TEXARKANA FIRST FINANCIAL CORPORATION
1998 ANNUAL REPORT TO STOCKHOLDERS
TABLE OF CONTENTS
Page
Chairman's Letter to Stockholders................................. 1
Corporate Profile................................................. 2
Selected Financial Data........................................... 3
Supplementary Financial Information............................... 4
Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 5
Report of Independent Certified Public Accountants................ 18
Financial Statements.............................................. 19
Directors and Officers............................................ 43
Banking Locations................................................. 43
Stockholder Information........................................... 44
Letter to Our Stockholders
Fiscal year 1998 was an eventful year. International economic problems rolled
through financial markets causing nearly a 2000 point drop in the Dow Jones
Industrial Average. Investors sold stocks and bought bonds which resulted in
interest rates dropping dramatically. With interest rates declining
significantly, borrowers refinanced mortgages in record amounts and loan
activity set new records.
Closer to home, these low interest rates led to record highs in loan activity
for the association. Loan originations were almost $65 million, a 49% increase
over the previous year. With this record of originations, our loan portfolio
grew $7.4 million with $14 million of loans sold in the secondary market.
Growth was evident in other areas with total assets increasing $10.7 million or
6% and deposits increasing $8.7 million or 6.1%.
Profitable growth has been and continues to be our primary objective. In this
past year, net income reached a record high of $3.3 million, an increase of
14.6%, resulting in earnings per share increasing to $2.03 from $1.71, an 18.7%
increase. The return on equity improved to 11.85% from 10.74% and the return on
average assets reached a high of 1.78%. Our strong equity position, a ratio of
14.5% of capital to assets, continues to exceed industry standards.
This past year also marked the third expansion of an existing branch office.
The DeQueen Branch moved from a leased downtown facility into a newly
constructed building located on U.S. Highway 70 West. Since moving into this
new building in August 1997, deposits have increased 12% and loans have
increased 19%. Also, our architect has completed the plans for a new branch
office on Richmond Road in Texarkana. This new facility will be a full service
facility and will be the first office in another state for the association.
This branch is necessary as it will give us a location in the high growth area
of Texarkana and allow us to better serve our existing Texas customers.
Looking back over the past year,we were able to continue with positive measures
to reduce our equity to asset ratio. An additional 111,000 company shares were
purchased to be held as treasury shares and the quarterly dividend to
stockholders was increased to $.16 per share. Together, this reduced our equity
to asset ratio from 15.3% to 14.5%. In fiscal year 1999, we will continue to
look for ways to enhance shareholder value.
With the continued help of our depositors, borrowers, employees, directors and
stockholders, we look forward to a profitable 1999.
Sincerely,
/s/ James W. McKinney
James W. McKinney
Chairman and Chief Executive Officer
1
CORPORATE PROFILE
Texarkana First Financial Corporation (the "Company") was incorporated in March
1995 under Texas law for the purpose of acquiring all of the capital stock
issued by First Federal Savings and Loan Association of Texarkana (the
"Association") in connection with the Association's conversion from a federally
chartered mutual savings and loan association to a federally chartered stock
savings and loan association (the "Conversion"). The Conversion was consummated
on July 7, 1995 and, as a result, the Company became a unitary savings and loan
holding company for the Association. The Company has no significant assets
other than the shares of the Association's common stock acquired in the
Conversion and the loan to the Employee Stock Ownership Plan("ESOP") and has no
significant liabilities. The business and management of the Company consists
primarily of the business and management of the Association. The Company has no
other subsidiaries and the Association has no subsidiaries.
The Association is a federally chartered stock savings and loan association
which conducts business through its main office and four full service branch
offices. The Association is primarily engaged in attracting deposits from the
general public and using these funds primarily to originate single-family (one-
to-four units) residential loans and to a significantly lesser extent,
nonresidential or commercial real estate loans, construction loans on primarily
residential properties, consumer loans and multi-family loans. To a limited
extent, the Association also invests in securities issued by the United States
Government and agencies thereof and mortgage-backed securities. The Association
derives its income principally from interest earned on loans and investments
and, to a lesser extent, from fees received in connection with the origination
of loans and for other services. The Association's primary expenses are
interest expense on deposits and general operating expenses. Funds for
activities are provided primarily by deposits, amortization and prepayments of
outstanding loans and other sources. The Association's goal is to continue to
serve its market area of southwest Arkansas and northeast Texas as a community
oriented, independent financial institution dedicated primarily to financing
home ownership while providing needed financial services to its customers in an
efficient manner.
The Company's and the Association's executive offices are located at Third and
Olive Streets, Texarkana, Arkansas 71854 and their telephone number is (870)
773-1103.
2
SELECTED FINANCIAL DATA
(Dollars in Thousands, Except Per Share Data)
Years Ended September 30 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
SUMMARY INCOME STATEMENT
Interest income...........$ 14,678 $ 13,417 $ 12,745 $ 11,236 $ 9,528
Interest expense.......... 7,905 6,982 6,480 6,042 5,035
Net interest income....... 6,773 6,435 6,265 5,194 4,493
Provision for loan losses. (100) -- -- 177 --
Noninterest income........ 1,151 755 753 665 1,277
Noninterest expense(1).... 2,933 2,604 3,335 2,367 2,010
Income before income tax.. 5,091 4,586 3,683 3,315 3,760
Income tax expense........ 1,785 1,702 1,282 1,312 1,219
Net income(1)............. 3,306 2,884 2,401 2,003 2,541
PER COMMON SHARE(2)
Net income(basic)......... $ 2.03 $ 1.71 $ 1.31 $ .40 N/A
Net income(diluted)....... $ 1.94 $ 1.68 $ 1.31 $ .40 N/A
Cash dividends declared(3) $ .58 $ .50 $ 3.45 -- N/A
Dividend payout ratio..... 28.54% 29.53% 263.36% -- N/A
Book value(end of year)... $16.36 $15.32 $14.02 $16.54 N/A
Market price(end of year). $22.38 $23.75 $14.25 $13.25 N/A
Market/book(end of year).. 136.80% 155.03% 101.64% 80.11% N/A
YEAR-END BALANCES
Total assets..............$189,451 $178,710 $165,747 $160,652 $140,178
Investment securities..... 27,685 21,176 17,458 21,432 17,004
Loans receivable, net..... 155,781 148,471 136,805 123,309 118,548
Deposits.................. 151,955 143,207 133,071 124,953 124,496
Stockholders' equity...... 27,416 27,380 26,424 32,808 12,996
PERFORMANCE RATIOS
Net interest margin....... 3.74% 3.90% 3.90% 3.59% 3.40%
Return on average assets.. 1.78 1.71 1.46 1.35 1.85
Return on average equity.. 11.85 10.74 7.34 10.92 21.44
Operating efficiency(4)... 37.01 36.22 47.52 40.40 34.84
ASSET QUALITY RATIOS
Nonperforming loans to
total loans.............. .19% .19% .15% .17% .09%
Nonperforming assets to
total assets............. .18 .23 .17 .33 .53
Allowance for loan losses
to nonperforming loans... 342.32 401.43 540.09 536.92 872.32
Allowance for loan losses
to total loans........... .64 .76 .84 .91 .81
Net charge-offs to
average total loans...... .014 .015 .003 .004 .14
CAPITAL RATIOS
Tier 1 capital to assets.. 14.42% 15.29% 15.95% 15.40% 9.26%
Tier 1 risk-based capital. 23.69 25.12 26.99 27.74 16.07
Total risk-based capital.. 24.24 25.82 27.78 28.68 16.47
(1) 1996 includes the special SAIF assessment of $835,000 ($515,000 net).
(2) 1995 per share data is for the period beginning July 7, the IPO date.
(3) 1996 includes a $3.00 special one-time distribution.
(4) Noninterest expense to net interest income plus noninterest income.
3
SUPPLEMENTARY FINANCIAL INFORMATION
Selected Quarterly Operating Results
(Dollars In Thousands, Except Per Share Data)
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Year Ended September 30, 1998
Interest income.............. $3,757 $3,686 $3,641 $3,594
Interest expense............. 2,054 1,998 1,930 1,923
Net interest income.......... 1,703 1,688 1,711 1,671
Provision for loan losses.... -- (100) -- --
Noninterest income........... 307 263 325 256
Noninterest expense.......... 719 732 751 731
Net income................... 900 842 808 756
Per common share:
Net income (basic)........... $ .56 $ .52 $ .49 $ .46
Net income (diluted)......... .54 .49 .47 .44
Cash dividends............... .16 .14 .14 .14
Common stock price:
High........................ 28.25 30.63 29.63 27.13
Low......................... 21.88 27.88 24.75 23.88
Last trade.................. 22.38 28.38 27.75 25.00
Selected ratios (annualized):
Net interest margin.......... 3.62% 3.69% 3.87% 3.78%
Return on average assets..... 1.86 1.80 1.78 1.67
Return on average equity..... 12.74 11.97 11.78 10.88
Year Ended September 30, 1997
Interest income.............. $3,486 $3,415 $3,283 $3,233
Interest expense............. 1,851 1,744 1,687 1,700
Net interest income.......... 1,635 1,671 1,596 1,533
Provision for loan losses.... -- -- -- --
Noninterest income........... 216 202 163 174
Noninterest expense.......... 651 602 626 725
Net income................... 756 797 712 619
Per common share:
Net income (basic)........... $ .46 $ .47 $ .42 $ .36
Net income (diluted)......... .44 .47 .41 .36
Cash dividends............... .1400 .1400 .1125 .1125
Common stock price:
High........................ 24.88 19.50 17.38 15.63
Low......................... 19.38 15.63 14.75 13.63
Last trade.................. 23.75 19.50 16.50 15.63
Selected ratios (annualized):
Net interest margin.......... 3.80% 4.03% 3.98% 3.79%
Return on average assets..... 1.71 1.87 1.74 1.50
Return on average equity..... 11.01 11.79 10.82 9.30
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of results of operations is intended to
assist in understanding the financial condition and results of operations of
the Company. The information contained in this section should be read in
conjunction with the Consolidated Financial Statements and the accompanying
Notes to Consolidated Financial Statements and the other sections contained in
this Annual Report.
The Company's results of operations depend primarily on its net interest in-
come, which is the difference between interest income on interest-earning
assets and interest expense on interest-bearing liabilities. The Company's
results of operations also are affected by the provision for loan losses, the
level of its noninterest income and expenses, and income tax expense.
Asset and Liability Management
The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities, and is considered negative when the amount of interest-
rate sensitive liabilities exceeds the amount of rate sensitive assets.
Generally, during a period of rising interest rates, a negative gap within
shorter maturities would adversely affect net interest income, while a positive
gap within shorter maturities would result in an increase in net interest
income, and during a period of falling interest rates, a negative gap within
shorter maturities would result in an increase in net interest income while a
positive gap within shorter maturities would have the opposite effect. As of
September 30, 1998, the Association estimates that its one-year gap was a
negative 48.0% and its ratio of interest-earning assets to interest-bearing
liabilities maturing or repricing within one year was 67.6%.
In order to minimize potential for adverse effects of material and prolonged
increases in interest rates on the Company's results of operations, management
has implemented and continues to monitor asset/liability management policies
to better match the maturities and repricing terms of the Association's
interest-earning assets and interest-bearing liabilities. Such policies have
consisted primarily of: (i) emphasizing the origination of adjustable-rate
mortgage loans ("ARMs"); and (ii) selling its fixed-rate residential mortgage
loans.
The Association focuses its lending activities on the origination of one year
adjustable-rate residential mortgage loans and, to a lesser extent, three-year
and five-year adjustable rate residential mortgage loans. Although adjustable-
rate loans involve certain risks, such loans decrease the risks associated with
changes in interest rates. As a result of the Association's efforts, as of
September 30, 1998, $93.3 million or 88.5% of the Association's portfolio of
one-to-four family residential mortgage loans consisted of ARMs.
5
In order to offer a full range of loan products to its customers, the
Association continues to originate fixed-rate loans and sell most of such loans
to the Federal Home Loan Mortgage Corporation ("FHLMC"). The Association also
originates mortgage loans insured by the Federal Housing Administration ("FHA")
and mortgage loans guaranteed by the Office of Veterans Affairs("VA") and sells
such loans to an independent mortgage company. During the years ended September
30, 1998 and 1997, such sales amounted to $13.6 million and $2.2 million,
respectively. Such sales were conducted as a means of minimizing the interest
rate risk associated with such loans.
Deposits are the Association's primary funding source. The Association prices
its deposit accounts based upon competitive factors and the availability of
prudent lending and investment opportunities. Pursuant to this policy, the
Association has generally neither engaged in sporadic increases or decreases in
interest rates paid nor offered the highest rates available in its deposit
market except upon specific occasions to control deposit flow or when market
conditions have created opportunities to attract longer-term deposits. In
addition, the Association does not pursue an aggressive growth strategy which
would force the Association to focus exclusively on competitors' rates rather
than deposit affordability. This policy has assisted the Association in
controlling its cost of funds.
Net Portfolio Value
Management also presently monitors and evaluates the potential impact of
interest rate changes upon the market value of the Association's portfolio
equity and the level of net interest income on a quarterly basis. The OTS
adopted a final rule in August 1993 incorporating an interest rate risk
component into the risk-based capital rules and under such rule, an institution
with a greater than "normal" level of interest rate risk will be subject to a
deduction of its interest rate component from total capital for purposes of
calculating the risk-based capital requirement. An institution with a greater
than "normal" interest rate risk is defined as an institution that would suffer
a loss of net portfolio value ("NPV") exceeding 2.0% of the estimated market
value of its assets in the event of a 200 basis point increase or decrease in
interest rates. NPV is the difference between incoming and outgoing discounted
cash flows from assets, liabilities, and off-balance sheet contracts. A
resulting change in NPV of more than 2% of the estimated market value of an
institution's assets will require the institution to deduct from its capital
50% of that excess change. The rule provides that the OTS will calculate the
interest rate risk component quarterly for each institution. The OTS has
recently indicated that no institution will be required to deduct capital for
interest rate risk until further notice. Small, highly capitalized
institutions, such as the Association, which have less than $300 million of
assets and a risk-based capital ratio in excess of 12% are not generally sub-
ject to the interest rate risk component. Although First Federal is not
subject to the interest rate risk component of the risk-based capital rules,
the maturity/rate data is voluntarily submitted to the OTS so that management
remains aware of the potential impact of interest rate changes as reported
quarterly by the OTS in its interest rate risk exposure report.
The following table presents First Federal's NPV as of September 30, 1998, as
calculated by the OTS, based on information which was provided to the OTS by
First Federal.
6
Net Portfolio Value
- -------------------------------------------------------------------------------
Estimated
Change in NPV As A
Interest Rates Estimated % of PV Amount Percent
(basis points) NPV of Assets of Change of Change
- ---------------- ------------- -------------- ------------- -----------
(Dollars in Thousands)
+400 bp $27,914 15.16% $-3,144 -10%
+300 bp 29,479 15.76 -1,580 -5
+200 bp 30,455 16.08 -603 -2
+100 bp 30,904 16.15 -155 0
0 bp 31,058 16.08
-100 bp 31,245 16.03 +187 +1
-200 bp 31,703 16.09 +645 +2
-300 bp 32,413 16.25 +1,355 +4
-400 bp 33,219 16.43 +2,161 +7
Risk Measures: 200 bp Rate Shock 9-30-98 6-30-98 3-31-98
- ---------------------------------------------- ------- ------- -------
Pre-Shock NPV Ratio: NPV as % of PV of Assets 16.08% 16.21% 17.19%
Exposure Measure: Post-Shock NPV Ratio 16.08% 15.41% 16.67%
Sensitivity Measure: Change in NPV Ratio 0 bp 80 bp 52 bp
7
Changes in Financial Condition
General. The Company's assets increased $10.7 million or 6.0% to $189.5 million
at September 30, 1998 from $178.7 million at September 30, 1997. The increase
was due primarily to increases of $7.3 million or 4.9% in loans receivable and
$6.5 million or 30.7% in investments, which were partially offset by a decrease
of $3.4 million or 56.5% in cash and cash equivalents. The Company's total
liabilities increased $10.7 million or 7.1% due primarily to increases of $8.7
million or 6.1% in deposits and $1.6 million or 32.3% in borrowed funds.
Cash and Cash Equivalents. Cash and federal funds sold decreased $3.4 million
or 56.5% to $2.6 million at September 30, 1998 from $6.1 million at September
30, 1997. In addition to normal operating uses, the cash funds were used
primarily to fund additional investments, payment of dividends and purchase of
additional shares of Company common stock.
Investments. Investments increased $6.5 million or 30.7% to $27.7 million at
September 30, 1998 from $21.2 million at September 30, 1997. Proceeds from
maturing investments were primarily reinvested in new investments.
Loans Receivable. Loans receivable, net of unearned income, increased $7.3
million or 4.9% to $155.8 million at September 30, 1998 from $148.5 million at
September 30, 1997. The increase in loans was the result of increases of $8.0
million or 5.8% in real estate loans, $1.4 million or 11.9% in consumer loans
and $.5 million or 19.2% in commercial loans.
Nonperforming Assets. Total nonperforming assets decreased $58,000 or 14.3% to
$349,000 or .18% of total assets at September 30, 1998 compared to $407,000 or
.23% of total assets at September 30, 1997. At September 30, 1998,
nonperforming loans were $293,000 or .19% of total loans compared to $280,000
or .19% of total loans at September 30, 1997. Foreclosed real estate owned
decreased $71,000 or 55.9% to $56,000 at September 30, 1998 from $127,000 at
September 30, 1997. At September 30, 1998, the allowance for loan losses was
$1.0 million or .64% of total loans and 342.32% of nonperforming loans compared
to $1.1 million or .76% of total loans and 401.43% of nonperforming loans at
September 30, 1997. Net charge-offs were $21,000 for both fiscal years ended
September 30, 1998 and 1997.
Deposits. Deposits increased $8.7 million or 6.1% to $152.0 million at
September 30, 1998 from $143.2 million at September 30, 1997. The increase in
deposits was the result of increases of $7.1 million or 5.7% in certificates of
deposit, $1.0 million or 19.3% in savings accounts, $481,000 or 6.4% in money
market accounts and $149,000 or 2.3% in NOW accounts. The additional deposits
were used primarily to fund increased loan demand and additional investments.
Borrowed Funds. Total borrowings increased $1.6 million or 32.3% to $6.6
million at September 30, 1998 from $5.0 million at September 30, 1997.
Borrowings, from the FHLB of Dallas, were utilized to purchase and hold
previously purchased GNMA adjustable rate mortgage-backed securities.
Stockholders' Equity. Stockholders' equity remained at $27.4 million at
September 30, 1998, primarily the result of retained earnings which was
partially offset by the purchase of additional treasury shares at a cost of
$2.9 million. Net income increased $422,000 or 14.6% to $3.3 million for
fiscal 1998 compared to $2.9 million for fiscal 1997. The ratio of stock-
holders' equity to total assets was 14.5% at September 30, 1998 compared to
15.3% at September 30, 1997.
8
Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The
following table presents, for the periods indicated, the interest income and
rates earned on average interest-earning assets, the interest expense and rates
paid on average interest-bearing liabilities, and the net interest income and
net interest margin which is net interest income divided by average interest-
earning assets. Since interest-earning assets do not include any tax-exempt
securities except for applicable state income taxes, income and rates include
no adjustment for a tax-equivalent basis.
Year Ended September 30,
------------------------------------------------------------
1998 1997 1996
------------------- -------------------- -------------------
Average Income/ Average Income/ Average Income/
Balance Expense Balance Expense Balance Expense
Rate Rate Rate
($) ($) (%) ($) ($) (%) ($) ($) (%)
------------------- -------------------- -------------------
(Dollars in Thousands)
ASSETS
Loans receivable... 149,774 12,764 8.52 141,830 11,997 8.46 129,182 10,850 8.40
Investments........ 22,626 1,362 6.02 21,099 1,264 5.99 29,527 1,738 5.89
Mortgage-backed
securities........ 8,803 552 6.27 2,119 156 7.35 2,067 157 7.60
------- ------ ------- ------ ------- ------
Earning assets... 181,203 14,678 8.10 165,048 13,417 8.13 160,776 12,745 7.93
------ ------ ------
Nonearning assets.. 4,752 3,994 3,601
------- ------- -------
Total assets..... 185,955 169,042 164,377
======= ======= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Transaction and
savings accounts.. 20,377 601 2.95 20,661 559 2.70 20,243 553 2.73
Other time deposits 126,634 6,942 5.48 117,718 6,376 5.42 107,866 5,919 5.49
------- ------ ------- ------ ------- ------
Total deposits... 147,011 7,543 5.13 138,379 6,935 5.01 128,109 6,472 5.05
Borrowings......... 6,436 362 5.63 827 47 5.72 143 8 5.87
------- ------ ------- ------ ------- ------
Interest-bearing
liabilities..... 153,447 7,905 5.15 139,206 6,982 5.02 128,252 6,480 5.05
------ ------ ------
Noninterest-bearing
liabilities....... 4,601 2,976 3,420
------- ------- -------
Total liabilities 158,048 142,182 131,672
Equity 27,907 26,860 32,705
------- ------- -------
Total liabilities
and equity...... 185,955 169,042 164,377
======= ======= =======
Net interest income 6,773 6,435 6,265
===== ===== =====
Net interest spread 2.95 3.11 2.88
Net interest margin 3.74 3.90 3.90
9
Rate/Volume Analysis.
Rate/Volume Analysis. The following table describes the extent to which
changes in volume and changes in interest rates of interest-related assets and
liabilities have affected interest income and expense during the periods
indicated. Volume change is computed by multiplying the change in volume by the
prior year rate. Rate change is computed by multiplying the change in rate by
the prior year volume. Changes attributable to the combined impact of volume
and rate are allocated proportionately to the changes due to volume and the
changes due to rate.
Change Change
1998 from 1997 1997 from 1996
-------------------- --------------------
Increase(Decrease) Increase(Decrease)
Due to Due to
-------------------- --------------------
(Dollars in Thousands) Total Volume Rate Total Volume Rate
----- ------ ----- ----- ------ -----
Change in interest income:
Loans receivable.........$ 767 $ 681 $ 86 $1,147 $1,069 $ 78
Investments.............. 98 92 6 (474) (505) 31
Mortgage-backed securities 396 415 (19) (1) 4 (5)
----- ----- ----- ----- ----- -----
Total interest income... 1,261 1,188 73 672 568 104
----- ----- ----- ----- ----- -----
Change in interest expense:
Transaction and
savings accounts........ 42 (8) 50 6 13 (7)
Other time deposits...... 566 493 73 457 532 (75)
----- ----- ----- ----- ----- -----
Total deposits.......... 608 485 123 463 545 (82)
Borrowings............... 315 316 (1) 39 39 --
----- ----- ----- ----- ----- -----
Total interest expense.. 923 801 122 502 584 (82)
----- ----- ----- ----- ----- -----
Net interest income.....$ 338 $ 387 $ (49) $ 170 $ (16) $ 186
===== ===== ===== ===== ===== =====
10
Comparison of Results of Operations for Years Ended September 30, 1998 and 1997
General. The Company's net income was $3.3 million for fiscal 1998 compared to
$2.9 million for fiscal 1997. The increase of $422,000 or 14.6% during fiscal
1998 was primarily due to increases of $338,000 in net interest income and
$396,000 in noninterest income and a $100,000 credit to provision for loan
losses, all of which were partially offset by increases of $329,000 in
noninterest expense and $83,000 in income tax expense.
For fiscal 1998 and fiscal 1997, net income per common share was $2.03 and
$1.71, respectively (diluted $1.94 and $1.68, respectively). Return on average
assets was 1.78% and 1.71%, respectively, and return on average equity was
11.85% and 10.74%, respectively.
Net Interest Income. The Company's net interest income increased $338,000 or
5.3% to $6.8 million for fiscal 1998 compared to $6.4 million for fiscal 1997.
The increase was due to an increase of $1.3 million or 9.4% in interest income
which was partially offset by an increase of $923,000 or 13.2% in interest
expense. The increase in interest income was primarily due to an increase in
the average balance of interest earning assets. The increase in interest
expense was due to an increase in the average balance of interest bearing
liabilities and an increase in the average rate. For fiscal year 1998 compared
to fiscal year 1997, the net interest margin was 3.74% and 3.90%, respectively,
and the net interest spread was 2.95% and 3.11%, respectively.
Interest Income. During fiscal 1998 compared to fiscal 1997, total interest
income increased $1.3 million or 9.4% primarily due to an increase in average
balance. The average balance of total earning assets increased $16.2 million to
$181.2 million from $165.0 million and the average yield declined to 8.10% from
8.13%. The increase in total interest income was due to increases in income on
loans and income on investments. Interest income on loans increased $767,000 or
6.4% of which $681,000 was due to an increase in average balance and $86,000
was due to an increase in average yield. The increase in the average balance of
loans to $149.8 million from $141.8 million was due to increased loan demand
while the increase in the average yield to 8.52% from 8.46% primarily reflects
market interest rates and the result of sales of lower fixed rate loans during
the first half of fiscal 1998. Interest income on investments (including
mortgage-backed securities) increased $494,000 or 34.8% of which $507,000 was
due to an increase in average balance, partially offset by a decrease of
$13,000 due to a decline in average yield.
Interest Expense. During fiscal 1998 compared to fiscal 1997, total interest
expense increased $923,000 or 13.2% of which $801,000 was due to an increase in
average balance and $122,000 due to an increase in average rate. The average
balance of total interest-bearing liabilities increased $14.2 million to $153.4
million from $139.2 million and the average rate increased to 5.15% from 5.02%.
The increase in total interest expense was due primarily to an increase in
interest on deposits which increased $608,000 or 8.8% of which $485,000 was due
to an increase in average balance and $123,000 due to an increase in average
rate to 5.13% from 5.01%. Interest on borrowed funds increased $315,000 of
which $316,000 was due to an increase in average balance, partially offset by a
decrease of $1,000 due to a decline in the average rate to 5.63% from 5.72%.
11
Provision for Loan Losses. During fiscal 1998, the allowance for loan losses
was reduced by $100,000 with a credit to the provision for loan losses. The
adjustment reduced the amount of the unallocated reserve allowance. No charge
has been made to provision for loan losses since March 1995. During this time,
asset quality remained consistently favorable with a ratio of nonperforming
loans to total loans of .19%, .19%, and .15% at September 30, 1998, 1997 and
1996, respectively. Management believes that the current allowance for loan
losses is adequate based upon prior loss experience, the volume and type of
lending conducted by the Association, industry standards, past due loans and
the current economic conditions in the market area.
Noninterest Income. Noninterest income increased $396,000 or 52.5% to $1.15
million for fiscal 1998 compared to $755,000 for fiscal 1997. The increase was
primarily due to increases in gain on sale of loans, loan origination fees and
service charge income. See Note 16 of the Notes to the Consolidated Financial
Statements for comparison of other noninterest income items.
Noninterest Expense. Noninterest expense increased $329,000 or 12.6% to $2.9
million for fiscal 1998 compared to $2.6 million for fiscal 1997. The increase
was primarily due to increases in compensation and benefits expense and
occupancy expense. The increase in compensation and benefits was due to a
$167,000 or 15.5% increase in compensation and a $96,000 or 18.9% increase in
benefits. The increase in compensation expense was primarily due to the
addition of 4 employees - one in the fourth quarter of fiscal 1997, one in the
second quarter of fiscal 1998 and two in the third quarter of fiscal 1998. The
increase in benefits expense was due primarily to expenses related to the ESOP
and the employee and director stock benefit plans. See Note 16 of the Notes to
the Consolidated Financial Statements for comparison of other noninterest
expense items.
Income Taxes. Income tax expense amounted to $1.8 million for fiscal 1998 and
$1.7 million for fiscal 1997, resulting in effective tax rates of 35.1% and
37.1% respectively. The lower effective tax rate for 1998 was due to a $15,000
state tax refund, the $100,000 credit to provision for loan losses and the
increased fair market value of vested Management Recognition Plan shares. The
credit to provision for loan losses has the effect of tax free income since the
provision, for tax purposes, is based on the experience method rather than the
recorded provision amount. The Company's recorded expense for the vested
Management Recognition Plan shares is limited to the fair market value at the
date of award, but the allowable deduction, for tax purposes, is the fair
market value at the date of vesting. The vested value in excess of the award
value (an unrecorded, tax deductible, expense) was $202,000 in fiscal 1998
and $58,000 in fiscal 1997. The average award price is $14.50 per share and
the average vested value per share was $27.34 in fiscal 1998 and $16.08 in
fiscal 1997. See Note 10 of the Notes to the Consolidated Financial Statements.
Comparison of Results of Operations for Years Ended September 30, 1997 and 1996
General. The Company's net income was $2.9 million for fiscal 1997 compared to
$2.4 million for fiscal 1996. The increase of $483,000 or 20.1% during fiscal
1997 was primarily due to an increase of $170,000 in net interest income, an
increase of $2,000 in noninterest income and a decrease of $731,000 in
noninterest expense, all of which were partially offset by an increase in
income tax expense.
For fiscal 1997 and fiscal 1996, net income per common share was $1.71 and
$1.31, respectively (diluted $1.68 and $1.31, respectively). Return on average
assets was 1.71% and 1.46%, respectively, and return on average equity was
10.74% and 7.34%, respectively.
Net Interest Income. The Company's net interest income increased $170,000 or
2.7% to $6.4 million for fiscal 1997 compared to $6.3 million for fiscal 1996.
The increase was due to an increase of $672,000 or 5.3% in interest income
which was partially offset by an increase of $502,000 or 7.7% in interest
expense. The increase in interest income was due to an increase in both the
average balance of and average yield on interest earning assets while the
increase in interest expense was due to an increase in the average balance of
interest bearing liabilities, partially offset by a decline in the average
rate. For fiscal year 1997 compared to fiscal year 1996, the net interest
margin was 3.90% and 3.90%, respectively, and the net interest spread was
3.11% and 2.88%, respectively.
12
Interest Income. During fiscal 1997 compared to fiscal 1996, total interest
income increased $672,000 or 5.3% of which $568,000 was due to an increase in
average balance and $104,000 was due to an increase in average yield. The
average balance of total earning assets increased $4.3 million to $165.0 million
from $160.8 million and the average yield increased to 8.13% from 7.93%. The
increase in total interest income was due to an increase in income on loans,
partially offset by a decrease in income on investments. Interest income on
loans increased $1.1 million or 10.6% of which $1.0 million was due to an
increase in average balance and $.1 million was due to an increase in average
yield. The increase in the average balance of loans to $141.8 million from
$129.2 million was due to increased loan demand while the increase in the
average yield to 8.46% from 8.40% primarily reflects the increase in market
interest rates, particularly during the first half of fiscal 1997. Interest
income on investments decreased $474,000 or 27.3% of which $505,000 was due
to a decrease in average balance, partially offset by an increase of $31,000
due to an increase in average yield.
Interest Expense. During fiscal 1997 compared to fiscal 1996, total interest
expense increased $502,000 or 7.7% of which $584,000 was due to an increase in
average balance, partially offset by $82,000 due to a decline in average rate.
The average balance of total interest-bearing liabilities increased $10.9
million to $139.2 million from $128.3 million and the average rate declined to
5.02% from 5.05%. The increase in total interest expense was due primarily to
an increase in interest on deposits which increased $463,000 or 7.2% of which
$545,000 was due to an increase in average balance, partially offset by a
decrease of $82,000 due to a decline in average rate to 5.01% from 5.05%.
Provision for Loan Losses. No provisions were made for loan losses during
fiscal 1997 and fiscal 1996. The $177,000 provision for loan losses during
fiscal 1995 was due primarily to management's assessment at such time of an
increased risk of loss in light of a proposed closing of a major local employer
which employed approximately 2,500 persons in 1995 and approximately 1,600
persons in 1997. However, the Base Realignment and Closure Commission removed
the depot from the closure list but proposed a transfer of certain operations
to another depot. The reduction due to base realignments was completed October
1997 and resulted in a workforce reduction of approximately 600 employees.
Noninterest Income. Noninterest income increased $2,000 or .3% to $755,000 for
fiscal 1997 compared to $753,000 for fiscal 1996. Such increase was primarily
due to increases in service charge income and gain on sale of loans, and
decreases of loan origination fees and various other noninterest income items.
See Note 16 of the Notes to the Consolidated Financial Statements for
comparison of other noninterest income items.
Noninterest Expense. Noninterest expense decreased $731,000 or 21.9% to $2.6
million for fiscal 1997 compared to $3.3 million for fiscal 1996. The decrease
was primarily due to decreases in SAIF deposit insurance premium and legal and
professional expense, which were partially offset by an increase in compensa-
tion and benefits expense. The increase in compensation and benefits was due
to a $91,000 or 9.3% increase in compensation and a $215,000 or 42.9% increase
in benefits. The increase in compensation expense was the result of adding two
additional staff members and normal salary and merit increases. The increase
in benefits expense was due primarily to expenses related to the ESOP and the
employee and director stock benefit plans. See Note 16 of the Notes to the
Consolidated Financial Statements for comparison of other noninterest expense
items.
Income Taxes. Income tax expense amounted to $1.7 million for fiscal 1997 and
$1.3 million for fiscal 1996, resulting in effective tax rates of 37.1% and
34.8% respectively. See Note 10 of the Notes to the Consolidated Financial
Statements.
13
Liquidity and Capital Resources
The Association's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Association's
primary sources of funds are deposits, amortization, prepayments and maturities
of outstanding loans, sales of loans, maturities of investment securities and
other short-term investments and funds provided from operations. While
scheduled loan amortization and maturing investment securities and short-term
investments are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions and competition. The Association manages the pricing of its deposits
to maintain a steady deposit balance. In addition, the Association invests
excess funds in overnight deposits and other short-term interest-earning assets
which provide liquidity to meet lending requirements. The Association has
generally been able to generate enough cash through the retail deposit market,
its traditional funding source, to offset the cash utilized in lending and
investing activities. As an additional source of funds, the Association may
borrow from the FHLB of Dallas and has utilized this source of funds with
borrowings of $6.6 million, $5.0 million and $2.9 million at September 30,
1998, 1997 and 1996, respectively.
All savings institutions are required to maintain an average daily balance of
liquid assets equal to a certain percentage of the sum of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less. The liquidity requirement may vary from time to time (between 4% and
10%) depending upon economic conditions and savings flows of all savings
institutions. At the present time, the required minimum liquid asset ratio is
4%. At September 30, 1998, the Association's liquidity ratio was 11.30%.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, the Association maintains
a strategy of investing in various lending products such as single-family
residential loans. The Association uses its sources of funds primarily to meet
its ongoing commitments, to pay maturing savings certificates and savings
withdrawals and fund loan commitments. At September 30, 1998, the total
approved loan commitments outstanding, excluding construction loans, amounted
to $5.7 million and the unadvanced portion of construction loans approximated
$5.8 million. At September 30, 1998, certificates of deposit scheduled to
mature in one year or less totaled $96.8 million and investment securities
scheduled to mature in one year or less totaled $2.1 million. Management
believes that a significant portion of maturing deposits will remain with the
Association.
As of September 30, 1998, the Association's regulatory capital was well in
excess of all applicable regulatory requirements. See "Selected Financial
Data" and Note 14 of the Notes to the Consolidated Financial Statements.
14
Recent Accounting Developments
In October 1995, the FASB issued SFAS no. 123, "Accounting for Stock-Based
Compensation", requiring companies to provide new disclosures about employee
stock options in the form of a note to the financial statements based on their
fair value at the date of grant. Companies are permitted to switch to the fair
value method to record compensation cost for new and modified employee stock
options. Since options granted to employees generally are not traded on an
exchange, companies are required to use recognized option pricing models to
estimate the fair values. Valuations of option pricing models depend on such
factors as the relationship of the underlying stock's price to the price of the
option, expected dividend yields, expected volatility of the Company's stock
price, the expected level of risk-free interest rates and the expected time
remaining until the option expires. Valuations of the same pricing model could
change if different assumptions were made. Option values are dependent on the
future performance of the Company's stock and overall stock market conditions
and there can be no assurance that the calculated values from an option pricing
model will be realized. Companies are, however, allowed to measure compensation
cost of all employee stock compensation plans using the intrinsic value based
method of accounting. Companies that elect to remain with the existing
accounting are required to make disclosures as if this statement had been
adopted. The new disclosures are required in financial statements for fiscal
years beginning after December 15, 1995, with earlier application permitted.
The disclosures must include the proforma effects of options and other awards
granted in fiscal years beginning after December 15, 1994. The Company, as
permitted, has elected not to adopt the fair value accounting provisions of
SFAS 123 and will continue to apply APB Opinion 25 and related Interpretations
in accounting for plans and provide the required proforma disclosures of
SFAS 123.
In February 1997, the FASB issued final standards on earnings per share ("EPS")
under two new pronouncements, Statement of Financial Accounting Standards No.
128 and SFAS 129 which include standards for computing and presenting EPS and
for disclosing information about an entity's capital structure. The standards
for EPS apply to entities with publicly held common stock or potential common
stock, while the standards for disclosure about capital structure apply to all
entities. The standards eliminate the presentation of primary EPS and require
presentation of basic EPS, the principal difference being that common stock
equivalents will not be considered in the computation of basic EPS. The
standards also require dual presentation of basic and diluted EPS on the face
of the income statement for all entities with complex capital structures and
require a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Basic EPS would include no dilution and would be computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS would reflect the potential
dilution that could occur if the potential common shares were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. The standards require restatement
of all prior-period EPS data presented. SFAS 128 and SFAS 129 are effective
for periods ending after December 15, 1997 and earlier application is not
permitted.
15
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
This statement establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. It requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income (including, for example, unrealized gains and losses on
available for sale securities) be reported in a financial statement that is
displayed with the same prominence as other financial statements. It requires
that an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement, and (b) display the accumulated balance of
other comprehensive income separately from net worth and additional paid-in
capital in the equity section of a statement of financial position. SFAS No.
130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Adoption of this statement is not expected
to have a material effect on the Company's consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". This statement requires disclosures for
each segment that are similar to those required under current standards with
the addition of quarterly disclosure requirements and a finer partitioning of
geographic disclosures. It requires limited segment data on a quarterly basis.
It also requires geographic data by country, as opposed to broader geographic
regions as permitted under current standards. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997, with earlier application
permitted. Since the statement is limited to additional disclosure, adoption
of the statement will not have an impact on the Company's financial condition
or results of operation.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits". This statement revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. It standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful as
they were when prior FASB statements were issued. This statement is effective
for fiscal years beginning after December 15, 1997. Since the statement is
disclosure related, it will not have an impact on the Company's financial
condition or results of operations.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". This statement standardizes the accounting
for derivative instruments, including certain derivative instruments embedded
in other contracts. Entities are required to carry all derivative instruments
in the statement of financial position at fair value. The accounting for
changes in the fair value (that is, gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and, if so, on the reason for holding it. SFAS No. 133 is
effective for financial statements issued for periods beginning after June 15,
1999. Adoption of this statement is not expected to have a material effect on
the Company's financial condition or results of operations.
16
Recent Legislation
Deposits of the Association are currently insured by the Savings Association
Insurance Fund ("SAIF"). Both the SAIF and the Bank Insurance Fund ("BIF"),
the federal deposit insurance fund that covers commercial bank deposits, are
required by law to attain and thereafter maintain a reserve ratio of 1.25% of
insured deposits. The previously underfunded status of the SAIF resulted in
the introduction of federal legislation intended to, among other things,
recapitalize the SAIF and address the resulting premium disparity between the
two insurance funds. On September 30, 1996, The Omnibus Appropriations Act was
signed into law. The legislation authorized a one-time charge on SAIF insured
institutions in the amount of .657 dollars for every one hundred dollars of
assessable deposits. Additional provisions of the Act include new BIF and SAIF
premiums and the merger of BIF and SAIF. The new BIF and SAIF premiums will
include a premium for repayment of the Financing Corporation ("FICO") bonds
plus any regular insurance assessment, currently nothing for the lowest risk
category institutions. Until full pro-rata FICO sharing is in effect, the FICO
premiums for BIF and SAIF will be 1.3 and 6.4 basis points, respectively,
beginning January 1, 1997. Full pro-rata FICO sharing is to begin no later
than January 1, 2000. BIF and SAIF are to be merged on January 1, 1999,
provided the bank and savings association charters are merged by that date.
As a result of this legislation, the Association's assessment amounted to
$835,000 which was included in expense in September, the fourth quarter of
fiscal 1996, and paid in November, the first quarter of fiscal 1997. While
the one-time special assessment resulted in a significant reduction of the
fiscal 1996 earnings, the resulting lower premiums benefited the fiscal 1998
and 1997 earnings and will continue to benefit future years earnings.
In August 1996, the Small Business Job Protection Act was signed into law.
This act repealed the percentage method of computing the bad debt deduction
for tax years beginning after December 31, 1995. The state of Arkansas
repealed the deduction effective for years beginning after January 1, 1997.
If certain conditions apply, the Company would have to include in income pre-
vious bad debt deductions. For federal tax purposes the conditions do not
apply, and so long as the Association (the Company's subsidiary) continues to
qualify as a thrift or a bank no repayment of the tax on prior bad debt deduct-
ions will be required. Should the Association fail to qualify as a thrift or
bank, the tax would have to be repaid ratably over a six year period. The
Association is currently in no jeopardy of failing to qualify as a thrift or
bank. The Company will have to repay tax on approximately $1.5 million of bad
debt deductions for state tax purposes. The Company has made provision of
$89,000 for this tax and expects this repayment to have no further effect on
income.
In July, 1997, congress passed the 1997 Tax Law which contained both individual
and business tax provisions. Although the majority of the law's provisions
relate to individuals, it also contains several business related provisions.
Business related provisions include extensions of special tax credits that were
scheduled to expire in 1997, a new welfare-to-work tax credit, modification of
alternative minimum tax provisions, a change in the net operating
carryforward/carryback periods, new rules affecting IRAs and modifications of
rules affecting tax-qualified retirement plans and certain other retirement
savings vehicles. The 1997 Tax Law will have no material impact on the
Company's financial condition or results of operations.
Impact of Inflation and Changing Prices
The financial statements and related financial data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in relative purchasing power
over time due to inflation.
Unlike most industrial companies, virtually all of the Company's and the
Association's assets and liabilities are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation.
17
REPORT OF INDEPENDENT AUDITORS
November 16, 1998
The Board of Directors and Stockholders
Texarkana First Financial Corporation
We have audited the accompanying consolidated statements of financial
condition of Texarkana First Financial Corporation and subsidiary as of
September 30, 1998 and 1997, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each of the
years in the three-year period ended September 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Texarkana
First Financial Corporation and subsidiary as of September 30, 1998 and 1997,
and the results of their operations and their cash flows for each of the years
in the three-year period ended September 30, 1998, in conformity with
generally accepted accounting principles.
Wilf & Henderson, P. C.
Certified Public Accountants
18
TEXARKANA FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands, Except Share Data)
At September 30,
1998 1997
-------- --------
ASSETS
Cash and cash equivalents
Cash and due from banks $ 2,341 $ 1,147
Interest-bearing deposits in other banks 249 3,331
Federal funds sold 45 1,575
-------- --------
Total cash and cash equivalents 2,635 6,053
Investment securities available for sale 25,651 18,767
Mortgage-backed securities held to maturity 849 1,293
Federal Home Loan Bank stock 1,185 1,116
Loans receivable 155,781 148,471
Allowance for loan losses (1,003) (1,124)
Accrued interest receivable 1,331 1,176
Foreclosed real estate held for sale, net 56 127
Premises and equipment, net 2,387 2,382
Other assets 579 449
-------- --------
Total assets $189,451 $178,710
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $151,955 $143,207
Advances from borrowers for taxes and insurance 2,070 1,920
Borrowed funds 6,600 4,989
Accrued federal income tax 330 302
Accrued state income tax 194 216
Accrued expenses and other liabilities 886 696
-------- --------
Total liabilities 162,035 151,330
-------- --------
Commitments and contingencies -- --
-------- --------
Common stock, $0.01 par value;
15,000,000 shares authorized;
1,983,750 shares issued and outstanding 20 20
Additional paid-in capital 13,627 13,485
Common stock acquired by employee benefit plans (1,831) (2,208)
Treasury stock, at cost; 307,758 shares and
196,745 shares at September 30, 1998
and September 30, 1997, respectively (5,996) (3,103)
Unrealized gain on securities
available for sale, net of tax 127 81
Retained earnings substantially restricted 21,469 19,105
-------- --------
Total stockholders' equity 27,416 27,380
-------- --------
Total liabilities and stockholders' equity $189,451 $178,710
======== ========
See accompanying notes to consolidated financial statements.
19
TEXARKANA FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
For the years ended September 30,
1998 1997 1996
------- ------- -------
Interest income:
Loans:
First mortgage loans $11,401 $10,782 $ 9,962
Consumer and other loans 1,363 1,215 888
Investments - taxable 1,362 1,264 1,738
Mortgage-backed and related securities 552 156 157
------- ------- -------
Total interest income 14,678 13,417 12,745
------- ------- -------
Interest expense:
Deposits 7,543 6,935 6,472
Borrowed funds 362 47 8
------- ------- -------
Total interest expense 7,905 6,982 6,480
------- ------- -------
Net interest income 6,773 6,435 6,265
Provision for loan losses (100) -- --
------- ------- -------
Net interest income after
provision for loan losses 6,873 6,435 6,265
------- ------- -------
Noninterest income:
Gain on sale of repossessed assets, net 6 24 21
Loan origination and commitment fees 435 283 336
Gain on sale of mortgage loans, net 263 32 --
Gain (loss) on sale of securities
available for sale, net -- -- (3)
Other non interest income 447 416 399
------- ------- -------
Total noninterest income 1,151 755 753
------- ------- -------
Noninterest expense:
Compensation and benefits 2,081 1,788 1,482
Occupancy and equipment 222 173 168
Federal insurance premiums 90 123 1,136
Other 540 520 549
------- ------- -------
Total noninterest expense 2,933 2,604 3,335
------- ------- -------
Income before income taxes 5,091 4,586 3,683
Income taxes 1,785 1,702 1,282
------- ------- -------
Net income $ 3,306 $ 2,884 $ 2,401
======= ======= =======
Earnings per common share $2.03 $1.71 $1.31
Earnings per common share, assuming dilution $1.94 $1.68 $1.31
Weighted average number of shares 1,627,087 1,686,598 1,832,494
Weighted average number of shares,
assuming dilution 1,708,687 1,720,070 1,833,786
See accompanying notes to consolidated financial statements.
20
TEXARKANA FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
Unrealized
Stock Gain
Acquired (Loss)
By on AFS
Common Paid-in Benefit Treasury Secur- Retained Total
Stock Capital Plans Stock ities Earnings Equity
----- ------- -------- ------- ----- -------- -------
At October 1, 1995 $20 $19,134 $(1,353) $ -- $ 8 $14,999 $32,808
ESOP shares committed
to be released -- 67 139 -- -- -- 206
Common stock acquired
for MRP plans -- -- (933) -- -- -- (933)
Purchase treasury stock -- -- -- (1,567) -- -- (1,567)
Unrealized (loss) on
securities available
for sale -- -- -- -- (16) -- (16)
Dividends paid
from earnings -- -- -- -- -- (326) (326)
Capital distributions -- (6,149) -- -- -- -- (6,149)
Net income -- -- -- -- -- 2,401 2,401
--- ------- ------- ------- ---- ------- -------
At September 30, 1996 $20 $13,052 $(2,147) $(1,567) $ (8) $17,074 $26,424
Common stock acquired
by benefit plans -- 396 (454) -- -- -- (58)
ESOP shares committed
to be released -- 37 210 -- -- -- 247
MRP stock amortization -- -- 183 -- -- (10) 173
Purchase treasury stock -- -- -- (1,536) -- -- (1,536)
Unrealized gain on
securities available
for sale -- -- -- -- 89 -- 89
Dividends paid
($.505 per share) -- -- -- -- -- (843) (843)
Net income -- -- -- -- -- 2,884 2,884
--- ------- ------- ------- ---- ------- -------
At September 30, 1997 $20 $13,485 $(2,208) $(3,103) $ 81 $19,105 $27,380
ESOP shares committed
to be released -- 142 178 -- -- -- 320
MRP stock amortization -- -- 199 -- -- (10) 189
Stock options exercised -- -- -- 9 -- (1) 8
Purchase treasury stock -- -- -- (2,902) -- -- (2,902)
Unrealized gain on
securities available
for sale -- -- -- -- 46 -- 46
Dividends paid
($.58 per share) -- -- -- -- -- (931) (931)
Net income -- -- -- -- -- 3,306 3,306
--- ------- ------- ------- ---- ------- -------
At September 30, 1998 $20 $13,627 $(1,831) $(5,996) $127 $21,469 $27,416
=== ======= ======= ======= ==== ======= =======
See accompanying notes to consolidated financial statements.
21
TEXARKANA FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For the years ended September 30,
1998 1997 1996
------- ------- -------
Cash Flows From Operating Activities:
Interest and dividends received $14,452 $13,341 $12,478
Miscellaneous income received 1,012 693 681
Interest paid (3,389) (2,817) (2,875)
Cash paid to suppliers and employees (2,145) (2,803) (2,242)
Cash from REO operations 23 51 49
Cash paid for REO operations (27) (16) (19)
Cash from loans sold 10,678 1,392 1,566
Cash paid for loans originated to sell (10,678) (1,392) (1,566)
Income taxes paid (1,892) (1,465) (1,674)
------- ------- -------
Net Cash Provided By Operating Activities 8,034 6,984 6,398
------- ------- -------
Cash Flows From Investing Activities:
Proceeds from call and maturity
of investment securities 14,450 5,500 11,500
Proceeds from sale of investment securities
available for sale -- 1,399 1,387
Purchases of securities available for sale (21,262)(10,716) (9,593)
Collection of principal on
mortgage-backed securities 444 340 762
Recovery of investment in service bureau -- -- 85
Purchase of fixed assets (116) (457) (352)
Sale of fixed assets -- 3 --
Net (increase) in loans (7,586)(11,797)(13,623)
Proceeds from sale of REO and other REO recoveries 350 121 72
Cash paid for REO held for resale (20) (59) (4)
------- ------- -------
Net Cash Used In Investing Activities (13,740)(15,666) (9,766)
------- ------- -------
Cash Flows From Financing Activities:
Net increase (decrease) in savings,
demand deposits, and certificates of deposit 4,221 6,087 4,426
Net increase (decrease) in escrow funds 149 56 (79)
Purchase of stock for employee benefit plans -- (59) (933)
Purchase of treasury stock (2,788) (1,536) (1,567)
Treasury shares sold 8 -- --
Dividend and return of capital distributions (913) (804) (6,263)
Funds borrowed 97,462 16,635 2,815
Repayment of funds borrowed (95,851)(14,504) (19)
------- ------- -------
Net Cash Provided By (Used In)
Financing Activities 2,288 5,875 (1,620)
------- ------- -------
Net Increase (Decrease) In Cash and Cash Equivalents (3,418) (2,807) (4,988)
Cash and Cash Equivalents, beginning of year 6,053 8,860 13,848
------- ------- -------
Cash and Cash Equivalents, end of year $ 2,635 $ 6,053 $ 8,860
======= ======= =======
See accompanying notes to consolidated financial statements.
22
SUPPLEMENTAL INFORMATION CONCERNING CASH FLOWS
For the years ended September 30,
1998 1997 1996
------- ------- -------
Reconciliation of net income to cash provided
by operating activities:
Net income $ 3,306 $ 2,884 $ 2,401
------- ------- -------
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 119 94 81
Amortization of discounts and premiums (2) (44) (43)
Amortization of common stock
acquired by benefit plans 598 492 206
Amortization of deferred loan fees (38) (17) (18)
Amortization of mortgage servicing rights 17 2 --
(Gain) loss on sales of real estate owned (5) (10) (11)
(Gain) loss on investment securities
available for sale -- -- 3
(Gain) loss on sale of interest
in service center -- -- (33)
(Recovery) of or provision for loan losses (100) -- --
Interest expense credited to certificates 4,527 4,047 3,693
Dividend and interest income
added to investments (69) (64) (102)
Loan fees deferred 44 21 13
Mortgage servicing rights capitalized (169) (30) --
Changes in assets and liabilities:
(Increase) decrease in interest receivable (155) 31 (146)
Increase (decrease) in accrued interest payable (12) 118 (88)
Increase (decrease) in income tax payable (106) 238 (392)
Net increase (decrease) in other
receivables and payables 79 (778) 834
------- ------- -------
Total adjustments 4,728 4,100 3,997
------- ------- -------
Net cash provided by operations $ 8,034 $ 6,984 $ 6,398
======= ======= =======
Supplemental schedule of noncash investing
and financing activities:
Acquisition of real estate
in settlement of loans $ 310 $ 248 $ 161
Loans made to finance sale of REO 60 134 32
Transfer of REO to real estate
held for investment -- -- 320
FHLB stock dividends not redeemed 69 64 62
Transfer of securities from held to maturity
to available for sale -- -- 16,679
See accompanying notes to consolidated financial statements.
23
Note 1 - Summary of Significant Accounting Policies
Conversion to Capital Stock Form of Ownership
On February 22, 1995, the Board of Directors of First Federal Savings and Loan
Association of Texarkana (the "Association") adopted a Plan of Conversion to
convert from a federally chartered mutual savings and loan to a federally
chartered stock savings and loan with the concurrent formation of Texarkana
First Financial Corporation (the "Company"), a unitary savings and loan
holding company. The Conversion was completed on July 7, 1995. Texarkana
First Financial Corporation issued 1,983,750 shares of its common stock in a
public offering to the Association's eligible depositors and borrowers and the
Texarkana First Financial Corporation Employee Stock Ownership Plan (the
"ESOP) and resulted in proceeds to the Company of $17,755 net of $694 of costs
associated with the Conversion.
Business
The Company's principal subsidiary, First Federal Savings and Loan Association
of Texarkana, is a federally-chartered stock savings and loan conducting
business from its main office in Texarkana, Arkansas and from four branch
offices located in Arkansas.
The Company is subject to competition from other financial institutions and
other companies that provide financial services. The Company and the
Association are subject to the regulations of certain federal agencies and
undergo periodic examinations by those regulatory authorities.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
the Association. All significant intercompany transactions have been
eliminated in consolidation.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. Additionally, certain
reclassifications have been made in order to conform with the current year's
presentation.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported values of assets and
liabilities as of the date of the statement of financial condition and
revenues and expenses for the period. Actual results could differ
significantly from those estimates. Material estimates that are particularly
susceptible to significant change in the near-term relate to the determination
of the allowance for loan losses, the valuation of other real estate owned,
and the valuation of deferred tax assets as well as the effect of prepayments
on premiums and discounts associated with investments and mortgage-related
securities. Management believes that the allowance for loan losses, the
valuations of other real estate owned and deferred tax assets are adequate,
and that the effect of prepayments on premiums and discounts associated with
investments and mortgage-related securities has been adequately evaluated.
Various agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses and valuation of
other real estate owned.
Cash
For purposes of the statement of cash flows, cash and cash equivalents include
cash and interest-bearing deposits, federal funds sold, and all highly liquid
debt instruments with original maturities when purchased of three months or
less.
24
Note 1 - Summary of Significant Accounting Policies - continued
Assets Available for Sale
Included in assets available for sale are any investments which the Company
believes may be involved in interest rate risk, liquidity, or other
asset/liability management decisions which might reasonably result in such
assets not being held until maturity. Investments available for sale are
carried at fair value with net unrealized gains and losses included, net of
income tax, in stockholders' equity.
During the year ended September 30, 1997 the company started a policy of using
Federal Home Loan Bank (FHLB) advances to purchase Government National
Mortgage Association (GNMA) adjustable rate mortgages (ARMS). The Company
structures the ARMS so that a portion of the portfolio reprices quarterly to
offset any rise in the interest rate charged by the FHLB. The ARMS will be
liquidated to pay off the advances should the cost of borrowing exceed the
return on the ARMS.
Investments and Mortgage-Related Securities
Investments and mortgage-related securities, including equity securities that
are not readily marketable, are stated at cost, adjusted for the amortization
of premiums and the accretion of discounts using a method which approximates
level yield. Management has the ability and the intent to hold such
securities until maturity. The Company is required to maintain stock in the
Federal Home Loan Bank of Dallas ("FHLB") in an amount equal to 1% of mortgage
loans secured by residential property. Such stock is carried by the Company
at cost.
Loans Receivable
Loans held to maturity are stated at the amount of the unpaid principal
balance net of capitalized loan origination fees and certain direct
origination costs. Loan fees in excess of the direct cost of originating the
loan that result in income in excess of the market rate are deferred and taken
into income over the contractual life of the loan on a level yield basis.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level that management
considers adequate to provide for potential losses based upon evaluation of
known and inherent risks in the loan portfolio, past loss experience, current
economic conditions, and other relevant factors. While management uses the
best information available to make such evaluations, future adjustments to the
allowance may be necessary if economic conditions differ substantially from
the assumptions used in making the evaluation. In addition, various agencies
as an integral part of their examination process, periodically review the
allowance for loan losses. Such agencies may require the Company to recognize
additions to the allowance for loan losses based on their judgments of
information that is available to them at the time of their examination.
Accrued Interest
Interest on loans is credited to income as it is earned. Generally, interest
income is not accrued for loans delinquent 90 days or greater. Payments
received on nonaccrual and impaired loans are applied to the outstanding
principal balance. The Company does not recognize interest on impaired loans.
Foreclosed Real Estate Held for Sale
Real estate acquired through foreclosure is classified as other real estate
owned. Other real estate owned is carried at the lower of cost or fair value,
less estimated selling costs. Fair value is generally determined through the
use of independent appraisals. In certain cases, internal cash flow analysis
are used as the basis for fair value, if such amounts are lower than the
appraised values.
25
Note 1 - Summary of Significant Accounting Policies - continued
Premises and Equipment
Premises and equipment are carried at cost. Depreciation and amortization are
generally computed on the straight-line method. The estimated useful lives
used to compute depreciation and amortization are 40 to 50 years for buildings
and 5 to 10 years for furniture and equipment. The cost of maintenance and
repairs is charged to expense as incurred. Significant renewals and
improvements are capitalized.
Mortgage Servicing Rights
Effective October 1, 1996, the Company adopted Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 122
"Accounting for Mortgage Servicing Rights." This standard requires the
Company to recognize servicing rights as assets, regardless of how such assets
were acquired. Additionally, the Company is required to assess the fair value
of these assets at each reporting date to determine impairment. Mortgage
servicing rights are being amortized on a straight line basis over periods not
exceeding 8 years.
Income Taxes
Deferred tax assets and liabilities are recognized for the future consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets are recognized for future deductible temporary differences.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Earnings Per Common Share
In December 1997, the Company adopted the provisions of SFAS Statement No.
128, "Earnings per Share". The Statement specifies the computation,
presentation, and disclosure requirements for earnings per share for entities
with publicly held common stock. It replaces the presentation of primary
earnings per share with a presentation of earnings per common share and fully
diluted earnings per share with earnings per common share - assuming dilution.
All earnings per share data is stated to reflect the adoption of the
Statement.
Earnings per common share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Earnings per
share - assuming dilution is computed by increasing the weighted average
number of common shares outstanding during the period by the number of
additional common shares that would have been outstanding if all dilutive
potential common shares had been issued. Dilutive potential common shares of
the Company include the Employees' and the Directors' stock option plans.
Employee Stock Ownership Plan (ESOP)
The Company accounts for its ESOP in accordance with Statement of Position 93-
6, "Employers' Accounting For Employee Stock Ownership Plans", which requires
the Company to recognize compensation expense equal to the fair value of the
ESOP shares during the periods in which they become committed to be released.
To the extent that the fair value of ESOP shares differs from the cost of such
shares, this differential will be charged or credited to equity. Management
expects the recorded amount of expense to fluctuate as continuing adjustments
are made to reflect changes in the fair value of the ESOP shares. ESOP shares
are considered outstanding as they are committed to be released for purposes
of computing earnings per share
26
Note 1 - Summary of Significant Accounting Policies - continued
Stock - Based Compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-based
Compensation" (SFAS 123). This statement encourages, but does not require,
the adoption of fair value accounting for stock based compensation to
employees. The Company, as permitted, has elected not to adopt the fair value
accounting provisions of SFAS 123, and has instead continued to apply APB
Opinion 25 and related interpretations in accounting for plans and provide the
required proforma disclosures of SFAS 123.
Impact of New Accounting Standards
The FASB issued SFAS No. 130, "Reporting Comprehensive Income," effective for
fiscal years beginning after December 15, 1997, with earlier implementation
allowed. The new standard requires an entity to report and display
comprehensive income and its components. The Company's comprehensive income
will include net income plus net unrealized gain or loss on available for sale
securities.
The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," effective for fiscal years beginning after December 15,
1997, with earlier implementation allowed. The new standard specifies revised
guidelines for determining an entity's operating segments and the type and
level of financial information to be disclosed.
The FASB issued SFAS No. 132, "Employer's Disclosures about Pensions and Other
Post Retirement Benefits," effective for fiscal years beginning after December
15, 1997, with earlier implementation encouraged. This Statement revises
employers' disclosures about pensions and other post retirement benefit plans.
The Statement does not change the measurement or recognition of these plans.
The FASB issued FASB No. 133, "Accounting for Derivative Instruments and
Hedging Activities," effective for fiscal quarters of all fiscal years
beginning after June 15, 1999, with earlier application encouraged. The
Statement establishes accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities.
The Company opted to delay adoption of these statements until required. The
adoption of these statements is not expected to have a material impact on
financial conditions, results of operations, or cash flows reported by the
Company.
Note 2 - Debt and Equity Securities
Assets available for sale at September 30, 1998 consisted of the following:
September 30, 1998
-------------------------------
Unrealized
Amortized ------------- Fair
Cost Gains Losses Value
------- ----- ------ -------
U. S. Government and agencies debt securities $17,106 $309 $ -- $17,415
Government National Mortgage Association ARM's 7,378 -- 58 7,320
Federal National Mortgage Association 578 3 -- 581
Midwest Financial Institutions Trust, Series 3 396 -- 61 335
------- ----- ----- -------
$25,458 $312 $119 $25,651
======= ==== ==== =======
At September 30, 1998 securities totaling $2,350 were pledged to secure
municipal jumbo certificates of deposit. There were no sales of available for
sale securities during the year ended September 30, 1998.
27
Note 2 - Debt and Equity Securities - continued
Assets available for sale at September 30, 1997 consisted of the following:
September 30, 1998
-------------------------------
Unrealized
Amortized ------------- Fair
Cost Gains Losses Value
------- ----- ------ -------
U. S. Government and agencies debt securities $13,184 $140 $ 17 $13,307
Government National Mortgage Association ARM's 5,460 7 7 5,460
------- ----- ----- -------
$18,644 $147 $ 24 $18,767
======= ==== ==== =======
Securities to be held to maturity at September 30, 1998 and 1997 consisted of
the following:
September 30, 1998
-------------------------------
Unrealized
Amortized ------------- Fair
Cost Gains Losses Value
------- ----- ------ -------
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation $ 437 $ 15 $ -- $ 452
Federal National Mortgage Association 412 4 -- 416
Equity securities:
Federal Home Loan Bank Stock 1,185 -- -- 1,185
------- ----- ----- -------
$ 2,034 $ 19 $ -- $ 2,053
======= ==== ==== =======
September 30, 1998
-------------------------------
Unrealized
Amortized ------------- Fair
Cost Gains Losses Value
------- ----- ------ -------
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation $ 588 $ 31 $ -- $ 619
Federal National Mortgage Association 705 6 -- 711
Equity securities:
Federal Home Loan Bank Stock 1,116 -- -- 1,116
------- ----- ----- -------
$ 2,409 $ 37 $ -- $ 2,446
======= ==== ==== =======
The scheduled maturities of securities available for sale and held to
maturity, excluding equity securities, at September 30, 1998 follows.
Mortgage-backed securities are allocated among periods based on date of final
payoff.
Available for sale Held to maturity
------------------ ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
Due in one year or less $ 896 $ 836 $ -- $ --
Due from one to five years 13,110 13,340 412 416
Due from five to ten years 2,996 3,064 437 452
Due after ten years 8,456 8,411 -- --
------- ------- ----- -----
$25,458 $25,651 $ 849 $ 868
======= ======= ===== =====
28
Note 3 - Accrued Interest Receivable
Accrued interest at September 30, 1998 and 1997 is summarized as follows:
September 30,
-------------------
1998 1997
-------- --------
Investment securities available for sale $ 248 $ 164
Mortgage-backed securities held to maturity 9 13
Loans receivable 1,074 999
-------- --------
$ 1,331 $ 1,176
========= ========
Note 4 - Loans Receivable
Loans receivable at September 30, 1998 and 1997 consist of the following:
September 30,
-------------------
1998 1997
-------- --------
Real estate loans:
One-to-four family $105,369 $105,163
Multi-family 1,582 806
Nonresidential real estate and land 25,517 25,889
Construction residential 10,501 4,916
Construction commercial 2,499 704
-------- --------
Total real estate loans 145,468 137,478
Commercial loans 2,841 2,384
Consumer loans 13,394 11,966
-------- --------
Total loans 161,703 151,828
Less: Loans in process 5,801 3,241
Deferred fees and discounts 121 116
-------- --------
Net loans $155,781 $148,471
======== ========
Nonaccruing and renegotiated loans at September 30, 1998, 1997, and 1996 were
$0, $0, and $68, respectively. The Company is not committed to lend additional
funds to debtors whose loans have been modified. Interest income that would
have been recorded under the original terms of such loans and the interest
income actually recognized for the periods is as follows:
September 30,
------------------------------
1998 1997 1996
-------- -------- --------
Contractual interest income $ -- $ -- $ 6
Interest income recognized -- -- (2)
-------- -------- --------
Interest income foregone $ -- $ -- $ 4
======== ======== ========
The activity in the allowance for loan losses is summarized as follows:
September 30,
------------------------------
1998 1997 1996
-------- -------- --------
Balance, beginning of the year $ 1,124 $ 1,145 $ 1,149
Provisions (returned to) or charged to income (100) -- --
Charge-offs (21) (21) (4)
Recoveries -- -- --
-------- -------- --------
$ 1,003 $ 1,124 $ 1,145
======== ======== ========
29
Note 5 - Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
statements of financial condition. The unpaid principal balances of those
loans are summarized as follows:
September 30,
------------------------------
1998 1997 1996
-------- -------- --------
Federal Home Loan Mortgage Corporation $ 31,363 $ 22,116 $ 22,500
Others 1,177 1,246 1,336
-------- -------- --------
Total $ 32,540 $ 23,362 $ 23,836
======== ======== ========
Following is an analysis of the changes in mortgage loan servicing rights:
September 30,
-------------------
1998 1997
-------- --------
Balance, beginning of the year $ 28 $ --
Originated rights 177 30
Amortized (26) (2)
-------- --------
Total $ 179 $ 28
======== ========
Note 6 - Foreclosed Real Estate Held for Sale
Foreclosed real estate and related allowances at September 30, 1998 and 1997
consisted of the following:
September 30,
-------------------
1998 1997
-------- --------
Foreclosed real estate:
Balance, beginning of the period $ 127 $ 72
Additions to foreclosed real estate 330 307
Sales of foreclosed real estate (401) (252)
-------- --------
Balance, end of the period $ 56 $ 127
-------- --------
Allowance for loss -- --
-------- --------
Net foreclosed real estate $ 56 $ 127
======== ========
Note 7 - Premises and Equipment
Premises and equipment at September 30, 1998 and 1997 consisted of the
following:
September 30,
-------------------
1998 1997
-------- --------
Land $ 592 $ 643
Office buildings and improvements 2,551 2,428
Furniture and equipment 536 500
-------- --------
3,679 3,571
Less accumulated depreciation (1,292) (1,189)
-------- --------
Premises and equipment, net of accumulated depreciation $ 2,387 $ 2,382
======== ========
Depreciation expense was $119, $ 94, and $ 81 for the years ended September
30, 1998, 1997, and 1996, respectively.
30
Note 8 - Deposits
The major types of saving deposits by weighted interest rates, amounts, and
the percentages of such types are as follows:
September 30, 1998 September 30, 1997
---------------------- ----------------------
Weighted Weighted
Interest Interest
Rate Amount % Rate Amount %
-------- -------- ---- -------- -------- ----
Noninterest bearing deposits --% $ 1,400 1% --% $ 1,360 1%
NOW accounts 2.00% 2,971 2% 2.25% 3,043 2%
Super NOW accounts 2.25% 2,400 2% 2.50% 2,219 2%
Money market and passbook 3.29% 14,253 8% 3.25% 12,757 8%
-------- ---- -------- ----
21,024 13% 19,379 13%
Certificates of deposits 5.50% 130,931 87% 5.50% 123,828 87%
-------- ---- -------- ----
Totals $151,955 100% $143,207 100%
======== ==== ======== ====
A summary of certificates of deposit by maturity is as follows:
September 30,
-------------------
1998 1997
-------- --------
Within one year $ 96,777 $ 89,328
One to two years 21,240 15,534
Two to three years 5,917 11,603
Four to five years 3,296 4,137
Thereafter 3,701 3,226
-------- --------
$130,931 $123,828
======== ========
At September 30, 1998, 1997, and 1996, respectively, interest expense on
deposits for the indicated period is summarized as follows:
September 30,
------------------------------
1998 1997 1996
-------- -------- --------
Money market $ 293 $ 262 $ 262
Passbook savings 184 173 168
Now 123 124 123
Certificates of deposit 6,943 6,376 5,919
-------- -------- --------
$ 7,543 $ 6,935 $ 6,472
======== ======== ========
The aggregate amount of deposits with a minimum denomination of $100 was
$29,994 at September 30, 1998
and $23,365 at September 30, 1997. Deposits in excess of $100 are not covered
by federal deposit insurance.
Note 9 - Borrowed Funds
During the years ended September 30, 1998 and September 30, 1997, the company
obtained advances from the Federal Home Loan Bank. The advances are under
the terms of its collateral agreement with the FHLB. Security for the
advances is a blanket security agreement pledging first mortgage loans. At
September 30, 1998 and 1997, the Company owed the FHLB $6,600 and $4,967,
respectively. Of the outstanding balance at September 30, 1998, $1,600 bears
interest at 5.275% and matures October 29, 1998, and $5,000 bears interest at
4.37% and matures September 28, 2008. The long-term loan is callable by the
Federal Home Loan Bank on September 28, 2000 and quarterly thereafter.
31
Note 10 - Federal and State Income Taxes
The Company and the Association file consolidated federal and state income
tax returns on a fiscal year basis. In prior years for purposes of computing
federal income tax, the Association was allowed a special bad debt deduction
of 8% of taxable income or a specified amount based on experience formulas.
The Association used the percentage method for the period ended September 30,
1996. As a result of the use of the percentage method, retained earnings
include approximately $2,625 and $2,502 at September 30, 1998 and 1997,
respectively, for which no deferred income tax liability has been recognized.
The unrecorded deferred income tax liability on the above amounts was
approximately $1,024 at September 30, 1998 and $982 at September 30, 1997.
In August 1996, the "Small Business Job Protection Act" was signed into law.
This act repealed the percentage method of computing the bad debt deduction
for tax years beginning after December 31, 1995 and in certain circumstances
requires the repayment of bad debt deductions previously taken. As long as the
Company's subsidiary continues to qualify as a thrift or a bank no repayment
of the tax on prior bad debt deductions will be required for federal tax
purposes. The state of Arkansas repealed the deduction effective for years
beginning after January 1, 1997. The Company is repaying the state tax on
approximately $1,523 of bad debt deductions over a six year period. The
Company has made provision for this tax in prior financial statements and
repayment will have no effect on income.
Income tax expense for the years indicated consisted of the following:
September 30,
------------------------------
1998 1997 1996
-------- -------- --------
Current:
Federal $ 1,491 $ 1,142 $ 1,380
State 220 207 198
-------- -------- --------
$ 1,711 $ 1,349 $ 1,578
-------- -------- --------
Deferred:
Federal $ 71 $ 317 $ (289)
State 3 36 (7)
-------- -------- --------
$ 74 $ 353 $ (296)
-------- -------- --------
Total provisions $ 1,785 $ 1,702 $ 1,282
======== ======== ========
A reconciliation of tax expense computed by applying the statutory corporate
tax rate to earnings before taxes and the tax expense shown in the
accompanying statements of operations is as follows:
September 30,
------------------------------
1998 1997 1996
-------- -------- --------
Effective federal and state statutory rates 38.3% 38.3% 38.3%
-------- -------- --------
Expected tax at statutory rates $ 1,949 $ 1,756 $ 1,411
Adjustments to expected tax:
Bad debt deductions (38) -- (136)
Interest not taxable for state (45) (30) (39)
Employee benefit plan differences (61) (22) 27
Other (20) (2) 19
-------- -------- --------
$ 1,785 $ 1,702 $ 1,282
======== ======== ========
Effective tax rates 35.1% 37.1% 34.8%
======== ======== ========
32
Note 10 - Federal and State Income Taxes - continued
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
September 30,
------------------------------
1998 1997 1996
-------- -------- --------
Deferred tax assets:
Deferred loan fees $ 44 $ 40 $ 40
Special one time SAIF assessment -- -- 284
State deferred income tax 56 58 46
Employee benefit plans 94 89 68
Other 29 -- 6
-------- -------- --------
Deferred tax assets $ 223 $ 187 $ 444
-------- -------- --------
Deferred tax liabilities:
Fixed assets $ (418) $ (430) $ (442)
Federal Home Loan Bank stock (204) (176) (150)
State bad debt reserves (83) (94) (63)
Mortgage servicing rights (72) (11) --
Other (86) (42) (2)
-------- -------- --------
Deferred tax liabilities $ (863) $ (753) $ (657)
-------- -------- --------
Net deferred tax liabilities $ (640) $ (566) $ (213)
======== ======== ========
Note 11 - Commitments and Contingencies
As of September 30, 1998, the Company is committed to the funding of
approximately $11,466 of loans. The Company had off balance sheet financial
instruments representing credit risk in the form of unfunded lines of credit
in the amount of $425 at September 30, 1998 and $427 at September 30, 1997.
Note 12 - Special Dividend Payment
During the year ended September 30, 1996, the Company received a private
letter ruling from the IRS addressing the tax implications of dividends paid
during that year. The private letter ruling stated that dividends from the
Company were not taxable to the recipient to the extent they exceeded earnings
and profits. During that year the Company paid total dividends of three
dollars and forty-five cents per share or $6,475. Of this amount $326 was
determined to be a payment from accumulated earnings and $6,149 was
determined to be a return of capital to the shareholders.
Note 13 - Employee Benefit Plans
The Association has a contributory defined contribution pension plan for all
eligible employees. Retirement benefits under this form of pension plan are
limited to the value of each participant's account at the time of retirement;
therefore, vested benefits will not exceed the value of the participant's
account at any time. The cost of the plan for the periods ended September 30,
1998 and 1997, was approximately $5 and $5, respectively.
In connection with the Conversion, as discussed in Note 1, the Company
established the ESOP for the benefit of eligible employees. The Company
purchased 138,862 shares of common stock on behalf of the ESOP in the
Conversion. In December 1996, the Company purchased an additional 26,730
shares with the proceeds from dividends on the unallocated ESOP shares. As of
September 30, 1998, 12,420 shares were committed to be released and 40,218
shares have been allocated to participants. The fair value of the 112,954
unearned ESOP shares was $2,531 at September 30, 1998.
33
Note 13 - Employee Benefit Plans - continued
The Company recorded compensation related to the ESOP of $411 for the year
ended September 30, 1998 and $311 for the year ended September 30, 1997.
On December 27, 1995, the Board approved an Employee Stock Program, Management
Recognition Plans (MRP) for officers and directors, and a Directors Stock
Option Plan subject to the approval of the stockholders. The shareholders
approved these plans at the January 1996 shareholders meeting. The purpose of
these plans is to retain personnel of experience and ability by providing
employees and non-employee directors with compensation for their past services
and as an incentive for such services in the future.
As of September 30, 1998 the Company has acquired 65,135 shares of its common
stock on behalf of the MRP through open market purchases. An aggregate of
64,935 shares, net of forfeitures, have been awarded to the Company's Board of
Directors and officers as of September 30, 1998, subject to vesting and other
provisions of the MRP. At September 30, 1998 the deferred cost of unearned
MRP shares totaled $609 and is recorded as a charge against stockholders'
equity. Compensation expense will be recognized ratably over the five year
vesting period only for those shares awarded. The Company recorded
compensation and employee benefit expense related to the MRP of $188 for the
year ended September 30, 1998 and $193 for the year ended September 30, 1997.
Common stock totaling 39,676 shares have been granted and may be exercised by
the Company's non-employee directors, subject to vesting and other provisions
of the Directors' Stock Option Plan. No options were granted in the year
ended September 30, 1998. During the year ended September 30, 1997, 3,968
options were granted and may be exercised, subject to vesting at fifteen
dollars and twelve and one half cents per share. During the year ended
September 30, 1996, 35,708 options were granted and may be exercised, subject
to vesting, at fourteen dollars and twenty-five cents per share.
Common stock totaling 136,588 shares, net of forfeitures and shares exercised,
has been granted to the Company's key employees. These shares may be exercised
by the Company's key employees, subject to vesting and other provisions of the
Employee Stock Program. No shares were awarded during the year ended September
30, 1998. During the year ended September 30, 1997, 11,000 options, net of
forfeitures, were granted and may be exercised, subject to vesting, at twenty
one dollars and twenty five cents per share. During the year ended September
30, 1996, 125,588 options, net of forfeitures and shares exercised, were
granted and may be exercised, subject to vesting, at thirteen dollars and
seventy-five cents per share.
As stated in note 1, The Company has elected not to adopt the fair value
accounting provisions of SFAS 123, and has instead continued to apply APB
Opinion 25 and related interpretations in accounting for plans and provide the
required proforma disclosures of SFAS 123. Had the grant date fair value
provisions of SFAS 123 been adopted, for the year ended September 30, 1998,
additional compensation of $150 would have been recognized, net income would
have been $3,156, and earnings per common share would have been $1.94. For
the year ended September 30, 1997, the Company would have recognized
additional compensation of $137, net income would have been $2,747, and
earnings per common share would have been $1.63.
34
Note 13 - Employee Benefit Plans-continued
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. No options were granted in the fiscal
year ended September 30, 1998. Weighted-average assumptions used for grants
in 1997 were, dividend yields of 3.00%, expected volatility of 60% and 64%,
risk free interest rate of 6.51% and 6.04%, and expected lives of 7 and 8
years. Weighted average assumptions used for grants in 1996 were, dividend
yields of 3.00%, expected volatility of 65% and 70%, risk free interest rate
of 5.57% and 6.86%, and expected lives of 7 and 8 years.
A summary of the status of the Company's two fixed stock option plans as of
September 30, 1998, 1997, and 1996 and changes during the years then ended is
as follows:
September 30,
---------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
Outstanding
beginning of year 177,864 $14.387 163,896 $13.859 -- $ --
Granted -- -- 15,968 19.728 163,896 13.859
Exercised (600) 13.750 -- -- -- --
Forfeited (1,000) 21.250 (2,000) 13.750 -- --
------- ------- -------
Outstanding end of year 176,264 $14.350 177,864 $14.387 163,896 $13.859
======= ======= =======
Options exercisable
at year end 67,146 $14.118 27,084 $13.882 -- $ --
Weighted average fair
value of options
granted during the year $ -- $ 5.36 $ 4.10
Shares outstanding at September 30, 1998 and the contractual life of those
shares is as follows:
Remaining
Number Contractual
Outstanding Life
----------- -----------
Exercise Prices
$13.750 125,588 8.0
$14.250 35,708 7.3
$15.125 3,968 8.3
$21.250 11,000 8.8
----------- -----------
Total shares and weighted average
contractual life 176,264 7.9
=========== ===========
35
Note 14 - Regulatory Matters
The plan of Conversion described in Note 1 provides for the establishment of a
special liquidation account for the benefit of eligible account holders and
the supplemental eligible account holders in an amount equal to the net worth
of the Association as of the date of its latest statement of financial
condition contained in the final offering circular used in connection with the
conversion. The liquidation account will be maintained for the benefit of
eligible account holders and supplemental eligible account holders who
continue to maintain their accounts at the Association after the conversion.
The liquidation account will be reduced from time to time to the extent that
qualifying account balances are reduced. In the event of a complete
liquidation, each eligible and supplemental eligible account holder will be
entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held. The Company may not declare or pay cash dividends on its shares of
common stock if the effect thereof would cause the Company's stockholders'
equity to be reduced below applicable regulatory capital maintenance
requirements for insured institutions or below the special liquidation account
referred to above.
The Company's subsidiary is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the subsidiary must met specific capital guidelines that involve
quantitative measures of the subsidiary's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The subsidiary's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the subsidiary to maintain minimum amounts and ratios (set forth in
the table below) of tier 1 capital (as defined in the regulations) to
adjusted total assets (as defined in the regulations), tier 1 risk-based
capital to risk-weighted assets (as defined in the regulations), and of total
risk-based capital (as defined in the regulations) to average assets (as
defined in the regulations). Management believes, as of September 30, 1998,
that the subsidiary meets all capital adequacy requirements to which it is
subject.
As of June 30, 1998, the most recent notification from the Office of Thrift
Supervision categorized the subsidiary as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the subsidiary must maintain minimum tier 1, tier I risk-based,
total risk-based capital ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institutions category.
In the following table tier 1 capital is computed as a percentage of adjusted
total assets of $188,847, at September 30, 1998, and $178,477, at September
30, 1997. Tier 1 risk-based capital and total risk-based capital are computed
as a percent of total risk weighted assets of $114,840, for the year ended
September 30, 1998, and $108,635, for the year ended September 30, 1997.
36
Note 14 - Regulatory Matters - continued
The following sets forth the unconsolidated subsidiary's compliance with each
of the regulatory capital requirements as of September 30, 1998 and 1997.
Minimum for Minimum To Be
Actual Capital Adequacy Well Capitalized
--------------- ---------------- ----------------
Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ------ ------- ------
As of September 30, 1998:
Tier 1 or leverage capital
(to adjusted total assets) $26,991 14.29% $ 7,554 4.00% $ 9,442 5.00%
Tier 1 risk-based capital
(to risk-weighted assets) $26,991 23.50% $ 4,594 4.00% $ 6,890 6.00%
Total risk-based capital
(to risk-weighted assets) $27,627 24.06% $ 9,187 8.00% $11,484 10.00%
As of September 30, 1997:
Tier 1 or leverage capital
(to adjusted total assets) $26,797 15.01% $ 7,139 4.00% $ 8,924 5.00%
Tier 1 risk-based capital
(to risk-weighted assets) $26,797 24.67% $ 4,345 4.00% $ 6,518 6.00%
Total risk-based capital
(to risk-weighted assets) $27,553 25.36% $ 8,691 8.00% $10,864 10.00%
Note 15 - Earnings Per Common Share
A reconciliation of earnings per common share to earnings per common share
assuming dilution is as follows:
September 30,
------------------------------
1998 1997 1996
-------- -------- --------
Earnings per common share:
Net income applicable to common stock $ 3,306 $ 2,884 $ 2,401
======== ======== ========
Weighted average number of common shares
outstanding, in thousands 1,627 1,687 1,832
======== ======== ========
Earnings per common share $ 2.03 $ 1.71 $ 1.31
======== ======== ========
Earnings per common share - assuming dilution:
Net income applicable to common stock $ 3,306 $ 2,884 $ 2,401
======== ======== ========
Weighted average number of common shares
outstanding, in thousands 1,627 1,687 1,832
Effect of dilutive securities:
Weighted average shares issuable under the
Director's stock option plan (thousands) 18 6 1
Weighted average shares issuable under the
Employee's stock option plan (thousands) 63 27 --
-------- -------- --------
Weighted average shares adjusted (thousands) 1,708 1,720 1,833
======== ======== ========
Earnings per common share - assuming dilution $1.94 $1.68 $1.31
======== ======== ========
37
Note 16 - Other Noninterest Income and Expense
Other noninterest income and expense amounts are summarized as follows:
September 30,
------------------------------
1998 1997 1996
-------- -------- --------
Other noninterest income:
Service charges on deposits $ 172 $ 156 $ 123
Other service charges and fees 122 95 88
Service fees on loans sold 93 83 85
Other 60 82 103
-------- -------- --------
$ 447 $ 416 $ 399
======== ======== ========
Other noninterest expense:
Data processing charges $ 113 $ 108 $ 112
Advertising 65 67 54
Professional fees 56 76 116
OTS assessments 55 48 51
Stationary, printing, postage, and telephone 95 84 79
Insurance and bond premiums 45 43 42
Other 111 94 95
-------- -------- --------
$ 540 $ 520 $ 549
======== ======== ========
Note 17 - Recent Legislation
In September 1996, the Omnibus Appropriations Act was signed into law. This
legislation authorized a one time charge of SAIF-insured institutions in the
amount of .657 dollars for every one hundred dollars of assessable deposits,
and an eventual merger of the SAIF and Bank Insurance Fund (BIF). The Company
included in expense $835 in the year ended September 30, 1996, related to this
legislation.
Note 18 - Related Party Transactions
The Company had a total of $829 and $425 at September 30, 1998 and 1997,
respectively, in direct loans to officers and directors. New loans totaled
$520 and $180, and repayments totaled $116 and $212 for the years ended
September 30, 1998 and 1997, respectively. The Company purchases a major
portion of its insurance coverage from a company partially owned by two Board
Members. The Company paid $40, $41, and $56 for such coverage, during the
years ended September 30, 1998, 1997 and 1996, respectively. The Company paid
$72, $72, and $72 to directors for director's fees during the years ended
September 30, 1998, 1997, and 1996 respectively.
Note 19 - Significant Group Concentrations of Credit Risk
The Company invests a portion of its cash in deposit accounts with various
financial institutions in amounts which may exceed the insured amount of $100.
The Company performs ongoing evaluations of the financial institutions in
which it invests deposits and periodically assesses its credit risk with
respect to these accounts. The Company also sells federal funds to other
institutions to maximize interest earned on idle cash. Federal funds sold are
unsecured loans to the purchasing institution. In the case of an insolvency,
the Company would be at risk for federal funds sold to the insolvent
institution. Federal funds sold totaled $45 and $1,575 at September 30, 1998
and 1997, respectively. The Company sells to a pre-approved list of
institutions which are periodically evaluated.
38
Note 19 - Significant Group Concentrations of Credit Risk - continued
Most of the Company's business activity is with customers located in the
Northeast Texas and Southwest Arkansas area, accordingly, a substantial
portion of its debtors' ability to honor their contracts is dependent upon
this area. Loans to this group are primarily to individual home owners and
are secured by one to four family dwellings. The Company's largest loans to
one borrower amounted to $3,315 at September 30, 1998. This portfolio is
primarily collateralized by commercial real estate. The Company has loans
outside its normal lending area to three different borrowers in Ft. Worth,
Texas in the total amount of $2,541 and $2,736 at September 30, 1998 and 1997,
respectively. This portfolio is secured by three commercial properties.
The Company's policy for requiring collateral on single family dwellings is
that the loan not exceed 95% of collateral value. In some cases, however,
with board approval, 100% of collateral value may be loaned. For commercial
and multi-family dwellings, 85% of loan to collateral value is required. For
loans on building sites, 80% of loan to collateral value is required. For
loans on undeveloped land, 65% of loan to collateral value is required.
Note 20 - Derivative Financial Instruments
The Company has limited involvement with derivative financial instruments and
does not use them for trading purposes.
Note 21 - Fair Value of Financial Instruments
Fair value estimates, methods, and assumptions are set forth below for the
Company's financial instruments whether or not recognized in the balance
sheet, for which it is practicable to estimate that value. The fair values
may not represent actual values of the financial instruments that could have
been realized as of year end or that will be realized in the future.
Cash and Cash Equivalents - For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Investments and Mortgage-related Securities - The fair value of longer term
investments and mortgage-related securities is estimated based on bid prices
published in financial newspapers or bid quotations received from securities
dealers. The carrying amounts of stocks approximate fair value because shares
may be redeemed at par.
Loans - The fair value of performing loans is calculated by discounting
expected cash flows using an estimated market discount rate for similar loans
that would be made to borrowers with similar credit history and maturities.
The fair value for nonaccrual loans was derived through a discounted cash flow
analysis, which includes the opportunity costs of carrying a nonperforming
asset. Estimated discount rates were based on the probability of loss and the
expected time to recovery. Loans with a higher probability of loss were
assigned higher risk premiums and were discounted over long periods of time,
resulting in lower values.
Accrued Interest Receivable - For accrued interest receivable, the carrying
amount is a reasonable estimate of fair value.
39
Note 21 - Fair Value of Financial Instruments - continued
Deposit Liabilities - The fair value of deposits with no stated maturity, such
as noninterest-bearing deposits, savings and NOW accounts, and money market
and checking accounts is equal to the amount payable upon demand as of
September 30, 1998 and 1997. The fair value of certificates of deposit is
based on the present value of contractual cash flows. The discount rate used
to compute present values are estimated using the rates currently offered for
deposits of similar maturities in the Company's marketplace.
Borrowed Money - Due to the short term maturity and or call provisions of the
loans, the carrying amount is a reasonable estimate of the fair value.
Commitments to Extend Credit - The Company does not normally charge fees for
commitments to extend credit. Interest rates on commitments to extend credit
are normally committed for periods of less than one month. The Company does
not normally issue standby letters of credit or other financial guarantees.
Outstanding loan commitments and the unused portion of loans in progress
totaled $11,466 and $6,979 at September 30, 1998 and 1997, respectively.
Unused lines of credit totaled $425 and $427 at September 30, 1998 and 1997,
respectively. It is impractical to assign any fair value to these
commitments.
The carrying amount and estimated fair value of the Company's financial
instruments are as follows:
September 30, 1998 September 30, 1997
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Financial assets:
Cash and cash equivalents $ 2,635 $ 2,635 $ 6,053 $ 6,053
Assets available for sale 25,651 25,651 18,767 18,767
Investments and mortgage
backed securities 2,034 2,053 2,409 2,446
Loans receivable, net 155,781 158,698 148,471 151,832
Accrued interest 1,331 1,331 1,176 1,176
-------- -------- -------- --------
Total Financial Assets $187,432 $190,368 $176,876 $180,274
======== ======== ======== ========
Financial liabilities:
Deposits $151,955 $153,023 $143,207 $142,996
Borrowed money 6,600 6,600 4,989 4,989
-------- -------- -------- --------
Total Financial Liabilities $158,555 $159,623 $148,196 $147,985
======== ======== ======== ========
40
Note 22 - Parent Company Only Financial Information
Condensed financial statements of Texarkana First Financial Corporation
(parent company) are shown below. The parent company has no significant
operating activities.
Condensed Statements of Financial Condition:
For the years ended September 30, 1998 and 1997: 1998 1997
-------- --------
Assets
Cash $ 340 $ 152
Investment securities available for sale 335 --
Dividends receivable -- 500
Federal and state income tax receivable 73 208
Investment in subsidiary 27,158 26,878
-------- --------
Total assets $ 27,906 $ 27,738
======== ========
Liabilities
Accounts payable $ 114 $ --
Dividends payable 268 250
Accrued expenses 108 108
-------- --------
Total liabilities 490 358
-------- --------
Stockholders' equity
Common stock 20 20
Additional paid-in capital 13,627 13,485
Common stock acquired by employee benefit plans (1,831) (2,208)
Treasury stock (5,996) (3,103)
Unrealized gain (loss) on available for sale securities 127 81
Retained earnings 21,469 19,105
-------- --------
Total stockholders' equity 27,416 27,380
-------- --------
Total liabilities and stockholders' equity $ 27,906 $ 27,738
======== ========
Condensed Statements of Operations:
For years ended September 30, 1998, 1997, and 1996
1998 1997 1996
------ ------ ------
Income:
Income before equity in undistributed
earnings of subsidiary $ 123 $ 113 $ 473
Dividends from subsidiary 3,500 3,500 --
Equity in undistributed income of subsidiary 23 (337) 2,410
------ ------ ------
Total income 3,646 3,276 2,883
------ ------ ------
Expenses:
Compensation and employee benefits 301 320 89
Management fees 240 221 276
Professional fees 20 20 76
Income tax (244) (201) (1)
Other 23 32 42
------ ------ ------
Total expense 340 392 482
------ ------ ------
Net income $3,306 $2,884 $2,401
====== ====== ======
41
Note 22 - Parent Company Only Financial Information - continued
Condensed Statements of Cash Flow:
For years ended September 30, 1998, 1997, and 1996
1998 1997 1996
------ ------ ------
Income:
Operating activities:
Interest income $ 123 $ 151 $ 443
Dividends from subsidiary 4,000 3,000 --
Miscellaneous income -- -- 4
Cash paid to suppliers and employees (385) (389) (390)
Interest paid (1) (10) --
Income tax (paid) received 401 27 (78)
------ ------ ------
Net cash provided by (used in)
operating activities 4,138 2,779 (21)
------ ------ ------
Investing activities:
Purchase of assets available for sale (396) -- (1,997)
Proceeds from sale of assets available for sale -- 2,399 1,387
Collection of ESOP loan principal 139 139 92
------ ------ ------
Net cash provided by (used in)
investing activities (257) 2,538 (518)
------ ------ ------
Financing activities:
Purchase of common stock for employee benefit plans -- (59) (933)
Purchase of treasury shares (2,788) (1,536) (1,567)
Sale of treasury shares 8 -- --
Funds borrowed -- 4,435 2,815
Borrowed funds repaid -- (7,250) --
Dividend and return of capital distributions (913) (804) (6,263)
------ ------ ------
Net cash provided by (used in)
financing activities (3,693) (5,214) (5,948)
------ ------ ------
Net change during the period 188 103 (6,487)
Cash and cash equivalents at the
beginning of the period 152 49 6,536
------ ------ ------
Cash and cash equivalents at the end of the period $ 340 $ 152 $ 49
====== ====== ======
Reconciliation of net income to net cash
provided by operating activities:
Net income $3,306 $2,884 $2,401
Undistributed earnings of subsidiary (23) -- (2,410)
Excess distributions from subsidiary -- 337 --
Amortization of discounts and premiums -- -- (16)
Amortization of employee benefit plans 199 199 89
(Increase) decrease in dividends
receivable from subsidiary 500 (500) --
Increase (decrease) in income tax payable 156 (173) (85)
Increase (decrease) in other receivables and payables -- 32 --
------ ------ ------
Net cash provided by(used in) operating activities $4,138 $2,779 ($21)
====== ====== ======
42
TEXARKANA FIRST FINANCIAL CORPORATION
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS EXECUTIVE OFFICERS
John M. Andres James W. McKinney
Managing Partner, Chairman of the Board and
Thomas & Thomas Chief Executive Officer
John E. Harrison Donald N. Morriss
President and Vice Chairman of the Board
Chief Operating Officer
Arthur L. McElmurry John E. Harrison
Retired CEO, President and
Wadley Regional Medical Center Chief Operating Officer
James W. McKinney Travis L. Mauldin
Chairman of the Board and Executive Vice President
Chief Executive Officer
Donald N. Morriss James L. Sangalli
Chairman and President, Chief Financial Officer
Offenhauser & Co., Inc.
Josh R. Morriss, Jr.
Retired Chairman,
Offenhauser & Co., Inc.
BANKING LOCATIONS
Main Office
Third & Olive Streets
Texarkana, Arkansas 71854
Branch Offices and Managers
611 East Wood Street 1011 W. Collin Raye Drive
Ashdown, Arkansas 71822 DeQueen, Arkansas 71832
Rocky B. Murray W. Lynn Chaney, VP
6th & S. Main 111 W. Shepherd
Hope, Arkansas 71801 Nashville, Arkansas 71852
Paul S. Ball, VP Betty A. Willard
43
STOCKHOLDER INFORMATION
TRANSFER AGENT/REGISTRAR
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
(800)866-1340
INDEPENDENT AUDITORS
Wilf & Henderson, P.C.
1430 College Drive
P.O. Box 5197
Texarkana, Texas 75505
SPECIAL LEGAL COUNSEL
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W., Suite 1200
Washington, D.C. 20005
STOCKHOLDER REQUESTS
Stockholders may request, without charge, a copy of the Company's Annual
Report on Form 10-K as filed with the Securities and Exchange Commission
by writing:
Debbie Rose, Secretary
Texarkana First Financial Corporation
P.O. Box 2950
Texarkana, Arkansas 75505
Stockholders needing assistance with stock records, transfers or lost
certificates, please contact the Company's transfer agent, Registrar and
Transfer Company.
MARKET LISTING
Shares of the Company's common stock are listed and traded on the American
Stock Exchange under the name of Texarkana, symbol "FTF". At September 30,
1998, the Company had approximately 412 stockholders of record. Such
holdings do not reflect the number of beneficial owners of common stock.
44