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 December 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
THE BRYAN COLLEGE STATION FINANCIAL HOLDING COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction 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 February 10, 1999
-------------- -------------------------
Common Stock 389,436
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
Bryan, Texas
FORM 10-QSB
Three Months Ended December 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..........................10-20
PART II - OTHER INFORMATION
Other Information............................................................21
Signatures...................................................................22
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and September 30, 1998
(Unaudited)
In thousands, except per share data
December 31, September 30,
1998 1998
------------ -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,584 $ 1,435
Interest-bearing deposits
in other financial institutions 4,250 3,892
----------- -----------
Total cash and cash equivalents 5,834 5,327
Securities available for sale - 5
Mortgage-backed securities
held-to-maturity (fair value:
December 1998 - $894; September 1998 - $945) 903 954
Loans held for sale 273 328
Loans receivable 72,164 71,666
Federal Home Loan Bank stock 388 382
Real estate owned and in judgment 339 282
Premises and equipment 1,622 1,636
Accrued interest receivable 662 608
Other assets 1,775 1,446
----------- -----------
$ 83,960 $ 82,634
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 75,117 $ 73,554
Advance payments by borrowers
for insurance and taxes 238 863
Advance from Federal Home Loan Bank 1,000 800
Debentures 3,629 3,629
Accrued interest payable and other liabilities 1,098 1,045
----------- -----------
81,082 79,891
Minority Interest 873 873
Stockholders' equity
Common stock - par value $.01 per share;
authorized 3,000,000 shares, issued 389,436
at December 31, 1998 and 239,612 shares at
December 31, 1997 4 4
Additional paid-in capital 1,849 1,849
Retained earnings, substantially restricted 152 17
----------- -----------
2,005 1,870
----------- -----------
$ 83,960 $ 82,634
=========== ===========
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
In thousands, except per share data
Three months ended
December 31,
1998 1997
---- ----
<S> <C> <C>
Interest income
Loans $ 1,878 $ 1,608
Mortgage-backed securities 13 17
Other 66 45
---------- ----------
Total interest income 1,957 1,670
Interest expense
Deposits 861 693
Other borrowings 109 116
---------- ----------
Total interest expense 970 809
---------- ----------
Net interest income 987 861
Provision for loan losses 20 29
---------- ----------
Net interest income after provision for loan 967 832
Noninterest income
Service charges 198 128
Net gain on sale of loans and mortgage
servicing rights 139 35
Other 63 30
---------- ----------
Total noninterest income 400 193
Noninterest expenses
Compensation and benefits 548 404
Occupancy and equipment expense 133 90
Federal insurance premiums 15 9
Net (gain)/loss on real estate owned - 7
Professional fees 55 39
Data processing 62 47
Other 333 235
---------- ----------
Total noninterest expenses 1,146 831
---------- ----------
Income before income tax expense 221 194
Income tax expense 86 66
---------- ----------
Net income 135 128
Preferred stock dividends - (22)
---------- ----------
Net income available to shareholders $ 135 $ 106
========== ==========
Earnings per share:
Basic and diluted $ .32 $ 0.17
========== ==========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
December 31, 1998 and 1997
(Unaudited)
In thousands, except per share data
Three months ended
December 31,
1998 1997
---- ----
<S> <C> <C>
Balance at beginning of period $ 1,870 $ 4,834
Net income 135 128
Cash dividends paid - (82)
-------------- -------------
Balance at December 31, $ 2,005 $ 4,880
============== =============
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
In thousands
Three months ended
December 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 135 $ 128
Adjustments to reconcile net income to net
cash from operating activities
Depreciation 61 51
Amortization of premiums and discounts on
mortgage-backed securities, net 1 1
Net change in loans held for sale 165 75
Amortization of deferred loan origination fees 12 (23)
Net gains on sales of
Mortgage loans (110) (18)
Mortgage servicing rights (29) (17)
Provision for losses on loans
and real estate owned 20 29
Federal Home Loan Bank stock dividend (6) (13)
Change in
Accrued interest receivable (54) 11
Other assets (329) 95
Accrued interest payable and
other liabilities 51 (129)
----------- -----------
Net cash from operating activities (83) 190
Cash flows from investing activities
Net increase in loans receivable (583) (309)
Principal payments on mortgage-backed securities
and collateralized mortgage obligations 52 69
Proceeds from maturity of securities 5 -
Proceeds from sale of mortgage servicing rights 29 17
Investment in office properties and equipment, net (47) (74)
Investment in real estate owned (4) (3)
Proceeds from sale of real estate owned - 4
----------- -----------
Net cash from investing activities (548) (296)
Cash flows from financing activities
Net increase in deposits 1,563 3,526
Net decrease in advance payments by
borrowers for insurance and taxes (625) (723)
Net change in advances from Federal
Home Loan Bank 200 (3,000)
Dividends paid - (82)
----------- -----------
Net cash from financing activities 1,138 (279)
----------- -----------
Net change in cash and cash equivalents 507 (385)
Cash and cash equivalents at beginning of period 5,327 4,431
----------- -----------
Cash and cash equivalents at end of period $ 5,834 $ 4,046
=========== ===========
</TABLE>
6
<PAGE>
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 (the Bank), as of December
31, 1998 and September 30, 1998, and the results of its operations and cash
flows for the three-month periods ended December 31, 1998 and 1997.
NOTE 2 - ALLOWANCE FOR LOAN LOSSES
The summary of changes in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Three months ended
December 31,
(In thousands)
1998 1997
---- ----
<S> <C> <C>
Balances, beginning of period $ 307 $ 273
Provision charged to operations 20 29
Charge-offs (10) (2)
Recoveries 1 2
--------- ---------
Balances, end of period $ 318 $ 302
========= =========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three months ended December 31, 1998 and 1997
(Unaudited)
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 December 31, 1998.
Tangible Core Risk based
Capital Capital Capital
----------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
GAAP capital $ 5,494 $ 5,494 $ 5,494
General valuation allowances - - 318
---------- ---------- ----------
Regulatory capital 5,494 5,494 5,812
Minimum capital requirement 3,324 1,246 5,342
---------- ---------- ----------
Excess regulatory capital over
minimum requirement $ 2,170 $ 4,248 $ 470
========== ========== ==========
</TABLE>
NOTE 4 - EARNINGS PER COMMON SHARE
Earnings per share is computed under the provisions of Statement of
Financial Accounting Standards No. 128 "Earnings Per Share", which was adopted
retroactively by the Company at the beginning of the fourth quarter of 1998.
Amounts reported as Earnings Per Common Share for the two quarters ended
December 31, 1998 and 1998 reflect the earnings available to common stockholders
for the year divided by the weighted average number of common shares
outstanding. Diluted earnings per share shows the dilutive effect of additional
common shares issuable under stock options. Earnings per share for the quarter
ended December 31, 1997 has been restated to reflect the 2.5 exchange ratio of
Bank stock for Company stock that occurred on April 1, 1998. In addition,
earnings per share for both periods have been restated to reflect a 10% common
stock dividend declared in January 1999. The weighted average shares outstanding
used to calculated earnings per share were 428,380 and 637,974 for the quarters
ended December 31, 1998 and 1997, respectively.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Bryan-College Station Financial Holding Company (the "Holding
Company"and, when referred to with its subsidiary, the "Company"), a Delaware
corporation, was formed to act as the unitary thrift holding company for First
Federal Savings Bank, Bryan, Texas ("First Federal" or the "Bank") by acquiring
100% of the stock of First Federal through the exchange of approximately 32% of
First Federal common stock for Holding Company common stock and the purchase of
approximately 68% of First Federal common stock for cash (the "Acquisition").
The Company received approval from the Office of Thrift Supervision (the "OTS")
to acquire all of the common stock of the Bank outstanding upon completion of
the Acquisition. The Acquisition was completed on April 1, 1998. All references
to the Company, unless otherwise indicated, at or before April 1, 1998 refer to
the Bank.
First Federal's major goals are to provide high quality full-service retail
banking on a profitable basis to its targeted "niche" of customers, the
middle-class population, through its offices located in Bryan/College Station
and its loan production offices located in its expanded trade area between
Dallas, Houston and Austin, Texas. First Federal intends to continue to focus
primarily on one-to four-family residential loans, direct and indirect consumer
lending, including automobile loans and home improvement loans, construction
loans, and commercial business loans, some of which are partially guaranteed by
the U.S. Small Business Association ("SBA"). In addition, First Federal also
seeks to continue improving its asset quality and minimizing to the extent
possible, its vulnerability to changes in interest rates in order to maintain a
reasonable spread between its average yield on loans and securities and its
average cost of interest paid on deposits and borrowings.
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 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.
9
<PAGE>
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 losses on repossessed
assets, 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 and the sale of loans, without
requiring additional capital.
During the past fiscal year, management has transitioned First Federal to
prepare for future growth and in order to provide more convenient banking
services to its customers, by (i) upgrading its tellers with more experienced,
full-time professionals; (ii) opening a new full-service branch in north Bryan,
adjacent to a key intersection between two major highways, in the heart of a
large area where many of First Federal's targeted middle class customers live,
and an area not presently served by a banking facility; (iii) doubling the size
of its staff in its expanding Second Chance Auto Lending Program (which requires
up to $6,000 of insurance per loan for losses due to the borrower's loan
default); (iv) hiring new management and adding to the staff of its Residential
Lending Department and providing this department with new and larger offices on
the main east-west artery in College Station; (v) providing 24-hour telephone
banking; (vi) addressing the challenges of the Year 2000 issue, with much time
and expense, and (vii) increasing salaries to retain quality people on its
staff. Management believes that this strategy will enable First Federal to
enhance profitability in the future and meet the needs of its customers in a
highly competitive market.
First Federal's restructuring and expansion, as described above, in order
to provide additional full-service banking and convenience to its customers, has
caused an increase in First Federal's operating expense levels which, despite
the recent increase in net interest income, resulted in First Federal's
operating expenses exceeding its net interest income for the quarter ending
December 31, 1998.
Since 1991, First Federal has relied primarily on its noninterest income
for net income. While First Federal's noninterest income has been a relatively
steady source of income, it is highly dependent upon the ability of First
Federal to originate loans and realize profits on the sale of these loans and
related servicing rights to the secondary market and to increase its service
charge and fee income from additional checking accounts resulting from its
transition to full-service banking.
10
<PAGE>
Financial Condition
The Company's total assets increased by $1.4 million to $84.0 million at
December 31, 1998 from $82.6 million at September 30, 1998. This increase
consisted primarily of an increase in cash on hand, loans receivable and other
assets.
Net loans receivable (excluding loans held for sale) increased $498,000 to
$72.2 million at December 31, 1998, compared to $71.7 million at September 30,
1998. During the three months ended December 31, 1998, the Company originated
$6.4 million of mortgage loans, including $6.0 million secured by one- to
four-family residential loans. Approximately $369,000 of these mortgage loans
represented refinancings of existing loans. In addition, the Company originated
$5.7 million in consumer loans, of which $2.9 million were 2nd chance auto loans
and $2.3 million in commercial business loans.
Deposits increased $1.5 million to $75.1 million at December 31, 1998,
compared to $73.6 million at September 30, 1998, as a result of increased
marketing of checking accounts. Other liabilities deceased $372,000 to $6.0
million at December 31, 1998, compared to $6.3 million at September 30, 1998,
primarily as a result of the payment of escrowed funds in December, 1998 for
property taxes related to loans held by the Bank, partially offset by an
increase in advances from the Federal Home Loan Bank of Dallas.
Stockholders' equity in the Company increased $135,000 to $2.0 million at
December 31, 1998 from $1.9 million at September 30, 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/Chief Executive Officer, Senior Vice President/Financial,
Executive Vice President/Chief Financial Officer, Manager of Operations 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.
11
<PAGE>
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 continues to emphasize 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 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.
12
<PAGE>
It has been, and continues to be, an objective of First Federal's Board of
Directors and management to manage interest rate risk. First Federal's
asset/liability policy, established by the Board of Directors, dictates
acceptable limits on the amount of change in NPV given certain changes in
interest rates. See "-- Asset/Liability Management."
Presented below, as of September 30, 1998, 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.
<TABLE>
<CAPTION>
Acceptable Limits
Change in Established by
Interest Rate Estimated At September 30, 1998 Board of Directors
(Basis Points) NPV $ Change % Change % Change
- --------------- --------- -------- -------- --------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
+400 $7,937 $ 73 1% 75%
+300 8,068 204 3 (50)
+200 8,099 235 3 (30)
+100 7,998 134 2 (15)
0 7,864 --- --- ---
-100 7,872 8 --- (15)
-200 8,105 241 3 (30)
-300 8,409 545 7 (50)
-400 8,703 839 11 (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,
13
<PAGE>
First Federal would experience a 11% increase in NPV in a declining rate
environment and a 1% decrease in a rising rate environment. As of September 30,
1998, an increase in interest rates of 200 basis points would have resulted in a
3% decrease 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 3%
increase in the present value of First Federal's assets.
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
The provision for loan losses is based on management's periodic review of
the Company's loan portfolio which considers, among other factors, past actual
loan loss experience, the general prevailing economic conditions, changes in the
size, composition and risks inherent in the loan portfolio, independent
third-party loan reviews, and specific borrower considerations such as the
ability to repay the loan and the estimated value of the underlying collateral.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for estimated
loan losses on loans. Such agencies may require the Company to provide additions
to the allowance based upon judgments which differ from those of management.
The Company recorded a provision for loan losses in the amount of $20,000
for the three months ending December 31, 1998, as compared to a $29,000 loan
loss provision for the three months ending December 31, 1997. The increase in
the provision for loan losses was largely a result of an increase in
non-performing assets. This increase was partially offset by continued low
levels of charge-offs relative to the allowance for loan losses and the use of
credit-default insurance coverage for certain automobile loans to limit the
Company's loan loss exposure. Total non-performing assets increased during the
three month period ended December 31, 1998 to $2.1 million or 2.54% of total
assets as compared to $1.2 million or 1.46% of total assets at September 30,
1998. 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.
14
<PAGE>
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
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. 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.
Comparison of Three months ended December 31, 1998 to December 31, 1997
The Company reported net income after taxes of $135,000 for the three
months ended December 31, 1998, an increase of $7,000 as compared to $128,000 in
net income reported for the three months ended December 31, 1997. The increase
in net income, as discussed in more detail below, resulted primarily from a
$287,000 increase in the Company's interest income and a $207,000 increase in
noninterest income, partially offset by an $161,000 increase in expense on
interest on its deposits and interest on its debentures and a $315,000 increase
in noninterest expense.
Net interest income increased $126,000 to $987,000 for the three-month
period ended December 31, 1998 from $861,000 for the prior period in 1997. This
increase primarily resulted from increases in the average balance and yield of
the loan portfolio, offset in part by increases in the volume and cost of
deposits and advances. In addition, the Holding Company issued 11 1/2%
debentures due March 2003 ("Debentures") in April of 1998, resulting in an
increased volume of notes payable. The average yield on loans increased as a
result of an increase in the volume of insured consumer automobile loans and
direct consumer loans which yield a higher rate than traditional mortgage loans.
The average balance of loans also increased as a result of a concerted effort to
increase the consumer loan portfolio through building relationships with auto
dealerships and promoting the "Second Chance Auto Loan Program". These increases
were partially offset by an increase in the cost of funds resulting from an
increase in the average balance of deposits, increased rates paid on deposits in
order to remain competitive and due to the Debentures. As a result of the above,
for the three months ended December 31, 1998, the spread between the average
yield on interest earning assets (loans and securities) and the average cost of
funds increased to 5.58% at December 31, 1998 from 4.60% at December 31, 1997.
15
<PAGE>
Noninterest income increased $207,000 to $400,000 for the three months
ended December 31, 1998 from $193,000 for the three months ended December 31,
1997. This increase can be attributed to a $70,000 increase in service charges
on checking accounts, a $104,000 increase on net gain on sale of loans and
mortgage servicing rights and a $33,000 increase in other noninterest income.
The increase and the gain on the sale of loans was attributable to the sale of
Second Chance Auto Loans.
Noninterest expense increased $315,000 to $1.1 million for the three months
ended December 31, 1998 from $831,000 for the three months ended December 31,
1997. Compensation and benefits increased $144,000 as a result of an increase in
the number of employees due primarily to the opening of a new branch and
increased expenses related to the expansion of the mortgage lending and second
chance automobile lending departments. Occupancy expense increased $43,000
primarily as a result of the opening of the new North Bryan branch and the
recently expanded mortgage lending offices in College Station. Other expense
increased $98,000, which consisted of various items, including $33,000 of
amortization of debt issue costs and organizational costs related to the
formation of the Holding Company and payment of a Bank preferred stock dividend
of $22,000. Various other expenses have also increased primarily as a result of
the overall growth and increased loan production of the Company.
Income tax expense was $86,000 for the three months ended December 31,
1998, as compared to $66,000 for the three months ended December 31, 1997. The
period reflected a tax rate of 38.9% and 34.0% for December 31, 1998 and
December 31, 1997, respectively.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, checking accounts,
principal and interest payments on loans and mortgage related securities,
proceeds from sales of long term, fixed-rate residential mortgage loans and
other funds provided from operations. Additionally, the Company has borrowed
funds from the FHLB of Dallas or utilize particular sources of funds based on
need, comparative costs and availability at the time.
While scheduled loan and mortgage-backed securities repayments, 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, general economic conditions
and most recently, the restructuring occurring in the thrift institutions
industry.
16
<PAGE>
The Company maintains investments in liquid assets based on management's
assessment of cash needs, expected deposit flows, availability of advances from
the FHLB, 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 deposit marketing activities, and increasing borrowings from the
FHLB.
At December 31, 1998, the Company had commitments to originate loans,
including loans in process, totaling $2.1 million. The Company also had $1.6
million of outstanding unused lines of credit and $73,000 of letters of credit.
The Company considers its liquidity and capital resources to be adequate to meet
its foreseeable short and long-term needs. The Company expects to be able to
fund or refinance, on a timely basis, its material commitments and long-term
liabilities. First Federal intends to expand its Second Chance Auto Loan Program
with additional select automobile dealers throughout the State of Texas,
retaining a portion of these loans for its own portfolio, and selling excess
loan originations in order to maintain capital compliance and liquidity needs.
The Company also has the ability, if needed, to borrow up to $28.4 million from
the FHLB of Dallas for liquidity purposes. At December 31, 1998, the Company had
$1.0 million in advances outstanding from the FHLB.
Federal regulations require insured institutions to maintain minimum levels
of liquid assets. As of December 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
December 31, 1998, First Federal's regulatory liquidity ratio was 7.96%. 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 December 31, 1998 the Bank had Tier 1 (Core) Capital of $5.5 million, or
6.61% of total assets which was $2.2 million above the minimum capital
requirement of $3.3 million or 4% of total assets.
At December 31, 1998, the Bank had total risk based capital of $5.8 million
and risk weighted assets of $66.8 million or total risk based capital of 8.70%
of risk weighted assets. This amount was $470,000 above the minimum regulatory
requirement of $5.3 million, or 8.0% of risk weighted assets.
17
<PAGE>
Year 2000 Issue
General. The year 2000 ("Y2K") issue confronting the Company and its
suppliers, customers, customers' suppliers and competitors centers on the
inability of computer systems to recognize the year 2000. Many existing computer
programs and systems originally were programmed with six digit dates that
provided only two digits to identify the calendar year in the date field. With
the impending new millennium, these programs and computers will recognize "00"
as the year 1900 rather than the year 2000.
Financial institution regulators recently have increased their focus upon
Y2K compliance issues and have issued guidance concerning the responsibilities
of senior management and directors. The Federal Financial Institutions
Examination Council has issued several interagency statements on Y2K project
management awareness. These statements require financial institutions to, among
other things, examine the Y2K implications of their reliance on vendors and with
respect to the data exchange and the potential impact of the Y2K issue on their
customers, suppliers, and borrowers. These statements also require each
federally regulated institution to survey its exposure, measure its risk and
prepare a plan to address the Y2K issue. In addition, the federal banking
regulators have issued safety and soundness guidelines to be followed by insured
depository institutions, such as the Bank, to assure resolution of any Y2K
problems. The federal banking agencies have assessed that Y2K testing and
certification is a key safety and soundness issue in conjunction with regulatory
exams and thus, that an institution's failure to address appropriately the Y2K
issue could result in supervisory action, including reduction of the
institution's supervisory ratings, the denial of applications for approval of
mergers or acquisitions or the imposition of civil money penalties.
Risks. Like most financial service providers, the Company and its
operations may be significantly affected by the Y2K issue due to its dependence
on technology and date-sensitive data. Computer software and hardware and other
equipment, both within and outside the Company's direct control, and third
parties with whom the Company electronically or operationally interfaces
(including without limitation its customers and third party vendors) are likely
to be affected. If computer systems are not modified in order to be able to
identify the year 2000, many computer applications could fail or create
erroneous results. As a result, many calculations, which rely on date field
information such as interest, payment on due dates, and all operating functions,
could generate results which are significantly misstated, and the Company could
experience an inability to process transactions, prepare statements or engage in
similar normal business activities. Likewise, under certain circumstances, a
failure to adequately address the Y2K issue could adversely affect the viability
of the Company's suppliers and creditors and the creditworthiness of its
borrowers. Thus, if not adequately addressed, the Y2K issue could result in a
significant adverse impact on the Company's operations and, in turn, its
financial condition and results of operations.
18
<PAGE>
State of Readiness. During October 1997, the Company formulated its plan to
address the Y2K issue. Since that time, the Company has taken the following
steps:
o Established senior management advisory and review responsibilities;
o Completed a company-wide inventory of applications and system software;
o Built an internal tracking database for applications and system software;
o Developed compliance plans and schedules for all lines of business;
o Completed a computer network, hardware, and software upgrade;
o Completed in-house testing of all systems;
o Obtained data processor vendor compliance certification;
o Completed data processor vendor testing;
o Began awareness and educational activities for employees through existing
internal communication channels; and
o Developed a process to respond to customer inquiries as well as help
educate customers on the Y2K issue.
The following paragraphs summarize the phases of the Company's Y2K plan:
Awareness Phase. The Company formally established a Y2K plan that is headed
by a senior manager, and a project team was assembled for management of the Y2K
project. The project team created a plan of action that includes milestones,
budget estimates, strategies, and methodologies to track and report the status
of the project. Members of the project team also attended conferences and
information sharing sessions to gain more insight into the Y2K issue and
potential strategies for addressing it. This phase is substantially complete.
Assessment Phase. The Company's strategies were further developed with
respect to how the objectives of the Y2K plan would be achieved, and a Y2K
business risk assessment was conducted to quantify the extent of the Company's
Y2K exposure. A corporate inventory (which is periodically updated as new
technology is acquired and as systems progress through subsequent phases) was
developed to identify and monitor Y2K readiness for information systems
(hardware, software, vendors, and utilities) as well as environmental systems
(security systems, facilities, etc.). Systems were prioritized based on business
impacts and available alternatives. Mission critical systems supplied by vendors
were researched to determine Y2K readiness. If Y2K ready versions were not
available, the Company began identifying functional replacements which were
either upgradable or Y2K ready, and a formal plan was developed to repair,
upgrade or replace all mission critical systems. This phase is substantially
complete.
19
<PAGE>
The Company will begin Y2K discussions with its larger borrowers. All
credits greater than $50,000 will be evaluated for Y2K exposure by a
relationship account officer using a questionnaire developed by the Company's
credit administration staff. As part of the current credit approval process, all
new and renewed loans are evaluated for Y2K risk. During the course of these
evaluations, Company personnel will meet individually with each of its larger
borrowers to discuss and obtain information regarding each borrower's dependence
on information technology and third party vendors and the nature of steps being
taken by the borrowers to address their own Y2K issues.
Renovation Phase. The Company's corporate inventory revealed that Y2K
upgrades were available for all vendor supplied mission critical systems, and
all these Y2K ready versions have been delivered and placed into production and
have entered the validation process.
Validation Phase. The validation phase is designed to test the ability of
hardware and software to accurately process date-sensitive data. The Company has
substantially completed the validation testing of each mission critical system.
The Company hired two outside firms to perform this phase. These firms tested
independent of each other verifying the other's validation of all systems.
During the validation testing process, no significant Y2K problems have been
identified relating to any modified or upgraded mission critical systems.
Implementation Phase. The Company's plan calls for placing Y2K ready code
into production before having actually completed Y2K validation testing. Y2K
ready modified or upgraded versions have been installed and placed into
production with respect to all mission critical systems.
Company Resources Invested. The Company's Y2K project team has been
assigned the task of ensuring that all systems across the Company are
identified, analyzed for Y2K compliance, corrected if necessary, tested, and
have the changes into service by the end of the first quarter of 1999. The Y2K
project team members represent all functional areas of the Company, including
branches, data processing, loan administration, accounting, item processing and
operations, compliance, internal audit, human resources, and marketing. An
assistant vice president who reports directly to a member of the Company's
senior management heads the team. The Company's Board of Directors oversees the
Y2K plan and provides guidance and resources to, and receives quarterly updates
from, the Y2K team.
20
<PAGE>
The Company is expensing all costs associated with required system changes
as those costs are incurred, and such costs are being funded through operating
cash flows. The total cost of the Y2K conversion project since commencement in
October 1997 for the Company is estimated to be $250,000 of which $117,000 has
been spent as of December 31, 1998. The Company does not expect significant
increases in future data processing costs related to Y2K compliance.
Contingency Plans. During the assessment phase, the Company began
developing back-up or contingency plans for each of its mission critical
systems. Virtually all of the Company's mission critical systems are dependent
upon third party vendors or service providers. Therefore, contingency plans
include selecting a new vendor or service provider and converting their system.
In the event a current vendor's system fails during the validation phase and it
is determined that the vendor is unable or unwilling to correct the failure, the
Company will convert to a new system from a preselected list of prospective
vendors. In each case, realistic trigger dates have been established to allow
for orderly and successful conversions. For some systems, contingency plans
consist of using spreadsheet software or reverting to manual systems until
system problems can be corrected.
The majority of the Company's mission critical system falls into the
categories of its core- banking software and its proof of deposit system. The
Company has received warranties from vendors to the effect that the proof of
deposit and core-banking system is Y2K ready.
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.
21
<PAGE>
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.
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
22
<PAGE>
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 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.
23
<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.
24
<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: February 16, 1999 /s/ J. Stanley Stephen
-------------------------------------
J. Stanley Stephen
President and Chief Executive Officer
Date: February 16, 1999 /s/ William Wantuck
--------------------------------------
William Wantuck
Chief Financial Officer
25
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