<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM_______________TO__________________
COMMISSION FILE NUMBER 1-13842
TEXARKANA FIRST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 71-0771419
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3RD AND OLIVE STREETS
TEXARKANA, ARKANSAS 71854
(Address) (Zip Code)
Registrant's telephone number, including area code: (501) 773-1103
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK (PAR VALUE $.01 PER SHARE)
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
As of December 13, 1996, the aggregate value of the 1,781,276 shares of
Common Stock of the Registrant outstanding on such date, which excludes
53,287 shares held by all directors and officers of the Registrant as a
group, was approximately $27.2 million. This figure is based on the closing
sale price of $15.25 per share of the Registrant's Common Stock on December
20, 1996.
Number of shares of Common Stock outstanding as of December 20, 1996:
1,834,563
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Annual Report to Stockholders for the year ended
September 30, 1996 are incorporated into Part II, Items 5 through 8.
(2) Portions of the definitive proxy statement for the 1996 Annual Meeting of
Stockholders are incorporated into Part III, Items 10 through 13.
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TEXARKANA FIRST FINANCIAL CORPORATION
FORM 10-K
TABLE OF CONTENTS
PAGE
PART 1
Item 1 Business.................................................. 1
Item 2 Properties................................................ 34
Item 3 Legal Proceedings......................................... 34
Item 4 Submission of Matters To Vote of Security Holders......... 34
PART II
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters........................... 35
Item 6 Selected Financial Data................................... 35
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 35
Item 8 Financial Statements and Supplementary Data............... 35
Item 9 Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.................... 35
PART III
Item 10 Directors and Executive Officers of the Registrant........ 35
Item 11 Executive Compensation.................................... 35
Item 12 Security Ownership of Certain
Beneficial Owners and Management.......................... 35
Item 13 Certain Relationships and Related Transactions............ 35
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K................................... 36
<PAGE>
PART I.
ITEM 1. BUSINESS.
GENERAL
Texarkana First Financial Corporation (the "Company") is a Texas corporation
organized in March 1995 by First Federal Savings and Loan Association of
Texarkana ("First Federal" or the "Association") for the purpose of becoming
a unitary holding company of the Association. The only significant assets of
the Company are the capital stock of the Association, the Company's loan to
the Company's Employee Stock Ownership Plan ("ESOP"), and the portion of the
net proceeds retained by the Company in connection with the conversion of the
Association from the mutual to stock form of organization in July 1995 (the
"Conversion"). The business and management of the Company consists of the
business and management of the Association.
The Association is a federally chartered stock savings and loan association
which conducts business through its main office and four full service branch
offices. In July 1995, the Association converted from a federally chartered
mutual savings and loan association to a federally chartered stock savings
and loan association.
First Federal is primarily engaged in attracting deposits from the general
public through its branch offices and using such deposits primarily to
originate single-family (one-to-four units) residential loans and to a
significantly lesser extent, nonresidential or commercial real estate loans,
construction loans on primarily residential properties, consumer loans and
multi-family loans. To a limited extent, the Association also invests in
securities issued by the United States ("U.S.") Government and agencies
thereof and mortgage-backed securities. The Association derives its income
principally from interest earned on loans and investments and, to a lesser
extent, from fees received in connection with the origination of loans and
for other services. The Association's primary expenses are interest expense
on deposits and general operating expenses. Funds for activities are
provided primarily by deposits, amortization and prepayments of outstanding
loans and other sources.
The Association serves its market area of southwest Arkansas and northeast
Texas as a community oriented, independent financial institution dedicated
primarily to financing home ownership while providing needed financial
services to its customers in an efficient manner.
The Association is subject to regulation by the Office of Thrift Supervision
(the "OTS"), as its chartering authority and primary regulator, and by the
Federal Deposit Insurance Corporation (the "FDIC"), which insures the
Association's deposits up to applicable limits. The Association also is
subject to certain reserve requirements established by the Board of Governors
of the Federal Reserve System ("Federal Reserve Board") and is a member of
the Federal Home Loan Bank ("FHLB") of Dallas, which is one of the 12 banks
which comprise the FHLB System.
The Company's executive offices are located at 3rd and Olive Streets,
Texarkana, Arkansas 71854, and its telephone number is (501) 773-1103.
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MARKET AREA
First Federal is headquartered in Texarkana, Arkansas which is located where
the southwest corner of Arkansas and the northeast corner of Texas meet. It
is approximately 70 miles north of Shreveport, Louisiana, 140 miles southwest
of Little Rock, Arkansas and 180 miles northeast of Dallas, Texas.
Texarkana, Arkansas and Texarkana, Texas are the focal points of this general
market area and serve as the hub of economic activity. The Association's
market area is comprised of Little River, Hempstead, Miller, Sevier and
Howard Counties in Arkansas and Bowie County, Texas ("market area"). The
Association conducts business through its five offices in the Arkansas cities
of Texarkana, Ashdown, DeQueen, Hope and Nashville. The Association's market
area is characterized by a limited number of major employers or industries
with a significantly higher level of residents employed in manufacturing and
a lower level of people employed in the wholesale/retail trade industry. The
Association's market area has also been characterized by higher unemployment
rates than Texas, Arkansas and the United States. The unemployment rate for
the Association's principal market area of Miller County, Arkansas and Bowie
County, Texas was 6.6% and 7.6%, respectively, at September 30, 1996.
Due to defense cutbacks, Red River Army Depot, a major local employer which
currently employees approximately 2,500 persons, was previously scheduled to
be closed. However, the Base Realignment and Closure Commission removed the
depot from the closure list but proposed a transfer of certain operations to
another depot in Alabama. The reduction due to base realignments is
currently scheduled to begin on or after October 1997, and is expected to
result in a workforce reduction of approximately 500 to 600 employees. Since
the Red River Army Depot is located just outside Texarkana in Bowie County,
Texas, any major employment reduction would impact the economy of Texarkana.
Management of the Association intends to closely monitor all loans made to
employees of the Red River Army Depot in order to mitigate the impact, if
any, on its operations.
LENDING ACTIVITIES
GENERAL. At September 30, 1996, the Association's total portfolio of loans
receivable ("total loan portfolio"), amounted to $140.5 million or 84.8% of
the Company's $165.7 million of total assets at such time. The Association
has traditionally concentrated its lending activities on conventional first
mortgage loans secured by single-family residential property. Consistent
with such approach, $98.0 million or 69.8% of the total loan portfolio
consisted of one-to-four family residential loans. To a lesser extent, the
Association also originates multi-family residential loans, nonresidential
real estate and land loans, construction loans, commercial business loans and
consumer loans. Such loan categories amounted to $1.5 million or 1.1%, $19.8
million or 14.1%, $7.8 million or 5.6%, $3.3 million or 2.3% and $10.1
million or 7.2% of the total loan portfolio, respectively. The Association
does not offer loans which are insured by the Federal Housing Administration
("FHA") nor partially guaranteed by the Office of Veterans Affairs ("VA").
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LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition of
First Federal's loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS) AMOUNT % AMOUNT % AMOUNT %
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family........ $ 98,031 69.78% $ 91,811 72.94% $ 84,836 69.91%
Multi-family.............. 1,503 1.07 1,581 1.26 1,650 1.36
Nonresidential and land... 19,765 14.07 17,741 14.09 18,438 15.20
Construction.............. 7,818 5.56 5,917 4.70 9,025 7.44
-------- ------ -------- ------ ------- ------
Total real estate loans.. 127,117 90.48 117,050 92.99 113,949 93.91
Commercial loans........... 3,264 2.32 962 .76 72 .06
Consumer loans............. 10,107 7.20 7,859 6.25 7,318 6.03
-------- ------ -------- ------ ------- ------
Total loans............. 140,488 100.00% 125,871 100.00% 121,339 100.00%
------ ------ ------
------ ------ ------
Less:
Loans in process........... 3,571 2,444 2,669
Deferred fees and discounts 112 118 122
Allowance for loan losses.. 1,145 1,149 977
------- ------- -------
Net loans................ $135,660 $122,160 $117,571
------- ------- -------
------- ------- -------
</TABLE>
CONTRACTUAL MATURITIES. The following table presents the scheduled
maturities of First Federal's loans at September 30, 1996. Demand loans,
loans having no stated schedule of repayment and no stated maturity, and
overdraft loans are reported as due in one year or less. The amounts shown
for each maturity period do not take into consideration loan prepayments but
do reflect normal amortization.
<TABLE>
<CAPTION>
AMOUNTS DUE AFTER SEPTEMBER 30, 1996 IN YEARS
----------------------------------------------------
ONE THREE SIX
OR THROUGH THROUGH AFTER
(DOLLARS IN THOUSANDS) LESS TWO FIVE TEN TEN TOTAL
------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family....... $ 796 $ 374 $2,792 $11,498 $82,571 $98,031
Multi-family............. -- -- 22 172 1,309 1,503
Nonresidential and land.. 461 70 2,078 5,276 11,880 19,765
Construction............. 5,568 89 96 265 1,800 7,818
Commercial loans.......... 626 58 140 2,440 -- 3,264
Consumer loans............ 3,766 1,427 3,979 935 -- 10,107
------- ------- ------ ------- ------- --------
Total loans............. $11,217 $2,018 $9,107 $20,586 $97,560 $140,488
------- ------- ------ ------- ------- --------
------- ------- ------ ------- ------- --------
</TABLE>
3
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The following table sets forth the dollar amount of total loans, before net
items, at September 30, 1996 which have fixed interest rates or which have
floating or adjustable interest rates.
SEPTEMBER 30, 1996
------------------------------------
FLOATING OR
FIXED ADJUSTABLE
(DOLLARS IN THOUSANDS) RATE RATE TOTAL
------- ----------- --------
Real estate loans:
One-to-four family................ $ 7,690 $ 90,341 $ 98,031
Multi-family...................... 22 1,481 1,503
Nonresidential and land........... 3,360 16,405 19,765
Construction...................... 4,026 3,792 7,818
Commercial loans................... 1,330 1,934 3,264
Consumer loans..................... 10,097 10 10,107
------- -------- --------
Total loans...................... $26,525 $113,963 $140,488
------- -------- --------
------- -------- --------
ORIGINATION, PURCHASE AND SALE OF LOANS. The lending activities of the
Association are subject to the written, non-discriminatory, underwriting
standards and loan origination procedures established by the Association's
Board of Directors and management. Loan originations are obtained by a
variety of sources, including builders, realtors, walk-in customers, branch
managers and radio advertising. The Association stresses its community ties,
customized, personal service and an efficient underwriting and approval
process. The Association uses either an in-house or independent appraiser on
all loans and typically uses an independent appraiser for nonresidential real
estate loans over $400,000. In addition, the Association requires hazard,
title and, to the extent applicable, flood insurance on all secured property.
Loan applications are initially processed by branch managers or loan officers
and all real estate loans up to $300,000 are approved by the Association's
Loan Committee consisting of the Association's President, Executive Vice
President, and certain employees. The President and the Chairman of the
Board have the ability to jointly approve loans between $300,000 and $500,000
and loans over $500,000 must be approved by the Board of Directors. All
loans are ratified by the Association's Board of Directors.
Since 1985, the Association has not been an active purchaser of loans. A
$1.0 million participation interest in a construction loan for a local
retirement center was purchased in fiscal 1996, no loans were purchased in
fiscal 1995, and a $1.4 million participation interest was purchased in
fiscal 1994 with a prior commitment to sell to a third party.
As part of its asset/liability management, the Association typically sells
its fixed-rate residential loans to the Federal Home Loan Mortgage
Corporation ("FHLMC") with servicing retained and without recourse. The
Association sold $2.2 million, $1.5 million and $8.8 million of fixed-rate
loans during fiscal 1996, 1995 and 1994, respectively. Substantially all
fixed-rate loans with terms of 15 years or greater have been originated
pursuant to commitments to sell such loans to the FHLMC, with servicing
retained, in order to reduce interest rate risk. Sales of loans produce
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future servicing income if servicing is retained and provide funds for
additional lending and other purposes.
Loans sold to the FHLMC are sold pursuant to forward sales commitments and,
therefore, an increase in interest rates after loan origination and prior to
sale does not adversely affect the Association's income at the time of sale.
When loans are sold to the FHLMC, the Association retains the responsibility
for servicing the loans, including collecting and remitting mortgage loan
payments, accounting for principal and interest and holding and disbursing
escrow or impound funds for real estate taxes and insurance premiums. The
Association receives a servicing fee for performing these services for
others. The Association serviced for others mortgage loans amounting to
$23.8 million at September 30, 1996.
The following table shows total loans originated, purchased, sold and repaid
during the periods indicated.
YEAR ENDED SEPTEMBER 30,
---------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
------- ------- -------
Loan originations:
One-to-four family residential............. $19,747 $14,003 $22,072
Multi-family residential................... -- -- 1,340
Nonresidential and land.................... 3,737 2,465 2,667
Construction............................... 8,216 6,287 8,599
Commercial................................. 2,783 702 121
Consumer................................... 7,137 5,012 3,944
------- ------- -------
Total loan originations................... 41,620 28,469 38,743
------- ------- -------
Loan purchases.............................. 1,000 -- 1,365
------- ------- -------
Total loan originations and purchases..... 42,620 28,469 40,108
------- ------- -------
Less sales and loan principal repayments:
Loans sold................................. 2,179 1,514 8,784
Loan principal repayments.................. 24,737 18,637 25,125
------- ------- -------
Total loans sold and principal repayments. 26,916 20,151 33,909
------- ------- -------
Increase (decrease) due to other items, net. (1,087) (3,786) ( 224)
------- ------- -------
Net increase (decrease) in total loans...... $14,617 $ 4,532 $ 5,975
------- ------- -------
------- ------- -------
LOANS-TO-ONE BORROWER. A savings institution generally may not make loans to
one borrower and related entities in an amount which exceeds 15% of its
unimpaired capital and surplus, although loans in an amount equal to an
additional 10% of unimpaired capital and surplus may be made to a borrower if
the loans are fully secured by readily marketable securities. At September
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30, 1996, the Association's limit on loans-to-one borrower was approximately
$4.1 million. The Association's largest loan or group of loans-to-one
borrower, including persons or entities related to the borrower, is an
aggregate of 11 loans with total outstanding balances of $3.8 million and
includes seven real estate loans totaling $1.9 million, one commercial
business loan of $1.9 million and three consumer loans totaling $45,000. The
Association also has outstanding loans to four different borrowers in Ft.
Worth, Texas secured by four commercial buildings with total outstanding
balances of $3.2 million. As of September 30, 1996, these loans were current
as to payments of principal and interest and were performing according to the
terms of the loan documents.
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LOANS. The Association has
historically concentrated its lending activities on the origination of loans
secured by first mortgage liens on existing one-to-four family residences.
At September 30, 1996, $98.0 million or 69.8% of the total loan portfolio
consisted of one-to-four family residential real estate loans. The
Association originated $19.7 million, $14.0 million and $22.1 million of
one-to-four family residential loans in fiscal 1996, 1995 and 1994,
respectively, and intends to continue to emphasize the origination of
permanent loans secured by first mortgage liens on one-to-four family
residential properties in the future. Of the $98.0 million of such loans at
September 30, 1996, $90.3 million or 92.1% had adjustable-rates of interest
and $7.7 million or 7.9% had fixed-rates of interest. The Association's
fixed-rate loans are originated primarily with terms of 15, 20 and 30 years.
Substantially all of the Association's fixed-rate residential loans are
originated pursuant to commitments to sell such loans to the FHLMC with
servicing retained.
The Association currently originates for its portfolio one-to-four family
residential mortgage loans which typically provide for an interest rate which
adjusts every year in accordance with a designated index (the weekly average
yield on U.S. Treasury securities adjusted to a constant comparable maturity
of one year) plus a margin. Such loans are typically based on a 15 to
30-year amortization schedule. The Association does not offer "teaser"
rates, and, generally, the amount of any increase or decrease in the interest
rate after the initial one year period is limited to 2% per year, with a
limit of 6% over the life of the loan. The Association also originates
residential mortgage loans with an interest rate which is fixed for three or
five years and adjusts every three or five year period thereafter.
Generally, such loans have a lifetime ceiling of 5% over the initial rate.
The Association's adjustable-rate loans are assumable and do not contain
prepayment penalties. The Association underwrites its adjustable rate loans
on the basis of the borrowers ability to pay at the rate after the first
adjustment.
Adjustable-rate loans decrease the risks associated with changes in interest
rates but involve other risks, primarily because as interest rates rise, the
payment by the borrower rises to the extent permitted by the terms of the
loan, thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. The Association believes that these risks, which have not
had a material adverse effect on the Association to date, generally are less
than the risks associated with holding fixed-rate loans in an increasing
interest rate environment.
The Association's residential mortgage loans typically do not exceed 80% of
the appraised value of the security property. However, the Association is
permitted to lend up to 100% of the appraised value of the real property
securing a residential loan; however, if the amount of a
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residential loan originated or refinanced exceeds 90% of the appraised value,
the Association is required by federal regulations to obtain private mortgage
insurance on the portion of the principal amount that exceeds 80% of the
appraised value of the security property. Pursuant to underwriting
guidelines adopted by the Board of Directors, the Association can lend up to
95% of the appraised value of the property securing a one-to-four family
residential loan, and generally requires borrowers to obtain private mortgage
insurance on the portion of the principal amount of the loan that exceeds 80%
of the appraised value of the security property.
MULTI-FAMILY RESIDENTIAL REAL ESTATE LOANS. Although the Association does
not emphasize multi-family residential loans and has not been active in this
area, the Association has, in the past, originated mortgage loans for the
acquisition and refinancing of existing multi-family residential properties.
At September 30, 1996, $1.5 million or 1.1% of the total loan portfolio
consisted of loans secured by existing multi-family residential real estate
properties. Such amount primarily represents three loans secured by
apartment buildings located in the Association's primary market area.
Multi-family loans are made on terms up to 25 years with adjustable rates.
Loan to value ratios on the Association's multi-family real estate loans are
currently limited to 75%. It is also the Association's general policy to
obtain corporate or personal guarantees, as applicable, on its multi-family
residential real estate loans from the principals of the borrower.
Multi-family real estate lending entails significant additional risks as
compared with one-to-four family residential property lending. Such loans
typically involve large loan balances to single borrowers or groups of
related borrowers. The payment experience on such loans is typically
dependent on the successful operation of the real estate project. The
success of such projects is sensitive to changes in supply and demand
conditions in the market for multi-family real estate as well as economic
conditions generally.
NONRESIDENTIAL REAL ESTATE AND LAND LOANS. The Association originates
mortgage loans for the acquisition and refinancing of nonresidential or
commercial real estate properties and land development loans to local
developers and individuals. At September 30, 1996, $17.8 million or 12.7% of
the total loan portfolio consisted of loans secured by existing commercial
real estate properties and $2.0 million or 1.4% of the total loan portfolio
consisted of land loans. Management currently anticipates that commercial
real estate loans will continue to comprise a substantial portion of the loan
portfolio in the future.
The majority of the Association's commercial real estate loans are secured by
office buildings, churches, retail shops and manufacturing facilities.
Substantially all of the Association's commercial real estate loans are
secured by property located in the Association's market area.
The Association requires appraisals of all properties securing commercial
real estate loans. Appraisals are performed by an in-house appraiser or an
independent appraiser designated by the Association, depending upon the size
of the loan, all of which are reviewed by management. The Association
considers the quality and location of the real estate, the credit of the
borrower, cash flow of the project and the quality of management involved
with the property.
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The Association will originate commercial real estate loans with fixed
interest rates or interest rates which adjust in accordance with a designated
index. Such loans are typically based on a 10 to 20 year amortization
schedule. Loan to value ratios on the Association's commercial real estate
loans are generally limited to 85%. As part of the criteria for underwriting
multi-family and commercial real estate loans, the Association generally
imposes a debt coverage ratio (the ratio of net cash from operations before
payment of debt service to debt service) of not less than 1.25. It is also
the Association's policy to typically obtain corporate or personal
guarantees, as applicable, on its commercial real estate loans from the
principals of the borrower.
Commercial real estate lending entails significant additional risks as
compared with single-family residential property lending. Such loans
typically involve large loan balances to single borrowers or groups of
related borrowers. The payment experience on such loans is typically
dependent on the successful operation of the real estate project. The
success of such projects is sensitive to changes in supply and demand
conditions in the market for commercial real estate as well as regional
and economic conditions generally. At September 30, 1996, the Association
did not have any non-performing commercial real estate loans.
The Association originates land loans to local developers for the purpose of
developing the land (i.e., roads, sewer and water). In addition, the
Association originates lot loans to individuals for the purpose of acquiring
home sites. Such loans are secured by a lien on the property and are
typically limited to 65% of the value of the secured property. Land loans to
developers are limited to a term of eight years while lot loans to
individuals are limited to a term of 15 years.
CONSTRUCTION LOANS. The Association also originates primarily residential
construction loans, although the Association has originated nonresidential
construction loans to a limited degree. Construction loans are classified as
either residential or nonresidential at the time of origination, depending on
the nature of the property securing the loan. The Association's construction
lending activities are limited to the Association's primary market area. At
September 30, 1996, construction loans amounted to $7.8 million or 5.6% of
the total loan portfolio, of which $6.3 million consisted of residential
construction loans and $1.5 million consisted of nonresidential construction
loans. The Association's construction loans generally have fixed interest
rates for a term of six months, with payments being made monthly on an
interest-only basis. However, the Association is permitted to extend a
construction loan up to two years under its loan policy. Construction loans
to builders are made with a maximum loan to value ratio of 75%. Construction
loans to individuals are typically made with a loan to value ratio of 80%,
although the Association will make such loans with a loan to value ratio up
to 95% with private mortgage insurance.
With limited exceptions, the Association's construction loans are made to
individual homeowners and a limited number of local real estate builders and
developers for the purpose of constructing one-to-four family residential
homes. Upon application, credit review and analysis of personal and
corporate financial statements, the Association will make loans to local
builders. These loans may be used for the purpose of construction of
speculative (or unsold) residential properties although a majority of the
loans to builders are for the construction of pre-sold single-family homes.
Once approved for a construction line, draws are granted on a percentage of
completion basis. The Association also inspects construction projects as
draws are requested.
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Construction lending is generally considered to involve a higher level of
risk as compared to one-to-four family residential lending, due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on developers and builders. Moreover,
a construction loan can involve additional risks because of the inherent
difficulty in estimating both a property's value at completion of the project
and the estimated cost (including interest) of the project. The nature of
these loans is such that they are generally more difficult to evaluate and
monitor. In addition, speculative construction loans to a builder are not
pre-sold and thus pose a greater potential risk to the Association than
construction loans to individuals on their personal residences.
The Association has attempted to minimize the foregoing risks by, among other
things, limiting the extent of its construction lending generally and by
limiting its construction lending to primarily residential properties. In
addition, the Association has adopted underwriting guidelines which impose
stringent loan-to-value, debt service and other requirements for loans which
are believed to involve higher elements of credit risk, by limiting the
geographic area in which the Association will do business and by working with
builders with whom it has established relationships.
COMMERCIAL BUSINESS LOANS. The Association offers commercial business loans
which include working capital lines of credit and term loans for financing
inventory, accounts receivable, equipment and acquisitions. Depending on the
collateral pledged to secure the extension of credit, maximum loan to value
ratios range from 50% of used equipment value to 90% of pledged deposits at
the Association. Also, personal guarantees are generally obtained from the
principals of the borrower. Loan terms vary from one year for lines of
credit to 10 years for equipment and business acquisition loans. The
interest rates can be fixed or adjustable. At September 30, 1996, commercial
business loans amounted to $3.3 million or 2.3% of the total loan portfolio.
CONSUMER LOANS. The Association offers consumer loans in order to provide a
full range of financial services to its customers. The consumer loans
offered by the Association include home improvement loans, automobile loans,
deposit account secured loans and other personal loans. At September 30,
1996, consumer loans amounted to $10.1 million or 7.2% of the total loan
portfolio with $2.5 million in home improvement loans, $3.6 million in
automobile loans, $1.5 million in loans secured by deposit accounts and $2.5
million in other personal loans..
The Association's home improvement loans are typically adjustable rate loans
with terms of between five and ten years. Although the Association does not
require that it hold the first mortgage on the secured property, the
Association does hold the first mortgage on a significant majority of its
home improvement loans. The Association limits the mortgages on the secured
property to 80% of the value of the secured property.
The Association's automobile loans are originated by the Association and are
typically for the purchase of new and used cars and trucks. Such loans are
generally originated with a maximum term of five years.
Loans secured by deposit accounts are originated for up to 90% of the account
balance, with a hold placed on the account restricting the withdrawal of the
account balance.
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ASSET QUALITY
When a borrower fails to make a required payment on a loan, the Association
attempts to cure the deficiency by contacting the borrower and seeking the
payment. Depending upon the type of loan, late notices are sent and/or
personal contacts are made. In most cases, deficiencies are cured promptly.
While the Association generally prefers to work with borrowers to resolve
such problems, when a mortgage loan becomes 90 days delinquent, the
Association institutes foreclosure or other proceedings, as necessary, to
minimize any potential loss.
Loans are placed on non-accrual status when, in the judgment of management,
the probability of collection of interest is deemed to be insufficient to
warrant further accrual. When a loan is placed on non-accrual status,
previously accrued but unpaid interest is deducted from interest income. The
Association does not accrue interest on real estate loans past due 90 days or
more unless, in the opinion of management, the value of the property securing
the loan substantially exceeds the outstanding balance of the loan
(principal, interest and escrows) and collection is probable. Loans may be
reinstated to accrual status when all payments are brought current and, in
the opinion of management, collection of the remaining balance can be
reasonably expected.
Real estate acquired by the Association as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as other real estate owned until
sold. Pursuant to a statement of position ("SOP 92-3") issued by the AICPA
in April 1992, which provides guidance on determining the balance sheet
treatment of foreclosed assets in annual financial statements for periods
ending on or after December 15, 1992, there is a rebuttable presumption that
foreclosed assets are held for sale and such assets are recommended to be
carried at the lower of fair value minus estimated costs to sell the
property, or cost (generally the balance of the loan on the property at the
date of acquisition). After the date of acquisition, all costs incurred in
maintaining the property are expended and costs incurred for the improvement
or development of such property are capitalized up to the extent of their net
realizable value. The Association's accounting for its real estate acquired
by foreclosure complies with the guidance set forth in SOP 92-3.
Under generally accepted accounting principles, the Association is required
to account for certain loan modifications or restructurings as "troubled debt
restructurings." In general, the modification or restructuring of a debt
constitutes a troubled debt restructuring if the Association, for economic or
legal reasons related to the borrower's financial difficulties, grants a
concession to the borrower that the Association would not otherwise consider.
Debt restructurings or loan modifications for a borrower do not necessarily
always constitute troubled debt restructurings, however, and troubled debt
restructurings do not necessarily result in non-accrual loans. The
Association did not have any troubled debt restructurings as of September 30,
1996.
10
<PAGE>
DELINQUENT LOANS. The following table sets forth information concerning
delinquent loans as of September 30, 1996, in dollar amounts and as a
percentage of First Federal's total loan portfolio. The amounts presented
represent the total outstanding principal balances of the related loans,
rather than the actual payment amounts which are past due.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------------------
DAYS DELINQUENT
----------------------------------------------------
30-59 DAYS 60-89 DAYS 90 OR MORE DAYS
---------------- ---------------- ----------------
PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL
(DOLLARS IN THOUSANDS) AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family........ $437 .31% $ 34 .02% $134 .10%
Multi-family.............. 43 .03 -- -- -- --
Nonresidential and land... 11 .01 -- -- -- --
Construction.............. -- -- -- -- -- --
Commercial loans........... -- -- -- -- -- --
Consumer loans............. 87 .06 10 .01 10 .01
--- --- ---
Total delinquent loans... $578 $ 44 $144
--- --- ---
--- --- ---
</TABLE>
The following table sets forth the amounts and categories of First Federal's
nonperforming assets and troubled debt restructurings and other selected
statistics at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Non-accruing loans:
One-to-four family residential.......... $ 66 $ 40 $ 40
Multi-family residential................ -- -- --
Nonresidential and land................. -- -- --
Construction............................ -- -- --
Commercial.............................. -- -- --
Consumer................................ 2 2 3
----- ----- -----
Total non-accruing loans.............. 68 42 43
Accruing loans 90 days or
more delinquent......................... 144 172 69
Restructured debt......................... -- -- --
----- ----- -----
Total nonperforming loans............. 212 214 112
----- ----- -----
Real estate owned, net.................... 72 320 635
----- ----- -----
Total nonperforming assets............ $ 284 $ 534 $ 747
----- ----- -----
----- ----- -----
Total loans outstanding................... $140,488 $125,871 $121,339
Total assets............................. 165,747 160,652 140,178
Total nonperforming loans to
total loans............................. .15% .17% .09%
Total nonperforming assets to
total assets............................ .17% .33% .53%
</TABLE>
11
<PAGE>
Interest income that would have been recorded under the original terms of the
Association's non-accruing loans for fiscal years 1996, 1995 and 1994
amounted to $6,000, $7,000 and $5,000, respectively, and the interest
recognized during fiscal years 1996, 1995 and 1994 amounted to $2,000, $3,000
and $3,000, respectively.
The $72,000 of REO at September 30, 1996 consists of a single-family
residence located on 7.9 acres near Lockesburg, Arkansas.
CLASSIFIED ASSETS. Federal regulations require that each insured savings
association classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them.
There are three classifications for problem assets: "substandard," "doubtful"
and "loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets
have the weaknesses of substandard assets with the additional characteristic
that the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable, and there is a
high possibility of loss. An asset classified loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. At September 30, 1996, the Association had
$724,000 of loans which were classified as substandard.
ALLOWANCE FOR LOAN LOSSES. It is management's policy to maintain an
allowance for estimated losses based on the perceived risk of loss in the
loan portfolio and the adequacy of the allowance. Management's periodic
evaluation of the adequacy of the allowance is based on the Association's
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated
value of the underlying collateral and current economic conditions. The
allowance is increased by provisions for loan losses which are charged
against income.
Although management uses the best information available to make
determinations with respect to the provisions for loan losses, additional
provisions for loan losses may be required to be established in the future
should economic or other conditions change substantially. In addition, the
OTS and the FDIC, as an integral part of their examination process,
periodically review the Association's allowance for possible loan losses.
Such agencies may require the Association to recognize additions to such
allowance based on their judgments about information available to them at the
time of their examination.
12
<PAGE>
The following table summarizes changes in the allowance for possible loan
losses and other selected statistics for the periods presented.
Year Ended September 30,
----------------------------------
(Dollars in Thousands) 1996 1995 1994
-------- -------- --------
Allowance for loan losses, beginning
of period................................$ 1,149 $ 977 $ 1,134
------- ------- -------
Loans charged-off:
Residential real estate................. -- (4) (137)
Nonresidential real estate.............. -- -- --
Commercial loans........................ -- -- --
Consumer loans.......................... (4) (2) ( 20)
------- ------- -------
Total charge-offs...................... (4) (6) (157)
------- ------- -------
Recoveries of loans
previously charged-off:
Residential real estate................. -- -- --
Nonresidential real estate.............. -- -- --
Commercial loans........................ -- -- --
Consumer loans.......................... -- 1 --
------- ------- -------
Total recoveries....................... -- 1 --
------- ------- -------
Net charge-offs........................ (4) (5) (157)
------- ------- -------
Provision for loan losses................. -- 177 --
------- ------- -------
Allowance for loan losses, end
of period................................$ 1,145 $ 1,149 $ 977
------- ------- -------
------- ------- -------
Total loans outstanding...................$140,488 $125,871 $121,339
Total nonperforming loans................. 212 214 112
Average total loans....................... 129,182 121,074 113,575
Allowance for loan losses to
total loans.............................. .82% .91% .81%
Allowance for loan losses to
nonperforming loans...................... 540.09% 536.92% 872.32%
Net charge-offs to
average total loans...................... .003% .004% .138%
13
<PAGE>
The following table presents the allocation of First Federal's allowance for
possible loan losses by loan classification at each of the dates indicated.
September 30,
-------------------------------------
(Dollars in Thousands) 1996 1995 1994
--------- --------- ---------
Real estate loans:
One-to-four family.............. $ 246 $ 231 $ 23
Multi-family.................... 20 -- --
Nonresidential and land......... 494 548 148
Construction.................... 10 9 --
Commercial loans................. 34 -- --
Consumer loans................... 52 35 10
Unallocated/general.............. 289 326 796
----- ----- -----
Total allowance................ $1,145 $1,149 $ 977
----- ----- -----
----- ----- -----
The following table presents, for each of the dates indicated, the percentage
of the allowance for loan losses allocated to each loan classification, and
the percentage of total loans applicable to each loan classification.
September 30,
--------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
Allowance Loans Allowance Loans Allowance Loans
--------- ------ --------- ------ --------- ------
Real estate loans:
One-to-four family......... 21.5% 69.8% 20.1% 72.9% 2.4% 69.9%
Multi-family............... 1.8 1.1 -- 1.3 -- 1.4
Nonresidential and land.... 43.1 14.1 47.7 14.1 15.1 15.2
Construction............... .9 5.5 .8 4.7 -- 7.4
Commercial loans............ 3.0 2.3 -- .8 -- .1
Consumer loans.............. 4.5 7.2 3.0 6.2 1.0 6.0
Unallocated/general......... 25.2 -- 28.4 -- 81.5 --
----- ----- ----- ----- ----- -----
Total..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
INVESTMENT ACTIVITIES
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities (which also are known
as mortgage participation certificates or pass-through certificates)
typically represent a participation interest in a pool of single-family or
multi-family mortgages, the principal and interest payments on which are
passed from the mortgage originators, through intermediaries (generally U.S.
Government agencies and government sponsored enterprises) that pool and
repackage the participation interests in the form of securities, to investors
such as the Association. Such U.S. Government agencies and government
sponsored enterprises, which guarantee the payment of principal and interest
to investors, primarily include the FHLMC, the Federal National Mortgage
Association ("FNMA") and the Government National Mortgage Association
("GNMA").
The FHLMC is a public corporation chartered by the U.S. government and
guarantees the timely payment of interest and the ultimate return of
principal within one year. The FHLMC mortgage-
14
<PAGE>
backed securities are not backed by the full faith and credit of the United
States, but because the FHLMC is a U.S. government sponsored enterprise,
these securities are considered high quality investments with minimal credit
risks. The GNMA is a government agency within the Department of Housing and
Urban Development which is intended to help finance government assisted
housing programs. The GNMA guarantees the timely payment of principal and
interest, and GNMA securities are backed by the full faith and credit of the
U.S. Government. The FNMA guarantees the timely payment of principal and
interest, and FNMA securities are indirect obligations of the U.S. Government.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well as
the prepayment risk, are passed on to the certificate holder. Accordingly,
the life of a mortgage-backed pass-through security approximates the life of
the underlying mortgages.
The following table presents the composition of the mortgage-backed
securities portfolio at each of the dates indicated. No mortgage-backed
securities are classified as available-for-sale.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
Carrying Market Carrying Market Carrying Market
(Dollars in Thousands) Value Value Value Value Value Value
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities
Held-to-maturity:
Federal Home Loan Mortgage
Corporation.(FHLMC)........ $ 709 $ 734 $1,301 $1,339 $1,612 $1,630
Federal National Mortgage
Association (FNMA)......... 809 804 979 984 1,097 1,066
----- ----- ----- ----- ----- -----
Total..................... $1,518 $1,538 $2,280 $2,323 $2,709 $2,696
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
The following table sets forth the contractual maturities of the mortgage-
backed securities portfolio at September 30, 1996. None of the securities
are classified as available-for-sale.
Amounts at September 30, 1996 Which Mature In
------------------------------------------------
1 Year 1 to 5 5 to 10 Over 10
(Dollars in Thousands) or Less Years Years Years Total
-------- -------- -------- -------- --------
Mortgage-backed securities
Held-to-maturity:
Federal Home Loan Mortgage
Corporation.(FHLMC)......... $ -- $ -- $ -- $ 709 $ 709
Federal National Mortgage
Association (FNMA).......... -- 809 -- -- 809
----- ----- ----- ----- -----
Total.......................$ -- $ 809 $ -- $ 709 $1,518
----- ----- ----- ----- -----
----- ----- ----- ----- -----
15
<PAGE>
Mortgage-backed securities generally increase the quality of the
Association's assets by virtue of the insurance or guarantees that back them,
are more liquid than individual mortgage loans and may be used to
collateralize borrowings or other obligations of the Association. At
September 30, 1996, none of the Association's mortgage-backed securities were
pledged to secure obligations of the Association.
The actual maturity of a mortgage-backed security may be less than its stated
maturity due to prepayments of the underlying mortgages. Prepayments that
are faster than anticipated may shorten the life of the security and
adversely affect its yield to maturity. The yield is based upon the interest
income and the amortization of any premium or discount related to the
mortgage-backed security. In accordance with generally accepted accounting
principles, premiums and discounts are amortized over the estimated lives of
the loans, which decrease and increase interest income, respectively. The
prepayment assumptions used to determine the amortization period for premiums
and discounts can significantly affect the yield of the mortgage-backed
security, and these assumptions are reviewed periodically to reflect actual
prepayments. Although prepayments of underlying mortgages depend on many
factors, including the type of mortgages, the coupon rate, the age of
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates,
the difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant
determinant of the rate of prepayments. During periods of falling mortgage
interest rates, if the coupon rate of the underlying mortgages exceeds the
prevailing market interest rates offered for mortgage loans, refinancing
generally increases and accelerates the prepayment of the underlying
mortgages and the related security. Under such circumstances, the
Association may be subject to reinvestment risk because to the extent that
the Association's mortgage-backed securities amortize or prepay faster than
anticipated, the Association may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate.
INVESTMENT SECURITIES. The investment policy, as established by the Board of
Directors, is designed primarily to provide and maintain liquidity and to
generate a favorable return on investments without incurring undue interest
rate risk, credit risk, and investment portfolio asset concentrations. The
investment policy is currently implemented by the President and Executive
Vice President within the parameters set by the Board of Directors.
The Company and the Association are authorized to invest in obligations
issued or fully guaranteed by the U.S. Government, certain federal agency
obligations, certain time deposits, negotiable certificates of deposit issued
by commercial banks and other insured financial institutions, investment
grade corporate debt securities and other specified investments.
Securities that management has the intent and positive ability to hold to
maturity are classified as held to maturity and are reported at amortized
cost. Securities classified as available for sale are reported at fair
value, with unrealized gains and losses excluded from earnings and reported
in a separate component of equity. At September 30, 1996, $2.6 million of
the investment securities were classified as held to maturity and $14.9
million were classified as available for sale. At September 30, 1996,
investments in the debt and/or equity securities of any one issuer did not
exceed more than 10% of the Company's stockholders' equity.
16
<PAGE>
The following table sets forth the composition of the investment securities
portfolio at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------------
1996 1995 1994
----------------- ----------------- ------------------
CARRYING MARKET CARRYING MARKET CARRYING MARKET
(DOLLARS IN THOUSANDS) VALUE VALUE VALUE VALUE VALUE VALUE
-------- ------ -------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Investment securities
Available-for-sale:
U.S. Government securities.. $14,898 $14,887 $ 999 $ 1,007 $ -- $ --
------ ------ ------ ------ ------ ------
Total available-for-sale... 14,898 14,887 999 1,007 -- --
------ ------ ------ ------ ------ ------
Held-to-maturity:
U.S. Government securities.. -- -- 17,153 17,122 13,364 12,887
Federal Home Loan Bank stock 1,053 1,053 992 992 931 931
------ ------ ------ ------ ------ ------
Total held-to-maturity....... 1,053 1,053 18,145 18,114 14,295 13,818
------ ------ ------ ------ ------ ------
Total investment securities $15,951 $15,940 $19,144 $19,121 $14,295 $13,818
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>
The following table sets forth the amount of investment securities which
mature during each of the periods indicated.
<TABLE>
<CAPTION>
AMOUNTS AT SEPTEMBER 30, 1996 WHICH MATURE IN
-----------------------------------------------
1 YEAR 1 TO 5 5 TO 10 OVER 10
(DOLLARS IN THOUSANDS) OR LESS YEARS YEARS YEARS TOTAL
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Investment securities
Available-for-sale:
U.S. Government securities... $ 2,000 $12,475 $ 423 $ -- $14,898
------ ------ ------ ------ ------
Total available-for-sale.... 2,000 12,475 423 -- 14,898
------ ------ ------ ------ ------
Held-to-maturity:
U.S. Government securities... -- -- -- -- --
Federal Home Loan Bank stock. 1,053 -- -- -- 1,053
------ ------ ------ ------ ------
Total held-to-maturity...... 1,053 -- -- -- 1,053
------ ------ ------ ------ ------
Total investment securities $ 3,053 $12,475 $ 423 $ -- $15,951
====== ====== ====== ====== ======
</TABLE>
17
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Association's funds for
lending and other investment purposes. In addition to deposits, the
Association derives funds from loan principal repayments, prepayments and
advances from the FHLB of Dallas. Loan repayments are a relatively stable
source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions. Borrowings
may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources. They may also be used on a longer
term basis for general business purposes. The Association has not generally
utilized borrowings as a source of funds.
DEPOSITS. The Association's deposit products include a broad selection of
deposit instruments, including NOW accounts, money market accounts, regular
savings accounts and term certificate accounts. Deposit account terms vary,
with the principal differences being the minimum balance required, the time
periods the funds must remain on deposit and the interest rate.
The Association considers its primary market area to be southwest Arkansas
and northeast Texas. The Association utilizes traditional marketing methods
to attract new customers and savings deposits. The Association does not
advertise for deposits outside of its primary market area or utilize the
services of deposit brokers, and management believes that an insignificant
number of deposit accounts were held by non-residents of Arkansas and Texas
at September 30, 1996.
The Association has been competitive in the types of accounts and in interest
rates it has offered on its deposit products but does not necessarily seek to
match the highest rates paid by competing institutions. Although market
demand generally dictates which deposit maturities and rates will be accepted
by the public, the Association intends to continue to promote longer term
deposits to the extent possible and consistent with its asset and liability
management goals.
The following table sets forth, by type of deposit, the distribution of the
amount of deposits and the percentage of total deposits as of the dates
indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------
1996 1995 1994
--------------- ---------------- ----------------
(DOLLARS IN THOUSANDS) AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit:
2.01% to 4.00%.......... $ 632 .5% $ 627 0.5% $ 25,147 20.2%
4.01% to 6.00%.......... 98,572 74.1 73,363 58.7 63,530 51.1
6.01% to 8.00%.......... 13,577 10.2 31,063 24.9 9,510 7.6
8.01% and over........... 4 0.0 1,287 1.0 3,152 2.5
------- ----- ------- ----- ------- -----
Total certificate accounts.. 112,785 84.8 106,340 85.1 101,339 81.4
Passbook and statement
savings accounts............ 5,917 4.4 5,025 4.0 6,426 5.2
Money market and
NOW accounts................ 14,369 10.8 13,588 10.9 16,731 13.4
------- ----- ------- ----- ------- -----
Total deposits.............. $133,071 100.0% $124,953 100.0% $124,496 100.0%
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
</TABLE>
18
<PAGE>
The following table presents, by type of deposit, the average balance and the
average rate paid for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------
1996 1995 1994
--------------- --------------- --------------
AVERAGE AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) BALANCE RATE BALANCE RATE BALANCE RATE
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Passbook and statement
savings accounts........... $ 5,280 3.18% $ 5,676 3.70% $ 6,085 2.71%
Money market and
NOW accounts............... 14,963 2.57 14,929 2.79 16,539 2.52
Certificates of deposit..... 107,866 5.49 106,087 5.10 99,940 4.45
------- ---- ------- ---- ------- ----
Total deposits............ $128,109 5.05% $126,692 4.77% $122,564 4.11%
------- ---- ------- ---- ------- ----
------- ---- ------- ---- ------- ----
</TABLE>
The following table sets forth the net deposit flows during the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Increase(decrease) before interest credited. $ 3,844 $(3,646) $(3,310)
Interest credited........................... 4,274 4,103 3,294
------ ------ ------
Net increase(decrease) in deposits......... $ 8,118 $ 457 $ (16)
------ ------ ------
------ ------ ------
</TABLE>
The following table presents, by various interest rate categories, the amount
of certificates of deposit at September 30, 1996 and the amounts which mature
during the periods indicated.
<TABLE>
<CAPTION>
AMOUNTS AT SEPTEMBER 30, 1996
SEPTEMBER 30, MATURING WITHIN
------------- ----------------------------------
AFTER
(DOLLARS IN THOUSANDS) 1996 1 YEAR 2 YEARS 3 YEARS 3 YEARS
------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Certificates of deposit:
2.01% to 4.00%.......... $ 632 $ 632 $ -- $ -- $ --
4.01% to 6.00%.......... 98,572 73,732 14,386 8,045 2,409
6.01% to 8.00%.......... 13,577 6,503 2,129 385 4,560
8.01% and over.......... 4 -- -- -- 4
------- ------- ------- ------ ------
Total certificate accounts. $112,785 $80,867 $16,515 $8,430 $6,973
------- ------- ------- ------ ------
------- ------- ------- ------ ------
</TABLE>
19
<PAGE>
The following table sets forth maturities of certificates of deposit of
$100,000 or more at September 30, 1996 by time remaining to maturity.
(DOLLARS IN THOUSANDS) AMOUNT
-------
Three months or less................ $ 2,043
Three months through six months..... 5,146
Six months through 12 months........ 5,154
Over 12 months...................... 3,718
-------
Total.............................. $16,061
-------
-------
BORROWED FUNDS. The Association may obtain advances from the FHLB of Dallas
upon the security of the common stock it owns in that bank and certain of its
residential mortgage loans and securities held to maturity, provided certain
standards related to creditworthiness have been met. Such advances are made
pursuant to several credit programs, each of which has its own interest rate
and range of maturities. Such advances are generally available to meet
seasonal and other withdrawals of deposit accounts and to permit increased
lending. The Association has not generally utilized such advances as a
source of funds. At September 30, 1996, the Association had no advances from
the FHLB.
In September 1996, the Company borrowed $475,000 from a local financial
institution on a short-term basis and sold $2.4 million of securities with
repurchase agreements. The loan and the repurchase agreements mature and
will be repaid in October 1996. See Note 10 of the Notes to the Consolidated
Financial Statements incorporated by reference in Item 8 hereof.
EMPLOYEES
The Company and the Association had 34 full-time employees and two part-time
employees at September 30, 1996. None of these employees is represented by a
collective bargaining agent, and the Company believes that it enjoys good
relations with its personnel.
SUBSIDIARIES
As of September 30, 1996, the Company had no subsidiaries other than First
Federal, and First Federal had no subsidiaries.
COMPETITION
The Association faces strong competition both in attracting deposits and
making real estate loans. Its most direct competition for deposits has
historically come from other savings association, credit unions and
commercial banks, including many large financial institutions which have
greater financial and marketing resources available to them. In addition,
during times of high interest rates, the Association has faced additional
significant competition for investors' funds from short-term money market
securities, mutual funds and other corporate and government securities. The
ability of the Association to attract and retain savings deposits depends on
its ability to generally
20
<PAGE>
provide a rate of return, liquidity and risk comparable to that offered by
competing investment opportunities.
The Association experiences strong competition for real estate loans
principally from commercial banks and mortgage companies. The Association
competes for loans principally through the interest rates and loan fees it
charges and the efficiency and quality of services it provides borrowers.
Competition may increase as a result of the continuing reduction of
restrictions on the interstate operations of financial institutions.
REGULATION
THE COMPANY
GENERAL. The Company, as a registered savings and loan holding company
within the meaning of the Home Owners' Loan Act ("HOLA"), is subject to OTS
regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, First Federal is subject to
certain restrictions in its dealings with the Company and affiliates thereof.
ACTIVITIES RESTRICTIONS. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one
subsidiary savings institution. However, if the Director of the OTS
determines that there is reasonable cause to believe that the continuation by
a savings and loan holding company of an activity constitutes a serious risk
to the financial safety, soundness or stability of its subsidiary savings
institution, the Director may impose such restrictions as deemed necessary to
address such risk, including limiting (i) payment of dividends by the savings
institution; (ii) transactions between the savings institution and its
affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution. Notwithstanding the
above rules as to permissible business activities of unitary savings and loan
holding companies, if the savings institution subsidiary of such a holding
company fails to meet the QTL test, as discussed under "--The
Association--Qualified Thrift Lender Test," then such unitary holding company
becomes subject to the activities restrictions applicable to multiple savings
and loan holding companies and, unless the savings institution requalifies as
a QTL within one year thereafter, must register as, and become subject to the
restrictions applicable to, a bank holding company. See "--The
Association--Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution, other
than through merger or other business combination with First Federal, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve
emergency thrift acquisitions and where each subsidiary savings institution
meets the QTL test, as set forth below, the activities of the Company and any
of its subsidiaries (other than First Federal or other subsidiary savings
institutions) would thereafter be subject to further restrictions. Among
other things, no multiple savings and loan holding company or subsidiary
thereof which is not a savings institution may commence or continue for a
limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof any business activity, upon prior notice to,
and no objection by the OTS, other than: (i) furnishing
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or performing management services for a subsidiary savings institution; (ii)
conducting an insurance agency or escrow business; (iii) holding, managing,
or liquidating assets owned by or acquired from a subsidiary savings
institution; (iv) holding or managing properties used or occupied by a
subsidiary savings institution; (v) acting as trustee under deeds of trust;
(vi) those activities authorized by regulation as of March 5, 1987, to be
engaged in by multiple savings and loan holding companies; or (vii) unless
the Director of the OTS by regulation prohibits or limits such activities for
savings and loan holding companies, those activities authorized by the FRB as
permissible for bank holding companies. Those activities described in (vii)
above also must be approved by the Director of the OTS prior to being engaged
in by a multiple savings and loan holding company.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding
company of a savings institution (such as the Company) and any companies
which are controlled by such parent holding company are affiliates of the
savings institution. Generally, Sections 23A and 23B (i) limit the extent to
which the savings institution or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, and contain an aggregate limit on
all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered
transaction" includes the making of loans, purchase of assets, issuance of a
guarantee and other similar transactions. In addition to the restrictions
imposed by Sections 23A and 23B, no savings institution may (i) loan or
otherwise extend credit to an affiliate, except for any affiliate which
engages only in activities which are permissible for bank holding companies,
or (ii) purchase or invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliate, except for affiliates which are subsidiaries of
the savings institution.
In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer
and to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires
that loans to directors, executive officers and principal stockholders be
made on terms substantially the same as offered in comparable transactions to
other persons and also requires prior board approval for certain loans. In
addition, the aggregate amount of extensions of credit by a savings
institution to all insiders cannot exceed the institution's unimpaired
capital and surplus. Furthermore, Section 22(g) places additional
restrictions on loans to executive officers. At September 30, 1996, First
Federal was in compliance with the above restrictions.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior
approval of the Director of the OTS, (i) control of any other savings
institution or savings and loan holding company or substantially all the
assets thereof or (ii) more than 5% of the voting shares of a savings
institution or holding
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company thereof which is not a subsidiary. Except with the prior approval of
the Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25%
of such company's stock, may acquire control of any savings institution,
other than a subsidiary savings institution, or of any other savings and loan
holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls
savings institutions in more than one state if (i) the multiple savings and
loan holding company involved controls a savings institution which operated a
home or branch office located in the state of the institution to be acquired
as of March 5, 1987; (ii) the acquiror is authorized to acquire control of
the savings institution pursuant to the emergency acquisition provisions of
the Federal Deposit Insurance Act ("FDIA"); or (iii) the statutes of the
state in which the institution to be acquired is located specifically permit
institutions to be acquired by the state-chartered institutions or savings
and loan holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-chartered savings
institutions).
FIRREA amended provisions of the Bank Holding Company Act of 1956 to
specifically authorize the FRB to approve an application by a bank holding
company to acquire control of a savings institution. FIRREA also authorized
a bank holding company that controls a savings institution to merge or
consolidate the assets and liabilities of the savings institution with, or
transfer assets and liabilities to, any subsidiary bank which is a member of
the Bank Insurance Fund ("BIF") with the approval of the appropriate federal
banking agency and the FRB. As a result of these provisions, there have been
a number of acquisitions of savings institutions by bank holding companies in
recent years.
THE ASSOCIATION
GENERAL. The OTS has extensive authority over the operations of federally
chartered savings institutions. As part of this authority, savings
institutions are required to file periodic reports with the OTS and are
subject to periodic examinations by the OTS and the FDIC. The investment and
lending authority of savings institutions are prescribed by federal laws and
regulations, and such institutions are prohibited from engaging in any
activities not permitted by such laws and regulations. Those laws and
regulations generally are applicable to all federally chartered savings
institutions and may also apply to state-chartered savings institutions.
Such regulation and supervision is primarily intended for the protection of
depositors.
The OTS' enforcement authority over all savings institutions and their
holding companies was substantially enhanced by FIRREA. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated
for violations of laws and regulations and unsafe or unsound practices.
Other actions or inactions may provide the basis for enforcement action,
including misleading or untimely reports filed with the OTS. FIRREA
significantly increased the amount of and grounds for civil money penalties.
On December 19, 1991, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") was enacted into law. The FDICIA provides for, among
other things, the
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recapitalization of the BIF; the authorization of the FDIC to make emergency
special assessments under certain circumstances against BIF members and
members of the Savings Association Insurance Fund ("SAIF"); the establishment
of risk-based deposit insurance premiums; and improved examinations and
reporting requirements. The FDICIA also provides for enhanced federal
supervision of depository institutions based on, among other things, an
institution's capital level.
INSURANCE OF ACCOUNTS. The deposits of First Federal are insured to the
maximum extent permitted by the SAIF, which is administered by the FDIC, and
are backed by the full faith and credit of the U.S. Government. As insurer,
the FDIC is authorized to conduct examinations of, and to require reporting
by, FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation
or order to pose a serious threat to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings institutions, after
giving the OTS an opportunity to take such action.
Under current FDIC regulations, SAIF-insured institutions are assigned to one
of three capital groups which are based solely on the level of an
institution's capital--"well capitalized," "adequately capitalized," and
"undercapitalized"--which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the
FDIA, as discussed below. These three groups are then divided into three
subgroups which reflect varying levels of supervisory concern, from those
which are considered to be healthy to those which are considered to be of
substantial supervisory concern. The matrix so created results in nine
assessment risk classifications, with rates ranging from .23% for well
capitalized, healthy institutions to .31% for under capitalized institutions
with substantial supervisory concerns. The insurance premiums for First
Federal for the two semi-annual periods in each of calendar 1994, calendar
1995 and calendar 1996 were .23% (per annum) of insured deposits.
On September 30, 1995, the FDIC established an assessment rate schedule of 4
to 31 basis points for BIF members. Under the schedule, approximately 91% of
BIF members would pay the lowest assessment rate of 4 basis points. The
assessment rate of 23 to 31 basis points, described above, remained
applicable to SAIF-insured institutions.
In July 1995, the Chairman of the FDIC announced in testimony before the U.S.
Congress, related to the condition of the SAIF, a proposal to recapitalize
the SAIF by a one-time charge of SAIF-insured institutions of approximately
$6.6 billion, or approximately $.85 for every $100 of assessable deposits,
and an eventual merger of the SAIF with the BIF.
On September 30, 1996, the Omnibus Appropriations Act was signed into law.
The legislation authorized a one-time charge of SAIF insured institutions at
a rate of 65.7 basis points per $100.00 of March 31, 1995 deposits. As a
result, First Federal's assessment amounted to $834,839. Additional
provisions of the Act include new BIF and SAIF premiums and the merger of BIF
and SAIF. The new BIF and SAIF premiums will include a premium for repayment
of the Financing Corporation ("FICO") bonds plus any regular insurance
assessment, currently nothing for the lowest risk category institutions.
Until full pro-rata FICO sharing is in effect, the FICO premiums for BIF and
SAIF will be 1.3 and 6.4 basis points, respectively, beginning January 1,
1997. Full pro-rata FICO sharing is to begin no later than January 1, 2000.
BIF and SAIF are to
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be merged on January 1, 1999, provided the bank and savings association
charters are merged by that date
The FDIC may terminate the deposit insurance of any insured depository
institution, including First Federal, if it determines after a hearing that
the institution has engaged or is engaging in unsafe or unsound practices, is
in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement
with the FDIC. It also may suspend deposit insurance temporarily during the
hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If insurance of accounts is terminated,
the accounts at the institution at the time of the termination, less
subsequent withdrawals, continue to be insured for a period of six months to
two years, as determined by the FDIC. Management is aware of no existing
circumstances which would result in termination of the Association's deposit
insurance.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings institutions are
required to maintain minimum levels of regulatory capital. Pursuant to
FIRREA, the OTS has established capital standards applicable to all savings
institutions. These standards generally must be as stringent as the
comparable capital requirements imposed on national banks. The OTS also is
authorized to impose capital requirements in excess of these standards on
individual institutions on a case-by-case basis.
Current OTS capital standards require savings institutions to satisfy three
different capital requirements. Under these standards, savings institutions
must maintain "tangible" capital equal to at least 1.5% of adjusted total
assets, "core" capital equal to at least 3.0% of adjusted total assets and
"total" capital (a combination of core and "supplementary" capital) equal to
at least 8.0% of "risk-weighted" assets. For purposes of the regulation,
core capital generally consists of common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related
surplus, minority interests in the equity accounts of fully consolidated
subsidiaries, certain nonwithdrawable accounts and pledged deposits and
"qualifying supervisory goodwill." Tangible capital is given the same
definition as core capital but does not include qualifying supervisory
goodwill and is reduced by the amount of all the savings institution's
intangible assets, with only a limited exception for purchased mortgage
servicing rights. First Federal had no goodwill or other intangible assets
at September 30, 1996. Both core and tangible capital are further reduced by
an amount equal to a savings institution's debt and equity investments in
subsidiaries engaged in activities not permissible to national banks (other
than subsidiaries engaged in activities undertaken as agent for customers or
in mortgage banking activities and subsidiary depository institutions or
their holding companies).
In determining compliance with the risk-based capital requirement, a savings
institution is allowed to include both core capital and supplementary capital
in its total capital, provided that the amount of supplementary capital
included does not exceed the savings institution's core capital.
Supplementary capital generally consists of hybrid capital instruments;
perpetual preferred stock which is not eligible to be included as core
capital; subordinated debt and intermediate-term preferred stock; and general
allowances for loan losses up to a maximum of 1.25% of risk-weighted assets
(a maximum of 1.5% prior to December 31, 1992). In determining the required
amount of risk-based capital, total assets, including certain off-balance
sheet items, are multiplied by a risk weight based on the risks inherent in
the type of assets. The risk weights assigned by the
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OTS for principal categories of assets are (i) 0% for cash and securities
issued by the U.S. Government or unconditionally backed by the full faith and
credit of the U.S. Government; (ii) 20% for securities (other than equity
securities) issued by U.S. Government-sponsored agencies and mortgage-backed
securities issued by, or fully guaranteed as to principal and interest by,
the FNMA or the FHLMC, except for those classes with residual characteristics
or stripped mortgage-related securities; (iii) 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan-to-value ratio of not more than 80% at
origination unless insured to such ratio by an insurer approved by the FNMA
or the FHLMC, qualifying residential bridge loans made directly for the
construction of one- to four-family residences and qualifying multi-family
residential loans; and (iv) 100% for all other loans and investments,
including consumer loans, commercial loans, and one- to four-family
residential real estate loans more than 90 days delinquent, and for
repossessed assets.
In August 1993, the OTS adopted a final rule incorporating an interest-rate
risk component into the risk-based capital regulation. Under the rule, an
institution with a greater than "normal" level of interest rate risk will be
subject to a deduction of its interest rate risk component from total capital
for purposes of calculating its risk-based capital. As a result, such an
institution will be required to maintain additional capital in order to
comply with the risk-based capital requirement. An institution with a
greater than "normal" interest rate risk is defined as an institution that
would suffer a loss of net portfolio value exceeding 2.0% of the estimated
economic value of its assets in the event of a 200 basis point increase or
decrease (with certain minor exceptions) in interest rates. The interest
rate risk component will be calculated, on a quarterly basis, as one-half of
the difference between an institution's measured interest rate risk and 2.0%
multiplied by the economic value of its assets. The rule also authorizes the
Director of the OTS, or his designee, to waive or defer an institution's
interest rate risk component on a case-by-case basis. The final rule was
originally effective as of January 1, 1994, subject however to a two quarter
"lag" time between the reporting date of the data used to calculate an
institution's interest rate risk and the effective date of each quarter's
interest rate risk component. However, in October 1994 the Director of the
OTS indicated that it would waive the capital deductions for institutions
with a greater than "normal" risk until the OTS publishes an appeals process.
On August 21, 1995, the OTS released Thrift Bulletin 67 which established (i)
an appeals process to handle "requests for adjustments" to the interest rate
risk component and (ii) a process by which "well-capitalized" institutions
may obtain authorization to use their own interest rate risk model to
determine their interest rate risk component. The Director of the OTS
indicated, concurrent with the release of Thrift Bulletin 67, that the OTS
will continue to delay the implementation of the capital deduction for
interest rate risk pending the testing of the appeals process set forth in
Thrift Bulletin 67.
Any savings institution that fails any of the capital requirements is subject
to possible enforcement actions by the OTS or the FDIC. Such actions could
include a capital directive, a cease and desist order, civil money penalties,
the establishment of restrictions on the institution's operations,
termination of federal deposit insurance and the appointment of a conservator
or receiver. The OTS' capital regulation provides that such actions, through
enforcement proceedings or otherwise, could require one or more of a variety
of corrective actions.
At September 30, 1996, First Federal exceeded all of its regulatory capital
requirements, with tangible, core and risk-based capital ratios of 16.55%,
16.55% and 28.54%, respectively.
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The following table sets forth First Federal's compliance with each of the
above-described capital requirements as of September 30, 1996.
<TABLE>
<CAPTION>
Tangible Core Risk-Based
(Dollars in Thousands) Capital Capital Capital
---------- --------- ----------
<S> <C> <C> <C>
Regulatory capital...................... $27,031 $27,031 $ 27,805
Minimum required regulatory capital..... 2,450 4,900 7,793
------- ------- --------
Excess regulatory capital............... $24,581 $22,131 $ 20,012
------- ------- --------
------- ------- --------
Total adjusted assets................... $163,340 $163,340 $ 97,411
------- ------- --------
------- ------- --------
Regulatory capital ratio................ 16.55% 16.55% 28.54%
Minimum required capital ratio.......... 1.50% 3.00% 8.00%
Excess regulatory capital ratio......... 15.05% 13.55% 20.54%
</TABLE>
LIQUIDITY REQUIREMENTS. All savings institutions are required to maintain an
average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary
from time to time (between 4% and 10%) depending upon economic conditions and
savings flows of all savings institutions. At the present time, the
required minimum liquid asset ratio is 5%. At September 30, 1996, First
Federal's liquidity ratio was 17.10%.
CAPITAL DISTRIBUTIONS. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible debt
and other transactions charged to the capital account of a savings
institution to make capital distributions. Generally, the regulation creates
a safe harbor for specified levels of capital distributions from institutions
meeting at least their minimum capital requirements, so long as such
institutions notify the OTS and receive no objection to the distribution from
the OTS. Savings institutions that do not qualify for the safe harbor are
required to obtain prior OTS approval before making any capital
distributions.
Generally, a savings institution that before and after the proposed
distribution meets or exceeds its fully phased-in capital requirements (Tier
1 institutions) may make capital distributions during any calendar year equal
to the higher of (i) 100% of net income for the calendar year-to-date plus
50% of its "surplus capital ratio" at the beginning of the calendar year or
(ii) 75% of net income over the most recent four-quarter period. The
"surplus capital ratio" is defined to mean the percentage by which the
institution's ratio of total capital to assets exceeds the ratio of its fully
phased-in capital requirement to assets. "Fully phased-in capital
requirement" is defined to mean an institution's capital requirement under
the statutory and regulatory standards to be applicable on December 31, 1994,
as modified to reflect any applicable individual minimum capital requirement
imposed upon the institution. Failure to meet fully phased-in or minimum
capital
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requirements will result in further restrictions on capital distributions,
including possible prohibition without explicit OTS approval. See "- Regulatory
Capital Requirements."
Tier 2 institutions, which are institutions that before and after the
proposed distribution meet or exceed their minimum capital requirements, may
make capital distributions up to a specified percentage of their net income
during the most recent four quarter period, depending on how close the
institution is to meeting its fully phased-in capital requirements. Tier 2
institutions that meet the capital requirements in effect on January 1, 1993
(including the 8% risk-based requirement and then-applicable exclusions on
non-permissible subsidiary investments and goodwill) are permitted to make
distributions totalling up to 75% of their net income over the most recent
four quarter period.
In order to make distributions under these safe harbors, Tier 1 and Tier 2
institutions must submit 30 days written notice to the OTS prior to making
the distribution. The OTS may object to the distribution during that 30-day
period based on safety and soundness concerns. In addition, a Tier 1
institution deemed to be in need of more than normal supervision by the OTS
may be downgraded to a Tier 2 or Tier 3 institution as a result of such a
determination.
Tier 3 institutions, which are institutions that do not meet current minimum
capital requirements, or that have capital in excess of either their fully
phased-in capital requirement or minimum capital requirement but which have
been notified by the OTS that it will be treated as a Tier 3 institution
because they are in need of more than normal supervision, cannot make any
capital distribution without obtaining OTS approval prior to making such
distributions.
At September 30, 1996, First Federal was a Tier 1 institution for purposes of
this regulation.
On December 5, 1994, the OTS published a notice of proposed rulemaking to
amend its capital distribution regulation. Under the proposal, institutions
would be permitted to only make capital distributions that would not result
in their capital being reduced below the level required to remain "adequately
capitalized." An institution is adequately capitalized if it has a total
risked-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio
of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or more and does
not meet the definition of well capitalized. Because the Association is a
subsidiary of a holding company, the proposal would require the Association
to provide notice to the OTS of its intent to make a capital distribution.
The Association does not believe that its ability to make capital
distributions will be adversely affected.
BRANCHING BY FEDERAL SAVINGS INSTITUTIONS. OTS policy permits interstate
branching to the full extent permitted by statute (which is essentially
unlimited). Generally, federal law prohibits federal savings institutions
from establishing, retaining or operating a branch outside the state in which
the federal institution has its home office unless the institution meets the
IRS' domestic building and loan test (generally, 60% of a thrift's assets
must be housing-related) ("IRS Test"). The IRS Test requirement does not
apply if, among other things, the law of the state where the branch would be
located would permit the branch to be established if the federal savings
institution were chartered by the state in which its home office is located.
Furthermore, the OTS will evaluate a branching applicant's record of
compliance with the Community Reinvestment Act of 1977 ("CRA"). An
unsatisfactory CRA record may be the basis for denial of a branching
application.
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QUALIFIED THRIFT LENDER TEST. All savings institutions are required to meet
a QTL test set forth in Section 10(m) of the HOLA and regulations of the OTS
thereunder to avoid certain restrictions on their operations. A savings
institution that does not meet the QTL test set forth in the HOLA and
implementing regulations must either convert to a bank charter or comply with
the following restrictions on its operations: (i) the institution may not
engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for a national
bank; (ii) the branching powers of the institution shall be restricted to
those of a national bank; (iii) the institution shall not be eligible to
obtain any advances from its FHLB; and (iv) payment of dividends by the
institution shall be subject to the rules regarding payment of dividends by a
national bank. Upon the expiration of three years from the date the savings
institution ceases to be a QTL, it must cease any activity and not retain any
investment not permissible for a national bank and immediately repay any
outstanding FHLB advances (subject to safety and soundness considerations).
Currently, the QTL test requires that 65% of an institution's "portfolio
assets" (as defined) consist of certain housing and consumer-related assets
on a monthly average basis in nine out of every 12 months. Assets that
qualify without limit for inclusion as part of the 65% requirement are loans
made to purchase, refinance, construct, improve or repair domestic
residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); stock issued by the FHLB of
Dallas; and direct or indirect obligations of the FDIC. In addition, the
following assets, among others, may be included in meeting the test subject
to an overall limit of 20% of the savings institution's portfolio assets: 50%
of residential mortgage loans originated and sold within 90 days of
origination; 100% of consumer and educational loans (limited to 10% of total
portfolio assets); and stock issued by the FHLMC or the FNMA. Portfolio
assets consist of total assets minus the sum of (i) goodwill and other
intangible assets, (ii) property used by the savings institution to conduct
its business, and (iii) liquid assets up to 20% of the institution's total
assets. At September 30, 1996, the qualified thrift investments of First
Federal were approximately 85% of its portfolio assets.
ACCOUNTING REQUIREMENTS. FIRREA requires the OTS to establish accounting
standards to be applicable to all savings institutions for purposes of
complying with regulations, except to the extent otherwise specified in the
capital standards. Such standards must incorporate GAAP to the same degree
as is prescribed by the federal banking agencies for banks or may be more
stringent than such requirements.
The accounting principles for depository institutions are currently
undergoing review to determine whether the historical cost model or
market-based measure of valuation is the appropriate measure for reporting
the assets of such institutions in their financial statements. Such proposal
is controversial because any change in applicable accounting principles which
requires depository institutions to carry mortgage-backed securities and
mortgage loans at fair market value could result in substantial losses to
such institutions and increased volatility in their liquidity and operations.
Currently, it cannot be predicted whether there may be any changes in the
accounting principles for depository institutions in this regard beyond those
imposed by SFAS No. 115 or when any such changes might become effective.
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FEDERAL HOME LOAN BANK SYSTEM. First Federal is a member of the FHLB of
Dallas, which is one of 12 regional FHLBs that administers the home financing
credit function of savings institutions. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of
the FHLB System. It makes loans to members (i.e., advances) in accordance
with policies and procedures established by the Board of Directors of the
FHLB. At September 30, 1996, the Association had no FHLB advances.
As a member, First Federal is required to purchase and maintain stock in the
FHLB of Dallas in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At September 30, 1996, First Federal had $1.1
million in FHLB stock, which was in compliance with this requirement.
As a result of FIRREA, the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to affordable
housing programs through direct loans or interest subsidies on advances
targeted for community investment and low- and moderate-income housing
projects. These contributions have adversely affected the level of FHLB
dividends paid and could continue to do so in the future. These
contributions also could have an adverse effect on the value of FHLB stock in
the future.
FEDERAL RESERVE SYSTEM. The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily NOW and Super
NOW checking accounts) and non-personal time deposits. As of September 30,
1996, no reserves were required to be maintained on the first $4.3 million of
transaction accounts, reserves of 3% were required to be maintained against
the next $47.7 million of net transaction accounts (with such dollar amounts
subject to adjustment by the FRB), and a reserve of 10% against all remaining
net transaction accounts. Because required reserves must be maintained in
the form of vault cash or a noninterest-bearing account at a Federal Reserve
Bank, the effect of this reserve requirement is to reduce an institution's
earning assets.
TAXATION
FEDERAL TAXATION
GENERAL. The Company and First Federal are subject to the generally
applicable corporate tax provisions of the Code, and First Federal is subject
to certain additional provisions of the Code which apply to thrift and other
types of financial institutions. The following discussion of federal
taxation is intended only to summarize certain pertinent federal income tax
matters and is not a comprehensive discussion of the tax rules applicable to
the Company and First Federal.
TAX YEAR. The Company and the Association file separate federal income tax
returns on the basis of a fiscal year ending on September 30.
BAD DEBT RESERVES. Savings institutions, such as First Federal, which meet
certain definitional tests primarily relating to their assets and the nature
of their businesses, are permitted to establish
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a reserve for bad debts and to make annual additions to the reserve. These
additions may, within specified formula limits, be deducted in arriving at the
institution's taxable income. For purposes of computing the deductible
addition to its bad debt reserve, the institution's loans are separated into
"qualifying real property loans" (i.e., generally those loans secured by
certain interests in real property) and all other loans ("non-qualifying
loans"). The deduction with respect to non-qualifying loans must be computed
under the experience method as described below. The following formulas may be
used to compute the bad debt deduction with respect to qualifying real property
loans: (i) actual loss experience, or (ii) a percentage of taxable income.
Reasonable additions to the reserve for losses on non-qualifying loans must be
based upon actual loss experience and would reduce the current year's addition
to the reserve for losses on qualifying real property loans, unless that
addition is also determined under the experience method. The sum of the
additions to each reserve for each year is the institution's annual bad debt
deduction.
Under the experience method, the deductible annual addition to the
institution's bad debt reserves is the amount necessary to increase the
balance of the reserve at the close of the taxable year to the greater of (a)
the amount which bears the same ratio to loans outstanding at the close of
the taxable year as the total net bad debts sustained during the current and
five preceding taxable years bear to the sum of the loans outstanding at the
close of the six years, or (b) the lower of (i) the balance of the reserve
account at the close of the Association's "base year," which was its tax year
ended September 30, 1988, or (ii) if the amount of loans outstanding at the
close of the taxable year is less than the amount of loans outstanding at the
close of the base year, the amount which bears the same ratio to loans
outstanding at the close of the taxable year as the balance of the reserve at
the close of the base year bears to the amount of loans outstanding at the
close of the base year.
Under the percentage of taxable income method, the bad debt deduction equals
8% of taxable income determined without regard to that deduction and with
certain adjustments. The availability of the percentage of taxable income
method permits a qualifying savings institution to be taxed at a lower
effective federal income tax rate than that applicable to corporations in
general. This resulted generally in an effective federal income tax rate
payable by a qualifying savings institution fully able to use the maximum
deduction permitted under the percentage of taxable income method, in the
absence of other factors affecting taxable income, of 31.3% exclusive of any
minimum tax or environmental tax (as compared to 34% for corporations
generally). For tax years beginning on or after January 1, 1993, the maximum
corporate tax rate was increased to 35%, which increased the maximum
effective federal income tax rate payable by a qualifying savings institution
fully able to use the maximum deduction to 32.2%. Any savings institution at
least 60% of whose assets are qualifying assets, as described in the Code,
will generally be eligible for the full deduction of 8% of taxable income.
As of September 30, 1996, approximately 85% of the assets of First Federal
were "qualifying assets" as defined in the Code.
Under the percentage of taxable income method, the bad debt deduction for an
addition to the reserve for qualifying real property loans cannot exceed the
amount necessary to increase the balance in this reserve to an amount equal
to 6% of such loans outstanding at the end of the taxable year. The bad debt
deduction is also limited to the amount which, when added to the addition to
the reserve for losses on non-qualifying loans, equals the amount by which
12% of deposits at the close of the year exceeds the sum of surplus,
undivided profits and reserves at the
31
<PAGE>
beginning of the year. In addition, the deduction for qualifying real
property loans is reduced by an amount equal to all or part of the deduction
for non-qualifying loans.
First Federal used the percentage method for the periods ended September 30,
1996, 1995 and 1994.
At September 30, 1996, the federal income tax reserves of First Federal
included approximately $2.3 million for which no federal income tax has been
provided. Because of these federal income tax reserves and the liquidation
account to be established for the benefit of certain depositors of First
Federal in connection with the conversion of the Association to stock form,
the retained earnings of First Federal are substantially restricted.
In August 1996, the Small Business Job Protection Act was signed into law.
This Act repealed the percentage method of computing the bad debt deduction
for tax years beginning after December 31, 1995. If the Association
continues to qualify as a small bank with assets under $500 million, it will
not be required to repay the tax on prior bad debt deductions. Should the
Association fail to meet this requirement, the tax will have to be repaid
ratably over a six year period. The Association is currently in no jeopardy
of failing to meet this requirement.
DISTRIBUTIONS. If First Federal were to distribute cash or property to its
sole stockholder, and the distribution was treated as being from its
accumulated bad debt reserves, the distribution would cause First Federal to
have additional taxable income. A distribution is deemed to have been made
from accumulated bad debt reserves to the extent that (a) the reserves exceed
the amount that would have been accumulated on the basis of actual loss
experience, and (b) the distribution is a "non-qualified distribution." A
distribution with respect to stock is a non-qualified distribution to the
extent that, for federal income tax purposes, (i) it is in redemption of
shares, (ii) it is pursuant to a liquidation of the institution, or (iii) in
the case of a current distribution, together with all other such
distributions during the taxable year, it exceeds the institution's current
and post-1951 accumulated earnings and profits. The amount of additional
taxable income created by a non-qualified distribution is an amount that when
reduced by the tax attributable to it is equal to the amount of the
distribution.
MINIMUM TAX. The Code imposes an alternative minimum tax at a rate of 20%.
The alternative minimum tax generally applies to a base of regular taxable
income plus certain tax preferences ("alternative minimum taxable income" or
"AMTI") and is payable to the extent such AMTI is in excess of an exemption
amount. The Code provides that an item of tax preference is the excess of
the bad debt deduction allowable for a taxable year pursuant to the
percentage of taxable income method over the amount allowable under the
experience method. Other items of tax preference that constitute AMTI
include (a) tax-exempt interest on newly issued (generally, issued on or
after August 8, 1986) private activity bonds other than certain qualified
bonds and (b) 75% of the excess (if any) of (i) adjusted current earnings as
defined in the Code, over (ii) AMTI (determined without regard to this
preference and prior to reduction by net operating losses).
NET OPERATING LOSS CARRYOVERS. A corporation may carry back net operating
losses ("NOLs") to the preceding three taxable years and forward to the
succeeding 15 taxable years. This
32
<PAGE>
provision applies to losses incurred in taxable years beginning after 1986. At
September 30, 1996, the Company and First Federal had no NOL carryforwards for
federal income tax purposes.
CAPITAL GAINS AND CORPORATE DIVIDENDS-RECEIVED DEDUCTION. Corporate net
capital gains are taxed at a maximum rate of 34%. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated
tax return, and corporations which own less than 20% of the stock of a
corporation distributing a dividend may deduct only 70% of dividends received
or accrued on their behalf. However, a corporation may deduct 100% of
dividends from a member of the same affiliated group of corporations.
OTHER MATTERS. Federal legislation is introduced from time to time that
would limit the ability of individuals to deduct interest paid on mortgage
loans. Individuals are currently not permitted to deduct interest on
consumer loans. Significant increases in tax rates or further restrictions
on the deductibility of mortgage interest could adversely affect First
Federal.
First Federal's federal income tax returns for the tax years ended September
30, 1993 forward are open under the statute of limitations and are subject to
review by the IRS.
STATE TAXATION
The Association is subject to Arkansas corporation income tax which is 6.5%
of all earnings when income exceeds $100,000.
The Company is incorporated under Texas law and, accordingly, is subject to
Texas franchise tax in an amount equal to the greater of .25% of
stockholders' equity or 4.5% of net income.
33
<PAGE>
ITEM 2. PROPERTIES.
The Association conducts its business from its executive office in Texarkana,
Arkansas, and four full-service offices, all of which are located in
Southwest Arkansas. The following table sets forth the net book value
(including leasehold improvements and equipment) and certain other information
with respect to the offices and other properties at September 30, 1996.
<TABLE>
<CAPTION>
Leased/ Net Book Value Amount of
Owned of Property Deposits
_________________________ ______________ ______________ ______________
(Dollars In Thousands)
<S> <C> <C> <C>
Third & Olive Streets Owned $1,310 $90,911
Texarkana, Arkansas
611 East Wood Street Owned 82 11,013
Ashdown, Arkansas
6th & S. Main Owned 131 11,840
Hope, Arkansas
217 W. DeQueen Avenue Leased(1)(2) 178 16,545
DeQueen, Arkansas
111 W. Shepherd Leased(1) -- 2,762
Nashville, Arkansas
Richmond Road Owned(3) 313 --
Texarkana, Texas
</TABLE>
____________________
(1) Such properties are leased on a month to month basis.
(2) Property has been purchased and construction has begun on a new facility
located at 1011 W. Collin Raye Drive, DeQueen AR 71832. Construction,
which began in August, 1996, is expected to be completed in January,
1997. Upon completion, the value is expected to be approximately
$682,000 including land, building and equipment.
(3) Future building site. Construction of a full-service branch office
is scheduled for fiscal year 1998.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any pending legal proceedings other than
nonmaterial legal proceedings occurring in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
None submitted during the fourth quarter of the fiscal year.
34
<PAGE>
PART II.
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Shares of Texarkana First Financial Corporation's common stock are traded
under the name Texarkana, symbol "FTF", on the American Stock Exchange. At
September 30, 1996, the Company had approximately 432 stockholders of record.
Such holdings do not reflect the number of beneficial owners of common stock.
Cash dividends declared and any additional information required herein, to
the extent applicable, is incorporated by reference from page 5 of the
Company's 1996 Annual Report to Stockholders ("Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from page 4 of the
1996 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required herein is incorporated by reference from pages 6 to
16 of the 1996 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages 17 to
38 of the 1996 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information required herein is incorporated by reference from pages 2 and
3 of the definitive proxy statement of the Company for the Annual Meeting of
Stockholders to be held on January 21, 1997, which was filed on December 23,
1996 ("Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from pages 6 to
9 of the Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from pages 5 and
6 of the Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from page 9 of
the Definitive Proxy Statement, and page 34 of the Annual Report, Note 18 in
the Notes to the Consolidated Financial Statements.
35
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) The following financial statements are incorporated by reference from
Item 8 hereof (see Exhibit 13):
Report of Independent Auditors
Consolidated Statements of Financial Condition as of September 30, 1996
and 1995.
Consolidated Statements of Income for the Fiscal Periods Ended September
30, 1996, 1995 and 1994
Consolidated Statements of Changes in Shareholders' Equity for the
Fiscal Periods Ended September 30, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the Fiscal Periods ended
September 30, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission ("SEC") are omitted
because of the absence of conditions under which they are required or because
the required information is included in the consolidated financial statements
and related notes thereto.
(3) The following exhibits are filed as part of this Form 10-K, and this
list includes the Exhibit index.
EXHIBIT INDEX PAGE
2.1 Plan of Conversion *
3.1 Articles of Incorporation of Texarkana First Financial Corporation *
3.2 Bylaws of Texarkana First Financial Corporation *
4.1 Stock Certificate of Texarkana First Financial Corporation **
10.1 Employment Agreement among First Federal Savings and Loan
Association of Texarkana, Texarkana First Financial Corporation
and James W. McKinney *
10.2 Employment Agreement among First Federal Savings and Loan
Association of Texarkana, Texarkana First Financial Corporation
and John E. Harrison *
10.3 1996 Key Employee Stock Compensation Program *
10.4 1996 Management Recognition Plan for Officers *
10.5 1996 Management Recognition Plan for Directors *
10.6 1996 Directors' Stock Option Plan *
11.0 Earnings Per Share Computation E-1
13.0 1996 Annual Report to Stockholders ***
____________________
* Incorporated herein by reference from the Corporation's Registration
Statement on Form S-1 (Registration No. 33-900834) filed by the Company
with the SEC on March 31, 1995, as subsequently amended.
** Incorporated herein by reference from the Company's Form 10-K for the
year ended September 30, 1995.
*** Previously filed by EDGAR on December 23, 1996
36
<PAGE>
(b) REPORTS ON FORM 8-K.
None filed during the fourth quarter of the fiscal year.
(c) See (a)(3) above for all exhibits and the Exhibit Index.
(d) There are no other financial statements and financial statement
schedules which were excluded from the 1996 Annual Report to Stockholders which
are required to be included herein.
37
<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.
TEXARKANA FIRST FINANCIAL CORPORATION
By: /s/ James W. McKinney
----------------------------------
James W. McKinney
President, Chief Executive Officer
and Director
Pursuant to the requirements 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 the dates indicated.
/s/ James W. McKinney December 26, 1996
- ----------------------------------
James W. McKinney
President, Chief Executive Officer
and Director
/s/ Josh R. Morriss, Jr. December 26, 1996
- ----------------------------------
Josh R. Morriss, Jr.
Chairman of the Board
/s/ John E. Harrison December 26, 1996
- ----------------------------------
John E. Harrison
Executive Vice President and
Director
38
<PAGE>
/s/ John M. Andres December 26, 1996
- ----------------------------------
John M. Andres
Director
/s/ Arthur L. McElmurry December 26, 1996
- ----------------------------------
Arthur L. McElmurry
Director
/s/ Donald N. Morriss December 26, 1996
- ----------------------------------
Donald N. Morriss
Director
/s/ James L. Sangalli December 26, 1996
- ----------------------------------
James L. Sangalli
Chief Financial Officer
39
<PAGE>
Exhibit 11.0
Earnings Per Share Computation
<PAGE>
Form 10-K
Exhibit 11
EARNINGS PER SHARE COMPUTATION
<TABLE>
<CAPTION>
Year Ended Period Ended
September 30, September 30,
1996 1995(1)
------------ -------------
<S> <C> <C>
Net Income $2,401,180 $733,625
------------ --------
------------ --------
PRIMARY
Weighted average shares outstanding 1,832,272 1,844,928
Earnings per share $1.31 $ .40
FULLY DILUTED
Weighted average shares outstanding 1,832,494 1,844,928
Earnings per share $1.31 $ .40
</TABLE>
___________________
(1) Earnings per share for 1995 are calculated for the period beginning
July 7, 1995, the date of the initial public offering.
E-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 1,481
<INT-BEARING-DEPOSITS> 1,829
<FED-FUNDS-SOLD> 5,550
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,887
<INVESTMENTS-CARRYING> 2,571
<INVESTMENTS-MARKET> 2,591
<LOANS> 135,660
<ALLOWANCE> 1,145
<TOTAL-ASSETS> 165,747
<DEPOSITS> 133,071
<SHORT-TERM> 2,858
<LIABILITIES-OTHER> 3,394
<LONG-TERM> 0
0
0
<COMMON> 20
<OTHER-SE> 26,404
<TOTAL-LIABILITIES-AND-EQUITY> 165,747
<INTEREST-LOAN> 10,850
<INTEREST-INVEST> 1,895
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 12,745
<INTEREST-DEPOSIT> 6,472
<INTEREST-EXPENSE> 6,480
<INTEREST-INCOME-NET> 6,265
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (3)
<EXPENSE-OTHER> 3,335
<INCOME-PRETAX> 3,683
<INCOME-PRE-EXTRAORDINARY> 3,683
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,401
<EPS-PRIMARY> 1.31
<EPS-DILUTED> 1.31
<YIELD-ACTUAL> 3.90
<LOANS-NON> 68
<LOANS-PAST> 144
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 371
<ALLOWANCE-OPEN> 1,149
<CHARGE-OFFS> 4
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,145
<ALLOWANCE-DOMESTIC> 1,145
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 289
</TABLE>
