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, 1998
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: (870) 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 ]
The aggregate market value of the 1,342,217 shares of voting stock held by
non-affiliates of the registrant was $32.2 million, based on the closing sale
price of $24.00 per share on December 1, 1998. For purposes of this
calculation only, affiliates are deemed to be directors, executive officers
and certain beneficial owners.
Number of shares of Common Stock outstanding at December 1, 1998: 1,642,792
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Annual Report to Stockholders for the year ended
September 30, 1998 are incorporated into Part II, Items 5 through 8.
(2) Portions of the definitive proxy statement for the 1998 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.............................................. 36
Item 3 Legal Proceedings....................................... 36
Item 4 Submission of Matters To Vote of Security Holders....... 36
PART II
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters......................... 37
Item 6 Selected Financial Data................................. 37
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 37
Item 8 Financial Statements and Supplementary Data............. 37
Item 9 Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.................. 37
PART III
Item 10 Directors and Executive Officers of the Registrant...... 38
Item 11 Executive Compensation.................................. 38
Item 12 Security Ownership of Certain
Beneficial Owners and Management........................ 38
Item 13 Certain Relationships and Related Transactions.......... 38
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K................................. 39
<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. In July 1995, the Association
converted from a federally chartered mutual savings and loan association to a
federally chartered stock savings and loan association (the "Conversion").
The Association is the only subsidiary of the Company and the Company's
investment in the subsidiary is its only significant asset.
The business and management of the Company consists primarily of the business
and management of the Association which is a federally chartered stock savings
and loan association conducting business through its main office and four full
service branch offices.
First Federal is primarily engaged in attracting deposits from the general
public 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 (870) 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. At September 30, 1998, the
unemployment rate for the Association's principal market area of Miller
County, Arkansas and Bowie County, Texas was 7.8%. The unemployment rate of
Miller County, Arkansas and Bowie County, Texas was 4.8% and 8.1%,
respectively, and the statewide unemployment rate for both Arkansas and Texas
was 5.0%.
Lending Activities
General. At September 30, 1998, the Association's total portfolio of loans
receivable, net of unearned income, amounted to $155.8 million or 82.2% of the
Company's $189.5 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, $105.4 million or 65.2% of the total
loan portfolio consisted of one-to-four family residential loans. The
Association also originates multi-family residential loans, nonresidential
real estate and land loans, construction loans, commercial business loans and
consumer loans. For each of these loan categories, the amount and percent of
the total loan portfolio at September 30, 1998 was $1.6 million or 1.0% of
multi-family residential loans, $25.5 million or 15.8% of nonresidential real
estate and land loans, $13.0 million or 8.0% of construction loans, $2.8
million or 1.7% of commercial business loans, and $13.4 million or 8.3% of
consumer loans.
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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.
September 30,
__________________________________________________
1998 1997 1996
_______________ _______________ _______________
(Dollars in Thousands) Amount % Amount % Amount %
________ ______ ________ ______ ________ ______
Real estate loans:
One-to-four family.........$105,369 65.16% $105,163 69.27% $ 98,031 69.78%
Multi-family............... 1,582 .98 806 .53 1,503 1.07
Nonresidential and land.... 25,517 15.78 25,889 17.05 19,765 14.07
Construction............... 13,000 8.04 5,620 3.70 7,818 5.56
_______ ______ _______ ______ _______ ______
Total real estate loans... 145,468 89.96 137,478 90.55 127,117 90.48
Commercial loans............ 2,841 1.76 2,384 1.57 3,264 2.32
Consumer loans.............. 13,394 8.28 11,966 7.88 10,107 7.20
_______ ______ _______ ______ _______ ______
Total loans.............. 161,703 100.00% 151,828 100.00% 140,488 100.00%
====== ====== ======
Less:
Loans in process........... 5,801 3,241 3,571
Deferred fees and discounts 121 116 112
_______ _______ _______
Net loans................$155,781 $148,471 $136,805
======= ======= =======
Contractual Maturities. The following table presents the scheduled maturities
of First Federal's loans at September 30, 1998. Demand loans, loans having no
stated schedule of repayment and no stated maturity, and overdraft loans are
reported as due in one year or less. The amounts shown for each maturity
period do not take into consideration loan prepayments but do reflect normal
amortization.
Amounts Due After September 30, 1998 in Years
____________________________________________________
One Two Three Six After
or through through Ten
(Dollars in Thousands) Less Five Ten Total
_______ _______ _______ _______ _______ _______
Real estate loans:
One-to-four family......$ 1,124 $ 165 $ 4,481 $ 15,750 $ 83,849 $105,369
Multi-family............ 7 -- -- 105 1,470 1,582
Nonresidential and land. 338 627 2,329 5,806 16,417 25,517
Construction............ 13,000 -- -- -- -- 13,000
Commercial loans......... 519 20 453 1,849 -- 2,841
Consumer loans........... 4,310 2,010 5,530 1,177 367 13,394
_______ _______ _______ _______ _______ _______
Total loans............$ 19,298 $ 2,822 $ 12,793 $ 24,687 $102,103 $161,703
======= ======= ======= ======= ======= =======
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The following table sets forth the dollar amount of total loans at September
30, 1998 which have fixed interest rates or which have floating or adjustable
interest rates.
September 30, 1998
____________________________________
Floating or
Fixed Adjustable
(Dollars in Thousands) Rate Rate Total
_______ ___________ ________
Real estate loans:
One-to-four family...............$ 12,088 $ 93,281 $105,369
Multi-family..................... 7 1,575 1,582
Nonresidential and land.......... 4,120 21,397 25,517
Construction..................... 6,402 6,598 13,000
Commercial loans.................. 1,182 1,659 2,841
Consumer loans.................... 12,913 481 13,394
_______ _______ _______
Total loans.....................$ 36,712 $124,991 $161,703
======= ======= =======
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 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 loan officers or branch managers.
Generally, loan officers and branch managers may approve loans up to $100,000
and all other loans up to $300,000 are approved by the Association's Loan
Committee consisting of the Association's Chief Executive Officer, president,
Executive Vice President and certain other employees. The Chief Executive
Officer and one outside director may 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. No
loans were purchased in fiscal 1998 and fiscal 1997, and a $1.0 million
participation interest in a local retirement center construction loan was
purchased in fiscal 1996.
As part of its asset/liability management, the Association typically sells its
conventional fixed-rate residential loans to the Federal Home Loan Mortgage
Corporation ("FHLMC") with servicing retained and without recourse. Sales of
loans produce future servicing income if servicing is retained and provide
funds for additional lending and other purposes. The Association sold $13.3
million, $2.2 million and $2.2 million of fixed-rate loans during fiscal 1998,
1997 and 1996, respectively.
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Loans sold to the FHLMC are not sold pursuant to forward sales commitments.
Some loans have an interest rate that is set at the origination date and
others have a rate that is set at the closing date. For those loans with a
rate set at origination, the Association assumes some interest rate risk since
the market rate at date of sale could differ from the rate set at the
origination date.
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.
At September 30, 1998, mortgage loans serviced for others amounted to $32.5
million.
The Association also originates mortgage loans insured by the Federal Housing
Administration ("FHA") and mortgage loans guaranteed by the Office of Veterans
Affairs ("VA"). Such loans are sold to an independent mortgage company with
servicing rights and without recourse.
The following table shows total loans originated, purchased, sold and repaid
during the periods indicated.
Year Ended September 30,
___________________________
(Dollars in Thousands) 1998 1997 1996
______ ______ ______
Loan originations:
One-to-four family residential.............$33,005 $18,172 $19,747
Multi-family residential................... 1,291 193 --
Nonresidential and land.................... 2,990 7,173 3,737
Construction............................... 13,854 8,543 8,216
Commercial................................. 751 714 2,783
Consumer................................... 11,363 9,448 7,137
______ ______ ______
Total loan originations................... 63,254 44,243 41,620
______ ______ ______
Loan purchases.............................. -- -- 1,000
______ ______ ______
Total loan originations and purchases..... 63,254 44,243 42,620
______ ______ ______
Less sales and loan principal repayments:
Loans sold................................. 13,643 2,160 2,179
Loan principal repayments.................. 39,358 29,948 24,737
______ ______ ______
Total loans sold and principal repayments. 53,001 32,108 26,916
______ ______ ______
Increase (decrease) due to other items, net. (378) (794) (1,087)
______ ______ ______
Net increase (decrease) in total loans......$ 9,875 $11,341 $14,617
====== ====== ======
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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
30, 1998, the Association's limit on loans-to-one borrower was approximately
$4.2 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 four loans with total outstanding balances of $3.3 million and
includes two commercial real estate loans totaling $3.2 million, one
commercial business loan of $9,000 and one consumer loan of $120,000. The
Association also has outstanding loans to three different borrowers in Ft.
Worth, Texas secured by three commercial buildings with total outstanding
balances of $2.5 million. As of September 30, 1998, these loans are current
as to payments of principal and interest and are 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, 1998, $105.4 million or 65.2% of the total loan portfolio
consisted of one-to-four family residential real estate loans. The
Association originated $33.0 million, $18.2 million and $19.7 million of one-
to-four family residential loans in fiscal 1998, 1997 and 1996, 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 $105.4 million of such loans at September 30, 1998,
$93.3 million or 88.5% had adjustable-rates of interest and $12.1 million or
11.5% had fixed-rates of interest. The Association's fixed-rate loans are
originated primarily with terms of 15, 20 and 30 years. Most 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 5% 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.
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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 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, 1998, $1.6 million or 1.0% of the total loan portfolio
consisted of loans secured by existing multi-family residential real estate
properties. Such amount primarily represents 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, 1998, $22.1 million or 13.7% of
the total loan portfolio consisted of loans secured by existing commercial
real estate properties and $3.4 million or 2.1% 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.
7
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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.
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.
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 acquiring home
sites. Such loans are secured by a lien on the property and are typically
limited to 80% 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, 1998, construction loans amounted to $13.0 million or 8.0% of
the total loan portfolio, of which $10.5 million consisted of residential
construction loans and $2.5 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.
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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.
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, 1998, commercial business loans
amounted to $2.8 million or 1.7% 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, 1998,
consumer loans amounted to $13.4 million or 8.3% of the total loan portfolio
with $2.8 million in home improvement loans, $5.3 million in automobile loans,
$1.0 million in loans secured by deposit accounts and $4.3 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 generally limits the mortgages on the
secured property to 80% of the value of the secured property.
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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.
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,
1998.
Delinquent Loans. The following table sets forth information concerning
delinquent loans as of September 30, 1998, 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.
10
<PAGE>
September 30, 1998
_________________________________________________
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
______ ________ ______ ________ ______ ________
Real estate loans:
One-to-four family........$ 844 .52% $ 192 .12% $ 177 .11%
Multi-family.............. -- -- -- -- -- --
Nonresidential and land... 139 .09 635 .39 10 .01
Construction.............. 194 .12 203 .13 84 .05
Commercial loans........... -- -- -- -- 9 --
Consumer loans............. 223 .14 21 .01 13 .01
_____ _____ _____
Total delinquent loans...$1,400 .87% $1,051 .65% $ 293 .18%
===== ===== =====
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.
September 30,
_________________________
(Dollars in Thousands) 1998 1997 1996
_____ _____ _____
Non-accruing loans:
One-to-four family residential..........$ -- $ -- $ 66
Multi-family residential................ -- -- --
Nonresidential and land................. -- -- --
Construction............................ -- -- --
Commercial.............................. -- -- --
Consumer................................ -- -- 2
_____ _____ _____
Total non-accruing loans.............. -- -- 68
Accruing loans 90 days or
more delinquent......................... 293 280 144
Restructured debt......................... -- -- --
_____ _____ _____
Total nonperforming loans............. 293 280 212
_____ _____ _____
Real estate owned, net.................... 56 127 72
_____ _____ _____
Total nonperforming assets............$ 349 $ 407 $ 284
===== ===== =====
Loans, net of unearned income...........$155,781 $148,471 $136,805
Total assets............................ 189,451 178,710 165,747
Total nonperforming loans to
total loans............................. .19% .19% .15%
Total nonperforming assets to
total assets............................ .18% .23% .17%
11
<PAGE>
Interest income that would have been recorded under the original terms of the
Association's non-accruing loans for fiscal years 1998, 1997 and 1996 amounted
to $0, $0 and $6,000, respectively, and the interest recognized during fiscal
years 1998, 1997 and 1996 amounted to $0, $0 and $2,000, respectively.
The $56,000 of REO at September 30, 1998 consists of one single-family
residence located within our market area.
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, 1998, the Association had
$859,000 of loans which were classified as substandard.
Allowance for Loan Losses. It is management's policy to maintain an allowance
for estimated losses based on the perceived risk of loss in the loan portfolio
and the adequacy of the allowance. Management's periodic evaluation of the
adequacy of the allowance is based on the Association's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of the
underlying collateral and current economic conditions. The allowance is
increased by provisions for loan losses which are charged against income.
Although management uses the best information available to make determinations
with respect to the provisions for loan losses, additional provisions for loan
losses may be required to be established in the future should economic or
other conditions change substantially. In addition, the OTS and the FDIC, as
an integral part of their examination process, periodically review the
Association's allowance for possible loan losses. Such agencies may require
the Association to recognize additions to such allowance based on their
judgments about information available to them at the time of their
examination.
12
<PAGE>
The following table summarizes changes in the allowance for possible loan
losses and other selected statistics for the periods presented.
Year Ended September 30,
__________________________________
(Dollars in Thousands) 1998 1997 1996
________ ________ ________
Allowance for loan losses, beginning
of period................................$ 1,124 $ 1,145 $ 1,149
_______ _______ _______
Loans charged-off:
Residential real estate................. (1) (2) --
Nonresidential real estate.............. -- -- --
Commercial loans........................ -- -- --
Consumer loans.......................... (20) (19) (4)
_______ _______ _______
Total charge-offs...................... (21) (21) (4)
_______ _______ _______
Recoveries of loans
previously charged-off:
Residential real estate................. -- -- --
Nonresidential real estate.............. -- -- --
Commercial loans........................ -- -- --
Consumer loans.......................... -- -- --
_______ _______ _______
Total recoveries....................... -- -- --
_______ _______ _______
Net charge-offs........................ (21) (21) (4)
_______ _______ _______
Provision for loan losses................. (100) -- --
_______ _______ _______
Allowance for loan losses, end
of period................................$ 1,003 $ 1,124 $ 1,145
======= ======= =======
Loans, net of unearned income.............$155,781 $148,471 $136,805
Total nonperforming loans................. 293 280 212
Average total loans....................... 149,774 141,830 129,182
Allowance for loan losses to
total loans.............................. .64% .76% .84%
Allowance for loan losses to
nonperforming loans...................... 342.32% 401.43% 540.09%
Net charge-offs to
average total loans...................... .014% .015% .003%
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) 1998 1997 1996
_________ _________ _________
Real estate loans:
One-to-four family.............. $ 207 $ 205 $ 246
Multi-family.................... 8 6 20
Nonresidential and land......... 540 542 494
Construction.................... 18 12 10
Commercial loans................. 28 34 34
Consumer loans................... 99 86 52
Unallocated/general.............. 103 239 289
_____ _____ _____
Total allowance................ $1,003 $1,124 $1,145
===== ===== =====
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,
__________________________________________________
1998 1997 1996
________________ ________________ ________________
Allowance Loans Allowance Loans Allowance Loans
_________ ______ _________ ______ _________ ______
Real estate loans:
One-to-four family......... 20.6% 65.1% 18.2% 69.3% 21.5% 69.8%
Multi-family............... .8 1.0 .5 .5 1.8 1.1
Nonresidential and land.... 53.8 15.8 48.2 17.0 43.1 14.1
Construction............... 1.8 8.0 1.1 3.7 .9 5.5
Commercial loans............ 2.8 1.8 3.0 1.6 3.0 2.3
Consumer loans.............. 9.9 8.3 7.7 7.9 4.5 7.2
Unallocated/general......... 10.3 -- 21.3 -- 25.2 --
_____ _____ _____ _____ _____ _____
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").
14
<PAGE>
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-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. At September 30, 1998, $8.0 million of the
mortgage-backed securities were classified as available for sale and $.8
million were classified as held to maturity.
The following table presents the composition of the mortgage-backed securities
portfolio at each of the dates indicated.
September 30,
________________________________________________
1998 1997 1996
______________ ______________ ______________
Market Market Market
(Dollars in Thousands) Cost Value Cost Value Cost Value
______ ______ ______ ______ ______ ______
Mortgage-backed securities:
Held to maturity:
FHLMC...................... $ 437 $ 452 $ 588 $ 619 $ 709 $ 734
FNMA....................... 412 416 705 711 809 804
_____ _____ _____ _____ _____ _____
Total held to maturity... 849 868 1,293 1,330 1,518 1,538
_____ _____ _____ _____ _____ _____
Available for sale:
FNMA....................... 578 581 -- -- -- --
GNMA....................... 7,378 7,320 5,460 5,460 -- --
_____ _____ _____ _____ _____ _____
Total available for sale. 7,956 7,901 5,460 5,460 -- --
_____ _____ _____ _____ _____ _____
Total Mortgage-backed
securities............... $8,805 $8,769 $6,753 $6,790 $1,518 $1,538
===== ===== ===== ===== ===== =====
15
<PAGE>
The following table sets forth the contractual maturities of the mortgage-
backed securities portfolio at September 30, 1998.
Amounts at September 30, 1998 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:
FHLMC....................... $ -- $ -- $ 437 $ -- $ 437
FNMA........................ -- 412 -- -- 412
_____ _____ _____ _____ _____
Total held to maturity.... -- 412 437 -- 849
_____ _____ _____ _____ _____
Available for sale:
FNMA........................ -- -- -- 578 578
GNMA........................ -- -- -- 7,378 7,378
_____ _____ _____ _____ _____
Total available for sale.. -- -- -- 7,956 7,956
_____ _____ _____ _____ _____
Total mortgage-backed
securities................ $ -- $ 412 $ 437 $7,956 $8,805
===== ===== ===== ===== =====
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, 1998,
$8.0 million 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.
16
<PAGE>
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 Chairman, President and
Chief Financial Officer 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, 1998, $17.5 million of the
investment securities were classified as available for sale and $1.2 million
were classified as held to maturity.
The following table sets forth the composition of the investment securities
portfolio at the dates indicated.
September 30,
________________________________________________
1998 1997 1996
______________ ______________ ______________
Market Market Market
(Dollars in Thousands) Cost Value Cost Value Cost Value
______ ______ ______ ______ ______ ______
Investment securities:
Available for sale:
U.S. Government securities..$17,106 $17,415 $13,184 $13,307 $14,898 $14,887
Equity securities........... 396 335 -- -- -- --
______ ______ ______ ______ ______ ______
Total available for sale... 17,502 17,750 13,184 13,307 14,898 14,887
______ ______ ______ ______ ______ ______
Held to maturity:
Federal Home Loan Bank stock 1,185 1,185 1,116 1,116 1,053 1,053
______ ______ ______ ______ ______ ______
Total held to maturity..... 1,185 1,185 1,116 1,116 1,053 1,053
______ ______ ______ ______ ______ ______
Total investment securities$18,687 $18,935 $14,300 $14,423 $15,951 $15,940
====== ====== ====== ====== ====== ======
17
<PAGE>
The following table sets forth the amount of investment securities which
mature during each of the periods indicated.
Amounts at September 30, 1998 Which Mature In
_______________________________________________
1 Year 1 to 5 5 to 10 Over 10
(Dollars in Thousands) or Less Years Years Years Total
_______ _______ _______ _______ _______
Investment securities
Available for sale:
U.S. Government securities...$ 500 $13,110 $ 2,996 $ 500 $17,106
Equity securities............ 396 -- -- -- 396
______ ______ ______ ______ ______
Total available for sale.... 896 13,110 2,996 500 17,502
______ ______ ______ ______ ______
Held to maturity:
Federal Home Loan Bank stock. 1,185 -- -- -- 1,185
______ ______ ______ ______ ______
Total held to maturity...... 1,185 -- -- -- 1,185
______ ______ ______ ______ ______
Total investment securities $ 2,081 $13,110 $ 2,996 $ 500 $18,687
====== ====== ====== ====== ======
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.
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, 1998.
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.
18
<PAGE>
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.
September 30,
________________________________________________
1998 1997 1996
______________ ______________ ______________
(Dollars in Thousands) Amount % Amount % Amount %
________ _____ ________ _____ ________ _____
Certificates of deposit:
2.01% to 4.00%..........$ 200 .1% $ 295 .2% $ 632 0.5%
4.01% to 6.00%.......... 118,730 78.2 109,606 76.6 98,572 74.1
6.01% to 8.00%.......... 11,996 7.9 13,923 9.7 13,577 10.2
8.01% and over........... 5 0.0 4 0.0 4 0.0
_______ _____ _______ _____ _______ _____
Total certificate accounts.. 130,931 86.2 123,828 86.5 112,785 84.8
_______ _____ _______ _____ _______ _____
Passbook and statement
savings accounts............ 6,272 4.1 5,257 3.7 5,917 4.4
Money market accounts........ 7,981 5.3 7,500 5.2 8,045 6.0
NOW accounts................. 5,371 3.5 5,262 3.7 5,120 3.9
Noninterest bearing deposits. 1,400 .9 1,360 .9 1,204 .9
_______ _____ _______ _____ _______ _____
Total deposits..............$151,955 100.0% $143,207 100.0% $133,071 100.0%
======= ===== ======= ===== ======= =====
The following table presents, by type of deposit, the average balance and the
average rate paid for the periods indicated.
Year Ended September 30,
________________________________________________
1998 1997 1996
______________ ______________ ______________
Average Average Average
(Dollars in Thousands) Balance Rate Balance Rate Balance Rate
________ _____ ________ _____ ________ _____
Certificates of deposit..... $126,634 5.48% $117,718 5.42% $107,866 5.49%
Passbook and statement
savings accounts........... 5,713 3.30 5,417 3.26 5,280 3.18
Money market and
NOW accounts............... 14,664 2.81 14,044 2.72 13,937 2.57
Noninterest bearing accounts 1,359 -- 1,200 -- 1,026 --
_______ ____ _______ ____ _______ ____
Total deposits............ $148,370 5.08% $138,379 5.01% $128,109 5.05%
======= ==== ======= ==== ======= ====
19
<PAGE>
The following table sets forth the net deposit flows during the periods
indicated.
Year Ended September 30,
_______________________________
(Dollars in Thousands) 1998 1997 1996
_________ _________ _________
Increase(decrease) before interest credited. $ 3,610 $ 5,504 $ 3,844
Interest credited........................... 5,138 4,632 4,274
______ ______ ______
Net increase(decrease) in deposits......... $ 8,748 $10,136 $ 8,118
====== ====== ======
The following table presents, by various interest rate categories, the amount
of certificates of deposit at September 30, 1998 and the amounts which mature
during the periods indicated.
Amounts at September 30, 1998
September 30, Maturing Within
_____________ __________________________________
After
(Dollars in Thousands) 1998 1 Year 2 Years 3 Years 3 Years
_____________ _______ _______ _______ _______
Certificates of deposit:
2.01% to 4.00%.......... $ 200 $ 200 $ -- $ -- $ --
4.01% to 6.00%.......... 118,730 95,650 12,077 4,011 6,992
6.01% to 8.00%.......... 11,996 927 9,163 1,906 --
8.01% and over.......... 5 -- -- -- 5
_______ _______ _______ _______ _______
Total certificate accounts. $130,931 $ 96,777 $ 21,240 $ 5,917 $ 6,997
======= ======= ======= ======= =======
The following table sets forth maturities of certificates of deposit of
$100,000 or more at September 30, 1998 by time remaining to maturity.
(Dollars in Thousands) Amount
_______
Three months or less............... $ 3,427
Three months through six months.... 7,845
Six months through 12 months....... 9,107
Over 12 months..................... 5,488
______
Total............................. $25,867
======
20
<PAGE>
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. Recently, the Association has utilized such advances as a
supplemental source of funds for the Association's investment and lending
activities.
The following table presents certain information regarding borrowed funds for
the periods indicated.
Year Ended September 30,
________________________________
(Dollars in Thousands) 1998 1997 1996
__________ __________ __________
FHLB advances:
Average balance outstanding.............. $ 6,423 $ 706 $ --
Maximum amount outstanding at any
month-end during the period............ 7,200 4,967 --
Balance outstanding at end of period..... 6,600 4,967 --
Weighted average interest rate
during the period...................... 5.52% 5.53% --
Weighted average interest rate
at the end of the period............... 4.59% 5.54% --
Repurchase agreements:
Average balance outstanding.............. $ -- $ 82 $ 78
Maximum amount outstanding at any
month-end during the period............ -- -- 2,340
Balance outstanding at end of period..... -- -- 2,340
Weighted average interest rate
during the period...................... -- 5.58% 5.58%
Weighted average interest rate
at the end of the period............... -- -- 5.58%
Other borrowed money:
Average balance outstanding.............. $ 13 $ 39 $ 65
Maximum amount outstanding at any
month-end during the period............ 22 43 518
Balance outstanding at end of period..... -- 22 518
Weighted average interest rate
during the period...................... 6.50% 6.61% 6.78%
Weighted average interest rate
at the end of the period............... -- 6.50% 8.10%
Total borrowings:
Average balance outstanding.............. $ 6,436 $ 827 $ 143
Maximum amount outstanding at any
month-end during the period............ 7,222 4,989 2,858
Balance outstanding at end of period..... 6,600 4,989 2,858
Weighted average interest rate
during the period...................... 5.63% 5.72% 5.87%
Weighted average interest rate
at the end of the period............... 4.59% 5.61% 5.49%
21
<PAGE>
Employees
The Company and the Association had 38 full-time employees and two part-time
employees at September 30, 1998. 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, 1998, 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 associations, 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 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.
22
<PAGE>
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.
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 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.
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<PAGE>
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, 1998, 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
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.
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<PAGE>
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 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.
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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. 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 be merged on January 1, 1999, provided the bank
and savings association charters are merged by that date.
Under the current risk classification system, 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 zero basis points for well
capitalized, healthy institutions to 27 basis points for under capitalized
institutions with substantial supervisory concerns.
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 certain levels of regulatory capital. OTS-regulated
savings associations must comply with two overlapping sets of regulatory
capital standards (1) capital adequacy and minimum standards pursuant to
FIRREA, and (2) various capital measures pursuant to FDICIA "Prompt Corrective
Action".
Pursuant to FIRREA, savings institutions are required 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. 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).
At September 30, 1998, the Association had no goodwill or other intangible
assets and had no subsidiaries engaged in impermissible activities.
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<PAGE>
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.
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 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.
At September 30, 1998, pursuant to FIRREA, First Federal exceeded all of its
regulatory capital requirements with a tangible capital ratio of 14.3%, a core
capital ratio of 14.3% and a risk-based capital ratio of 24.1%.
Pursuant to FDICIA "Prompt Corrective Action", each federal banking agency is
required to implement a system of prompt corrective action for institutions
which it regulates. The federal banking agencies, including the OTS, have
adopted substantially similar regulations, which became effective December 19,
1992. Under the regulations, an institution shall be deemed to be (i) "well
capitalized" if it has total risk-based capital of 10.0% or more, has a Tier I
risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio
of 5.0% or more and is not subject to any order or final capital directive to
meet and maintain a specific capital level for any capital measure, (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage
capital ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of "well capitalized", (iii) "undercapitalized" if it has
a total risk-based capital ratio that is less than 8.0%, a Tier I risk-based
capital ratio that is less than 4.0% or a Tier I leverage capital ratio that
is less than 4.0% (3.0% under certain circumstances), (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0%, and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. The FDIA and the regulations promulgated
thereunder also specify circumstances under which a federal banking agency may
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category (except that the FDIC may not reclassify a significantly
undercapitalized institution as critically undercapitalized).
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<PAGE>
At September 30, 1998, pursuant to FDICIA, the Association was in the "well
capitalized" category with a total risk-based ratio of 24.1%, a Tier 1 risk-
based ratio of 23.5% and a Tier 1 leverage ratio of 14.3%.
The following table sets forth First Federal's compliance with each of the
above-described capital requirements at September 30, 1998 and 1997.
September 30, 1998
______________________________________
Tier 1 Tier 1 Total
Leverage Risk-based Risk-based
(Dollars in Thousands) Capital Capital Capital
__________ __________ __________
GAAP capital............................ $27,158 $27,158 $27,158
Adjustments to capital:
Non-allowable assets................. -- -- (319)
Unrealized gain on securities........ (167) (167) (167)
Allowable allowance for loan losses.. -- -- 955
______ ______ ______
Regulatory capital...................... $26,991 $26,991 $27,627
====== ====== ======
Total adjusted assets................... $188,847 $114,840 $114,840
======= ======= =======
Regulatory capital ratio................ 14.29% 23.50% 24.06%
===== ===== =====
Ratios for:
Adequately capitalized requirement... 4.00% 4.00% 8.00%
Well capitalized requirement......... 5.00% 6.00% 10.00%
September 30, 1997
______________________________________
Tier 1 Tier 1 Total
Leverage Risk-based Risk-based
(Dollars in Thousands) Capital Capital Capital
__________ __________ __________
GAAP capital............................ $26,878 $26,878 $26,878
Adjustments to capital:
Non-allowable assets................. -- -- (320)
Unrealized gain on securities........ (81) (81) (81)
Allowable allowance for loan losses.. -- -- 1,076
______ ______ ______
Regulatory capital...................... $26,797 $26,797 $27,553
====== ====== ======
Total adjusted assets................... $178,477 $108,635 $108,635
======= ======= =======
Regulatory capital ratio................ 15.01% 24.67% 25.36%
===== ===== =====
Ratios for:
Adequately capitalized requirement... 4.00% 4.00% 8.00%
Well capitalized requirement......... 5.00% 6.00% 10.00%
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Liquidity Requirements. All savings institutions are required to maintain an
average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary
from time to time (between 4% and 10%) depending upon economic conditions and
savings flows of all savings institutions. At the present time, the required
minimum liquid asset ratio is 4%. At September 30, 1998, First Federal's
liquidity ratio was 13.4%.
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 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.
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<PAGE>
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, 1998, 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.
Community Reinvestment. Under the Community Reinvestment Act of 1977, as
amended ("CRA"), as implemented by OTS regulations, a savings institution has
a continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions nor does it limit
an institution's discretion to develop the types of products and services that
it believes are best suited to its particular community, consistent with the
CRA. The CRA requires the OTS, in connection with its examination of a
savings institution, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation
of certain applications by such institution. FIRREA amended the CRA to
require public disclosure of an institution's CRA rating and require the OTS
to provide a written evaluation of an institution's CRA performance utilizing
a rating system which identifies four levels of performance that may describe
an institution's record of meeting community needs: outstanding, satisfactory,
needs to improve and substantial noncompliance. The CRA also requires all
institutions to make public disclosure of their CRA ratings.
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<PAGE>
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, 1998, the qualified
thrift investments of First Federal were approximately 83% of its portfolio
assets.
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 regulatory capital and record of
compliance with the Community Reinvestment Act of 1977. An unsatisfactory CRA
record may be the basis for denial of a branching application.
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.
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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.
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, 1998, the Association had $6.6 million in advances
from the FHLB of Dallas.
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, 1998, First Federal had $1.2
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.
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,
1998, no reserves were required to be maintained on the first $4.7 million of
transaction accounts, reserves of 3% were required to be maintained against
the next $43.1 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.
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<PAGE>
Tax Year. The Company and the Association file consolidated 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 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.
33
<PAGE>
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, 1998, approximately 83% 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 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.
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 certain conditions apply,
the Company would have to include in income previous bad debt deductions. For
federal tax purposes the conditions do not apply, and so long as the
Association continues to qualify as a thrift or a bank no repayment of the tax
on prior bad debt deductions will be required. Should the Association fail to
qualify as a thrift or bank the tax would have to be repaid ratably over a six
year period. The Association is currently in no jeopardy of failing to
qualify as a thrift or bank.
First Federal used the experience method for the periods ended September 30,
1998 and 1997 and used the percentage method for the period ended September
30, 1996.
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.
34
<PAGE>
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. Prior to the 1997 Tax Law, a corporation could
carry back net operating losses ("NOLs") to the preceding three taxable years
and forward to the succeeding 15 taxable years, applicable to losses incurred
in taxable years beginning after 1986. The 1997 Tax Law reduced the carryback
period from three years to two years and increased the carryforward period
from 15 years to 20 years, effective for NOLs for taxable years beginning
after July 1997. At September 30, 1998, 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, 1995 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 includes a
graduated rate schedule with the highest rate of 6.5% of earnings in excess of
$100,000.
The state of Arkansas repealed the percentage method of computing the bad debt
deduction for years beginning after January 1, 1997. As a result, the Company
will have to repay tax on approximately $1.5 million of bad debt deductions
ratably over a six year period for state tax purposes. The Company has made
provision in the amount of $89,000 for this tax in prior financial statements
and repayment will have no effect on income.
The Association is subject to Arkansas franchise tax in an amount equal to
.27% of Arkansas apportioned capital stock. The Arkansas apportioned capital
stock is the Association's capital stock (par value) multiplied by the ratio
of Arkansas assets to total assets.
The Company is incorporated under Texas law and is subject to Texas franchise
tax in an amount equal to the greater of 4.5% of Texas apportioned earned
surplus, or .25% of Texas apportioned capital and surplus. The Texas
apportioned earned surplus and capital is calculated using the ratio of
Texas gross receipts to total gross receipts.
35
<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, 1998.
Leased/ Net Book Value Amount of
Owned of Property Deposits
_________________________ ______________ ______________ ______________
(Dollars In Thousands)
Third & Olive Streets Owned $1,224 $101,442
Texarkana, Arkansas
611 East Wood Street Owned 77 11,463
Ashdown, Arkansas
6th & S. Main Owned 124 16,082
Hope, Arkansas
1011 W. Collin Raye Drive Owned 651 20,025
DeQueen, Arkansas
111 W. Shepherd Leased(1) -- 2,943
Nashville, Arkansas
Richmond Road Owned(2) 311 --
Texarkana, Texas
____________________
(1) Property is leased on a month to month basis.
(2) Future building site. Construction of a full-service branch office
is scheduled to begin in March 1999 with an estimated completion date
of October 1999 and an approximate cost of $850,000.
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.
36
<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, 1998, the Company had approximately 412 stockholders of record.
Cash dividends declared and any additional information required herein, to the
extent applicable, is incorporated by reference from pages 3 and 4 of the
Company's 1998 Annual Report to Stockholders ("Annual Report").
Item 6. Selected Financial Data.
The information required herein is incorporated by reference from pages 3 and
4 of the 1998 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 5 to
17 of the 1998 Annual Report.
Item 8. Financial Statements and Supplementary Data.
The information required herein is incorporated by reference from pages 18 to
42 of the 1998 Annual Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
37
<PAGE>
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 26, 1999, which was filed on December 21,
1998 ("Definitive Proxy Statement").
Item 11. Executive Compensation.
The information required herein is incorporated by reference from pages 7 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 38 of the Annual Report, Note 18 in
the Notes to the Consolidated Financial Statements.
38
<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 13.0):
Report of Independent Auditors
Consolidated Statements of Financial Condition as of September 30, 1998
and 1997.
Consolidated Statements of Income for the Fiscal Periods Ended September
30, 1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity for the Fiscal
Periods Ended September 30, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the Fiscal Periods ended
September 30, 1998, 1997 and 1996.
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 1998 Annual Report to Stockholders ***
____________________
39
<PAGE>
* 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 21, 1998
(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 1998 Annual Report to Stockholders which are
required to be included herein.
40
<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
/s/ James W. McKinney
_________________________________
By: James W. McKinney
Chairman of the Board
and Chief Executive Officer
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 21, 1998
James W. McKinney
Chairman of the Board
and Chief Executive Officer
/s/ John E. Harrison
__________________________________ December 21, 1998
John E. Harrison
President, Chief Operation Officer,
and Director
/s/ John M. Andres
__________________________________ December 21, 1998
John M. Andres
Director
/s/ Arthur L. McElmurry
__________________________________ December 21, 1998
Arthur L. McElmurry
Director
/s/ Donald N. Morriss
__________________________________ December 21, 1998
Donald N. Morriss
Director
/s/ Josh R. Morriss, Jr.
__________________________________ December 21, 1998
Josh R. Morriss, Jr.
Director
/s/ James L. Sangalli
__________________________________ December 21, 1998
James L. Sangalli
Chief Financial Officer
41
<PAGE>
Form 10-K
Exhibit 11
EARNINGS PER SHARE COMPUTATION
Years Ended September 30,
__________________________________
1998 1997 1996
__________ __________ __________
Net Income.................................$3,305,759 $2,883,956 $2,401,180
========= ========= =========
Weighted average shares:
Common shares outstanding................ 1,627,087 1,686,598 1,832,272
Common stock equivalents due to
assumed exercise of stock options...... 81,600 33,472 1,514
_________ _________ _________
Common shares assuming dilution...... 1,708,687 1,720,070 1,833,786
========= ========= =========
Net income per common share:
Basic.................................... $2.03 $1.71 $1.31
Assuming dilution........................ 1.94 1.68 1.31
____________________
E-1
<PAGE>
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