SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998
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- or -
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission Number: 0-25538
TECHE HOLDING COMPANY
-----------------------------------
(Exact name of Registrant as specified in its Charter)
Louisiana 72-1287456
- --------------------------------------------- --------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
211 Willow Street 70538
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (318) 828-3212
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which Registered
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Common Stock, par value American Stock Exchange
$.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 (ss.229.405 of this chapter) 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-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based on the closing price of the Registrant's Common Stock
as quoted on the American Stock Exchange, Inc., on December 18, 1998, was
$36,189 million (2,392,655 shares at $15.125 per share).
As of December 18, 1998 there were issued and outstanding 3,028,480 shares
of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
September 30, 1998. (Parts I, II and IV)
2. Portions of the Proxy Statement for the 1999 Annual Meeting of
Stockholders. (Part III)
<PAGE>
<TABLE>
<CAPTION>
INDEX
PART I Page
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<S> <C> <C>
Item 1. Business..................................................................................... 1
Item 2. Properties................................................................................... 29
Item 3. Legal Proceedings............................................................................ 29
Item 4 Submission of Matters to a Vote of Security-Holders.......................................... 29
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 29
Item 6 Selected Financial Data...................................................................... 29
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................ 30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................... 30
Item 8. Financial Statements and Supplementary Data.................................................. 30
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................................... 30
PART III
Item 10. Directors and Executive Officers of the Registrant............................................ 30
Item 11. Executive Compensation........................................................................ 30
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 30
Item 13. Certain Relationships and Related Transactions................................................ 30
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 31
</TABLE>
<PAGE>
PART I
Item 1. Business
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General
Teche Holding Company (the "Company" or the "Registrant") is a
Louisiana corporation organized in December 1994 at the direction of Teche
Federal Savings Bank (the "Bank" or "Teche Federal") to acquire all of the
capital stock that the Bank issued in its conversion from the mutual to stock
form of ownership (the "Conversion"). References to the "Bank" or "Teche
Federal" herein, unless the context requires otherwise, refer to the Company on
a consolidated basis.
The Bank is a community-oriented federal savings bank offering a
variety of financial services to meet the local banking needs of St. Mary,
Lafayette, Iberia, St. Martin and Terrebonne Parishes, Louisiana (the "Primary
Market Area"). Teche Federal conducts its business from its main office in
Franklin, Louisiana and eleven branch offices located in Morgan City, Bayou
Vista, New Iberia (two offices), Lafayette (two offices), Breaux Bridge and
Houma (three offices), and Thibodeaux, Louisiana. A new branch office in
Lafayette will be completed in the first half of 1999 and a second branch office
is planned for the Franklin market. The Bank expects to make an additional
investment of approximately $2.6 million related to the branches in Lafayette
and Franklin.
The Company and the Bank are subject to regulation by the Office of
Thrift Supervision ("OTS"), the Federal Deposit Insurance Corporation ("FDIC")
and the Securities and Exchange Commission ("SEC").
Market Area/Competition
Teche Federal's home office is located in Franklin, St. Mary Parish,
Louisiana, which is approximately 50 miles southeast of Lafayette, 90 miles
south of Baton Rouge and 120 miles west of New Orleans. The limited population
of Franklin and St. Mary Parish (approximately 9,000 and 64,000, respectively)
has, over the years, caused the Bank to expand through the establishment of
branch offices in the contiguous Parishes of Iberia, St. Martin, Lafayette and
Terrebonne.
The local economy is dependent to a certain extent on the oil and gas,
seafood and agricultural (primarily sugar cane) industries. These industries are
cyclical in nature and have a direct impact on the level and performance of the
Bank's loan portfolio. Economic downturns in the past have caused a decrease in
loan originations and an increase in nonperforming assets. However, the
metropolitan Lafayette area, which is the fourth largest city in Louisiana, has
experienced sustained growth and is the home to the University of Southwestern
Louisiana, several hospitals and various small-to medium-size businesses, and
has provided the Bank with increased lending opportunities.
The Bank encounters strong competition both in the attraction of
deposits and origination of real estate and other loans. Competition comes
primarily from other financial institutions in its Primary Market Area,
including savings banks, commercial banks and savings associations, credit
unions and investment and mortgage brokers in serving its Primary Market Area.
The Bank also originates mortgage loans through its branch offices and
affiliations with mortgage originators, secured by properties throughout its
Primary Market Area and other locations in Louisiana.
1
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Lending Activities
Analysis of Loan Portfolio. Set forth below is selected data relating
to the composition of the Bank's loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
1998 1997 1996 1995 1994
-------------------- ------------------ --------------------- ------------------ ----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ ------- -------- -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate
mortgage loans:
One- to four-family............ $301,071 84.27% $310,306 86.25% $288,109 87.03% $234,329 87.49% $213,325 86.27%
Construction/permanent loans... 11,867 3.32 11,067 3.08 13,740 4.15 8,097 3.02 11,676 4.72
Multi-family................... 1,934 .54 2,839 .79 3,006 .91 2,871 1.07 2,144 .87
Commercial real estate loans..... 6,261 1.75 6,897 1.92 7,346 2.22 7,540 2.82 7,152 2.89
Land loans....................... 1,604 .45 2,634 .73 2,844 .86 2,288 .85 1,858 .75
Consumer loans:
Loans on savings accounts...... 5,881 1.65 5,984 1.66 5,657 1.71 6,260 2.34 5,312 2.15
Other.......................... 28,643 8.02 20,049 5.57 10,343 3.12 6,441 2.41 5,796 2.35
------- ------ -------- ------ -------- ------ ------- ------ -------- ------
Total loans............... 357,261 100.00% 359,776 100.00% 331,045 100.00% 267,826 100.00% 247,263 100.00%
======= ====== ====== ====== ====== ======
Less:
Allowance for loan losses...... 3,515 3,355 3,182 2,966 2,778
Deferred loan fees, net........ 580 860 1,122 1,266 1,308
Undisbursed portion of
loans-in-process............. 7,994 8,686 10,525 5,725 9,633
------- -------- -------- -------- --------
Net loans................ $345,172 $346,875 $316,216 $257,869 $233,544
======= ======= ======== ======= =======
</TABLE>
2
<PAGE>
Origination, Purchase and Repayment of Loans. The following table sets
forth the Bank's loan originations and loan purchases and principal repayments
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Total gross loans receivable at
beginning of year.......................... $359,776 $331,045 $267,826 $247,263 $219,007
======= ======= ======= ======= =======
Loans originated and purchased:
One- to four-family residential........... 43,142 49,705 70,730 33,010 $ 36,702
Residential construction/permanent(1)..... 17,118 18,968 23,049 15,110 22,933
Multi-family residential.................. 70 167 -- -- 268
Land and non-residential real estate...... 1,901 1,271 3,579 1,970 1,601
Consumer loans............................ 24,393 16,889 11,402 11,280 8,108
------ ------ ------- ------ -----
Total loans originated................ 86,624 87,000 108,760 61,370 69,612
------ ------ ------- ------ ------
Reductions in principal - primarily due
to loan repayments and prepayments ........ (89,139) (58,269) (45,541) (40,807) (41,356)
------- ------- ------- ------- -------
Net loan activity........................... $(2,515) $ 28,731 $ 63,219 $ 20,563 $ 28,256
====== ======= ======= ======= =======
Total gross loans receivable at end of
year....................................... $357,261 $359,776 $331,045 $267,826 $247,263
======= ======= ======= ======= =======
</TABLE>
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(1) Construction/permanent loans are primarily originated for permanent
financing to individuals. See "-- Residential Construction/Permanent
Loans." These loans generally do not pay off at completion, but are
automatically transferred to the one- to four-family residential loan
portfolio.
Loan Purchases. While the Bank primarily focuses on the origination of
one- to four-family residential mortgages, in 1998 the Bank purchased $2.7
million of performing fixed-rate mortgage loans from financial institutions in
south Louisiana.
3
<PAGE>
Loan Maturity Tables. The following table sets forth the maturity of
the Bank's loan portfolio at September 30, 1998. The table does not include
prepayments or scheduled principal repayments. Adjustable-rate mortgage loans
are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
One- to Residential All
Four- Construction/ Multi- Commercial Other
Family Permanent Family Real Estate Land Loans Total
------ --------- ------ ----------- ---- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
1 year or less .................. $ 153 $ -- $ -- $ 18 $ 6 $ 4,073 $ 4,250
-------- -------- -------- -------- -------- -------- --------
After 1 year:
More than 1 year to 3 years ... 1,441 -- -- 496 59 5,312 7,308
More than 3 years to 5 years .. 3,992 -- 95 384 264 9,016 13,751
More than 5 years to 10 years . 46,132 -- 347 1,745 637 14,620 63,481
More than 10 years to 20 years 107,903 1,388 645 3,291 572 1,260 115,059
More than 20 years ............ 141,450 10,479 847 327 66 243 153,412
-------- -------- -------- -------- -------- -------- --------
Total due after September 30,
1998 ..................... 300,918 11,867 1,934 6,243 1,598 30,451 353,011
-------- -------- -------- -------- -------- -------- --------
Total amount due ............ $301,071 $ 11,867 $ 1,934 $ 6,261 $ 1,604 $ 34,524 $357,261
======== ======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 1998, which have pre-determined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Adjustable
Rates Rates (1) Total
----- --------- -----
(In Thousands)
One- to four-family..................... $154,872 $146,045 $300,918
Residential construction/permanent...... 1,880 9,987 11,867
Other................................... 34,585 5,641 40,226
-------- ------- -------
Total.............................$ 191,337 $161,674 $353,011
======== ======= =======
- --------------------
(1) Many of these adjustable-rate loans have initial fixed terms of three to
ten years, with rates adjusting annually thereafter. See "-- One- to
Four-Family Residential Loans."
One- to Four-Family Residential Loans. The primary lending activity of
Teche Federal is the origination of one- to four-family owner-occupied,
residential mortgage loans, secured by property located in the Bank's Primary
Market Area.
4
<PAGE>
Teche Federal generally originates single-family owner occupied
residential mortgage loans in amounts up to 80% of the lower of the appraised
value or selling price of the property securing the loan. The Bank also
originates such loans in amounts up to 95% of the lower of the appraised value
or selling price of the mortgaged property, provided that private mortgage
insurance is provided on the amount in excess of 80% of the lesser of the
appraised value or selling price.
The Bank currently offers ARMs with terms of up to 30 years that
initially adjust on the first, third, fifth or tenth year after origination and
annually thereafter. The Bank began offering ARMs in 1981. The Bank originated
$36.4 million of ARMs during the year ended September 30, 1998, of which $21.3
million will first adjust annually after five years. The initial rate is
determined by the Bank in accordance with market and competitive factors.
Historically, the predominant index was based on the monthly median cost of
funds at all SAIF insured financial institutions. For ARMs originated after
December 31, 1994, the Bank uses an index based on the one-year U.S. Treasury
Bill rate adjusted to constant maturity. The terms and conditions of the ARM
loans held by the Bank are varied, partially due to changing market conditions
and partially due to the acquisition by the Bank of loans of First Federal in
Breaux Bridge from the RTC, Community Homestead in Houma and other loan
purchases. The Bank's current ARM originations adjust by a maximum of 2.0% per
adjustment, with a current lifetime cap of 11.875%.
The Bank offers fixed-rate mortgages with terms of up to 30 years,
which amortize monthly. Interest rates charged on fixed-rate mortgage loans are
competitively priced based on market conditions and the Bank's cost of funds.
The Bank originates and holds its fixed-rate mortgage loans as long term
investments. Most loans are originated in conformance with the Federal Home Loan
Mortgage Corporation ("FHLMC") and the Federal National Mortgage Association
("FNMA") guidelines and can therefore be sold in the secondary market should
management deem it necessary. The Bank originated $20.9 million of fixed-rate
mortgage loans during the year ended September 30, 1998.
The Bank offers home equity loans on single family residences. At
September 30, 1998, home equity mortgage loans totaled $15.6 million. While the
Bank does offer adjustable rate home equity lines of credit, the majority of the
home equity portfolio have fixed rates with a maximum term of 15 years. A
variety of home equity loan programs are offered including combined loan to
values up to 125.00%. Creditworthiness, capacity, and loan to value are the
primary factors considered during underwriting. To offset additional credit risk
and higher combined loan to values, the Bank reduces loan terms and increases
loan yields.
Residential Construction/Permanent Loans. The Bank's construction loans
have primarily been made to finance the construction of single-family owner
occupied residential properties and, to a limited extent, single family housing
for sale by contractors. Construction/permanent loans generally are made to
customers of the Bank in its Primary Market Area. The Bank offers
construction/permanent loans in amounts up to 80% of the appraised value of the
property securing the loan. Loan proceeds are disbursed in increments as
construction progresses and as inspections warrant. Construction/permanent loans
to individuals generally do not pay off at completion of the construction phase,
but are automatically transferred to the Bank's one- to four-family residential
portfolio. These single-family residential loans are structured to allow the
borrower to pay interest only on the funds advanced for the construction for a
period of up to nine months at the end of which time the loan converts to a
permanent mortgage. While construction lending is generally considered to
involve a higher degree of risk than financing of existing residential
properties, at September 30, 1998, no construction/permanent loans were
delinquent.
Multi-Family and Commercial Real Estate Loans. The Bank has historically
originated a limited amount of loans secured by multi-family and commercial real
estate, including non-owner
5
<PAGE>
occupied residential multi-family dwelling units (more than four units), as well
as professional office buildings and apartment complexes.
The Bank generally originates multi-family and commercial real estate
loans up to 70% of the appraised value of the property securing the loan. The
Bank's philosophy to originate commercial real estate and multi-family loans
only to borrowers known to the Bank and on properties in its market area. The
multi-family and commercial real estate loans in the Bank's portfolio generally
consist of fixed-rate and ARMs which were originated at prevailing market rates
for terms up to 15 years.
Loans secured by multi-family and commercial real estate are generally
larger and involve a greater degree of risk than one- to four-family residential
mortgage loans. Of primary concern in multi-family and commercial real estate
lending is the borrower's creditworthiness, the feasibility and cash flow
potential of the project, and the outlook for successful operation or management
of the properties. As a result, repayment of such loans may be subject to a
greater extent than residential real estate loans to adverse conditions in the
real estate market or the economy. In accordance with the Bank's classification
of assets policy and procedure, the Bank requests annual financial statements on
major loans secured by multi-family and commercial real estate. At September 30,
1998 the aggregate balance of the five largest multi-family and commercial real
estate loans totaled $2.0 million with no single loan larger than $748,000,000.
Land Loans. At September 30, 1998, the Bank had $1.6 million invested in
residential lot loans to individuals.
Consumer Loans. The Bank also offers loans in the form of loans secured
by deposits, home equity loans, automobile loans, mobile home loans, credit card
loans and unsecured personal consumer loans. Federal regulations allow the Bank
to make secured and unsecured consumer loans of up to 35% of the Bank's assets.
The Bank originates consumer loans in order to provide a wide range of
financial services to its customers and because the shorter terms and normally
higher interest rates on such loans help maintain a profitable spread between
its average loan yield and its cost of funds. In connection with consumer loan
applications, the Bank verifies the borrower's income and reviews a credit
bureau report. In addition, the relationship of the loan to the value of the
collateral is considered.
Loans secured by deposits at the Bank are typically made for no more
than 90% of the deposit and at an interest rate 2% above the rate paid on the
deposit. At September 30, 1998, the Bank had $5.8 million of loans secured by
deposits.
Teche Federal also originates automobile and mobile home loans. At
September 30, 1998, $5.2 million and $.5 million consisted of automobile and
mobile home loans, respectively.
The Bank has recently instituted a credit card program whereby
customers are offered revolving credit through Teche Federal credit cards which
are serviced by a third-party vender. At September 30, 1998, such credit cards
had a balance of $1.6 million.
Consumer loans tend to be originated at higher interest rates than
conventional residential mortgage loans and for shorter terms which benefits the
Bank's interest rate risk management. However, consumer loans generally involve
more risk than first mortgage one- to four-family residential real estate loans.
Repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance as a result of damage, loss or
depreciation, and the remaining deficiency
6
<PAGE>
often does not warrant further substantial collection efforts against the
borrower. In addition, loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Further, the
application of various state and federal laws, including federal and state
bankruptcy and insolvency law, may limit the amount which may be recovered.
These loans may also give rise to defenses by the borrower against the Bank and
a borrower may be able to assert against the Bank claims and defenses which it
has against the seller of the underlying collateral. In underwriting consumer
loans, the Bank considers the borrower's credit history, an analysis of the
borrower's income and ability to repay the loan, and the value of the
collateral. The Bank's risks associated with consumer loans have been further
limited by the modest amount of consumer loans made by the Bank. At September
30, 1998, the Bank had approximately $0.1 million in consumer loans delinquent
more than 90 days.
Loan Approval Authority and Underwriting. All mortgage loans greater
than $227,150, including sale & assumptions and loans to facilitate the sale of
REO, must be approved by a minimum of two members of the Senior Loan Committee.
All mortgage loans up to and including $227,150 must be approved by one member
of the Loan Committee.
Certain loan officers and members of management approved by the Board
are authorized to approve consumer loans. The amounts which any one person may
approve for a secured consumer loan range from $25,000 to $100,000. The range of
lending authority for unsecured loans is $5,000 to $25,000. Secured loans in
excess of $100,000 and unsecured loans in excess of $25,000 must be approved by
two members of the Loan Committee.
One- to four-family residential mortgage loans are generally
underwritten according to FHLMC and FNMA guidelines, generally utilizing their
approved mortgage documents. For all loans originated by the Bank, upon receipt
of a completed loan application from a prospective borrower, a credit report is
ordered, income and certain other information is verified and, if necessary,
additional financial information is requested. An appraisal of the real estate
intended to secure the proposed loan is required which typically is performed by
an independent appraiser designated and approved by the Board of Directors of
the Bank. The Bank makes construction/permanent loans on individual properties.
Funds advanced during the construction phase are held in a loan-in-process
account and disbursed based upon various stages of completion. The independent
appraiser determines the stage of completion based upon its physical inspection
of the construction.
The Bank generally requires title insurance for its 1-4 family
residential loans with loan amounts of $150,000 or greater. Title insurance is
required for all construction loans, regardless of loan amount. The Bank
requires that fire and extended coverage casualty insurance (and, if
appropriate, flood insurance) be maintained in an amount at least equal to the
outstanding loan balance.
It is the Bank's policy to require borrowers to advance funds on a
monthly basis together with each payment of principal and interest to an escrow
account from which the Bank makes disbursements for items such as real estate
taxes and hazard insurance premiums.
Mortgage loans originated by the Bank generally include due-on-sale
clauses which provide the Bank with the contractual right to deem the loan
immediately due and payable in the event that the borrower transfers ownership
of the property without the Bank's consent.
Loan Commitments. Teche Federal issues written, formal commitments to
prospective borrowers on all real estate approved loans. The commitment requires
acceptance within 30 days of the date of issuance. Commitments for consumer
loans, which are not given in writing, expire 30 days after
7
<PAGE>
issuance. At September 30, 1998, the Bank had $13.9 million of commitments to
originate mortgage loans, including $8.0 million of the undisbursed portion of
loans-in-process.
Loans-to-One Borrower. Savings associations cannot make any loans to
one borrower in an amount that exceeds in the aggregate 15% of unimpaired
capital and retained income on an unsecured basis and an additional amount equal
to 10% of unimpaired capital and retained income if the loan is secured by
readily marketable collateral (generally, financial instruments, not real
estate) or $500,000, whichever is higher. The Bank's maximum loan-to-one
borrower limit was approximately $5.6 million as of September 30, 1998.
At September 30, 1998, the Bank's largest lending relationship
consisted of a $747,800 construction/permanent loan to a non-profit corporation
for the construction of a 60-apartment complex for the elderly and low income
families in Alexandria, Louisiana. This project was funded with a $1.2 million
grant from the Affordable Housing Program of the FHLB of Dallas and a $755,000
loan from the Bank which is fully guaranteed by the U.S. Department of Housing
and Urban Development ("HUD"). The project is currently in use. The next five
largest lending relationships at September 30, 1998 ranged from $286,000 to
$342,000 and were secured primarily by apartment complexes and commercial
properties located in the Bank's Primary Market Area. Of these loans, $300,000
is classified as substandard. See "-- Non-performing and Problem Assets
- --Classified Assets."
Non-Performing and Problem Assets
General. Teche Federal's Primary Market Area is dependent, to a certain
extent, on the oil and gas, seafood and agricultural (primarily sugar cane)
industries. These industries are cyclical in nature and have a direct impact on
the level and performance of the Bank's loan portfolio. In the mid-1980s, after
sharp increases in interest rates, oil prices fell, causing severe economic
problems in Louisiana and the Bank's Primary Market Area. During this time, the
Bank experienced a sharp increase in non-performing assets and real estate owned
("REO"). The Bank's Primary Market Area has, to a certain extent, diversified
somewhat since the mid-1980's, however, management continues to monitor its loan
portfolio and has instituted various underwriting standards to address any
future economic downturns.
Non-Performing Assets and Delinquencies. When a borrower fails to make
a required payment on a loan and does not cure the delinquency promptly, the
loan is classified as delinquent. In this event, the normal procedure followed
by the Bank is to make contact with the borrower at prescribed intervals in an
effort to bring the loan to a current status. In most cases, delinquencies are
cured promptly. If a delinquency is not cured, the Bank normally, subject to any
required prior notice to the borrower, commences foreclosure proceedings, in
which the property may be sold. In foreclosure sale, the Bank may acquire title
to the property through foreclosure, in which case the property so acquired is
offered for sale and may be financed by a loan involving terms more favorable to
the borrower than those normally offered. Any property acquired as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until such time as it is sold or otherwise disposed of by the Bank to recover
its investment. Any real estate acquired in settlement of loans is initially
recorded at the estimated fair value at the time of acquisition and is
subsequently reduced by additional allowances which are charged to earnings if
the estimated fair value of the property declines below its initial value.
Subsequent costs directly relating to development and improvement of property
are capitalized (not to exceed fair value), whereas costs related to holding
property are expensed.
The Bank's general policy is to place a loan on nonaccrual status when
the loan becomes 90 days delinquent or otherwise demonstrates other risks of
collectibility. Interest on loans that are contractually
8
<PAGE>
90 days or more past due is reserved through an allowance account. The allowance
is established by a charge to interest income equal to all interest previously
accrued, and interest is subsequently recognized only to the extent cash
payments are received until, in management's judgment, the borrower's ability to
make periodic interest and principal payments is back to normal, in which case
the loan is returned to accrual status.
The following table sets forth information regarding non-accrual loans,
real estate owned ("REO"), and loans that are 90 days or more delinquent but on
which the Bank was accruing interest at the dates indicated and restructured
loans. There are no restructured loans other than those included in the table.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured by one- to four-family
residences ................................................ $ 640 $ 1,028 $ 544 $ 584 $578
All other mortgage loans .................................... -- -- -- 59 198
Consumer ...................................................... 83 88 15 19 50
-------- ------- ------ ------- ----
Total .................................................... $ 723 $ 1,116 $ 559 $ 662 $826
======== ======= ====== ======= ====
Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
Permanent loans secured by one- to four-family
residences ................................................ -- -- -- -- --
All other mortgage loans .................................... -- -- -- -- --
Consumer ...................................................... -- -- -- -- --
-------- ------- ------ ------- ----
Total .................................................... $ -- $ -- $ -- $ -- $--
======== ======= ====== ======= ====
Total non-performing loans ..................................... $ 723 $ 1,116 $ 559 $ 662 $826
======== ======= ====== ======= ====
Real estate owned .............................................. $ 331 $ 33 $ 46 $ 253 $ 99
======== ======= ====== ======= ====
Total non-performing assets .................................... $ 1,054 $ 1,149 $ 605 $ 915 $925
======== ======= ====== ======= ====
Total non-performing loans to total loans
outstanding before allowance ................................. .20% .31% .17% .25% .35%
======== ======= ====== ======= ====
Total non-performing loans to total assets ..................... .18% .27% .15% .20% .29%
======== ======= ====== ======= ====
Total non-performing assets to total assets .................... .26% .28% .16% .28% .33%
======== ======= ====== ======= ====
</TABLE>
Interest income that would have been recorded on loans accounted for on
a non-accrual basis under the original terms of such loans was not significant
for the year ended September 30, 1998.
9
<PAGE>
The following table sets forth the types and dollar amounts of the
Bank's loans which were more than 60 days delinquent as of September 30, 1998:
At
September 30,
1998
--------------
(In Thousands)
Residential mortgage loans....................... $1,420
Non-residential real estate loans................ --
Land loans....................................... --
Consumer loans................................... 104
Real Estate Owned. Real estate acquired by the Bank as the result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired it is recorded at the fair value at
the date of foreclosure. At September 30, 1998, the Bank had REO with a net
balance of $331,000.
Allowances for Loan Losses and Real Estate Owned. It is management's
policy to provide for losses on loans in its loan portfolio and foreclosed REO.
A provision for loan losses is charged to operations based on management's
evaluation of the losses that may be incurred in the Bank's loan portfolio. Such
evaluation, which includes a review of all loans of which full collectibility of
interest and principal may not be reasonably assured, considers, among other
matters, the estimated net realizable value of the underlying collateral.
Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loss provisions may be
deemed necessary. There can be no assurance that the allowance for losses will
be adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
10
<PAGE>
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the Bank's allowance for loan losses by loan category and the
percent of loans in each category to total loans receivable at the dates
indicated. The portion of the loan loss allowance allocated to each loan
category does not represent the total available for losses which may occur
within the loan category since the total loan loss allowance is a valuation
reserve applicable to the entire loan portfolio.
<TABLE>
<CAPTION>
At September 30,(1)
--------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------- -------------------- ------------------ ---------------------- -------------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At end of year
allocated to:
One- to four-family......... $2,600 84.27% $2,558 86.25% $2,426 87.03% $2,201 87.49% $2,050 86.27%
Multi-family and
commercialreal estate..... 246 2.29 437 2.71 414 3.13 510 3.89 494 3.76
Construction................ 24 3.32 26 3.08 25 4.15 25 3.02 25 4.72
Consumer and other loans.... 645 10.12 334 7.96 317 5.69 230 5.60 209 5.25
----- ------- ---- ------ ----- ------ ----- ------ ----- ------
Total allowance(1).......... $3,515 100.00% $3,355 100.00% $3,182 100.00% $2,966 100.00% $2,778 100.00%
===== ====== ===== ====== ===== ====== ===== ====== ===== ======
</TABLE>
- ------------------------
(1) Includes specific reserves for assets classified as loss.
11
<PAGE>
Analysis of the Allowance for Loan Losses. The following table sets
forth information with respect to the Bank's allowance for loan losses for the
periods indicated:
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding, net ................ $ 345,172 $ 346,875 $ 316,216 $ 257,869 $ 233,554
========= ========= ========= ========= =========
Average loans outstanding ................... $ 349,769 $ 336,509 $ 283,962 $ 245,567 $ 219,393
========= ========= ========= ========= =========
Allowance balances (at beginning of year) ... $ 3,355 $ 3,182 $ 2,966 $ 2,778 $ 2,193
--------- --------- --------- --------- ---------
Provision ................................... 180 240 300 360 577
--------- --------- --------- --------- ---------
Effect of pooling ........................... -- -- -- --
Charge offs:
Residential real estate mortgage loans:
One- to four-family units ............... (56) (7) (28) (81) (63)
Construction loans ........................ -- -- -- -- --
Multi-family and commercial real estate
loans ................................... -- -- -- (72) --
Land loans ................................ -- -- -- -- --
Other ..................................... (8) (69) (59) (32) (34)
--------- --------- --------- --------- ---------
Total charge-offs ..................... (64) (76) (87) (185) (97)
Recoveries
Residential real estate mortgage loans .... -- -- 3 -- --
One- to four-family units ............... 18 9 -- 12 105
Construction loans ........................ -- -- -- -- --
Multi-family and commercial real estate
loans ................................... 22 -- -- -- --
Land loans ................................ -- -- -- -- --
Other ..................................... 4 -- -- 1 --
--------- --------- --------- --------- ---------
Total recoveries ...................... 44 9 3 13 105
--------- --------- --------- --------- ---------
Net (charge-offs) recoveries .............. (20) (67) (84) (172) 8
--------- --------- --------- --------- ---------
Allowance balance (at end of year) .......... $ 3,515 $ 3,355 $ 3,182 $ 2,966 $ 2,778
========= ========= ========= ========= =========
Allowance for loan losses to total loans
outstanding before allowance .............. 1.01% .96% 1.00% 1.14% 1.18%
Net loans charged off as a percent of average
loans outstanding before allowance ........ .01% .02% .03% .07% --%
</TABLE>
12
<PAGE>
Analysis of the Allowance for Losses on Real Estate Owned. The
following table sets forth information with respect to the Bank's allowance for
losses on real estate owned at the dates indicated.
At September 30,
----------------------------------------------
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
(Dollars in Thousands)
Total real estate owned, net .. $ 331 $ 33 $ 46 $ 253 $ 99
===== ===== ===== ===== =====
Allowance - beginning ......... 112 108 131 $ 163 $ 186
Provision ..................... -- 4 -- -- --
Charge-offs ................... -- -- (23) (32) (23)
----- ----- ----- ----- -----
Allowance - ending ............ $ 112 $ 112 $ 108 $ 131 $ 163
===== ===== ===== ===== =====
Allowance for losses on
real estate owned to real
estate owned before allowance 25% 77% 70% 34% 62%
Investment Activities
General. To supplement lending activities, Teche Federal invests in
residential mortgage-backed securities, investment securities and
interest-bearing deposits. These investments have historically consisted of
investment securities issued by U.S. Government agencies. Such securities can
serve as collateral for borrowings and, through repayments and maturities, as a
source of liquidity. Teche Federal anticipates having the ability to fund all of
its investing activities from funds held on deposit at FHLB of Dallas,
maturities, loan repayments and the Bank's borrowing capacity.
Federally chartered savings institutions have the authority to invest
in various types of assets, including U.S. Treasury obligations, securities of
various federal agencies and of state and municipal governments, deposits at the
FHLB of Dallas, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various restrictions,
such institutions also have the authority to invest a portion of its assets in
commercial paper, corporate debt securities and ARM funds, the assets of which
conform to the investments that federally chartered savings institutions are
otherwise authorized to make directly. Savings institutions are also required to
maintain minimum levels of liquid assets which vary from time to time. The Bank
may decide to increase its liquidity above the required levels depending upon
the availability of funds and comparative yields on investments in relation to
return on loans.
The Bank is required under federal regulations to maintain a minimum
amount of liquid assets and is also permitted to make certain other securities
investments. At September 30, 1998 the Bank's regulatory liquidity was 7.49%
which is in excess of 5% required by OTS regulations. See "Regulation --
Regulation of the Bank -- Federal Home Loan Bank System" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
The Boards of Directors of the Bank and the Company maintain Investment
Committees which are authorized to establish and implement investment policies
and to supervise the Bank's or the
13
<PAGE>
Company's investment activities. Pursuant to its delegated authority, the
Investment Committees have established permissible types of investments, quality
criteria, portfolio limits, procedures, controls and committee and individual
investment authorities. The investment policies consider the Bank's and the
Company's business plan, growth plans, current economic environments, range of
reasonably foreseeable economic environments, the types of securities to be held
and other safety and soundness considerations.
Before being purchased, each investment is analyzed as to investment
intent. The Bank distinguishes between investment activities undertaken for
investment, for sale or for trading. Such activities are differentiated based
upon the Bank's desire to earn an interest yield (held to maturity), to realize
a holding gain from assets held for indefinite periods of time (available for
sale) or to earn a dealer's spread between the bid and asked prices (held for
trading). The Bank attempts to earn an acceptable spread between the cost of
funds used to purchase an investment and the return on that investment. Under
circumstances when credit risk, interest rate risk or prepayment risk is
significantly reduced, a lesser return may be considered acceptable.
Securities which are classified as "held to maturity" are accounted for
based on historical cost adjusted for amortization of premiums or discounts
using the level yield method. The "held to maturity" portfolio consists
primarily of U.S. Government obligations and securities of various federal
agencies, municipal debt securities and mortgage-backed and related securities.
Securities that are classified as "available for sale" are accounted for at
their market value, with unrealized gains and losses reported as a separate
component of capital. Securities that are classified as "held for trading" are
accounted for at their fair market value, with unrealized gains and losses
included in earnings.
The following table sets forth the carrying value of the Company's
investment portfolio, short-term investments and FHLB stock at the dates
indicated.
At September 30,
------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Investment securities issued by U.S.
Government agencies and corporations (1)...... $ 4,478 $ 7,312 $ 11,462
FHLB Stock...................................... 3,884 3,927 3,703
Mortgage-backed securities (1).................. 31,220 30,378 32,099
Common stock and municipal obligations.......... 1,071 164 935
------ ------- --------
Total investment and mortgage-backed
securities................................ 40,653 41,781 48,199
Interest-bearing deposits....................... 5,260 4,510 6,064
------- ------ --------
Total investments............................ $ 45,913 $46,291 $ 54,263
======= ====== ========
- --------------------
(1) Investment and mortgage-backed securities "available for sale" are
carried at fair market value, while investment and mortgage-backed
securities "held to maturity" are carried at cost.
14
<PAGE>
Mortgage-backed and Investment 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 quasi-governmental
agencies) that pool and repackage the participation interests in the form of
securities, to investors such as the Bank. Such quasi-governmental agencies,
which guarantee the payment of principal and interest to investors, primarily
include FHLMC, FNMA and Government National Mortgage Association ("GNMA").
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 can be composed of either fixed-rate mortgages or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of 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 is equal to the life of the underlying mortgages. Mortgage-backed
securities issued by FHLMC, FNMA, and GNMA make up a majority of the
pass-through certificates market. At September 30, 1998, the Bank had
mortgage-backed securities available for sale with an amortized cost of $30.9
million and an estimated market value of $31.2 million.
At September 30, 1998, Teche Federal had an investment securities
portfolio with an amortized cost of approximately $4.3 million, consisting
primarily of obligations of U.S. government corporations and agencies, as
permitted by the OTS regulations. The market value of investment securities at
September 30, 1998 (excluding FHLB stock and interest-bearing accounts), was
$4.5 million. Teche Federal will continue to seek high quality investments with
short to intermediate maturities.
Interest-Bearing Accounts Held at Other Financial Institutions. At
September 30, 1998, the Bank held $5.3 million in the FHLB and interest-bearing
deposits in other financial institutions. The Bank maintains these accounts in
order to maintain liquidity.
15
<PAGE>
Investment Portfolio Maturities. The following table sets forth certain
information regarding the amortized cost, carrying value, market value, weighted
average yields and maturities of the Bank's investment and mortgage-backed
securities portfolio at September 30, 1998.
<TABLE>
<CAPTION>
As of September 30, 1998
----------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investments
----------------- ----------------- ----------------- ------------------- --------------------------------
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average Carrying Market
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield Value Value
------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ----- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities
available for sale.......$ -- N/A% $4,332 6.5% $ -- N/A% $ -- N/A% $4,332 6.51% $4,478 $4,478
Mortgage-backed Securities
available for sale(1)... -- N/A 12,295 6.27 243 8.61 18,364 6.84 30.902 6.63 31,220 31,220
FHLB Stock................ -- N/A -- N/A -- N/A -- N/A 3,884 5.95 3,884 3,884
Municipal Obligations..... 20 5.48 226 5.09 -- N/A -- N/A 246 5.12 246 246
Equity Securities......... -- N/A N/A N/A -- N/A -- N/A 757 N/A 825 825
Total...............$ 20 5.48% $16,853 6.4% $ 243 8.61% $18,364 6.84% $40,121 6.42% $40,653 $40,653
====== ====== ===== ====== ====== ====== ======
</TABLE>
- ------------------------------
(1) Does not assume prepayments.
16
<PAGE>
Sources of Funds
General. Deposits are the major source of the Bank's funds for lending
and other investment purposes. Teche Federal also derives funds from
amortization and prepayment of loans and mortgage-backed securities, maturities
of investment securities and operations. Scheduled loan principal and interest
payments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are significantly influenced by general interest
rates and market conditions. Teche Federal also utilizes advances from the FHLB
of Dallas.
Deposits. Consumer and commercial deposits are attracted principally
from within the Bank's Primary Market Area through the offering of a broad
selection of deposit instruments including regular savings, demand and NOW
accounts and certificates of deposit. Deposit account terms vary according to
the minimum balance required, the time period the funds must remain on deposit
and the interest rate, among other factors.
The interest rates paid by the Bank on deposits can be set daily at the
direction of senior management. Senior management determines the interest rate
to offer the public on new and maturing accounts. Senior management obtains the
interest rates being offered by other financial institutions within its market
area. This data along with a report showing the dollar value of certificates of
deposit maturing is reviewed and interest rates are determined.
Regular savings accounts, money market accounts and NOW accounts
constituted $71.5 million, or 25.6% of the Bank's deposit portfolio at September
30, 1998. Certificates of deposit constituted $207.8 million or 74.4% of the
deposit portfolio, including $46.5 million of which had balances of $100,000 and
over. As of September 30, 1998, the Bank had no brokered deposits.
Time Deposits by Rate. The following table presents, by various rate
categories, the amount of certificate accounts outstanding at the dates
indicated and the periods to maturity of the certificate accounts outstanding at
September 30, 1998.
Period to Maturity from September 30, 1998
----------------------------------------------
Less than One to Two to Over Three
One Year Two Years Three Years Years
-------- --------- ----------- -----
(In Thousands)
Certificate accounts:
3.00 to 3.99%...... $ 1,514 $ -- $ -- $ 2
4.00 to 4.99%...... 33,065 6,943 441 --
5.00 to 5.99%...... 62,287 44,653 7,265 5,769
6.00 to 6.99%...... 13,306 16,344 5,924 7,841
7.00 to 7.99%...... -- 2,233 -- 173
-------- -------- -------- -------
Total.......... $ 110,172 $ 70,173 $ 13,630 $ 13,785
======== ======== ======== =======
Certificate Accounts of $100,000 and Above. Teche Federal maintains a
policy of offering higher interest rates on certificates with larger balances.
For example, for certificates with terms of 12 months which were purchased on
September 30, 1998, those with balances of $500 would yield 4.75%, those with
balances of $40,000 would yield 5.00%, those with balances of $75,000 would
yield 5.10% and those with balances of $99,000 would yield 5.20%. As a result,
to some extent, Teche Federal customers tend to consolidate accounts to earn the
highest possible interest. This enables the Bank to effectively compete in the
marketplace, reduce the number of accounts and associated costs, and increase,
to some extent the number of accounts with balances of $100,000. The following
table indicates the
17
<PAGE>
amount of the Bank's certificates of deposit of $100,000 or more by time
remaining until maturity as of September 30, 1998.
Certificates Weighted
of Deposit Interest Rate
---------- -------------
(In Thousands)
Maturity Period:
3 months or less........... $ 8,772 5.29%
Over 3 through 6 months.... 7,622 5.28
Over 6 through 12 months... 9,547 5.55
Over 12 months............. 20,523 5.84
------- -----
Totals..................... $ 46,464 5.59
=======
Savings Deposit Activity. The following table sets forth the savings
activities of the Bank for the periods indicated:
At September 30,
-------------------------------------
1998 1997 1996
---------- ---------- ---------
(In Thousands)
Beginning balance......................... $ 280,302 $254,723 $233,805
Net deposits (withdrawals)................ (13,949) 12,545 9,259
Interest credited on deposits............. 12,912 13,034 11,659
------- ------- --------
Ending balance............................ 279,265 280,302 $254,723
======== ======= =======
Total increase (decrease) in deposits.... $ (1,037) $ 25,579 $ 20,918
======== ======= =======
Percentage increase (decrease)............ (.37)% 10.04% 8.95%
Borrowings
Deposits are the primary source of funds of the Bank's lending and
investment activities and for its general business purposes. The Bank may obtain
advances from the FHLB of Dallas to supplement its supply of lendable funds.
Advances from the FHLB of Dallas are typically secured by a pledge of the Bank's
stock in the FHLB of Dallas and a portion of the Bank's first mortgage loans and
certain other assets. The Bank, if the need arises, may also access the Federal
Reserve Bank discount window to supplement its supply of lendable funds and to
meet deposit withdrawal requirements. At September 30, 1998, Teche Federal had
$67.7 million in advances outstanding from the FHLB of Dallas.
18
<PAGE>
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the years ended on the dates indicated:
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
--------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding.................... $68,306 $64,685 $42,405
Maximum amount outstanding at any
month-end during the year....................... 77,335 72,684 72,500
Balance outstanding at end of year............. 67,721 65,398 66,900
Weighted average interest rate during the year. 5.56% 5.64% 5.53%
Weighted average interest rate at end of year.. 5.34% 5.73% 5.39%
</TABLE>
Subsidiary Activity
The only subsidiary of the Company is Teche Federal.
As of September 30, 1998, the Bank had one subsidiary: Family Investment
Services, Inc. ("FISI") and the net book value of the Bank's investment in
stock, unsecured loans and conforming loans in its service corporation was
$111,000. FISI was inactive at September 30, 1998.
Teche Federal is permitted to invest up to 2% of its assets in the
capital stock of, or secured or unsecured loans to, subsidiary corporations,
with an additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. Under such limitations,
as of September 30, 1998, Teche Federal was authorized to invest up to
approximately $8.1 million in the stock of, or loans to, service corporations
(based upon the 2% limitation).
Personnel
As of September 30, 1998, the Bank had 138 full-time and 59 part-time
employees. None of the Bank's employees is represented by a collective
bargaining group. The Bank believes that its relationship with its employees is
good.
Regulation
Set forth below is a brief description of all materials laws and
regulations which relate to the regulation of the Bank and the Company. The
description does not purport to be complete and is qualified in its entirety by
reference to applicable laws and regulations.
19
<PAGE>
Holding Company Regulation
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, should such subsidiaries
be formed, which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings association. This
regulation and oversight is intended primarily for the protection of the
depositors of the Bank and not for the benefit of stockholders of the Company.
The Company is also required to file certain reports with, and otherwise comply
with, the rules and regulations of the OTS and the SEC.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test. If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless such other associations each also
qualify as a QTL and were acquired in a supervisory acquisition. See "Regulation
of the Bank -- Qualified Thrift Lender Test."
Restrictions on Acquisitions. The Company must obtain approval from the
OTS before acquiring control of any other SAIF-insured association. Such
acquisitions are generally prohibited if they result in a multiple savings and
loan holding company controlling savings associations in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings association.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition. In
addition, no company may acquire control of such an institution without prior
OTS approval.
Federal Securities Law. The Company is subject to filing and reporting
requirements by virtue of having its common stock registered under the
Securities Exchange Act of 1934. Furthermore, Company stock held by persons who
are affiliates (generally officers, directors and principal stockholders) of the
Company may not be resold without registration or unless sold in accordance with
certain resale restrictions. If the Company meets specified current public
information requirements, each affiliate of the Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
Regulation of the Bank
General. As a federally chartered, SAIF-insured savings association,
the Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various federal statutory and
regulatory requirements. The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.
20
<PAGE>
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that they find in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
law, especially in such matters as the ownership of savings accounts and the
form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC or the
Congress could have a material adverse impact on the Company, the Bank and their
operations.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured member (as defined by law
and regulation). The FDIC has the authority, should it initiate proceedings to
terminate an institution's deposit insurance, to suspend the insurance of any
such institution without tangible capital. However, if a savings association has
positive capital when it includes qualifying intangible assets, the FDIC cannot
suspend deposit insurance unless capital declines materially, the institution
fails to enter into and remain in compliance with an approved capital plan or
the institution is operating in an unsafe or unsound manner.
Regardless of an institution's capital level, insurance of deposits may
be terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits
based on the risk a particular institution poses to its deposit insurance fund.
Under this system, a bank or thrift pays within a range of six cents to 31 cents
per $100 of domestic deposits, depending upon the institution's risk
classification. This risk classification is based on an institution's capital
group and supervisory subgroup assignment. In addition, the FDIC is authorized
to increase such deposit insurance rates, on a semi-annual basis, if it
determines that such action is necessary to cause the balance in the SAIF to
reach the designated reserve ratio of 1.25% of SAIF-insured deposits within a
reasonable period of time. The FDIC also may impose special assessments on SAIF
members to repay amounts borrowed from the U.S. Treasury or for any other reason
deemed necessary by the FDIC. The Bank's federal deposit insurance premium
expense for the fiscal year ended September 30, 1998, amounted to approximately
$172,000.
Examination Fees. In addition to federal deposit insurance premiums,
savings institutions like the Bank are required by OTS regulations to pay
assessments to the OTS to fund the operations of the OTS. The general assessment
is paid on a semi-annual basis and is computed based on total assets of the
institution, including subsidiaries. The Bank's OTS assessment expense for the
fiscal year ended September 30, 1998 totalled approximately $89,828.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) a leverage ratio
21
<PAGE>
(core capital) equal to at least 3% of total adjusted assets, and (3) a
risk-based capital requirement equal to 8.0% of total risk-weighted assets.
Savings associations with a greater than "normal" level of interest
rate exposure will, in the future, be subject to a deduction for an interest
rate risk ("IRR") component may be from capital for purposes of calculating
their risk-based capital requirement. See "-- Net Portfolio Value Analysis."
As shown below, the Bank's regulatory capital exceeded all minimum
regulatory capital requirements applicable to it as of September 30, 1998:
Percent of
Adjusted
Amount Assets
------ ------
(Dollars in Thousands)
Tangible Capital:
Actual capital......................... $ 53,415 13.1%
Regulatory requirement................. 6,100 1.5
------ -----
Excess................................. $ 47,315 11.6%
======= =====
Core Capital:
Actual capital......................... $ 53,415 13.1%
Regulatory requirement................. 16,268 3.0
------ -----
Excess................................. $ 37,147 9.1%
====== ======
Risk-Based Capital:
Actual capital......................... $ 56,195 25.3%
Regulatory requirement................. 17,748 8.0
------- -----
Excess................................. $ 38,447 17.3%
======= ======
The Bank is not under any agreement with regulatory authorities nor is
it aware of any current recommendations by the regulatory authorities which, if
they were to be implemented, would have a material effect on liquidity, capital
resources or operations of the Bank or the Company.
Net Portfolio Value Analysis - Interest Rate Risk. The Bank is subject
to interest rate risk to the degree that its interest-bearing liabilities,
primarily deposits with short- and medium-term maturities, mature or reprice at
different rates than our interest-earning assets. Although having liabilities
that mature or reprice less frequently on average than assets will be beneficial
in times of rising interest rates, such an asset/liability structure will result
in lower net income during periods of declining interest rates, unless offset by
other factors.
The Bank believes it is critical to manage the relationship between
interest rates and the effect on its net portfolio value ("NPV"). This approach
calculates the difference between the present value of expected cash flows from
assets and the present value of expected cash flows from assets and the present
value of expected cash flows from liabilities, as well as cash flows from
off-balance sheet contracts. The Bank manages assets and liabilities within the
context of the marketplace, regulatory limitations and within its limits on the
amount of change in NPV which is acceptable given certain interest rate changes.
22
<PAGE>
The OTS requires all regulated thrift institutions to calculate the
estimated change in the institution's NPV assuming instantaneous parallel shifts
in the Treasury yield curve of 100 to 400 basis points either up or down in 100
basis point increments. The NPV is defined as the present value of expected cash
flows from existing assets less the present value of expected cash flows from
existing liabilities plus the present value of net expected cash inflows from
existing off-balance sheet contracts.
The OTS provides all institutions that file a schedule entitled the
Consolidated Maturity & Rate Schedule ("CMR") as a part of their quarterly
Thrift Financial Report with an interest rate sensitivity report of NPV. The OTS
simulation model uses a discounted cash flow analysis and an option-based
pricing approach to measuring the interest rate sensitivity of NPV. The OTS
model estimates the economic value of each type of asset, liability, and
off-balance sheet contract under the assumption that the Treasury yield curve
shifts instantaneous and parallel up and down 100 to 400 basis points in 100
basis points increments. The OTS allows thrifts under $500 million in total
assets to use the results of their interest rate sensitivity model, which is
based on information provided by the institution, to estimate the sensitivity of
NPV.
The OTS model utilizes an option-based pricing approach to estimate the
sensitivity of mortgage loans. The most significant embedded option in these
types of assets is the prepayment option of the borrowers. The OTS model uses
various price indications and prepayment assumptions to estimate sensitivity of
mortgage loans.
In the OTS model, the value of deposit accounts appears on the asset
and liability side of the NPV analysis. In estimating the value of certificates
of deposit accounts ("CD"), the liability portion of the CD is represented by
the implied value when comparing the difference between the CD face rate and
available wholesale CD rates. On the asset side of the NPV calculation, the
value of the "customer relationship" due to the rollover of retail CD deposits
represents an intangible asset in the NPV calculation.
Other deposit accounts such as NOW accounts, money market demand
accounts, passbook accounts, and non-interest-bearing accounts also are included
on the asset and liability side of the NPV calculation in the OTS model. These
accounts are valued at 100% of the respective account balances on the liability
side. On the asset side of the analysis, the value of the "customer
relationship" of the various types of deposit accounts is reflected as a deposit
intangible.
The NPV sensitivity of borrowed funds is estimated by the OTS model
based on a discounted cash flow approach.
The OTS uses, as a critical point, a change of plus or minus 200 basis
points in order to set its "normal" institutional results and peer comparisons.
A resulting change in NPV of more than 2% of the estimated market value of its
assets will require the institution to deduct from its capital 50% of that
excess change. The rules provide that the OTS will calculate the IRR component
quarterly for each institution. The greater the change, positive or negative, in
NPV, the more interest rate risk is assumed to exist with the institution. The
following table lists the Bank's latest percentage change in NPV assuming an
immediate change of plus or minus 100, 200, 300 and 400 basis points from the
level of interest rates at September 30, 1998.
23
<PAGE>
NPV as % of PV
Net Portfolio Value of Assets
- ------------------------------------- ----------------------------------
Change NPV
in Rates $ Amount $Change(1) %Change(2) Ratio(3) Change(4)
- -------- -------- ---------- ---------- -------- ---------
(Dollars in Thousands)
+400 bp 38,165 -23,881 -38% 9.95% -489 bp
+300 bp 45,488 -16,558 -27% 11.56% -328 bp
+200 bp 52,391 -9,654 -16% 13.00% -184 bp
+100 bp 58,190 -3,855 -6% 14.14% -70 bp
0 bp 62,046 14.84%
-100 bp 63,562 1,516 +2% 15.04% +20 bp
-200 bp 65,262 3,216 +5% 15.27% +43 bp
-300 bp 67,866 5,820 +9% 15.67% +84 bp
-400 bp 70,828 8,783 +14% 16.13% +129 bp
(1) Represents the excess (deficiency) of the estimated NPV assuming the
indicated change in interest rates minus the estimated NPV assuming no
change in interest rates.
(2) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
(3) Calculated as the estimated NPV divided by average total assets.
(4) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
September 30, September 30,
1998 1997
------------- -------------
*** RISK MEASURES: 200 BP RATE SHOCK ***
Pre-Shock NPV Ratio: NPV as % of PV of Assets... 14.84% 14.11%
Exposure Measure: Post-Shock NPV Ratio.......... 13.00% 10.91%
Sensitivity Measure: Change in NPV Ratio........ -184 bp -320 bp
*** CALCULATION OF CAPITAL COMPONENT ***
Change in NPV as % of PV of Assets.............. 2.31% 3.76 %
Interest Rate Risk Capital Component ($000)..... $ 0 $3,643
24
<PAGE>
As the table shows, increases in interest rates would result in net
decreases in the Bank's NPV, while decreases in interest rates will result in
smaller net increases in the Bank's NPV. Based on these specific OTS
regulations, the Bank would be required to deduct $3.7 million from total
capital for purposes of calculating the Bank's risk-based capital requirement.
(The Bank's NPV decreases by 3.2% if interest rates increase by 200 basis
points.) Certain shortcomings are inherent in the methodology used in the above
table. Modeling changes in NPV requires the making of certain assumptions that
may tend to oversimplify the manner in which actual yields and costs respond to
changes in market interest rates. First, the models assume that the composition
of the Bank's interest sensitive assets and liabilities existing at the
beginning of a period remains constant over the period being measured. Second,
the models assume that a particular change in interest rates is reflected
uniformly across the yield curve regardless of the duration to maturity or
repricing of specific assets and liabilities. Accordingly, although the NPV
measurements do provide an indication of the Bank's interest rate risk exposure
at a particular point in time, such measurements are not intended to provide a
precise forecast of the effect of changes in market interest rates on the Bank's
net interest income.
In times of decreasing interest rates, the value of fixed-rate assets
could increase in value and the lag in repricing of interest rate sensitive
assets could be expected to have a positive effect on the Bank.
Prompt Corrective Action. The FDICIA also established a system of
prompt corrective action to resolve the problems of undercapitalized
institutions. Under this system, the banking regulators are required to take
certain supervisory actions against undercapitalized institutions, the severity
of which depends upon the institution's degree of capitalization. Under the OTS
final rule implementing the prompt corrective action provisions, an institution
shall be deemed to be (i) "well capitalized" if it has total risk-based capital
of 10.0% or more, has a Tier I risk-based capital ratio (core or leverage
capital to risk-weighted assets) of 6.0% or more, has a leverage capital 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
I risked-based ratio of 4.0% or more and a 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 6.0%, a Tier I risk-based capital ratio that is
less than 4.0% or a leverage capital ratio that is less than 4.0% (3.0% in
certain circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a leverage capital ratio that is less than 3.0%
and (v) "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2.0%. In addition, under certain
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). Immediately upon becoming undercapitalized, an institution
shall become subject to various restrictions and could be subject to additional
supervisory actions.
The Bank is currently a "well capitalized institution" as defined in
the prompt corrective action regulations and as such is not subject to any
prompt corrective action measures.
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days' advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company. In
addition, the Bank may not declare or pay a cash dividend on its capital stock
if the effect thereof would be to reduce the regulatory capital of the Bank
below the amount required for the liquidation account to be established in
connection with the Conversion.
25
<PAGE>
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. As of
September 30, 1998, the Bank was a Tier 1 institution. In the event the Bank's
capital fell below its fully phased-in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
Finally, under the FDICIA, a savings association is prohibited from
making a capital distribution if, after making the distribution, the savings
association would be "undercapitalized" (not meet any one of its minimum
regulatory capital requirements).
Qualified Thrift Lender Test. The Home Owners' Loan Act ("HOLA"), as
amended, requires savings institutions to meet a QTL test. If the Bank maintains
an appropriate level of Qualified Thrift Investments (primarily residential
mortgages and related investments, including certain mortgage-backed securities)
("QTIs") and otherwise qualifies as a QTL, it will continue to enjoy full
borrowing privileges from the FHLB of Dallas. The required percentage of QTIs is
65% of portfolio assets (defined as all assets minus intangible assets, property
used by the institution in conducting its business and liquid assets equal to
10% of total assets). Certain assets are subject to a percentage limitation of
20% of portfolio assets. In addition, savings associations may include shares of
stock of the FHLBs, FNMA and FHLMC as qualifying QTIs. The FDICIA also amended
the method for measuring compliance with the QTL test to be on a monthly basis
in nine out of every 12 months, as opposed to on a daily or weekly average of
QTIs. As of September 30, 1998, the Bank was in compliance with its QTL
requirement with 99.04% of its assets invested in QTIs.
A savings association that does not meet a QTL test must either convert
to a bank charter or comply with the following restrictions on its operations:
(i) the savings association 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 savings
association shall be restricted to those of a national bank; (iii) the savings
association shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the savings association 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 association 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).
Loans-to-One Borrower. See "Business -- Lending Activities -- Loans-to-One
Borrower."
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and
26
<PAGE>
moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OTS, in connection with its examination of a savings
institution, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution. Current law requires public disclosure of an
institution's CRA rating and requires the OTS to provide a written evaluation of
an institution's CRA performance utilizing a four-tiered descriptive rating
system in lieu of the existing five-tiered numerical rating system. The OTS
reported that Teche Federal had a "satisfactory record of meeting community
credit needs," in its last examination dated January 5, 1998. The OTS further
stated that "an institution in this group has an outstanding record of, and is a
leader in, ascertaining and helping to meet the credit needs of its entire
delineated community, including low- and moderate-income neighborhoods, in a
manner consistent with its resources and capabilities."
Transactions With Affiliates. Generally, restrictions on transactions
with affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the Bank as
comparable transactions with non-affiliates. In addition, certain of these
transactions are restricted to an aggregate percentage of the Bank's capital;
collateral in specified amounts must usually be provided by affiliates to
receive loans from the Bank. Affiliates of the Bank include the Company and any
company which would be under common control with the Bank. In addition, a
savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of any
affiliate which is not a subsidiary. The OTS has the discretion to treat
subsidiaries of savings associations as affiliates on a case-by-case basis.
The Bank's authority to extend credit to its officers, directors and
10% shareholders, as well as to entities that such persons control is currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O
promulgated by the Federal Reserve Board. Among other things, these regulations
require such loans to be made on terms substantially similar to those offered to
unaffiliated individuals, place limits on the amount of loans the Bank may make
to such persons based, in part, on the Bank's capital position, and require
certain approval procedures to be followed. OTS regulations, with minor
variation, apply Regulation O to savings associations.
Branching by Federal Savings Banks. Effective May 11, 1992, the OTS
amended its Policy Statement on Branching by Federal Savings Associations to
permit interstate branching to the full extent permitted by statute (which is
essentially unlimited). This permits savings associations with interstate
networks to diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
associations. However, the OTS will evaluate a branching applicant's record of
compliance with the CRA. A poor CRA record may be the basis for denial of a
branching application.
Liquidity Requirements. All savings associations 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 associations. At the present time, the required liquid
asset ratio is 4%. At September 30, 1998, the Bank's liquidity ratio was 7.49%.
Liquid assets for purposes of this ratio include specified short-term
assets (e.g., cash, certain time deposits, certain banker's acceptances and
short-term U.S. Government obligations), and long-term assets (e.g., U.S.
Government obligations of more than one and less than five years and state
agency obligations
27
<PAGE>
with a minimum term of 18 months). The regulations governing liquidity
requirements include as liquid assets debt securities hedged with forward
commitments obtained from, or debt securities subject to repurchase agreements
with, members of the Bank of Primary Dealers in United States Government
Securities or banks whose accounts are insured by the FDIC, debt securities
directly hedged with a short financial future position, and debt securities that
provide the holder with a right to redeem the security at par value, regardless
of the stated maturities of the securities. FIRREA also authorized the OTS to
designate as liquid assets certain mortgage-related securities with less than
one year to maturity. Short- term liquid assets currently must constitute at
least 1% of an association's average daily balance of net withdrawable deposit
accounts and current borrowings. Monetary penalties may be imposed upon
associations for violations of liquidity requirements.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Dallas, which is one of 12 regional FHLBs that administer the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB. As of
September 30, 1998, the Bank had $67.7 million borrowed from the FHLB of Dallas
to fund operations; however, there can be no assurances that additional
borrowings will not be made in the future.
As a member, the Bank 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. As of September 30, 1998, the Bank had $3.9 million
in FHLB stock, which was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings associations 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. For the fiscal year ended September 30, 1998, dividends paid by
the FHLB of Dallas to the Bank totalled $232,419.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS. At September
30, 1998, the Bank's total transaction accounts were in compliance with the
Federal Reserve Board requirements.
Savings associations have authority to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve policy generally requires savings
associations to exhaust all OTS sources before borrowing from the Federal
Reserve System. The Bank had no such borrowings at September 30, 1998.
State Taxation
The Louisiana Corporation Income Tax Act provides for an exemption from
the Louisiana Corporation Income Tax for mutual savings banks and for banking
corporations, which includes stock associations (e.g., the Bank). However, this
exemption does not extend to non-banking entities such as the Company. The
non-banking subsidiaries of the Bank (as well as the Company) are subject to the
Louisiana Corporate Income Tax based on their Louisiana taxable income, as well
as franchise taxes. The Louisiana Corporation Income Tax applies at graduated
rates from 4% upon the first $25,000 of
28
<PAGE>
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 and an allowance for net operating losses, if any. Beginning January
1, 1996, the Company became subject to the Louisiana Shares Tax and the
Louisiana Franchise Tax. The Louisiana Shares Tax is imposed on the assessed
value of the Bank's stock. The formula for deriving the assessed value is to
calculate 15% of the sum of (i) 20% of a corporation's capitalized earnings,
plus (ii) 80% of a corporation's taxable stockholders' equity, and to subtract
from that amount 50% of a corporation's real and personal property assessment.
Other various items may also be subtracted in calculating a corporation's
capitalized earnings. The Louisiana Shares Tax and the Louisiana Franchise Tax
was approximately $541,653 (net of taxes) for the year ended September 30, 1998.
Item 2. Description of Properties
- -----------------------------------
Properties
The Bank operates from its main office located at 211 Willow Street,
Franklin, Louisiana and eight branch offices. The Bank's total investment in
office property and equipment is $12.8 million with a net book value of $8.8
million at September 30, 1998. The Bank currently operates automated teller
machines at most of its branch offices.
Item 3. Legal Proceedings
- --------------------------
Neither the Company nor its subsidiaries are involved in any pending
legal proceedings, other than routine legal matters occurring in the ordinary
course of business, which in the aggregate involve amounts which are believed by
management to be immaterial to the consolidated financial condition or results
of operations of the Company.
Item 4. Submission of Matters to a Vote of Security-Holders
- ------------------------------------------------------------
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Market and Dividend Information" in
the Registrant's Annual Report to Stockholders for the fiscal year ended
September 30, 1998 ("Annual Report") on page 3, and is incorporated herein by
reference.
Item 6. Selected Financial Data
- --------------------------------
The above-captioned information appears under "Selected Financial and
Other Data" in the Annual Report on page 2, and is incorporated herein by
reference.
29
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
- --------------------------------------------------------------------------------
The above-captioned information appears under Management's Discussion
and Analysis of Financial Condition and Results of Operations in the Annual
Report on pages 4 through 10 and is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
See Net Portfolio Value Analysis on pages 22 through 24.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The Consolidated Financial Statements of Teche Holding and its
subsidiaries, together with the report thereon by Deloitte & Touche, LLP appears
in the Annual Report on pages 11 through 30 and are incorporated herein by
reference.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the section captioned "Information with
Respect to Nominees for Director, Directors Continuing in Office, and Executive
Officers" at pages 4 to 8 of the Registrant's definitive proxy statement for the
Registrant's Annual Meeting of Stockholders to be held on January 20, 1999 (the
"Proxy Statement"), which was filed with the Commission on December 17, 1998 and
incorporated herein by reference. See also "Item 1. Business of the Bank --
Personnel" included herein.
Item 11. Executive Compensation
- --------------------------------
The information relating to executive compensation is incorporated
herein by reference to the Proxy Statement at pages 8 through 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Proxy Statement
at pages 1 through 3.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information relating to certain relationships and related
transactions is incorporated herein by reference to the Proxy Statement on page
14.
30
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Financial Statements of the Company are incorporated by reference to the
following indicated pages of the Annual Report.
PAGE
----
Independent Auditors' Report...................................... 11
Consolidated Balance Sheets as of September 30, 1998 and 1997..... 12
Consolidated Statements of Income For the Years Ended
September 30, 1998, 1997 and 1996............................... 13
Consolidated Statements of Stockholders' Equity
for the Years Ended September 30, 1998, 1997 and 1996........... 14
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1998, 1997 and 1996............................... 15
Notes to Consolidated Financial Statements........................ 17
The remaining information appearing in the Annual Report is not deemed
to be filed as part of this report, except as expressly provided herein.
(2) All schedules are omitted because they are not required or
applicable, or the required information is shown in the consolidated financial
statements or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Articles of Incorporation of Teche Holding Company*
3.2 Bylaws of Teche Holding Company*
4.0 Stock Certificate of Teche Holding Company*
10.1 Form of Teche Federal Savings Bank Management Stock Plan**
10.2 Form of Teche Holding Company 1995 Stock Option Plan**
11.0 Statement regarding computation of earnings per share (see
Note 1 to the Notes to Consolidated Financial Statements in
the Annual Report)
13.0 Annual Report to Stockholders for the fiscal year ended
September 30, 1998
21.0 Subsidiary of the Registrant (see "Item 1 Business -
Subsidiary Activity" herein)
23.0 Independent Auditors' Consent
27.0 Financial Data Schedule***
(b) Reports on Form 8-K.
None
- -----------------------------
* Incorporated herein by reference into this document from the Exhibits
to Form S-1, Registration Statement, initially filed with the
Commission on December 16, 1994, Registration No. 33-87486.
** Incorporated herein by reference into this document from the Exhibits
to the Registrant's Form 10-K for the fiscal year ended September 30,
1995, filed with the Commission.
*** Only in electronic filing.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TECHE HOLDING COMPANY
Dated: December 29, 1998 By: /s/Patrick O. Little
---------------------------------------
Patrick O. Little
President, Chief Executive
Officer and Director
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on December 29, 1998.
By: /s/Patrick O. Little By: /s/J. L. Chauvin
---------------------------------- -------------------------------
Patrick O. Little J. L. Chauvin
President, Chief Executive Officer Vice President and Treasurer
and Director (Principal Financial Officer)
(Principal Executive Officer)
By: /s/W. Ross Little By:
---------------------------------- -------------------------------
W. Ross Little Robert Earl Mouton
Chairman of the Board Director
By: /s/Mary Coon Biggs By: /s/Christian L. Olivier
---------------------------------- -------------------------------
Mary Coon Biggs Christian L. Olivier
Director Director
By: /s/Virginia Kyle Hine By:
---------------------------------- -------------------------------
Virginia Kyle Hine W. Ross Little, Jr.
Director Director and Secretary
By: /s/Henry L. Friedman By:
---------------------------------- -------------------------------
Henry L. Friedman Thomas F. Kramer, M.D.
Director Director
By: /s/Donelson T. Caffery, Jr.
----------------------------------
Donelson T. Caffery, Jr.
Director
EXHIBIT 13
<PAGE>
1998
ANNUAL REPORT
TECHE HOLDING
COMPANY
FRANKLIN, LOUISIANA
<PAGE>
Teche Holding Company New Iberia Breaux Bridge
211 Willow Street 529 N. Lewis 601 E. Bridge St.
Franklin, LA 70538 New Iberia, LA 70560 Breaux Bridge, LA 70517
(318)364-5528 (318)332-2149
Teche Federal Savings Bank
211 Willow Street New Iberia Houma
Franklin, LA 70538 142 W. St. Peter St. 706 Barrow
Telephone: (318)828-3212 New Iberia, LA 70560 Houma, LA 70360
LA WATS (800)256-1500 (318)364-5145 (504)868-8766
FAX (318)828-0110
Call Center (800)897-0315 Lafayette Houma
Downtown 1983 Prospect Street
1001 Johnston Houma, LA 70363
Lafayette, LA 70501 (504)857-9990
(318)232-6463
Morgan City Houma
1001 7th St. Lafayette Winn Dixie Market Place
Morgan City, LA 70380 2306 W. Pinhook 1218 St. Charles
(504)384-0653 Lafayette, LA 70508 Houma, LA 70360
(318)232-3419 (504)873-5799
Bayou Vista Lafayette Thibodaux
206 Arlington Marketing/Auditing Winn Dixie Market Place
Bayou Vista, LA 70380 606 Lee Avenue 375 North Canal Blvd
(504)395-5244 Lafayette, LA 70501 Thibodaux, LA 70302
(318)237-8066 (504)446-6707
Table of Contents
Page
President's Message ......................................................1
Selected Financial Information ...........................................2
Business of The Company & Business of the Bank ...........................3
Market and Dividend Information ..........................................3
Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................................4
Independent Auditors' Report ............................................11
Consolidated Balance Sheets .............................................12
Consolidated Statements of Income .......................................13
Consolidated Statements of Stockholders' Equity .........................14
Consolidated Statements of Cash Flows ...................................15
Notes to Consolidated Financial Statements ..............................17
Directors and Officers ..................................................31
General Information .....................................................31
<PAGE>
TECHE HOLDING
COMPANY
President's Message
- --------------------------------------------------------------------------------
Dear Fellow Shareholders,
1998 was an eventful and rewarding year. We look forward to the
opportunities and challenges ahead while continuing to build value for our
stockholders and serve our local communities and customers.
The continued consolidation of the banking industry in our area has
created opportunities for independent locally owned institutions such as Teche
as customers seek more individual attention.
During 1998, the number of checking accounts, balances and the fees
associated with them have continued to grow. This growth has contributed
significantly to the bottom line in terms of noninterest income as well as net
interest margin. We plan to continue our growth in these areas through continued
marketing and additional locations to serve customers.
During 1998 we opened three new offices in the LaFourche/Terrebonne
area, including our first two supermarket branches and our first office in
LaFourche Parish. Furthermore, we believe the new Teche office on Prospect
Boulevard in Houma will provide a higher level of convenience with three offices
throughout Houma.
Simultaneously, we have begun construction on our new Broadmoor branch
on Johnston Street in Lafayette. We expect this branch to be open in the spring
of 1999. The Franklin branch should be complete by the end of 1999, and the new
operations and administrative center should be complete in 2000. On the lending
side, our home equity loan program was successful in 1998 and is an important
part of our plans going forward.
Over the last four years our annualized growth has been approximately
11%. While we showed little growth during 1998, we will continue to seek growth
in consumer loans, core deposits, net interest margin and noninterest income.
We have been working diligently with our data processor FiServ to be
sure that the Year 2000 concerns are taken in stride. While there can be no
assurances at this time, we fully anticipate that January 1, 2000 will be a
non-event for our internal operations.
We thank you for the confidence you have placed in Teche as a
shareholder. Despite the current market difficulties, we continue to post
consistent earnings and dividends. We will continue to identify ways to serve
customers and reward shareholders
Wishing you a Merry Christmas and a prosperous New Year!
Sincerely,
/s/ Patrick O. Little
-----------------------------------
Patrick O. Little
<PAGE>
SELECTED FINANCIAL AND OTHER DATA (dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At or for the Year Ended September 30,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Assets $408,823 $404,097 $379,590 $323,852 $284,570
Loans Receivable, Net 345,172 346,875 316,216 257,869 233,554
Securities-Available for Sale 36,769 37,854 44,496 5,413 19,866
Securities-Held to Maturity -- -- -- 44,209 16,210
Cash and cash equivalents 10,680 5,868 7,072 6,400 6,604
Savings Deposits 279,265 280,302 254,723 233,805 236,736
FHLB Advances 67,721 65,398 66,900 24,200 23,800
Stockholders' Equity 52,527 54,359 52,282 61,908 20,963
Summary of Operations
Interest Income $ 30,357 $ 29,788 $ 26,591 $ 23,380 $ 20,770
Interest Expense 16,712 16,681 14,003 12,053 9,708
------- -------- -------- -------- --------
Net Interest Income 13,645 13,107 12,588 11,327 11,062
Provision for Loan Losses 180 240 300 360 577
------- -------- -------- -------- --------
Net Interest Income after
provision for Loan Losses 13,465 12,867 12,288 10,967 10,485
Non-Interest Income 3,475 2,590 1,852 1,029 844
SAIF Special Assessment 1,824
Non-Interest Expenses 11,198 9,867 8,616 6,405 5,414
------- -------- -------- -------- --------
Income Before Gains(Losses) on Sales of
Securities and Income Taxes 5,742 5,590 3,700 5,591 5,915
Gain (Loss)on Sale of Securities 138 274 91 (819) --
Income Tax Expense 2,067 1,997 1,270 1,635 1,970
------- -------- -------- -------- --------
Net Income
Actual $ 3,813 $ 3,867 $ 2,521 $ 3,137 $ 3,945
======= ======== ======== ======== ========
Before Special Assessment $ 3,725
========
Selected Financial Ratios
Ratio of Equity to Assets 12.8% 13.5% 13.8% 19.1% 7.4%
Book Value/Common Share $ 16.97 $ 15.81 $ 14.76 $ 14.63 N/A(1)
Dividends declared per Share $ 0.50 $ 0.50 $ 0.50 $ 0.25 N/A(1)
Basic Income per Common Share (2)
Actual $ 1.23 $ 1.26 $ 0.70 $ 0.46 N/A(1)
Before SAIF Special Assessment $ 1.03
Diluted income per common share (2)
Actual $ 1.17 $ 1.23 $ 0.70 $ 0.46 N/A(1)
Before SAIF Special Assessment $ 1.03
Annualized Return on Average Assets
Actual 0.94% 0.99% 0.72% 1.04% 1.51%
Before SAIF Special Assessment 1.07%
Annualized Return on Average Equity
Actual 6.79% 7.34% 4.29% 7.87% 20.19%
Before SAIF Special Assessment 6.33%
Net Interest Margin 3.45% 3.42% 3.68% 3.84% 4.35%
Other Non-Interest Exp/Avg Assets
Actual 2.75% 2.52% 3.00% 2.12% 2.07%
Before SAIF Special Assessment 2.48%
Other Non-Interest Inc/Average Assets 0.85% 0.66% 0.53% 0.34% 0.32%
Non-Performing Loans/Loans (3) 0.21% 0.32% 0.17% 0.26% 0.35%
Allowance for Loan Losses/Loans(3) 1.01% 0.96% 1.00% 1.14% 1.18%
Dividend Payout Ratio
Actual 40.65% 39.68% 71.43% 54.35% N/A(1)
Before SAIF Special Assessment 48.54%
</TABLE>
(1) There were no shares outstanding prior to April 17, 1995
(2) The income per share amounts for the years ended September 30,
1997, 1996 and 1995 have been retroactively restated in
connection with the Company's adoption of FASB Statement No. 128
in the year ended September 30, 1998. See Note 1 to the
consolidated financial statements.
(3) Total loans before allowance for loan losses
2
<PAGE>
Business of the Bank
Teche Federal Savings Bank (the "Bank") attracts savings deposits from the
general public and uses such deposits primarily to originate loans secured by
first mortgages on owner-occupied, one- to four-family residences in its primary
market area. To a lesser extent, the Bank purchases loans and originates
residential construction, multi-family and commercial real estate loans and
consumer loans, and invests in mortgage-backed and investment securities.
It is the Bank's intention, subject to the Board of Directors' fiduciary duties,
to remain an independent community savings bank serving the local banking needs
of its primary market area, which presently includes nine full service offices
in the Louisiana Parishes of St. Mary, Iberia, Lafayette, St. Martin, Terrebonne
and Lafourche. Deposits at Teche Federal are insured up to the maximum legal
amount by the FDIC.
Business of the Company
Teche Holding Company (the "Company") is a Louisiana corporation organized in
December 1994 at the direction of the Board of Directors of the Bank to acquire
all of the capital stock that the Bank issued upon its conversion from the
mutual to stock form of organization (the "Conversion").
Summary of Quarterly Operating Results
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
(Amounts in thousands, except for per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income $7,541 $7,595 $7,630 $7,591 $7,307 $7,332 $7,486 $7,663
Interest Expense 4,285 4,160 4,120 4,147 4,078 4,068 4,199 4,336
Net interest Income 3,256 3,435 3,510 3,444 3,229 3,264 3,287 3,327
Provision for Loan Losses 45 45 45 45 60 60 60 60
Income Before Income Taxes 1,404 1,517 1,592 $1,367 1,338 1,726 1,384 1,416
Net Income 913 996 1,014 890 883 1,143 911 930
Basic income per common share 0.30 0.32 0.33 0.29 0.29 0.38 0.30 0.30
Diluted Income per common share 0.28 0.30 0.31 0.28 0.29 0.37 0.29 0.29
</TABLE>
Market and Dividend Information
Teche Holding Company's common stock trades on the American Stock Exchange under
the symbol "TSH". The following sets forth the high and low sale prices and cash
dividends declared for the common stock for the last two year period.
<TABLE>
<CAPTION>
Cash
Quarter ended Sales Price Period End Close Dividend Declared Date Declared
High Low
<S> <C> <C> <C> <C> <C>
December 31, 1996 $14.375 $13.000 $14.375 $0.125 December 17, 1996
March 31, 1997 $16.375 $14.375 $16.375 $0.125 February 19, 1997
June 30, 1997 $19.375 $15.500 $19.000 $0.125 May 19, 1997
September 30, 1997 $20.625 $17.500 $20.625 $0.125 August 20, 1997
December 31, 1997 $24.000 $20.000 $22.250 $0.125 November 17, 1997
March 31, 1998 $22.875 $20.000 $22.750 $0.125 February 18, 1998
June 30, 1998 $22.375 $18.125 $19.625 $0.125 May 19, 1998
September 30, 1998 $20.000 $14.375 $15.125 $0.125 August 19, 1998
</TABLE>
According to the records of the Company's transfer agent, there were 646
registered stockholders of record at December 1, 1998. This number does not
include any persons or entities who hold their stock in nominee or "street" name
through various brokerage firms.
The Company's ability to pay dividends is substantially dependent upon the
dividends it receives from the Bank. Under current regulations, the Bank is not
permitted to pay dividends if its regulatory capital would thereby be reduced
below (1) the amount then required for the liquidation account established in
connection with the Bank's conversion from mutual to stock form, or (2) the
regulatory capital requirements imposed by the Office of Thrift Supervision
("OTS"). Capital distributions are also subject to certain limitations based on
the Bank's net income. See Notes 9, 18 and 19 of notes to Consolidated Financial
Statements. The Bank's total capital at September 30, 1998 exceeded the amounts
of its liquidation account and regulatory capital requirements.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
General
The Private Securities Litigation Reform act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believe", "anticipates", "contemplates", "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rate risks associated with the effect of opening new
branches, the ability to control costs and expenses, and general economic
conditions. Teche Holding Company undertakes no obligation to publicly release
the results of any revisions to those forward looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrences of unanticipated events.
The Company's consolidated results of operation are primarily dependent on the
Bank's net interest income, or the difference between the interest income earned
on its loan, mortgage-backed securities and investment securities portfolios,
and the interest expense paid on its savings deposits and other borrowings. Net
interest income is affected not only by the difference between the yields earned
on interest-earning assets and the costs incurred on interest-bearing
liabilities, but also by the relative amounts of such interest-earning assets
and interest-bearing liabilities.
Other components of net income include: provisions for losses on loans and other
assets; noninterest income (primarily, service charges on deposit accounts and
other fees, net rental income, and gains and losses on investment activities);
noninterest expenses (primarily, compensation and employee benefits, federal
insurance premiums, office occupancy expense, marketing expense and expenses
associated with foreclosed real estate) and income taxes.
Earnings of the Company also are significantly affected by economic and
competitive conditions, particularly changes in interest rates, government
policies and regulations of regulatory authorities.
References to the "Bank" herein, unless the context requires otherwise, refer to
the Company on a consolidated basis.
Management Strategy
Management's strategy has been to maximize earnings and profitability through
steady growth while maintaining asset quality. The Bank's lending strategy has
historically focused on the origination of traditional one- to four-family
mortgage loans with the primary emphasis on single family residences in the
Bank's primary market area. This focus, because home mortgage lending is
typically considered to be one of the safer forms of lending, is designed to
reduce the risk of loss on the Bank's loan portfolio. However, the relative lack
of diversification in its loan portfolio structure does increase the Bank's
portfolio concentration risk by making the value of the portfolio relatively
more susceptible to declines in real estate values in its market area. The Bank
supplements its home lending operations with the origination of home equity and
other consumer tyupes of loans, and the purchase of loans, investments and
mortgage-backed securities.
Asset and Liability Management
Interest Rate Sensitivity Analysis. Net interest income, the primary component
of the Bank's net income, is derived from the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities. The Bank
has sought to manage its exposure to changes in interest rates by monitoring the
effective maturities or repricing characteristics of its interest-earning assets
and interest-bearing liabilities. The matching of the Bank's assets and
liabilities may be analyzed by examining the extent to which its assets and
liabilities are interest rate sensitive and by monitoring the expected effects
of interest rate changes on its net interest income and net portfolio value.
The ability to maximize net interest income is largely dependent upon achieving
a positive interest rate spread that can be sustained during fluctuations in
prevailing interest rates. The Bank is exposed to interest rate risk as a result
of the difference in the maturity of interest-bearing liabilities and
interest-earning assets and the volatility of interest rates. Since most deposit
accounts react more quickly to market interest rate movements than do
traditional mortgage loans because of their shorter terms to maturity, increases
in interest rates may have an adverse effect on the Bank's earnings. Conversely,
this same mismatch will generally benefit the Bank's earnings during periods of
declining or stable interest rates.
4
<PAGE>
Teche Federal attempts to manage its interest rate exposure by shortening the
maturities of its interest-earning assets by emphasizing adjustable rate
mortgages ("ARMs"), originating shorter term loans such as residential
construction and consumer loans and the investment of excess liquidity in
purchased loans, adjustable rate mortgage-backed securities and other securities
with relatively short terms to maturity. Furthermore, Teche Federal works to
manage the interest rates it pays on deposits while maintaining a stable deposit
base and providing quality services to its customers. In recent years, the Bank
has increased its short-term borrowings while continuing to rely primarily upon
deposits as its source of funds. At September 30, 1998, the weighted average
term to repricing of Teche Federal's ARM loan and mortgage-backed securities
portfolio was approximately 26 months. In contrast, $110.2 million of the Bank's
certificate accounts and $71.5 million of the Bank's regular deposit accounts
(e.g. NOW, money market, savings) out of $279.3 million of total deposits mature
or reprice within one year or less. Based on past experience, however,
management believes that much of the Bank's deposits will remain at the Bank.
Furthermore, the Bank has approximately $37.1 million in short-term advances and
$12.8 million in adjustable rate mortgage-backed securities.
Management believes that it has adequate capital to accept a certain degree of
interest rate risk. In accepting some interest rate risk, the Bank has been able
to increase its net interest income in the low interest rate environment that
has existed during earlier years. Should interest rates rise, management
believes the Bank's capital position will enable it to withstand such a negative
impact on earnings while the Bank adds higher yielding assets.
Rate/Volume Analysis. The table below sets forth certain information regarding
changes in interest income and interest expense of the Bank for 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 (changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); and (iii) the net change.
The changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
<TABLE>
<CAPTION>
Year Ended September 30,
1998 vs 1997 1997 vs 1996
------------------------------------------------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Net Volume Rate Net
------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities(1) $ (87) $(317) $(404) $ (636) $ (21) $ (657)
Loans receivable, net 1066 (137) 929 4,116 (277) 3,839
Other interest-earning assets (2) (23) 67 44 (14) 29 15
------ ----- ----- ------ ----- ------
Total Interest Earning Assets 956 (387) 569 3,466 (269) 3,197
------ ----- ----- ------ ----- ------
Interest-bearing liabilities
Deposits 185 (307) (122) 1,085 290 1,375
FHLB advances 204 (51) 153 1,255 48 1,303
------ ----- ----- ------ ----- ------
Total interest-bearing liabilities 389 (358) 31 2,340 338 2,678
------ ----- ----- ------ ----- ------
Net change in net interest income $ 567 $ (29) $ 538 $1,126 $(607) $ 519
====== ===== ===== ====== ===== ======
</TABLE>
(1) Includes investment securities available for sale
(2) Includes certificates of deposit and other interest-bearing accounts.
5
<PAGE>
Average Balance Sheet. The following table sets forth certain information
relating to the Company's actual and average balance sheet and reflects the
actual and average yield on assets and actual and average cost of liabilities
for the periods indicated and the actual and average yields earned and rates
paid. Such yields and costs are derived by dividing income or expenses by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances. Management does
not believe that the use of month-end balances instead of daily average balances
has caused any material differences in the information presented.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest Earning Assets
Securities, Net (1) $ 42,769 $ 2,682 6.27% $ 44,038 $ 3,086 7.01% $ 53,072 $ 3,743 7.05%
Loans receivable (2)(3) 349,769 27,470 7.85% 336,509 26,541 7.89% 283,962 22,702 7.99%
Other Interest-earning
assets(4) 2,475 205 8.28% 3,056 161 5.27% 4,724 146 3.09%
-------- ------- -------- ------- -------- -------
Total interest-earning assets 395,013 30,357 7.69% 383,603 29,788 7.77% 341,758 26,591 7.78%
======= ======= =======
Non-interest earning assets 12,436 8,464 6,543
-------- -------- --------
Total assets $407,449 $392,067 $348,301
======== ======== ========
Liabilities and Equity
Interest-bearing Liabilities
NOW accounts $ 22,545 $ 397 1.76% $ 20,244 $ 357 1.76% $ 20,347 $ 320 1.57%
Statement & regular
savings accounts 25,861 663 2.56% 25,160 655 2.60% 25,815 708 2.74%
Money funds accounts 9,342 343 3.67% 9,696 346 3.57% 10,615 391 3.68%
Certificates of Deposit 207,722 11,509 5.54% 206,273 11,676 5.66% 182,518 10,240 5.61%
-------- ------- -------- ------- -------- -------
Total Deposits 265,470 12,912 4.86% 261,373 13,034 4.99% 239,295 11,659 4.87%
FHLB advances 68,306 3,800 5.56% 64,685 3,647 5.64% 42,405 2,344 5.53%
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities 333,776 16,712 5.01% 326,058 16,681 5.12% 281,700 14,003 4.97%
======== ======= ======== ======= ======== =======
Non-interest-bearing
liabilities 17,488 13,351 7,801
-------- -------- -------
Total liabilities 351,264 339,409 289,501
Stockholders' Equity 56,185 52,658 58,800
-------- -------- -------
Total liabilities and
Stockholders' Equity $407,449 $392,067 $348,301
======== ======== ========
Net interest income/interest
rate spread (5) $13,645 2.68% $ 12,588 2.81%
======= ========
Net interest margin (6) 3.45% 3.42% 3.68%
Interest-earning assets/
Interest bearing liabilities 118.35% 117.65% 121.32%
</TABLE>
(1) Includes securities available for sale and unamortized discounts and
premiums and FHLB stock
(2) Amount is net of deferred loan fees, loan discounts and premiums,
loans-in-process and allowance for loan losses and includes non-accruing
loans.
(3) Interest income includes loan fees of approximately $86,000 in 1998,
$106,000 in 1997 and $87,000 in 1996.
(4) Amount includes certificates of deposit and other interest-bearing deposits
(5) Interest rate spread represents the difference between the yield on average
interest-earning assets and the cost of average interest-bearing
liabilities
(6) Net interest margin represents net interest income divided by average
interest-earning assets.
6
<PAGE>
Changes in Financial Condition From September 30, 1997 to September 30, 1998
General. Total assets increased $ 4.7 million, or 1.2% to $408.8 million at
September 30, 1997 from $ 404.1 million at September 30, 1996, as a result of
continued branch expansion and the purchase of property for construction of a
central operations center.
Loans Receivable, Net. The Bank's net loans receivable decreased $1.7 million or
0.4% to $345.2 million from $346.9 million at September 30, 1997 due primarily
to reduced loan volume and repayments. Of all real estate loans originated in
fiscal 1998, 60% had adjustable rates.
Deposits. The Bank's deposits, after interest credited, remained relatively
stable for the year, decreasing only $1 million or 0.4% to $ 279.3 million at
September 30, 1998 from $280.3 million at September 30, 1997 primarily due to
deposit withdrawals offset somewhat by interest credited.
Advances From FHLB. Advances from the Federal Home Loan Bank of Dallas increased
$2.3 million, or 3.6% to $ 67.7 from $65.4 million at September 30, 1997 as the
Bank was able to fund loan growth from deposits and other sources.
Stockholders' Equity. Stockholders' equity decreased $1.8 million, or 3.4% from
$54.4 million at September 30, 1997 to $52.5 million at September 30, 1997, due
primarily to the repurchase of common stock for the treasury pursuant to the
Company's stock repurchase program.
Comparison of Operating Results for Years ended September 30, 1996, 1997 and
1998.
Analysis of Net Income
General. The Bank reported net income of $3.8 million, $3.9 million and $2.5
million for fiscal 1998, 1997 and 1996. The decrease of $54,000 or 1.4% during
fiscal 1998 compared to fiscal 1997 was primarily due to increased net non
interest expense. The increase of $1.3 million or 53.4% during fiscal 1997
compared to fiscal 1996 was primarily due to the one time special assessment of
$1.8 million ($1.2 million net of income taxes) in fiscal 1996 as a result of
legislation enacted on September 30, 1996 to recapitalize the Savings
Association Insurance Fund ("SAIF"), which was not present in fiscal 1997.
Interest Income. Interest income amounted to $30.4 million, $29.8 million and
$26.6 million for the years ended 1998, 1997 and 1996, respectively. The
$569,000 or l.9% increase in fiscal 1998 was primarily due to increased average
home equity balances, offset somewhat by decreased yields on loans and
securities. The $3.2 million or 12.0% increase in fiscal 1997 was primarily due
to increased loans.
Interest Expense. Interest expense totaled $16.7 million, $16.7 million and
$14.0 million for the years ended September 1998, 1997 and 1996, respectively.
Interest expense remained relatively stable with an increase in average deposit
balances somewhat offset by decreased rates paid on deposits.
Net Interest Income. Net interest income amounted to $13.6 million, $13.1
million and $12.6 million for the years ended September 30, 1998, 1997 and 1996.
The $0.5 million, or 4.1% increase in fiscal 1998 was primarily due to increased
average home equity loan balances. The increase of $0.5 million or 4.1% from
fiscal 1996 to fiscal 1997 was primarily due to increased loan balances during
the year despite a general decline in the Bank's net interest rate spread and
margins during this period.
Provision for Loan Losses. The Bank provided $180,000, $240,000 and $300,000 to
the reserve for loan losses for the years ended September 30, 1998, 1997 and
1996, respectively. The allowance for loan losses was $3,355,000 at 1997 fiscal
year end and $3,515,000 at 1998 fiscal year end. The decrease in the provision
for loan losses in 1997 as compared to 1996 resulted from management's
evaluation of the adequacy of the allowance for loan losses.
While the Bank maintains its allowance for losses at a level which it considers
to be adequate to provide for potential losses, there can be no assurance that
further additions will not be made to the loss allowances and that such losses
will not exceed the estimated amounts. See Note 1 to Consolidated Financial
Statements.
Non-Interest Income. Non-interest income during the years ended September 30,
1998, 1997 and 1996 amounted to $3.48 million, $2.59 million and $1.9 million
respectively. The increases in both fiscal 1998 and fiscal 1997 were primarily
due to increased fee income due to an increase in transaction accounts.
7
<PAGE>
Non-Interest Expense. Absent the one-time SAIF special assessment in fiscal
1996, non-interest expense increased steadily over the three periods, totaling
$11.2 million, $9.9 million and $8.6 million during the years ended September
30, 1998, 1997 and 1996. The increases in both fiscal 1998 and 1997 were due to
continued expansion of office facilities, increased marketing expenses,
increased investment in new technology and increased costs due to being a public
company and higher compensation expense, including the cost of stock benefit
plans adopted in connection with the Bank's mutual to stock conversion and
company growth. The principal component of non-interest expense, compensation
and employee benefits, increased in each of the last three years. Other
operating expenses increased from $1.4 million to $1.6 million to $1.7 million
for the years ended September 30, 1996, 1997 and 1998, respectively.
On January 1, 1996, Teche became subject to the Louisiana Shares Tax and the
Louisiana Franchise Tax. This amounted to an expense of $541,000, $493,000 and
$387,000 in the years ended September 30, 1998, 1997 and 1996, respectively.
Gain on Sale of Securities. In the years ended September 30, 1998, 1997 and
1996, gains on the sale of securities amounted to $138,000, $274,000 and
$91,000, respectively.
Income Tax Expense. For the years ended September 30, 1998, 1997 and 1996, the
Bank incurred income tax expense of $2.1, $2.0 million and $1.3 million,
respectively. The varying amounts were caused primarily by the varied pre-tax
income of the Bank.
Year 2000. The "year 2000" issue is a general term used to describe the various
problems that may result from improper processing of dates and date-sensitive
calculations by computers, software, and other machinery. The problems generally
arise from the fact that most computers and software have historically used only
two digits to identify the year in a date, often meaning that the computer will
not distinguish dates in the "2000's" from dates in the "1900's."
The following discussion of the implications of the Year 2000 problem for the
Bank, contains numerous forward looking statements based on inherently uncertain
information. The cost of the project and the date on which the Bank plans to
complete the internal Year 2000 modifications are based on management's
assumptions of future events including the continued availability of internal
and external resources, third party modifications and other factors. However,
there can be no guarantee that these statements will be achieved and actual
results could differ. Moreover, although management believes it will be able to
make the necessary modifications in advance, there can be no guarantee that
failure to modify the systems would not have a material adverse effect on the
Bank.
The Bank places a high degree of reliance on computer systems of third parties,
such as customers, suppliers, and other financial and governmental institutions.
Although the Bank is assessing the readiness of these third parties and
preparing contingency plans, there can be no guarantee that the failure of these
third parties to modify their systems in advance of December 31, 1999 would not
have a material adverse affect on the Bank.
The Bank has a year 2000 committee that is addressing potential year 2000 issues
with its internal and external software and computer systems. The committee has
assessed the Bank's automated systems and has contacted third party vendors to
provide appropriate assurances regarding their ability to address any year 2000
issues.
Most of the critical data processing of the Bank is provided by a third party
national service bureau. This service bureau began renovations to their software
applications in the early 1990's to address year 2000 issues. The Bank is
currently assisting the service bureau in its internal core system testing which
will continue through December of 1998. During the test period the Bank will
also test its internal systems compatibility with that of the service bureau in
live data tests.
Total cost associated with required modifications to existing systems is not
expected to be material to the Company's financial position. No additional
outside personnel is expected to be needed to resolve any Year 2000 issues at
this time. The current estimated costs to replace some hardware and software
systems is approximately $210,000, some of which will be capitalized and
depreciated over approximately three years. The Bank does not separately track
the internal costs incurred for the Year 2000 project, such costs are
principally the related payroll costs.
The Bank has completed contacting all material customers and non-information
technology suppliers (i.e. utility systems, telephone systems and security
systems) regarding their Year 2000 state of readiness.
8
<PAGE>
The most likely worst case Year 2000 scenario is that data processing would be
temporarily interrupted (as much as 2 to 3 days) which would increase the time
necessary to service customers and may prevent some customers from being
serviced until the problem is corrected. The Bank believes that completed and
planned modifications to its internal systems will allow it to be ready for the
year 2000. However, factors outside of the Bank's control and unexpected service
bureau and other third party problems could impact the Bank's ability to process
data which could have a significant adverse impact on the financial condition
and results of operations of the Bank.
In the event that the year 2000 problems affect daily operations, the year 2000
committee is preparing daily operating procedures that should allow us to
provide most of our services. These procedures will be provided to each branch
and will be tested during 1999.
Despite the best efforts of management to address this issue, the vast number of
external entities that have direct and indirect business relationships with the
Bank, such as customer, vendors, payment systems providers and other financial
institutions, makes it impossible to assure that a failure to achieve compliance
by one or more of these entities would not have material adverse impact on the
operations of the Bank.
Liquidity and Capital Resources
The Bank is required to maintain minimum levels of "liquid assets," as defined
by the OTS regulations. This requirement, which may be varied from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The required minimum ratio at September
30, 1998 was four percent. The Bank's average liquidity ratio was approximately
7.49 percent during September 1998. The Bank manages its average liquidity ratio
to meet its funding needs, including: deposit outflows; disbursement of payments
collected from borrowers for taxes and insurance; repayment of Federal Home Loan
Bank advances and other borrowings; and loan principal disbursements. The Bank
also monitors its liquidity position in accordance with its asset/liability
management objectives.
In addition to funds provided from operations, the Bank's primary sources of
funds are: savings deposits; principal repayments on loans and mortgage-backed
securities; and matured or called investment securities. The Bank also borrows
funds from time to time from the Federal Home Loan Bank of Dallas (the "FHLB").
Scheduled loan repayments and maturing investment securities are a relatively
predictable source of funds. However, saving deposit flows and prepayments on
loans and mortgage-backed securities are significantly influenced by changes in
market interest rates, economic conditions and competition. The Bank strives to
manage the pricing of its deposits to maintain a balanced stream of cash flows
commensurate with its loan commitments and other predictable funding needs.
The Bank usually maintains a portion of its cash on hand in interest-bearing
demand deposits with the FHLB to meet immediate loan commitment and savings
withdrawal funding requirements. When applicable, cash in excess of immediate
funding needs is invested into longer-term investment and mortgage-backed
securities, some of which may also qualify as liquid investments under current
OTS regulations.
The Bank has other sources of liquidity if a need for additional funds arises,
such as FHLB of Dallas advances and the ability to borrow against
mortgage-backed and other securities. On September 30, 1998, the Bank had total
FHLB borrowings of $67.7million, or 16.6% of the Bank's assets.
Management believes the Bank has sufficient resources available to meet its
foreseeable funding requirements. At September 30, 1998, the Bank had
outstanding loan commitments of $13.9 million, and certificates of deposit
scheduled to mature within one year of $110.2 million, substantially all of
which management expects, based on past experience, will remain with the Bank.
Regulations of the OTS require the Bank to meet or exceed three separate
standards of capital adequacy. These regulations require financial institutions
to have minimum tangible capital equal to 1.50 percent of total adjusted assets;
minimum core capital equal to 4.00 percent of total adjusted assets; and
risk-based capital equal to 8.00 percent of total risk-weighted assets. At
September 30, 1998, Teche Federal exceeded all regulatory capital requirements.
See Note 18 to the Consolidated Financial Statements.
9
<PAGE>
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with Generally
Accepted Accounting Principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Bank's operations. Unlike most industrial companies, nearly all the assets
and liabilities of the Bank are financial. As a result, interest rates have a
greater impact on the Bank's performance than do the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
10
<PAGE>
Deloitte &
Touche
- ---------- -------------------------------------------------------
Deloitte & Touche LLP Telephone: (504) 581-2727
Suite 3700 Facsimile: (504) 561-7293
One Shell Square
701 Poydras Street
New Orleans, Louisiana 70139-3700
Board of Directors and Shareholders
Teche Holding Company
Franklin, Louisiana
We have audited the accompanying consolidated balance sheets of Teche Holding
Company and subsidiary as of September 30, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended September 30, 1998. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Teche Holding Company and
subsidiary as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
November 6, 1998
- ---------------
Deloitte Touche
Tohmatsu
- ---------------
11
<PAGE>
TECHE HOLDING COMPANY AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 10,680 $ 5,868
Certificates of deposit 658 634
Securities available-for-sale, at estimated market
value (amortized cost of $36,239 in 1998 and $37,297 in 1997) 36,769 37,854
Loans receivable, net of allowance for loan losses of
$3,515 in 1998 and $3,335 in 1997 345,172 346,875
Accrued interest receivable 2,065 2,051
Investment in Federal Home Loan Bank stock, at cost 3,884 3,927
Real estate owned, net 331 33
Prepaid expenses and other assets 500 501
Premises and equipment, at cost, less accumulated depreciation 8,764 6,354
-------- --------
TOTAL ASSETS $408,823 $404,097
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $279,265 $280,302
Advances from Federal Home Loan Bank 67,721 65,398
Borrowings for common stock repurchase 5,178 --
Advance payments by borrowers for taxes and insurance 1,644 1,742
Accrued interest payable 485 309
Accounts payable and other liabilities 1,223 1,123
Deferred income taxes 780 864
-------- --------
Total liabilities 356,296 349,738
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 10,000,000 shares authorized;
4,233,350 and 4,232,000 shares issued 42 42
Preferred stock, 5,000,000 shares authorized, none issued -- --
Additional paid-in capital 42,037 41,642
Retained earnings 28,757 26,536
Unearned ESOP shares (2,086) (2,419)
Unearned Compensation (MSP) (790) (1,258)
Treasury stock - 1,138,000 and 795,000 shares, at cost (15,783) (10,552)
Unrealized gain on securities available-for-sale, net
of deferred income taxes 350 368
-------- --------
Total stockholders' equity 52,527 54,359
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $408,823 $404,097
======== ========
</TABLE>
See notes to consolidated financial statements.
12
<PAGE>
TECHE HOLDING COMPANY AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
INTEREST INCOME:
<S> <C> <C> <C>
Interest and fees on loans $27,470 $26,541 $22,702
Interest and dividends on investment securities 585 997 1,699
Interest on mortgage backed securities 2,097 2,089 2,044
Other interest income 205 161 146
------- ------- -------
30,357 29,788 26,591
------- ------- -------
INTEREST EXPENSE:
Deposits 12,912 13,034 11,659
Advances from Federal Home Loan Bank 3,800 3,647 2,344
------- ------- -------
16,712 16,681 14,003
------- ------- -------
NET INTEREST INCOME 13,645 13,107 12,588
PROVISION FOR LOAN LOSSES 180 240 300
------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 13,465 12,867 12,288
NON-INTEREST INCOME:
Service charges 3,033 2,278 1,477
Gain on sale of real estate owned 13 94 19
Other income 429 218 356
------- ------- -------
Total non-interest income 3,475 2,590 1,852
------- ------- -------
GAIN ON SALE OF SECURITIES 138 274 91
------- ------- -------
NON-INTEREST EXPENSE:
Compensation and employee benefits 5,697 5,093 4,272
Occupancy, equipment and data processing expense 2,377 1,819 1,477
Marketing 737 602 488
SAIF deposit insurance premiums 172 225 543
SAIF special assessment -- -- 1,824
Louisiana shares tax 541 493 387
Other operating expenses 1,674 1,635 1,449
------- ------- -------
Total non-interest expense 11,198 9,867 10,440
------- ------- -------
INCOME BEFORE INCOME TAXES 5,880 5,864 3,791
INCOME TAXES 2,067 1,997 1,270
------- ------- -------
NET INCOME $ 3,813 $ 3,867 $ 2,521
======= ======= =======
BASIC INCOME PER COMMON SHARE $ 1.23 $ 1.26 $ .70
======= ======= =======
DILUTED INCOME PER COMMON SHARE $ 1.17 $ 1.23 $ .70
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
13
<PAGE>
TECHE HOLDING COMPANY AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Unrealized
Gain
(Loss) on
Additional Unearned Unearned Securities
Common Paid-In Retained ESOP Compensation Treasury Available-
Stock Capital Earnings Shares (MSP) Stock for-Sale, net Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, October 1, 1995 $42 $41,324 $23,555 $(3,083) $ -- $ -- $ 70 $61,908
Contribution to ESOP 112 332 444
Purchase of stock for Management (2,320) (2,320)
StockPlan ("MSP")
Amortization of MSP 420 420
Purchase of common stock
for treasury (9,149) (9,149)
Dividends declared -
$.50 per share (1,826) (1,826)
Net income 2,521 2,521
Change in unrealized gains on
securities available-for-sale, net 284 284
--- ------- ------- ------- ------- -------- ---- -------
BALANCE, September 30, 1996 42 41,436 24,250 (2,751) (1,900) (9,149) 354 52,282
Contribution to ESOP 206 332 538
Amortization of MSP 642 642
Purchase of common stock
for treasury (1,403) (1,403)
Dividends declared - $.50 per share (1,581) (1,581)
Net income 3,867 3,867
Change in unrealized gains on
securities available-for-sale, net 14 14
--- ------- ------- ------- ------- -------- ---- -------
BALANCE, September 30, 1997 42 41,642 26,536 (2,419) (1,258) (10,552) 368 54,359
Contribution to ESOP 284 333 617
Amortization of MSP 468 468
Tax benefit from vesting
of MSP shares 87 87
Exercise of stock options 24 24
Purchase of common stock
for treasury (5,231) (5,231)
Dividends declared - $.50 per share (1,592) (1,592)
Net income 3,813 3,813
Change in unrealized gains on
securities available-for-sale, net (18) (18)
--- ------- ------- ------- ------- -------- ---- -------
BALANCE, September 30, 1998 $42 $42,037 $28,757 $(2,086) $ (790) $(15,783) $350 $52,527
=== ======= ======= ======= ======= ======== ==== =======
</TABLE>
See notes to consolidated financial statements.
14
<PAGE>
TECHE HOLDING COMPANY AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,813 $ 3,867 $ 2,521
Adjustments to reconcile net income
to net cash provided by operating activities:
Accretion of discount and amortization of premium
on investments and mortgage-backed securities 12 (207) (657)
Provision for loan losses 180 240 300
ESOP expense 617 509 432
MSP expense 468 642 420
Deferred income taxes (change) (75) 797 (394)
Gain on sale of securities (138) (274) (91)
Gain on sale of real estate owned (13) (94) (19)
Gain on sale of other real estate -- -- (149)
Depreciation 704 513 404
Accretion of deferred loan fees and other (86) (106) (87)
Accretion of discount on loans (272) (212) (194)
Change in accrued interest receivable (14) (183) (116)
Change in prepaid expenses and other assets 1 282 (264)
Change in accrued interest payable 176 26 (44)
Change in accounts payable and other liabilities 100 (472) 859
SAIF special assessment payable -- (1,824) 1,824
Other - net (174) 96 (137)
------- ------- --------
Net cash provided by operating activities 5,299 3,600 4,608
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities
available-for-sale 3,000 7,550 10,300
Proceeds from sale of investment securities
available-for-sale 413 881 1,100
Purchase of investment securities available-for-sale (12,856) (8,389) (13,452)
Principal repayments on mortgage-backed securities
available-for-sale 10,627 7,102 6,385
Principal repayments on mortgaged-backed securities -- -- 1,966
held-to-maturity (24) 280 (324)
Net (increase) decrease in certificates of deposit
Net loan repayments(origination) 1,881 (30,581) (58,366)
Investment in FHLB stock 43 (224) (1,032)
Proceeds from sale of real estate -- 40 424
Purchase of premises and equipment (3,114) (2,375) (761)
------- ------- --------
Net cash used in investing activities (30) (25,716) (53,760)
------- ------- --------
</TABLE>
(Continued)
15
<PAGE>
TECHE HOLDING COMPANY AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (1,592) (1,581) (2,313)
Net increase (decrease) in deposits (1,037) 25,579 20,918
Net increase (decrease) in FHLB advances 2,323 (1,502) 42,700
Purchase of common stock for MSP -- -- (2,320)
Cash paid for purchase of common stock for treasury (400) (1,403) (9,149)
Borrowings under note payable agreement 347 -- --
(Decrease) increase in advance payments by borrowers
for taxes and insurance (98) (181) (12)
------ ------- -------
Net cash (used in) provided by financing activities (457) 20,912 49,824
------ ------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 4,812 (1,204) 672
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 5,868 7,072 6,400
------- ------- -------
CASH AND CASH EQUIVALENTS,
END OF YEAR $10,680 $ 5,868 $ 7,072
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $16,810 $16,655 $14,047
======= ======= =======
Income taxes paid $ 1,877 $ 1,515 $ 1,690
======= ======= =======
Financing and investing activities not
requiring the outflow of cash:
Reclassification of securities from
held-to-maturity to available-for-sale $ -- $ -- $42,000
======= ======= =======
Purchase of common stock for treasury
financed by seller $ 4,831 $ -- $ --
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
(Concluded)
16
<PAGE>
TECHE holding company and subsidiary
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company are described below.
Principles of Consolidation - The consolidated financial statements include the
accounts of Teche Holding Company and its wholly-owned subsidiary, Teche Federal
Savings Bank (collectively "the Company"). All significant intercompany balances
and transactions have been eliminated in consolidation. The Company is a retail
savings bank which attracts deposits from the general public and uses such
deposits primarily to originate loans secured by first mortgages on
owner-occupied, family residences.
Use of 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.
Cash and Cash Equivalents - Cash and cash equivalents comprise cash and
non-interest bearing and interest bearing demand deposits with other financial
institutions.
Securities - Securities designated as held-to-maturity are stated at cost
adjusted for amortization of the related premiums and accretion of discounts,
computed using the level yield method. The Company has the positive intent and
ability to hold these securities to maturity.
Securities designated as available-for-sale are stated at estimated market
value. Unrealized gains and losses are aggregated and reported as a separate
component of stockholders' equity, net of deferred income taxes. These
securities are acquired with the intent to hold them to maturity, but they are
available for disposal in the event of unforeseen liquidity needs.
Gains and losses on security transactions are determined on the specific
identification method.
Loans Receivable - Loans receivable are stated at the unpaid principal balances,
less the allowance for loan losses and net deferred loan fees, and unearned
discount. Unearned discount relates principally to installment loans. Interest
on loans is credited to operations based on the principal amount outstanding
using the interest method.
When the payment of principal or interest on a loan is delinquent for 90 days,
or earlier in some cases, the loan is placed on non-accrual status. When a loan
is placed on non-accrual status, interest accrued during the current year prior
to the judgment of uncollectibility is charged to operations. Interest accrued
during prior periods is charged to the allowance for loan losses. Loans are
returned to an accruing status only as payments are received and if collection
of all principal and interest is not in doubt. If doubt exists, any payments
received on such non-accrual loans are applied first to outstanding loan amounts
and next to the recovery of charged-off loan amounts. Any excess is treated as
recovery of lost interest.
The Company considers a loan to be impaired when, based upon current information
and events, it believes it is possible that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. The Company's impaired loans include troubled debt restructurings,
and performing and non-performing major loans in which full payment of principal
or interest is not expected. The Company calculates a reserve required for
impaired loans based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or the loan's observable
market price or the fair value of its collateral. The Company did not have a
significant amount of impaired loans at September 30, 1998 or 1997.
Allowance for Loan Losses - The allowance for loan losses is a valuation
allowance available for losses incurred on loans. Any losses are charged to the
allowance for loan losses when the loss actually occurs or when a determination
is made that a loss is likely to occur. Recoveries are credited to the allowance
at the time of recovery.
17
<PAGE>
Periodically during the year management estimates the likely level of losses to
determine whether the allowance for loan losses is adequate to absorb losses in
the existing portfolio. Based on these estimates, an amount is charged to the
provision for loan losses and credited to the allowance for loan losses in order
to adjust the allowance to a level determined to be adequate to absorb such
losses.
Management's judgment as to the level of losses on existing loans involves the
consideration of current and anticipated economic conditions and their potential
effects on specific borrowers; an evaluation of the existing relationships among
loans, known and inherent risks in the loan portfolio, and the present level of
the allowance; results of examination of the loan portfolio by regulatory
agencies; and management's internal review of the loan portfolio. In determining
the collectibility of certain loans, management also considers the fair value of
any underlying collateral.
It should be understood that estimates of loan losses involve an exercise of
judgment. While it is possible that in particular periods the Company may
sustain losses which are substantial relative to the allowance for loan losses,
it is the judgment of management that the allowance for loan losses reflected in
the consolidated balance sheets is adequate to absorb losses in the existing
loan portfolio.
Loan Fees, Loan Costs, Discounts and Premiums - Loan origination and commitment
fees, and certain direct loan origination costs are deferred and amortized as an
adjustment to the related loan's yield using the interest method over the
contractual life of the loan.
Discounts received in connection with mortgage loans purchased are amortized to
income over the contractual term of the loan using the interest method. These
discounts have been deducted from the related loan balances.
Premises and Equipment - The Company computes depreciation generally on the
straight-line method for both financial reporting and federal income tax
purposes. The estimated useful lives used to compute depreciation are: buildings
and improvements, twenty to forty years; and furniture, fixtures and equipment,
three to ten years.
Real Estate Owned - Real estate acquired through, or in lieu of, foreclosure is
initially recorded at the fair value at the time of foreclosure, less estimated
cost to dispose, and any related writedown is charged to the allowance for loan
losses. The fair values have not exceeded the balances of the related loans.
Valuations are periodically performed by management and provisions for estimated
losses on real estate owned are charged to operations when any significant and
permanent decline reduces the fair value, less sales costs, to less than the
carrying value. The ability of the Company to recover the carrying value of real
estate is based upon future sales of the real estate owned. The ability to
effect such sales is subject to market conditions and other factors, many of
which are beyond the Company's control. Operating income of such properties, net
of related expenses, and gains and losses on their disposition are included in
the accompanying consolidated statements of income.
Income Taxes - Income taxes are accounted for using the liability method.
Income Per Share - In February 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting No. 128, "Earnings Per Share."
This Statement simplifies the standards for computing income per common share
previously required under APB Opinion No. 15, "Earnings Per Share." Basic income
per common share (EPS) excludes dilution and is computed by dividing net income
by the weighted-average number of common shares outstanding for the period.
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 net
income of the Company. Diluted EPS is computed by dividing net income by the
total of the weighted-average number of shares outstanding plus the effect of
outstanding options and Management Stock Plan ("MSP") grants. SFAS No. 128 was
effective and was adopted by the Company for the year ended September 30, 1998,
and all prior period EPS data has been restated. The Company previously reported
primary income per share of $1.21 and $.68 for the years ended September 30,
1997 and 1996, respectively, and fully diluted income per share of $1.16 and
$.68 for the years ended September 30, 1997 and 1996, respectively. The Company
accounts for the shares acquired by the ESOP in accordance with Statement of
Position 93-6 and, therefore, shares controlled by the ESOP are not considered
in the weighted average shares outstanding until the shares are committed for
allocation to an employee's individual account.
18
<PAGE>
2. INTEREST RATE RISK
The Company is engaged principally in providing first mortgage loans to
individuals. At September 30, 1998 the Company had interest earning assets of
approximately $396,000,000, most of which will not mature or be repriced until
after five years. Interest bearing liabilities totaled approximately
$352,000,000, most of which will mature or can be repriced within one year. The
shorter duration of interest-sensitive liabilities indicates that in a rising
rate environment the Company is exposed to interest rate risk because
liabilities may be repricing faster at higher interest rates, thereby reducing
the market value of long-term assets and net interest income. In a falling rate
environment the market value of long-term assets and net interest income may be
increased.
3. SECURITIES
The amortized cost and estimated market values of securities available-for-sale
are as follows (in thousands):
<TABLE>
<CAPTION>
September 30, 1998
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Investment securities:
Obligations of U.S. government
corporations and agencies $ 4,332 $ 146 $ -- $ 4,478
Municipal obligations 246 -- -- 246
------- ------ ------ -------
4,578 146 -- 4,724
Mortgage-backed securities:
Government National Mortgage Corporation 965 77 -- 1,042
Federal Home Loan Mortgage Corporation 20,275 225 (1) 20,499
Federal National Mortgage Association 9,664 59 (44) 9,679
------- ------ ------ -------
30,904 361 (45) 31,220
Equity securities 757 104 (36) 825
------- ------ ------ -------
$36,239 $ 611 $ (81) $36,769
======= ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
September 30, 1997
-------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Investment securities:
Obligations of U.S. government
corporations and agencies $ 7,251 $ 61 $ -- $ 7,312
Municipal obligations 164 -- -- 164
------- ------ ------ -------
7,415 61 -- 7,476
------- ------ ------ -------
Mortgage-backed securities:
Government National Mortgage Corporation 1,163 97 -- 1,260
Federal Home Loan Mortgage Corporation 15,548 284 -- 15,832
Federal National Mortgage Association 13,171 115 -- 13,286
------- ------ ------ -------
29,882 496 -- 30,378
------- ------ ------ -------
$37,297 $ 557 $ -- $37,854
======= ====== ====== =======
</TABLE>
19
<PAGE>
The amortized cost and estimated market value of securities available-for-sale
at September 30, 1998, by contractual maturity, are shown below (in thousands):
Estimated
Amortized Market
Cost Value
Investment securities:
Due in one year or less $ 20 $ 20
Due after one year through five years 4,558 4,704
Mortgage-backed securities 30,904 31,220
Equity securities 757 825
-------- --------
$ 36,239 $ 36,769
======== ========
Gross gains of $138,000, $274,000 and $91,000 were realized on sales of
securities in the years ended September 30, 1998, 1997 and 1996, respectively.
At September 30, 1998 securities with a cost of approximately $8,300,000 were
pledged to secure deposits and advances from the Federal Home Loan Bank as
required or permitted by law.
4. LOANS RECEIVABLE
Loans receivable are summarized as follows (in thousands):
September 30,
-----------------------------
1998 1997
Residential real estate mortgage loans:
One-to-four family units $301,071 $310,306
Multi-family 1,934 2,839
Land loans 1,604 2,634
Construction loans 11,867 11,067
Non-residential real estate loans 6,261 6,897
Loans on savings accounts 5,881 5,984
Other consumer loans 28,643 20,049
357,261 359,776
-------- --------
Less:
Allowance for loan losses 3,515 3,355
Deferred loan fees 580 860
Undisbursed portion of loans in process 7,994 8,686
-------- --------
$345,172 $346,875
======== ========
Changes in the allowance for loan losses are as follows (in thousands):
Year Ended
September 30,
--------------------------------------
1998 1997 1996
Beginning balance, October 1 $ 3,355 $ 3,182 $ 2,966
Provision charged to operating expense 180 240 300
Recoveries 44 9 3
Loans charged off (64) (76) (87)
------- ------- -------
Ending balance, September 30 $ 3,515 $ 3,355 $ 3,182
======= ======= =======
Substantially all of the Company's loans receivable are with customers in
southern Louisiana.
At September 30, 1998 and 1997 there were unamortized discounts on loans
purchased of approximately $900,000 and $1,200,000, respectively. These
unamortized discounts have been deducted from the related loan balances in the
table above.
The amount of nonaccrual loans at September 30, 1998 and 1997 was not
significant. The amount of interest not accrued on these loans did not have a
significant effect on net income in 1998, 1997 or 1996.
20
<PAGE>
The Company has collateralized its advances from the Federal Home Loan Bank by a
blanket floating lien on its first mortgage loans.
5. REAL ESTATE OWNED
Real estate owned consisted of the following (in thousands):
September 30,
------------------------
1998 1997
Real estate acquired through foreclosure $ 443 $ 145
Less allowance for losses (112) (112)
------ -----
Real estate owned, net $ 331 $ 33
====== ======
Changes in the allowance for losses on real estate owned are as follows (in
thousands):
Year Ended
September 30,
--------------------------------
1998 1997 1996
Beginning balance, October 1 $ 112 $ 108 $ 131
Provision charged to operating expense -- 4 --
Allowance related to real estate sold -- -- (23)
------ ------ ------
Ending balance, September 30 $ 112 $ 112 $ 108
====== ====== ======
6. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows (in thousands):
September 30,
-------------------------
1998 1997
Land $ 3,571 $ 2,529
Buildings and improvements 4,406 3,365
Furniture, fixtures and equipment 4,851 3,858
------- -------
12,828 9,752
Less accumulated depreciation (4,064) (3,398)
------- -------
$ 8,764 $ 6,354
7. DEPOSITS
Deposits are summarized as follows (in thousands):
September 30,
--------------------------
1998 1997
NOW accounts $ 37,000 $ 31,576
Passbook and regular savings 25,791 25,398
Money funds accounts 8,711 8,998
Certificates of deposit 207,763 214,330
-------- --------
$279,265 $280,302
======== ========
Certificates of deposit of $100,000 and over amounted to $46,500,000 and
$47,700,000 at September 30, 1998 and 1997, respectively.
21
<PAGE>
Certificates of deposits at September 30, 1998, mature as follows (in
thousands):
Less than one year $110,172
1-2 years 70,173
2-3 years 13,630
3-4 years 8,015
4-5 years 4,481
over 5 years 1,292
--------
TOTAL $207,763
--------
8. ADVANCES FROM FEDERAL HOME LOAN BANK AND CASH RESERVE REQUIREMENTS
At September 30, 1998 the Company was indebted to the FHLB for $67,721,000 of
advances bearing interest at a weighted average rate of 5.34% which are due as
follows (in thousands):
Year Ended
September 30,
1999 $36,740
2000 12,155
2001 7,595
2002 4,434
2003 5,097
Thereafter 1,700
-------
$67,721
-------
These advances are collateralized by a blanket floating lien on the Company's
first mortgage loans.
Included in the table above are $30,000,000 of advances callable in the year
ended September 30, 1999, $5,000,000 callable in 2006 and $5,000,000 callable in
2003. These advances have been included in the above table based upon their call
dates rather than their stated due dates of between December 2007 and July 2008.
At September 30, 1997 the Company was indebted to the Federal Home Loan Bank
(FHLB) for $37,628,000 of advances bearing interest at an average rate of 5.6%
which are due in October 1997 and $27,770,000 of advances bearing interest at an
average rate of 6.1% which are due in the year ended September 30, 2002. The
advances due in October 1997 were renewed upon maturity on a short term basis.
The Company is required to maintain certain cash reserves relating to its
deposit liabilities. This requirement is ordinarily satisfied by cash on hand.
9. BORROWINGS FOR COMMON STOCK REPURCHASES
The Company borrowed $5,178,000 at September 30, 1998 in connection with
repurchases of common stock for the treasury. Approximately $4,800,000 was due
to brokers on the settlement date of such purchases and $347,000 was due under a
note payable. The note payable provides maximum borrowings of $8,000,000 for
dividend payments and common stock repurchases with interest at 2% above the
LIBOR rate and is due September 30, 1999. The stock of the Bank is pledged as
collateral on this note. The note payable agreement contains certain covenants
which, among other things, require the maintenance of certain amounts of
stockholder's equity, net income and the allowance for loan losses of the Bank.
10. INCOME TAXES
The Company is permitted under the Internal Revenue Code to deduct an annual
addition to an allowance for bad debts in determining taxable income, subject to
certain limitations. The Company has generally used the percentage of taxable
income method to calculate this addition. This addition differs from the bad
debt experience used for financial accounting purposes. Bad debt deductions for
income tax purposes are included in taxable income of later years only if the
bad debt reserve is used subsequently for purposes other than to absorb bad debt
losses. Because the Company does not intend to use the reserve for purposes
other than to absorb bad debt losses, generally accepted
22
<PAGE>
accounting principles do not require that deferred income taxes be provided on
that portion which existed as of September 30, 1988. At September 30, 1998,
retained earnings included approximately $4,200,000 representing such bad debt
deductions for which no deferred income taxes have been provided.
During the year ended September 30, 1996 legislation was enacted which
eliminates the use of the percentage of taxable income method to calculate the
addition to the allowance for bad debts for income tax purposes. This was
effective October 1, 1996 with respect to the Company. In addition, the
legislation requires that the Company include in taxable income the allowance
established subsequent to September 30, 1988. This allowance amounted to
approximately $2,800,000 at September 30, 1997 and will be included in taxable
income in annual installments of approximately $470,000 beginning October 1,
1998. As the taxes with respect to this allowance are paid they are added to
deferred tax assets and, therefore, the payment of these taxes should have no
significant effect upon the Company's results of operations.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of September 30, 1998 and
1997 are as follows (in thousands):
1998 1997
Deferred tax assets:
MSP expense-deductible in subsequent year $ 185 $ 180
Allowance for loan losses 90 44
Other 145 160
------ ------
Total deferred tax assets 420 384
------ ------
Deferred tax liabilities:
Deferred loan fees and costs, net 319 242
Tax over book depreciation 210 174
Dividends on FHLB stock 345 357
Unrealized gain on securities available-for-sale 180 189
Other 146 286
------ ------
Total deferred tax liabilities 1,200 1,248
------ ------
Net deferred tax liabilities $ (780) $ (864)
====== ======
The components of income taxes are as follows (in thousands):
Year Ended
September 30,
-------------------------------------------------
1998 1997 1996
Currently payable $ 2,142 $ 1,200 $ 1,664
Deferred (75) 797 (394)
------- ------- -------
$ 2,067 $ 1,997 $ 1,270
======= ======= =======
Income taxes differ from the amounts computed by applying the U.S. Federal
income tax rate of 34% to earnings before income taxes. The reasons for these
differences are as follows (in thousands):
Year Ended
September 30,
--------------------------------------
1997 1996 1995
Taxes computed at statutory rates $ 1,999 $ 1,994 $ 1,289
Increase (decrease) in taxes due to
miscellaneous items 68 3 (19)
------- ------- -------
$ 2,067 $ 1,997 $ 1,270
======= ======= =======
Actual tax rate 35% 34% 34%
======= ======= =======
23
<PAGE>
11. NON-INTEREST EXPENSE
Occupancy, equipment and data processing expenses consisted of the following:
Year Ended
September 30,
--------------------------------
1998 1997 1996
Occupancy, including depreciation,
insurance, rent, utilities, etc. $ 751 $ 610 $ 571
Equipment, including depreciation,
telephone, etc. 1,155 811 523
Data processing 471 398 383
------ ------ ------
$2,377 $1,819 $1,477
====== ====== ======
Other operating expenses consisted of the following (in thousands):
Year Ended
September 30,
---------------------------------
1998 1997 1996
Stationary, printing and postage $ 635 $ 591 $ 392
Other 1,039 1,044 1,057
------- ------ ------
$ 1,674 $1,635 $1,449
======= ====== ======
12. RETIREMENT PLAN
The Company participates in a defined benefit multi-employer retirement plan
which covers substantially all employees. The plan is administered by the
Financial Institutions Retirement Fund. Charges to operations under the plan
include normal cost. There were no required payments in the years ended
September 30, 1998, 1997 and 1996. The market value of the net assets of the
retirement fund exceeds the liability of the present value of accrued benefits.
No separate information regarding the Company's share of the assets and
liabilities of this plan is available.
13. INCOME PER SHARE
Following is a summary of the information used in the computation of basic and
diluted income per common share for the years ended September 30, 1998, 1997 and
1996:
Year Ended
September 30,
---------------------------------
1998 1997 1996
Weighted average number of common
shares outstanding - used in computation
of basic earnings per common share 3,106 3,060 3,603
Effect of dilutive securities:
Stock options 129 61 --
MSP stock grants 31 28 8
----- ----- -----
Weighted average number of common shares
outstanding plus effect of dilutive
securities used in computation of
diluted earnings per common share 3,266 3,149 3,611
===== ===== =====
14. EMPLOYEE STOCK PLANS
The Company maintains an ESOP for the benefit of Teche Federal Savings Bank's
employees who meet certain eligibility requirements. The ESOP Trust acquired
332,337 shares of common stock in the Company's initial public offering with
proceeds from a loan from the Company. Teche Federal Savings Bank makes cash
contributions to the ESOP on a basis sufficient to enable the ESOP to make the
required loan payments to the Company.
The note payable referred to above bears interest at the prime rate adjusted
quarterly with interest payable quarterly and principal payable in annual
installments of at least $332,337. The loan is secured by the shares of the
stock purchased.
24
<PAGE>
As the debt is repaid, shares are released from collateral and allocated to
qualified employees based on the proportion of principal paid in the year. The
Company accounts for its ESOP in accordance with Statement of Position 93-6.
Accordingly, the shares pledged as collateral are reported as a reduction of
stockholders' equity in the consolidated balance sheets. 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 income per
share computations. Dividends on allocated ESOP shares are recorded as a
reduction of retained earnings and dividends on unallocated ESOP shares are
recorded as a reduction of debt.
Compensation expense related to the ESOP was $617,000, $509,000 and $432,000 for
the years ended September 30, 1998, 1997 and 1996, respectively. The following
is a summary of shares held in the ESOP Trust as of September 30, 1998 and 1997:
1998 1997
Shares released for allocation or
committed to be released 123,702 90,468
Unreleased shares 208,635 241,869
---------- ----------
Total ESOP shares 332,337 332,337
---------- ----------
Market value of unreleased shares
at September 30, 1997 $5,027,000 $6,860,000
========== ==========
In the year ended September 30, 1996, the stockholders of the Company approved
the Teche Holding Company 1995 Stock Option Plan (the "Plan") under which
options to purchase 423,200 common shares were reserved and granted to executive
employees and directors of Teche Federal Savings Bank. In the years ended
September 30, 1997 and 1996, the issuance of additional options were authorized.
The exercise prices were equal to the market price on the date of grant and 20%
of the options are exercisable on the first anniversary date after the date of
grant and 20% annually thereafter. All unexercised options expire ten years from
the date of grant. No compensation expense was recognized under the Plans in
1998, 1997 or 1996. The following table summarizes activity relating to the
Plans:
Available Weighted
for Options Average
Grant Outstanding Price
Balance, October 1, 1997 -- -- $ --
Reserved under the 1995 Plan 432,200 -- 13.938
Granted (432,200) 432,200 --
-------- ------- -------
Balance, September 30, 1996 -- 432,200 13.938
Reserved under the 1996 Plan 34,000 -- --
Granted (10,000) 10,000 15.938
-------- ------- -------
Balance, September 30, 1997 24,000 442,200 13.983
Reserved under the 1997 Plan 34,000 -- --
Granted (54,800) 54,800 19.875
Exercised -- (1,350) 15.938
-------- ------- -------
Balance, September 30, 1998 3,200 495,650 $14.632
======== ======= =======
Exercisable at September 30, 1997 96,597 $13.938
======= =======
Exercisable at September 30, 1998 181,147 $13.947
======= =======
In the year ended September 30, 1996, the stockholders of the Company approved
the Management Stock Plan ("MSP") under which restricted grants of 169,280
shares were made to executive employees and directors of Teche Federal Savings
Bank. Teche Federal Savings Bank acquired the Company's stock on the open market
for the benefit of the recipients. The recipients vest 20% annually as long as
they remain as Teche Federal Savings Bank directors or employees. The Board of
Directors could terminate the MSP at anytime. The Company recognizes
compensation expense ratably over the vesting period and the cost of unvested
shares is reported as unearned compensation as a reduction of stockholders'
equity. Compensation expense related to the MSP was $468,000, $642,000 and
$420,000 for the years ended September 30, 1998, 1997 and 1996, respectively.
There were 97,506 unvested shares at September 30, 1998.
25
<PAGE>
The Company applies APB Opinion No. 25 and related interpretation in accounting
for its stock options. Accordingly, no compensation cost has been recognized. In
October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 requires disclosure of the compensation cost for
stock-based incentives granted by the Company based on the fair value at grant
date for awards. The weighted average fair value of options granted during the
years ended September 30, 1998, 1997 and 1996 was $5.52, $4.41 and $3.85,
respectively. Applying SFAS No. 123 would result in pro forma net income and
income per share amounts as follows:
1998 1997 1996
Net income:
As reported $3,813,000 $3,867,000 $2,521,000
Pro forma 3,428,000 3,370,000 2,220,000
Basic income per share:
As reported $ 1.23 $ 1.26 $ .70
Pro forma 1.10 1.10 .62
Diluted income per share:
As reported $ 1.17 $ 1.23 $ .70
Pro forma 1.06 1.09 .61
The fair value of each option is estimated on the date of grant using an
option-pricing model with the following weighted-average assumptions used for
grants: dividend yield of 2.5%; expected volatility of 20 percent; risk-free
interest rate of 5.5 to 6.0 percent; and expected lives of 8 years for all
options.
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business the Company is a party to financial instruments
with off-balance sheet risk to meet the financing needs of its customers. The
financial instruments include commitments to extend credit and commitments to
sell loans. Those instruments involve, to varying degrees, elements of credit
risk in excess of the amounts recognized in the consolidated balance sheets. The
contract amounts of those instruments reflect the extent of the involvement the
Company has in particular classes of financial instruments.
As of September 30, 1998, the Company had made various commitments to extend
credit totaling approximately $13,900,000 including $7,994,000 of the
undisbursed portion of loans in process. Most of these commitments are at fixed
rates. The rates on fixed rate loan commitments range from 6.5% to 8.25% at
September 30, 1998. The rates on variable rate loan commitments range from
5.875% to 8.00% at September 30, 1998. As of September 30, 1997, such
commitments totaled approximately $13,600,000 including $8,686,000 of the
undisbursed portion of loans in process.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being fully drawn upon, the total commitment amount disclosed above does
not necessarily represent future cash requirements. The Company evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if considered necessary by the Company upon extension of credit, is
based on management's credit evaluation of the customer.
16. DISCLOSURES ABOUT 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 - For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Investment and Mortgage-Backed Securities - For investment securities, fair
value equals quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
26
<PAGE>
Loans - The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
for the same remaining maturities.
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-maturities certificates of deposit is estimated using the
rates currently offered for deposits of similar remaining maturities.
Advances from Federal Home Loan Bank - The fair value of advances is estimated
using rates currently available for advances of similar remaining maturities.
Commitments - The fair value of commitments to extend credit was not
significant.
The estimated fair values of the Company's financial instruments are as follows
at September 30, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and certificates of deposit $ 11,338 $ 11,338 $ 6,502 $ 6,502
Investment and mortgage-backed securities 36,769 36,769 37,854 37,854
Loans 348,687 352,000 350,230 352,000
Less: allowance for loan losses 3,515 3,515 3,355 3,355
-------- -------- -------- --------
Loans, net of allowance 345,172 348,485 346,875 348,645
-------- -------- -------- --------
Financial liabilities:
Deposits 279,265 279,800 280,302 280,500
Advances from Federal Home Loan Bank 67,721 67,600 65,398 65,348
Borrowings for common stock repurchases 5,178 5,178 -- --
</TABLE>
17. RELATED PARTY TRANSACTIONS
The Company has an employment agreement with an executive officer under which
the Company has agreed to pay the executive officer annual compensation of
$142,000 through November 16, 2000.
The Company has severance agreements with certain other executive officers under
which the Company has agreed to aggregate payments of approximately $885,000 in
the event services of the executives are terminated following a "change in
control" of the Company.
18. SAIF SPECIAL ASSESSMENT AND REGULATORY CAPITAL
On September 30, 1996 legislation was enacted which required that the Company
pay a SAIF special assessment based upon its deposits as of March 31, 1995. The
$1,824,000 cost of this special assessment which was recorded as of September
30, 1996 was paid in the year ended September 30, 1997. SAIF premiums have been
lower since the first quarter of the year ended September 30, 1997.
The Bank's actual capital and its statutory required capital levels based on the
consolidated financial statements accompanying these notes was as follows (in
thousands):
<TABLE>
<CAPTION>
September 30, 1998
----------------------------------------------------------------------------------
To be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Purposes Action Provisions
-------------------- -------------------- ---------------------
Actual Required Required
-------------------- -------------------- ---------------------
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Core capital $53,415 13.1% $16,268 4.0% $24,402 6.0%
Tangible capital $53,415 13.1% $ 6,100 1.5% N/A N/A
Total Risk based capital $56,195 25.3% $17,748 8.0% $22,185 10.0%
Leverage $53,415 13.1% N/A N/A $20,335 5.0%
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
September 30, 1998
----------------------------------------------------------------------------------
To be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Purposes Action Provisions
-------------------- -------------------- ---------------------
Actual Required Required
-------------------- -------------------- ---------------------
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Core capital $48,221 12.0% $12,100 3.0% $24,200 6.0%
Tangible capital $48,221 12.0% $ 6,050 1.5% N/A N/A
Total Risk based capital $50,990 22.5% $18,160 8.0% $22,700 10.0%
Leverage $48,221 12.0% N/A N/A $20,170 5.0%
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
required each federal banking agency to implement prompt corrective actions for
institutions that it regulates. In response to this requirement, OTS adopted
final rules based upon FDICIA's five capital tiers. The rules provide that a
savings bank is "well capitalized" if its total risk-based capital ratio is 10%
or greater, its Tier 1 risk-based capital ratio is 6% or greater, its leverage
is 5% or greater and the institution is not subject to a capital directive.
Under this regulation, the Bank was deemed to be "well capitalized" as of
September 30, 1998 and 1997 based upon the most recent notifications from its
regulators. There are no conditions or events since those notifications that
management believes would change its classifications.
19. SUMMARIZED FINANCIAL INFORMATION OF TECHE HOLDING COMPANY
(PARENT COMPANY ONLY)
Balance Sheets
1998 1997
Assets:
Investment in subsidiary $ 53,832* $ 48,695*
Due from subsidiary -- 2,450*
Due from ESOP 2,086* 2,419*
Other 1,787 1,207
-------- --------
$ 57,705 $ 54,771
======== ========
Liabilities and stockholders' equity:
Borrowings for common stock repurchase $ 5,178 $ --
Accrued expenses -- 412
Stockholders' equity 52,527 54,359
-------- --------
$ 57,705 $ 54,771
======== ========
Statements of Earnings
Year Ended September 30
------------------------------------------
1998 1997 1996
Equity in earnings of subsidiary $ 3,871 * $ 3,938 * $ 2,194 *
Interest income from subsidiary 264 * 429 * 937 *
Management fee and other expenses
allocated to the Parent (252)* (799)* (373)*
Other income (expenses) (38) 312 (62)
Income tax expense (32) (13) (175)
------- ------- -------
Net income $ 3,813 $ 3,867 $ 2,521
======= ======= =======
28
<PAGE>
<TABLE>
<CAPTION>
Statements of Cash Flows
Year Ended September 30
--------------------------------
1998 1997 1996
<S> <C> <C> <C>
Cash Flows from Operating Activities $ 1,273 $ 3,019 $ 200
Cash Flows from Investing Activities:
Repayment of loan by subsidiary 364 382* 10,250*
------- ------- --------
Net cash provided by investing activities 364 382 10,250
------- ------- --------
Cash Flows from Financing Activities:
Borrowings under note payable agreement 347 -- --
Sale of common stock -- --
Dividends paid (1,592) (1,581) (2,313)
Cash paid for purchase of common stock for treasury (400) (1,403) (9,149)
------- ------- --------
Net cash used in financing activities (1,645) (2,984) (11,462)
------- ------- --------
Net increase (decrease) in cash and cash equivalents (8) 417 (1,012)
Cash and cash equivalents, beginning of year 900 483 1,495
------- ------- --------
Cash and cash equivalents, end of year $ 892 $ 900 $ 483
------- ------- --------
</TABLE>
*Eliminated in consolidation
Stockholder's equity of the Company includes the undistributed earnings of Teche
Federal Savings Bank. Dividends are payable only out of retained earnings or
current net income. Moreover, dividends to the Company's stockholders can
generally be paid only from liquid assets of Teche Holding Company and dividends
paid to the Company by the Bank. The amount of capital of the Bank available for
dividends at September 30, 1998 was approximately $29,000,000.
20. NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. This Statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as the other financial
statements. Other comprehensive income includes unrealized gains and losses on
certain investments in debt and equity securities and certain other items. In
addition, the accumulated balance of other comprehensive income must be
displayed separately in the stockholders' equity section of the consolidated
balance sheet. Reclassifications of financial statements for earlier periods,
provided for comparative purposes, is required. The Company cannot determine the
impact that the adoption of this new accounting standard will have on its
consolidated financial statements until the completion of each reporting period.
The Company presently expects to adopt this accounting standard on October 1,
1998 as required.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which will be effective for the Company
beginning October 1, 1998. The Statement redefines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about a Company's operating segments. The Company has not yet
completed its analysis to determine which operating segments will be reflected
in its financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
Under this Statement, a company that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. At the date of
initial application, a company may transfer any held-to-maturity security into
the available-for-sale category or the trading category. A company will then be
able in the future to designate a security transferred into the
available-for-sale category as the hedged item. The unrealized
29
<PAGE>
holding gain or loss on a held-to-maturity security transferred to another
category at the date of the initial application will be reported in net income
or accumulated other comprehensive income consistent with the requirements of
SFAS No. 115. Such transfers from the held-to-maturity category at the date of
initial adoption will not call into question a company's intent to hold other
debt securities to maturity in the future.
SFAS No. 133 applies to all entities and is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Earlier adoption of this Statement
is permitted. The Company expects to adopt this accounting standard on October
1, 1999.
30
<PAGE>
Directors of
Teche Holding Company and
Teche Federal Savings Bank
- --------------------------------------------
W. Ross Little, Chairman
Patrick O. Little
Mrs. Mary Coon Biggs
Donelson T. Caffery, Jr.
Henry L. Friedman
Mrs. Virginia Kyle Hine
Dr. Thomas F. Kramer
Robert E. Mouton
Christian L. Olivier, Jr.
W. Ross Little, Jr.
Advisory Directors of
Teche Federal Savings Bank
- --------------------------------------------
Charles H. Davidson
Nelson D. Henry
Robert Judice, Jr.
W. Ross Little, Jr.
Maunette B. Rischer
INDEPENDENT AUDITORS
- --------------------------------------------
Deloitte and Touche, LLP
One Shell Square
701 Poydras Street
New Orleans, LA 70139
LEGAL COUNSEL
- --------------------------------------------
Biggs, Trowbridge, Supple,
Cremaldi and Curet, L.L.P.
Lawless Building
Willow Street
Franklin, LA 70538
SPECIAL COUNSEL
- --------------------------------------------
Malizia, Spidi, Sloane & Fisch, P.C.
One Franklin Square
1301 K. Street, N.W., Suite 700 East
Washington, D.C. 20005
REGISTRAR AND STOCK
TRANSFER AGENT
- --------------------------------------------
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
(800) 368-5948
Fax (908) 497-2312
31
<PAGE>
Officers of Teche Federal Savings Bank
- --------------------------------------
W. Ross Little ............... Chairman
Patrick O. Little ............ President/CEO
Robert E. Mouton ............. Executive Vice President
Faye L. Ibert ................ Senior Vice-President
J.L. Chauvin ................. Senior Vice-President/Treasurer
Chief Financial Officer
Daryl Broussard .............. Senior Vice-President
Chief Lending Officer
Stanley Plessela ............. Vice-President
D. Ross Landry ............... Vice-President
W. Ross Little, Jr. .......... Vice-President, Secretary
Nancy Terrell ................ Vice-President
Angela Badeaux ............... Vice President
Glen Brown ................... Vice-President
James P. Hamilton ............ Assistant Vice-President
Elaine G. Cockerham .......... Assistant Vice-President
Lydia B. Hebert .............. Assistant Vice-President
Carol Nini ................... Assistant Vice-President
Eddie LeBlanc ................ Assistant Vice-President,
Internal Auditor
Brenda Henson ................ Assistant Vice-President
Karen Verret ................. Assistant Vice-President
Wendy Frederick .............. Assistant Vice-President
Tamaria B. LeCompte .......... Assistant Vice-President
Gwen Sellers ................. Assistant Vice-President
Lavergne Boutte .............. Assistant Vice-President
Vicky Landry ................. Assistant Vice-President
Mary Beth Brady .............. Assistant Vice-President
Donna Cheely ................. Assistant Vice-President
Irma Nell Bourque ............ Assistant Vice-President
Andy Magers .................. Assistant Vice-President
Beverly Adams ................ Assistant Vice-President
Gerry Mouton ................. Assistant Vice-President
Debbie Stevens ............... Assistant Vice-President
Dalie Eldridge ............... Assistant Vice-President
Bill Babineaux ............... Assistant Vice-President
Lucille Wattigny ............. Assistant Vice-President
Susan Simoneaux .............. Assistant Vice-President
Theresa Landry ............... Assistant Vice-President
Lynn Blanchard ............... Assistant Vice-President
32
EXHIBIT 23
<PAGE>
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-2342 and 333-55913 of Teche Holding Company on Form S-8 of our report dated
November 6, 1998, incorporated by reference in the Annual Report on Form 10-K of
Teche Holding Company for the year ended September 30, 1998.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
New Orleans, Louisiana
December 28, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
ANNUAL REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 10,680
<INT-BEARING-DEPOSITS> 658
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
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<INVESTMENTS-MARKET> 0
<LOANS> 348,687
<ALLOWANCE> 3,515
<TOTAL-ASSETS> 408,823
<DEPOSITS> 279,265
<SHORT-TERM> 36,740
<LIABILITIES-OTHER> 4,132
<LONG-TERM> 30,981
0
0
<COMMON> 42
<OTHER-SE> 52,485
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<INTEREST-LOAN> 27,470
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<INTEREST-TOTAL> 30,357
<INTEREST-DEPOSIT> 12,912
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<EXPENSE-OTHER> 11,198
<INCOME-PRETAX> 5,880
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<NET-INCOME> 3,813
<EPS-PRIMARY> 1.23
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