UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(x) Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1998
( ) Transition Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from ----------- to ------------------
Commission File Number: 0-23323
THE BRYAN COLLEGE STATION FINANCIAL HOLDING COMPANY
---------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE
--------
(State or other jurissdication of incorporation of organization)
36-4153491
----------
(I.R.S. employer identification no.)
2900 Texas Avenue, Bryan, Texas 77802
(Address of principal executive offices) (Zip Code)
(409) 779-2900
-------------
(Registrants telephone number, including area code)
Former name, former address and former fiscal year, if changed since
last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the proceeding 12 months (or for such shorter period that the issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x_______ No______
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Shares Outstanding
Class as of August 14, 1998
--------- -----------------------
Common Stock 389,436
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
Bryan, Texas
FORM 10-QSB
Nine Months Ended June 30, 1998
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Page
Consolidated Statements of Financial Condition......................... 3
Consolidated Statements of Income...................................... 4
Consolidated Statements of Changes in Stockholders' Equity............. 5
Consolidated Statements of Cash Flows.................................. 6
Notes to Consolidated Financial Statements............................. 7-9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................... 10-20
PART II - OTHER INFORMATION
Other Information.......................................................... 21
Signatures................................................................. 22
2
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL
HOLDING COMPANY
BRYAN/COLLEGE STATION, TEXAS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1998 and September 30, 1997
In thousands, except per share data
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
June 30, September 30,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,444 $ 756
Interest-bearing deposits in other financial institutions 3,417 3,675
----------- -----------
Total cash and cash equivalents 4,861 4,431
Mortgage-backed securities held-to-maturity (estimated
market value: June 1998 - $997; September 1997 - $1,129) 1,007 1,150
Loans held for sale 394 204
Loans receivable 67,602 65,033
Federal Home Loan Bank stock 377 896
Real estate owned and in judgment 398 520
Premises and equipment 1,637 1,117
Accrued interest receivable 551 537
Other assets 1,730 1,201
----------- -----------
$ 78,557 $ 75,089
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 69,120 $ 58,808
Advance payments by borrowers for insurance and taxes 671 862
Advance from Federal Home Loan Bank 2,000 10,000
Minority interest 872 -
Debentures 3,629 -
Accrued interest payable and other liabilities 432 585
----------- -----------
76,724 70,255
Stockholders' equity
Common stock - par value $.01 per share;
authorized 3,000,000 shares, issued 389,436 4 2
Additional paid-in capital 1,849 2,743
Retained earnings, substantially restricted (20) 2,088
------------ -----------
1,833 4,834
----------- -----------
$ 78,557 $ 75,089
=========== ===========
</TABLE>
3
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL
HOLDING COMPANY
BRYAN/COLLEGE STATION, TEXAS
CONSOLIDATED STATEMENTS OF INCOME
In thousands, except per share data
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Nine months ended Three months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income
Loans $ 4,903 $ 3,847 $ 1,686 $ 1,334
Mortgage-backed securities 48 56 15 18
Other 117 104 33 39
---------- ---------- ---------- ----------
Total interest income 5,068 4,007 1,734 1,391
Interest expense
Deposits 2,173 1,825 761 639
Other borrowings 311 57 128 24
---------- ---------- ---------- ----------
Total interest expense 2,484 1,882 889 663
---------- ---------- ---------- ----------
NET INTEREST INCOME 2,584 2,125 845 728
Provision for loan losses 79 17 50 15
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN 2,505 2,108 795 713
Noninterest income
Service charges 429 449 171 135
Net gain on sale of loans and mortgage
servicing rights 135 99 56 40
Other 82 41 20 41
---------- ---------- ---------- ----------
Total noninterest income 646 589 247 216
Noninterest expenses
Compensation and benefits 1,376 988 514 347
Occupancy and equipment expense 303 239 118 76
Federal insurance premiums 28 36 10 8
Net (gain)/loss on real estate owned 13 2 - 4
Professional fees 136 95 52 25
Data processing 143 125 48 40
Other 767 501 332 165
---------- ---------- ---------- ----------
Total noninterest expenses 2,766 1,986 1,074 665
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE 385 711 (32) 264
Income tax expense (benefit) 131 242 (11) 90
---------- ---------- ----------- ----------
NET INCOME (loss) 254 469 (21) 174
Bank Preferred stock dividends (44) (66) - (22)
----------- ---------- ---------- ----------
Net income (loss) available to shareholders $ 210 $ 403 $ (21) $ 152
========== ========== =========== ==========
Earnings (loss) per share
Basic $ .45 $ .67 $ (.05) $ .25
========== ========== =========== ==========
Diluted $ .45 $ .66 $ (.05) $ .25
========== ========== =========== ==========
</TABLE>
4
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL
HOLDING COMPANY
BRYAN/COLLEGE STATION, TEXAS
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
June 30, 1998 and 1997
In thousands, except per share data
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Nine months ended Three months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $ 4,834 $ 4,316 $ 4,945 $ 4,567
Net income (loss) 254 469 (21) 174
Issuance of 200,000 shares common stock 2,000 - 2,000 -
Purchase of Bank common stock (3,943) - (3,943) -
Minority interest (872) - (872) -
Stock issue costs (276) - (276) -
Cash dividends paid (164) (66) - (22)
------------ ----------- ----------- -----------
Balance at June 30, $ 1,833 $ 4,719 $ 1,833 $ 4,719
=========== =========== =========== ===========
</TABLE>
5
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL
HOLDING COMPANY
BRYAN/COLLEGE STATION, TEXAS
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Nine months ended Three months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 254 $ 469 $ (21) $ 174
Adjustments to reconcile net income to net
cash from operating activities
Depreciation 190 123 93 40
Net change in loans held for sale (129) (13) (218) 904
Amortization of deferred loan origination fees (31) 35 (59) 32
Net gains on sales of
Real estate owned (4) (12) (5) (10)
Mortgage loans and servicing rights (135) (99) (56) (40)
Provision for losses on loans and real estate owned 79 17 50 15
Federal Home Loan Bank stock dividend (33) (37) (6) (13)
Change in
Accrued interest receivable and other assets (67) (523) (4) (225)
Accrued interest payable and other liabilities (153) (103) (81) 189
----------- ----------- ----------- ----------
Net cash from operating activities (29) (143) (307) 1,066
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans receivable (2,496) (9,116) (649) (5,557)
Proceeds from maturity of securities - 1,000 - -
Principal payments on mortgage-backed securities
and collateralized mortgage obligations 140 103 35 31
Proceeds from sale of mortgage servicing rights 74 56 26 26
Redemption of FHLB stock 552 - 552 -
Investment in office properties and equipment, net (710) (245) (331) (58)
Capital expenditures on foreclosed real estate (10) (57) - -
Proceeds from sale of real estate owned 18 149 4 -
---------- ---------- ---------- ----------
Net cash from investing activities (2,432) (8,110) (363) (5,558)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 10,312 5,961 2,613 2,567
Net increase (decrease) in advance payments by
borrowers for insurance and taxes (191) (177) 305 292
Net change on advances from Federal
Home Loan Bank (8,000) 2,100 (1,700) (100)
Issuance of common stock, net of costs 1,724 - 1,724 -
Issuance of debentures, net of costs 3,153 - 3,153 -
Purchase of Bank stock (3,943) - (3,943) -
Dividends paid (164) (66) - (22)
----------- ----------- ---------- ----------
Net cash from financing activities 2,891 7,818 2,152 2,737
---------- ---------- ---------- ----------
Change in cash and cash equivalents 430 (435) 1,482 (1,755)
Cash and cash equivalents at beginning of period 4,431 2,806 3,379 4,126
---------- ---------- ---------- ----------
Cash and cash equivalents at end of period $ 4,861 $ 2,371 $ 4,861 $ 2,371
========== ========== ========== ==========
</TABLE>
6
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL
HOLDING COMPANY
BRYAN/COLLEGE STATION, TEXAS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, the unaudited consolidated financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial condition of The Bryan-College Station
Financial Holding Company (the Company) and its wholly-owned subsidiary, First
Federal Savings Bank, Bryan/College Station, Texas (the Bank), as of June 30,
1998 and September 30, 1997, and the results of its operations and cash flows
for the nine-month and three-month periods ended June 30, 1998 and 1997.
On April 1, 1998, the Company issued 200,000 shares of common stock at $10 per
share and 3,629 debentures at $1,000 per unit. The Debentures bear an interest
rate of 11.5% and mature in 2003. Each Debenture includes detachable warrants to
purchase 9 shares of Company common stock at $12.50 per share. Net proceeds to
the Company totaled $1.7 million and $3.2 million for the common stock and the
Debentures, respectively.
Concurrent with the offerings, the Company acquired 75,784 shares of common
stock of the Bank in exchange for 189,346 shares of Company common stock and
purchased the remaining 163,828 shares of the Bank's common stock for cash
totaling $3.9 million.
NOTE 2 - ALLOWANCE FOR LOAN LOSSES
The summary of changes in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Nine months ended
June 30,
(In thousands)
1998 1997
---- ----
<S> <C> <C>
Balances, beginning of period $ 273 $ 247
Provision charged to operations 79 17
Charge-offs (74) (4)
Recoveries 25 8
--------- ---------
Balances, end of period $ 303 $ 268
========= =========
</TABLE>
7
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL
HOLDING COMPANY
BRYAN/COLLEGE STATION, TEXAS
NOTE 3 - CAPITAL REQUIREMENTS
Pursuant to federal regulations, savings institutions must meet three separate
capital requirements. The following is a reconciliation of the Bank's capital
under generally accepted accounting principles (GAAP) to regulatory capital at
June 30, 1998.
<TABLE>
<CAPTION>
Core Risk based
Capital Capital
------- -------
(In thousands)
<S> <C> <C>
GAAP capital $ 5,119 $ 5,119
General valuation allowance - 303
----------- ----------
Regulatory capital 5,119 5,422
Minimum capital requirement 3,112 5,100
----------- ----------
Excess regulatory capital over
minimum requirement $ 2,007 $ 322
=========== ==========
</TABLE>
NOTE 4 - EARNINGS PER COMMON SHARE
A reconciliation of the numerator and denominator of the earning per common
share computation for the three and nine month periods ended June 30, 1998 and
1997 is presented below:
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings per common share
Net Income (loss) $ (21) $ 174 $ 254 $ 469
Preferred stock cash dividends - (22) (44) (66)
--------- --------- --------- ---------
Net income (loss) attributable to
common shareholders $ (21) $ 152 $ 210 $ 403
========== ========= ========= =========
Weighted average common shares
Outstanding 389,436 599,030 462,499 599,030
--------- --------- --------- ---------
Basic earnings (loss) per share $ (.05) $ .25 $ .45 $ .67
========== ======== ======== =========
</TABLE>
8
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL
HOLDING COMPANY
BRYAN/COLLEGE STATION, TEXAS
NOTE 4 - EARNINGS PER COMMON SHARE (CONTINUED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income attributable to common
Shareholders $ (21) $ 152 $ 210 $ 403
========== ========= ========= =========
Weighted average common shares
Outstanding 389,436 599,030 462,499 599,030
Add effect of stock options - 12,697 - 12,697
--------- --------- --------- ---------
Total weighted average shares
Outstanding 389,436 611,727 462,499 611,727
--------- --------- --------- ---------
Diluted earnings (loss) per share $ (.05) $ .25 $ .45 $ .66
========== ======== ========== =========
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Bryan-College Station Financial Holding Company (the "Company"), was
formed at the direction of First Federal Savings Bank, Bryan, Texas ("First
Federal" or the "Bank"), for the purpose of owning all the outstanding common
stock of First Federal. The Company was incorporated under the laws of the State
of Delaware and generally is authorized to engage in any activity that is
permitted by the Delaware General Corporation Law. On April 1, 1998, the company
issued 200,000 shares of common stock at $10 per share and 3,629 denbentures at
$1,000 per unit. The Debentures bear an interest rate of 11.5% and mature in
2003. Each Debenture includes detachable warrants to purchasae 9 shares of
company common stock at $12.50 per share. Net proceeds to the Company totaled
$1.7 million and $3.2 million for common stock and the Debentures, respectively.
Concurrent with the offerings, the Company acquired 75,784 shares of common
stock of the Bank in exchange for 189,346 shares of Company common stock and
purchased the remaining 163,828 shares of the Bank's common stock for cash
totaling $3.9 million. The Company has not engaged in any material operations
prior to the recapitalization April 1, 1998, and at March 31, 1998, had no
significant assets. Accordingly, the following discussion focuses on the
financial condition and results of operations of the Bank for periods prior to
April 1, 1998.
The Company's major goals are to provide high quality full service retail
banking on a profitable basis to its customers (predominantly middle class and
blue collar individuals and small to medium-sized businesses) through its
readily accessible offices located in the most northern and southern part of
Bryan and in College Station and its principal offices centrally located between
the two cities. The Company intends to continue to focus primarily on one to
four-family residential lending, direct and indirect consumer lending, including
home improvement loans, constructions loans and small to medium-sized commercial
business loans, some of which are partially guaranteed by the U.S. Small
Business Administration. The Company also intends to focus on expanding the
credit- default insured indirect automobile loan program for subprime borrowers
("Second Chance Auto Loans"), so that it can increase profitability of First
Federal through higher-yielding portfolio loans. The Company may elect to sell
some of these loans in the future to other lenders.. In addition, the Company
also seeks to continue to maintain its current level of asset quality and
continue to minimize, to the extent possible, its vulnerability to changes in
interest rates in order to continue to maintain a reasonable spread between its
average yield on loans and securities and its average cost of interest paid on
deposits and borrowings.
Like all financial institutions, the Company's subsidiary, First Federal,
has always been subject to interest rate risk because its interest-bearing
liabilities (primarily deposits) mature or reprice at different times, or on a
different basis than its interest-earning assets (primarily loans). First
Federal's net income is also affected by gains and losses on the sale of
residential mortgage loans and loan servicing rights to the secondary market
nationally, investments, provisions expensed for loan and other repossessed real
estate and repossessed vehicle losses, service charge fees, loan servicing
income, fees for other financial services rendered, operating expenses and
income taxes.
10
<PAGE>
The Company believes that building its subsidiary's earnings from net interest
income and noninterest income, (such as the profitable sale of long-term, fixed
rate and adjustable rate loans to the secondary market), utilizing a
fully-staffed residential loan department and SBA business loan staff, along
with income from service charges and fees on checking accounts from its recent
transition to full service retail banking and its new North Bryan Branch, while
continuing to reduce operating expenses, can provide a stable foundation for
successful operations. Noninterest income can provide an excellent source of
secondary income through fees charged to customers for services rendered,
without requiring additional capital.
The Company's net interest income has historically been dependent largely
upon the difference ("spread") between the average yield earned primarily on
loans, and to a lesser extent mortgage-backed securities and other securities
("interest-earning assets"), and the average rate paid on savings and other
deposits and borrowings ("interest-bearing liabilities"), as well as the
relative amounts of such assets and liabilities. The interest rate spread
between interest-earning assets and interest-bearing liabilities is impacted by
several factors including economic and competitive conditions that influence
interest rates, loan demand, deposit flows, regulatory developments and the
types of assets and liabilities on its balance sheet.
First Federal's recent restructuring and expansion to provide full-service
banking and more convenience to its customers through expanded drive-in
facilities, a new North Bryan full-service branch, expansion of its personnel in
Second Chance Auto Lending, mortgage lending, additional and more experienced
tellers, and additional personnel in new accounts, accounting and direct
consumer lending, has caused planned increases in First Federal's operating
expense levels. First Federal believes these increased operating expenses to be
necessary in order to plan for growth and profitability in the future. There can
be no assurance that these objectives will be achieved. As a result, as of June
30, 1998, the Company's operating expense exceeded its' net interest income.
Periodically, the Company relies on its noninterest income for net income.
FINANCIAL CONDITION
First Federal's total assets increased by $3.5 million to $78.6 million at
June 30, 1998 from $75.1 million at September 30, 1997, an increase of 5%. This
increase consisted primarily of an increase in loans receivable and premises and
equipment, partially offset by a decrease of Federal Home Loan Bank stock.
Loans receivable (excluding residential mortgage loans held for sale at
month end to the secondary market) increased $2.6 million to $67.6 million at
June 30, 1998, compared to $65.0 million at September-30, 1997. During the nine
months ended June 30, 1998, First Federal originated $21.3 million of mortgage
loans, including $19.3 million secured by one- to four-family residences, and in
addition originated $14.3 million in consumer loans and $5.1 million in
commercial (business) loans. Approximately $1.4 million of these mortgage loans
represented refinancings of existing First Federal loans. Premises and equipment
increased due to improvements to the existing main office and the opening of an
additional full-service branch in north Bryan in June 1998 to provide additional
convenience to its' customers and to plan for future growth.
11
<PAGE>
Deposits increased $10.3 million, or 17.5% to $69.1 million at June 30,
1998, compared to $58.8 million at September 30, 1997, as a result of increased
marketing of short-term certificates of deposits--along with new checking
accounts. Other liabilities deceased $3.9 million to $7.5 million at June 30,
1998, compared to $11.4 million at September-30, 1997, primarily as a result of
a $8.0 million decrease in advances from the Federal Home Loan Bank of Dallas,
which was funded by the increase in the Bank's deposits, partially offset by the
issuance of $3.6 million in Debentures to fund the purchase of Bank stock.
Stockholders' equity in the Company decreased $3.0 million to $1.8 million
at June 30, 1998 from $4.8 million at September 30, 1997. The decrease was
largely attributable to the purchase of approximately 68% of the Bank's common
stock by the Company totaling $3.9 million. This decrease was partially offset
by net income of $254,000 for the nine months ended June 30, 1998 and proceeds
from the issuance of $2,000,000 of new common stock of the Company, netting $1.7
million. Stockholders equity was also reduced by the reclassification of the
Bank's existing preferred stock of $872,000 as a minority interest liability in
the consolidated financial statements, resulting from the Company's acquisition
of the Bank's common stock on April 1, 1998.
ASSET/LIABILITY MANAGEMENT
The Company's subsidiary, First Federal, like all financial institutions,
is subject to interest rate risk to the degree that its interest-bearing
liabilities (deposits) mature or reprice more rapidly, or on a different basis,
than its interest-earning assets, (loans), some of which may be longer term or
fixed interest rate. As a continuing part of its financial strategy, First
Federal continually considers methods of managing any such asset/liability
mismatch, consistent with maintaining acceptable levels of net interest income
and interest rate risk.
In order to monitor and manage interest rate sensitivity and interest rate
spread, First Federal created an Asset/Liability Committee ("ALCO"), composed of
its President/CEO, Senior Vice President/Financial, Executive Vice President and
one outside Director. The responsibilities of the ALCO are to assess First
Federal's asset/liability mix and recommend strategies that will enhance income
while managing First Federal's vulnerability to changes in interest rates.
First Federal's asset/liability management strategy has two goals. First,
the Bank seeks to build its net interest income and noninterest income, while
adhering to its underwriting and lending guidelines. Second, and to a lesser
extent, First Federal seeks to increase the interest rate sensitivity of its
assets and decrease the interest rate sensitivity of its liabilities so as to
reduce First Federal's overall sensitivity to changes in interest rates. There
can be no assurance that this strategy will achieve the desired results and will
not result in substantial losses in the event of an increase in interest rate
risk.
As part of this strategy, management has recently emphasized growth in
noninterest-bearing deposits such as checking accounts or lower interest-bearing
savings deposits by offering full service retail banking to its targeted
customer base. In order to minimize the possible adverse impact that a rise in
interest rates may have on net interest income, First Federal has developed
several strategies
12
<PAGE>
to manage its interest rate risk. Primarily, First Federal is currently selling
all newly-originated one-to four-family residential mortgage loans which are
saleable in the secondary market--most of which are long-term fixed-rate loans.
In addition, First Federal currently offers in-house (portfolio) three-year
fixed rate balloon loans and other adjustable rate loans, and has implemented an
active, diversified short-term consumer lending program, giving First Federal an
opportunity to reprice its loans on a more frequent basis.
NET PORTFOLIO VALUE
The Office of Thrift Supervision (the "OTS"), First Federal's primary
regulator has issued a proposed rule for the calculation of an interest rate
risk component for institutions with a greater than "normal" (i.e., greater than
2%) level of interest rate risk exposure ("NPV"). The OTS has not yet
implemented the capital deduction for interest rate risk. NPV is the difference
between incoming and outgoing discounted cash flows from assets, liabilities and
off-balance sheet contracts. This approach calculates the difference between the
present value of expected cash flows from assets and the present value of
expected cash flows from liabilities, as well as cash flows from off-balance
sheet contracts. Under OTS regulations, an institution's "normal" level of
interest rate risk in the event of an assumed change in interest rates is a
decrease in the institution's NPV in an amount not exceeding 2% of the present
value of its assets. The amount of that deduction is one-half of the difference
between (a) the institution's actual calculated exposure to a 200 basis point
interest rate increase or decrease (whichever results in the greater pro forma
decrease in NPV) and (b) its "normal" level of exposure which is 2% of the
present value of its assets.
Presented below, as of March 31, 1998, the date of the latest OTS report,
is an analysis of First Federal's interest rate risk as measured by changes in
NPV for instantaneous and sustained parallel shifts in the yield curve, in 100
basis point increments, up and down 400 basis points in accordance with OTS
regulations. As illustrated in the table, NPV is more sensitive to rising rates
than declining rates. This occurs principally because, as rates rise, the market
value of fixed-rate loans declines due to both the rate increase and slowing
prepayments. When rates decline, First Federal does not experience a significant
rise in market value for these loans because borrowers prepay at relatively high
rates. OTS assumptions are used in calculating the amounts in this table.
13
<PAGE>
Acceptable Limits
Change in Established by Board of
Interest Rate At Mar. 31, 1998 Directors
(Basis Points) $ Change %Change % Change
- -------------- -------- -------- ----------------------
(Dollars in Thousands)
+400 $7,326 $(604) (8)% (75)%
+300 7,625 (305) (4) (50)
+200 7,856 (74) (1) (30)
+100 7,978 48 1 (15)
--- 7,930 --- --- ---
-100 7,813 (117) (1) (15)
-200 7,878 (52) (1) (30)
-300 8,154 224 3 (50)
-400 8,500 570 7 (75)
Management reviews the OTS measurements on a quarterly basis. In addition
to monitoring selected measures on NPV, management also monitors effects on net
interest income resulting from increases or decreases in rates. This measure is
used in conjunction with NPV measures to identify excessive interest rate risk.
In the event of a 400 basis point change in interest rates, First Federal would
experience a 7% increase (or $570,000) in NPV in a declining rate environment
and an 8% decrease (or $604,000) in a rising rate environment. As of March 31,
1998, an increase in interest rates of 200 basis points would have resulted in a
1% decrease (or $74,000) in the present value of First Federal's assets, while a
change in the interest rates of negative 200 basis points would have resulted
also in a 1% decrease in the present value of First Federal's assets. These
levels are within the limits acceptable to the Board of Directors.
In evaluating First Federal's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing
tables must be considered. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Further, in the event of a change in interest rates, prepayment
and early withdrawal levels would likely deviate significantly from those
assumed in calculating the table. For example, projected passbook, money market
and checking account maturities may also materially change if interest rates
change. Finally, the ability of many borrowers to service their debt may
decrease in the event of an interest rate increase. First Federal considers all
of these factors in monitoring its exposure to interest rate risk.
NON-PERFORMING ASSETS AND LOAN LOSS PROVISION
Management establishes specific reserves for the estimated losses on loans
when it determines that losses are anticipated on these loans. The Company
calculates any allowance for possible loan losses based upon its ongoing
evaluation of pertinent factors underlying the types and
14
<PAGE>
quality of its loans, with particular emphasis on average historical loan losses
during the preceding three years. These factors include but are not limited to
the current and anticipated economic conditions, including uncertainties in the
real estate market, the level of classified assets, historical loan loss
experience, a detailed analysis of individual loans for which full
collectability may not be assured, a determination of the existence and fair
value of collateral, the ability of the borrower to repay and the guarantees
securing such loans. Management, as a result of this review process, and in
light of uncertain economic conditions, recorded a provision for loan losses in
the amount of $50,000 for the three months ending June 30, 1998, as compared to
a $15,000 loan loss provision for the three months ending June 30, 1997. The
Bank's loan loss reserve balance as of June 30, 1998 was $303,000 compared to
the September 30, 1997 loan loss reserve of $273,000, or 0.45% and 0.42% of
total loans, respectively. Total non-performing assets increased during the
three month period ended June 30, 1998 to $1.7 million or 2.16% of total assets
as compared to $1.3 million or 1.71% of total assets at September 30, 1997. Most
of this increase in non-performing assets was attributable to several past-due
residential mortgage loans, the unpaid principal balance of which is less than
the appraised value. Historical actual charge-offs (net of recoveries) from loan
losses over the past three fiscal years ended 9/30/97 have averaged only $13,000
per year on an average loan portfolio of $50.9 million.
The Company will continue to monitor and adjust its allowance for losses on
loans as the Board of Director's and management's analysis of its growing loan
portfolio and overall economic conditions dictate. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Company to
recognize additions to the allowance based upon their judgment of the
information available to them at the time of their examination. Therefore,
although the Company maintains its allowance for losses on loans at a level
which it considers to be adequate to provide for potential losses, in view of
the continued uncertainties in the economy generally and the regulatory
uncertainty pertaining to reserve levels for the thrift industry generally,
there can be no absolute assurance that losses will not exceed the estimated
amounts or the Bank will not be required to make additional substantial
additions to its allowance for losses on loans in the future.
RESULTS OF OPERATIONS
The Company's results of operations are primarily dependent on its net
interest income--which is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Interest income is a function of the average balances of interest-earning assets
(primarily loans) outstanding during the period and the average yields earned on
such assets. Interest expense is a function of the average amount of
interest-bearing liabilities (primarily deposits) outstanding during the period
and the average rates paid on such liabilities. The Company also generates
noninterest income, such as income from service charges and fees on checking
accounts, loan servicing and other fees and charges and gains on sales of loans
and servicing rights. The Company's net income is also affected by the level of
its noninterest expenses, such as employee salaries and benefits, occupancy and
equipment expenses, and federal deposit insurance premiums.
15
<PAGE>
COMPARISON OF NINE MONTHS ENDED JUNE 30, 1998 TO JUNE 30, 1997
The Company reported net income after taxes of $254,000 for the nine months
ended June 30, 1998, a decrease of $215,000 as compared to $469,000 in net
income reported for the nine months ended June 30, 1997. The decrease in
earnings, as discussed in more detail below, resulted primarily from a $602,000
increase in the Company's interest expense on increased deposits and interest on
its new debentures, and a $763,000 increase in noninterest expense, partially
offset by an increase of $1.1 million in interest income and an increase of
$40,000 in noninterest income.
Net interest income increased $459,000 to $2.6 million for the nine month
period ended June 30, 1998 from $2.1 million for the prior period in 1997. This
increase was attributable primarily to an increase in interest earned on loans
receivable, primarily as a result of an increase in the amount of outstanding
loans partially offset by increases in volumes of the Company's deposit
liabilities and Federal Home Loan Bank advances. This increase was also
partially offset by interest expense of the Debentures as part of the Company's
reorganization. For the nine months ended June 30, 1998, the spread between the
average yield on interest earning assets and the average cost of funds decreased
to 4.65% at June 30, 1998 from 4.81% at June 30, 1997.
Noninterest income increased $57,000 to $646,000 for the nine months ended
June 30, 1998 from $589,000 for the nine months ended June 30, 1997. This
increase can be attributed to a $36,000 increase in net gain on sale of loans
and mortgage servicing rights and a $41,000 increase in other noninterest
income, as a result of recognizing excess auto dealer reserves due to the
repayment of auto loan balances. The Company recorded a $20,000 decrease in
service charges on checking accounts during the nine months ended June 30, 1998,
as a result of a change in policy to more accurately reflect the collectibility
of service charges on a current basis.
Noninterest expense increased $780,000 to $2.8 million for the nine months
ended June 30, 1998 from $2.0 million for the nine months ended June 30, 1997.
This increase can primarily be attributed to a $388,000 increase in compensation
and benefits expense due to increases in salaries to be able to meet competitive
financial institutions' salaries and retain key people with First Federal,
additional staffing for the recently expanding mortgage and consumer loan
departments, and in particular the Second Chance Auto Loan Program, a $64,000
increase in occupancy and equipment expense, due to the recent opening of First
Federal's new branch in North Bryan, a $41,000 increase in professional fees, a
$18,000 increase in data processing expense due to the Bank's growth and a
$266,000 increase in other noninterest expense. This increase consisted
primarily of increases in office supplies, postage, telephone, etc. which relate
to the growth in the Company's asset size, $33,000 relating to the amortization
of debt issue cost and $20,000 in franchise tax expense relating to the holding
company. This was partially offset by a $8,000 decrease in federal deposit
insurance premiums. This additional noninterest expense was incurred primarily
as an investment in the Bank's plans for future growth and future increased
profitability. There can be no assurance that these objectives can be achieved.
The Company is currently in the process of conducting a comprehensive
review of its computer systems to identify the systems that could be affected by
the "Year 2000" potential issue. The Year 2000 potential issue is the result of
computer programs being written using two digits
16
<PAGE>
rather than four to define the applicable year. Any of the Company's programs
that have time sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in system failure or
miscalculations. Management anticipates that the enhancements necessary to
prepare its systems for the year 2000 will be completed in a timely manner.
The Company is also aware of the risks to third parties, including vendors
(and to the extent appropriate, depositors and borrowers) and the potential
adverse impact on the company resulting from failures by these parties to
adequately address these risks. The Company has been communicating with its
outside data processing service bureau, as well as other third-party service
providers (and to the extent appropriate, depositors and borrowers), to assess
their progress in evaluating their systems and implementing any corrective
measures required by them to be prepared for the year 2000. To date, the Company
has not been advised by any of its primary vendors that there are any
unmitigated risks regarding potential issues related to the Year 2000. However,
no assurance can be given as to the adequacy of any plans or to the timeliness
of their implementation.
The Company anticipates that it may incur additional internal staff costs
as well as consulting and other expenses related to the enhancements necessary
to prepare the systems for the Year 2000. Based on the Company's current
knowledge and investigations, any additional expense relating to the Year 2000
potential issues is not expected to have a material impact on the Company's
financial position or results of operations.
Income tax expense decreased $111,000 to $131,000 for the nine months ended
June 30, 1998 from $242,000 for the nine month ended June 30, 1997. The period
reflected a tax rate of 34.0% for June 30, 1998 and June 30, 1997, respectively.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 TO JUNE 30, 1997
The Company reported net income after taxes of ($21,000) for the three
months ended June-30, 1998, a decrease of $195,000 as compared to $174,000 in
net income reported for the three months ended June 30, 1997. The decrease in
earnings, as discussed in more detail below, resulted primarily from a $226,000
increase in the Company's interest expense on deposits and its' debentures and a
$392,000 increase in noninterest expense (as discussed further below), partially
offset by an increase of $343,000 in interest income and an increase of $14,000
in noninterest income.
Net interest income increased $117,000 to $845,000 for the three month
period ended June-30, 1998 from $728,000 for the prior period in 1997. This
increase was attributable primarily to an increase in interest earned on loans
receivable primarily as a result of an increase in the amount of outstanding
loans, partially offset by an increase in volumes of the Company's deposit
liabilities. For the three months ended June 30, 1998, the spread between the
average yield on interest earning assets and the average cost of funds decreased
to 4.65% at June 30, 1998 from 4.81% at June 30, 1997.
Noninterest income increased $31,000 to $247,000 for the three months ended
June 30, 1998 from $216,000 for the three months ended June 30, 1997. This
increase can be attributed to a
17
<PAGE>
$36,000 increase in service charges on checking accounts, a $16,000 net gain on
sale of loans and mortgage servicing rights, offset by a $21,000 decrease in
other noninterest income.
Noninterest expense increased $409,000 to $1.1 million for the three months
ended June 30, 1998 from $665,000 for the three months ended June 30, 1997. This
increase can primarily be attributed to a $167,000 increase in compensation and
benefits expense due to increase in salaries for key people in the Bank to meet
competition and retain them in the Bank, the recently expanded mortgage loan
department, additional staffing for the expanding consumer loan department, and
in particular the Bank's profitable Second Chance Auto Loan Program, additional
and more experienced tellers, expansion of the new accounts and loan collection
department, a $42,000 increase in occupancy and equipment expense related to the
Bank's new North Bryan branch, a $27,000 increase in professional fees and a
$167,000 increase in other noninterest expense. This increase consisted
primarily of increases in office supplies, postage, telephone, etc. which relate
to the growth in the Company's asset size, $33,000 relating to the amortization
of debt issue cost and $20,000 in franchise tax expense relating to the holding
company.
Income tax expense/(benefits) was ($11,000) for the three months ended June
30, 1998, as compared to $90,000 for the three months ended June 30, 1997. The
benefit for the current period was a result of a net loss before tax for the
three months ended June 30, 1998. The period reflected a tax rate of 34.1% and
(34.4%) for June 30, 1998 and June 30, 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
First Federal's primary sources of funds are savings and checking accounts,
principal and interest payments on loans and mortgage-backed securities,
proceeds from sales of loans and other funds provided from operations.
Additionally, First Federal borrows funds from the FHLB of Dallas or utilizes
other borrowing of funds based on need, comparative costs and availability at
the time.
While scheduled loan and mortgage-backed repayments and short-term
investments, and FHLB borrowings are relatively stable sources of funds, deposit
flows are unpredictable and are a function of external factors including
competition, the general level of interest rates and general economic
conditions.
The Company maintains investments in liquid assets based on management's
assessment of cash needs, expected deposit flows, available yield on liquid
assets (both short-term and long-term) and the objectives of its asset/liability
management program. Several options are available to increase liquidity,
including reducing loan originations, increasing loan sales, increasing deposit
marketing activities, and increasing borrowings.
Federal regulations require insured institutions to maintain minimum levels
of liquid assets. As of June 30, 1998, the minimum regulatory liquidity
requirement was 4% of the sum of First Federal's average daily balance of net
withdrawable deposit accounts and borrowing payable in one year or less. At June
30, 1998, First Federal's regulatory ratio was 4.52%. First Federal uses its
capital resources principally to meet its ongoing commitments to fund maturing
certificates of deposits and deposit withdrawals, repay borrowings, fund
existing and continuing loan
18
<PAGE>
commitments, maintain its liquidity and meet operating expenses. At June 30,
1998, First Federal had commitments to originate loans totaling $4.3 million.
First Federal also had $4.5 million of outstanding unused lines of credit. If
needed for liquidity purposes, First Federal was eligible to borrow $25.5
million from the Federal Home Loan Bank of Dallas at June 30, 1998. First
Federal considers its liquidity, sources of additional liquidity and capital
resources to be adequate to meet its foreseeable and long-term needs. First
Federal expects to be able to fund or refinance, on a timely basis, its material
commitments and long-term liabilities.
At June 30, 1998 the Bank had Tier 1 (Core) Capital of $5.1 million, or
6.58% of total assets which was $2.0 million above the minimum capital
requirement of $3.1 million or 4% of total assets.
At June 30, 1998, the Bank had total risk based capital of $5.4 million and
risk weighted assets of $63.7 million or total risk based capital of 8.51% of
risk weighted assets. This amount was $322,000 above the minimum regulatory
requirement of $5.1 million, or 8.0% of risk weighted assets.
Net proceeds received from the Company initial public offering of
common stock and Debentures after cash payments to First Federal's stockholders
and expenses totaled $694,000. Management believes that dividends from First
Federal will be adequate to meet the Company's foreseeable liquidity needs.
NEW ACCOUNTING PRONOUNCEMENTS
On March 3, 1997, the Financial Accounting Standards Board (FASB) issued
Statement 128, "Earnings Per Share", which is effective for financial statements
beginning with year end 1997. Statement 128 simplifies the calculation of
earnings per share (EPS) by replacing primary EPS with basic EPS. It also
requires dual presentation of basic EPS and diluted EPS for entities with
complex capital structures. Basic EPS include no dilution and is computed by
dividing income available to common shareholders by the weighted-average common
shares outstanding for the period. Diluted EPS reflects the potential dilution
of securities that could share in earnings, such as stock options, warrants or
other common stock equivalents. Statement 128 has had little impact on the Banks
earnings per share calculations. All prior period EPS data have been restated to
conform with the new presentation.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," was issued by the Financial Accounting Standards Board in
1977. This Statement established standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. It does not address issues of recognition or measurement
for comprehensive income and its components. Statement 130 is effective for
fiscal years beginning after December 15, 1997. Since the provisions of this
Statement are disclosure oriented, it will have no impact on the operations of
the Bank.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," was issued in 1997 by the
Financial Accounting Standards Board. This Statement established standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those
19
<PAGE>
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. Statements 131 is effective for periods beginning after December 15,
1997. Management does not believe that the provisions of this Statement are
applicable to the Bank, since substantially all of the Bank's operations are
banking activities.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133"), issued in June
1998, must be adopted as of January 1, 2000. This Statement establishes
accounting and reporting standards for derivative financial instruments and for
hedging activities. Upon adoption of the Statement, all derivatives must be
recognized at fair value as either assets or liabilities in the statement of
financial position. Changes in the fair value of derivatives not designated as
hedging instruments are to be recognized currently in earnings. Gains or losses
on derivatives designated as hedging instruments are either to be recognized
currently in earnings or are to be recognized as a component of other
comprehensive income, depending on the intended use of the derivatives and the
resulting designations. Upon adoption, retroactive application of this Statement
to financial statements of prior periods is not permitted. Management
anticipates the adoption of SFAS No. 133 will not have a material impact on the
financial condition or operations of the Bank.
SAFE HARBOR STATEMENT
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provision for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Company and the subsidiaries include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and could affect the Company's financial performance and cause the
Company's actual results for future periods to differ materially from those
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made.
The Company does not undertake, and specifically disclaims any obligation,
to revise any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or
20
<PAGE>
circumstances after the date of such statements. Further information concerning
the Company and its business, including additional factors that could materially
affect the Company's financial results, is included in the Company's filings
with the Securities and Exchange Commission.
21
<PAGE>
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE BRYAN COLLEGE STATION FINANCIAL
HOLDING COMPANY
Date:_____________________ ____________________________________
J. Stanley Stephen
President and Chief Executive Officer
Date:_____________________ _____________________________________
Mary L. Hegar
Chief Financial Officer
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> MAR-31-1998
<PERIOD-END> JUN-30-1998
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