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, 1999
( ) 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.
No Yes X
----------- ------------
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 5, 1999
------------------ ------------------
Common Stock 428,409
Transitional Small Business Disclosure Format (check one):
No X Yes
----------- ------------
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THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
BRYAN, TEXAS
FORM 10-QSB
THREE MONTHS ENDED MARCH 31, 1999
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...................10-23
PART II - OTHER INFORMATION
Other Information...........................................................24
Signatures..................................................................26
2
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Item 1. Financial Statements
<TABLE>
<CAPTION>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
BRYAN/COLLEGE STATION, TEXAS
----------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 1999 and September 30, 1998
(Unaudited)
In thousands, except per share data
-----------------------------------------------------------------------------------------------
March 31, September 30,
1999 1998
----------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,825 $ 1,435
Interest-bearing deposits in other financial institutions 2,863 3,892
----------- -----------
Total cash and cash equivalents 4,688 5,327
Securities available-for-sale 5 5
Mortgage-backed securities held-to-maturity 852 954
Loans held for sale 230 328
Loans receivable 72,358 71,666
Federal Home Loan Bank stock 393 382
Mortgage servicing rights 298 -
Real estate owned and in judgment 424 282
Premises and equipment 1,651 1,636
Accrued interest receivable 626 608
Other assets 2,099 1,446
----------- -----------
$ 83,624 $ 82,634
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 75,711 $ 73,554
Advance payments by borrowers for insurance and taxes 413 863
Advances from Federal Home Loan Bank - 800
Debentures 3,629 3,629
Accrued interest payable and other liabilities 881 1,045
----------- -----------
80,634 79,891
Minority interest 873 873
Stockholders' equity
Common stock - par value $.01 per share;
authorized 1,500,000 shares in 1999 and
3,000,000 shares in 1998, issued 389,436 shares 4 4
Additional paid-in capital 1,849 1,849
Retained earnings, substantially restricted 264 17
----------- -----------
2,117 1,870
----------- -----------
$ 83,624 $ 82,634
=========== ===========
</TABLE>
3
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<TABLE>
<CAPTION>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
BRYAN/COLLEGE STATION, TEXAS
-------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME For
the three months and six months ended March 31, 1999 and 1998
(Unaudited)
In thousands, except per share data
--------------------------------------------------------------------------------------------------
Six Months Ended Three Months Ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income
Loans $ 3,673 $ 3,217 $ 1,795 $ 1,609
Mortgage-backed securities 25 33 12 16
Other 107 84 41 39
---------- ---------- ---------- ----------
Total interest income 3,805 3,334 1,848 1,664
Interest expense
Deposits 1,624 1,412 763 719
Other borrowings 217 183 108 67
---------- ---------- ---------- ----------
Total interest expense 1,841 1,595 871 786
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,964 1,739 977 878
Provision for loan losses 50 29 30 -
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,914 1,710 947 878
Noninterest income
Service charges 361 258 163 130
Gain on sale of loans and mortgage servicing rights 351 79 212 44
Other 215 62 152 32
---------- ---------- ---------- ----------
Total noninterest income 927 399 527 206
Noninterest expense
Compensation and benefits 1,143 862 595 458
Occupancy and equipment expense 275 185 142 95
Federal insurance premiums 32 18 17 9
Net (gain) loss on real estate owned,
including provision 146 13 146 6
Professional fees 136 84 81 45
Data processing 125 95 63 48
Office supplies 71 55 37 30
Telephone 57 32 28 14
Postage 54 49 22 28
Other 451 299 213 128
---------- ---------- ---------- ----------
Total noninterest expense 2,490 1,692 1,344 861
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAX EXPENSE 351 417 130 223
Income tax expense 104 142 18 76
---------- ---------- ---------- ----------
NET INCOME 247 275 112 147
Bank preferred stock dividends - (44) - (22)
---------- ---------- ---------- ----------
NET INCOME AVAILABLE TO SHAREHOLDERS $ 247 $ 231 $ 112 $ 125
========== ========== ========== ==========
EARNINGS PER SHARE:
BASIC $ .63 $ .39 $ .29 $ .21
========== =========== ========== ==========
DILUTED $ .63 $ .38 $ .29 $ .21
========== =========== ========== ==========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
BRYAN/COLLEGE STATION, TEXAS
--------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
March 31, 1999 and 1998
(Unaudited)
In thousands, except per share data
--------------------------------------------------------------------------------------------
Six Months Ended Three Months Ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $ 1,870 $ 4,834 $ 2,005 $ 4,880
Net income 247 275 112 147
Cash dividends paid - (164) - (82)
--------- ---------- ---------- ----------
Balance at end of period $ 2,117 $ 4,945 $ 2,117 $ 4,945
========= ========== ========== ==========
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
BRYAN/COLLEGE STATION, TEXAS
------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three and six months ended March 31, 1999 and 1998
(Unaudited)
In thousands
------------------------------------------------------------------------------------------
Six Months Ended Three Months Ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 247 $ 275 $ 112 $ 147
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 167 97 106 46
Amortization of premiums and discounts on
investment and mortgage-backed securities, net 3 (2) 2 (3)
Net change in loans held for sale 378 89 213 14
Net change in mortgage servicing rights (298) - (298) -
Change in deferred loan origination fees 32 30 20 53
Net (gains) losses on sales of
Mortgage loans (280) (31) (170) (13)
Mortgage servicing rights (71) (48) (42) (31)
Real estate owned 9 1 9 1
Provision for losses on loans 50 29 30 -
Federal Home Loan Bank stock dividend (11) (27) (5) (14)
Change in
Accrued interest receivable (18) (11) 36 (22)
Other assets (653) (52) (324) (147)
Accrued interest payable and other liabilities (164) (72) (215) 57
---------- --------- ---------- --------
Net cash provided by (used in) operating
activities (609) 278 (526) 88
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans receivable (1,109) (1,847) (526) (1,538)
Principal payments on mortgage-backed securities
and collateralized mortgage obligations 99 105 42 36
Proceeds from sale of mortgage servicing rights 71 48 42 31
Investment in office properties and equipment, net (182) (379) (135) (305)
Proceeds from sale of foreclosed real estate 199 14 199 10
Capital expenditures on foreclosed real estate (15) (10) (11) (7)
---------- --------- ---------- --------
Net cash used in investing activities (937) (2,069) (389) (1,773)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 2,157 7,699 594 4,173
Net increase (decrease) in advance payments by
borrowers for insurance and taxes (450) (496) 175 227
Net change in Federal Home Loan Bank advances (800) (6,300) (1,000) (3,300)
Dividends paid - (164) - (82)
--------- --------- --------- --------
Net cash provided by (used in) financing activities 907 739 (231) 1,018
--------- --------- ---------- --------
Decrease in cash and cash equivalents (639) (1,052) (1,146) (667)
Cash and cash equivalents at beginning of period 5,327 4,431 5,834 4,046
--------- --------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,688 $ 3,379 $ 4,688 $ 3,379
========= ========= ========= ========
</TABLE>
6
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
BRYAN/COLLEGE STATION, TEXAS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, the unaudited consolidated financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial condition of The Bryan-College Station
Financial Holding Company (the "Company") and its wholly-owned subsidiary, First
Federal Savings Bank, Bryan/College Station, Texas (the "Bank") as of March 31,
1999 and September 30, 1998, and the results of its operations and cash flows
for the three-month and six-month periods ended March 31, 1999 and 1998.
On April 1, 1998, the Company issued 200,000 shares of common stock at $10 per
share and 3,629 debentures at $1,000 per unit. The debentures bear an interest
rate of 11.5% and mature in 2003. Each debenture includes detachable warrants to
purchase 9 shares of Company common stock at $12.50 per share. Net proceeds to
the Company totaled $1.7 million and $3.2 million for the common stock and the
debentures, respectively.
Concurrent with the offerings, the Company acquired 75,784 shares of common
stock of the Bank in exchange for 189,346 shares of Company common stock and
purchased the remaining 163,828 shares of the Bank's common stock for cash
totaling $3.9 million.
NOTE 2 - ALLOWANCE FOR LOAN LOSSES
The summary of changes in the allowance for loan losses is as follows:
Six Months Ended
March 31,
(In thousands)
1999 1998
----------- ----------
Balances, beginning of period $ 307 $ 273
Provision charged to operations 50 29
Charge-offs (17) (68)
Recoveries - 5
---------- ----------
Balances, end of period $ 340 $ 239
========== ==========
7
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
BRYAN/COLLEGE STATION, TEXAS
- --------------------------------------------------------------------------------
NOTE 3 - CAPITAL REQUIREMENTS
Pursuant to federal regulations, savings institutions must meet two separate
capital requirements. The following is a summary of the Bank's regulatory
requirements at March 31, 1999:
Core Risk-Based
Capital Capital
------------ ------------
(In thousands)
Regulatory capital $ 5,702 $ 6,042
Minimum capital requirement 3,310 5,377
----------- ----------
Excess regulatory capital over
minimum requirement $ 2,392 $ 665
=========== ==========
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
BRYAN/COLLEGE STATION, TEXAS
- --------------------------------------------------------------------------------
NOTE 4 - 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. Earnings per share for the three
months and six months ended March 31, 1998 have been restated to reflect the 2.5
exchange ratio of Company common stock for Bank common stock.
A reconciliation of the numerator and denominator of the earnings per common
share computation for the periods ended March 31, 1999 and 1998 is presented
below.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC EPS COMPUTATION
Net income $ 247 $ 275 $ 112 $ 147
Preferred stock dividends - (44) - (22)
---------- ------------ ---------- ----------
Income available to common shareholders 247 231 112 125
---------- ------------ ---------- ----------
Common shares outstanding 389,436 599,030 389,436 599,030
---------- ------------ ---------- ---------
Basic EPS $ .63 $ .39 $ .29 $ .21
=========== =========== ========== =========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
BRYAN/COLLEGE STATION, TEXAS
--------------------------------------------------------------------------------
NOTE 4 - EARNINGS PER COMMON SHARE (Continued)
<S> <C> <C> <C> <C>
DILUTED EPS COMPUTATION
Income available to common shareholders $ 247 $ 231 $ 112 $ 125
------------ ------------ ------------ ------------
Weighted average common shares 389,436 599,030 389,436 599,030
Effect of stock options - 5,538 - 5,538
------------ ------------ ------------ ------------
Total shares 389,436 604,568 389,436 604,568
Diluted EPS $ .63 $ .38 $ .29 $ .21
============ =========== ============ ============
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Bryan-College Station Financial Holding Company (the "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.
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
10
<PAGE>
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
for each loan 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
March 31, 1999.
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.
FINANCIAL CONDITION
The Company's total assets increased by $1.0 million to $83.6 million at
March 31, 1999 from $82.6 million at September 30, 1998. This increase consisted
primarily of an increase in loans receivable.
Net loans receivable (excluding loans held for sale) increased $692,000 to
$72.4 million at March 31, 1999, compared to $71.7 million at September 30,
1998, despite the sale of $3.0 million in loan participations during this same
11
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period of time. During the three months ended March 31, 1999, the Company
originated $8.5 million of mortgage loans, including $7.6 million secured by
one- to four-family residential loans. In addition, the Company originated $7.2
million in consumer loans, of which $2.6 million were Second Chance Auto loans
and $2.3 million in commercial business loans.
Deposits increased $2.1 million to $75.7 million at March 31, 1999,
compared to $73.6 million at September 30, 1998, as a result of increased
marketing of checking accounts. Other liabilities decreased $1.4 million to $4.9
million at March 31, 1999, 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 and a decrease in advances from
the Federal Home Loan Bank of Dallas.
Stockholders' equity in the Company increased $247,000 to $2.1 million at
March 31, 1999 from $1.9 million at September 30, 1998 due to the net income
earned.
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, Executive Vice President/CFO, Senior Vice
President/Financial and four outside Directors. The responsibilities of the ALCO
are to assess First Federal's asset/liability mix and recommend strategies that
will enhance income while managing First Federal's vulnerability to changes in
interest rates.
First Federal's asset/liability management strategy has two goals. First,
the Bank seeks to build its net interest income and noninterest income, while
adhering to its underwriting and lending guidelines. Second, and to a lesser
extent, First Federal seeks to increase the interest rate sensitivity of its
assets and decrease the interest rate sensitivity of its liabilities so as to
reduce First Federal's overall sensitivity to changes in interest rates. There
can be no assurance that this strategy will achieve the desired results and will
not result in substantial losses in the event of an increase in interest rate
risk.
As part of this strategy, management 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
12
<PAGE>
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.
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 December 31, 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.
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Acceptable
Limits
Established
Change in At December 31, by Board of
Interest Rate Estimated 1998 Directors
(Basis Points) NPV $ Change % Change % Change
(Dollars in Thousands)
+400 $8,088 -126 -2% 75%
+300 8,276 62 1 (50)
+200 8,370 156 2 (30)
+100 8,341 127 2 (15)
0 8,214 --- --- ---
-100 8,160 -54 -1 (15)
-200 8,297 83 1 (30)
-300 8,597 534 5 (50)
-400 8,748 839 7 (75)
Management reviews the OTS measurements on a quarterly basis. In addition
to monitoring selected measures on NPV, management also monitors effects on net
interest income resulting from increases or decreases in rates. This measure is
used in conjunction with NPV measures to identify excessive interest rate risk.
In the event of a 400 basis point change in interest rates, First Federal would
experience a 7% increase in NPV in a declining rate environment and a 2%
decrease in a rising rate environment. As of December 31, 1998, an increase in
interest rates of 200 basis points would have resulted in a 2% increase 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 1% 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.
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<PAGE>
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 $30,000
for the three months ending March 31, 1999. There was no provision for loan
losses for the period ending March 31, 1998. 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 March 31,
1999 to $2.2 million or 2.69% 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 current appraised
value.
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 SIX MONTHS ENDED MARCH 31, 1999 TO MARCH 31, 1998
The Company reported net income after taxes of $247,000 for the six months
ended March 31, 1999, a decrease of $28,000 as compared to $275,000 in net
income reported for the six months ended March 31, 1998. The decrease in
earnings, as discussed in more detail below, resulted primarily from a $246,000
increase in the Company's interest expense, which included $208,000 additional
interest expense on the Company's debentures due March 2003 and issued on April
1, 1998 (the "Debentures"), and a $798,000 increase in noninterest expense,
partially offset by an increase of $471,000 in interest income and an increase
of $528,000 in noninterest income.
15
<PAGE>
Net interest income increased $225,000 to $2.0 million for the six month
period ended March 31, 1999 from $1.6 million for the prior period in 1998. This
increase was attributable primarily to an increase in interest earned on loans
receivable, primarily as a result of an increase in the average balance of the
loan portfolio partially offset by increased deposit costs and interest expense
paid on the Debentures. For the six months ended March 31, 1999, the spread
between the average yield on interest earning assets and the average cost of
funds increased to 5.87% at March 31, 1999 from 4.82% at March 31, 1998.
Noninterest income increased $528,000 to $927,000 for the six months ended
March 31, 1999 from $399,000 for the six months ended March 31, 1998. This
increase can be attributed to a $103,000 increase in service charges on checking
accounts, a $272,000 increase in net gain on sale of loans and mortgage
servicing rights and a $153,000 increase in other noninterest income. The
increase in noninterest income was primarily a result of recognizing excess auto
dealer reserves due to the repayment of auto loan balances and the receipt of
after tax casualty loss for hail damage to the Bank's office premises and bank
owned vehicles.
Noninterest expense increased $798,000 to $2.5 million for the six months
ended March 31, 1999 from $1.7 million for the six months ended March 31, 1998.
Compensation and benefits increased $281,000 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 and equipment expense increased
$90,000 as a result of the opening of the new North Bryan branch and the
recently expanded mortgage lending offices in College Station. Net (gain) loss
on real estate owned, including provision increased $133,000 due to a provision
of $129,000 for repossessed assets. Other expenses increased $152,000, which
consisted of various items, including $66,000 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 $44,000. Various other
expenses have also increased primarily as a result of the overall growth and
increased loan production of the Company.
Income tax expense decreased $ 38,000 to $104,000 for the six months ended
March 31, 1999 from $142,000 for the six month ended March 31, 1998. The period
reflected tax rates of 29.6% and 34.1% for March 31, 1999 and March 31, 1998,
respectively.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 TO MARCH 31, 1998
The Company reported net income after taxes of $112,000 for the three
months ended March 31, 1999, a decrease of $35,000 as compared to $147,000 in
net income reported for the three months ended March 31, 1998. The decrease in
net income, as discussed in more detail below, resulted primarily from a $85,000
increase in the Company's interest expense on its deposits and interest on its
Debentures and a $483,000 increase in noninterest expense. This was partially
offset by an $184,000 increase in interest income and a $321,000 increase in
noninterest income.
16
<PAGE>
Net interest income increased $99,000 to $977,000 for the three-month
period ended March 31, 1999 from $878,000 for the prior period in 1998. This
increase primarily resulted from increases in the average balance and yield of
the loan portfolio, offset in part by increases in the average balance and cost
of deposits and advances. In addition, the Holding Company issued the Debentures
in April of 1998, resulting in increased borrowing costs. 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 credit-default
insured "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 and payment of interest on the Company's Debentures. The
spread between the average yield on interest earning assets (loans and
securities) and the average cost of funds increased to 5.87% at March 31, 1999
from 4.82% at March 31, 1998.
Noninterest income increased $321,000 to $527,000 for the three months
ended March 31, 1999 from $206,000 for the three months ended March 31, 1998.
This increase can be attributed to a $33,000 increase in service charges on
checking accounts, a $168,000 increase on net gain on sale of loans and mortgage
servicing rights, which was primarily attributable to the sale of participations
in Second Chance Auto Loans, and a $120,000 increase as a result of recognizing
excess auto dealer reserves due to the repayment of auto loan balances and the
receipt of after tax casualty loss for hail damage to the Bank's office premises
and bank owned vehicles.
Noninterest expense increased $483,000 to $1.3 million for the three months
ended March 31, 1999 from $861,000 for the three months ended March 31, 1998.
Compensation and benefits increased $137,000 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 $47,000 primarily as
a result of the opening of the new North Bryan branch and the recently expanded
mortgage lending offices in College Station. Net (gain) losses in repossessed
assets, including provision, increased $140,000 due to a provision of $129,000
for repossessed assets. Other expense increased $85,000, which consisted of
various items, including $33,000 of amortization of debenture 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 $18,000 for the three months ended March 31, 1999,
as compared to $76,000 for the three months ended March 31, 1998. The period
reflected a tax rate of 13.8% and 34.1% for March 31, 1999 and March 31, 1998,
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 in the past, has
borrowed funds from the FHLB of Dallas or utilized particular sources of funds
based on need, comparative costs and availability at the time.
17
<PAGE>
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.
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 March 31, 1999, the Company had commitments to originate loans,
including loans in process, totaling $7.9 million. The Company also had $1.5
million of outstanding unused lines of credit and $50,000 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 credit-default insured 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 loan participations in order to maintain capital compliance and
liquidity needs. The Company also has the ability, if needed, to borrow up to
$20.3 million from the FHLB of Dallas for liquidity purposes. At March 31, 1999,
the Company had no 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
March 31, 1999, First Federal's regulatory liquidity ratio was 7.46%. 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, 1999 the Bank had Tier 1 (Core) Capital of $5.7 million, or
6.89% of total assets which was $2.4 million above the minimum capital
requirement of $3.3 million or 4% of total assets.
At March 31, 1999, the Bank had total risk based capital of $6.0 million
and risk weighted assets of $67.2 million or total risk based capital of 8.99%
of risk weighted assets. This amount was $665,000 above the minimum regulatory
requirement of $5.4 million, or 8.0% of risk weighted assets.
18
<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.
19
<PAGE>
STATE OF READINESS. In 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.
20
<PAGE>
The Company has begun Y2K discussions with its larger borrowers. All
credits greater than $50,000 are being 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 are meeting 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. 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.
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 $139,000 has
been spent as of March 31, 1999. 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 pre-selected 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.
21
<PAGE>
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
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.
Statement 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.
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" ("SFAS No. 134"), changes the
way companies involved in mortgage banking account for certain securities and
other interests they retain after securitizing mortgage loans that were held for
sale. SFAS 134 allows any retained mortgage-backed securities after a
securitization of mortgage loans held for sale to be classified based on holding
intent in accordance with Statement of Financial Accounting Standards No. 115
except in cases where the retained mortgage-backed security is committed to be
sold before or during the securitization process in which case it must be
classified as trading. Previously, all retained mortgage-backed securities were
required to be classified as trading. SFAS 134 was effective on January 1, 1999
and did not have a significant impact on the Company's financial statements, as
the Company currently does not securitize loans.
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.
22
<PAGE>
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
(a) On February 18, 1999 the Company held its Annual Meeting of
Stockholders.
(b) Stockholders voted on the following matters:
(i) The election of the following directors of the Company:
VOTE
VOTES FOR WITHHELD
----- --- --------
Robert H. Conaway 328,463 0
Ken L. Hayes 326,463 2,000
George Koenig 326,263 2,200
Joseph W. Krolczyk 326,333 2,130
Jack W. Lester, Jr. 327,463 1,000
Charles Neelley 328,463 0
Richard L. Peacock 323,756 4,707
Roland Ruffino 328,363 100
Gary A. Snoe 328,433 30
J. Stanley Stephen 327,433 1,030
Earnest A. Wentrcek 323,756 4,707
(ii) The ratification of the adoption of the Company's 1998 Stock
Option and Incentive Plan:
VOTES FOR AGAINST ABSTAIN
----- --- ------- -------
287,654 33,146 7,663
(iii) The approval of a proposal to decrease the number of shares of
authorized common stock, par value $.01 per share from 3,000,000
to 1,500,000 by amending the Fourth Article of the Company's
Certificate of Incorporation:
24
<PAGE>
VOTES FOR AGAINST ABSTAIN
----- --- ------- -------
322,316 1,625 4,522
(iv) The approval of a proposal that would limit the voting rights of
any stockholder who benefically owns in excess of 10% of the then
outstanding shares of the Company's common stock from voting any
shares held in excess of 10% by amending the Fourth Article of
the Company's Certificate of Incorporation:
VOTES FOR AGAINST ABSTAIN
----- --- ------- -------
315,158 11,045 2,260
(v) The approval of a proposal requiring that the affirmative vote of
at least 80% of the shares entitled to vote approve any future
change to proposal IV, if approved, by amending the Thirteenth
Article of the Company's Certificate of Incorporation:
VOTES FOR AGAINST ABSTAIN
----- --- ------- -------
319,381 17,502 2,230
(vi) The ratification of the appointment of Crowe, Chizek and Company
LLP as auditors of the Company for the fiscal year ending
September 30, 1999:
VOTES FOR AGAINST ABSTAIN
----- --- ------- -------
325,190 133 3,140
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
1. Exhibit 3(i): Certificate of Amendment of Certificate of
Incorporation
2. Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1999.
25
<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 14, 1999 /s/ J. Stanley Stephen
--------------------- --------------------------------------
J. Stanley Stephen
President and Chief Executive Officer
(Duly Authorized Representative)
Date: May 14, 1999 /s/ William Wantuck
--------------------- ----------------------------------------
William Wantuck
Chief Financial Officer
(Principal Financial Officer)
26
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
* * * * *
The Bryan-College Station Financial Holding Company (the "Company"), a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of the Company, resolutions
were duly adopted setting forth proposed amendments to the Company's Certificate
of Incorporation, declaring said amendments to be advisable and calling an
annual meeting of the stockholders of the Company for consideration thereof. The
resolutions setting forth the proposed amendments are as follows:
"RESOLVED, that an amendment to the Fourth Article of the Company's Certificate
of Incorporation that would amend clause A by decreasing the number of shares of
authorized common stock, par value $.01 per share from 3,000,000 to 1,500,000,
subject to shareholder approval, is hereby approved; and be it further
RESOLVED, that an amendment to the Fourth Article of the Company's Certificate
of Incorporation adding clause D that would limit the voting rights of any
stockholder who beneficially owns in excess of 10% of the then-outstanding
shares of the Company's common stock (the "Limit") from voting any shares held
in excess of the Limit, subject to shareholder approval, is hereby approved; and
be it further
RESOLVED, that an amendment to the Thirteenth Article of the Company's
Certificate of Incorporation requiring the affirmative vote of at least 80% of
the shares entitled to vote must approve, an amendment to clause D of the Fourth
Article provided that such amendment is approved by shareholders, also subject
to shareholder approval, is hereby approved."
SECOND: That thereafter, pursuant to resolutions of its Board of Directors, an
annual meeting of the stockholders of the Company was duly called and held, upon
notice in accordance with Section 222 of the General Corporation Law of the
State of Delaware at which meeting the necessary number of shares as required by
statute was voted in favor of the amendments.
THIRD: That said amendments were duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, The Bryan-College Station Financial Holding Company has
caused this certificate to be signed by J. Stanley Stephen, its President and
Chief Executive Officer, this 23rd day of February, 1999.
By /s/ J. Stanley Stephen
---------------------------------
J. Stanley Stephen, President and
Chief Executive Officer
2
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The following schedule contains summary financial information extracted from the
financial statements contained in the Registrant's quarterly report on Form
10-QSB for the period ended March 31, 1999 and is qualified in its entirety.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,825
<INT-BEARING-DEPOSITS> 2,863
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 230
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 852
<INVESTMENTS-MARKET> 0
<LOANS> 72,358
<ALLOWANCE> 340
<TOTAL-ASSETS> 83,624
<DEPOSITS> 75,711
<SHORT-TERM> 413
<LIABILITIES-OTHER> 881
<LONG-TERM> 4,502
0
0
<COMMON> 4
<OTHER-SE> 2,113
<TOTAL-LIABILITIES-AND-EQUITY> 83,624
<INTEREST-LOAN> 1,795
<INTEREST-INVEST> 12
<INTEREST-OTHER> 41
<INTEREST-TOTAL> 1,848
<INTEREST-DEPOSIT> 763
<INTEREST-EXPENSE> 871
<INTEREST-INCOME-NET> 977
<LOAN-LOSSES> 30
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,344
<INCOME-PRETAX> 130
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 112
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
<YIELD-ACTUAL> 6.07
<LOANS-NON> 0
<LOANS-PAST> 935
<LOANS-TROUBLED> 1,351
<LOANS-PROBLEM> 1,201
<ALLOWANCE-OPEN> 318
<CHARGE-OFFS> 9
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 340
<ALLOWANCE-DOMESTIC> 340
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 340
</TABLE>
