.
The Association has entered into agreements with outside third parties
to sell loans that it originates. The Association may be required to
repurchase a loan if it becomes delinquent within a specified period of
time as stated in the agreement. The total amount of loans originated
and sold to these parties subject to repurchase amounted to $2.4 million
and $2.4 million at December 31, 1998 and 1997, respectively.
Note 19 - Fair Value of Financial Instruments -
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value:
Cash and Short-Term Investments - For those short-term instruments, the
carrying amount is a reasonable estimate of fair value.
Securities - Fair value of securities available for sale is based on
quoted market prices or dealer quotes, if available. If a quoted market
price is not available, fair value is estimated using quoted market
prices for similar securities.
Loans - The fair value for loans is estimated using discounted cash flow
analyses, with interest rates currently being offered for similar loans
to borrowers with similar credit rates. Loans with similar
classifications are aggregated for purposes of the calculations. The
allowance for loan loss, which was used to measure the credit risk, is
subtracted from loans.
Deposits - The fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of
deposit is estimated using discounted cash flow analyses, with interest
rates currently offered for deposits of similar remaining maturities.
Commitments to Extend Credit and Standby Letters of Credit - The fair
value of commitments to extend credit and standby letters of credit were
not significant.
The estimated approximate fair values of Ponchatoula's financial in-
struments as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
(In Thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and Short-Term Investments $ 3,703 $ 3,703 $ 1,254 $ 1,254
Securities Available for Sale 21,190 21,190 17,450 17,450
Securities - Held to Maturity 10,203 10,090 10,301 10,415
Loans - Net 52,640 52,933 29,483 29,294
------- ------- -------- --------
$87,736 $87,916 $ 58,488 $ 58,413
======= ======= ======== ========
</TABLE>
(CONTINUED)
27
<PAGE>
1998 1997
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
(In Thousands)
Financial Liabilities:
Deposits $39,829 $39,531 $42,111 $42,088
======= ======= ======= =======
Note 20 - Contingencies -
In the normal course of business, the Company is involved in various
legal proceedings. In the opinion of management and legal counsel,
any liability resulting from such proceedings would not have a
material adverse effect on the Company's financial statements.
Note 21 - Concentrations of Credit -
All of the Association's business activities are with customers in
the Association's market area, which consists primarily of Tangipahoa
Parish. The majority of such customers are depositors of the
Association. The concentrations of credit by type of loan are shown
in Note 3. Ponchatoula generally originates single-family residential
loans within its primary lending area. It is also active in
originating secured consumer loans to customers, primarily automobile
and home equity loans.
28
<PAGE>
Note 22 - Parent Company Financial Statements -
The financial statements for Homestead Bancorp, Inc. (Parent Company
Only) are presented below:
HOMESTEAD BANCORP, INC.
STATEMENT OF FINANCIAL CONDITION
as of December 31, 1998
ASSETS
(In Thousands)
Cash $ 1,347
Interest-Bearing Deposits in Other Institutions 500
Mortgage-Backed Securities Available for Sale 2,459
ESOP Loan Receivable 867
Investment in Subsidiary 11,602
Accrued Interest Receivable 24
---------
Total Assets $ 16,799
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Income Taxes Payable $ 6
---------
Total Liabilities 6
Stockholders' Equity:
Common Stock 15
Paid-in Capital in Excess of Par 12,942
Retained Earnings 3,875
Accumulated Other Comprehensive Income (6)
---------
16,826
Common Stock Acquired by Management Recognition Plans (33)
---------
Total Stockholders' Equity 16,793
---------
Total Liabilities and Stockholders' Equity $ 16,799
=========
29
<PAGE>
HOMESTEAD BANCORP, INC.
STATEMENT OF INCOME
for the period from inception July 17, 1998 to December 31, 1998
(In Thousands)
Income:
Interest on Mortgage-Backed Securities $ 28
Interest on ESOP Note 38
Other 6
--------
Total Income 72
Expenses:
Operating Expenses 38
--------
Income Before Equity in Undistributed Net Income of Subsidiary 34
Equity in Undistributed Net Income of Subsidiary 403
--------
Net Income Before Income Taxes 437
Applicable Income Tax Expense 13
--------
Net Income $ 424
========
30
<PAGE>
HOMESTEAD BANCORP, INC.
STATEMENT OF CASH FLOWS
for the period from inception July 17, 1998 to December 31, 1998
(In Thousands)
Cash Flows From Operating Activities:
Net Income $ 424
Adjustments to Reconcile Net Income to Net Cash Provided
by (Used in) Operating Activities:
Equity in Undistributed Net Income of Subsidiary (403)
(Increase) Decrease in Accrued Interest Receivable (24)
Increase (Decrease) in Income Taxes Payable 6
-----------
Net Cash Provided by Operating Activities 3
Cash Flows From Investing Activities:
Purchase of Mortgage-Backed Securities (2,479)
-----------
Net Cash Used in Investing Activities (2,479)
Cash Flows From Financing Activities:
Net Cash Proceeds from Sale of Stock 5,331
Note Receivable Issued on ESOP (896)
Payment Received on Note 29
Dividends Paid (148)
MRP Shares Earned 7
-----------
Net Cash Provided by Financing Activities 4,323
Net Increase (Decrease) in Cash 1,847
Cash and Cash Equivalents - Beginning of Period -
-----------
Cash and Cash Equivalents - End of Period $ 1,847
===========
Supplemental Schedule of Noncash Investing and Financing
Activities:
Increase in Unrealized Gain (Loss) on Securities Available
for Sale $ (20)
===========
Increase (Decrease) in Deferred Tax Effect on Unrealized
Gain (Loss) on Securities Available for Sale $ (7)
===========
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion compares the consolidated financial condition
of Homestead Bancorp, Inc. (the "Company") and Subsidiary, Ponchatoula
Homestead Savings, F.A. (the "Association") at December 31, 1998 to
December 31, 1997 and the results of operations for the 12 months ended
December 31, 1998 with the same periods in 1997. Currently, the
business and management of Homestead Bancorp, Inc. is primarily the
business and management of the Association. This discussion should be
read in conjunction with the consolidated financial statements and
footnotes included herein.
The Company and Association's results of operations depends primarily
on their net interest income, which is the difference between interest
and dividend income on interest-earning assets, which principally
consist of loans, mortgage-backed securities and investment securities,
and interest expense on interest-bearing deposits and borrowings.
Results of operations also are affected by the provision for losses on
loans and leases (or recoveries of prior provisions for losses); the
level of their noninterest income, including gain on sale of loans;
their general, administrative and other expenses, including
compensation and benefits, occupancy and equipment expense, federal
insurance premiums, net real estate owned expense and miscellaneous
other expenses; and their income tax expense.
This Annual Report includes statements that may constitute forward-looking
statements, usually containing the words "believe," "estimate,"
"project," "expect," "intend" or similar expressions. These statements
are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements
inherently involve risks and uncertainties that could cause actual
results to differ materially from those reflected in the forward-looking
statements. Factors that could cause future results to vary
from current expectations include, but are not limited to, the
following: changes in economic conditions (both generally and more
specifically in the markets in which the Association operates); changes
in interest rates, deposit flows, loan demand, real estate values and
competition; changes in accounting principles, policies or guidelines
and in government legislation and regulation (which change from time to
time and over which the Company and Association have no control); and
other risks detailed in this Annual Report and in the Company's other
public filings. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis
only as of the date hereof. The Company undertakes no obligation to
publicly revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof.
Asset and Liability Management
In order to minimize the potential for adverse effects of material
fluctuations in interest rates on the Company's and Association's
results of operations, they have implemented and continue to monitor
their asset and liability management policies to better match the
maturities and repricing terms of their interest-earning assets and
interest-bearing liabilities. Such policies have consisted primarily
of (i) emphasizing the matching long-term fixed rate first mortgage
loans with funding from long-term fixed rate FHLB Advances and matching
short-term consumer loans, monthly adjustable lines of credit,
adjustable rate mortgage-backed securities, and short-term treasury and
agency securities with the relatively short-term deposit accounts of
the institution.
From 1982 through 1994, the only single-family residential loans which
the Association had originated for retention in its portfolio had been
ARMs. All of the ARMs currently originated have interest rates which
adjust annually, although the portfolio contains some ARMs which were
originated in the mid 1980s with interest rates adjusting every three
years. The Association's origination of ARMs has decreased due to the
preference of it's customers for fixed-rate residential mortgage loans.
The Assocation's portfolio of adjustable-rate, single-family
residential mortgage loans and leases amounted to $6.8 million.
Beginning in 1995, through January, 1998, the Association offered
15-year, fixed-rate residential mortgage loans for retention in its
portfolio. These fixed rate loans retained in the portfolio have
interest rates of 8.00% or above as of December 31, 1998 and a
loan-to-value ratio of 80% or below.
32
<PAGE>
From October 1990 to February 1998, the Association originated fixed-rate
single-family residential mortgage loans to meet the needs of its
customers and to generate fee income when the loans were sold. Upon
origination, the fixed-rate loans were mainly sold to institutional
investors in the secondary market in order to eliminate the interest
rate risk associated with such loans, as well as to generate additional
funds for lending and other purposes. These loans are accounted for as
held for sale and are carried at the lower of cost or estimated market
value in the aggregate. Loans held for sale were $267,000 and $1.4
million at December 31, 1998 and 1997, respectively. Commencing
February 1998, the Association amended its policy to provide for the
retention of 15 and 30-year, fixed-rate residential mortgage loans,
with such loans to be funded with long-term advances from the Federal
Home Loan Bank ("FHLB") of Dallas. While loan originations have
increased significantly, the amount of loans sold have continued to
decline.
Currently, the Association only purchases mortgage-backed securities
with adjustable interest rates that reprice at least annually and
investment securities with terms of two years or less. The maturities
of the investment securities are staggered so that a portion matures
every quarter. In 1995 and 1996, the Association purchased
approximately $10 million of adjustable-rate mortgage-backed securities
(which reprice either monthly, semi-annually or annually) and funded
the purchases with FHLB advances with interest rates that adjust
monthly. These mortgage-backed securities were purchased in order to
earn a positive spread above the average rate on the FHLB advances, and
the average interest rate spread on these linked mortgage-backed
securities and FHLB advances was 1.33% for 1998. In order to better
match the maturity of its interest-bearing liabilities with the
maturity of its interest-earning assets, the Association offers
certificates of deposit with terms ranging from six months to one year.
At December 31, 1998, $25.8 million or 85.8% of the Association's
certificates of deposit mature in one year or less.
The Association considers its passbook accounts to be core deposits
that are less likely to be withdrawn if interest rates rise, although
the amount of passbook accounts has been steadily declining in recent
years. The passbook accounts have variable interest rates, and the
Association believes that it can adjust the interest rate on the
accounts to retain a substantial portion of these deposits. Passbook
accounts amounted to $7.2 million or 18.2% of total deposits at
December 31, 1998, compared to $8.3 million or 19.6% of total deposits
at December 31, 1997.
Finally, in order to manage its interest expense more effectively, the
Association has elected to offer rates on its deposit accounts that are
moderately lower than certain of its competitors' rates, and as a
result has occasionally experienced deposit outflows. Pursuant to this
policy, the Association has generally neither engaged in sporadic
increases or decreases in interest rates paid nor offered the highest
rates available in its deposit market. This policy has assisted the
Association in controlling its cost of funds.
33
<PAGE>
The following table presents the difference between the Company's and
the Association's interest-earning assets and interest-bearing
liabilities within specified maturities at December 31, 1998. This table
does not necessarily indicate the impact of general interest rate
movements on the Company's and the Association's net interest income,
because the repricing of certain assets and liabilities is subject to
competitive and other limitations. 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.
<TABLE>
<CAPTION>
0 Months Over Three Over One Over Three Over Five
Through Through Through Through Through Over Ten
Three Months 12 Months Three Years Five Years Ten Years Years Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)(2):
One-to four-family residential:
Adjustable-rate $ 2,094 $ 6,366 $ 310 $ 161 $ - $ - $ 8,931
Fixed-rate 21 8 73 23 320 31,115 31,560
Construction 699 6,542 - - - - 7,241
Commerical real estate - - - - 116 - 116
Consumer 548 361 706 1,394 1,310 4,029 8,348
Leases receivable - 2 - 6 187 79 274
Adjustable-rate mortgage-backed
securities 8,652 18,761 - - - - 27,413
Investment securities 400 1,000 915 - - - 2,315
FHLB stock 1,665 - - - - - 1,665
-------- --------- --------- -------- -------- -------- --------
Total interest-earning assets 14,079 33,040 2,004 1,584 1,933 35,223 87,863
Interest-bearing liabilities:
Passbook, money market and NOW
Accounts (3) 486 1,457 3,887 3,887 - - 9,717
Certificates of deposit (4) 9,815 16,025 3,352 920 - - 30,112
FHLB advances:
Adjustable-rate 9,300 - - - - - 9,300
Fixed-rate - - - - 7,756 15,709 23,465
-------- --------- --------- -------- -------- -------- --------
Total interest-bearing liabilities 19,601 17,482 7,239 4,807 7,756 15,709 72,594
-------- --------- --------- -------- -------- -------- --------
Interest rate sensitivity gap $ (5,522) $ 15,558 $ (5,235) $(3,223) $(5,823) $19,514 $ 15,269
========= ========= ========= ======== ======== ======== ========
Cumulative interest rate sensitivity
gap $ (5,522) $ 10,036 $ 4,801 $ 1,578 $(4,245) $15,269
========= ========= ========= ======== ======== ========
Percentage of cumulative gap
to total assets (6.22)% 11.30% 5.41% 1.78% (4.78)% 17.19%
========= ========= ========= ======== ======== ========
Cumulative ratio of interest-earning
assets to interest-bearing liabilities 71.83% 127.06% 110.83% 103.21% 92.54% 121.03%
========= ========= ========= ======== ======== ========
</TABLE>
34
<PAGE>
__________________________
(1) Loans receivable are gross of loans in process, deferred
fees, unearned discounts, and allowance for loan losses.
(2) Adjustable-rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in
the period in which they are due, and fixed-rate assets are
included in the periods in which they are scheduled to
mature, without reflecting scheduled amortization or any
estimated prepayments.
(3) Although the Association's passbook, money market and NOW
accounts are generally subject to immediate withdrawal,
management considers a substantial amount of these accounts
to be core deposits having significantly longer effective
maturities based on the Association's retention of such
deposits in changing interest rate environments. The decay
rate used on these accounts was 20% per year over the first
five years, which is faster than the actual withdrawals
experienced by the Association in the last two years. If
all of the Association's passbook, money market and NOW
accounts had been assumed to be subject to repricing within
one year, interest-bearing liabilities which were estimated
to mature or reprice within one year would have exceeded
interest-earning assets with comparable characteristics by
$5.5 million or 6.1% of total assets.
(4) It is assumed that certificates of deposit will not be
withdrawn prior to maturity.
Management also presently monitors and evaluates the potential
impact of interest rate changes upon the market value of the
Company's portfolio equity on a quarterly basis, in an attempt to
ensure that interest rate risk is maintained within limits
established by the Board of Directors. The Office of Thrift
Supervision ("OTS") adopted a final rule in August 1993
incorporating an interest rate risk component into the risk-based
capital rules. Under the rule, an institution with a greater
than "normal" level of interest rate risk will be subject to a
deduction of its interest rate risk component from total capital
for purposes of calculating the risk-based capital requirement,
although the OTS has indicated that no institution will be
required to deduct capital for interest rate risk until further
notice. An institution with a greater than "normal" interest
rate risk is defined as an institution that would suffer a loss
of net portfolio value ("NPV") exceeding 2.0% of the estimated
market value of its assets in the event of a 200 basis point
increase or decrease in interest rates. NPV is the difference
between incoming and outgoing discounted cash flows from assets,
liabilities, and off-balance sheet contracts. A resulting change
in NPV of more than 2% of the estimated market value of an
institution's assets will require the institution to deduct from
its risk-based capital 50% of that excess change. The rule
provides that the OTS will calculate the interest rate risk
component quarterly for each institution. Because a 200 basis
point increase in interest rates would have resulted in less than
a 2% decrease in the Company's NPV as a percentage of the
estimated market value of its assets as of December 31, 1998, the
Company would not have been subject to any capital deduction as
of December 31, 1998 if the regulation had been effective as of
such date. The following table presents the Company's NPV as of
December 31, 1998, as calculated by the OTS, based on information
provided to the OTS by the Company.
35
<PAGE>
<TABLE>
<CAPTION>
Change in Change in
Interest Rates NPV as % of NPV as % of
in Basis Points Net Portfolio Value Portfolio Value Portfolio Value
(Rate Shock) Amount $ Change % Change of Assets of Assets (1)
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
400 $ 12,336 $ 966 8.0% 15.4% 2.3%
300 12,532 1,161 10.0 15.3 2.2
200 12,497 1,126 10.0 14.9 1.8
100 12,167 797 7.0 14.3 1.1
Static 11,370 - - 13.1 -
(100) 9,927 (1,443) (13.0) 11.3 (1.8)
(200) 7,993 (3,378) (30.0) 9.0 (4.1)
(300) 5,863 (5,507) (48.0) 6.6 (6.6)
(400) 3,388 (7,982) (70.0) 3.8 (9.4)
</TABLE>
(1) Based on the portfolio value of the Company's assets assuming
no change in interest rates.
As shown by the table above, increases in interest rates will
result in increases in net portfolio value, while decreases in
interest rates will result in declines in net portfolio value.
Changes in Financial Condition
The Company's total assets increased from $59.6 million at
December 31, 1997 to $88.8 million at December 31, 1998.
At December 31, 1998, net loans and leases receivable (including
loans held for sale) were $52.6 million or 59.3% of total
assets. Of the total loan and lease portfolio, $44.1million or
83.8% consisted of single-family residential loans or leases
(including construction of single-family residences). Consumer
loans accounted for $8.3 million or 15.9% of the total loan and
lease portfolio at December 31, 1998, while the remainder of the
portfolio consisted of $116,000 of commercial real estate loans
and leases and $83,000 of unimproved land loans.
Mortgage-backed securities and investment securities represented
30.9% and 2.6% of total assets, respectively, at December 31,
1998, and cash and cash equivalents amounted to 4.2% of total
assets at such date.
Non-performing assets have increased from .29% of total assets at
December 31, 1997 to .43% of total assets at December 31, 1998.
Non-accruing single-family residential loans and leases
represented 100% of the total non-performing assets at December
31, 1998. At December 31, 1998, allowance for loan and lease
losses equaled $302,000, representing .57% of total loans and
leases outstanding and 78.9% of total non-performing assets.
Total deposits decreased during 1998 to $39.8 million at December
31, 1998 from $42.1 million at December 31, 1997. Certificate
accounts decreased by $1.3 million or 4.2% during 1998, while
transaction accounts decreased by $961,000 or 9.0% during 1998.
The decrease in total deposits is attributable to the increased
competition which offers higher interest rates.
36
<PAGE>
Total stockholders' equity was $15.9 million at December 31,
1998, an increase of $10.2 million or 178% from December 31,
1997, which mainly can be attributed to the sale of additional
shares of the Company's stock in the conversion. In addition,
the Company had net income of $424,000 in 1998, less dividends
of $209,000 combined with the change in unrealized gain (loss) on
securities available for sale during 1998 of $29,000. The Mutual
Holding Company waived the receipt of $182,000 in dividends
during 1998 on the shares owned by it prior to the conversion.
Results of Operations
The Company's net income increased by $108,000 or 34.2% in 1998
and increased by $170,000 or 116.4% in 1997 over the respective
prior periods. The fluctuation was primarily due to an increase
in net interest income after provision for recovery of loan and
lease losses of $318,000 or 18.2%, combined with an increase in
non-interest income of $120,000 or 32.2%, offset by an increase
in non-interest expense of $270,000 or 16.7%, and an increase of
$60,000 or 32.4% in income tax expense. The increase in non-interest
income is due to an increase in loan fees of $134,000 or
70.9%, due to an increase in the volume of loans closed and
retained in house. The increase in total non-interest expense
was attributable to an increase of $98,000 or 11.3% in
compensation expense combined with an increase of $158,000 or
28.2% in other non-interest expense. The increase in other
non-interest expense is attributable to the increase of professional
fees and services of $95,000 or 44.4%, in connection with the
increased loan volume. The increase in compensation expense of
$98,000 is due to the establishment of an ESOP during 1998 which
resulted in $36,000 in ESOP compensation expense combined with an
increase in employee compensation due to an increase in bonuses
paid during 1998.
Net Interest Income
The Company's net interest income is determined by its average
interest rate spread (i.e., the difference between the average
yields earned on its interest-earning assets and the average
rates paid on its interest-bearing liabilities), the relative
amounts of interest-earning assets and interest-bearing
liabilities and the degree of mismatch in the maturity and
repricing characteristics of its interest-earning assets and
interest-bearing liabilities.
With the decrease in interest rates in 1998, Ponchatoula's
average interest rate spread decreased to 2.11% for 1998 from
2.65% for 1997, as the average yield on total interest-earning
assets declined by 40 basis points combined with an increase of
14 basis points in the average rate paid on total
interest-bearing liabilities. This decrease in the average interest
rate spread was partially offset by an increase in the ratio of
average interest-earning assets to average interest-bearing
liabilities to 118.18% for 1998 from 108.20% for 1997.
In 1997, the average interest rate spread increased to 2.65% from
2.54% in 1996, as the average yield on total interest-earning
assets decreased by 13 basis points and the average rate paid on
total interest-bearing liabilities decreased by 24 basis points.
The lower rate on interest-bearing liabilities in 1997 was mainly
due to certificates of deposit. The benefit of this increased
spread was partially offset by a decrease in the ratio of average
interest-earning assets to average interest-bearing liabilities
to 108.2% from 109.01% for 1996.
Net interest income increased by $388,000 or 22.4% in 1998 and by
$47,000 or 2.8% in 1997, over the respective prior periods. The
increases were due to increases in the ratio of average
interest-earning assets to average interest-bearing liabilities for 1998
and due to increases in the average interest rate spread for 1997.
37
<PAGE>
Average Balances, Net Interest Income and Yields Earned and Rates Paid.
The following table presents for the periods indicated the total dollar
amount of interest income from the Company's 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, and
the net interest margin. All average balances are based on monthly balances.
<TABLE>
<CAPTION>
1998 1997 1996
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate Balance Interest Rate
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans and leases receivable(2) $ 39,360 $ 3,214 8.17% $28,403 $2,429 8.55% $27,597 $2,384 8.64%
Mortgage-backed securities 25,535 1,454 5.69 25,246 1,576 6.24 24,861 1,621 6.52
Investment securities 3,652 209 5.72 2,469 145 5.87 2,293 155 6.76
Other interest-earning assets 5,558 284 5.11 1,621 97 5.98 2,328 116 4.98
-------- ------- ------ ------- ------ ----- ------- ------ -----
Total interest-earning assets 74,105 5,161 6.96 57,739 4,247 7.36 57,079 4,276 7.49
-------- ------ ------ ----- ------ -----
Noninterest-earning assets 1,529 1,591 1,278
-------- ------- -------
Total assets $ 75,634 $59,330 $58,357
======== ======== =======
Interest-bearing liabilities:
Deposits $ 41,371 1,840 4.45 $43,607 1,971 4.52 $44,733 2,158 4.82
FHLB advances 21,336 1,201 5.63 9,755 544 5.58 7,630 433 5.67
-------- ------- ------ ------- ------ ----- ------- ------ -----
Total interest-bearing
liabilities 62,707 3,041 4.85 53,362 2,515 4.71 52,363 2,591 4.95
-------- ------ ------ ----- ------ -----
Noninterest-bearing liabilities 472 391 452
-------- ------- -------
Total liabilities 63,179 53,753 52,815
Stockholders' equity 12,455 5,577 5,542
-------- -------- -------
Total liabilities and stockholders'
equity $ 75,634 $59,330 $58,357
======== ======== =======
Net interest income; average interest
rate spread $ 2,120 2.11% $1,732 2.65% $1,685 2.54%
======= ======= ====== ======= ====== ======
Net interest margin(3) 2.86% 3.00% 2.95%
======= ======= =======
Average interest-earning assets to
average interest-bearing liabilities 118.18% 108.20% 109.01%
======= ======= =======
(1) At December 31, 1998, the weighted average yields earned and rates paid were as follows: loans and leases receivable,
7.62%; mortgage-backed securities, 6.30%; investment securities, 5.72%; other interest-earning assets, 5.19%, total
interest-earning assets, 7.12%; deposits, 4.25%; FHLB advances, 5.51%; total interest-bearing liabilities, 4.81%; and
average interest rate spread, 2.31%.
(2) Includes loans classified as held for sale.
(3) Equals net interest income divided by average interest-earning assets.
</TABLE>
38
<PAGE>
Rate/Volume Analysis
The following table describes the extent to which changes in
interest rates and changes in volume of interest-related assets
and liabilities have affected the Company's interest income and
expense during the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), and (ii)
changes in rate (change in rate multiplied by prior year volume).
The combined effect of changes in both rate and volume has been
allocated proportionately to the change due to rate and the
change due to volume.
<TABLE>
<CAPTION>
1998 vs. 1997 1997 vs. 1996
--------------------------------- ----------------------------------
Increase(Decrease) Total Increase(Decrease) Total
Due to Increase Due to Increase
Rate Volume (Decrease) Rate Volume (Decrease)
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans and leases receivable(1) $(119) $ 904 $ 785 $ (23) $ 68 $ 45
Mortgage-backed securities (141) 19 (122) (69) 24 (45)
Investment securities (5) 69 64 (21) 11 (10)
Other interest-earning assets (17) 204 187 21 (40) (19)
------ ------ ------ ------- ----- -----
Total interest-earning assets (282) 1,196 914 (92) 63 (29)
------ ------ ------ ------- ----- -----
Interest-bearing liabilities:
Deposits (40) (91) (131) (134) (53) (187)
FHLB advances 10 647 657 (8) 119 111
------ ------ ------ ------- ----- -----
Total interest-bearing liabilities (30) 556 526 (142) 66 (76)
------ ------ ------ ------- ----- -----
Increase (decrease) in net interest income $(252) $ 640 $388 $ 50 $ (3) $ 47
====== ======= ====== ======= ======= =====
(1) Includes loans classified as held for sale.
</TABLE>
Interest Income
Interest on loans and leases increased by $785,000 or 32.3% in 1998
and by $45,000 or 1.9% in 1997 from the respective prior periods. The
increases in 1998 and 1997 were due to increases of 38.6% and 2.9%,
respectively, in the average balance of loans and leases receivable.
The increase in the average balance in 1998 was the result of an
increase in single-family residential loans and consumer loans, offset
by a decrease in construction loans and single-family residential
leases. The increase in the average balance in 1997 was the result of
an increase in single-family residential loans, and consumer loans,
offset by a decrease in construction loans and single-family
residential leases. The increased average balances were partially
offset by decreases in the average yield to 8.17% in 1998 from 8.55%
in 1997 and 8.64% in 1996.
Interest on mortgage-backed securities decreased by $122,000 or 7.74%
in 1998 and decreased by $45,000 or 2.8% in 1997 from the respective
prior periods. The decrease in 1998 was due to a decrease in the
average yield to 5.69% from 6.24% in 1997, offset by an increase of
$289,000 or 1.1% in the average balance. The decrease in 1997 was
due to a decrease in the average yield to 6.24% from 6.52% in 1996,
offset by an increase of $385,000 or 1.5% in the average balance.
39
<PAGE>
In 1997 the amount of mortgage-backed securities purchased
substantially declined, resulting in a decrease in the average
balance. Because the Association implemented its strategy of having
$10 million of mortgage-backed securities linked to FHLB advances in
1996, fewer mortgage-backed securities were purchased in 1997 and 1998.
Interest on investment securities increased by $64,000 or 44.1% in
1998 and decreased by $10,000 or 6.4% in 1997, from the respective
prior periods. The increase in 1998 was due to a decrease in the
average yield to 5.72% from 5.87% in 1997, offset by an increase in
the average balance of $1.2 million or 47.9%. The decrease in 1997
was due to a decrease in the average yield to 5.87% from 6.76% in
1996, offset by an increase in the average balance of investment
securities of $176,000 or 7.7%. The fluctuation in the average yields
was primarily due to the maturity of higher yielding, two-year U.S.
government agency securities, with the proceeds invested in similar
securities with lower yields.
Other interest income, which consists of interest on interest-bearing
deposits in other institutions and dividends on FHLB stock, increased
by $187,000 or 192.8% in 1998 and by $19,000 or 16.4% in 1997 from the
respective prior periods. The increase in 1998 is the result of the
increase in the interest-bearing deposit accounts and purchase of
additional FHLB stock which increased the average balance by $3.9
million or 242.9%. The decrease in 1997 is the result of a $707,000
or 30.4% decrease in the average balance, partially offset by an
increase in the average yield to 5.98% from 4.98% in 1996.
Total interest income increased by $914,000 or 21.5% in 1998 and
decreased by $29,000 or .7% in 1997 from the respective prior periods.
The increase in 1998 was the result of an increase of $16.4 million
or 28.3% in the average balance of interest-earning assets, offset by
a decrease in the average yield of 40 basis points. The decrease in
1997 was primarily attributable to the overall decrease of 13 basis
points in the average yield, offset by an increase of $660,000 or 1.2%
in the average balance.
Interest Expense
Interest on deposits decreased by $131,000 or 6.6% in 1998 and
decreased by $187,000 or 8.7% in 1997 from the respective prior
periods. The decrease in 1998 was due to a decrease in the average
balance of deposits of $2.2 million or 5.1% and a decrease in the
average yield to 4.45% from 4.52% for 1997. The decrease in 1997 was
due to a decrease in the average balance of $1.1 million or 2.5%, and
a decrease in the average yield to 4.52% from 4.82% for 1996.
Interest on FHLB advances increased by $657,000 or 120.8% in 1998 and
by $111,000 or 25.6% in 1997. The increases in 1998 and 1997 were due
to increases in the average balance of FHLB advances of $11.6 million
for 1998 and $2.1 million for 1997 with the increase in 1998 combined
with an increase in the average yield to 5.63% in 1998 from 5.58% in
1997 and 5.67% in 1996. Specific mortgage-backed securities, with a
fair value of $6.1 million, were pledged to the FHLB as collateral
securing the advances at December 31, 1998.
40
<PAGE>
Provision for (Recovery of) Loan and Lease Losses
Provision for (recovery of) loan and lease losses was $54,000,
$(16,000) and $3,000 for 1998, 1997 and 1996, respectively. These
provisions were based upon, among other variables, non-accruing
loans totaling $383,000, $173,000 and $365,000 at December 31, 1998,
1997 and 1996, respectively. The provision in 1998 was primarily due
to the $210,000 or 121.4% increase in non-accruing loans during 1998,
in addition to the $24.3 million increase in the net loan and lease
portfolio.
Noninterest Income
Gains on sales of loans decreased by $30,000 or 18.0% in 1998 and
increased by $73,000 or 30.4% in 1997, over the respective prior
periods. The fluctuations are based primarily upon changes in the
amount of loans sold. The decrease in 1998 was primarily due to
decreased loan demand. The amounts of loans sold were $ million in
1998, $8.7 million in 1997 and $9.9 million in 1996. At the time the
loan is sold, income is recognized in the amount of loan fees that
were deferred at the time of origination. Because the Association is
retaining a significant portion of newly originated, 30-year
fixed-rate mortgages, the amount of loans sold and the related gains
on sales declined.
Loan fees and service charges increased by $134,000 or 70.9% in 1998
and by $3,000 or 1.6% during 1997. These increases are attributable
to more in-house loans being originated and an increase in late
charges on mortgage and consumer loans.
Other income, which primarily consists of service fees on deposit
accounts and withdrawal penalties on certificates of deposit,
increased by $16,000 or 94.1% in 1998 and decreased by $9,000 or
112.5% in 1997 from the respective prior periods.
Noninterest Expenses
Compensation and benefits increased by $98,000 or 11.3% in 1998 and by
$51,000 or 6.2% in 1997 over the respective prior periods. The
increase in 1998 was due primarily to an increase in salaries and
officers compensation, the result of annual raises during 1998, as
well as the ESOP compensation expense. At December 31, 1998 and 1997,
Ponchatoula had 21 full-time and one part-time employee. The
increase in 1997 is primarily attributable to an increase in salaries
of $27,000 or 4.7% and an increase in health insurance of $13,000 or
24.8%.
Occupancy and equipment expense increased by $37,000 or 26.4% in 1998
and by $11,000 or 7.3% in 1997, compared to the respective prior
periods. As of 1997, all new assets purchased are being depreciated
using the straight-line method instead of accelerated methods.
Depreciation expense increased by $8,000 or 27.6% in 1998 due to new
assets acquired. During 1997, depreciation expense decreased by
$14,000 or 32.6% as a result of certain assets becoming fully
depreciated in 1996 and less assets acquired during 1997.
Federal insurance premiums increased by $4,000 or 17.4% in 1998 and
decreased by $353,000 or 93.9% in 1997, compared to the respective
prior periods. These fluctuations were primarily due to the special
SAIF assessment imposed on all SAIF-insured institutions as of
September 30, 1997, which amounted to $284,000 for the Association.
Excluding this special SAIF assessment, federal insurance premiums
increased by $4,000 or 17.4% in 1998 and decreased by $69,000 or 75.0%
in 1997 over the respective prior periods. The decrease in 1997
reflects a decrease in the deposit insurance assessment rates as of
January 1, 1997.
41
<PAGE>
The Company incurred $-0- of net real estate owned expense in 1998
after recognizing net expense from its real estate owned of $27,000 in
1997 and income of $3,000 in 1996. Net (gains) losses on the sale of
real estate owned which are included in such expense amounted to $-0-,
$23,000 and $(7,000) in 1998, 1997, and 1996, respectively.
Other expenses, which consist of professional fees, data processing
fees, postage and supplies and other miscellaneous items, increased by
$158,000 or 28.2% in 1998 and decreased by $7,000 or 1.2% in 1997.
The increase in 1998 was a result of an increase in data processing
fees, professional fees in connection with the increased loan volume
and other expenses, offset by a reduction in postage and supplies and
insurance. The decrease in 1997 was a result of a decrease in
professional fees and data processing fees, offset by an increase in
postage and supplies and other expenses.
Total noninterest expenses increased by $270,000 or 16.7% in 1998 and
decreased by $290,000 or 15.2% in 1997 over the respective prior
periods. The increase in 1998 was attributable to an increase of
$98,000 in compensation expense combined with an increase of $158,000
in other non-interest expense. Compensation expense increased due to
the Company sponsoring an ESOP plan in 1998 in addition to annual
salary increases and increases in bonuses paid. Other non-interest
expense increased due to an increase in professional fees due to the
increased loan volume as well as increases in other non-interest
expenses.
Federal Income Taxes
Federal income taxes increased by $60,000 or 32.4% in 1998 and
increased by $125,000 or 208.3% in 1997, compared to the respective
prior periods. The increase in 1998 resulted from a 33.5% increase
in pre-tax income offset by a decrease in the effective tax rate to
36.6% in 1998 from 36.9% in 1997. See Note 10 of Notes to Financial
Statements. The increase in 1997 resulted primarily from a 143.2%
increase in pre-tax income and an increase in the effective tax rate
to 36.9% in 1997 from 29.1% in 1996.
Liquidity and Capital Resources
The Company is required under applicable federal regulations to
maintain specified levels of "liquid" investments in qualifying types
of U.S. Government, federal agency and other investments having
maturities of five years or less. Current OTS regulations require
that a savings institution maintain liquid assets of not less than 5%
of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less, of which short-term liquid
assets must consist of not less than 1%. Ponchatoula's liquidity
amounted to 55.2% and 7.5% at December 31, 1998 and 1997,
respectively.
In 1998 and 1997, cash was provided by operating activities by net
income and the sale of loans in excess of the amount of loans
originated for sale. Other adjustments to reconcile net income to net
cash provided by operations during 1998 and 1997 consisted primarily
of net amortization of premiums on securities, depreciation, and
increases or decreases in various receivable and payable accounts.
The primary investing activities are the origination of loans and the
purchase of mortgage-backed securities and investment securities. In
1998, investing activities used $27.0 million of cash, as the amount
of mortgage-backed securities purchased exceeded the maturing or
called securities by $2.9 million, and the increase in loans and
leases amounted to $24.4
42
<PAGE>
million. In 1997, investing activities provided $184,000 of cash, as
the amount of mortgage-backed securities maturing exceeded the amount
purchased by $2.2 million and loans and leases increased by $1.8
million. The primary financing activities in 1998 and 1997 consisted
of deposits and FHLB advances. In addition, in 1998 $9.9 million was
provided from the net proceeds from the issuance of common stock.
Financing activities provided $27.7 million of cash in 1998 and used
$1.6 million of cash in 1997. Overall, cash and cash equivalents
increased by $2.4 million and declined by $44,000 in 1998 and 1997,
respectively. See the Statements of Cash Flows in the Financial
Statements.
At December 31, 1998, the Association had no commitments to originate
adjustable-rate loans. At the same date, scheduled maturities of
certificates of deposit during the succeeding 12 months amounted to
$25.8 million. Management of the Association believes that it has
adequate resources to fund all of its commitments and that it can
adjust the rates on certificates of deposit to retain deposits in
changed interest rate environments. If the Association requires funds
beyond its internal funding capacities, advances from the FHLB of
Dallas are available as an additional source of funds.
Under applicable OTS regulations, Ponchatoula is required to maintain
regulatory capital sufficient to maintain minimum total risk-based,
Tier 1 risk based, and Tier 1 leverage ratios of at least 8.0%, 4.0%
and 4.0%, respectively. At December 31, 1998, the Association had
total risk-based, Tier 1 risk based and Tier 1 leverage ratios of
30.4%, 29.7% and 12.5%, respectively. See Note 15 of Notes to
Financial Statements.
Impact of Inflation and Changing Prices
The financial statements and related financial data presented herein
have been prepared in accordance with generally accepted accounting
principles, which generally require the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in relative purchasing power over time due to
inflation. Unlike most industrial companies, virtually all of the
Company's assets and liabilities are monetary in nature. As a result,
interest rates generally have a more significant impact on the
Company's performance than does the effect of inflation.
The Year 2000
The Company began the process of preparing its computer systems and
applications for the Year 2000 in 1997. The process involves
identifying and resolving date recognition problems in computer
systems and software, and to a lesser extent, other operating
equipment, that could be caused by the date change from December 31,
1999 to January 1, 2000.
The Company has completed its review of all business processes that
could be affected by the Year 2000 issue. The review revealed that
substantially all vendors which service the Company have provided
regular updates as to their progress in becoming Year 2000 compliant.
The Company keeps track of the vendors' compliance efforts. It is
expected that management will approve a $5,000 to $10,000 budget for
future Year 2000 compliance. This amount is in addition to the
$12,000 of past expenditures regarding the Company's Year 2000
compliance. Management does not believe that issues related to the
Year 2000 are reasonably likely to have or will have a material
effect on the Company's liquidity, capital resources, or results
of operation.
43
<PAGE>
However, management's ability to predict the results or the effects of
Year 2000 issues is inherently uncertain and subject to factors that
may cause actual results to materially differ from those anticipated.
Factors that could affect actual results include the possibility that
contingency plans and remediation efforts will not operate as
intended, the Company's failure to timely or completely identify all
software and hardware applications that require remediation,
unexpected costs, and the general uncertainty associated with the
impact of Year 2000 issues on the banking industry, the Company's
customers, vendors, and others with whom it conducts business.
Readers are cautioned not to place undue reliance on these forward
looking statements.
44
<PAGE>
<TABLE>
PONCHATUOLA HOMESTEAD SAVINGS, F.A.
OFFICERS AND STAFF
<CAPTION>
Ponchatoula Office Amite Office
<S> <S> <S>
L. C. Caldwell, Jr. Donna D. Hanna Renee P. Mangano
President and CEO Mortgage Loan Specialist Branch Manager/
Consumer Loan Officer
Barbara B. Theriot Lori D. Meissner Mortgage Loan Officer
Secretary-Treasurer Information Systems
Manager Marsha V. Spring
Denise P. Hoover Customer Service Representative
Asst. Vice President/
Mortgage Loan Closing Patti M. Stephens Stephanie G. Campo
Deposit Account Customer service Representative
William D. McCormick Counselor
Asst. Vice President/
Consumer Loan Manager Brenda H. Davis
Asst. Manager/
Betty F. Whann Mortgage Loan Department
Asst. Vice President/
Consumer Loan Coordinator Catherine T. Bardwell Office Locations
Mortgage Loan Officer
Karen S. Bates 195 North Sixth Street
Asst. Vice President/ Betty L. Plauche Ponchatoula, LA 70454
Insurance Mortgage Loan Coordinator
113 North Bay Street
Brian E. Steib Amite, LA 70462
Asst. Vice President/ Teresa A. Wiley
Special Assets Manager Mortgage Loan Processor
Consumer Loan Officer
Shana P. Wells
Marian L. Kinchen Customer Service Representative
Asst. Vice President/
Manager-Mortgage Lois D. Freeman
Loan Department Customer Service Representative
Kelly B. Morse
Controller
</TABLE>
45
<PAGE>
<TABLE>
HOMESTEAD BANCOPP, INC.
<CAPTION>
DIRECTORS Officers Office Location
<S> <S> <S>
Dr. M. J. Schanzbach L. C. Caldwell, Jr. 195 North Sixth Street
Chairman President & CEO Ponchatoula, LA 70454
John C. Bohning Barbara B. Theriot General Counsel
Vice-Chairman Secretary-Treasurer
Allen B. Pierson, Jr.
Allen B. Pierson, Jr. Kelly B. Morse Post Office Box 748
Director Controller Ponchatoula, LA 70454
Barbara B. Theriot Special Counsel
Director
Elias, Matz, Tiernan & Herrick
Dennis E. James 734 15th Street, N.W.
Director Director Emeritus 12th Floor
Washington, D.C. 20005
Robert H. Gabriel H. J. Gabriel, Jr.
Director Independent Auditor
L. C. Caldwell, Jr. P. C. Granier Hannis T. Bourgeois, LLP
Director 2322 Tremont Drive
Suite 200
Baton Rouge, LA 70809
</TABLE>
Transfer Agent and Registrar Information Requests
Registrar and Transfer Company Requests for copies of Form 10-Q
10 Commerce Drive or Form 10-K should be made to:
Cranford, New Jersey 07016 President
Homestead Bancorp, Inc.
195 North Sixth Street
Ponchatoula, LA 70454
Stock Information
The company's stock is traded on the NASDAQ Small
Cap Market under the symbol HSTD. The IPO closed
on July 17, 1998. Between July 17 and December 31
the stock traded in a range from $6.75 to $10.00 per
share.
Two cash dividends of $0.05 per share were paid to stockholders
on September 25 and December 18, 1998.
46
<TABLE>
SUBSIDIARIES OF REGISTRANT
<CAPTION>
Date and % of Voting Shares,
Partnership Interests,
Voting Trust Certificates
Name & Address Year & State Inc. Capital Contributions. Description of Activity
<S> <S> <S> <S>
Ponchatoula Homestead Savings, F.A. 1994, Louisiana July 17, 1998 owns 100% A Savings and Loan Association
195 North Sixth Street of voting shares
Ponchatoula, LA 70454
</TABLE>
<TABLE> <S> <C>
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<MULTIPLIER> 1,000
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
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<TOTAL-ASSETS> 88819
<DEPOSITS> 39829
<SHORT-TERM> 9300
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<LONG-TERM> 23465
0
0
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<ALLOWANCE-CLOSE> 302
<ALLOWANCE-DOMESTIC> 302
<ALLOWANCE-FOREIGN> 0
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</TABLE>
