UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File Number 0-21165
FIRST ALLEN PARISH BANCORP, INC.
(Name of small business issuer in its charter)
Delaware 72-1331593
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 South 10th Street, Oakdale, Louisiana 71463
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (318) 335-2031
--------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [ X ] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
The Registrant's revenues for the fiscal year ended December 31, 1998
were $2,411,105.
As of March 30, 1999, there were issued and outstanding 266,622 shares
of the Registrant's Common Stock. The Registrant's voting stock is not regularly
and actively traded, and there are no regularly quoted bid and asked prices for
the Registrant's voting stock. Accordingly, the Registrant is unable to
determine the aggregate market value of the voting stock held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and III of Form 10-KSB - Portions of Annual Report to
Stockholders for the fiscal year ended December 31, 1998.
Part III of Form 10-KSB - Portions of Proxy Statement for 1999 Annual
Meeting of Stockholders.
2
PART I
Item 1. Description of Business
General
First Allen Parish Bancorp, Inc. ("First Allen Parish Bancorp" and,
with its subsidiaries, the "Company") was formed in June 1996 at the direction
of First Federal Savings and Loan Association of Allen Parish ("First Federal"
or the "Association") for the purpose of owning all of the outstanding stock of
the Association issued upon the conversion of the Association from the mutual to
stock form (the "Conversion"). On September 27, 1996, First Allen Parish Bancorp
acquired all of the shares of the Association in connection with the completion
of the Conversion. All references to the Company, unless otherwise indicated, at
or before September 27, 1996 refer to the Association. The Company's common
stock is quoted on the National Security Quotation System "Pink Sheets" under
the symbol "FALN".
First Federal is a federally-chartered stock savings and loan
association headquartered in Oakdale, Louisiana. First Federal was originally
chartered in 1962. Its deposits are insured up to the maximum allowable amount
by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit
Insurance Corporation (the "FDIC"). Through its office in Oakdale, First Federal
serves communities located in Allen Parish and in the surrounding parishes in
the State of Louisiana. At December 31, 1998, the Company had total assets of
$38.7 million, deposits of $33.6 million and stockholders' equity of $4.8
million.
The Association has been, and intends to continue to be, a
community-oriented financial institution offering selected financial services to
meet the needs of the communities it serves. The Association attracts deposits
from the general public and historically has used such deposits, together with
other funds, to originate loans secured by real estate, including one- to
four-family residential mortgage loans, commercial real estate loans, land
loans, construction loans and loans secured by other properties. At December 31,
1998, 81.2% of the Association's gross loan portfolio consisted of loans secured
by real estate. The Association also originates consumer and other loans
consisting primarily of loans secured by automobiles, manufactured homes, loans
secured by deposits ("share loans") and lines of credit. At December 31, 1998,
consumer and other loans constituted 31.5% of the Association's gross loan
portfolio. In order to supplement its loan originations, the Association has
invested a significant portion of its assets in mortgage-backed securities,
which are insured or guaranteed by federal agencies, as well as other
investments. At December 31, 1998, the Association's mortgage-backed securities
portfolio totaled $16.2 million, or 41.9% of total assets. See "- Investment
Activities."
The executive office of the Company and the Association is located at
222 South 10th Street, Oakdale, Louisiana 71463 and its telephone number is
(318) 335-2031. A newly constructed full service branch completed in November
1998 is located at 110 North Fifth Street, Oberlin, Louisiana and a loan
production office was opened in 1998 located at 531 North Ninth Street, Kinder,
Louisiana.
Market Area and Competition
- ---------------------------
First Federal serves Allen Parish, Louisiana and the surrounding
parishes, from its offices in Oakdale, Oberlin and Kinder, Louisiana. Allen
Parish consists of small farms and residential communities of predominantly one-
to four-family residences. The Association's market for deposits is concentrated
in Allen Parish. The Association is the only independent financial institution
headquartered in Allen Parish.
The economy of the Association's market area consists primarily of
small farming communities, the timber and wood industry and state and local
government. The largest employers in the Association's market area are the
Federal Bureau of Prisons, which operates a corrections facility, Boise Cascade
Corporation, a wood manufacturer, Arizona Chemical, a division of International
Paper Co., Grand Casino, which is operated by the Coushatta Indians and the
Allen Parish School Board. In recent years the oil and gas industry has become a
growing segment of the Association's economy.
3
The Association's business and operating results are significantly
affected by the general economic conditions in the Association's market area.
Management believes that the population in the Association's market area will
remain stable in the foreseeable future.
The Association faces significant competition in attracting deposits
from commercial banks, other savings institutions and credit unions. The
Association faces additional competition for deposits from short-term money
market funds, from other corporate and government securities funds and from
brokerage funds and insurance companies. The Association also faces significant
competition in the origination of loans from savings institutions, mortgage
banking companies, credit unions and commercial banks.
Lending Activities
- ------------------
General. The Association's loan portfolio consists primarily of loans
secured by real estate which consist primarily of loans secured by one- to
four-family residences, commercial real estate loans, construction loans and
loans secured by other properties. The Association also originates consumer and
other loans consisting primarily of loans secured by automobiles, manufactured
homes, share loans, lines of credit and other consumer loans. At December 31,
1998, the Association's gross loans totaled $16.8 million, of which $8.8 million
or 52.8% were one-to four-family residential mortgage loans. Of the one- to
four-family mortgage loans outstanding at that date, 32.7% were fixed-rate
loans, and 67.3% were adjustable-rate loans. At December 31, 1998, $2.1 million
or 12.4% of gross loans were secured by commercial real estate properties
consisting of retail shops and churches, $394,000, or 2.3%, of gross loans were
construction loans for the construction of owner-occupied homes, and $483,000,
or 2.9% of gross loans consisted of land loans. At that date, consumer and other
loans totaled $4.7 million or 27.8% of the Association's gross loan portfolio,
of which $774,000, or 4.6%, consisted of share loans, $702,000, or 4.2%,
consisted of automobile loans, $2.2 million, or 13.3%, consisted of lines of
credit to small farms and businesses, $40,000 or 0.2% consisted of loans on
manufactured homes and $935,000 or 5.5% consisted of other loans (consisting of
personal loans, disaster relief loans, and loans to governmental entities and
non-profit organizations).
The Association also invests in mortgage-backed securities. At December
31, 1998, mortgage-backed and related securities totaled $16.2 million. See "-
Investment Activities."
The Association's loans-to-one borrower limit is generally the greater
of 15% of unimpaired capital and surplus or $500,000. At December 31, 1998, the
maximum amount which the Association could have lent under this limit to any one
borrower and the borrower's related entities was approximately $585,000. At
December 31, 1998, the Association had one borrower that exceeded this maximum
limit; however the Association is currently working with this borrower to reduce
its loan below the required limit. The Association's largest lending
relationship at December 31, 1998 was $824,000 in loans to one borrower which
was comprised of six loans, three of which were secured by real estate and three
of which were unsecured commercial loans. The Association's second largest
lending relationship at December 31, 1998 was $533,000 in loans to one borrower
which was comprised of ten loans, seven of which were secured by real estate,
one of which was secured by a certificate of deposit and two of which were
unsecured commercial loans. The Association's third largest lending relationship
totaled $326,000, which consisted of four loans, two of which were secured by
real estate, one of which was secured by an automobile, and one of which was an
unsecured commercial loan. At December 31, 1998, all of these loans were
performing in accordance with their terms.
4
Loan Portfolio Composition. Set forth below is data relating to the
composition of the Association's loan portfolio by type of loan as of the dates
indicated.
At December 31,
-----------------------------------------------------------
1998 1997 1996
------------------ ------------------ -----------------
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
Real estate loans:
One- to four-family residential $8,884 59.64% $ 8,376 61.38% $7,279 60.97%
Commercial real estate loans.. 2,084 13.99 1,467 10.75 1,519 12.73
Construction.................. 394 2.65 353 2.59 487 4.08
Land loans.................... 483 3.24 612 4.49 451 3.78
Other real estate loans....... 256 1.72 280 2.05 237 1.99
------ ------ ------- ------ ------ ------
Total first mortgage loans..... 12,101 81.24 11,088 81.25 9,973 83.55
------ ------ ------- ------ ------ ------
Consumer and other loans:
Automobile.................... 702 4.71 526 3.85 475 3.97
Manufactured homes............ 40 0.27 24 0.18 22 0.19
Share loans................... 774 5.19 735 5.39 795 6.66
Lines of credit............... 2,248 15.10 1,321 9.68 1,003 8.41
Other loans................... 935 6.27 970 7.11 721 6.04
------ ------ ------- ------ ------ ------
Total consumer and other loans 4,699 31.54 3,576 26.21 3,016 25.27
------ ------ ------- ------ ------ ------
Total loans receivable..... 16,800 112.78 14,664 107.46 12,989 108.82
Less:
Undisbursed loan proceeds..... (1,579) (10.60) (710) (5.20) (755) (6.34)
Unearned discounts............ (21) (0.14) (8) (0.06) -- --
Allowance for loan losses..... (304) (2.04) (300) (2.20) (296) (2.48)
------- ------- -------- ------- ------- -------
Total loans receivable,
net ..................... $14,896 100.00% $13,646 100.00% $11,938 100.00%
======= ====== ======= ====== ======= ======
One- to Four-Family Mortgage Loans. The Association's primary lending
activity is the origination of one-to four-family, owner-occupied, residential
mortgage loans secured by property located in the Association's market area.
Loans are generated through the Association's marketing efforts, its existing
customers and referrals, real estate brokers, builders and local businesses. The
Association generally has limited its real estate loan originations to the
financing of properties located within its market area and will not make out of
state loans. At December 31, 1998, the Association had $8.8 million, or 52.8% of
its gross loan portfolio, invested in mortgage loans secured by one- to
four-family residences.
The Association originates for retention in its portfolio fixed-rate
residential one- to four-family loans with terms of up to 15 years. The
Association's fixed-rate mortgage loans amortize monthly with principal and
interest due each month. Residential real estate loans often remain outstanding
for significantly shorter periods than their contractual terms because borrowers
may refinance or prepay loans at their option.
The Association currently offers ARM loans with amortization periods
ranging up to 30 years. The Association generally offers ARM loans that either
adjust every year or every three years from the date of origination, with
interest rate adjustment limitations up to two percentage points per adjustment
and with a cap of up to six percentage points on total interest rate increases
over the life of the loan. Currently, ARM loans are originated with a minimum
interest rate of five percent and a maximum rate of 15% regardless of the
initial rate. In a rising interest rate environment, such rate limitations may
prevent ARM loans from repricing to market interest rates, which would have an
adverse effect on net interest income. The Association has used different
interest indices for ARM loans in the past, and currently uses the National
Average Contract Interest Rate for Major Lenders on the Purchase of Previously
Occupied Loans as its index. ARM loans secured by residential one- to
four-family real estate totaled $6.0 million, or 67.3% of the Association's
total one- to four-family residential real estate loans receivable at December
31, 1998. The origination of fixed-rate mortgage loans versus ARM loans is
monitored on an ongoing basis and is affected significantly by the level of
market interest rates, customer preference, the Association's interest rate gap
position and loan products offered by the Association's competitors.
Particularly in a relatively low interest rate
5
environment, borrowers may prefer fixed-rate loans to ARM loans. During the year
ended December 31, 1998, the Association originated $804,000 in fixed-rate
residential mortgage loans and $1.0 million of ARM loans.
The primary purpose of offering ARM loans is to make the Association's
loan portfolio more interest rate sensitive. However, as the interest income
earned on ARM loans varies with prevailing interest rates, such loans do not
offer the Association predictable cash flows as would long-term, fixed-rate
loans. ARM loans carry increased credit risk associated with potentially higher
monthly payments by borrowers as general market interest rates increase. It is
possible, therefore, during periods of rising interest rates, that the risk of
delinquencies and defaults on ARM loans may increase due to the upward
adjustment of interest costs to the borrower, resulting in increased loan
losses.
The Association's residential first mortgage loans customarily include
due-on-sale clauses, which are provisions giving the Association the right to
declare a loan immediately due and payable in the event, among other things,
that the borrower sells or otherwise disposes of the underlying real property
serving as security for the loan. Due-on-sale clauses are a means of imposing
assumption fees and increasing the interest rate on the Association's mortgage
portfolio during periods of rising interest rates.
Pursuant to federal regulations, all financial institutions are
required to adopt and maintain comprehensive written real estate lending
policies that are consistent with safe and sound banking practices. These
lending policies must reflect consideration of the Interagency Guidelines for
Real Estate Lending Policies adopted by the Federal banking agencies, including
the OTS, in December 1992 ("Guidelines"). The Guidelines set forth, pursuant to
the mandates of the FDICIA, uniform regulations prescribing standards for real
estate lending. Real estate lending is defined as extension of credit secured by
liens on interests in real estate or made for the purpose of financing the
construction of a building or other improvements to real estate, regardless of
whether a lien has been taken on the property.
The policies must address certain lending considerations set forth in
the Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards, and
documentation, approval and reporting requirements. These policies must also be
appropriate based upon the size of the institution and the nature and scope of
its operations, and must be reviewed and approved by the institution's board of
directors at least annually. The LTV ratio framework, with an LTV ratio being
the total amount of credit to be extended divided by the appraised value of the
property at the time the credit is originated, must be established for each
category of real estate loans. If not a first lien, the lender must combine all
senior liens when calculating this ratio. The Guidelines, among other things,
establish the following supervisory LTV limits: raw land (65%); land development
(75%); construction (commercial, multi-family and nonresidential) (80%);
improved property (85%); and owner occupied one- to four-family residential (no
maximum ratio, however, any LTV ratio in excess of 90% requires appropriate
insurance or readily marketable collateral).
Certain institutions are permitted to make real estate loans that do
not conform with the established LTV ratio limits up to 100% of the
institution's total capital. Within this aggregate limit, total loans for all
commercial, agricultural, multi-family and other non-one- to four-family
residential properties should not exceed 30% of total capital. An institution
will come under increased supervisory scrutiny as the total of such loans
approaches these levels. Certain loans are exempt from the LTV ratios (e.g.,
those guaranteed by a government agency, loans to facilitate the sale of real
estate owned, loans renewed, refinanced or restructured by the original
lender(s) to the same borrower(s) where there is no advancement of new funds,
etc.).
6
Regulations limit the amount that a savings association may lend
relative to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Such regulations
permit a maximum LTV ratio of 95% for residential property (and 100% for loans
guaranteed by the Veterans Administration) and 90% for all other real estate
loans. The Association's lending policies, however, generally limit the maximum
LTV ratio on fixed-rate and ARM loans to 95% of the lesser of the appraised
value or the purchase price of the property securing the loan in the case of
loans secured by one- to four-family owner-occupied properties. The maximum LTV
ratio on other types of real estate loans is generally the lesser of 80% of the
appraisal value or the purchase price of the property.
When underwriting residential real estate loans, the Association
reviews and verifies each loan applicant's employment, income and credit
history. Management believes that stability of income and past credit history
are integral parts in the underwriting process. Generally, the applicant's total
monthly mortgage payment, including all escrow amounts, is limited to 28% of the
applicant's total monthly income. In addition, total monthly obligations of the
applicant, including mortgage payments, should not generally exceed 42% of total
monthly income. Written appraisals are generally required on real estate
property offered to secure an applicant's loan. For real estate loans with LTV
ratios of between 80% and 95%, the Association requires private mortgage
insurance. The Association requires fire, casualty and where necessary flood
insurance on all properties securing real estate loans. The Association requires
title insurance, and an attorney's title opinion.
Commercial Real Estate Loans. The Association originates commercial
real estate loans typically secured by retail facilities, churches and office
buildings. At December 31, 1998, $2.1 million, or 12.4% of the Association's
gross loan portfolio consisted of commercial real estate loans. At December 31,
1998, all of the Association's commercial real estate loans were secured by
properties within the State of Louisiana. The maximum loan to value ratio for
commercial real estate loans originated by the Association is 80%. At December
31, 1998, the largest commercial real estate loan had a principal balance of
$334,000, and was secured by commercial real estate. The loan was performing in
accordance with its terms at December 31, 1998.
The underwriting standards employed by the Association for commercial
real estate loans include a determination of the applicant's credit history and
an assessment of the applicant's ability to meet existing obligations and
payments on the proposed loan. Written appraisals are obtained on all commercial
real estate loans. The Association assesses the creditworthiness of the
applicant by reviewing a credit report, financial statements and tax returns on
the applicant.
Loans secured by commercial real estate generally involve a greater
degree of credit risk than one- to four-family mortgage loans. The increased
risk is the result of several factors, including the effects of general economic
conditions in income producing properties and the successful operation or
management of the properties securing the loans. Furthermore, the repayment of
loans secured by commercial real estate is typically dependent upon the
successful operation of the related business and real estate property. If the
cash flow from the project is reduced, the borrower's ability to repay the loan
may be impaired.
Land Loans. The Association offers land loans, primarily loans to
purchase and develop single family homesites, which may consist of individual
lots or large acreage tracts. At December 31, 1998, $483,000, or 2.9% of the
Association's gross loan portfolio consisted of land loans. The maximum loan
amount generally does not exceed 75% of the appraised value of the property. The
terms of land loans are negotiated on a case by case basis; however, fixed rate
loans are typically originated for terms of 5 years or less; adjustable rate
land loans are originated for terms up to 15 years and will either adjust at a
premium over the prime rate or will be based upon the National Average Contract
Interest Rate for Major Lenders on the Purchase of Previously Occupied Loans.
The Association will make a limited number of land loans for speculation
purposes. Land loans are typically made to companies or individuals with whom
the Association has had a prior business relationship.
7
Construction Lending. At December 31, 1998, the Association had
$394,000 or 2.3% of its gross loan portfolio, invested in construction loans.
First Federal offers loans to both builders and individuals for the construction
of one- to four-family residences. Currently, such loans are offered with fixed-
or adjustable-rates of interest, with loan terms of six months. The interest
rates of construction loans are typically at a margin over the prime rate or the
National Average Contract Interest Rate for Major Lenders on the Purchase of
Previously Owned Homes. The maximum loan amount will not exceed 80% of the
appraised value of the project. The Association requires the builder to submit
plans, specifications and cost projections. In addition, the Association reviews
the borrower's existing financial condition, including total outstanding debt.
Funds are dispersed as the construction project progresses. Following the
construction period, these loans may convert to permanent loans, generally with
terms for up to 15 years if the interest rate is fixed and up to 30 years if the
interest rate is adjustable. At December 31, 1998, none of the Association's
construction loans were non-performing.
Construction lending and land loans are generally considered to involve
a higher level of credit risk than one-to four-family residential lending since
the risk of loss on construction loans is dependent largely upon the accuracy of
the initial estimate of the individual property's value upon completion of the
project and the estimated cost (including interest) of the project. If the cost
estimate proves to be inaccurate, the Association may be required to advance
funds beyond the amount originally committed to permit completion of the
project.
Consumer and Other Lending. First Federal offers a variety of consumer
loans, including loans secured by deposits, lines of credit, automobile and home
improvement loans. The Association currently originates substantially all of its
consumer loans in its primary market area generally to its existing customers.
At December 31, 1998, the Association's consumer and other loan portfolio
totaled $4.7 million, or 27.8% of its gross loan portfolio.
The Association offers loans secured by the borrower's savings deposits
("share loans"). At December 31, 1998, share loans totaled $774,000, or 4.6% of
the Association's gross loan portfolio.
First Federal originates home improvement loans. Home equity and home
improvement loans secured by second mortgages, together with loans secured by
all prior liens, are generally limited to 80% or less of the appraised value of
the home. Generally, such loans have a maximum term of up to 15 years. As of
December 31, 1998, home improvement loans amounted to $46,000, which represented
0.28% of the Association's gross loan portfolio.
The Association also originates lines of credit for businesses. These
loans are made on both a secured and unsecured basis. Lines of credit may be
secured by real estate, equipment and inventory. They are generally originated
with interest rates that adjust at a premium above the prime rate. All lines of
credit are reviewed annually by the Association. Lines of credit loans amounted
to approximately $2.2 million at December 31, 1998, which represented 13.3% of
the Association's gross loan portfolio.
Another component of the Association's consumer loan portfolio consists
of automobile loans. The Association originates automobile loans on a direct
basis, where the Association extends credit directly to the borrower. These
loans generally have terms that do not exceed five years and carry a fixed-rate
of interest. Generally, loans on new vehicles are made in amounts up to 80% of
dealer cost and loans on used vehicles are made in amounts up to 80% of the
vehicle's published NADA value. At December 31, 1998, the Association's
automobile loans totaled $702,000 or 4.2% of the Association's gross loan
portfolio.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The underwriting
standards employed by the Association for consumer loans include an application,
a determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is a primary consideration, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by rapidly depreciable assets, such as automobiles. Further, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the
8
outstanding loan balance as a result of the greater likelihood of damage, loss
or depreciation. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
affected by adverse personal circumstances. Furthermore, the application of
various federal and state laws, including bankruptcy and insolvency laws, may
limit the amount which can be recovered on such loans. Management believes that
its level of delinquencies is relatively low in comparison with other financial
institutions, and that its low level of consumer loan delinquencies is
attributable to the Association's policy of aggressively contacting borrowers
who become delinquent in repaying their loans. At December 31, 1998, $9,685 in
consumer loans were non-performing. See "- Delinquencies and Classified Assets."
There can be no assurances, however, that delinquencies will not increase in the
future.
Loan Maturity Schedule
- ----------------------
The following table sets forth certain information at December 31,
1998, regarding the dollar amount of loans maturing in the Association's
portfolio based on their contractual terms to maturity. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less.
One Three Five Ten Twenty
Within Through Through Through Through Years
One Year Three Years Five Years Ten Years Twenty Years Or More Total
---------- ---------- --------- ---------- ---------- ---------- ----------
First mortgage loans:
One- to four-family residential $ 799,182 $ 185,617 $ 357,912 $2,579,434 $3,887,744 $1,074,489 $8,884,378
Other properties............. 318,130 95,641 256,664 967,211 1,143,434 41,788 2,822,868
Construction................. 287,298 106,703 -- -- -- -- 394,001
Consumer and other loans....... 3,239,557 647,343 567,960 149,210 94,598 -- 4,698,668
---------- ---------- --------- ---------- ---------- ---------- ----------
Total..................... $4,644,167 $1,035,304 $1,182,536 $3,695,855 $5,125,776 $1,116,277 $16,799,915
========== ========== ========== ========== ========== ========== ===========
The following table sets forth the dollar amount of all loans at
December 31, 1998 that have predetermined interest rates and have floating or
adjustable interest rates and which are due after December 31, 1999.
Floating or
Fixed-Rates Adjustable Rates Total
First mortgage loans:
One- to four-family residential........................... $2,371,341 $5,713,855 $8,085,196
Other properties.......................................... 1,879,079 625,659 2,504,738
Construction.............................................. 106,703 -- 106,703
Consumer and other loans.................................... 1,459,111 -- 1,459,111
---------- ---------- ----------
Total.................................................. $5,816,234 $6,339,514 $12,155,748
========== ========== ===========
9
Origination of Loans
- --------------------
Loan originations are developed from continuing business with
depositors and borrowers, soliciting realtors, builders, walk-in customers and
third-party sources. All real estate loans must be approved by the Association's
board of directors. Consumer and other loans up to $15,000 may be approved by
the Association's President. All other consumer and other loans must be approved
by the Board of Directors.
While the Association originates both adjustable-rate and fixed-rate
loans, its ability to originate loans to a certain extent is dependent upon the
relative customer demand for loans in its market, which is affected by the
interest rate environment, among other factors. For the year ended December 31,
1998, the Association originated $5.5 million in fixed-rate loans and $3.0
million in adjustable rate loans.
In recent years the Association has neither purchased, nor sold loans.
All loans originated by the Association are retained in the Association's
portfolio.
Set forth below is a table showing the Association's loan originations
and repayments for the periods indicated.
Year Ended December 31,
---------------------------------------------------
1998 1997 1996
-------- ------- --------
(In Thousands)
Total loans receivable at beginning of period $ 14,664 $12,989 $ 11,883
-------- ------- --------
Originations:
First mortgage loans -
One- to four-family residential........... 1,803 2,199 590
Construction.............................. 1,104 306 664
Other properties.......................... 500 618 1,025
Consumer and other loans:
Automobile................................ 632 389 308
Manufactured home......................... 24 6 5
Other..................................... 2,778 2,200 2,564
Refinancing................................ 1,682 1,388 755
-------- ------- --------
Total originations...................... 8,523 7,106 5,911
Transfer of mortgage loans
to foreclosed real estate............... -- (28) (74)
Repayments................................ (6,387) (5,403) (4,731)
--------- -------- ---------
Net loan activity........................... 2,136 1,675 1,106
-------- ------- --------
Total loans receivable
at end of period.................... $ 16,800 $14,664 $ 12,989
======== ======= ========
Delinquencies and Classified Assets
- -----------------------------------
The Association's collection procedures provide that when a loan is 15
days past due, a computer-generated late charge notice is sent to the borrower
requesting payment plus a late charge. If the loan remains delinquent a
telephone call is made or a letter is sent to the borrower stressing the
importance of reinstating the loan and obtaining reasons for the delinquency
before the loan becomes delinquent after 30 days. After 45 days a written
commitment to bring the loan current is required. When a loan continues in a
delinquent status for 90 days or more, and a repayment schedule has not been
made or adhered to by the borrower, a notice of intent to foreclose upon the
underlying property is sent to the borrower by the Association's attorney,
giving the borrower 10 days to cure the delinquency. If not cured, foreclosure
proceedings are initiated.
In recent years the Association has increased its collection efforts by
more closely monitoring delinquent loans and employing diligent collection
efforts. Management believes that these efforts have contributed to the loan
portfolio's low delinquency levels. At December 31, 1998, 1997 and 1996 the
percentage of total loans delinquent 90 days or more to net loans receivable
were 0%, 0%, and 0%, respectively.
Delinquent Loans and Nonperforming Assets. Generally, when a loan
becomes more than 90 days delinquent, the Association will place the loan on
non-accrual status and previously accrued interest income on the loan
10
is charged against current income. The loan will remain on a non-accrual status
as long as the loan is more than 90 days delinquent.
Real estate acquired through foreclosure or by deed-in-lieu of
foreclosure is classified as real estate owned until such time as it is sold.
When real estate owned is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan, or its fair market value, less estimated
selling expenses. Any further write-down of real estate owned is charged against
earnings. At December 31, 1998, the Association owned approximately $0 of
property classified as real estate owned.
Delinquent consumer loans are handled in a similar manner as to those
described above; however, shorter time frames for each step apply due to the
type of collateral generally associated with such types of loans. The
Association's procedures for repossession and sale of consumer collateral are
subject to various requirements under Louisiana and federal consumer protection
laws.
The following table sets forth information with respect to the
Association's delinquent loans and other problem assets at December 31, 1998.
At December 31, 1998
----------------------------
Balance Number
------- ------
(In Thousands)
One- to four-family residential real estate:
Loans 60 to 89 days delinquent............................ $ -- --
Loans 90 days or more delinquent.......................... -- --
Other properties:
Loans 60 to 89 days delinquent............................ 31 1
Loans 90 days or more delinquent.......................... -- --
Construction:
Loans 60 to 89 days delinquent............................ 50 2
Loans 90 days or more delinquent.......................... -- --
Consumer and other loans:
Loans 60 to 89 days delinquent............................ 43 4
Loans 90 days or more delinquent.......................... -- --
Foreclosed real estate and repossessions...................... -- --
Other nonperforming assets.................................... -- --
Restructured loans within the meaning of Statement of
Financial Accounting Standards No. 15 (not included
in other nonperforming categories above).................. 107 5
Loans to facilitate sale of real estate owned................. 393 16
11
The following table sets forth information regarding delinquent loans
and real estate owned by the Association at the dates indicated. At December 31,
1998, the Association had $107,000 in restructured loans within the meaning of
SFAS 15.
At December 31,
------------------------------------------
1998 1997 1996
-------- ------- ---------
(Dollars In Thousands)
Non-accruing loans:
First mortgage loans:
One- to four-family residential.................. $ 66 $ 76 $ 44
Other properties................................. -- -- --
Commercial....................................... 42 49 --
Construction..................................... -- -- --
Consumer and other loans........................... 9 1 --
-------- ------- ---------
Total non-accruing loans......................... 117 126 44
-------- ------- ---------
Accruing loans past due 90 days or more:
First mortgage loans:
One- to four-family residential.................. -- -- $ --
Other properties................................. -- -- --
Construction..................................... -- -- --
Consumer and other loans........................... -- -- --
-------- ------- ---------
Total accruing loans delinquent
90 days or more.............................. -- -- --
-------- ------- ---------
Total non-performing loans................. 117 126 44
-------- ------- ---------
Total real estate owned............................ -- -- 75
-------- ------- ---------
Total non-performing assets................... $ 117 $ -- $ 119
======== ======= =========
Performing troubled debt restructurings............. $ 107 $ 199 $ 154
======== ======= =========
Total non-performing assets and troubled
debt restructurings.............................. $ 224 $ 325 $ 273
======== ======= =========
Total loans delinquent 90 days or more to
net loans receivable............................... 0.00% 0.00% 0.00%
-------- ------- ---------
Total loans delinquent 90 days or more to
total assets....................................... 0.00% 0.00% 0.00%
-------- ------- ---------
Total non-performing loans and REO
to total assets.................................... 0.30% 0.37% 0.38%
-------- ------- ---------
Total non-performing assets and troubled
debt restructurings to total assets................ 0.58% 0.97% 0.87%
-------- ------- ---------
12
Delinquent Loans
- ----------------
The following table sets forth information with respect to loans past
due 60-89 days in the Association's portfolio at the dates indicated.
At December 31,
------------------------------------------
1998 1997 1996
-------- ------- ---------
(In Thousands)
Loans past due 60-89 days:
First mortgage loans:
One- to four-family residential.................. $ -- $ -- $ 105
Other properties................................. 31 -- 5
Construction..................................... 50 54 --
Consumer and other loans........................... 43 23 5
For the year ended December 31, 1998 gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $10,000. The amount that was included in
interest income on such loans was $8,000 for the year ended December 31, 1998.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities, considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full" on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for losses in an
amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge-off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the regulatory authorities, who may order the establishment
of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Association
regularly reviews loans in its portfolio to determine whether such assets
require classification in accordance with applicable regulations. On the basis
of management's review of its assets, at December 31, 1998, the Association had
classified a total of $326,000 of its assets as substandard, $0 as doubtful, and
$15,000 as loss. At December 31, 1998, total classified assets comprised
$341,000, or 7.1% of the Association's capital, or .88% of the Association's
total assets.
Other Loans of Concern. Other than the non-performing loans set forth
in the tables above, as of December 31, 1998, there were no loans classified by
the Association with respect to which known information about the possible
credit problems of the borrowers or the cash flows of the security properties
have caused management to have some doubts as to the ability of the borrowers to
comply with present loan repayment terms and which may result in the future
inclusion of such items in the non-performing asset categories.
13
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity, including those loans which are being specifically monitored by
management. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters, the
loan classifications discussed above, the estimated fair value of the underlying
collateral, economic conditions, historical loan loss experience, the amount of
loans outstanding and other factors that warrant recognition in providing for an
adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at the
lower of cost or fair value minus estimated cost to sell. If fair value at the
date of foreclosure is lower than the balance of the related loan, the
difference will be charged-off to the allowance for loan losses at the time of
transfer. Valuations are periodically updated by management and if the value
declines, a specific provision for losses on such property is established by a
charge to operations. At December 31, 1998, the Association had properties with
a net book value of $0 which were acquired through foreclosure.
Although management believes that it uses the best information
available to determine the allowance, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Association's allowance for loan losses
will be the result of periodic loan, property and collateral reviews and thus
cannot be predicted in advance. In addition, federal regulatory agencies, as an
integral part of the examination process, periodically review the Association's
allowance for loan losses. Such agencies may require the Association to increase
the allowance based upon their judgment of the information available to them at
the time of their examination. At December 31, 1998, the Association had a total
allowance for loan losses of $304,000, representing 259.8% of total
non-performing loans and 2.0% of the Association's loans, net. See Note 4 of the
Notes to Consolidated Financial Statements.
14
The following table sets forth the allocation for loan losses by
category for the periods indicated.
At December 31,
----------------------------------------------------------------------
1998 1997 1996
------------------- ------------------- --------------------
% of Loans % of Loans % of Loans
In Each In Each In Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
First mortgage loans
One- to four-family residential................ $ 228 52.88% $ 225 57.12% $ 217 56.04%
Other properties............................... 38 16.80 37 16.08 37 16.99
Construction................................... -- 2.35 -- 2.41 -- 3.75
Consumer and other loans......................... 38 27.97 38 24.39 42 23.22
------- -------- ------ -------- ----- -------
Balance, end of period....................... $ 304 100.00% $ 300 100.00% $ 296 100.00%
======= ======== ====== ======== ===== =======
The following table sets forth information with respect to the
Association's allowance for loan losses at the dates indicated.
Year Ended December 31,
------------------------------------------------------------
1998 1997 1996
-------- -------- ------
(Dollars in thousands)
Balance at beginning of period................... $ 300 $ 296 $ 317
Charge-offs:
First mortgage loans........................... -- -- (10)
Consumer and other loans....................... (59) (33) (8)
Recoveries:
First mortgage loans........................... -- 7 --
Consumer and other loans....................... 4 27 5
--------- ---- -------
Net charge-offs.............................. (55) 1 (13)
Provision for loan losses (recoveries)..... 59 3 (8)
Balance, at end of period........................ $ 304 $ 300 $ 296
========= ====== =======
Allowance for loan losses as a per-
cent of net loans receivable at
end of period.................................. 2.00% 2.20% 2.48%
Ratio of net loans charged off during
the period to average loans outstanding
during the period.............................. (0.39)% 0.00% (0.11)%
Ratio of allowance for loan losses
to total non-performing loans
at end of period............................... 259.83% 238.70% 670.81%
Ratio of allowance for loan losses
to total non-performing loans
and REO at end of period....................... 259.83% 238.70% 249.02%
15
Investment Activities
- ---------------------
General. First Federal must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, the Association
has generally maintained liquid assets at levels above the minimum requirements
imposed by the OTS regulations and at levels believed adequate to meet the
requirements of normal operations, including repayments of maturing debt and
potential deposit outflows. Cash flow projections are regularly reviewed and
updated to assure that adequate liquidity is maintained. At December 31, 1998,
the Association's liquidity ratio (liquid assets as a percentage of net
withdrawable savings deposits and current borrowings) was 11.8%. See"Regulation
- - Liquidity."
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Association, as established by
the Board of Directors, is to invest funds among various categories of
investments and maturities based upon the Association's liquidity needs,
asset/liability management policies, investment quality, marketability and
performance objectives.
Mortgage-backed and Related Securities. The Association purchases
mortgage-backed and related securities to supplement residential loan production
and as part of its asset/liability strategy. The type of securities purchased is
based upon the Association's asset/liability management strategy and balance
sheet objectives. For instance, substantially all of the mortgage-backed and
related investments purchased by the Association over the last several years
have had adjustable rates of interest. Management believes that the adjustable
rate feature of the mortgages underlying adjustable rate mortgage-backed and
related securities generally will help to reduce changes in the value of the
mortgage-backed and related security in response to normal interest rate
fluctuations. As the interest rates on the mortgages underlying the adjustable
rate mortgage-backed and related securities are reset periodically, the yields
of such securities will gradually align themselves to reflect changes in the
market rates so that the market value of such securities will remain relatively
constant as compared to fixed rate instruments. The Association has invested
primarily in federal agency securities, principally Freddie Mac (formerly the
Federal Home Loan Mortgage Corporation), Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA") and Small
Business Association ("SBA") obligations. At December 31, 1998, the
Association's investment in mortgage-backed and related securities totaled $16.2
million or 41.9% of its total assets. At December 31, 1998, $9.7 million of the
Association's mortgage-backed and related securities were classified as
held-to-maturity and $6.4 million were classified as available for sale. See
Note 3 of the Notes to Consolidated Financial Statements.
The FNMA, Freddie Mac and GNMA certificates are modified pass-through
mortgage-backed and related securities that represent undivided interests in
underlying pools of fixed-rate, or certain types of adjustable-rate,
single-family residential mortgages issued by these government-sponsored
entities. As a result, the interest rate risk characteristics of the underlying
pool of mortgages, i.e., fixed rate or adjustable rate, as well as prepayment
risk, are passed on to the certificate holder. FNMA and Freddie Mac provide the
certificate holder a guarantee of timely payments of interest and ultimate
collection of principal, whether or not they have been collected. GNMA's
guarantee to the holder timely payments of principal and interest and are backed
by the full faith and credit of the U.S. government. The FNMA, Freddie Mac, GNMA
and SBA certificates are modified pass-through mortgage-backed and related
securities that represent undivided interests in underlying pools of fixed-rate,
or certain types of adjustable-rate, single-family residential mortgages, or in
the case of the SBA certificates, the portion of commercial and/or real estate
loans guaranteed by the SBA. As a result, the interest rate characteristics of
the underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well
as prepayment risk, are passed on to the certificate holder. FNMA and Freddie
Mac provide the certificate holder a guarantee of timely payments of interest
and ultimate collection of principal, whether or not they have been collected.
16
Mortgage-backed and related securities generally yield less than the
loans that underlie such securities, because of the cost of payment guarantees
or credit enhancements that reduce credit risk. In addition, mortgage-backed and
related securities are more liquid than individual mortgage loans and may be
used to collateralize obligations of the Association. In general,
mortgage-backed securities issued or guaranteed by FNMA and Freddie Mac are
weighted at no more than 20% for risk-based capital purposes, and
mortgage-backed securities issued or guaranteed by GNMA are weighted at 0% for
risk-based capital purposes, compared to an assigned risk weighting of 50% to
100% for whole residential mortgage loans. These types of securities thus allow
the Association to optimize regulatory capital to a greater extent than
non-securitized whole loans. The Association has sought to improve the yield on
its mortgage-backed securities portfolio by investing in mortgage-backed
securities with maturities in excess of 10 years.
While mortgage-backed securities carry a reduced credit risk as
compared to whole loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors such as the
geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of such mortgage loans and so affect both the prepayment speed,
and value, of such securities.
Set forth below is a table showing the Association's purchases and
repayments of mortgage-backed securities for the periods indicated. The
Association did not sell any mortgage-backed securities during 1998.
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
-------- ---------- ---------
(In Thousands)
Mortgage-backed securities at beginning
of period................................. $ 17,147 $ 17,186 $ 15,391
Purchases................................. 2,444 2,870 3,915
Sales..................................... -- (382) --
Repayments................................ (3,405) (2,470) (2,078)
Discount (premium) amortization............. 9 (57) (42)
-------- ---------- ---------
Mortgage-backed securities
at end of period.......................... $ 16,195 $ 17,147 $ 17,186
======== ========= ========
At December 31, 1998, the Association's investment securities consisted
solely of FHLB stock totaling $263,000. The Association invests excess liquidity
in FHLB overnight deposits.
OTS regulations restrict investments in corporate debt and equity
securities by the Association. These restrictions include prohibitions against
investments in the debt securities of any one issuer in excess of 15% of the
Association's unimpaired capital and unimpaired surplus as defined by federal
regulations, plus an additional 10% if the investments are fully secured by
readily marketable collateral. At December 31, 1998, the Association was in
compliance with this regulation. See "Regulation - Federal Regulation of Savings
Associations" for a discussion of additional restrictions on the Association's
investment activities.
The following table sets forth the carrying value of the Association's
FHLB stock and mortgage-backed securities at the dates indicated. At December
31, 1998, the market value of the Association's mortgage-backed portfolios and
investment securities was approximately $16.2 million and $263,000,
respectively.
At December 31,
-------------------------------------------
1998 1997 1996
----------- --------- ---------
(In Thousands)
Mortgage-backed securities......................... $ 16,195 $ 17,147 $ 17,186
Federal Home Loan Bank stock....................... 263 259 259
---------- --------- ---------
Total investments.............................. $ 16,458 $ 17,406 $ 17,448
========== ========= =========
17
Mortgage-Backed and Investment Portfolio Maturities. The following
table sets forth the scheduled maturities, carrying values, market values and
average yields for the Association's investment securities at December 31, 1998.
At December 31, 1998
--------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years
--------------------- ---------------------- --------------------- -----------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Mortgage-backed and
investment securities held
to maturity:
GNMA certificates........... -- -- $ 2 6.50% $ 5 8.00% $ 234 6.46%
Freddie Mac certificates.... -- -- 7 7.25 76 8.25 3,203 6.12%
FNMA certificates........... -- -- 97 6.63 -- -- 5,892 6.34%
Collateralized mortgage
obligations............... -- -- -- -- -- -- 39 7.25%
FHLB Stock.................. -- -- -- -- -- -- 263 5.81%
Municipal bonds............. -- -- -- -- -- -- 189 8.25%
Total..................... -- -- 106 6.67% 81 8.24% 9,820 6.30%
Mortgage-backed and investment
securities available for sale:
GNMA certificates........... -- -- -- -- -- -- 388 6.66%
Freddie Mac certificates.... -- -- 6 7.38% -- -- 2,221 6.39%
FNMA certificates........... -- -- -- -- -- -- 3,271 6.34%
SBA certificates............. -- -- -- -- -- -- 552 6.13%
Total..................... -- -- $ 6 7.38% $ -- --% $ 6,432 6.36%
Total Investment Portfolio
-----------------------------------
Carrying Market Average
Value Value Yield
----- ----- -----
Mortgage-backed and
investment securities held
to maturity:
GNMA certificates........... $ 241 $ 243 6.49%
Freddie Mac certificates.... 3,286 3,290 6.17%
FNMA certificates........... 5,989 5,999 6.34%
Collateralized mortgage
obligations............... 39 36 7.25%
FHLB Stock.................. 263 263 5.81%
Municipal bonds............. 189 202 8.25%
Total..................... 10,007 10,033 6.32%
Mortgage-backed and investment
securities available for sale:
GNMA certificates........... 388 383 6.66%
Freddie Mac certificates.... 2,228 2,231 6.39%
FNMA certificates........... 3,271 3,287 6.34%
SBA certificates............. 552 550 6.13%
Total..................... $ 6,438 $ 6,451 6.36%
18
The Association's investment securities portfolio at December 31, 1998,
contained $188,561 of tax exempt securities and no securities of any issuer with
an aggregate book value in excess of 10% of the Association's retained earnings,
excluding those issued by the U.S. government, or its agencies.
Sources of Funds
- ----------------
General. The Association's primary sources of funds are deposits,
receipt of principal and interest on loans and securities, interest-earning
deposits with other banks, FHLB advances, and other funds provided from
operations.
FHLB advances are used to support lending activities and to assist in
the Association's asset/liability management strategy. See "- Asset/Liability
Management." Typically, the Association does not use other forms of borrowings.
At December 31, 1998, the Association had $0 in FHLB advances.
Deposits. First Federal offers a variety of deposit accounts having a
wide range of interest rates and terms. The Association's deposits consist of
passbook, commercial demand, NOW, money market deposit and certificate accounts.
The certificate accounts currently range in terms from 30 days to five years.
The Association relies primarily on advertising, competitive pricing
policies and customer service to attract and retain these deposits. Currently,
First Federal solicits deposits from its market area only, and does not use
brokers to obtain deposits. The flow of deposits is influenced significantly by
general economic conditions, changes in money market and prevailing interest
rates and competition.
The Association has become more susceptible to short-term fluctuations
in deposit flows as customers have become more interest rate conscious. The
Association endeavors to manage the pricing of its deposits in keeping with its
profitability objectives giving consideration to its asset/liability management.
Notwithstanding the foregoing, a significant percentage of the Association's
deposits are for terms of less than one year. At December 31, 1998, $17.2
million or 51.2% of the Association's deposits were in certificates of deposits
with terms of 11 months or less. The Association believes that upon maturity
most of these deposits will remain at the Association. The ability of the
Association to attract and maintain savings accounts and certificates of
deposit, and the rates paid on these deposits, has been and will continue to be
significantly affected by market conditions.
19
Savings Portfolio
- -----------------
Deposits in the Association as of December 31, 1998, were represented
by the various types of deposit programs described below.
Weighted
Average Percentage
Interest Minimum Checking and Minimum of Total
Rate Term Savings Amount Balances Savings
---- ---- ------- ------ -------- -------
(In thousands)
0.00% None Non interest-bearing demand $ 5,000 $ 1,299 3.87%
2.00 None Passbook accounts 50 2,253 6.71
2.75 None Money market 2,500 604 1.80
2.02 None NOW accounts 100 8,809 26.25
Certificates of Deposit
-----------------------
5.14% 1-5 months Fixed term, fixed rate 2,500 12,369 36.86%
5.12 6-11 months Fixed term, fixed rate 2,500 4,825 14.38
5.33 12-17 months Fixed term, fixed rate 1,000 1,427 4.25
4.95 18-23 months Fixed term, fixed rate 1,000 1,279 3.81
5.84 24-29 months Fixed term, fixed rate 1,000 289 .86
5.97 30-35 months Fixed term, fixed rate 1,000 260 .77
6.00 36-47 months Fixed term, fixed rate 1,000 74 .22
5.82 48-53 months Fixed term, fixed rate 1,000 30 .09
5.67 54-59 months Fixed term, fixed rate 1,000 35 .13
5.25 60 months
or greater Fixed term, fixed rate 1,000 33,553 100.00%
Deposit Activity
- ----------------
The following table sets forth the deposit activities of the Association
for the periods indicated:
Year Ended December 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
(In Thousands)
Deposits, beginning of period......................... $ 28,656 $ 25,750 $ 26,583
Deposits.............................................. 85,306 64,833 55,778
Withdrawals........................................... (81,599) (63,138) (57,752)
----------- ----------- -----------
Net increase (decrease) before
interest credited................................. 3,707 1,695 (1,974)
Interest credited..................................... 1,190 1,211 1,141
---------- ---------- ----------
Net increase (decrease) in deposits................ 4,897 2,906 (833)
---------- ---------- -----------
Deposits, end of period............................... $ 33,553 $ 28,656 $ 25,750
========== ========== ==========
20
Deposit Flow
- ------------
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Association
between the dates indicated.
At December 31,
---------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------ ------------------------------
Balance Percent Change Balance Percent Change Balance Percent
(Dollars in Thousands)
Non interest-bearing demand $1,299 3.87% $ 387 $ 912 3.18% $ 456 $ 456 1.77%
NOW Accounts............. 8,809 26.25 5,035 3,774 13.17 552 3,222 12.51
Passbook savings......... 2,253 6.71 (331) 2,584 9.02 (174) 2,758 10.71
Money market deposit
accounts............... 604 1.80 (118) 722 2.52 (111) 833 3.24
Time deposits:
which mature
within 12 months....... 17,194 51.24 (648) 17,842 62.26 2,894 14,948 58.05
within 12-24 months.... 2,706 8.06 593 2,113 7.37 (1,130) 3,249 12.62
beyond 24 months....... 688 2.07 (21) 709 2.48 425 284 1.10
------ ----- --------- ------- ----- -------- ------- ------
Total........... $33,553 100.00% $ 4,897 $28,656 100.00% $ 2,906 $25.750 100.00%
======= ------ ======== ======= ====== ======== ======= ======
The following table indicates the amount of the Association's
certificates of deposit of $100,000 or more by time remaining until maturity at
December 31, 1998.
Certificates
of Deposits
-----------
(In thousands)
Three months or less.................................. $ 1,517
Over three through six months......................... 1,282
Over six through twelve months........................ 900
Over twelve months.................................... 752
---------
Total............................................. $ 4,451
=========
Time Deposits by Rates
The following table sets forth the time deposits in the Association
classified by rates as of the dates indicated.
December 31,
-------------------------------------------
1998 1997 1996
--------- -------- --------
(In Thousands)
3.99% or Less......................................... $ 313 $ -- $ 5
4.00 - 5.99%.......................................... 15,342 16,919 18,409
6.00 - 7.99%.......................................... 4,811 3,627 --
8.00 - 9.99%.......................................... 122 118 67
--------- -------- --------
$ 20,588 $ 20,664 $ 18,481
========= ======== ========
21
Time Deposit Maturity Schedule
- ------------------------------
The following table sets forth the amount and maturities of time deposits
at December 31, 1998.
Amount Due
-----------------------------------------------------------------------------------
Less Than 1-2 2-3 3-4 4-5 After
1 Year Years Years Years Years 5 Years Total
--------- ----- ----- ------- ------- ------- --------
(In Thousands)
Rate
3.99 or less........ $ -- $ 313 $ -- $ -- $ -- -- $ 313
4.00 - 5.99%........ 13,988 1,055 160 74 65 -- 15,342
6.00 - 7.99%........ 3,206 1,216 389 -- -- -- 4,811
8.00 - 9.99%........ -- 122 -- -- -- 122
-------- ------- ------ ------ ------- ------ --------
$ 17,194 $ 2,706 $ 549 $ 74 $ 65 -- $ 20,588
======== ======= ====== ====== ======= ====== ========
Borrowings. First Federal's borrowings historically have consisted of
advances from the FHLB of Dallas. Such advances may be made pursuant to
different credit programs, each of which has its own interest rate and range of
maturities. Federal law limits an institution's borrowings from the FHLB to 20
times the amount paid for capital stock in the FHLB, subject to regulatory
collateral requirements. At December 31, 1998, the Association had $0 million in
advances from the FHLB. The Association has the ability to purchase additional
capital stock from the FHLB.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances.
Year Ended December 31,
----------------------------------------
1998 1997 1996
-------- -------- ---------
(In Thousands)
FHLB advances
Maximum balance............. $ 1,000 $ 2,000 $ 1,500
Average balance............. $ 119 $ 282 $ 175
Regulation
- ----------
General
As a federally chartered savings institution, the Association is
subject to extensive regulation by the OTS. Both the OTS and FDIC, as insurer of
deposit accounts, periodically examine the Association for compliance with
various regulatory requirements. The Association must file reports with the OTS
describing its activities and financial condition. The Association is also
subject to certain reserve requirements promulgated by the Board of Governors of
the Federal Reserve System ("Federal Reserve Board"). This supervision and
regulation is intended primarily for the protection of depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the OTS, the FDIC or the Congress could
have a material adverse impact on the Company, the Association and their
operations. As a savings association holding company, the Company is subject to
OTS regulation, examination, supervision and reporting requirements.
22
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, the Association is required to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. The last regular OTS and FDIC examinations of the Association were
as of December 1998. When these examinations are conducted by the OTS and the
FDIC, the examiners may require the Association to provide for higher general or
specific loan loss reserves.
All savings associations are subject to a semi-annual assessment, based
upon the savings association's total assets. The Association's OTS assessment
for the fiscal year ended December 31, 1998, was approximately $11,300.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Association and the
Holding Company. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Association is prescribed by federal laws, and regulations, and it is prohibited
from engaging in any activities not permitted by such laws and regulations. For
instance, no savings institution may invest in non-investment grade corporate
debt securities. In addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may not exceed
400% of total capital, except with approval of the OTS. Federal savings
associations are also generally authorized to branch nationwide. The Association
is in compliance with the noted restrictions.
The Association's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). The Association is not in compliance with the
loans to one borrower limitation; however, the Association is currently working
with the borrower to reduce its loans below the required limit.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a capital compliance
plan. A failure to submit a plan or to comply with an approved plan will subject
the institution to further enforcement action. The OTS and the other federal
banking agencies have also proposed additional guidelines on asset quality and
earnings standards. No assurance can be given as to whether or in what form the
proposed regulations will be adopted. The guidelines are not expected to
materially effect the Association.
Insurance of Deposits
---------------------
Deposit Insurance. The FDIC is an independent federal agency that
insures deposits of banks and thrift institutions up to certain specified limits
and regulates such institutions for safety and soundness. The FDIC administers
two separate insurance funds, the Bank Insurance Fund ("BIF") for commercial
banks and state savings banks, and the SAIF for savings associations such as the
Association and banks that have acquired deposits from savings associations.
The FDIC is required to maintain designated levels of reserves in each fund.
23
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time, and may decrease these rates if the target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level is
determined based on its capital levels, and the FDIC's level of supervisory
concern about the institution.
In 1996, federal legislation was enacted to recapitalize the SAIF and
eliminate the significant premium disparity between the BIF and the SAIF. Under
that law, the Association and other institutions with SAIF-insured deposits were
charged a one-time special assessment equal to $0.657 per $100 of assessable
deposits at March 31,1995. The Association recognized this special assessment as
a charge to noninterest expense of $170,000 (or $112,000 when adjusted for
taxes) during the year ended December 31, 1996. The assessment was fully
deductible for both federal and state income tax purposes. Assessment rates for
regular ongoing, deposit insurance premiums currently range from 0.0% of
deposits for an institution in the highest category (i.e., well-capitalized and
financially sound, with no more than a few minor weaknesses) to 0.27% of
deposits for an institution in the lowest category (i.e., undercapitalized and
substantial supervisory consent). The Association's assessment rate for deposit
insurance was 0.23% of deposits for 1996, and it was reduced to 0.0% of deposits
beginning on January 1, 1997. The FDIC is authorized to raise the assessment
rates as necessary to maintain the required reserve ratio of 1.25%, and both the
BIF and the SAIF currently satisfy the reserve ratio requirement. The annual
rate of assessments on SAIF-assessable deposits for the payments on the FICO
bonds was 0.0648% for the semi-annual period beginning on January 1, 1997;
0.0630% for the semi-annual period beginning on July 1, 1997; and 0.0622%
currently. The 1996 law also provides for the merger of the SAIF and the BIF by
1999, but not until such time as bank and thrift charters are combined. Until
the charters are combined, savings associations with SAIF deposits may not
transfer deposits to the BIF without paying various exit and entrance fees, and
SAIF institutions will continue to pay higher FICO assessments. Such exit and
entrance fees need not be paid if a SAIF institution converts to a bank charter
or merges with a bank, as long as the resulting bank continues to pay applicable
insurance assessments to the SAIF, and as long as certain other conditions are
met.
While the legislation has reduced the disparity between premiums paid
on BIF deposits and SAIF deposits, and has relieved the thrift industry of a
portion of the contingent liability represented by the FICO bonds, the premium
disparity between SAIF-insured institutions, such as the Association, and
BIF-insured institutions will continue until at least January 1, 1999.
Regulatory Capital Requirements
Federally insured savings associations, such as the Association, are
required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. Generally, these capital
requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. Further, the valuation allowance applicable to the write-down
of investments and mortgage-backed securities in accordance with SFAS No. 115 is
excluded from the regulatory capital calculation. At December 31, 1998, the
Association had no intangible assets and an unrealized gain on investment
securities available for sale net of tax of $8,447.
24
At December 31, 1998, the Association had tangible capital of $3.7
million, or 9.88% of adjusted total assets, which is approximately $3.2 million
above the minimum requirement of 1.5% of adjusted total assets in effect on that
date.
The capital standards also require core capital of at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At December 31, 1998, the
Association had no intangible assets which were subject to these tests.
At December 31, 1998, the Association had core capital equal to $3.7
million, or 9.88% of adjusted total assets, which is $2.6 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 1998, the
Association had no capital instruments that qualify as supplementary capital and
$198,000 of general loss reserves, which was less than 1.25% of risk-weighted
assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Association had
exclusions from capital and assets at December 31, 1998 of $18,500.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
The OTS has adopted a final rule that requires every savings
association with more than normal interest rate risk exposure to deduct from its
total capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the present
value of its assets. This exposure is a measure of the potential decline in the
net portfolio value of a savings association, greater than 2% of the present
value of its assets, based upon a hypothetical 200 basis point increase or
decrease in interest rates (whichever results in a greater decline). Net
portfolio value is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The rule provides for a two quarter
lag between calculating interest rate risk and recognizing any deduction from
capital. Any savings association with less than $300 million in assets and a
total risk-based capital ratio in excess of 12% is exempt from this requirement
unless the OTS determines otherwise.
On December 31, 1998, the Association had total capital of $3.7 million
(including $3.7 million in core capital and $198,000 in qualifying supplementary
capital) and risk-weighted assets of $15.8 million (including $0 in converted
off-balance sheet assets); or total capital of 24.8% of risk-weighted assets.
This amount was 16.8% above the 8% requirement in effect on that date.
Thrift Charter
Congress has been considering legislation in various forms that would
require federal thrifts, such as the Bank, to convert their charters to national
or state bank charters. Legislation enacted in 1996 required the Treasury
Department to prepare for Congress a comprehensive study on development of a
common charter for federal savings associations
25
and commercial banks; and provided for the merger of the BIF and the SAIF into a
single deposit insurance fund on January 1, 1999 provided the thrift charter was
eliminated. The Association cannot determine whether, or in what form, such
legislation may eventually be enacted and there can be no assurance that any
legislation that is enacted would not adversely affect the Association and the
Company.
Prompt Corrective Regulatory Action
Under the OTS Prompt Corrective Action regulations, the OTS is required
to take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has total
risk-based capital of less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized," and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS may also take any one
of a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.
At December 31, 1998, the Association was categorized as "well
capitalized," meaning that the Association's total risk-based capital ratio
exceeded 10.0%, Tier I risk-based capital ratio exceeded 6.0%, leverage capital
ratio exceeded 5.0%, and the Association was not subject to a regulatory order,
agreement or directive to meet and maintain a specific capital level for any
capital measure.
Dividend Limitations
An OTS regulation imposes limitations upon all "capital distributions"
by savings associations, including cash dividends, payments by an association to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility given to well-capitalized associations. A savings
association which has total capital (immediately prior to and after giving
effect to the capital distribution) that is at least equal to its fully
phased-in capital requirements would be a Tier 1 institution ("Tier 1
Institution"). An association that has total capital at least equal to its
minimum capital requirements, but less than its capital requirements, would be a
Tier 2 institution ("Tier 2 Institution"). An institution having total capital
that is less than its minimum capital requirements would be a Tier 3 institution
("Tier 3 Institution"). However, an institution which otherwise qualifies as a
Tier 1 Institution may be designated by the OTS as a Tier 2 or Tier 3
Institution if the OTS determines that the institution is "in need of more than
normal supervision." The Association is currently a Tier 1 Institution.
A Tier 1 Institution may, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to the greater
of (a) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" at the beginning of
the calendar year (the smallest excess over its capital requirements), or (b)
75% of its net income over the most recent four-quarter period. Any additional
amount of capital distributions would require prior regulatory approval.
The OTS has proposed revisions to these regulations which would permit
savings associations to declare dividends in amounts which would assure that
they remain adequately capitalized following the dividend declaration. Savings
associations in a holding company system which are rated Camel 1 or 2 and which
are not in troubled condition would need to file a prior notice with the OTS
concerning such dividend declaration.
26
Liquidity
All savings associations, including the Association, 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. For a discussion of what the Association
includes in liquid assets, see "Business - Investment Activities." This liquid
asset ratio requirement may vary from time to time (between 4% and 10%)
depending upon economic conditions and savings flows of all savings
associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At December 31, 1998, the Association was in compliance with
both requirements, with an overall liquid asset ratio of 11.8% and a short-term
liquid assets ratio of 11.5%.
Accounting
An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation.
The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS. The Association is in compliance
with these amended rules.
Qualified Thrift Lender Test
All savings associations, including the Association, are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. This test requires a savings association to have at least 65%
of its portfolio assets (as defined by regulation) in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling
basis. Such assets primarily consist of residential housing related loans and
investments. At December 31, 1998, the Association complied with the QTL
requirement.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending
27
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OTS, in connection with the examination of the Association,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications,
such as a merger or the establishment of a branch, by the Association. An
unsatisfactory rating may be used as the basis for the denial of an application
by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Association may be required to devote additional
funds for investment and lending in its local community. The Association was
examined for CRA compliance in 1996 and received a rating of "Satisfactory", as
indicated in the OTS Community Reinvestment Act Performance Evaluation public
disclosure dated June 3, 1998.
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the association's capital. Affiliates of the Association include the Holding
Company and any company which is under common control with the Association. In
addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries which also permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Association or any other SAIF-insured savings
association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
If the Association fails the QTL test, the Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure the Holding Company must register as, and will
become subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See "- Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
28
Federal Securities Law
The stock of the Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At December 31, 1998, the Association was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
The Association is a member of the FHLB of Dallas, which is one of 12
regional FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are subject
to the regulation and oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, the Association is required to purchase and maintain stock
in the FHLB of Dallas. At December 31, 1998, the Association had $263,000 of
FHLB stock, which was in compliance with this requirement. In past years, the
Association has received substantial dividends on its FHLB stock. Over the past
five fiscal years such dividends have averaged 5.25% and were 5.94% for the year
ended December 31, 1998. No assurance can be given that such dividends will
continue in the future at such levels.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Association's FHLB stock may result in a corresponding
reduction in the Association's capital.
29
Federal and State Taxation
Federal Taxation. Historically, savings institutions such as the
Association which met certain definitional tests primarily related to their
assets and the nature of their business ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may have been deducted in arriving at their taxable income. The Association's
deductions with respect to "qualifying real property loans," which are generally
loans secured by certain interest in real property, were computed using an
amount based on the Association's actual loss experience, or a percentage equal
to 8% of the Association's taxable income, computed with certain modifications
and reduced by the amount of any permitted additions to the non-qualifying
reserve. Due to the Association's loss experience, the Association generally
recognized a bad debt deduction equal to 8% of taxable income.
In August 1996, the provisions repealing the current thrift bad debt
rules were passed by Congress as part of "The Small Business Job Protection Act
of 1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). As of December 31, 1998,
the Association's bad debt reserve subject to recapture over a six year period
totaled approximately $119,000. For taxable years beginning after December 31,
1995, the Association's bad debt deduction will be determined under the
experience method using a formula based on actual bad debt experience over a
period of years or, if the Association is a "large" association (assets in
excess of $500 million) on the basis of net charge-offs during the taxable year.
The new rules allow an institution to suspend bad debt reserve recapture for the
1996 and 1997 tax years if the institution's lending activity for those years is
equal to or greater than the institution's average mortgage lending activity for
the six taxable years preceding 1996 adjusted for inflation. For this purpose,
only home purchase or home improvements loans are included and the institution
can elect to have the tax years with the highest and lowest lending activity
removed from the average calculation. If an institution is permitted to postpone
the reserve recapture, it must begin its six year recapture no later than the
1998 tax year. The unrecaptured base year reserves will not be subject to
recapture as long as the institution continues to carry on the business of
banking. In addition, the balance of the pre-1988 bad debt reserves continue to
be subject to provisions of present law referred to below that require recapture
in the case of certain excess distributions to shareholders.
Distributions. To the extent that the Association makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a lesser amount if the Association's loan portfolio decreased since
December 31, 1987) and then from the supplemental reserve for losses on loans
("Excess Distributions"), and an amount based on the Excess Distributions will
be included in the Association's taxable income. Nondividend distributions
include distributions in excess of the Association's current and accumulated
earnings and profits, distributions in redemption of stock and distributions in
partial or complete liquidation. However, dividend paid out of the Association's
current or accumulated earnings and profits, as calculated for federal income
tax purposes, will not be considered to result in a distribution from the
Association's bad debt reserve. The amount of additional taxable income created
from an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus, if
the Association makes a "nondividend distribution," then approximately one and
one-half the times the Excess Distribution would be includable in gross income
for federal income tax purposes, assuming a 34% corporate income tax rate
(exclusive of state and local taxes). The Association does not presently intend
to pay dividends that wold result in a recapture of any portion of its tax bad
debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the
tax bad debt reserve deduction using the percentage of taxable income method
over the deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Association's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable years
beginning after December 31, 1986, and before January 1, 1996, an environmental
tax of 0.12% of the excess of AMTI (with certain modification) over $2.0 million
is imposed on corporations, including the Association, whether or not an
Alternative Minimum Tax is paid.
30
The Association files federal income tax returns on a calendar year
basis using the cash method of accounting. The Company has filed a separate
federal income tax return from the Association. Savings associations, such as
the Association, that file federal income tax returns as part of a consolidated
group are required by applicable Treasury regulations to reduce their taxable
income for purposes of computing the percentage bad debt deduction for losses
attributable to activities of the non-savings association members of the
consolidated group that are functionally related to the activities of the
savings association member.
The Association was audited by the IRS in 1997 with respect to federal
income tax returns. The audit did not result in material changes that affected
the financial condition of the Association.
State Taxation. The Louisiana Corporation Income Tax Act provides for
an exemption from the Louisiana Corporation Income Tax for mutual savings banks
and for banking corporations, which includes stock association (e.g., the
Association). However, this exemption does not extend to non-banking entities
such as the Company. The non-banking subsidiaries of the Association (as well as
the Company) are subject to the Louisiana Corporate Income Tax based on their
Louisiana taxable income, as well as franchise taxes. The Louisiana Corporation
Income Tax applies at graduated rates from 4% upon the first $25,000 of
Louisiana taxable income to 8% on all Louisiana taxable income in excess of
$200,000. For these purposes, "Louisiana taxable income" means net income which
is earned within or derived from sources within the State of Louisiana, after
adjustments permitted under Louisiana law including a federal income tax
deduction and an allowance for net operating losses, if any. In addition, the
Association is subject to the Louisiana Shares Tax which is imposed on the
assessed value of the Association's stock. The formula for deriving the assessed
value is to calculate 15% of the sum of (i) 20% of a corporation's capitalized
earnings, plus (ii) 80% of a corporation's taxable stockholders' equity, and to
subtract from that amount 50% of a corporation's real and personal property
assessment. Other various items may also be subtracted in calculating a
corporation's capitalized earnings.
Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
Employees
- ---------
At December 31, 1998, the Association had a total of 19 full-time and 3
part-time employees. The Association's employees are not represented by any
collective bargaining group. Management considers its employee relations to be
excellent.
Executive Officers of the Association and the Company Who Are Not Directors
- ---------------------------------------------------------------------------
Betty Jean Parker. Mrs. Parker, age 54, is the Treasurer and Chief
Financial Officer of the Association. Until June 1996, Mrs. Parker was also
Corporate Secretary of the Association. Mrs. Parker is responsible for the
supervision of the accounting department and reporting to the regulatory
authorities.
Item 2. Description of Property
- ------- -----------------------
The Company conducts its business through two offices, located in
Oakdale, Louisiana and Oberlin, Louisiana in Allen Parish. The following table
sets forth information relating to the Association's office as of December 31,
1998. The total net book value of the Company's premises and equipment
(including land, buildings and leasehold improvements and furniture, fixtures
and equipment) at December 31, 1998 was approximately $705,000.
31
Total
Approximate
Year Square Net Book Value at
Location Opened Footage December 31, 1998
- --------------------------------- ------ ------- -----------------
Main Office: 1975 4,100 $311,000
222 South 10th Street
Oakdale, Louisiana
Branch Office: 1997 3,000 $389,000
110 North Fifth Street
Oberlin, Louisiana 70655
Loan Production Office: 1998 1,000 $5,000
531 North Ninth Street, Suite A
Kinder, Louisiana 70655
Item 3. Legal Proceedings
- --------------------------
The Company is involved, from time to time, as plaintiff or defendant
in various legal actions arising in the normal course of their businesses. While
the ultimate outcome of these proceedings cannot be predicted with certainty, it
is the opinion of management, after consultation with counsel representing the
Company in the proceedings, that the resolution of these proceedings should not
have a material effect on the Company's financial position or results of
operations on a consolidated basis.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1998.
PART II
-------
Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters
- ----------------------------------------------------------------------
Pages 48 to 49 of the attached 1998 Annual Report to Shareholders is
herein incorporated by reference.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -------------------------------------------------------------------------
Pages 6 to 15 of the attached 1998 Annual Report to Shareholders are
herein incorporated by reference.
Item 7. Financial Statements
- ------- --------------------
Pages 16 to 47 of the attached 1998 Annual Report to Shareholders are
herein incorporated by reference.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
- -------------------------------------------------------------------------
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
32
PART III
--------
Item 9. Directors and Executive Officers of the Registrant
- ------- --------------------------------------------------
Information concerning Directors of the Registrant is incorporated
herein by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on April 30, 1999.
Item 10. Executive Compensation
- -------- ----------------------
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders scheduled to be held on April 30, 1999.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on
April 30, 1999.
Item 12. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders scheduled to be held on April 30, 1999.
Item 13. Exhibits List and Reports on Form 8-K
- -------- -------------------------------------
(a) (1) Financial Statements:
The following information appearing in the Registrant's Annual Report
to Shareholders for the year ended December 31, 1998, is incorporated by
reference in this Form 10-KSB Annual Report as Exhibit 13.
33
Page in
Annual
Annual Report Section Report
--------------------- ------
Report of Independent Auditors.......................................... 16
Consolidated Statements of Financial Condition at
December 31, 1998 and 1997....................................... 17
Consolidated Statements of Income for the Years
ended December 31, 1998 and 1997................................. 18
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 1998 and 1997....................................... 19
Consolidated Statements of Cash Flows for the Years ended
December 31, 1998 and 1997........................................ 20-21
Notes to Consolidated Financial Statements............................... 22-47
(a)(2) Financial Statement Schedules - All financial statement
schedules have been omitted as the information is either inapplicable or not
required under the related instructions.
(a)(3) Exhibits - The following exhibits are either filed or attached
as part of this report or are incorporated herein by reference.
Reference to
Regulation Prior Filing or
S-B Exhibit Exhibit Number
Number Document Attached Hereto
------ -------- ---------------
2 Plan of acquisition, reorganization, None
arrangement, liquidation or succession
3 Certificate of Incorporation and Bylaws *
4 Instruments defining the rights of *
security holders, including indentures
9 Voting trust agreement None
10.1 Employment Agreement with Charles L. Galligan *
10.2 Employment Agreement with Betty Jean Parker *
10.3 Employee Stock Ownership Plan *
10.4 Proposed 1998 Stock Option and Incentive Plan **
10.5 Proposed Recognition and Retention Plan **
11 Statement re: computation of per None
share earnings
12 Statement re: computation or ratios Not required
34
Reference to
Regulation Prior Filing or
S-B Exhibit Exhibit Number
Number Document Attached Hereto
------ -------- ---------------
13 Annual Report to Security Holders 13
16 Letter re: change in certifying None
accountant
18 Letter re: change in accounting None
principles
21 Subsidiaries of Registrant 21
22 Published report regarding matters None
submitted to vote of security holders
23 Consent of experts and counsel 23
24 Power of Attorney Not Required
27 Financial Data Schedule 27
28 Information from reports furnished to None
State insurance regulatory authorities
99 Additional exhibits None
- -------------------
*Filed on June 25, 1996, as exhibits to the Registrant's Form SB-2
registration statement (Registration No. 333-6803), pursuant to the Securities
Act of 1933. All of such previously filed documents are hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-B.
**Filed on March 30, 1998, as exhibits to the Registrant's Annual
Report on Form 10-KSB. Such previously filed documents are hereby incorporated
herein by reference in accordance with item 601 of Regulation S-B.
(b) Reports on Form 8-K - No Form 8-K was filed during the last
quarter of the year covered by this Form 10-KSB.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST ALLEN PARISH BANCORP, INC.
Date: March 29, 1999 By: /s/ Charles L. Galligan
-----------------------
Charles L. Galligan, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
By: /s/ Charles L. Galligan By: /s/ Betty Jean Parker
----------------------- ---------------------
Charles L. Galligan, President and Betty Jean Parker, Treasurer
Chief Executive Officer (Principal Financial and
(Principal Executive Officer) Accounting Officer)
Date: March 29, 1999 Date: March 29, 1999
By: /s/ Dr. James D. Sandefur By: /s/ Jesse Boyd, Jr.
------------------------- -------------------
Dr. James D. Sandefur, Chairman Jesse Boyd, Jr., Director
Date: March 29, 1999 Date: March 29, 1999
By: /s/ James E. Riley By: /s/ J. C. Smith
------------------ ---------------
James E. Riley, Director J. C. Smith, Director
Date: March 29, 1999 Date: March 29, 1999
By: /s/ Leslie A. Smith
-------------------
Leslie A. Smith, Director
Date: March 29, 1999
36
Index to Exhibits
Exhibit 13 1998 Annual Report to Stockholders
Exhibit 21 Subsidiaries of the Registrant
Exhibit 23 Consent of Accountants
Exhibit 27 Financial Data Schedule
37