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 March 31, 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
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THE BRYAN COLLEGE STATION FINANCIAL HOLDING COMPANY
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(Exact name of registrant as specified in its charter)
DELAWARE
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(State or other jurisdiction of incorporation of organization)
36-4153491
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(I.R.S employer identification no.)
2900 Texas Avenue, Bryan Texas 77802
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(Address of principal executive offices) (Zip Code)
(409) 779-2900
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(Registrant's telephone number, including area code)
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(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 May 18, 1998
----------------------- ------------------
COMMON STOCK 389,436
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
BRYAN, TEXAS
FORM 10-QSB
SIX MONTHS ENDED MARCH 31, 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....................................................10-19
PART II - OTHER INFORMATION
Other Information.............................................................20
Signatures....................................................................21
ii
<PAGE>
FIRST FEDERAL SAVINGS BANK
BRYAN/COLLEGE STATION, TEXAS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 1998 and September 30, 1997
(Unaudited)
In thousands, except per share data
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
March 31, September 30,
1998 1997
-------- -------
<S> <C> <C>
ASSETS
Cash and due from banks $ 952 $ 756
Interest-bearing deposits in other financial institutions 2,427 3,675
----------- -----------
Total cash and cash equivalents 3,379 4,431
Mortgage-backed securities held-to-maturity (fair value:
March 1998 - $ 1,037; September 1997 - $1,129) 1,047 1,150
Loans held for sale 146 204
Loans receivable 66,874 65,033
Federal Home Loan Bank stock 923 896
Real estate owned and in judgment 462 520
Premises and equipment 1,399 1,117
Accrued interest receivable 548 537
Other assets 1,253 1,201
----------- -----------
$ 76,031 $ 75,089
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 66,507 $ 58,808
Advance payments by borrowers for insurance and taxes 366 862
Advances from Federal Home Loan Bank 3,700 10,000
Accrued interest payable and other liabilities 513 585
----------- -----------
71,086 70,255
Stockholders' equity
Preferred stock - par value $.01 per share;
authorized 1,000,000 shares, issued 87,263 shares 1 1
Common stock - par value $.01 per share;
authorized 3,000,000 shares, issued 239,612 shares 2 2
Additional paid-in capital 2,743 2,743
Retained earnings, substantially restricted 2,199 2,088
----------- -----------
4,945 4,834
----------- -----------
$ 76,031 $ 75,089
=========== ===========
</TABLE>
3
<PAGE>
FIRST FEDERAL SAVINGS BANK
BRYAN/COLLEGE STATION, TEXAS
CONSOLIDATED STATEMENTS OF INCOME
For the three months and six months ended March 31, 1998 and 1997
(Unaudited)
In thousands, except per share data
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
March 31, March 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income
Loans $ 3,217 $ 2,513 $ 1,609 $ 1,288
Mortgage-backed securities 33 38 16 19
Securities - - - -
Other 84 65 39 32
---------- ---------- ---------- ----------
Total interest income 3,334 2,616 1,664 1,339
Interest expense
Deposits 1,412 1,186 719 602
Other borrowings 183 33 67 26
---------- ---------- ---------- ----------
Total interest expense 1,595 1,219 786 628
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,739 1,397 878 711
Provision for loan losses 29 2 - -
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,710 1,395 878 711
Noninterest income
Service charges 258 315 130 146
Gain on sale of loans and mortgage servicing rights 79 58 44 11
Other 62 - 32 -
---------- ---------- ---------- ----------
Total noninterest income 399 373 206 157
Noninterest expense
Compensation and benefits 862 641 458 320
Occupancy and equipment expense 185 163 95 81
Federal insurance premiums 18 28 9 8
Net (gain) loss on real estate owned 13 (2) 6 (9)
Professional fees 84 70 45 36
Data processing 95 85 48 44
Other 435 336 200 164
---------- ---------- ---------- ----------
Total noninterest expense 1,692 1,321 861 644
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAX EXPENSE 417 447 223 224
Income tax expense 142 152 76 76
---------- ---------- ---------- ----------
NET INCOME 275 295 147 148
Preferred stock dividends (44) (44) (22) (21)
---------- ---------- ---------- ----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 231 $ 251 $ 125 $ 127
========== ========== ========== ==========
EARNINGS PER SHARE:
BASIC $ .96 $ 1.05 $ .52 $ .53
========== =========== ========== ==========
DILUTED $ .94 $ 1.03 $ .51 $ .52
========== =========== ========== ==========
</TABLE>
4
<PAGE>
FIRST FEDERAL SAVINGS BANK
BRYAN/COLLEGE STATION, TEXAS
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
March 31, 1998 and 1997
(Unaudited)
In thousands, except per share data
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Six Months Ended Three Months Ended
March 31, March 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $ 4,834 $ 4,316 $ 4,880 $ 4,440
Net income 275 295 147 148
Cash dividends paid (164) (44) (82) (21)
--------- ---------- ---------- ----------
Balance at end of period $ 4,945 $ 4,567 $ 4,945 $ 4,567
========= ========== ========== ==========
</TABLE>
5
<PAGE>
FIRST FEDERAL SAVINGS BANK
BRYAN/COLLEGE STATION, TEXAS
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three and six months ended March 31, 1998 and 1997
(Unaudited)
In thousands
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Six Months Ended Three Months Ended
March 31, March 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 275 $ 295 $ 147 $ 148
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 97 83 46 41
Amortization of premiums and discounts on
investment and mortgage-backed securities, net (2) 1 (3) -
Net change in loans held for sale 89 (918) 14 (1,042)
Amortization of deferred loan origination fees 30 2 53 (11)
Net (gains) losses on sales of
Mortgage loans (31) (28) (13) (4)
Mortgage servicing rights (48) (30) (31) (7)
Real estate owned 1 (2) 1 (2)
Provision for losses on loans 29 2 - -
Federal Home Loan Bank stock dividend (27) (24) (14) (12)
Change in
Accrued interest receivable (11) (149) (22) (112)
Other assets (52) (149) (147) 156
Accrued interest payable and other liabilities (72) (292) 57 (171)
--------- --------- --------- --------
Net cash provided by (used in) operating
activities 278 (1,209) 88 (1,016)
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans receivable (1,847) (3,559) (1,538) (985)
Maturities of securities - 1,000 - -
Principal payments on mortgage-backed securities
and collateralized mortgage obligations 105 72 36 30
Proceeds from sale of mortgage servicing rights 48 30 31 7
Investment in office properties and equipment, net (379) (187) (305) (141)
Proceeds from sale of foreclosed real estate 14 149 10 149
Capital expenditures on foreclosed real estate (10) (57) (7) (57)
--------- --------- ---------- --------
Net cash used in investing activities (2,069) (2,552) (1,773) (997)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 7,699 3,394 4,173 2,095
Net increase (decrease) in advance payments by
borrowers for insurance and taxes (496) (469) 227 215
Net change in Federal Home Loan Bank advances (6,300) 2,200 (3,300) 700
Dividends paid (164) (44) (82) (21)
--------- --------- ---------- --------
Net cash provided by financing activities 739 5,081 1,018 2,989
--------- --------- --------- --------
Decrease in cash and cash equivalents (1,052) 1,320 (667) 976
Cash and cash equivalents at beginning of period 4,431 2,806 4,046 3,150
--------- --------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,379 $ 4,126 $ 3,379 $ 4,126
========= ========= ========= ========
</TABLE>
6
<PAGE>
FIRST FEDERAL SAVINGS BANK
BRYAN/COLLEGE STATION, TEXAS
NOTES TO CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 First Federal Savings
Bank, Bryan/College Station, Texas (the Bank) and its wholly-owned subsidiary,
First Service Corporation of Bryan, as of March 31, 1998 and September 30, 1997,
and the results of its operations and cash flows for the three-month and
six-month periods ended March 31, 1998 and 1997.
NOTE 2 - ALLOWANCE FOR LOAN LOSSES
The summary of changes in the allowance for loan losses is as follows:
Six Months Ended
March 31,
(In thousands)
1998 1997
---- ----
Balances, beginning of period $ 273 $ 247
Provision charged to operations 29 2
Charge-offs (68) (4)
Recoveries 5 5
---------- ----------
Balances, end of period $ 239 $ 250
========== ==========
NOTE 3 - EARNINGS PER COMMON SHARE
Earnings per share is calculated under the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share", which was adopted by the
Bank in 1997. The amount reported as earnings per common share for the period
reflects earnings available to common shareholders divided by the weighted
average number of common shares outstanding.
(Continued)
7
<PAGE>
NOTE 4 - EARNINGS PER COMMON SHARE (Continued)
A reconciliation of the numerator and denominator of the earnings per common
share computation for the periods ended March 31, 1998 and 1997 is presented
below.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
March 31, March 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC EPS COMPUTATION
Net income $ 275 $ 295 $ 147 $ 148
Preferred stock dividends (44) (44) (22) (21)
------------ ------------ ------------ ------------
Income available to common shareholders 231 251 125 127
------------ ------------ ------------ ------------
Common shares outstanding 239,612 239,612 239,612 239,612
------------ ------------ ------------ ------------
Basic EPS $ .96 $ 1.05 $ .52 $ .53
============ =========== ============ ============
DILUTED EPS COMPUTATION
Income available to common shareholders $ 231 $ 251 $ 125 $ 127
------------ ------------ ------------ ------------
Weighted average common shares 239,612 239,612 239,612 239,612
Effect of stock options 5,538 4,731 5,528 4,731
------------ ------------ ------------ ------------
Total shares 245,150 244,343 245,150 244,343
Diluted EPS $ .94 $ 1.03 $ .51 $ .52
============ =========== ============ ============
</TABLE>
NOTE 5 - CAPITAL REQUIREMENTS
Pursuant to federal regulations, savings institutions must meet two separate
capital requirements. The following is a summary of the Bank's regulatory
requirements at March 31, 1998:
Core Risk-Based
Capital Capital
------- -------
(In thousands)
Regulatory capital $ 4,945 $ 5,184
Minimum capital requirement 3,048 4,890
----------- ----------
Excess regulatory capital over
minimum requirement $ 1,897 $ 294
=========== ==========
(Continued)
8
<PAGE>
NOTE 6 - RECAPITALIZATION
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. On April 1, 1998, the Company acquired all of the common stock of First
Federal through the purchase of 163,828 First Federal common shares at $24.07
per share and exchange of 75,784 shares of First Federal common shares for
189,460 Company common shares. In addition, on April 1, 1998, the Company issued
200,000 shares of common stock at $10 per share and sold $3,629,000 in 5-year,
11.5% subordinated debentures (the "Debentures") and warrants to purchase a
total of 32,661 shares of Common Stock at an exercise price of $12.50 per share
(the "Warrants")
The Company incurred costs of approximately $979,000 related to the
recapitalization and the debt and stock offerings.
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
acquired all of the common stock of First Federal. The Company has not engaged
in any material operations and at March 31, 1998, had no significant assets.
Accordingly, the following discussion focuses on the financial condition of the
Bank at March 31, 1998 and the consolidated results of operations for the six
months ending March 31, 1998 compared to the same period in 1997.
First Federal'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) through its readily accessible offices located in
Bryan, College Station, and its loan production offices located in the middle of
its expanded market area in the growing triangle between Dallas, Houston and
Austin, Texas. The Bank intends to continue to focus primarily on one to
four-family residential lending, direct and indirect consumer lending, including
home improvement loans, constructions loans, small to medium-sized commercial
business loans, some of which are partially guaranteed by the U.S. Small
Business Administration and credit default insured indirect automobile loans for
subprime borrowers ("Second Chance Auto Loans"). In addition, First Federal 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, 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 loans, loan servicing rights and
investments, provisions expensed for loan and other repossessed real estate
losses, service charge fees, loan servicing income, fees for other financial
services rendered, operating expenses and income taxes. First Federal believes
that building its earnings from net interest income and noninterest income, such
as the profitable sale of long-term, fixed 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, 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.
First Federal'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
10
<PAGE>
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 restructuring and expansion to provide full-service banking
and more convenience to its customers has caused increases in First Federal's
operating expense levels, which in past periods resulted in First Federals
operating expenses exceeding its net interest income. Although net interest
income now exceeds noninterest expense, since 1991, First Federal has relied
primarily on its noninterest income for net income.
FINANCIAL CONDITION
First Federal's total assets increased by $942,000 to $76.0 million at
March 31, 1998 from $75.1 million at September 30, 1997. This increase consisted
primarily of an increase in loans receivable, partially offset by a decrease of
cash and cash equivalents.
Loans receivable (excluding loans held for sale at month end to the
secondary market) increased $1.9 million to $66.9 million at March 31, 1998,
compared to $65.0 million at September 30, 1997. During the three months ended
March 31, 1998, First Federal originated $6.4 million of mortgage loans,
including $6.2 million secured by one- to four-family residences and $6.0
million in consumer loans. Approximately $211,000 of these mortgage loans
represented refinancings of existing First Federal loans.
Deposits increased $7.7 million from $58.8 million at September 30, 1997 to
$66.5 million at March 31, 1998 as a result of increased marketing of short-term
certificates of deposits--along with new checking accounts. Other liabilities
deceased $6.8 million from $11.4 million at September 30, 1997 to $4.6 million
at March 31, 1998, primarily as a result of a $6.3 million decrease in advances
from the Federal Home Loan Bank of Dallas.
ASSET/LIABILITY MANAGEMENT
First Federal, like all financial institutions, is subject to interest rate
risk to the degree that its interest-bearing liabilities mature or reprice more
rapidly, or on a different basis, than its interest-earning assets, 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, 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
11
<PAGE>
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 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 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 December 31, 1997, 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.
12
<PAGE>
<TABLE>
<CAPTION>
Change in Acceptable Limits
Interest Rate Estimated Established by Board of
(Basis Points) NPV At December 31, 1997 Directors
-------------- ----------- --------------------- ----------------------
$ Change % Change % Change
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+400 $6,319 $(1,049) (14)% (75)%
+300 6,710 (658) (9) (50)
+200 7,045 (324) (4) (30)
+100 7,282 (87) (1) (15)
--- 7,368 --- --- ---
-100 7,357 (11) --- (15)
-200 7,539 171 2 (30)
-300 7,901 532 7 (50)
-400 8,324 956 13 (75)
</TABLE>
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 13% increase (or $956,000) in NPV in a declining rate environment
and a 14% decrease (or $1.0 million) in a rising rate environment. As of
December 31, 1997, an increase in interest rates of 200 basis points would have
resulted in a 4% decrease (or $324,000) in the present value of First Federal's
assets, while a change in the interest rates of negative 200 basis points would
have resulted in a 2% increase 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.
13
<PAGE>
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 Bank
calculates any allowance for possible loan losses based upon its ongoing
evaluation of pertinent factors underlying the types and 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, determined that no such
provision was required for the three months ending March 31, 1998 or March 31,
1997. The Bank's loan loss reserve balance as of March 31, 1998 was $239,000
compared to the September 30, 1997 loan loss reserve of $273,000, or 0.36% and
0.42% of total loans, respectively. Total non-performing assets decreased during
the three month period ended March 31, 1998 to $901,000 or 1.19% of total assets
as compared to $1.3 million or 1.71% of total assets at September 30, 1997.
Historical actual charge-offs (net of recoveries) from loan losses over the past
three fiscal years have averaged only $13,000 on an average loan portfolio of
$50.9 million.
The Bank will continue to monitor and adjust its allowance for losses on
loans as the Board of Director's and management's analysis of its loan portfolio
and 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 Bank 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 Bank
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
First Federal'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
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 outstanding during the period and the average rates paid on such
liabilities. First Federal 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. First
Federal'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.
14
<PAGE>
COMPARISON OF SIX MONTHS ENDED MARCH 31, 1998 TO MARCH 31, 1997
First Federal reported net income after taxes of $275,000 for the six
months ended March 31, 1998, a decrease of $20,000 as compared to $295,000 in
net income reported for the six months ended March 31, 1997. The decrease in
earnings, as discussed in more detail below, resulted primarily from a $376,000
increase in the Banks interest expense and a $371,000 increase in noninterest
expense, partially offset by an increase of $718,000 in interest income and an
increase of $26,000 in noninterest income.
Net interest income increased $342,000 to $1.7 million for the six month
period ended March 31, 1998 from $1.4 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 and an increased interest rate spread, partially offset by increases in
rates paid on the Bank's deposit liabilities and Federal Home Loan Bank
advances. For the six months ended March 31, 1998, the spread between the
average yield on interest earning assets and the average cost of funds increased
to 4.82% at March 31, 1998 from 4.51% at March 31, 1997.
Noninterest income increased $26,000 to $399,000 for the six months ended
March 31, 1998 from $373,000 for the six months ended March 31, 1997. This
increase can be attributed to a $21,000 increase in net gain on sale of loans
and mortgage servicing rights and a $62,000 increase in other noninterest
income, as a result of recognizing excess auto dealer reserves due to the
repayment of auto loan balances without excess loan losses. The Bank recorded a
$57,000 decrease in service charges on checking accounts, as a result of a
change in policy to more accurately reflect the collectibility of service
charges on a current basis.
Noninterest expense increased $371,000 to $1.7 million for the six months
ended March 31, 1998 from $1.3 million for the six months ended March 31, 1997.
This increase can primarily be attributed to a $221,000 increase in compensation
and benefits expense due to additional staffing for the expanding consumer loan
department, including the Second Chance Auto Loan Program and a $99,000 increase
in other noninterest expense, primarily office supplies, postage and telephone
expenses. This was partially offset by a $10,000 decrease in federal deposit
insurance premiums.
The Bank 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 rather than four to define the
applicable year. Any of the Bank'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 Bank 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 Bank 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 Bank 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.
15
<PAGE>
The Bank anticipates that it may incur 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 Bank's current knowledge and
investigations, any expense relating to the Year 2000 potential issues is not
expected to have a material impact on the Bank's financial position or results
of operations.
Income tax expense decreased $ 10,000 from $142,000 for the six months
ended March 31, 1998 from $152,000 for the six month ended March 31, 1997. The
period reflected a tax rate of 34.1% and 34.0% for March 31, 1998 and March 31,
1997, respectively.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 TO MARCH 31, 1997
First Federal reported net income after taxes of $147,000 for the three
months ended March 31, 1998, a decrease of $1,000 as compared to $148,000 in net
income reported for the three months ended March 31, 1997. The decrease in
earnings, as discussed in more detail below, resulted primarily from a $158,000
increase on the Bank's interest expense and a $217,000 increase in noninterest
expense, partially offset by an increase of $325,000 in interest income and an
increase of $49,000 in noninterest income.
Net interest income increased $167,000 to $878,000 for the three month
period ended March 31, 1998 from $711,000 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, and an increase in interest rate spread, partially offset by an increase
in rates paid on the Bank's deposit liabilities and Federal Home Loan Bank
advances. For the three months ended March 31, 1998, the spread between the
average yield on interest earning assets and the average cost of funds increased
to 4.82% at March 31, 1998 from 4.51% at March 31, 1997.
Noninterest income increased $49,000 to $206,000 for the three months ended
March 31, 1998 from $157,000 for the three months ended March 31, 1997. This
increase can be attributed to a $33,000 increase in net gain on sale of loans
and mortgage servicing rights and a $32,000 increase in other noninterest
income, as a result of recognizing excess auto dealer reserves due to the
repayment of auto loan balances without excess loan losses.. The Bank recorded a
$16,000 decrease in service charges on checking accounts, as a result of a
change in policy to more accurately reflect the collectibility of service
charges on a current basis.
Noninterest expense increased $217,000 to $861,000 for the three months
ended March 31, 1998 from $644,000 for the three months ended March 31, 1997.
This increase can primarily be attributed to a $138,000 increase in compensation
and benefits expense due to additional staffing for the expanding consumer loan
department, including the Second Chance Auto Loan Program and a $36,000 increase
in other noninterest expense, primarily office supplies, postage and telephone
expenses.
Income tax expense remained unchanged at $76,000 for the three months ended
March 31, 1998 and March 31, 1997. The period reflected a tax rate of 34.1% and
33.9% for March 31, 1998 and March 31, 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
16
<PAGE>
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.
First Federal 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 origination, increasing deposit marketing activities,
and increasing borrowings.
Federal regulations require insured institutions to maintain minimum levels
of liquid assets. As of March 31, 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
March 31, 1998, First Federal's regulatory ratio was 4.66%. 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 commitments, maintain its liquidity and meet
operating expenses. At March 31, 1998, First Federal had commitments to
originate loans totaling $3.9 million. First Federal also had $4.9 million of
outstanding unused lines of credit. If needed for liquidity purposes, First
Federal was eligible to borrow $22.9 million from the Federal Home Loan Bank of
Dallas at March 31, 1998. First Federal considers its 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 March 31, 1998 the Bank had Tier 1 (Core) Capital of $4.9 million, or
6.49% of total assets which was $1.9 million above the minimum capital
requirement of $3.0 million or 4% of total assets.
At March 31, 1998, the Bank had total risk based capital of $5.2 million
and risk weighted assets of $61.1 million or total risk based capital of 8.48%
of risk weighted assets. This amount was $294,000 above the minimum regulatory
requirement of $4.9 million, or 8.0% of risk weighted assets.
Net proceeds received from the Company initial public offering of common
stock, Debentures and Warrants after cash payments to First Federals
stockholders and expenses totaled $694,000. Management believes that loan
repayments and other sources of funds will be adequate to meet the Companys
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,
17
<PAGE>
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 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.
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 circumstances after the date of such
statements. Further information concerning the Company and
18
<PAGE>
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.
19
<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.
20
<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: May 18, 1998 /s/ J. Stanley Stephen
----------------------
J. Stanley Stephen
President and Chief Executive Officer
Date: May 18, 1998 /s/Mary L. Hegar
----------------
Mary L. Hegar
Chief Financial Officer
21
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<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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0
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