TEXARKANA FIRST FINANCIAL CORPORATION
1999 ANNUAL REPORT TO STOCKHOLDERS
TABLE OF CONTENTS
Page
Chairman's Letter to Stockholders................................. 1
Corporate Profile................................................. 2
Selected Financial Data........................................... 3
Supplementary Financial Information............................... 4
Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 5
Report of Independent Certified Public Accountants................ 17
Financial Statements.............................................. 18
Directors and Officers............................................ 43
Banking Locations................................................. 43
Stockholder Information........................................... 44
Glossary - Financial Terms........................................ 45
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Letter to Our Stockholders
Texarkana First Financial experienced another very good year of operations in
1999. Net income totaled $3.2 million or $2.07 per diluted share and the
return on stockholders' equity increased to 12.02% from 11.85%.
Loan growth continued at a very rapid pace with loan originations of $68
million, exceeding the previous year when borrowers refinanced mortgages in
record amounts.
Deposit growth of 1.3% was less than previous years. We attribute this to
many factors including lower interest rates during much of the year and a
bullish stock market.
We have been active in our stock buyback program during this past year with
the purchase of 136,650 treasury shares at a cost of $3.2 million. Repurchase
of common stock, to be held as treasury stock, reduces the number of
outstanding shares and total equity, which in turn results in improved
earnings per share and return on stockholders' equity.
Even though earnings are strong, this year has been a difficult time for bank
stocks. Both the S&P Major Regional Bank Index and the Stifel Thrift Index
were negative (13.8% and 12.4%) for the year. Your stock closed at 21 1/4 on
September 30, 1999 which was 1 1/8 or 5% lower than a year ago.
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act which eliminated the provisions of the Glass-Steagall Act of 1933. The
new law permits bank holding companies and its subsidiaries to offer banking,
securities and insurance services. Also, contained in the act is a provision
which permits Arkansas banks to charge the maximum rate of interest allowed in
the home state of a bank located outside of Arkansas but having branches in
the state. In summary, we believe the passage of this financial modernization
bill will present some new opportunities for additional income.
In March 2000, First Federal Savings will open the long awaited branch office
in Texas. This will be the first office in another state for the Association
and will give us a location in the high growth area of Texarkana. We
anticipate rapid growth from this office.
The Company is Y2K ready and we look forward to a positive beginning of the
new millennium in the year 2000. We appreciate your confidence expressed by
investing in Texarkana First Financial.
Sincerely,
/s/ James W. McKinney
James W. McKinney
Chairman and Chief Executive Officer
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CORPORATE PROFILE
Texarkana First Financial Corporation (the "Company") was incorporated in
March 1995 under Texas law for the purpose of acquiring all of the capital
stock issued by First Federal Savings and Loan Association of Texarkana (the
"Association") in connection with the Association's conversion from a
federally chartered mutual savings and loan association to a federally
chartered stock savings and loan association (the "Conversion"). The
Conversion was consummated on July 7, 1995 and, as a result, the Company
became a unitary savings and loan holding company for the Association. The
Company has no significant assets other than the shares of the Association's
common stock acquired in the Conversion and the loan to the Employee Stock
Ownership Plan ("ESOP") and has no significant liabilities. The business and
management of the Company consists primarily of the business and management of
the Association. The Company has no other subsidiaries and the Association
has no subsidiaries.
The Association is a federally chartered stock savings and loan association
which conducts business through its main office and four full service branch
offices. The Association is primarily engaged in attracting deposits from the
general public and using these funds 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 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's goal is
to continue to serve 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 Company's and the Association's executive offices are located at Third and
Olive Streets, Texarkana, Arkansas. Their mailing address is P.O. Box 2950,
Texarkana, Arkansas 75504-2950 and their telephone number is (870) 773-1103.
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SELECTED FINANCIAL DATA
(Dollars in Thousands, Except Per Share Data)
Years Ended September 30 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
SUMMARY INCOME STATEMENT
Interest income...........$ 14,862 $ 14,678 $ 13,417 $ 12,745 $ 11,236
Interest expense.......... 7,961 7,905 6,982 6,480 6,042
Net interest income....... 6,901 6,773 6,435 6,265 5,194
Provision for loan losses. -- (100) -- -- 177
Noninterest income........ 1,129 1,151 755 753 665
Noninterest expense(1).... 3,020 2,933 2,604 3,335 2,367
Income before income tax.. 5,010 5,091 4,586 3,683 3,315
Income tax expense........ 1,783 1,785 1,702 1,282 1,312
Net income(1)............. 3,227 3,306 2,884 2,401 2,003
PER COMMON SHARE(2)
Net income(basic)......... $ 2.17 $ 2.03 $ 1.71 $ 1.31 $ .40
Net income(diluted)....... $ 2.07 $ 1.94 $ 1.68 $ 1.31 $ .40
Cash dividends declared(3) $ .65 $ .58 $ .50 $ 3.45 --
Dividend payout ratio..... 30.00% 28.54% 29.53% 263.36% --
Book value(end of year)... $17.14 $16.36 $15.32 $14.02 $16.54
Market price(end of year). $21.25 $22.38 $23.75 $14.25 $13.25
Market/book(end of year).. 123.98% 136.80% 155.03% 101.64% 80.11%
YEAR-END BALANCES
Total assets..............$201,147 $189,451 $178,710 $165,747 $160,652
Investment securities..... 33,095 27,685 21,176 17,458 21,432
Loans receivable, net..... 161,208 155,781 148,471 136,805 123,309
Deposits.................. 153,992 151,955 143,207 133,071 124,953
Stockholders' equity...... 26,378 27,416 27,380 26,424 32,808
PERFORMANCE RATIOS
Net interest margin....... 3.63% 3.74% 3.90% 3.90% 3.59%
Return on average assets.. 1.65 1.78 1.71 1.46 1.35
Return on average equity.. 12.02 11.85 10.74 7.34 10.92
Operating efficiency(4)... 37.61 37.01 36.22 47.52 40.40
ASSET QUALITY RATIOS
Nonperforming loans to
total loans.............. .66% .19% .19% .15% .17%
Nonperforming assets to
total assets............. .53 .18 .23 .17 .33
Allowance for loan losses
to nonperforming loans... 93.08 342.32 401.43 540.09 536.92
Allowance for loan losses
to total loans........... .62 .64 .76 .84 .91
Net charge-offs to
average total loans...... .005 .014 .015 .003 .004
CAPITAL RATIOS
Tier 1 capital to assets.. 13.29% 14.42% 15.29% 15.95% 15.40%
Tier 1 risk-based capital. 22.13 23.69 25.12 26.99 27.74
Total risk-based capital.. 22.66 24.24 25.82 27.78 28.68
(1) 1996 includes the special SAIF assessment of $835,000 ($515,000 net).
(2) 1995 per share data is for the period beginning July 7, the IPO date.
(3) 1996 includes a $3.00 special one-time distribution.
(4) Noninterest expense to net interest income plus noninterest income.
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SUPPLEMENTARY FINANCIAL INFORMATION
Selected Quarterly Operating Results
(Dollars In Thousands, Except Per Share Data)
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Year Ended September 30, 1999
Interest income............. $3,753 $3,708 $3,659 $3,742
Interest expense............ 1,993 1,962 1,967 2,039
Net interest income......... 1,760 1,746 1,692 1,703
Provision for loan losses... -- -- -- --
Noninterest income.......... 244 269 276 340
Noninterest expense......... 746 740 771 763
Net income.................. 810 804 792 821
Per common share:
Net income (basic).......... $ .56 $ .55 $ .52 $ .54
Net income (diluted)........ .54 .52 .50 .51
Cash dividends.............. .17 .16 .16 .16
Common stock price:
High....................... 24.50 24.50 24.13 24.25
Low........................ 21.25 23.25 22.25 20.00
Last trade................. 21.25 23.75 23.75 23.13
Selected ratios (annualized):
Net interest margin......... 3.60% 3.66% 3.65% 3.60%
Return on average assets.... 1.61 1.64 1.66 1.69
Return on average equity.... 12.16 12.11 11.80 11.99
Year Ended September 30, 1998
Interest income............. $3,757 $3,686 $3,641 $3,594
Interest expense............ 2,054 1,998 1,930 1,923
Net interest income......... 1,703 1,688 1,711 1,671
Provision for loan losses... -- (100) -- --
Noninterest income.......... 307 263 325 256
Noninterest expense......... 719 732 751 731
Net income.................. 900 842 808 756
Per common share:
Net income (basic).......... $ .56 $ .52 $ .49 $ .46
Net income (diluted)........ .54 .49 .47 .44
Cash dividends.............. .16 .14 .14 .14
Common stock price:
High....................... 28.25 30.63 29.63 27.13
Low........................ 21.88 27.88 24.75 23.88
Last trade................. 22.38 28.38 27.75 25.00
Selected ratios (annualized):
Net interest margin......... 3.62% 3.69% 3.87% 3.78%
Return on average assets.... 1.86 1.80 1.78 1.67
Return on average equity.... 12.74 11.97 11.78 10.88
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of results of operations is intended to
assist in understanding the financial condition and results of operations of
the Company. The information contained in this section should be read in
conjunction with the Consolidated Financial Statements and the accompanying
Notes to Consolidated Financial Statements and the other sections contained in
this Annual Report.
The Company's results of operations depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets and interest expense on interest-bearing liabilities. The Company's
results of operations also are affected by the provision for loan losses, the
level of its noninterest income and expenses, and income tax expense.
Asset/Liability Management and Interest Rate Risk
The objective of asset/liability management is to maximize net interest margin
within an acceptable level of interest rate risk.
Net interest income is the primary component of net income and interest rate
risk is a significant exposure. Interest rate risk can be defined as the
amount of forecasted net interest income that may be gained or lost due to
favorable or unfavorable movements in interest rates.
In order to minimize the potential for adverse effects of material and
prolonged changes in interest rates on the Company's results of operations,
management has implemented and continues to monitor asset and liability
policies to better match the maturities and repricing terms of rate-sensitive
assets and rate-sensitive liabilities. Management also monitors and
evaluates, on a quarterly basis, the potential impact of interest rate changes
upon the Company's net portfolio value and net interest income.
The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate margin that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of rate-sensitive assets and rate-
sensitive liabilities which either reprice or mature within a given period of
time. The difference, or the interest rate repricing "gap", provides an
indication of the extent to which an institution's interest rate margin will
be affected by changes in interest rates. A gap is considered positive when
the amount of rate-sensitive assets exceeds the amount of rate-sensitive
liabilities, and is considered negative when the amount of rate-sensitive
liabilities exceeds the amount of rate-sensitive assets. During a period of
rising interest rates, a negative gap would cause a decrease in net interest
income, while a positive gap would cause an increase in net interest income.
During a period of declining interest rates, a negative gap would cause an
increase in net interest income, while a positive gap would cause a decrease
in net interest income.
At September 30, 1999, the estimated one-year gap was a negative 82.9% and the
ratio of rate-sensitive assets to rate-sensitive liabilities maturing or
repricing within one year was 54.7%.
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At September 30, 1999, assuming instantaneous interest rate changes sustained
for a twelve-month period, the following table presents the estimated percent
of change in the net portfolio value and net interest income for various
changes in interest rates (100 basis points equals 1%). Estimates are based
upon numerous assumptions. Actual sensitivity to interest rate changes could
vary significantly if actual experience differs from assumptions used in
making the calculations. Net portfolio value is the difference between
incoming and outgoing discounted cash flows from assets, liabilities and off-
balance sheet contracts, if any.
Percentage Change in
Change in -----------------------------
Interest Rates Net Portfolio Net Interest
(Basis Points) Value Income
--------------- ------------- ------------
+300 -16.1% -14.1%
+200 -8.9% -9.4%
+100 -3.6% -4.7%
-100 +2.4% +4.4%
-200 +4.9% +8.9%
-300 +7.9% +13.3%
Changes in Financial Condition
General
The Company's assets increased $11.7 million or 6.2% to $201.1 million at
September 30, 1999 from $189.5 million at September 30, 1998. The increase
was due primarily to increases of $5.4 million or 3.5% in loans receivable and
$5.4 million or 19.5% in investments. The Company's total liabilities
increased $12.7 million or 7.9% due primarily to increases of $2.0 million or
1.3% in deposits and $10.9 million or 165.2% in borrowed funds.
Cash and Cash Equivalents
Cash and federal funds sold increased $.5 million or 19.8% to $3.2 million at
September 30, 1999 from $2.6 million at September 30, 1998. The increase was
due primarily to increases in interest-bearing deposits in other banks and
federal funds sold.
Investments
Investments increased $5.4 million or 19.5% to $33.1 million at September 30,
1999 from $27.7 million at September 30, 1998. Proceeds from maturing
investments were primarily reinvested in new investments.
Loans Receivable
Loans receivable, net of unearned income, increased $5.4 million or 3.5% to
$161.2 million at September 30, 1999 from $155.8 million at September 30,
1998. The increase in loans was the result of an increase of $5.4 million or
3.7% in real estate loans, an increase of $1.2 million or 8.9% in consumer
loans and a decrease of $.2 million or 6.6% in commercial loans. The increase
was due to additional loan demand, including home equity loans, and the
retention of a portion of the originated fixed-rate mortgage loans. In fiscal
1999, $32.2 million of single-family mortgage loans were originated and $9.8
million were sold, and in fiscal 1998, $33.0 million of single-family mortgage
loans were originated and $13.6 million were sold. The ratio of fixed-rate
single-family mortgages to total single-family mortgage loans at September 30,
1999 and 1998 was 11.7% and 11.5%, respectively.
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Nonperforming Assets
Nonperforming assets increased $720,000 to $1.1 million or .53% of total
assets at September 30, 1999 compared to $349,000 or .18% of total assets at
September 30, 1998. At September 30, 1999, nonperforming loans were $1.1
million or .66% of total loans compared to $293,000 or .19% of total loans at
September 30, 1998. At September 30, 1999, the Company had no foreclosed real
estate, a decrease of $56,000 or 100% from September 30, 1998. At September
30, 1999, the allowance for loan losses was $995,000 or .62% of total loans
and 93.08% of nonperforming loans compared to $1.0 million or .64% of total
loans and 342.32% of nonperforming loans at September 30, 1998. Net charge-
offs were $8,000 and $21,000, respectively, for fiscal years ended September
30, 1999 and 1998.
Deposits
Deposits increased $2.0 million or 1.3% to $154.0 million at September 30,
1999 from $152.0 million at September 30, 1998. The increase in deposits was
the result of increases of $2.5 million or 36.6% in NOW accounts and $561,000
or 8.9% in savings accounts, and decreases of $735,000 or 9.2% in money market
accounts and $269,000 or .2% in certificates of deposit. The additional
deposits, along with additional borrowed funds, were used primarily to fund
increased loan demand and additional investments.
Borrowed Funds
Borrowings increased $10.9 million or 165.2% to $17.5 million at September 30,
1999 from $6.6 million at September 30, 1998. Additional borrowings, from the
FHLB of Dallas, were primarily utilized to fund increases in loans and
investments, and to purchase additional shares of company common stock to be
held as treasury shares.
Stockholders' Equity
Stockholders' equity decreased $1.0 million or 3.8% to $26.4 million at
September 30, 1999 from $27.4 million at September 30, 1998, primarily the
result of the purchase of additional treasury shares. The ratio of
stockholders' equity to total assets was 13.1% at September 30, 1999 compared
to 14.5% at September 30, 1998.
In 1999, treasury shares increased 136,650 shares at a cost of $3.2 million.
Repurchase of Company common stock, to be held as treasury shares, reduces the
number of outstanding common shares and total equity, which in turn results in
an improved earnings per share and return on average equity. However, funds
used to repurchase the shares are diverted from interest earning assets which
affects earnings. A reasonable repurchase program has positive results when
the Company can achieve asset growth and reduce excess capital with minimum
impairment of earnings. For fiscal 1999 compared to fiscal 1998, total assets
were up 6.2%, total equity was down 3.8%, net income was down 2.4%, return on
average equity was up to 12.02% from 11.85% and basic earnings per share was
up to $2.17 from $2.03.
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Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The
following table presents, for the periods indicated, the interest income and
rates earned on average interest-earning assets, the interest expense and
rates paid on average interest-bearing liabilities, and the net interest
income and net interest margin which is net interest income divided by average
interest-earning assets. Since interest-earning assets do not include any
tax-exempt securities except for applicable state income taxes, income and
rates include no adjustment for a tax-equivalent basis.
Year Ended September 30,
-----------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
Average Income/ Average Income/ Average Income/
Balance Expense Balance Expense Balance Expense
Rate Rate Rate
($) ($) (%) ($) ($) (%) ($) ($) (%)
------- ------ ---- ------- ------ ---- ------- ------ ----
(Dollars in Thousands)
ASSETS
Loans receivable.. 156,073 12,883 8.25 149,774 12,764 8.52 141,830 11,997 8.46
Investments....... 26,679 1,561 5.85 22,626 1,362 6.02 21,099 1,264 5.99
Mortgage-backed
securities....... 7,444 418 5.62 8,803 552 6.27 2,119 156 7.35
------- ------ ------- ------ ------- ------
Earning assets... 190,196 14,862 7.81 181,203 14,678 8.10 165,048 13,417 8.13
------ ------ ------
Nonearning assets. 5,502 4,752 3,994
------- ------- -------
Total assets..... 195,698 185,955 169,042
======= ======= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Transaction and
savings accounts.. 21,160 544 2.57 20,377 601 2.95 20,661 559 2.70
Other time deposits130,321 6,876 5.28 126,634 6,942 5.48 117,718 6,376 5.42
------- ------ ------- ------ ------- ------
Total deposits... 151,481 7,420 4.90 147,011 7,543 5.13 138,379 6,935 5.01
Borrowings........ 12,210 541 4.43 6,436 362 5.63 827 47 5.72
------- ------ ------- ------ ------- ------
Interest-bearing
liabilities..... 163,691 7,961 4.86 153,447 7,905 5.15 139,206 6,982 5.02
------ ------ ------
Noninterest-bearing
liabilities...... 5,150 4,601 2,976
------- ------- -------
Total liabilities 168,841 158,048 142,182
Equity............ 26,857 27,907 26,860
------- ------- -------
Total liabilities
and equity...... 195,698 185,955 169,042
======= ======= =======
Net interest income 6,901 6,773 6,435
===== ===== =====
Net interest spread 2.95 2.95 3.11
Net interest margin 3.63 3.74 3.90
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Rate/Volume Analysis. The following table describes the extent to which
changes in volume and changes in interest rates of interest-related assets and
liabilities have affected interest income and expense during the periods
indicated. Volume change is computed by multiplying the change in volume by
the prior year rate. Rate change is computed by multiplying the change in
rate by the prior year volume. Changes attributable to the combined impact of
volume and rate are allocated proportionately to the changes due to volume and
the changes due to rate.
Change Change
1999 from 1998 1998 from 1997
-------------------- --------------------
Increase(Decrease) Increase(Decrease)
Due to Due to
-------------------- --------------------
(Dollars in Thousands) Total Volume Rate Total Volume Rate
----- ------ ----- ----- ------ -----
Change in interest income:
Loans receivable......... $ 119 $ 537 $ (418) $ 767 $ 681 $ 86
Investments............... 199 245 (46) 98 92 6
Mortgage-backed securities (134) (86) (48) 396 415 (19)
----- ----- ----- ----- ----- -----
Total interest income.... 184 696 (512) 1,261 1,188 73
----- ----- ----- ----- ----- -----
Change in interest expense:
Transaction and
savings accounts......... (57) 27 (84) 42 (8) 50
Other time deposits....... (66) 202 (268) 566 493 73
----- ----- ----- ----- ----- -----
Total deposits........... (123) 229 (352) 608 485 123
Borrowings................ 179 325 (146) 315 316 (1)
----- ----- ----- ----- ----- -----
Total interest expense... 56 554 (498) 923 801 122
----- ----- ----- ----- ----- -----
Net interest income...... $ 128 $ 142 $ (14) $ 338 $ 387 $ (49)
===== ===== ===== ===== ===== =====
Comparison of Results of Operations for the Years Ended September 30, 1999
and 1998
General
The Company's net income was $3.2 million for fiscal 1999 compared to $3.3
million for fiscal 1998. The decrease of $79,000 or 2.4% during fiscal 1999
was primarily due to a $100,000 credit to provision for loan losses in 1998, a
decrease of $22,000 in noninterest income and an increase of $87,000 in
noninterest expense, all of which were partially offset by an increase of
$128,000 in net interest income and a decrease of $2,000 in income tax
expense.
For fiscal 1999 and fiscal 1998, net income per common share was $2.17 and
$2.03, respectively (diluted $2.07 and $1.94, respectively). Return on
average assets was 1.65% and 1.78%, respectively, and return on average equity
was 12.02% and 11.85%, respectively. The operating efficiency ratio was
37.61% and 37.01%, respectively.
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Net Interest Income
Net interest income increased $128,000 or 1.9% to $6.9 million for fiscal 1999
compared to $6.8 million for fiscal 1998. The increase was due to an increase
of $184,000 or 1.3% in interest income which was partially offset by an
increase of $56,000 or .7% in interest expense. The increase in interest
income was due to an increase in the average balance of interest earning
assets, partially offset by a decline in the average rate. The increase in
interest expense was due to an increase in the average balance of interest
bearing liabilities, partially offset by a decline in the average rate. For
fiscal year 1999 compared to fiscal year 1998, the net interest margin was
3.63% and 3.74%, respectively, and the net interest spread remained unchanged
at 2.95%.
Interest Income
Total interest income increased $184,000 or 1.3% due to an increase in average
balance, partially offset by a decline in the average rate. The average
balance of total earning assets increased $9.0 million to $190.2 million from
$181.2 million and the average yield declined to 7.81% from 8.10%. Interest
income on loans increased $119,000 or .9% of which $537,000 was due to an
increase in average balance (to $156.1 million from $149.8 million), partially
offset by a decrease of $418,000 due to a decline in average yield (to 8.25%
from 8.52%). The increase in the average balance of loans was due to
increased loan demand while the decline in the average yield primarily
reflects market interest rates during fiscal 1999. Interest income on
investments increased $199,000 or 14.6% of which $245,000 was due to an
increase in average balance (to $26.7 million from $22.6 million), partially
offset by a decrease of $46,000 due to a decline in average yield (to 5.85%
from 6.02%). Interest on mortgage-backed securities decreased $134,000 or
24.3% of which $86,000 was due to a decrease in average balance (to $7.4
million from $8.8 million) and $48,000 due to a decline in average yield (to
5.62% from 6.27%).
Interest Expense
Total interest expense increased $56,000 or .7% due to an increase in average
balance, partially offset by a decline in the average rate. The average
balance of total interest-bearing liabilities increased $10.3 million to
$163.7 million from $153.4 million and the average rate declined to 4.86% from
5.15%. Interest on deposits decreased $123,000 or 1.6% of which $352,000 was
due to a decline in average rate (to 4.90% from 5.13%), partially offset by an
increase of $229,000 due to an increase in average balance (to $151.5 million
from $147.0 million). Interest on borrowed funds increased $179,000 or 49.4%
of which $325,000 was due to an increase in average balance (to $12.2 million
from $6.4 million), partially offset by a decrease of $146,000 due to a
decline in the average rate (to 4.43% from 5.63%).
Provision for Loan Losses
No provisions were made for loan losses during fiscal 1999. During fiscal
1998, the allowance for loan losses was reduced by $100,000 with a credit to
the provision for loan losses, reducing the amount of the unallocated reserve
allowance. No charge has been made to provision for loan losses since March
1995. Asset quality remained favorable with a ratio of nonperforming loans to
total loans of .66%, .19%, and .19% at September 30, 1999, 1998 and 1997,
respectively. Management believes that the current allowance for loan losses
is adequate based upon prior loss experience, the volume and type of lending
conducted by the Association, industry standards, past due loans and the
current economic conditions in the market area.
Noninterest Income
Noninterest income decreased $22,000 or 1.9% to $1.13 million for fiscal 1999
compared to $1.15 million for fiscal 1998. The decrease was primarily due to
decreases in gain on sale of loans and loan origination fees, partially offset
by an increase in fee income. See Note 17 of the Notes to the Consolidated
Financial Statements for comparison of other noninterest income items.
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Noninterest Expense
Noninterest expense increased $87,000 or 3.0% to $3.0 million for fiscal 1999
compared to $2.9 million for fiscal 1998. The increase was primarily due to
an increase of $63,000 or 3.0% in compensation and benefits expense. See Note
17 of the Notes to the Consolidated Financial Statements for comparison of
other noninterest expense items.
Income Taxes
Income tax expense amounted to $1.8 million for fiscal 1999 and fiscal 1998.
The effective tax rates for fiscal 1999 and fiscal 1998 were 35.6% and 35.1%
respectively. The higher effective tax rate for 1999 was primarily due to the
$100,000 credit to provision for loan losses in 1998 and the decreased fair
market value of vested Management Recognition Plan shares in 1999. The credit
to provision for loan losses has the effect of tax free income since the
provision, for tax purposes, is based on the experience method rather than the
recorded provision amount. The Company's recorded expense for the vested
Management Recognition Plan shares is limited to the fair market value at the
date of award, but the allowable deduction, for tax purposes, is the fair
market value at the date of vesting. The vested value in excess of the award
value (an unrecorded, tax deductible, expense) was $169,000 in fiscal 1999 and
$202,000 in fiscal 1998. The average award price is $14.50 per share and the
average vested value per share was $22.80 in fiscal 1999 and $27.34 in fiscal
1998. See Note 10 of the Notes to the Consolidated Financial Statements.
Comparison of Results of Operations for the Years Ended September 30, 1998
and 1997
General
The Company's net income was $3.3 million for fiscal 1998 compared to $2.9
million for fiscal 1997. The increase of $422,000 or 14.6% during fiscal 1998
was primarily due to increases of $338,000 in net interest income and $396,000
in noninterest income and a $100,000 credit to provision for loan losses, all
of which were partially offset by increases of $329,000 in noninterest expense
and $83,000 in income tax expense.
For fiscal 1998 and fiscal 1997, net income per common share was $2.03 and
$1.71, respectively (diluted $1.94 and $1.68, respectively). Return on
average assets was 1.78% and 1.71%, respectively, and return on average equity
was 11.85% and 10.74%, respectively.
Net Interest Income
Net interest income increased $338,000 or 5.3% to $6.8 million for fiscal 1998
compared to $6.4 million for fiscal 1997. The increase was due to an increase
of $1.3 million or 9.4% in interest income which was partially offset by an
increase of $923,000 or 13.2% in interest expense. The increase in interest
income was primarily due to an increase in the average balance of interest
earning assets. The increase in interest expense was due to an increase in
the average balance of interest bearing liabilities and an increase in the
average rate. For fiscal year 1998 compared to fiscal year 1997, the net
interest margin was 3.74% and 3.90%, respectively, and the net interest spread
was 2.95% and 3.11%, respectively.
Interest Income
Total interest income increased $1.3 million or 9.4% primarily due to an
increase in average balance. The average balance of total earning assets
increased $16.2 million to $181.2 million from $165.0 million and the average
yield declined to 8.10% from 8.13%. The increase in total interest income was
due to increases in income on loans and income on investments. Interest
income on loans increased $767,000 or 6.4% of which $681,000 was due to an
increase in average balance and $86,000 was due to an increase in average
yield. The increase in the average balance of loans to $149.8 million from
$141.8 million was due to increased loan demand while the increase in the
average yield to 8.52% from 8.46% primarily reflects market interest rates and
the result of sales of lower fixed rate loans during the first half of fiscal
1998. Interest income on investments (including mortgage-backed securities)
increased $494,000 or 34.8% of which $507,000 was due to an increase in
average balance, partially offset by a decrease of $13,000 due to a decline in
average yield.
11
<PAGE>
Interest Expense
Total interest expense increased $923,000 or 13.2% of which $801,000 was due
to an increase in average balance and $122,000 due to an increase in average
rate. The average balance of total interest-bearing liabilities increased
$14.2 million to $153.4 million from $139.2 million and the average rate
increased to 5.15% from 5.02%. The increase in total interest expense was due
primarily to an increase in interest on deposits which increased $608,000 or
8.8% of which $485,000 was due to an increase in average balance and $123,000
due to an increase in average rate to 5.13% from 5.01%. Interest on borrowed
funds increased $315,000 of which $316,000 was due to an increase in average
balance, partially offset by a decrease of $1,000 due to a decline in the
average rate to 5.63% from 5.72%.
Provision for Loan Losses
During fiscal 1998, the allowance for loan losses was reduced by $100,000 with
a credit to the provision for loan losses. The adjustment reduced the amount
of the unallocated reserve allowance. No charge has been made to provision
for loan losses since March 1995. During this time, asset quality remained
consistently favorable with a ratio of nonperforming loans to total loans of
.19%, .19%, and .15% at September 30, 1998, 1997 and 1996, respectively.
Management believes that the current allowance for loan losses is adequate
based upon prior loss experience, the volume and type of lending conducted by
the Association, industry standards, past due loans and the current economic
conditions in the market area.
Noninterest Income
Noninterest income increased $396,000 or 52.5% to $1.15 million for fiscal
1998 compared to $755,000 for fiscal 1997. The increase was primarily due to
increases in gain on sale of loans, loan origination fees and service charge
income. See Note 17 of the Notes to the Consolidated Financial Statements for
comparison of other noninterest income items.
Noninterest Expense
Noninterest expense increased $329,000 or 12.6% to $2.9 million for fiscal
1998 compared to $2.6 million for fiscal 1997. The increase was primarily due
to increases in compensation and benefits expense and occupancy expense. The
increase in compensation and benefits was due to a $167,000 or 15.5% increase
in compensation and a $96,000 or 18.9% increase in benefits. The increase in
compensation expense was primarily due to the addition of 4 employees - one in
the fourth quarter of fiscal 1997, one in the second quarter of fiscal 1998
and two in the third quarter of fiscal 1998. The increase in benefits expense
was due primarily to expenses related to the ESOP and the employee and
director stock benefit plans. See Note 17 of the Notes to the Consolidated
Financial Statements for comparison of other noninterest expense items.
Income Taxes
Income tax expense amounted to $1.8 million for fiscal 1998 and $1.7 million
for fiscal 1997, resulting in effective tax rates of 35.1% and 37.1%
respectively. The lower effective tax rate for 1998 was due to a $15,000
state tax refund, the $100,000 credit to provision for loan losses and the
increased fair market value of vested Management Recognition Plan shares. The
credit to provision for loan losses has the effect of tax free income since
the provision, for tax purposes, is based on the experience method rather than
the recorded provision amount. The Company's recorded expense for the vested
Management Recognition Plan shares is limited to the fair market value at the
date of award, but the allowable deduction, for tax purposes, is the fair
market value at the date of vesting. The vested value in excess of the award
value (an unrecorded, tax deductible, expense) was $202,000 in fiscal 1998 and
$58,000 in fiscal 1997. The average award price is $14.50 per share and the
average vested value per share was $27.34 in fiscal 1998 and $16.08 in fiscal
1997. See Note 10 of the Notes to the Consolidated Financial Statements.
12
<PAGE>
Liquidity and Capital Resources
The Association's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The
Association's primary sources of funds are deposits, amortization, prepayments
and maturities of outstanding loans, sales of loans, maturities of investment
securities and other short-term investments and funds provided from
operations. While scheduled loan amortization and maturing investment
securities and short-term investments are relatively predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by general
interest rates, economic conditions and competition. The Association manages
the pricing of its deposits to maintain a steady deposit balance. In
addition, the Association invests excess funds in overnight deposits and other
short-term interest-earning assets which provide liquidity to meet lending
requirements. The Association has generally been able to generate enough cash
through the retail deposit market, its traditional funding source, to offset
the cash utilized in lending and investing activities. As an additional
source of funds, the Association may borrow from the FHLB of Dallas and has
utilized this source of funds with borrowings of $17.5 million, $6.6 million
and $5.0 million at September 30, 1999, 1998 and 1997, respectively.
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, 1999, the Association's liquidity ratio was
19.71%.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, the Association maintains
a strategy of investing in various lending products such as single-family
residential loans. The Association uses its sources of funds primarily to
meet its ongoing commitments, to pay maturing savings certificates and savings
withdrawals and fund loan commitments. At September 30, 1999, the total
approved loan commitments outstanding, excluding construction loans, amounted
to $7.5 million and the unadvanced portion of construction loans approximated
$6.7 million. At September 30, 1999, certificates of deposit scheduled to
mature in one year or less totaled $104.3 million and investment securities
scheduled to mature in one year or less totaled $3.7 million. Management
believes that a significant portion of maturing deposits will remain with the
Association.
As of September 30, 1999, the Association's regulatory capital was well in
excess of all applicable regulatory requirements. See "Selected Financial
Data" and Note 13 of the Notes to the Consolidated Financial Statements.
Impact of Inflation and Changing Prices
The financial statements and related financial data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms
of historical dollars, without considering changes in relative purchasing
power over time due to inflation.
13
<PAGE>
Unlike most industrial companies, virtually all of the Company's and the
Association's assets and liabilities are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation.
The Year 2000 Issue
Computer systems which are unable to recognize the year 2000 could fail or
create erroneous results by or at the year 2000 if the problem is not
corrected. Many existing computer programs use only two digits to identify a
year in the date field. Such programs, designed and developed without
considering the impact of a change in the century, are unable to distinguish
the year 2000 from the year 1900. Like most financial service providers, the
Company could be significantly affected by software and hardware both within
the Company and with other companies with whom it electronically or
operationally interfaces.
Management is aware of the potential problems and the costs required to
prevent material adverse consequences. Management has adopted a Year 2000
Plan, approved by the Board of Directors, and has appointed a committee to
implement the plan. The committee has assessed the Company's exposure;
scheduled necessary in-house hardware and software upgrades and replacements;
initiated formal communications with all major outside vendors, suppliers,
creditors and borrowers; scheduled testing of all operating systems; and
provided for a contingency plan for all critical systems.
The Company's core processing systems are outsourced through a contract with a
third party vendor. The Company's and the vendor's Year 2000 readiness is
reviewed and monitored by the OTS.
According to the Company's implementation schedule, hardware and software
upgrades and replacements were to be completed by December 31, 1998, and
validation testing of software was to be completed by March 31, 1999.
Implementation of the Year 2000 Plan is on schedule. In-house hardware and
software upgrades and replacements were completed November 30, 1998. Vendor
software modifications are 100% completed. The Company has participated in
the testing process as part of a user group which has evaluated testing
methodology and prepared its own test data along with that of other group
members. Initial testing was completed October 16, 1998. Test results have
been reviewed and final testing was completed April 12, 1999. Test results
were successful and all critical systems were determined to be Year 2000
ready. The contingency/business-resumption plan for all mission critical
systems has been completed and approved by management and the Board of
Directors.
Implementation of the Year 2000 Plan involves both direct and indirect costs
which are charged to earnings as incurred. Direct costs include hardware and
software upgrades and replacements, potential charges by third party software
vendors, and resulting costs if the contingency plan for critical systems must
be implemented. Indirect costs principally consist of existing employee time
related to implementation of the Year 2000 Plan. Based on estimated costs
within the Year 2000 Plan, such costs will not have a material impact on the
Company's financial condition or results of operations. The incremental costs
associated with the Company's Year 2000 compliance were budgeted at
approximately $35,000. Actual total costs are expected to be slightly less
than budgeted. At September 30, 1999, $31,000 had been expended.
14
<PAGE>
Recent Legislation
In July 1999, H.R. 775, the "Y2K Act", was signed into law to deal with a
unique circumstance of national significance - the Y2K computer problem and
potential liability that could result from these unique computer problems.
The Y2K Act provides businesses with protection from frivolous lawsuits
involving Year 2000 computer problems by allowing companies up to 90 days to
fix related problems before a lawsuit could be filed. Compensatory damages
against companies, officers and directors would not be limited, but punitive
damages would be capped. Companies would be penalized for only their share of
causing the problem, but suits by individual consumers would be exempt from
this proportional liability provision. Class action lawsuits would have to
involve more than 100 persons and claim more than $10 million before a case
could be transferred to federal court.
A new financial modernization bill titled the Gramm-Leach-Bliley Act (the
"Act") was signed into law in November 1999. The Act repealed the Glass-
Steagall Act and allows banks, insurance companies and security firms to
affiliate through new financial holding companies. A national bank may engage
in many new financial activities through a subsidiary. It authorizes
operating subsidiaries to sell any financial product without geographic
limitation. Activities not permitted in subsidiaries include insurance
underwriting, insurance company portfolio investing, real estate investment
and development, and merchant banking (merchant banking may be allowed in five
years if both the Fed and Treasury agree). The subsidiary operation would be
available only to well-capitalized and well-managed banks. The powers and
authorities of existing unitary thrift holding companies are grandfathered.
Sale of existing unitaries can be to financial companies only. The Office of
Thrift Supervision can continue to grant unitary charters to financial
companies, but cannot grant charters to nonfinancial companies. The Act
repealed the Savings Association Insurance Fund special reserve and allows the
FDIC to return nearly $1 billion to the SAIF general reserves.
The Act requires all financial institutions to disclose their privacy policies
to their customers at the time a relationship is created and then annually on
sharing customer information with affiliates and third parties. Customers
must be notified that they may opt-out of sharing with nonaffiliated third
parties, with certain exceptions. The Act extends the Community Reinvestment
Act compliance examination cycle for community banks (banks and thrifts with
less than $250 million in assets) to five years if they had an "outstanding"
rating and to four years if they had a "satisfactory" rating.
The Act also provides for modernization of the Federal Home Loan Bank System.
Governance of the FHLBanks will be decentralized, allowing Bank directors to
elect their chairman and vice chairman, and membership in the FHLB becomes
voluntary for all members.
Under the Act, the Federal Reserve Board is the umbrella supervisor of
financial holding companies, and state and federal regulators will
functionally regulate insurance and securities affiliates. The FDIC retains
full authority to allow state chartered banks to continue to engage in
grandfathered activities and to approve new activities that go beyond the
powers of national banks.
The deposits of the Association are currently insured by the Savings
Association Insurance Fund ("SAIF"). Both the SAIF and the Bank Insurance
Fund ("BIF"), the federal deposit insurance fund that covers commercial bank
deposits, are required by law to attain and thereafter maintain a reserve
ratio of 1.25% of insured deposits. On September 30, 1996, The Omnibus
Appropriations Act was signed into law. The legislation authorized a one-time
charge on SAIF insured institutions in the amount of .657 dollars for every
one hundred dollars of assessable deposits. Additional provisions of the Act
include new BIF and SAIF premiums for repayment of the Financing Corporation
("FICO") bonds plus any regular insurance assessment, currently nothing for
the lowest risk category institutions. Until full pro-rata FICO sharing is in
effect, the FICO premiums for BIF and SAIF were set at 1.3 and 6.4 basis
points, respectively, beginning January 1, 1997. Full pro-rata FICO sharing
was to begin no later than January 1, 2000.
15
<PAGE>
Recent Accounting Developments
In October 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". This statement establishes standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. It requires
that all items that are required to be recognized under accounting standards
as components of comprehensive income (including, for example, unrealized
gains and losses on available for sale securities) be reported in a financial
statement that is displayed with the same prominence as other financial
statements. It requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement, and (b) display
the accumulated balance of other comprehensive income separately from net
worth and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997 (the Company's effective date of October 1, 1998).
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Since the statement is disclosure related,
it has no effect on the Company's financial condition or results of operation.
In October 1998, the Company adopted SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits". This statement revises
employers' disclosures about pension and other postretirement benefit plans.
It does not change the measurement or recognition of those plans. It
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer as
useful as they were when prior FASB statements were issued. This statement is
effective for fiscal years beginning after December 15, 1997 (the Company's
effective date of October 1, 1998). Since the statement is disclosure
related, it has no effect on the Company's financial condition or results of
operation.
In January 1999, the Company adopted SFAS No. 134, "Accounting for Mortgage-
Backed Securities Retained after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise." This statement amends SFAS 65 to
require that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the resulting mortgage-
backed securities or other retained interest based on its ability and intent
to sell or hold those investments. This statement conforms the subsequent
accounting for securities retained after the securitization of mortgage loans
by a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a nonmortgage
banking enterprise.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". This statement standardizes the
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts. Entities are required to carry all
derivative instruments in the statement of financial position at fair value.
The accounting for changes in the fair value (that is, gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies
as part of a hedging relationship and, if so, on the reason for holding it.
Initially, SFAS No. 133 was to be effective for financial statements issued
for fiscal periods beginning after June 15, 1999. On July 7, 1999, FASB
issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS No. 133" providing for a
one year deferral to fiscal periods beginning after June 15, 2000 (the
Company's effective date of October 1, 2000). Adoption of this statement is
not expected to have a material effect on the Company's financial condition or
results of operations.
16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
November 23, 1999
The Board of Directors and Stockholders
Texarkana First Financial Corporation
We have audited the accompanying consolidated statements of financial
condition of Texarkana First Financial Corporation and subsidiary as of
September 30, 1999 and 1998, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the years in the
three-year period ended September 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Texarkana
First Financial Corporation and subsidiary as of September 30, 1999 and 1998,
and the results of their operations and their cash flows for each of the years
in the three-year period ended September 30, 1999, in conformity with
generally accepted accounting principles.
/s/ Wilf & Henderson, P. C.
Wilf & Henderson, P. C.
Certified Public Accountants
17
<PAGE>
TEXARKANA FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands, Except Share Data)
At September 30,
1999 1998
-------- --------
ASSETS
Cash and cash equivalents
Cash and due from banks $ 2,370 $ 2,341
Interest-bearing deposits in other banks 638 249
Federal funds sold 150 45
-------- --------
Total cash and cash equivalents 3,158 2,635
Investment securities available for sale 31,457 25,651
Mortgage-backed securities held to maturity 386 849
Federal Home Loan Bank stock 1,252 1,185
Loans receivable 161,208 155,781
Allowance for loan losses (995) (1,003)
Accrued interest receivable 1,311 1,331
Foreclosed real estate held for sale, net -- 56
Premises and equipment, net 2,691 2,387
Other assets 679 579
-------- --------
Total assets $201,147 $189,451
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $153,992 $151,955
Advances from borrowers for taxes and insurance 2,151 2,070
Borrowed funds 17,500 6,600
Accrued federal income tax 176 330
Accrued state income tax 134 194
Accrued expenses and other liabilities 816 886
-------- --------
Total liabilities 174,769 162,035
Commitments and contingencies -- --
-------- --------
Common stock, $0.01 par value;
15,000,000 shares authorized;
1,983,750 shares issued,
1,539,342 and 1,675,992 outstanding at
September 30, 1999 and September 30, 1998, respectively 20 20
Additional paid-in capital 13,742 13,627
Common stock acquired by employee benefit plans (1,448) (1,831)
Treasury stock, at cost; 444,408 shares
and 307,758 shares at September 30, 1999
and September 30, 1998, respectively (9,210) (5,996)
Accumulated other comprehensive income (439) 127
Retained earnings substantially restricted 23,713 21,469
-------- --------
Total stockholders' equity 26,378 27,416
-------- --------
Total liabilities and stockholders' equity $201,147 $189,451
======== ========
See accompanying notes to consolidated financial statements.
18
<PAGE>
TEXARKANA FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
For the years ended September 30,
1999 1998 1997
------ ------ ------
Interest income:
Loans:
First mortgage loans $11,415 $11,401 $10,782
Consumer and other loans 1,468 1,363 1,215
Investments - taxable 1,561 1,362 1,264
Mortgage-backed and related securities 418 552 156
------ ------ ------
Total interest income 14,862 14,678 13,417
------ ------ ------
Interest expense:
Deposits 7,420 7,543 6,935
Borrowed funds 541 362 47
------ ------ ------
Total interest expense 7,961 7,905 6,982
------ ------ ------
Net interest income 6,901 6,773 6,435
Provision for loan losses -- (100) --
------ ------ ------
Net interest income after
provision for loan losses 6,901 6,873 6,435
------ ------ ------
Noninterest income:
Loan origination and commitment fees 409 435 283
Gain on sale of mortgage loans, net 122 263 32
Gain (loss) on sale of securities
available for sale, net 11 -- --
Other noninterest income 587 453 440
------ ------ ------
Total noninterest income 1,129 1,151 755
------ ------ ------
Noninterest expense:
Compensation and benefits 2,144 2,081 1,788
Occupancy and equipment 226 222 173
Federal insurance premiums 90 90 123
Other noninterest expense 560 540 520
------ ------ ------
Total noninterest expense 3,020 2,933 2,604
------ ------ ------
Income before income taxes 5,010 5,091 4,586
Income taxes 1,783 1,785 1,702
------ ------ ------
Net income $ 3,227 $ 3,306 $ 2,884
====== ====== ======
Earnings per common share $2.17 $2.03 $1.71
Earnings per common share, assuming dilution $2.07 $1.94 $1.68
Weighted average number of shares 1,489,352 1,627,087 1,686,598
Weighted average number of shares,
assuming dilution 1,556,569 1,708,687 1,720,070
See accompanying notes to consolidated financial statements.
19
<PAGE>
TEXARKANA FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
Common Accum-
Stock ulated
Acquired Other
by Compre-
Common Paid-in Benefit Treasury hensive Retained
Stock Capital Plans Stock Income Earnings Total
----- ------- -------- -------- ------- ------- -------
At October 1, 1996 $20 $13,052 $(2,147) $(1,567) $ (8) $17,074 $26,424
-------
Comprehensive Income:
Net income -- -- -- -- -- 2,884 2,884
Change in unrealized
gain(loss) on AFS
securities, net -- -- -- -- 89 -- 89
-------
Comprehensive Income 2,973
-------
Common stock acquired
by benefit plans -- 396 (454) -- -- -- (58)
ESOP shares committed
to be released -- 37 210 -- -- -- 247
MRP stock amortization -- -- 183 -- -- (10) 173
Stock options exercised -- -- -- -- -- -- --
Purchase treasury stock -- -- -- (1,536) -- -- (1,536)
Dividends paid,
$.505 per share -- -- -- -- -- (843) (843)
--- ------- -------- -------- ------- ------- -------
At September 30, 1997 20 13,485 (2,208) (3,103) 81 19,105 27,380
-------
Comprehensive Income:
Net income -- -- -- -- -- 3,306 3,306
Change in unrealized
gain(loss) on AFS
securities, net -- -- -- -- 46 -- 46
-------
Comprehensive Income 3,352
-------
ESOP shares committed
to be released -- 142 178 -- -- -- 320
MRP stock amortization -- -- 199 -- -- (10) 189
Stock options exercised -- -- -- 9 -- (1) 8
Purchase treasury stock -- -- -- (2,902) -- -- (2,902)
Dividends paid,
$.58 per share -- -- -- -- -- (931) (931)
--- ------- -------- -------- ------- ------- -------
At September 30, 1998 20 13,627 (1,831) (5,996) 127 21,469 27,416
-------
Comprehensive Income:
Net income -- -- -- -- -- 3,227 3,227
Change in unrealized
gain(loss) on AFS
securities, net -- -- -- -- (566) -- (566)
-------
Comprehensive Income 2,661
-------
ESOP shares committed
to be released -- 115 185 -- -- -- 300
MRP stock amortization -- -- 198 -- -- (11) 187
Stock options exercised -- -- -- 73 -- (22) 51
Purchase treasury stock -- -- -- (3,287) -- -- (3,287)
Dividends paid,
$.65 per share -- -- -- -- -- (950) (950)
--- ------- -------- -------- ------- ------- -------
At September 30, 1999 $20 $13,742 $(1,448) $(9,210) $(439) $23,713 $26,378
=== ======= ======== ======== ======= ======= =======
See accompanying notes to consolidated financial statements.
20
<PAGE>
TEXARKANA FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For the years ended September 30,
1999 1998 1997
------- ------- -------
Cash Flows From Operating Activities:
Interest and dividends received $14,778 $14,452 $13,341
Miscellaneous income received 869 1,012 693
Interest paid (3,550) (3,389) (2,817)
Cash paid to suppliers and employees (2,472) (2,145) (2,803)
Cash from REO operations 41 23 51
Cash paid for REO operations (17) (27) (16)
Cash from loans sold 9,565 10,678 1,392
Cash paid for loans originated to sell (9,442)(10,678) (1,392)
Income taxes paid (1,705) (1,892) (1,465)
------- ------- -------
Net Cash Provided By Operating Activities 8,067 8,034 6,984
------- ------- -------
Cash Flows From Investing Activities:
Proceeds from call and maturity
of investment securities 7,191 14,450 5,500
Proceeds from sale of investment securities
available for sale 511 -- 1,399
Purchases of securities available for sale (14,321)(21,262)(10,716)
Collection of principal on
mortgage-backed securities 464 444 340
Purchase of fixed assets (320) (116) (457)
Sale of fixed assets -- -- 3
Net (increase) in loans (5,407) (7,586)(11,797)
Proceeds from sale of REO and other REO recoveries 52 350 121
Cash paid for REO held for resale (20) (20) (59)
------- ------- -------
Net Cash Used In Investing Activities (11,850)(13,740)(15,666)
------- ------- -------
Cash Flows From Financing Activities:
Net increase (decrease) in savings,
demand deposits, and certificates of deposit (2,367) 4,221 6,087
Net increase (decrease) in escrow funds 81 149 56
Purchase of stock for employee benefit plans -- -- (59)
Purchase of treasury stock (3,402) (2,788) (1,536)
Treasury shares sold 51 8 --
Dividend and return of capital distributions (957) (913) (804)
Funds borrowed 28,000 97,462 16,635
Repayment of funds borrowed (17,100)(95,851)(14,504)
------- ------- -------
Net Cash Provided By (Used In)
Financing Activities 4,306 2,288 5,875
------- ------- -------
Net Increase (Decrease) In Cash and Cash Equivalents 523 (3,418) (2,807)
Cash and Cash Equivalents, beginning of year 2,635 6,053 8,860
------- ------- -------
Cash and Cash Equivalents, end of year $ 3,158 $ 2,635 $ 6,053
======= ======= =======
See accompanying notes to consolidated financial statements.
21
<PAGE>
SUPPLEMENTAL INFORMATION CONCERNING CASH FLOWS
For the years ended September 30,
1999 1998 1997
------- ------- -------
Reconciliation of net income to cash provided
by operating activities:
Net income $ 3,227 $ 3,306 $ 2,884
------- ------- -------
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 113 119 94
Amortization of discounts and premiums (37) (2) (44)
Amortization of common stock
acquired by benefit plans 488 598 492
Amortization of deferred loan fees (33) (38) (17)
Amortization of mortgage servicing rights 55 17 2
(Gain) loss on sales of real estate owned (13) (5) (10)
(Gain) loss on investment securities
available for sale (11) -- --
(Recovery) of or provision for loan losses -- (100) --
Interest expense credited to certificates 4,404 4,527 4,047
Dividend and interest income added to investments (66) (69) (64)
Loan fees deferred 52 44 21
Mortgage servicing rights capitalized (127) (169) (30)
Changes in assets and liabilities:
(Increase) decrease in interest receivable 20 (155) 31
Increase (decrease) in accrued interest payable 7 (12) 118
Increase (decrease) in income tax payable 78 (106) 238
Net increase (decrease) in other
receivables and payables (90) 79 (778)
------- ------- -------
Total adjustments 4,840 4,728 4,100
------- ------- -------
Net cash provided by operations $ 8,067 $ 8,034 $ 6,984
======= ======= =======
Supplemental schedule of noncash investing
and financing activities:
Acquisition of property in settlement of loans $ 80 $ 310 $ 248
Loans made to finance sale of REO 124 60 134
FHLB stock dividends not redeemed 66 69 64
See accompanying notes to consolidated financial statements.
22
<PAGE>
Note 1 - Summary of Significant Accounting Policies
Conversion to Capital Stock Form of Ownership
On February 22, 1995, the Board of Directors of First Federal Savings and Loan
Association of Texarkana (the "Association") adopted a Plan of Conversion to
convert from a federally chartered mutual savings and loan to a federally
chartered stock savings and loan with the concurrent formation of Texarkana
First Financial Corporation (the "Company"), a unitary savings and loan
holding company. The Conversion was completed on July 7, 1995. Texarkana
First Financial Corporation issued 1,983,750 shares of its common stock in a
public offering to the Association's eligible depositors and borrowers and the
Texarkana First Financial Corporation Employee Stock Ownership Plan (the
"ESOP) and resulted in proceeds to the Company of $17,755 net of $694 of costs
associated with the Conversion.
Business
The Company's principal subsidiary, First Federal Savings and Loan Association
of Texarkana, is a federally-chartered stock savings and loan conducting
business from its main office in Texarkana, Arkansas and from four branch
offices located in Arkansas.
The Company is subject to competition from other financial institutions and
other companies that provide financial services. The Company and the
Association are subject to the regulations of certain federal agencies and
undergo periodic examinations by those regulatory authorities.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
the Association. All significant intercompany transactions have been
eliminated in consolidation.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. Additionally, certain
reclassifications have been made in order to conform with the current year's
presentation.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported values of assets and
liabilities as of the date of the statement of financial condition and
revenues and expenses for the period. Actual results could differ
significantly from those estimates. Material estimates that are particularly
susceptible to significant change in the near-term relate to the determination
of the allowance for loan losses, the valuation of other real estate owned,
and the valuation of deferred tax assets as well as the effect of prepayments
on premiums and discounts associated with investments and mortgage-related
securities. Management believes that the allowance for loan losses, the
valuations of other real estate owned and deferred tax assets are adequate,
and that the effect of prepayments on premiums and discounts associated with
investments and mortgage-related securities has been adequately evaluated.
Various agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses and valuation of
other real estate owned.
Cash
For purposes of the statement of cash flows, cash and cash equivalents include
cash and interest-bearing deposits, federal funds sold, and all highly liquid
debt instruments with original maturities when purchased of three months or
less.
23
<PAGE>
Note 1 - Summary of Significant Accounting Policies - continued
Assets Available for Sale
Included in assets available for sale are any investments which the Company
believes may be involved in interest rate risk, liquidity, or other
asset/liability management decisions which might reasonably result in such
assets not being held until maturity. Investments available for sale are
carried at fair value with net unrealized gains and losses included, net of
income tax, in stockholders' equity.
During the year ended September 30, 1997 the company started a policy of using
Federal Home Loan Bank (FHLB) advances to purchase Government National
Mortgage Association (GNMA) adjustable rate mortgages (ARMS). The Company
structures the ARMS so that a portion of the portfolio reprices quarterly to
offset any rise in the interest rate charged by the FHLB. The ARMS will be
liquidated to pay off the advances should the cost of borrowing exceed the
return on the ARMS.
Investments and Mortgage-Related Securities
Investments and mortgage-related securities, including equity securities that
are not readily marketable, are stated at cost, adjusted for the amortization
of premiums and the accretion of discounts using a method which approximates
level yield. Management has the ability and the intent to hold such
securities until maturity. The Company is required to maintain stock in the
Federal Home Loan Bank of Dallas ("FHLB") in an amount equal to 1% of mortgage
loans secured by residential property. The Company carries such stock at
cost.
Loans Receivable
Loans held to maturity are stated at the amount of the unpaid principal
balance net of capitalized loan origination fees and certain direct
origination costs. Loan fees in excess of the direct cost of originating the
loan that result in income in excess of the market rate are deferred and taken
into income over the contractual life of the loan on a level yield basis.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level that management
considers adequate to provide for potential losses based upon evaluation of
known and inherent risks in the loan portfolio, past loss experience, current
economic conditions, and other relevant factors. While management uses the
best information available to make such evaluations, future adjustments to the
allowance may be necessary if economic conditions differ substantially from
the assumptions used in making the evaluation. In addition, various agencies,
as an integral part of their examination process, periodically review the
allowance for loan losses. Such agencies may require the Company to recognize
additions to the allowance for loan losses based on their judgments of
information that is available to them at the time of their examination.
Accrued Interest
Interest on loans is credited to income as it is earned. Generally, interest
income is not accrued for loans delinquent 90 days or greater. Payments
received on nonaccrual and impaired loans are applied to the outstanding
principal balance. The Company does not recognize interest on impaired loans.
Foreclosed Real Estate Held for Sale
Real estate acquired through foreclosure is classified as other real estate
owned. Other real estate owned is carried at the lower of cost or fair value,
less estimated selling costs. Fair value is generally determined through the
use of independent appraisals. In certain cases, internal cash flow analysis
is used as the basis for fair value, if such amounts are lower than the
appraised values.
24
<PAGE>
Note 1 - Summary of Significant Accounting Policies - continued
Premises and Equipment
Premises and equipment are carried at cost. Depreciation and amortization are
generally computed on the straight-line method. The estimated useful lives
used to compute depreciation and amortization are 40 to 50 years for buildings
and 5 to 10 years for furniture and equipment. The cost of maintenance and
repairs is charged to expense as incurred. Significant renewals and
improvements are capitalized.
Mortgage Servicing Rights
Effective October 1, 1996, the Company adopted Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 122
"Accounting for Mortgage Servicing Rights." This standard requires the
Company to recognize servicing rights as assets, regardless of how such assets
were acquired. Additionally, the Company is required to assess the fair value
of these assets at each reporting date to determine impairment. Mortgage
servicing rights are being amortized on a straight line basis over periods not
exceeding 8 years.
Income Taxes
Deferred tax assets and liabilities are recognized for the future consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets are recognized for future deductible temporary differences.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Earnings Per Common Share
In December 1997, the Company adopted the provisions of SFAS Statement No.
128, "Earnings per Share". The Statement specifies the computation,
presentation, and disclosure requirements for earnings per share for entities
with publicly held common stock. It replaced the presentation of primary
earnings per share with a presentation of earnings per common share and fully
diluted earnings per share with earnings per common share - assuming dilution.
All earnings per share data is stated to reflect the adoption of the
Statement.
Earnings per common share are computed by dividing net income by the weighted
average number of common shares outstanding during the period. Earnings per
share - assuming dilution is computed by increasing the weighted average
number of common shares outstanding during the period by the number of
additional common shares that would have been outstanding if all dilutive
potential common shares had been issued. Dilutive potential common shares of
the Company include the Employees' and the Directors' stock option plans.
Employee Stock Ownership Plan (ESOP)
The Company accounts for its ESOP in accordance with Statement of Position 93-
6, "Employers' Accounting For Employee Stock Ownership Plans", which requires
the Company to recognize compensation expense equal to the fair value of the
ESOP shares during the periods in which they become committed to be released.
To the extent that the fair value of ESOP shares differs from the cost of such
shares, this differential will be charged or credited to equity. Management
expects the recorded amount of expense to fluctuate as continuing adjustments
are made to reflect changes in the fair value of the ESOP shares. ESOP shares
are considered outstanding as they are committed to be released for purposes
of computing earnings per share.
25
<PAGE>
Note 1 - Summary of Significant Accounting Policies - continued
Stock - Based Compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-based
Compensation" (SFAS 123). This statement encourages, but does not require,
the adoption of fair value accounting for stock based compensation to
employees. The Company, as permitted, has elected not to adopt the fair value
accounting provisions of SFAS 123, and has instead continued to apply APB
Opinion 25 and related interpretations in accounting for plans and provide the
required proforma disclosures of SFAS 123.
Recently Adopted Accounting Standards
In October 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," effective for the fiscal years beginning October 1, 1998 and after.
The new standard requires an entity to report and display comprehensive income
and its components. The Company's comprehensive income includes net income
plus net unrealized gain or loss on available for sale securities.
In October 1998, the Company adopted SFAS No. 132, "Employer's Disclosures
about Pensions and Other Post Retirement Benefits," effective for fiscal years
beginning October 1, 1998 and after. This Statement revises employers'
disclosures about pensions and other post retirement benefit plans. The
Statement does not change the measurement or recognition of these plans.
In January 1999, the Company adopted SFAS No. 134, "Accounting for Mortgage-
Backed Securities Retained after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise." This statement amends SFAS 65 to
require that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the resulting mortgage-
backed securities or other retained interest based on its ability and intent
to sell or hold those investments. This statement conforms the subsequent
accounting for securities retained after the securitization of mortgage loans
by a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a nonmortgage
banking enterprise.
Impact of New Accounting Standards
The FASB issued FASB No. 133, "Accounting for Derivative Instruments and
Hedging Activities," effective for fiscal quarters of all fiscal years
beginning after June 15, 2000, with earlier application encouraged. The
Statement establishes accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. The Company opted to delay adoption of this statement
until required. The adoption of this statement is not expected to have a
material impact on the consolidated financial statements.
Note 2 - Debt and Equity Securities
Assets available for sale at September 30, 1999 consisted of the following:
September 30, 1999
-------------------------------
Unrealized
Amortized ------------- Fair
Cost Gains Losses Value
------- ----- ------ -------
U. S. Government and agencies debt securities $25,928 $ -- $600 $25,328
Government National Mortgage Association ARM's 5,525 3 -- 5,528
Federal National Mortgage Association ARM's 274 -- 2 272
Midwest Financial Institutions Trust, Series 3 396 -- 67 329
------- ---- ---- -------
$32,123 $ 3 $669 $31,457
======= ==== ==== =======
At September 30, 1999, securities totaling $3,000 were pledged to secure
municipal jumbo certificates of deposit.
26
<PAGE>
Note 2 - Debt and Equity Securities - continued
Assets available for sale at September 30, 1998 consisted of the following:
September 30, 1998
-------------------------------
Unrealized
Amortized ------------- Fair
Cost Gains Losses Value
------- ----- ------ -------
U. S. Government and agencies debt securities $17,106 $309 $ -- $17,415
Government National Mortgage Association ARM's 7,378 -- 58 7,320
Federal National Mortgage Association 578 3 -- 581
Midwest Financial Institutions Trust, Series 3 396 -- 61 335
------- ---- ---- -------
$25,458 $312 $119 $25,651
======= ==== ==== =======
Securities to be held to maturity at September 30, 1999 and 1998 consisted of
the following:
September 30, 1999
-------------------------------
Unrealized
Amortized ------------- Fair
Cost Gains Losses Value
------- ----- ------ -------
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation $ 311 $ 8 $ -- $ 319
Federal National Mortgage Association 75 -- -- 75
Equity securities:
Federal Home Loan Bank Stock 1,252 -- -- 1,252
------- ---- ---- -------
$1,638 $ 8 $ -- $ 1,646
======= ==== ==== =======
September 30, 1998
-------------------------------
Unrealized
Amortized ------------- Fair
Cost Gains Losses Value
------- ----- ------ -------
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation $ 437 $ 15 $ -- $ 452
Federal National Mortgage Association 412 4 -- 416
Equity securities:
Federal Home Loan Bank Stock 1,185 -- -- 1,185
------- ---- ---- -------
$2,034 $ 19 $ -- $2,053
======= ==== ==== =======
The scheduled maturities of securities available for sale and held to
maturity, excluding equity securities, at September 30, 1999 follows.
Mortgage-backed securities are allocated among periods based on date of final
payoff.
Available for sale Held to maturity
------------------ ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
Due in one year or less $ 1,989 $2,063 $ 75 $ 75
Due from one to five years 19,519 17,238 -- --
Due from five to ten years 3,420 5,212 311 319
Due after ten years 6,799 6,615 -- --
------- ------- ----- -----
$31,727 $31,128 $ 386 $ 394
======= ======= ===== =====
Sales of available for sale securities totaled $500, $0, and $1,399, during
the years ended September 30, 1999, 1998 and 1997, respectively. Gains
totaled $11, $0, and $0, during these periods determined on the specific
identification method.
27
<PAGE>
Note 3 - Accrued Interest Receivable
Accrued interest at September 30, 1999 and 1998 is summarized as follows:
September 30,
------------------
1999 1998
------- -------
Investment securities available for sale $ 228 $ 248
Mortgage-backed securities held to maturity 5 9
Loans receivable 1,078 1,074
------- -------
$ 1,311 $ 1,331
======= =======
Note 4 - Loans Receivable
Loans receivable at September 30, 1999 and 1998 consist of the following:
September 30,
--------------------
1999 1998
-------- --------
Real estate loans:
One-to-four family $106,719 $105,369
Multi-family 1,454 1,582
Nonresidential real estate and land 26,204 25,517
Construction residential 10,956 10,501
Construction commercial 5,498 2,499
-------- --------
Total real estate loans 150,831 145,468
Commercial loans 2,654 2,841
Consumer loans 14,586 13,394
-------- --------
Total loans 168,071 161,703
Less: Loans in process 6,725 5,801
Deferred fees and discounts 138 121
-------- --------
Net loans $161,208 $155,781
======== ========
Nonaccruing and renegotiated loans at September 30, 1999, 1998, and 1997 were
$458, $0, and $0, respectively. The Company is not committed to lend
additional funds to debtors whose loans have been modified. Interest income
that would have been recorded under the original terms of such loans and the
interest income actually recognized for the periods is as follows:
September 30,
------------------------
1999 1998 1997
------ ------ ------
Contractual interest income $ 45 $ -- $ --
Interest income recognized (26) -- --
---- ---- ----
Interest income foregone $ 19 $ -- $ --
==== ==== ====
The activity in the allowance for loan losses is summarized as follows:
September 30,
------------------------
1999 1998 1997
------ ------ ------
Balance, beginning of the year $1,003 $1,124 $1,145
Provisions (returned to) or charged against income -- (100) --
Charge-offs (8) (21) (21)
Recoveries -- -- --
------ ------ ------
$ 995 $1,003 $1,124
====== ====== ======
28
<PAGE>
Note 5 - Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
statements of financial condition. The unpaid principal balances of those
loans are summarized as follows:
September 30,
---------------------------
1999 1998 1997
------- ------- -------
Federal Home Loan Mortgage Corporation $34,975 $31,363 $22,116
Others 1,103 1,177 1,246
------- ------- -------
Total $36,078 $32,540 $23,362
======= ======= =======
Following is an analysis of the changes in mortgage loan servicing rights:
September 30,
------------------
1999 1998
------- -------
Balance, beginning of the year $ 179 $ 28
Originated rights 127 177
Amortized (56) (26)
------- -------
Total $ 250 $ 179
======= =======
Note 6 - Foreclosed Real Estate Held for Sale
Foreclosed real estate and related allowances at September 30, 1999 and 1998
consisted of the following:
September 30,
------------------
1999 1998
------- -------
Foreclosed real estate:
Balance, beginning of the period $ 56 $ 127
Additions to foreclosed real estate 72 330
Sales of foreclosed real estate (128) (401)
----- -----
Balance, end of the period $ -- $ 56
Allowance for loss -- --
----- -----
Net foreclosed real estate $ -- $ 56
===== =====
Note 7 - Premises and Equipment
Premises and equipment at September 30, 1999 and 1998 consisted of the
following:
September 30,
------------------
1999 1998
------- -------
Land $ 592 $ 592
Office buildings and improvements 2,931 2,551
Furniture and equipment 549 536
------ ------
4,072 3,679
Less accumulated depreciation (1,381) (1,292)
------ ------
Premises and equipment, net of accumulated depreciation $2,691 $2,387
====== ======
Depreciation expense was $113, $ 119, and $ 94 for the years ended September
30, 1999, 1998, and 1997, respectively.
29
<PAGE>
Note 8 - Deposits
The major types of saving deposits by weighted interest rate, amounts, and the
percentages of such types are as follows:
September 30, 1999 September 30, 1998
---------------------- ----------------------
Weighted Weighted
Interest Interest
Rate Amount % Rate Amount %
-------- -------- ---- -------- -------- ----
Noninterest bearing deposits --% $ 3,362 2% --% $ 1,400 1%
NOW accounts 1.50% 3,163 2% 2.00% 2,971 2%
Super NOW accounts 1.75% 2,726 2% 2.25% 2,400 2%
Money market and passbook 3.09% 14,079 9% 3.29% 14,253 8%
-------- ---- -------- ----
23,330 15% 21,024 13%
Certificates of deposits 5.15% 130,662 85% 5.50% 130,931 87%
-------- ---- -------- ----
Totals $153,992 100% $151,955 100%
======== ==== ======== ====
A summary of certificates of deposit by maturity is as follows:
September 30,
-------------------
1999 1998
-------- --------
Within one year $104,341 $ 96,777
One to two years 15,063 21,240
Two to three years 5,970 5,917
Four to five years 3,731 3,296
Thereafter 1,557 3,701
-------- --------
$130,662 $130,931
======== ========
At September 30, 1999, 1998, and 1997, respectively, interest expense on
deposits for the indicated period is summarized as follows:
September 30,
---------------------------
1999 1998 1997
------- ------- -------
Money market $ 247 $ 293 $ 262
Passbook savings 203 184 173
Now 98 123 124
Certificates of deposit 6,872 6,943 6,376
------- ------- -------
$ 7,420 $ 7,543 $ 6,935
======= ======= =======
The aggregate amount of deposits with a minimum denomination of $100 was
$24,885 at September 30, 1999 and $29,994 at September 30, 1998. Deposits in
excess of $100 are not covered by federal deposit insurance.
Note 9 - Borrowed Funds
During the years ended September 30, 1999 and September 30, 1998, the company
obtained advances from the Federal Home Loan Bank. The advances are under
the terms of its collateral agreement with the FHLB. Security for the
advances is a blanket security agreement pledging first mortgage loans. The
advances are fixed rate advances callable in either one or two years and
quarterly thereafter.
30
<PAGE>
Note 9 - Borrowed Funds - continued
At September 30, 1999, advances consisted of the following:
Interest
Rates Amount
-------- --------
Amounts maturing in years ending:
September 30, 2000, 7 day advance, maturing 10/6/99 5.31% $ 2,500
September 30, 2004, 5 year advance, callable 10/1/99,
and quarterly thereafter 4.18% 5,000
September 30, 2008, 10 year advance, callable 9/28/00,
and quarterly thereafter 4.37% 5,000
September 30, 2009, 10 year advance, callable 5/8/00,
and quarterly thereafter 4.72% 5,000
--------
$ 17,500
========
Note 10 - Federal and State Income Taxes
The Company and the Association file consolidated federal and state income tax
returns on a fiscal year basis. The provisions for income taxes are summarized
as follows:
September 30,
---------------------------
1999 1998 1997
------- ------- -------
Current:
Federal $ 1,851 $ 1,491 $ 1,142
State 215 220 207
------- ------- -------
$ 2,066 $ 1,711 $ 1,349
------- ------- -------
Deferred:
Federal $ (271) $ 71 $ 317
State (12) 3 36
------- ------- -------
$ (283) $ 74 $ 353
------- ------- -------
Total provisions $ 1,783 $ 1,785 $ 1,702
======= ======= =======
A reconciliation of tax expense computed by applying the statutory corporate
tax rate to earnings before taxes and the tax expense shown in the
accompanying statements of operations is as follows:
September 30,
---------------------------
1999 1998 1997
------- ------- -------
Effective federal and state statutory rates 38.3% 38.3% 38.3%
------- ------- -------
Expected tax at statutory rates $ 1,919 $ 1,949 $ 1,756
Adjustments to expected tax:
Bad debt deductions -- (38) --
Interest not taxable for state (92) (45) (30)
Employee benefit plan differences (59) (61) (22)
Other 15 (20) (2)
------- ------- -------
$ 1,783 $ 1,785 $ 1,702
======= ======= =======
Effective tax rates 35.6% 35.1% 37.1%
======= ======= =======
In August 1996, new legislation was enacted that provided for the recapture
into taxable income certain amounts previously deducted as additions to the
bad debt reserves for income tax purposes. The Company is repaying the state
income tax on approximately $1,523 of previous bad debt deductions over a six-
year period. The Company has made provision for this tax in prior financial
statements and repayment has no effect on income.
31
<PAGE>
Note 10 - Federal and State Income Taxes - continued
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
September 30,
---------------------------
1999 1998 1997
------- ------- -------
Deferred tax assets:
Deferred loan fees $ 52 $ 44 $ 40
State deferred income tax 52 56 58
Employee benefit plans 102 94 89
Other 239 29 --
------- ------- -------
Deferred tax assets $ 445 $ 223 $ 187
------- ------- -------
Deferred tax liabilities:
Fixed assets $ (403) $ (418) $ (430)
Federal Home Loan Bank stock (231) (204) (176)
State bad debt reserves (66) (83) (94)
Mortgage servicing rights (101) (72) (11)
Other -- (86) (42)
------- ------- -------
Deferred tax liabilities $ (801) $ (863) $ (753)
------- ------- -------
Net deferred tax liabilities $ (356) $ (640) $ (566)
======= ======= =======
Specifically exempted from deferred tax recognition requirements are bad debt
reserves for tax purposes of U. S. savings and loans in the Association's base
year, as defined by regulations. Base year reserves totaled approximately
$2,843. Consequently, a deferred tax liability of approximately $1,089
related to such reserves was not provided for in the consolidated statements
of financial condition at September 30, 1999 and September 30, 1998. Payment
of dividends to shareholders out of retained earnings deemed to have been made
out of earnings previously set aside as bad debt reserves may create taxable
income to the Company. The Company does not anticipate making any such
distributions.
Note 11 - Commitments and Contingencies
As of September 30, 1999, the Company is committed to the funding of
approximately $14,197 of loans. The Company had off balance sheet financial
instruments representing credit risk in the form of unfunded lines and letters
of credit in the amount of $703 at September 30, 1999 and $425 at September
30, 1998. At September 30, 1999 and September 30, 1998 there was no material
litigation to which the Company was a party.
Note 12 - Employee Benefit Plans
The Association has a contributory defined contribution pension plan for all
eligible employees. Retirement benefits under this form of pension plan are
limited to the value of each participant's account at the time of retirement;
therefore, vested benefits will not exceed the value of the participant's
account at any time. The cost of the plan for the periods ended September 30,
1999 and 1998, was approximately $3 and $5, respectively.
In connection with the Conversion, as discussed in Note 1, the Company
established the ESOP for the benefit of eligible employees. The Company
purchased 138,862 shares of common stock on behalf of the ESOP in the
Conversion. In December 1996, the Company purchased 26,730 additional shares
with the proceeds from dividends on the unallocated ESOP shares. As of
September 30, 1999, 12,536 shares were committed to be released and 54,106
shares have been allocated to participants. The fair value of the 98,950
unearned ESOP shares was $2,103 at September 30, 1999.
32
<PAGE>
Note 12 - Employee Benefit Plans - continued
The Company recorded compensation related to the ESOP of $371 for the year
ended September 30, 1999, $411 for the year ended September 30, 1998, and $311
for the year ended September 30, 1997.
On December 27, 1995, the Board approved an Employee Stock Program, Management
Recognition Plans (MRP) for officers and directors, and a Directors Stock
Option Plan subject to the approval of the stockholders. The shareholders
approved these plans at the January 1996 shareholders meeting. The purpose of
these plans is to retain personnel of experience and ability by providing
employees and non-employee directors with compensation for their past services
and as an incentive for such services in the future.
As of September 30, 1999 the Company has acquired 65,135 shares of its common
stock on behalf of the MRP through open market purchases. An aggregate of
64,935 shares, net of forfeitures, have been awarded to the Company's Board of
Directors and officers as of September 30, 1999, subject to vesting and other
provisions of the MRP. At September 30, 1999 the deferred cost of unearned
MRP shares totaled $411 and is recorded as a charge against stockholders'
equity. Compensation expense will be recognized ratably over the five year
vesting period only for those shares awarded. The Company recorded
compensation and employee benefit expense related to the MRP of $188 for the
year ended September 30, 1999, $188 for the year ended September 30, 1998, and
$193 for the year ended September 30, 1997.
Common stock totaling 36,626 shares have been granted and may be exercised by
the Company's non-employee directors, subject to vesting and other provisions
of the Directors' Stock Option Plan. No options were granted in the years
ended September 30, 1999 and 1998. During the year ended September 30, 1997,
3,968 options were granted and may be exercised, subject to vesting at fifteen
dollars and twelve and one half cents per share. During the year ended
September 30, 1996, 32,658 options, net of forfeitures and shares exercised,
were granted and may be exercised, subject to vesting, at fourteen dollars and
twenty-five cents per share.
Common stock totaling 135,988 shares, net of forfeitures and shares exercised
has been granted to the Company's key employees. The Company's key employees,
subject to vesting and other provisions of the Employee Stock Program may
exercise these shares. No shares were awarded during the years ended
September 30, 1999 and 1998. During the year ended September 30, 1997, 11,000
options, net of forfeitures, were granted and may be exercised, subject to
vesting, at twenty one dollars and twenty five cents per share. During the
year ended September 30, 1996, 124,988 options, net of forfeitures and shares
exercised, were granted and may be exercised, subject to vesting, at thirteen
dollars and seventy-five cents per share.
As stated in note 1, The Company has elected not to adopt the fair value
accounting provisions of SFAS 123, and has instead continued to apply APB
Opinion 25 and related interpretations in accounting for plans and provide the
required proforma disclosures of SFAS 123. Had the grant date fair value
provisions of SFAS 123 been applied, for the year ended September 30, 1999,
additional compensation of $148 would have been recognized, net income would
have been $3,079, and earnings per common share would have been $2.07. For the
year ended September 30, 1998, additional compensation of $150 would have been
recognized, net income would have been $3,156, and earnings per common share
would have been $1.94. For the year ended September 30, 1997, the additional
compensation of $137 would have been recognized, net income would have been
$2,747, and earnings per common share would have been $1.63.
33
<PAGE>
Note 12 - Employee Benefit Plans-continued
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. No options were granted in the fiscal
years ended September 30, 1999 and 1998. Weighted-average assumptions used
for grants in 1997 were, dividend yields of 3.00%, expected volatility of 60%
and 64%, risk free interest rate of 6.51% and 6.04%, and expected lives of 7
and 8 years. Weighted average assumptions used for grants in 1996 were,
dividend yields of 3.00%, expected volatility of 65% and 70%, risk free
interest rate of 5.57% and 6.86%, and expected lives of 7 and 8 years.
A summary of the status of the Company's two fixed stock option plans as of
September 30, 1999, 1998, and 1997 and changes during the years then ended is
as follows:
September 30,
-------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
Outstanding
beginning of year 176,264 $14.350 177,864 $14.387 163,896 $13.859
Granted -- -- -- -- 15,968 19.728
Exercised (3,650) 14.168 (600) 13.750 -- --
Forfeited -- -- (1,000) 21.250 (2,000) 13.750
------- ------- -------
Outstanding
end of year 172,614 $14.354 176,264 $14.350 177,864 $14.387
======= ======= =======
Options exercisable
at year end 98,870 $14.199 67,146 $14.118 27,084 $13.882
Weighted average fair
value of options grant-
ed during the year $ -- $ -- $ 5.36
Shares outstanding at September 30, 1999 and the contractual life of those
shares is as follows:
Remaining
Number Contractual
Outstanding Life
----------- -----------
Exercise Prices
13.750 124,988 7.0
14.250 32,658 6.3
15.125 3,968 7.3
21.250 11,000 7.8
----------- -----------
Total shares and weighted average
contractual life 172,614 6.9
=========== -----------
34
<PAGE>
Note 13 - Regulatory Matters
The plan of Conversion described in Note 1 provides for the establishment of a
special liquidation account for the benefit of eligible account holders and
the supplemental eligible account holders in an amount equal to the net worth
of the Association as of the date of its latest statement of financial
condition contained in the final offering circular used in connection with the
conversion. The liquidation account will be maintained for the benefit of
eligible account holders and supplemental eligible account holders who
continue to maintain their accounts at the Association after the conversion.
The liquidation account will be reduced from time to time to the extent that
qualifying account balances are reduced. In the event of a complete
liquidation, each eligible and supplemental eligible account holder will be
entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held. The Company may not declare or pay cash dividends on its shares of
common stock if the effect thereof would cause the Company's stockholders'
equity to be reduced below applicable regulatory capital maintenance
requirements for insured institutions or below the special liquidation account
referred to above.
The Company's subsidiary is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
subsidiary must met specific capital guidelines that involve quantitative
measures of the subsidiary's assets, liabilities, and certain off-balance-
sheet items as calculated under regulatory accounting practices. The
subsidiary's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the subsidiary to maintain minimum amounts and ratios (set forth in
the table below) of tier 1 capital (as defined in the regulations) to adjusted
total assets (as defined in the regulations), tier 1 risk-based capital to
risk-weighted assets (as defined in the regulations), and of total risk-based
capital (as defined in the regulations) to risk-weighted assets (as defined in
the regulations). Management believes, as of September 30, 1999, that the
subsidiary meets all capital adequacy requirements to which it is subject.
As of June 30, 1999, the most recent notification from the Office of Thrift
Supervision categorized the subsidiary as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the subsidiary must maintain minimum tier 1, tier I risk-based,
total risk-based capital ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institutions category.
In the following table tier 1 capital is computed as a percentage of adjusted
total assets of $201,435, at September 30, 1999, and $188,847, at September
30, 1998. Tier 1 risk-based capital and total risk-based capital are computed
as a percent of total risk weighted assets of $120,875, for the year ended
September 30, 1999, and $114,840, for the year ended September 30, 1998.
35
<PAGE>
Note 13 - Regulatory Matters - continued
The following sets forth the unconsolidated subsidiary's compliance with each
of the regulatory capital requirements as of September 30, 1999 and 1998.
Minimum for Minimum To Be
Actual Capital Adequacy Well Capitalized
------------- ---------------- ----------------
Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ------ ------- ------
As of September 30, 1999:
Tier 1 or leverage capital
(to adjusted total assets) $26,586 13.20% $ 8,057 4.00% $10,072 5.00%
Tier 1 risk-based capital
(to risk-weighted assets) $26,586 21.99% $ 4,835 4.00% $ 7,253 6.00%
Total risk-based capital
(to risk-weighted assets) $27,229 22.53% $ 9,670 8.00% $12,088 10.00%
As of September 30, 1998:
Tier 1 or leverage capital
(to adjusted total assets) $26,991 14.29% $ 7,554 4.00% $ 9,442 5.00%
Tier 1 risk-based capital
(to risk-weighted assets) $26,991 23.50% $ 4,594 4.00% $ 6,890 6.00%
Total risk-based capital
(to risk-weighted assets) $27,627 24.06% $ 9,187 8.00% $11,484 10.00%
Note 14 - Earnings Per Common Share
A reconciliation of earnings per common share to earnings per common share
assuming dilution is as follows:
September 30,
---------------------------
1999 1998 1997
------- ------- -------
Earnings per common share:
Net income applicable to common stock $ 3,227 $ 3,306 $ 2,884
======= ======= =======
Weighted average number of common shares
outstanding, in thousands 1,489 1,627 1,687
======= ======= =======
Earnings per common share $ 2.17 $ 2.03 $ 1.71
======= ======= =======
Earnings per common share - assuming dilution:
Net income applicable to common stock $ 3,227 $ 3,306 $ 2,884
======= ======= =======
Weighted average number of common shares
outstanding, in thousands 1,489 1,627 1,687
Effect of dilutive securities:
Weighted average shares issuable under the
Director's stock option plan, in thousands 15 18 6
Weighted average shares issuable under the
Employee's stock option plan, in thousands 53 63 27
------- ------- -------
Weighted average shares adjusted, in thousands 1,557 1,708 1,720
======= ======= =======
Earnings per common share - assuming dilution $ 2.07 $ 1.94 $ 1.68
======= ======= =======
36
<PAGE>
Note 15 - Other Comprehensive Income
The amount of income tax expense or benefit allocated to each component of
comprehensive income for the years ended September 30, 1999, 1998, and 1997,
including reclassification adjustments are as follows:
September 30, 1999
-----------------------------
Before Tax Net
tax (Expense) of Tax
Amount or Benefit Amount
-------- --------- --------
Unrealized losses on securities:
Unrealized holding losses arising during period $ (847) $ 288 $ (559)
Less: reclassification adjustment for gains
realized in net income (11) 4 (7)
-------- --------- --------
Other Comprehensive Income $ (858) $ 292 $ (566)
======== ========= ========
September 30, 1998
-----------------------------
Before Tax Net
tax (Expense) of Tax
Amount or Benefit Amount
-------- --------- --------
Unrealized gains on securities:
Unrealized holding gains arising during period $ 69 $ (23) $ 46
Less: reclassification adjustment for gains
realized in net income -- -- --
-------- --------- --------
Other Comprehensive Income $ 69 $ (23) $ 46
======== ========= ========
September 30, 1997
-----------------------------
Before Tax Net
tax (Expense) of Tax
Amount or Benefit Amount
-------- --------- --------
Unrealized gains on securities:
Unrealized holding gains arising during period $ 135 $ (46) $ 89
Less: reclassification adjustment for gains
realized in net income -- -- --
-------- --------- --------
Other Comprehensive Income $ 135 $ (46) $ 89
======== ========= ========
Note 16 - Related Party Transactions
The Company had a total of $830 and $829 at September 30, 1999 and 1998,
respectively, in direct loans to officers and directors. New loans totaled
$96 and $520, and repayments totaled $95 and $116 for the years ended
September 30, 1999 and 1998, respectively.
Deposits from related parties totaled $923 at September 30, 1999.
The Company purchases a major portion of its insurance coverage from a company
partially owned by two Board Members. The Company paid $79, $40, and $41 for
such coverage, during the years ended September 30, 1999, 1998 and 1997,
respectively.
The Company paid $72, $72, and $72 to directors for director's fees during the
years ended September 30, 1999, 1998, and 1997 respectively.
37
<PAGE>
Note 17 - Other Noninterest Income and Expense
Other noninterest income and expense amounts are summarized as follows:
September 30,
---------------------------
1999 1998 1997
------- ------- -------
Other noninterest income:
Service charges on deposits $ 226 $ 172 $ 156
Other service charges and fees 160 122 95
Service fees on loans sold 110 93 83
Gain (loss) on sale of repossessed assets, net 13 6 24
Other 78 60 82
------ ------ ------
$ 587 $ 453 $ 440
====== ====== ======
Other noninterest expense:
Data processing charges $ 136 $ 113 $ 108
Advertising 58 65 67
Professional fees 47 56 76
OTS assessments 50 55 48
Stationary, printing, postage, and telephone 92 95 84
Insurance and bond premiums 41 45 43
Other 136 111 94
------ ------ ------
$ 560 $ 540 $ 520
====== ====== ======
Note 18 - Significant Group Concentrations of Credit Risk
The Company invests a portion of its cash in deposit accounts with various
financial institutions in amounts that may exceed the insured amount of $100.
The Company performs ongoing evaluations of the financial institutions in
which it invests deposits and periodically assesses its credit risk with
respect to these accounts. The Company also sells federal funds to other
institutions to maximize interest earned on idle cash. Federal funds sold are
unsecured loans to the purchasing institution. In the case of insolvency, the
Company would be at risk for federal funds sold to the insolvent institution.
Federal funds sold totaled $150 and $45 at September 30, 1999 and 1998,
respectively. The Company sells to a pre-approved list of institutions that
are periodically evaluated.
Most of the Company's business activity is with customers located in the
Northeast Texas and Southwest Arkansas area, accordingly, a substantial
portion of its debtors' ability to honor their contracts is dependent upon
this area. Loans to this group are primarily to individual homeowners and are
secured by one to four family dwellings. The Company's largest loans to one
borrower amounted to $3,531 at September 30, 1999. This portfolio is
primarily collateralized by commercial real estate. The Company has loans
outside its normal lending area to four different borrowers in Ft. Worth,
Texas in the total amount of $3,375 and $2,541 at September 30, 1999 and 1998,
respectively. This portfolio is secured by commercial and residential
properties.
The Company's policy for requiring collateral on single family dwellings is
that the loans not exceed 95% of collateral value. In some cases, however,
with board approval, 100% of collateral value may be loaned. For commercial
and multi-family dwellings, 85% of loan to collateral value is required. For
loans on building sites, 80% of loan to collateral value is required. For
loans on undeveloped land, 65% of loan to collateral value is required.
38
<PAGE>
Note 19 - Derivative Financial Instruments
The Company has limited involvement with derivative financial instruments and
does not use them for trading purposes.
Note 20 - Fair Value of Financial Instruments
Fair value estimates, methods, and assumptions are set forth below for the
Company's financial instruments whether or not recognized in the balance
sheet, for which it is practicable to estimate that value. The fair values
may not represent actual values of the financial instruments that could have
been realized as of year end or that will be realized in the future.
Cash and Cash Equivalents - For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Investments and Mortgage-related Securities - The fair value of longer-term
investments and mortgage-related securities is estimated based on bid prices
published in financial newspapers or bid quotations received from securities
dealers. The carrying amounts of stocks approximate fair value because shares
may be redeemed at par.
Loans - The fair value of performing loans is calculated by discounting
expected cash flows using an estimated market discount rate for similar loans
that would be made to borrowers with similar credit history and maturities.
The fair value for nonaccrual loans was derived through a discounted cash flow
analysis, which includes the opportunity costs of carrying a nonperforming
asset. Estimated discount rates were based on the probability of loss and the
expected time to recovery. Loans with a higher probability of loss were
assigned higher risk premiums and were discounted over long periods of time,
resulting in lower values.
Accrued Interest Receivable - For accrued interest receivable, the carrying
amount is a reasonable estimate of fair value.
Deposit Liabilities - The fair value of deposits with no stated maturity, such
as noninterest-bearing deposits, savings and NOW accounts, and money market
and checking accounts is equal to the amount payable upon demand as of
September 30, 1999 and 1998. The fair value of certificates of deposit is
based on the present value of contractual cash flows. The discount rate used
to compute present values is estimated using the rates currently offered for
deposits of similar maturities in the Company's marketplace.
Borrowed Money - Due to the short-term maturity and or call provisions of the
loans, the carrying amount is a reasonable estimate of the fair value.
Commitments to Extend Credit - The Company does not normally charge fees for
commitments to extend credit. Interest rates on commitments to extend credit
are normally committed for periods of less than one month. The Company does
not normally issue standby letters of credit or other financial guarantees.
Outstanding loan commitments and the unused portion of loans in progress
totaled $14,197 and $11,466 at September 30, 1999 and 1998, respectively.
Unused letters and lines of credit totaled $730 and $425 at September 30, 1999
and 1998, respectively. It is impractical to assign any fair value to these
commitments.
39
<PAGE>
Note 20 - Fair Value of Financial Instruments - continued
The carrying amount and estimated fair value of the Company's financial
instruments are as follows:
September 30,
------------------------------------
1999 1998
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Financial assets:
Cash and cash equivalents $ 3,158 $ 3,158 $ 2,635 $ 2,635
Assets available for sale 31,457 31,457 25,651 25,651
Investments and mortgage backed
securities 1,638 1,647 2,034 2,053
Loans receivable, net 161,208 162,861 155,781 158,698
Accrued interest 1,311 1,311 1,331 1,331
-------- -------- -------- --------
Total Financial Assets $198,772 $200,434 $187,432 $190,368
======== ======== ======== ========
Financial liabilities:
Deposits $153,992 $153,310 $151,955 $153,023
Borrowed money 17,500 17,500 6,600 6,600
-------- -------- -------- --------
Total Financial Liabilities $171,492 $170,810 $158,555 $159,623
======== ======== ======== ========
40
<PAGE>
Note 21 - Parent Company Only Financial Information
Condensed financial statements of Texarkana First Financial Corporation
(parent company) are shown below. The parent company has no significant
operating activities.
Condensed Statements of Financial Condition:
For the years ended September 30, 1999 and 1998:
1999 1998
------- -------
Assets
Cash $ 158 $ 340
Investment securities available for sale 329 335
Dividends receivable -- --
Federal and state income tax receivable 42 73
Receivable from subsidiary 29 --
Investment in subsidiary 26,191 27,158
------- -------
Total assets $26,749 $27,906
======= =======
Liabilities
Accounts payable $ -- $ 114
Dividends payable 263 268
Accrued expenses 108 108
------- -------
Total liabilities 371 490
Stockholders' equity
Common stock 20 20
Additional paid-in capital 13,742 13,627
Common stock acquired by employee benefit plans (1,448) (1,831)
Treasury stock (9,210) (5,996)
Accumulated other comprehensive income (439) 127
Retained earnings 23,713 21,469
------- -------
Total stockholders' equity 26,378 27,416
------- -------
Total liabilities and stockholders' equity $26,749 $27,906
======= =======
Condensed Statements of Operations:
For the years ended September 30, 1999, 1998, and 1997:
1999 1998 1997
------ ------ ------
Income:
Income before equity in undistributed
earnings of subsidiary $ 110 $ 123 $ 113
Dividends from subsidiary 4,000 3,500 3,500
Equity in undistributed income of subsidiary (540) 23 (337)
------ ------ ------
Total income 3,570 3,646 3,276
Expenses:
Compensation and employee benefits 305 301 320
Management fees 240 240 221
Professional fees 14 20 20
Income tax (237) (244) (201)
Other 21 23 32
------ ------ ------
Total expense 343 340 392
------ ------ ------
Net income $3,227 $3,306 $2,884
====== ====== ======
41
<PAGE>
Note 21 - Parent Company Only Financial Information - continued
Condensed Statements of Cash Flow:
For the years ended September 30, 1999, 1998, and 1997:
1999 1998 1997
------ ------ ------
Operating activities:
Interest income $ 110 $ 123 $ 151
Dividends from subsidiary 4,000 4,000 3,000
Miscellaneous income -- -- --
Cash paid to suppliers and employees (364) (385) (389)
Interest paid (1) (1) (10)
Income tax (paid) received 241 401 27
------ ------ ------
Net cash provided by (used in)
operating activities 3,986 4,138 2,779
------ ------ ------
Investing activities:
Purchase of assets available for sale -- (396) --
Proceeds from sale of assets available for sale -- -- 2,399
Collection of ESOP loan principal 139 139 139
------ ------ ------
Net cash provided by (used in)
investing activities 139 (257) 2,538
------ ------ ------
Financing activities:
Purchase of common stock for employee benefit plans -- -- (59)
Purchase of treasury stock (3,402) (2,788) (1,536)
Sale of treasury stock 52 8 --
Funds borrowed -- -- 4,435
Borrowed funds repaid -- -- (7,250)
Dividend and return of capital distributions (957) (913) (804)
------ ------ ------
Net cash provided by (used in)
financing activities (4,307) (3,693) (5,214)
------ ------ ------
Net change during the period (182) 188 103
Cash and cash equivalents at the
beginning of the period 340 152 49
------ ------ ------
Cash and cash equivalents at the end of the period $ 158 $ 340 $ 152
====== ====== ======
Reconciliation of net income to net cash
provided by operating activities:
Net income $3,227 $3,306 $2,884
Undistributed earnings of subsidiary 540 (23) --
Excess distributions from subsidiary -- -- 337
Amortization of employee benefit plans 215 199 199
(Increase) decrease in dividends
receivable from subsidiary -- 500 (500)
Increase(decrease) in income tax payable 33 156 (173)
Increase(decrease) in other receivables and payables (29) -- 32
------ ------ ------
Net cash provided by(used in) operating activities $3,986 $4,138 $2,779
====== ====== ======
42
<PAGE>
TEXARKANA FIRST FINANCIAL CORPORATION
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS EXECUTIVE OFFICERS
John M. Andres James W. McKinney
Managing Partner, Chairman of the Board and
Thomas & Thomas Chief Executive Officer
John E. Harrison Donald N. Morriss
President and Vice Chairman of the Board
Chief Operating Officer
Arthur L. McElmurry John E. Harrison
Retired CEO, President and
Wadley Regional Medical Center Chief Operating Officer
James W. McKinney Travis L. Mauldin
Chairman of the Board and Executive Vice President
Chief Executive Officer
Donald N. Morriss James L. Sangalli
Chairman and President, Chief Financial Officer
Offenhauser & Co., Inc.
Josh R. Morriss, Jr.
Retired Chairman,
Offenhauser & Co., Inc.
BANKING LOCATIONS
Main Office
Third & Olive Streets
Texarkana, Arkansas 71854-5917
Branch Offices and Managers
611 East Wood Street 1011 W. Collin Raye Drive
Ashdown, Arkansas 71822-3647 DeQueen, Arkansas 71832-2027
Rocky B. Murray W. Lynn Chaney, VP
6th & S. Main 111 W. Shepherd
Hope, Arkansas 71801-2616 Nashville, Arkansas 71852-2021
Paul S. Ball, VP Betty A. Willard
43
<PAGE>
STOCKHOLDER INFORMATION
TRANSFER AGENT/REGISTRAR
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
(800)866-1340
INDEPENDENT AUDITORS
Wilf & Henderson, P.C.
1430 College Drive
P.O. Box 5197
Texarkana, Texas 75505-5197
SPECIAL LEGAL COUNSEL
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W., Suite 1200
Washington, D.C. 20005
STOCKHOLDER REQUESTS
Stockholders may request, without charge, a copy of the Company's Annual
Report on Form 10-K as filed with the Securities and Exchange Commission
by writing:
Debbie Rose, Secretary
Texarkana First Financial Corporation
P.O. Box 2950
Texarkana, Arkansas 75504-2950
Stockholders needing assistance with stock records, transfers or lost
certificates, please contact the Company's transfer agent, Registrar and
Transfer Company.
MARKET LISTING
Shares of the Company's common stock are listed and traded on the American
Stock Exchange under the name of Texarkana, symbol "FTF". At September 30,
1999, the Company had approximately 400 stockholders of record. Such
holdings do not reflect the number of beneficial owners of common stock.
44
<PAGE>
Glossary - Financial Terms
Allowance for Loan Losses. A reserve which reflects management's
estimation of possible losses inherent in the loan portfolio.
Book Value Per Common Share. Common stockholders' equity divided by
common shares outstanding (net of uncommitted ESOP shares).
Charge-Offs. Loan balances written off against the allowance for loan
losses when the loan is deemed to be uncollectible.
Core Deposits. Deposits that are traditionally stable, including all
deposits other than time deposits of $100,000 or more and foreign deposits.
Earning Assets. Interest- or dividend-bearing assets, including loans,
investment securities and short-term investments.
Federal Funds. Generally one-day loans of excess reserves from one bank to
another. When a bank sells (lends) federal funds, these funds are called
"federal funds sold." When it buys (borrows) the funds, they are called
"federal funds purchased."
Net Charge-Offs. Amount of loans written off, net of any recovery of loans
previously written off.
Net Income Per Common Share. Net income applicable to common
stockholders divided by average common shares outstanding, net of uncommitted
ESOP shares.
Net Income Per Common Share - Assuming Dilution. Net income
applicable to common stockholders divided by average common shares outstanding
and common stock equivalents including restricted employee stock awards and
convertible securities.
Net Interest Margin. Net interest income divided by average earning
assets.
Net Interest Spread. The difference between the yield on earning assets
and the cost of funds.
Net Operating Revenue. The sum of net interest income and noninterest
income.
Nonperforming Assets. Nonperforming loans plus other real estate owned.
Nonperforming Loans. Nonaccrual loans, accruing loans 90 days or more
delinquent, and loans which have been restructured with material changes to
interest rates or terms of repayment.
Operating Efficiency Ratio. Noninterest expense divided by net
operating revenue.
Option. An agreement that allows, but does not require, a holder to buy or
sale a financial instrument at a predetermined price for a specified time.
Other Real Estate Owned (OREO). Real estate acquired through loan
default and to which the bank assumes title in order to sell the property.
Provision for Loan Losses. An adjustment to the reserve allowance for
loan losses which impacts earnings.
Return on Assets (ROA). Net income divided by average total assets.
Return on Equity (ROE). Net income divided by average total equity.
Risk-Based Capital. The amount of capital (Tier 1 plus Tier 2) required
by federal regulatory standards, based on a risk-weighting of assets.
Tier 1 Capital. Common stockholders' equity, qualifying perpetual
preferred stock and minority interest in equity accounts of consolidated
subsidiaries, adjusted for goodwill, other disallowed intangibles and
unrealized gains and losses on securities available for sale.
Tier 2 Capital. The allowance for loan losses, nonqualifying perpetual and
long-term preferred stock, hybrid capital instruments and subordinated debt,
and intermediate-term preferred stock (subject to certain limitations).
45
<PAGE>
