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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number 0-23323
THE BRYAN-COLLEGE STATION FINANCIAL
HOLDING COMPANY
(Name of Small Business Issuer in its Charter)
Delaware 36-4153491
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification
Number)
2900 Texas Avenue
Bryan, Texas 77802
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (409) 779-2900
Securities Registered Under Section 12(b) of the Exchange Act:
None
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $ .01 per share
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. YES X NO
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
The Issuer had $245,000 in net income for the fiscal year ended September
30, 1999.
As of December 28, 1999, there were issued and outstanding 428,409 shares
of the Issuer's Common Stock. The Issuer's voting stock is not regularly and
actively traded, and there are no regularly quoted bid and asked prices for the
Issuer's voting stock. Accordingly, the Issuer is unable to determine the
aggregate market value of the voting stock held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
PARTS II and IV of Form 10-KSB - Annual Report to Stockholders for the
Fiscal Year Ended September 30, 1999. Transitional Small Business Disclosure
Format: YES NO X
PART III of Form 10-KSB - Proxy Statement for the Annual Meeting of
Stockholders for the fiscal year ended September 30, 1999.
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<PAGE>
PART I
Item 1. Description of Business
General
The Bryan-College Station Financial Holding Company (the "Holding Company"
and, when referred to with First Federal Savings Bank, the "Combined Company"),
a Delaware corporation, was formed as of April 1, 1998 to act as a 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 Holding 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 Combined
Company, unless otherwise indicated, at or before April 1, 1998 refer to the
Bank.
First Federal is a federally chartered, independent thrift institution,
headquartered in Bryan-College Station, Texas, which began operations in 1965.
First Federal is predominantly a residential mortgage and consumer automobile
lender, originating loans primarily in Bryan-College Station and the surrounding
immediate trade area, and now expanding into the general trade area bordered by
the growing "Texas Triangle" of Houston, Austin-San Antonio, and
Dallas-Ft.Worth. First Federal originates a significant amount of consumer loans
primarily secured by automobiles through selected automobile dealers. These
loans are partially insured against loss by credit-default insurance. In
addition, to a lesser extent, First Federal originates residential construction
loans in its immediate trade area, Small Business Administration ("SBA")
partially guaranteed loans throughout the "Texas Triangle", and small commercial
real estate and small to medium commercial business loans. First Federal
converted from the mutual to stock form of organization and recapitalized in
1993. As a result of First Federal's transition to full-service banking in 1994
and 1995, and the incurring of the expenses associated therewith (such as new
data processing, tellers and drive-in facilities), net income was $193,000 in
1994 and $211,000 in 1995. In 1996, net income rose to $454,000 before a
one-time charge of $220,000 to recapitalize the Savings Association Insurance
Fund. In 1997, net income rose to $605,000 and to $628,000 in 1998. In this
fiscal year, net income increased 30% to $815,000.
Implementing new strategy, in 1994 and 1995, senior management of First
Federal began expanding its core residential mortgage lending and by investing
in innovative, niche business with higher risk-adjusted returns than residential
loans such as its Second Chance Auto Loan Program, in order to compete more
effectively in its "niche" market, increase the overall profitability of First
Federal and enhance stockholder value. In addition to its core residential
mortgage and Second Chance consumer auto lending business, since fiscal 1994
First Federal has increased its focus on the following products:
0 SBA loans (partially government guaranteed) throughout the
"Texas Triangle" by utilizing First Federal's new designation
as a certified SBA lender, and managed by an experienced &
seasoned SBA loan originator hired in
1999.
0 Direct consumer lending.
2
<PAGE>
0 Commercial lending to small and medium-sized businesses,
secured by "hard collateral" such as real estate and
automobiles.
0 Commercial real estate lending, primarily to small and
medium-sized businesses
0 Home improvement loans.
First Federal funds these lending products using a retail deposit base
gathered in its home market of Bryan-College Station as well as in the
surrounding counties of Burleson, Grimes, Leon, Madison, Robertson and
Washington, which comprise its immediate trade area. Because of the unique
charter granted to the Holding Company which permits it to enter into any type
of lawful business (subject to regulatory oversight), whether or not related to
banking (as long as such business is safe and profitable), its strategic plan
over the next three years is to safely and profitably diversify into different
types of businesses, products and services and carefully expand further into
this "Texas Triangle", including expanding the business of its primary operating
subsidiary, First Federal (as its capital will permit) through strategically
located, low-cost and profitable loan production offices and low-cost
full-service mini-branches -- in order to enhance stockholder value now and in
the future. First Federal currently operates three full-service offices and a
mortgage lending office, two of which are located in Bryan (including its
principal executive offices which are situated in the middle of the
Bryan-College Station community), a new facility located at a key highway
intersection in North Bryan, and one full-service branch in adjacent College
Station, which is the home of the third largest university in the nation, Texas
A&M University, and the new George Bush Presidential Library, and centrally
located mortgage lending offices in College Station.
First Federal has concentrated on the middle-class and blue-collar
population as its targeted market in providing banking products and services,
which had successfully led to its loan-to-deposit ratio of 97.9% at September
30, 1999 consisting primarily of performing short-term balloon and adjustable
rate residential mortgage loans and consumer loans which are secured primarily
by automobiles. Although its favorable loan demand enables the Bank to utilize
all of its deposits to fund loan products, First Federal maintains additional
liquidity through $28.5 million borrowing authority at the Federal Home Loan
Bank of Dallas ("FHLB of Dallas"). At September 30, 1999 and 1998, First
Federal's loan to deposit ratio was 97.9% and 110.9%, respectively. First
Federal has a positive spread between the interest it earns on its loans and the
interest it pays for deposits of 5.94% at September 30, 1999 as compared to
5.10% and 4.56% at September 30, 1998 and 1997, respectively. In addition, over
the past five fiscal years, First Federal has experienced an average of only
$34,000, or .058% of the average total loan portfolio in actual annual net loan
charge-offs, resulting from an average total loan portfolio of $58.5 million,
and an average of only $43,000 in actual annual net loan charge-offs over the
past three years from an average total loan portfolio of $65.7 million, or .065%
in actual annual net loan charge-offs.
In addition, this type of loan portfolio enabled the Bank to have an
interest rate risk scenario at September 30, 1999, so that if interest rates
were to rise 200 basis points (2%) the Bank would not have any change in its net
portfolio value -- and if interest rates were to rise 300 basis points (3%)
First Federal would have only a 2% change in its net portfolio value. See "Loan
Delinquencies; Nonperforming Assets and Classified Assets."
3
<PAGE>
Forward-Looking Statements
When used in this Annual Report on Form ("Form 10-KSB") or future filings
by the Holding Company, the Combined Company, or First Federal, with the
Securities and Exchange Commission, in the Holding Company's, the Combined
Company's or First Federal's press releases or other public or shareholder
communication, or in oral statements made with the approval of an authorized
executive officer the words or phrases "will likely result," "are expected to,"
"will continue," "is anticipated," "hope," "estimate," "project," "believe" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. The Holding
Company, the Combined Company, or First Federal wishes to caution readers not to
place undue reliance of any such forward-looking statements, which speak only as
of the date made, and to advise readers that various factors, including regional
and national economic conditions, changes in levels of market interest rates,
credit risks of lending activities, and competitive and regulatory factors,
could affect the financial performance of any or all of these entities and could
cause any or all of these actual entities results for future periods to differ
materially from those anticipated or projected.
The Holding Company, the Combined Company, or First Federal does not
undertake, and specially disclaims any obligations, to publicly release the
result of any revisions which may be made to any forward-looking statements in
order to reflect the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements.
Market Area
Bryan-College Station is in Brazos County, Texas and is located in the
center of the growing "Texas Triangle", bordered by Houston, Austin-San Antonio,
and Dallas-Ft. Worth. It is the home of Texas A&M University, which has an
enrollment of over 43,000 students and is the third largest university in the
nation -- and is also the home of the new George Bush Presidential Library. It
also is home to Blinn College's new campus, with its growing student body of
10,000 students. Management considers the Bryan-College Station area, and the
surrounding Texas counties of Brazos, Burleson, Grimes, Leon, Madison,
Robertson, and Washington to be its primary-market and trade areas for deposits
and lending activities; however, it has recently begun increasing its lending
into the triangle bordered by Houston, Austin-San Antonio, and Dallas-Ft. Worth
- -- into which it plans to carefully expand over the next three years.
Although higher education plays a large role in the Bryan-College Station
economy and assists the community in consistently achieving the lowest
unemployment rate in the State of Texas, recent diversification of the economy,
includes a new computer manufacturing plant which was completed in 1999, a
large, new regional computer services center which recently completed
construction, an expanding regional office for a national telephone company, a
large new regional poultry processing plant, a new juvenile detention center
which is the largest in the State of Texas, several specialty chemical plants, a
relatively new Compaq Computer Research Center, one of the largest aluminum
window and door manufacturing plants in the nation, and other computer-related
and high-tech industries. In addition, Bryan-College is home to a fast-growing
regional medical complex consisting of four major, expanding hospitals and
related facilities (including a new physicians-owned hospital now nearing
completion) which serves all of the area between Houston, Austin-San Antonio,
and Dallas-Ft. Worth. It also will be home to two very recently announced
multi-million dollar championship golf courses, hotels and conference centers.
4
<PAGE>
Population growth trends within First Federal's market area have shown
increases at rates exceeding those of the State. According to a 1996 Wall Street
Journal article, Brazos County (home of Bryan-College Station) was listed as one
of the top metropolitan areas which is expected to have the fastest household
growth in the U.S. over the next 20 years. Brazos County was ranked by the
American Demographics as third among "The 10 Hottest Counties," in terms of
"market potential." In addition, the 1997-98 American Almanac of Jobs and
Salaries named Bryan-College Station as the third fastest growing U.S.
metropolitan area in terms of job growth for the years 1995-2025. Data from the
U.S. Census estimates that the Bryan-College metropolitan area should have a 20%
growth rate from 1990 to the year 2000. The 1998 American Chamber of Commerce
Researchers Association Cost of Living Index indicated that the Bryan-College
Station area is one of the least expensive places to live in the United States.
The city ranks as the second least expensive city out of 29 surveyed Texas
cities and fifth least expensive city out of 329 surveyed cities in the nation.
Since 1990, numerous independent financial institutions have been acquired
in the Bryan-College Station area, some by out-of-state multi-bank holding
companies. Currently, there is only one other thrift institution operating in
the area, which is a branch owned by an organization out of Brazos County.
Consequently, management believes the opportunity exists for the continued
careful expansion of First Federal's lending and deposit gathering activities,
as one of the few remaining independent, publicly-traded financial institutions
in its primary trade-area and the general trade area into which it has now begun
some expansion, the "Texas Triangle" -- by offering full-service and innovative
banking to its targeted "niche", the growing middle class and blue-collar
segment of the population.
The principal executive offices of the Holding Company and First Federal
are located at 2900 Texas Avenue, Bryan, Texas 77802 and their telephone number
at that address is (409) 779-2900.
Lending Activities
General. The principal lending activities of First Federal are originating
first mortgage residential real estate loans secured by owner occupied one- to
four-family residential property, and originating and purchasing automobile
loans from automobile dealers selected by First Federal which are partially
insured against credit default.
While a substantial portion of the loans originated for portfolio by First
Federal are conventional residential mortgage loans (i.e., not guaranteed or
insured by agencies of the federal government), which are secured by residential
properties, most may not conform with all of the requirements for sale to Fannie
Mae ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). These
loans may not conform for several reasons. Some loans may have some relatively
small credit deficiencies (which in certain cases may result in First Federal
securing the loan by additional collateral and /or requiring a guarantor for the
loan). In addition, the borrower may, among other things, have an insufficient
length of employment history or insufficient length of residence history for the
loan to qualify for sale to FNMA or FHLMC, or the residence may not qualify
because of its rural location, or there exists insufficient, recent sales of
comparable properties for appraisal purposes. As a result, the loan may pose
some higher risk than secondary market conventional mortgage loans. However, all
long-term, fixed rate conventional mortgage loans are sold immediately to the
secondary market and are not held in First Federal's loan portfolio. Loans which
do not comply with FNMA or FHLMC underwriting requirements are held in First
Federal's
5
<PAGE>
loan portfolio only if they meet First Federal's credit underwriting
requirements and are short-term balloon loans or loans which have adjustable
interest rates.
In recent years, First Federal has significantly increased its consumer
lending area in order to increase its risk-adjusted yield on these loans,
consisting of consumer loans primarily secured by vehicles and originated
through indirect lending from automobile dealers under its Second Chance Auto
Lending Program, which has as additional protection credit-default insurance of
up to $6,000 per loan loss in the event the borrower fails to make timely
payments and the vehicle is repossessed. At September 30, 1999, the average
gross yield on $13.2 million unpaid principal balance of Second Chance Auto
loans was 19.36%. This Second Chance Auto Lending Program has gradually been
expanded to select auto dealers (primarily franchised new car dealers) located
throughout First Federal's immediate trade area in surrounding counties, and
more recently throughout the triangle between Houston, Austin and Dallas. In
order to expand its Second Chance Auto Loan Program, First Federal recently
hired the President of another automobile finance company to manage this loan
program, and is adding additional loan officers, loan assistants, new loan
funding software, additional loan collectors expanding its offices to
accommodate growth in this loan program. While this level of personnel creates
additional expense, nevertheless, First Federal believes this type of lending
requires additional personnel and facilities, which will necessarily increase
operating expenses -- so long as this type of lending is carefully managed and
increases the overall profitability of First Federal. First Federal also
originates residential construction loans, small commercial real estate and
small to medium commercial business loans. In addition, First Federal has begun
originating SBA business loans on a more active basis and in 1999 hired an
experienced and seasoned SBA loan originator to expand its SBA loan program
throughout the Texas Triangle with its newly-acquired designation as a Certified
SBA lender. Generally, First Federal sells for a profit the SBA guaranteed
portion of SBA loans and retains servicing for the entire loan.
First Federal's policy is not to invest its loan portfolio in long-term,
fixed rate mortgage-backed securities or retain long-term, fixed rate loans. In
order to reduce First Federal's vulnerability to changes in interest rates,
First Federal generally originates short-term three-year balloon and adjustable
rate, one- to four-family residential mortgage loans, consumer loans (especially
automobile loans) and short-term construction loans. At September 30, 1999,
First Federal had $22.8 million of balloon residential mortgage loans, $15.2
million of adjustable rate residential mortgage and other loans and $25.0
million of consumer loans (predominately automobile loans with an average life
of 30-34 months) out of a total of $72.1 million in gross loans.
Loan originations come primarily from advertising, walk-in customers, real
estate brokers, homebuilders, referrals from existing customers, and a number of
automobile dealers throughout the state of Texas. Non-residential loans in which
the aggregate lending relationship to one borrower does not exceed $100,000 are
approved by First Federal's President/Chief Executive Officer, and all
non-residential loan applications for over $100,000 in aggregate debt to one
borrower are approved by the Board of Directors' Loan Committee. Residential
loans which do not exceed $200,000, are approved by the President/Chief
Executive Officer, with loans of this type over $200,000 approved by the Board
of Directors' Loan Committee.
First Federal's total loan portfolio increased $5.1 million from fiscal
years 1997 to 1998; however, in order to gradually increase its regulatory
capital ratios (which are in excess of the minimum regulatory requirements),
First Federal intentionally reduced its loan portfolio $1.7 million during the
fiscal year from 1998 to 1999 through profitable sales of $5.6 million in 90%
loan participations in its Second Chance Auto Loan Program (with no recourse to
First Federal except for fraud or willful misconduct), and also reduced its
emphasis on direct consumer loans.
6
<PAGE>
Loan Portfolio Composition. The following table sets forth information
concerning the composition of First Federal's loan portfolio in dollar amounts
and in percentages (before deductions for loans in process, deferred fees and
discounts and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
Amount Percent Amount Percent Amount Percent
---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real Estate Loans
Residential.................. $33,436 46.35% $32,846 44.50% $35,541 51.72%
Residential held-for-sale.... 62 .09 328 .44 204 .30
Commercial................... 5,865 8.13 4,616 6.26 4,166 6.06
Construction................. 4,800 6.65 6,166 8.36 10,305 15.00
------- ----- ------- ----- ------- -----
Total real estate loans... 44,163 61.22 43,956 59.56 50,216 73.08
Other Loans:
Consumer loans:
Secured by automobile...... 18,529 25.69 24,636 33.38 15,082 21.95
Secured by deposit
accounts(1)............... 1,080 1.50 951 1.29 925 1.34
Held for sale.............. 2,402 3.33 --- --- --- ---
Other...................... 2,973 4.12 1,236 1.67 726 1.06
------- ----- ------- ----- ------- -----
Total consumer loans...... 24,984 34.64 26,823 36.34 16,733 24.35
Commercial business loans.... 2,988 4.14 3,024 4.10 1,766 2.57
------- ----- ------- ----- ------- -----
Total other loans......... 27,972 38.78 29,847 40.44 18,499 26.92
------- ----- ------- ----- ------- -----
Total loans .............. 72,135 100.00 73,803 100.00 68,715 100.00
Less:
Undisbursed portion of
construction loans.......... 1,669 2.32 2,089 2.83 3,452 5.02
Net deferred fees and
discounts................... 82 .11 30 .04 131 .19
Deferred income.............. 3 --- 3 --- 3 ---
Allowance for losses on
loans....................... 326 .45 307 .42 273 .40
Premiums, net of discounts... (383) (.53) (620) (.84) (381) (.55)
------- ----- ------- ----- ------- -----
Net loans ................ $70,438 97.65% $71,994 97.55% $65,237 94.94%
======= ===== ======= ===== ======= =====
</TABLE>
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(1) Not included in the regulatory definition of 35% maximum of consumer loans
to total assets.
7
<PAGE>
The following table shows the fixed- and adjustable-rate composition of
First Federal's loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------
Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real estate:
Residential.................... $22,808 31.62 $18,370 24.89% $21,486 31.27%
Residential held-for-sale...... 62 .09 328 .44 204 .30
Commercial..................... 3,677 5.10 2,321 3.16 2,470 3.59
Construction................... 4,800 6.65 5,924 8.02 10,305 15.00
-------- ------ ------- ------ ------- -------
Total real estate loans...... 31,347 43.46 26,943 36.51 34,465 50.16
Consumer loans................. 22,582 31.31 26,823 36.34 16,733 24.35
Consumer held for sale......... 2,402 3.33 --- --- --- ---
Commercial business loans...... 578 .80 642 .87 1,271 1.85
-------- ------ ------- ------ ------- -------
Total fixed-rate loans....... 56,909 78.90 54,408 73.72 52,469 76.36
Adjustable-Rate Loans:
Real estate:
Residential.................... 10,628 14.73 14,476 19.61 14,055 20.45
Commercial..................... 2,188 3.03 2,295 3.10 1,696 2.47
Construction................... --- --- 242 .34 --- ---
Commercial business loans...... 2,410 3.34 2,382 3.23 495 .72
-------- ------ ------- ------ ------- -------
Total adjustable rate loans.. 15,226 21.10 19,395 26.28 16,246 23.64
------- ------ ------- ------ ------- -------
Total loans.................. 72,135 100.00 73,803 100.00 68,715 100.00
Less:
Undisbursed portion of
construction loans............ 1,669 2.32 2,089 2.83 3,452 5.02
Deferred fees and discounts.... 82 .11 30 .04 131 .19
Deferred income................ 3 --- 3 --- 3 ---
Allowance for losses on loans.. 326 .45 307 .42 273 .40
Premiums, net of discounts..... (383) (.53) (620) (.84) (381) (.55)
------- ------ ------- ------ ------- -------
Net loans ................... $70,438 97.65% $71,994 97.55% $65,237 94.94%
======= ====== ======= ====== ======= =======
</TABLE>
8
<PAGE>
The following table shows the origination, purchase and repayment
activities for loans of First Federal for the periods indicated.
Year Ended September 30,
----------------------------
1999 1998 1997
----------------------------
(In Thousands)
Loans Funded:
Real estate - residential........ $19,541 $14,966 $18,468
- commercial.................. 1,940 2,269 1,485
- construction or development. 10,623 10,880 12,142
Non-real estate - consumer....... 15,088 20,384 13,052
- commercial business......... 12,975 7,615 2,446
--------- -------- -------
Total loans originated........ 60,167 56,114 47,593
Loans Sold:
Loans sold....................... 15,852 8,571 7,243
Principal repayments and
refinancings.................... 45,983 42,455 23,558
--------- ------- -------
Total reductions................. 61,835 51,026 30,801
Change in other items, net....... 112 1,669 (1,134)
--------- ------- -------
Net increase (decrease).......... $ (1,556) $ 6,757 $15,658
======== ======= =======
At September 30, 1999, First Federal serviced $6.8 million in loans for
others.
9
<PAGE>
The following schedule illustrates the maturities of First Federal's loan
portfolio, excluding loans held-for-sale at September 30, 1999. Loans which have
adjustable or renegotiable interest rates and amortizing loans are shown as
maturing in the period during which the loan is contractually due. This schedule
does not reflect the effects of possible prepayments or enforcement of
due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
------------------------------------------------
Residential Commercial Construction Consumer Business Total
-------------- -------------- -------------- -------------- --------------- ---------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
---------------- --------------- ----------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Due During
Years Ended
September 30,
2000(1)............ $ 5,148 9.08% $ 794 8.87% $4,770 8.44% $ 1,848 10.07% $1,270 9.22% $13,830 8.99%
2001 and 2002...... 14,922 8.78 1,044 8.81 --- --- 8,585 15.24 264 9.22 4,815 11.02
2003 and 2004...... 2,370 8.53 1,069 9.43 30 9.75 14,306 14.49 389 9.45 18,164 13.30
2005 to 2009....... 1,096 8.28 685 8.86 --- --- 227 8.99 375 9.53 2,383 8.71
2010 to 2019....... 1,705 8.47 1,423 9.33 --- --- 18 8.00 690 9.88 3,836 9.03
2020 and following. 8,257 8.47 850 8.33 --- --- --- --- --- --- 9,107 8.46
------- ------ ------ ------- ------ -------
$33,498 $5,865 $4,800 $24,984 $2,988 $72,135
======= ====== ====== ======= ====== =======
</TABLE>
- -------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
10
<PAGE>
The total amount of loans due after September 30, 2000, that have fixed rates of
interest (including three-year balloon home loans and other types of loans with
balloon maturities) is $45.2 million while the total amount of loans due after
such date which have floating or adjustable rates of interest is $13.1 million.
One- to Four-Family Residential Real Estate Lending. One of First Federal's
primary lending programs is the origination of loans secured by mortgages on
owner-occupied one- to four-family residences, and to a lesser degree on
non-owner occupied one- to four-family residences. In order to increase the
interest rate sensitivity of its residential loan portfolio, First Federal has
emphasized since 1979 the origination of non-FNMA and FHLMC conforming
three-year balloon loans (generally with 30 year amortization schedules). At
September 30, 1999, $21.2 million or 29.4%, of First Federal's gross loan
portfolio consisted of fixed-rate balloon loans on one- to four-family
residences. On the same date, First Federal had $1.6 of other fixed-rate
residential loans or 2.2% of the gross loan portfolio. All of these loans were
secured by residential properties located in the State of Texas, with a majority
of the properties located in First Federal's primary market area. On September
30, 1999, only 2.5% of all portfolio residential loans were 90 days or more past
due --all of which were secured by first liens on residential properties with
appraised values in excess of the unpaid balances of those loans.
First Federal's residential loans are generally underwritten and
documented to permit their sale in the secondary market. In the event they do
not conform to FNMA and FHLMC secondary market standards, First Federal will
determine whether or not such loans meet its credit-underwriting guidelines to
be considered for approval for funding into First Federal's loan portfolio.
First Federal evaluates both the borrower's ability to make principal and
interest payments and the value of the property (and any other collateral) that
will secure the loan. One- to four-family loan originations are generally made
in amounts up to 90% of the cost or appraised value of the security property,
whichever is lower. The determination as to lend in excess of 80% of the
appraised value is made on a case-by-case basis and is based on a variety of
factors, including the borrower's credit and payment history, length of
employment, length of residence and other factors relating to the borrower's
stability, debt-to-income ratio, as well as the quality of the property securing
the loan. First Federal may require private mortgage insurance on certain loans
that it retains in its portfolio. As a result, in most instances, concerning its
loans with loan-to-value ratios over 80% (but not exceeding the 90% maximum)
which may have no private mortgage insurance, in the event of a foreclosure,
First Federal can be subject to a greater risk of loss on the foreclosure and
disposition of such property in the event of a decrease in the value of the
property. First Federal has, however, had a very limited loss experience on such
loans. See "--Loan Delinquencies; Nonperforming Assets and Classified Assets."
Over the past three fiscal years, First Federal has experienced an average of
only $43,000 in actual annual total net loan charge-offs, resulting from an
average total loan portfolio of $65.7 million, or .058% in actual annual net
loan charge-offs.
First Federal's residential mortgage loans customarily include
"due-on-sale" clauses, which are provisions giving First Federal the right to
declare a loan immediately due and payable in the event the borrower sells or
otherwise disposes of the real property subject to the mortgage, when the loan
is not repaid in full. First Federal generally enforces these due-on-sale
clauses. First Federal requires, in connection with the origination of
residential real estate loans, title insurance and fire and casualty insurance
coverage as well as flood insurance, where appropriate, to protect First
Federal's interest. The cost of this insurance coverage is paid by the borrower.
11
<PAGE>
Mortgage-Backed Securities. Because of its very favorable loan demand,
First Federal has a limited portfolio of mortgage-backed securities, all of
which are held-to-maturity. Such mortgage-backed securities can serve as
collateral for borrowings and through repayments, as a source of liquidity. For
information regarding the carrying and market values of First Federal's
mortgage-backed securities portfolio, see Note 2 of the Notes to Financial
Statements.
Consistent with First Federal's asset/liability policy to minimize
interest rate risk, approximately 91% of First Federal's mortgage-backed
securities carry adjustable interest rates.
The following table sets forth the book value of the Bank's
mortgage-backed securities at the dates indicated.
September 30,
------------------------
1999 1998 1997
------------------------
Issuers:
Federal Home Loan Mortgage
Corporation.......................... $447 $655 $ 774
Federal National Mortgage Association 245 299 376
---- ---- ------
Total............................ $692 $954 $1,150
==== ==== ======
12
<PAGE>
The following table sets forth the contractual maturities of the Bank's
mortgage-backed securities at September 30, 1999. Not considered in the
preparation of the table below is the effect of prepayments, periodic principal
repayments and the adjustable rate nature of these instruments.
<TABLE>
<CAPTION>
Due in
----------------------------------------------------------------
6 Months 6 Months 1 to 3 to 5 5 to 10 10 to 20 Over 20 Balance
or Less to 1 Year 3 Years Years Years Years Years Outstanding
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Federal Home Loan Mortgage Corporation $ --- $ --- $ --- $ --- $ 8 $ 65 $ 374 $ 447
Federal National Mortgage Association. --- --- --- --- --- 104 141 245
----- ----- ----- ----- --- ---- ----- -----
Total............................ $ --- $ --- $ --- $ --- $ 8 $169 $ 515 $ 692
===== ===== ===== ===== === ==== ===== =====
</TABLE>
13
<PAGE>
First Federal's mortgage-backed and other securities portfolios are
managed in accordance with a written investment policy adopted by the Board of
Directors. Investments may be made in accordance with the policy and approval by
its Investment Committee.
Consumer Lending. Federal laws and regulations permit federally chartered
thrift institutions to make secured and unsecured consumer loans (First Federal
generally discourages unsecured lending) up to a regulatory-defined maximum of
35% of their total assets less permissible investments in commercial paper and
corporate debt. At September 30, 1999, such regulatory-defined consumer loans
represented 29.2% of First Federal's total assets. In addition, federal thrift
institutions have lending authority above the 35% limit for certain consumer
loans such as home improvement loans, mobile home loans, credit card loans and
educational loans. First Federal generally discourages unsecured loans, or loans
secured by "soft collateral" such as inventory, accounts receivable and
special-purpose equipment except where the borrower is credit-worthy and the
loan is partially guaranteed by the SBA.
As part of management's strategy to shorten the average effective maturity
of its loans and thereby minimize its interest rate risk, and also to increase
the average yield of its loan portfolio, First Federal offers various consumer
loans, including but not limited to automobile and home improvement loans. First
Federal also offers loans to its depositors on the security of their deposit
accounts.
First Federal currently originates substantially all of its consumer loans
in its primary market area, except for loans originated pursuant to its Second
Chance Auto Lending Program which are selectively purchased generally from
automobile dealers selected by First Federal and located in the State of Texas.
Direct consumer loans are made when First Federal extends credit directly to the
borrower as compared to indirect loans made through automobile dealers selected
by First Federal. First Federal will be increasing the origination of indirect
automobile loans through its Second Chance Auto Lending Program and has added
additional loan staff and software and loan collection staff to augment this
popular loan program.
In September 1991, upon the initiative of present management, First
Federal began purchasing motor vehicle installment sales contracts on a regular
indirect basis from selected automobile dealers pursuant to an agreement
established between the dealer and First Federal ("Dealer Agreement"). In
December 1995, First Federal expanded this type of lending by initiating a
credit-default insured indirect automobile loan origination program for
borrowers with less than prime credit, and involving automobile dealers selected
by First Federal and now located primarily in the "Texas Triangle" bordered by
Houston, Austin, San Antonio and Dallas ("Second Chance Auto Loans"). Second
Chance Auto Loans are currently insured by The Royal & Sun Alliance Company
(which carries a rating of A-1 "Superior" by A.M. Best's, an insurance rating
company) for credit-default by the borrower up to $6,000 per loan in the event
there is a deficiency between the unpaid balance of the loan and the resale
price of the repossessed vehicle. At September 30, 1999, $3.0 million of First
Federal's Second Chance Auto Loans was insured by other insurers subject to
their limitations, if any. On that date, Second Chance Auto Loans averaged, at
the time of origination, $12,500 per loan. At September 30, 1999, Second Chance
Auto Loans totaled $13.2 million while total automobile loans totaled $18.5
million or 28% of First Federal's gross loan portfolio.
In the future, First Federal may elect to make some credit-default
automobile loans to borrowers with less than prime credit and without
credit-default insurance, but with additional
14
<PAGE>
special loan loss reserves at a level which First Federal believes will be
adequate to absorb any future loan losses. First Federal may also elect to
insure its Second Chance Auto Loans against credit-default through different
insurance companies which may result in different levels of insured coverage.
Second Chance Auto Loans are underwritten according to the
credit-underwriting guidelines developed by First Federal and agreed to by First
Federal's credit-default insurer, while other non-insured retail installment
automobile sales contracts purchased from auto dealers are underwritten pursuant
to First Federal's own credit underwriting guidelines. Each sales contract is
fully amortized and provides for level payments over the term of the contract.
The contracts are non-recourse to the originating automobile dealer (except for
fraud) and are purchased, in First Federal's sole discretion, from the dealers
on a case-by-case basis, after the Bank's review of the borrower's
credit-worthiness and ability to pay the loan. First Federal also generally
conducts a personal interview with the borrower prior to approving the loan.
Second Chance Auto Loan's retail installment automobile contracts are
reviewed by First Federal's internal automobile loan review personnel, and
monthly random sample reviews are conducted by an independent outside audit firm
specializing in these types of loans in order to determine compliance with
approved credit-underwriting guidelines. In addition, this same firm conducts a
random sample audit each month to determine First Federal's compliance with
previously approved loan collection and servicing guidelines. All monthly audits
to date have reflected First Federal's substantial compliance with the credit
underwriting and loan collection and servicing guidelines of First Federal and
the credit-default insurance company. Among other things, the Bank considers the
market value, durability and useful life of the vehicle being financed in
conjunction with the term of the loan, along with the stability and
creditworthiness of the buyer. Used vehicles are generally not financed longer
than 60 months and only then when the vehicle is not older than two years and
has no more than 30,000 miles of usage.
Under the approved credit underwriting guidelines, the maximum amount
financed may not exceed 125% of the manufacturer's suggested retail price for
new vehicles or retail value for used vehicles as provided in the "NADA Official
Used Car Guide," which may include the cost of service and warranty contracts
and premiums for, credit life and disability insurance obtained in connection
with the vehicle (such amounts in addition to the sales price, collectively
referred to as "Additional Vehicle Costs"). First Federal will generally use the
Southwest edition of the "NADA Official Used Car Guide" to assign a value to a
used vehicle for underwriting purposes. The primary focus, however, is on the
ability and willingness of the borrower to repay the loan rather than the value
of the underlying collateral. The amount financed by First Federal generally
includes these Additional Vehicle Costs, which are refunded pro rata as a credit
to the loan in the event the borrower prepays the loan or the borrower defaults
in payment of the loan and the vehicle is repossessed. First Federal requires
comprehensive insurance coverage on vehicles securing consumer loans, paid for
by the borrower. However, First Federal pays for borrower credit-default
insurance on its Second Chance Auto Loan Program.
All automobile dealers enter into a Dealer Agreement with First Federal.
First Federal has two kinds of Dealer Agreements which are substantially
similar. Automobile dealers selling loans pursuant to the Second Chance Auto
Lending Program are not required to establish dealer reserves; however, the loan
amount of the automobile sales contract is generally discounted from the dealer
15
<PAGE>
by First Federal prior to purchase. For non-Second Chance Auto Loans, the Dealer
Agreement provides for a reserve account to be established, requiring a minimum
balance to be maintained at First Federal. The reserve account is used by First
Federal to protect against excess interest payments to the automobile dealer due
to loan prepayments, payoffs, or for repossession expenses plus any related
losses. Minimum reserve balances and the method of disbursement are outlined in
each Dealer Agreement. If the reserve account falls below the agreed upon
levels, the automobile dealer is required to increase the balance up to the
agreed upon minimum amount. Automobile dealers are also required to make an
immediate deposit to cover any shortages under this type of a Dealer Agreement.
At September 30, 1999, First Federal had $1.7 million of automobile loans
requiring automobile dealer reserves.
Consumer loans may entail greater risk than do residential mortgage loans,
particularly consumer loans that are secured by rapidly depreciable assets such
as automobiles. First Federal makes a very limited amount of unsecured loans,
which entail an even greater risk. Any repossessed collateral for a defaulted
consumer loan may not always provide an adequate source of repayment of the
outstanding loan balance as a result of the greater likelihood of damage, loss
or depreciation of the vehicle or other collateral. In certain circumstances,
such as the borrower filing Chapter 7 bankruptcy or First Federal being unable
to locate the borrower, the remaining deficiency may not warrant further
substantial collection efforts against the borrower. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus, are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Furthermore, the application of various federal and state
laws, including federal and state bankruptcy and insolvency laws, may limit the
amount which can be recovered on such loans. Such loans may also give rise to
claims and defenses by a borrower against an assignee of the loan, who may then
be able to assert against the assignee, the claims and defenses that he or she
has against the seller of the underlying collateral. Consumer loan delinquencies
may increase over time as the loans age. Lastly, there can be no assurance that
First Federal can collect any amount due under the applicable insurance policy.
However, since First Federal's Second Chance Auto Loan Program began in December
1995, no claim timely filed for reimbursement for credit-default insurance has
been denied by the credit-default insurance company.
At September 30, 1999, 1.22% of First Federal's consumer loans were
past-due over 90 days (nonperforming assets). However, there can be no assurance
that First Federal's consumer loan delinquencies and repossessions will not
increase in the future.
Construction Lending. First Federal generally makes construction loans to
individuals for the construction of their residences and generally to
experienced homebuilders primarily for the construction of contracted-for
(custom) residences, and also to a lesser degree primarily to experienced
homebuilders for residences that have not been pre-sold when First Federal
believes that the residence is priced and located so that it should be sold in
the relatively short term.
Construction loans to individuals for their residences generally have
terms of nine months and are usually made on a non-amortizing (interest only,
payable monthly), balloon basis, to be repaid from the permanent mortgage loan
when the construction is completed. First Federal's construction loans are
generally made either as the initial stage of a combination loan (i.e., with a
commitment from First Federal to provide permanent financing upon completion of
the project) or with a takeout obligation (commitment to provide permanent
financing by a third party lender).
16
<PAGE>
Residential construction loans are generally underwritten pursuant to the same
guidelines used for originating permanent residential loans. At September 30,
1999, First Federal had $4.8 million in residential construction loans, of which
$3.9 million are to borrowers who have indicated to First Federal that they
intend to live in the properties upon completion of construction.
Residential construction loans are generally made up to a maximum
loan-to-value ratio of 80% based on an independent appraisal and estimate of
costs. Residential construction loans involve additional risk attributable to
the fact that loan funds are advanced upon the security of the project under
construction, which is more difficult to value prior to the completion of
construction. Because of some uncertainties inherent in estimating construction
costs and the market for the home upon completion, it is relatively difficult to
evaluate the total loan funds required to complete a project, the related
loan-to-value ratios, and the likelihood of ultimate success of the project. In
evaluating a construction loan, First Federal considers the credit worthiness
and reputation of the borrower and the experience and reputation of the
contractor, the amount of the borrower's equity (down payment) in the project,
independent appraisal valuations and review of cost estimates, and, if
applicable, pre-construction sale and market information. Progress payments
during construction of homes are generally made only after inspection by an
independent, licensed real estate inspector. Residential construction loans to
borrowers other than owner occupants also involve many of the same risks,
discussed below, regarding commercial real estate loans and tend to be more
sensitive to general economic conditions than many other types of loans.
Commercial Real Estate Lending. In order to enhance the yield of its
assets, First Federal originates a limited amount of construction and permanent
loans secured by commercial real estate. First Federal's permanent commercial
real estate loan portfolio includes loans secured by churches, small office
buildings, and other small business properties. First Federal generally makes
only commercial real estate loans secured by income producing property, and
discourages large commercial real estate loans. At September 30, 1999, First
Federal had two commercial real estate loans in excess of $500,000 that were
secured by income-producing properties. These loans originated in July, 1998,
and February, 1999, and had a balances of $511,000 and $737,000, respectively,
at September 30, 1999 and are performing in accordance with their loan repayment
terms.
The following table presents information as to the locations and types of
properties securing First Federal's commercial real estate loans at September
30, 1999.
Number
of Principal
Loans Balance
------------------------
(Dollars in Thousands)
Bryan-College Station area:
Churches................... 10 1,174
Land....................... 27 794
Multi-family residential... 3 437
Retail..................... 16 2,244
Office..................... 6 741
Other...................... 6 475
---- ------
Total...................... 68 5,865
17
<PAGE>
Commercial real estate loans included in First Federal's portfolio have
terms generally ranging from 3 to 5 years with a balloon payment and 20-25 year
amortization schedules.
First Federal generally will not originate or purchase a commercial real
estate loan with a balance of greater than 80% of the appraised value of the
underlying collateral, subject to a lesser loan to value ratio as may be
required by regulations. Land and developed building lot loans are individually
negotiated and are secured by properties located in First Federal's principal
market area where First Federal personnel are familiar with current market
values and marketability. First Federal requires that any such appraisal be
performed by independent, professionally designated and qualified appraisers.
Senior management of First Federal reviews all independent appraisals prior to
funding any loan. In originating or purchasing any loan, First Federal considers
the creditworthiness of the borrower, the value of the underlying collateral and
the level of experience and reputation of the contractor. In determining the
borrower's creditworthiness, the Bank considers the character, experience,
management ability and financial strength of the borrower as well as the ability
of the property securing the loan to generate adequate funds to cover both
operating expenses and debt service.
Commercial real estate lending generally affords First Federal an
opportunity to receive interest at rates generally higher than those obtainable
from residential lending. Commercial real estate lending, however, entails a
higher level of risk than loans secured by one- to four-family residences. This
risk is primarily attributed to several factors, including the concentration of
principal in a limited number of loans and borrowers, the effects of general
economic conditions on income producing properties and the increased difficulty
of evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by commercial real estate is typically dependent upon the
successful operation of the related real estate project and thus, may be subject
to a greater extent to adverse conditions in the real estate market or the
economy generally. If the cash flow from the project is reduced (for example, if
leases are not obtained or renewed), the borrower's ability to repay the loan
may be impaired. For these reasons, First Federal limits the amount of
commercial real estate loans held in its loan portfolio. In order to manage
interest rate risk, the maturities of these loans are generally short or the
interest rates therein are adjustable.
Commercial Business and SBA Lending. First Federal engages in a limited
amount of commercial business lending, primarily to small businesses. These
loans are generally made with adjustable interest rates, in order to limit
interest rate risk. Many of these loans are SBA guaranteed; however, First
Federal generally sells the guaranteed portion of the loan. The SBA guarantees
up to 90% of the loan amount, which is backed by the full faith and credit of
the U.S. Government. This guaranty generally ranges from 75% to 90% of the loan
amount up to a maximum guaranteed loan amount of $750,000 subject to the type
and term of the loan. The term of these SBA loans generally range from five to
seven years for working capital loans and up to 25 years for loans secured by
income-producing real estates. Interest rates for loans with maturities less
than seven years cannot exceed 2.25% over WSJ Prime, and for those over seven
years, 2.75% of WSJ Prime. These loans are attractive to borrowers because of
the extended loan maturities and to the Bank, as lender, as the interest rates
adjust and because the guaranteed portion of the loan can be sold in the
secondary market. At September 30, 1999, First Federal had $3.0 million or 4.14%
of First Federal's gross loan portfolio in commercial business loans outstanding
of which $1.0 million represents the unguaranteed portion of SBA loans. As of
the same date, First Federal's largest commercial business loan was a $508,000
floor plan line of credit to an automobile dealer, secured
18
<PAGE>
by vehicles. The next largest commercial business loan was a $170,000 floor plan
line of credit to an automobile dealer and secured by vehicles. Each of these
loans are performing in accordance with their respective loan repayment terms.
First Federal discourages large commercial business lending because of the
larger risk exposure to the Bank's capital if such loans do not perform.
First Federal discourages unsecured loans. It also discourages loans
secured by "soft collateral" such as inventory or accounts receivable, except
where the borrower has a good credit history, debt-to-income ratio and the
majority of the loan is guaranteed by the SBA. First Federal's policy is to
generally make loans secured by "hard collateral," such as vehicles and improved
real estate (primarily homes). Loans are generally made using "soft collateral"
(such as inventory, accounts receivable, etc.) only when the majority of the
loan is guaranteed by the SBA. Unlike residential mortgage loans, which
generally are made on the basis of the borrower's ability to repay from
employment and other income and are secured by improved real property, business
loans pose a higher risk and typically are made on the basis of the borrower's
ability to make repayment from the cash flow of the business and to a lesser
extent, the borrower's net worth and liquid assets. First Federal's commercial
business loans are generally secured by business assets such as accounts
receivable, inventory and equipment and an SBA guaranty. As a result, the
availability of funds for the repayment of business loans may be substantially
dependent on the success of the business itself. Further, the collateral
securing the loan may depreciate over time, may be difficult to appraise and may
fluctuate in value based generally on the success of the business and the
economy. Partial guarantees (75% or more) by the SBA are generally required for
commercial business loans primarily secured by accounts receivable, inventory,
equipment and other "soft collateral."
Loan Delinquencies; Nonperforming Assets and Classified Assets
When a borrower fails to make a required payment on a loan, First Federal
attempts to cause the deficiency to be cured by contacting the borrower as soon
as possible. In most cases, deficien cies are cured promptly. After a payment is
three days past due, First Federal's collections department will contact the
borrower by telephone and letter and continue that contact on a regular basis.
Between 30-45 days past due, First Federal may also send the borrower a demand
letter. When deemed appropriate by senior management, First Federal institutes
action to foreclose on or repossess the collateral. If foreclosed on, real
property is sold at a public sale and may be purchased by a third party or by
First Federal. Repossessed vehicles are generally analyzed by an independent
automobile specialist, repaired and renovated accordingly by First Federal, and
resold without warranty through First Federal's personnel and through select
auto dealers and other independent parties. A decision as to whether and when to
initiate foreclosure or repossession proceedings is based on such factors as the
amount of the outstanding loan in relation to the original indebtedness, the
extent of delinquency and the borrower's ability and willingness to cooperate in
curing delinquencies. First Federal aggressively pursues delinquent loans and as
a result has experienced minimum foreclosure and losses thereon over the past
three years.
19
<PAGE>
The following table sets forth information concerning delinquent mortgage
and other loans at September 30, 1999 in dollar amounts and as a percentage of
First Federal's total loan portfolio. The amounts presented represent the total
remaining principal balances of the related loans, rather than the actual
payment amounts which are overdue.
<TABLE>
<CAPTION>
Loans Delinquent at September 30, 1999
----------------------------------------------------
Total
90 Days Delinquent
30-59 Days 60-89 Days and Over Loans
----------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Residential Real Estate:
Number of loans......... --- 12 8 20
Amount.................. $--- $480 $851 $1,331
Percent of total loans.. --- 1.43% 2.54% 3.97%
Commercial Real Estate:
Number of loans......... --- --- --- ---
Amount.................. --- --- --- ---
Percent of total loans.. --- --- --- ---
Consumer:
Number of loans......... 105 16 23 144
Amount.................. 1,013 162 295 1,470
Percent of total loans.. 4.05 .65 1.18 5.88
Total:
Number of loans......... 105 28 31 164
Amount.................. $1,013 $642 $1,146 $2,801
Percent of total loans.. 1.40 .89 1.59 3.88
</TABLE>
20
<PAGE>
The table below sets forth the amounts and categories of non-performing
assets in First Federal's loan portfolio. Loans are placed on non-accrual status
when the collection of principal and/or interest becomes doubtful or there is
insufficient collateral to prevent a loss. For all years presented, First
Federal has had no troubled debt restructurings, which involve forgiving a
portion of interest or principal on any loans. Foreclosed assets may include
assets acquired in settlement of loans.
September 30,
--------------------------------
1999 1998 1997
--------------------------------
(Dollars in Thousands)
Non-accruing loans:
Residential................. $ 21 $ --- $ ---
Consumer.................... 11 --- 8
------- ------- -------
Total..................... 32 --- 8
------- ------- -------
Accruing loans delinquent
more than 90 days:
Residential................. 851 446 370
Commercial Real Estate...... --- --- ---
Consumer.................... 295 135 126
------ ------- -------
Total..................... 1,146 581 496
------ ------- -------
Foreclosed assets:
Residential................. 298 282 520
Commercial real estate...... 275 --- ---
Other Repossessed Assets
(Vehicles)(1).............. 958 479 258
------ ------- -------
Total..................... 1,531 761 778
------ ------- -------
Total non-performing assets... $2,709 $ 1,342 $ 1,282
====== ======= =======
Total as a percentage of
total assets at end of period 3.31% 1.62% 1.71%
====== ======= =======
- -------------------
(1) Reserves established and relating to individual vehicles are not
reflected herein.
For the most part, nonperforming assets at September 30, 1999, consisted
of repossessed vehicles through the Second Chance Auto Loan Program totaling
$958,000 which were awaiting sale, reimbursement by insurance companies for
damage claims and reimbursement for credit-default insurance claims which had
been timely filed, two residential homes and an office building/warehouse. The
Combined Company generally expects the volume of repossessed vehicles to
continue at the same rate (7% to 10%) as it has since the beginning of the
Second Chance Auto Loan Program in December, 1995, and for the volume of
repossessed vehicles to gradually increase at the same rate as this loan program
expands.
As of September 30, 1999, there were no concentrations of loans in any
types of industry which exceeded 10% of First Federal's total loans, that are
not included as a loan category in the table above.
At September 30, 1999, nonaccrual loans totaled $32,000. Interest income
recognized relative to non-performing loans during the year ended September 30,
1999 was not material.
21
<PAGE>
Other Loans of Concern. As of September 30, 1999, there was an aggregate of
$1.5 million of loans which known information about the possible credit problems
of the borrowers or the cash flows of the security properties have caused
management to have some questions and/or doubts as to the ability of the
borrowers to comply with present loan repayment terms and which may result in
the future inclusion of such items in the nonperforming assets categories. None
of these loans, however, were considered to be a "loss" at September 30, 1999.
Classified Assets. Federal regulations require that each insured
institution classify its own assets on a regular basis. First Federal classifies
its assets no less than quarterly. In addition, in connection with examinations
of insured institutions, the OTS has authority to identify problem assets and,
if appropriate, require them to be classified. There are three classifications
for problem assets: substandard, doubtful and loss. "Substandard" assets have
one or more defined weaknesses and are characterized by the distinct possibility
that the insured institution will sustain some loss if the deficiencies are not
corrected. "Doubtful" assets have the weaknesses of substandard assets, with the
additional characteristics that the weaknesses make collection or liquidation in
full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified
"Loss" is considered uncollectible and of such little value that continuance as
an asset of the institution is not warranted. Assets classified as substandard
or doubtful require the institution to establish general allowances (reserves)
for possible loan losses. If an asset or portion thereof is classified as a
"Loss," the institution must either establish specific allowances (reserves) for
loan losses in the amount of 100% of the portion of the asset classified loss,
or charge-off such amount. General loss allowances established to cover possible
losses related to assets classified "Substandard" or "Doubtful" may be included
in determining the institution's regulatory capital under the risk-based capital
standard, while specific loss allowances do not qualify as regulatory capital.
If an institution does not agree with an examiner's classification of an asset,
it may appeal this determination to the OTS District Director. Generally, all
assets of First Federal which have been classified are included in the
discussion above of other loans of concern and assets for which repayment by the
borrower may be in doubt.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, First Federal's Board of
Directors has established an Asset Review Committee, which regularly reviews all
loans of any concern with senior management and applicable loan collection
personnel, to determine which loans should be classified under applicable
regulations. Classified assets loans, as described above, of First Federal at
September 30, 1999 were as follows:
(In Thousands)
Substandard(1)............ 2,607
Doubtful.................. ---
Loss...................... ---
- --------------
(1) Includes $1.5 million of "other loans of concern" and also repossessed
real estate (two single family residences and an office/warehouse) and
repossessed vehicles awaiting sale, reimbursement by insurance companies
for damage claims or reimbursements for claims submitted under
credit-default insurance, which loans are also classified as
"non-performing assets."
22
<PAGE>
Allowance for Losses on Loans
First Federal's policy is to establish allowances for loan losses based on
historical data, economic trends and projections, an assessment of the
borrower's overall financial condition, the type and value of any collateral
securing such loans and other relevant factors. While the Combined Company
believes that it uses the best information available to make such
determinations, future adjustments could be necessary and net income could be
affected if circumstances substantially differ from the assumptions used in
making the initial determination.
The following table sets forth an analysis of First Federal's allowance
for loan losses.
Year Ended September 30,
------------------------------------
1999 1998 1997
------------------------------------
(Dollars in Thousands)
Balance at beginning of period.... $307 $273 $247
Charge-offs...................... (92) (75) (5)
Recoveries........................ 7 30 6
Provisions for losses on loans.... 104 79 25
---- ---- ----
Balance at end of period.......... $326 $307 $273
==== ==== ====
Ratio of net charge-offs during
the period to average loans
outstanding during the period..... .12% .06% .01%
The allocation of the allowance for losses on loans at the dates indicated
is summarized as follows:
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------
Percent of Percent of Percent of
Loan in Loan in Loan in
Each Each Each
Category Category Category
Amount to Total Loans Amount to Total Loans Amount to Total Loans
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real Estate...... $103 61.22% $183 59.56% $200 73.08%
Other............ 223 38.78 124 40.44 73 26.92
---- ------ ---- ------ ---- ------
Total......... $326 100.00% $307 100.00% $273 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
For information on First Federal's allowance for losses on foreclosed real
estate, see Note 1 of the Notes to Financial Statements in the Annual Report to
Stockholders filed as Exhibit 13 to this Form 10-KSB.
23
<PAGE>
Investment Activities
The Combined Company's liquid assets (other than loans, mortgage-backed
securities receivable, and non-interest bearing deposits with the Federal
Reserve Bank of Dallas), are invested primarily in interest-bearing deposits
with the FHLB of Dallas, and FHLB stock. First Federal is required by federal
regulations to maintain a minimum amount of liquid assets that may be invested
in specified securities and is also permitted to make certain other security
investments. First Federal maintains liquidity in excess of regulatory
requirements. In addition, in order to ensure additional liquidity to meet large
unanticipated needs for cash, First Federal maintains a $28.5 million borrowing
authority at the FHLB of Dallas. Cash flow projections are regularly reviewed
and updated to assure that adequate liquidity is provided. As of September 30,
1999, First Federal's liquidity ratio (liquid assets as a percentage of net
withdrawable savings and current borrowings) was 6.18% as compared to the
regulatory requirement of 4%. At September 30, 1999, First Federal had no
borrowings from the FHLB; however, First Federal had the ability, if needed, to
borrow up to $28.5 million from the FHLB of Dallas for additional liquidity
purposes.
The following table sets forth the composition of the Combined Company's
liquid assets at the dates indicated.
At September 30,
----------------------------------------------
1999 1998 1997
----------------------------------------------
Book Fair Book Fair Book Fair
Value Value Value Value Value Value
----------------------------------------------
(Dollars in Thousands)
Interest-bearing deposits...... $1,619 $1,619 $3,892 $3,892 $3,675 $3,675
FHLB stock..................... 404 404 382 382 896 896
------ ------ ------ ------ ------ ------
Total liquid assets and
FHLB stock............... $2,023 $2,023 $4,274 $4,274 $4,571 $4,571
====== ====== ====== ====== ====== ======
Sources of Funds
General. Deposit accounts have traditionally been the principal source of
First Federal's funds for use in lending and for other general business
purposes. In addition to deposits, First Federal derives funds from loan
repayments and cash flows generated from its overall operations. Scheduled loan
payments are a relatively stable source of funds, while deposit inflows and
outflows and the related cost of such funds vary. Borrowings from the FHLB of
Dallas may be used on a short-term basis to compensate for seasonal reductions
in deposits or deposit inflows at less than projected levels and may be used on
a longer term basis to support expanded lending activities in order to minimize
excess cash on hand over and above liquidity requirements.
Deposits. First Federal attracts both short-term and long-term deposits
from its primary market area and has not actively sought deposits outside of
this area. However, its strategic plan is to expand its deposit-gathering
activities over the next three years to the "Texas Triangle" referred to
previously herein. First Federal offers regular passbook accounts, NOW accounts,
commercial and personal checking accounts (including its "Golden Eagle"
checking, designed for persons of age
24
<PAGE>
50 or more, its "30 Something" checking account designed for persons between 30
and 49 years of age, and its "Working People's" checking account), money market
deposit accounts, fixed interest rate certificates of deposits with varying
maturities, and negotiated rate $95,000 or above jumbo certificates of deposit
("Jumbo CDS"). At September 30, 1999, First Federal had $7.2 million in "Golden
Eagle" accounts, $1.5 million in its "30 Something" accounts and $0.3 million in
"Working People" accounts.
Deposit account terms vary according to the minimum balance required, the
time period the funds must remain on deposit and the interest rate, among other
factors. First Federal regularly evaluates the internal cost of funds, surveys
rates and types of accounts offered by competing institutions, reviews its cash
flow requirements for lending and liquidity and makes rate changes when deemed
appropriate. In order to decrease the volatility of its deposits, First Federal
imposes penalties of up to 30 days of interest for certificates maturing one
year or less and 90 days for certificates over one year, on early withdrawal on
its certificates of deposit. As are other financial institutions, First Federal
has become more susceptible to short-term fluctuations in deposit flows, as
customers have become more interest rate conscious. In addition, First Federal
has not been willing to pay higher rates to retain deposits that may not be
profitably deployed. First Federal does not have any brokered deposits and has
no present intention to accept or solicit such deposits.
In 1994, First Federal initiated its efforts to increase its depository
accounts through a marketing campaign emphasizing the community involvement of
First Federal with all segments of the population in its trade area. The
measures undertaken in connection with this marketing campaign include meetings
with many of the area's black church ministers and key representatives of their
congregations in order to solicit their banking business and make loans to their
churches for expansion and renovation and to individual church members,
increasing the proportion of First Federal's employees that speak Spanish,
advertising in Spanish language publications, making direct contact with local
Hispanic community organizations and the planning of the opening of a new office
at a later date in the north Bryan area with a significant Hispanic influence.
The new building for the north Bryan facility is planned for occupancy and
availability to customers on or before December 31, 1999. First Federal also
increased its checking or transaction accounts through an aggressive marketing
campaign aimed at, among others, local college students and faculty, and added a
full-service branch in College Station, Texas, (immediately south of Bryan) that
opened in the first half of 1994 and its new north Bryan full-service branch
that opened in temporary quarters in June, 1998, at a key intersection of a
principal north-south highway and a principal east-way highway through Bryan.
This immediate area in north Bryan presently has no other banking facility
nearby to service its financial needs.
25
<PAGE>
The following table sets forth the deposit flows at First Federal during
the periods indicated. Net increase (decrease) refers to the amount of deposits
during a period less the amount of withdrawals during the period.
Year Ended September 30,
-----------------------------------
1999 1998 1997
-----------------------------------
(Dollars in Thousands)
Opening balance.......... $73,554 $58,808 $51,677
Net deposits
(withdrawals)............ (2,624) 12,557 5,308
Interest credited........ 2,310 2,189 1,823
------- ------- -------
Ending balance........... $73,240 $73,554 $58,808
======= ======= =======
Net increase (decrease).. $ (314) $14,746 $ 7,131
======= ======= =======
Percent increase
(decrease)(1)........... (.43)% 25.07% 13.80%
======= ======= =======
- -------------------
(1) After two years of fast growth (averaging 20% a year in 1997 and 1998),
management planned a "no -growth" strategy for deposits in the fiscal year
ending September 30, 1999, in order to gradually increase ratios of
capital to total assets and increase emphasis on profitability of First
Federal, both goals were accomplished by First Federal.
26
<PAGE>
The following table sets forth the dollar amount of savings deposits, by
interest rate range, in the various types of deposit programs offered by First
Federal at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Certificate Accounts:
0.00- 2.99%...............$ 56 0.1% $ 45 0.1% $ 88 .2%
3.00- 4.99%............... 26,281 35.8 5,509 7.5 4,250 7.2
5.00- 6.99%............... 19,765 27.0 43,093 58.6 34,489 58.6
7.00- 8.99%............... 930 1.3 911 1.2 978 1.7
-------- ----- ------- ----- ------- -----
Total Certificate Accounts. 47,032 64.2 49,558 67.4 39,805 67.7
Other Accounts:
Passbook Accounts.......... 5,130 7.0 5,199 7.1 4,393 7.5
NOW Accounts.............. 11,327 15.5 9,735 13.2 6,970 11.8
Money Market Accounts...... 4,465 6.1 4,595 6.2 4,229 7.2
Commercial Checking
Accounts.................. 2,253 3.1 2,178 3.0 1,232 2.1
Other non-interest bearing
accounts.................. 3,033 4.1 2,289 3.1 2,179 3.7
Total Other Accounts....... 26,208 35.8 23,996 32.6 19,003 32.3
-------- ----- ------- ----- ------- -----
Total Deposits(1).......... $73,240 100.0% $73,554 100.0% $58,808 100.0%
======== ===== ======= ===== ======= =====
</TABLE>
At September 30, 1999 scheduled maturities of certificates of
deposit are as follows.
At September 30,
-------------------------------------------
2002 and
2000 2001 thereafter Total
-------------------------------------------
0.00- 2.99%......... $ 56 $ --- $ --- $ 56
3.00- 4.99%......... 23,212 2,516 553 26,281
5.00- 6.99%......... 15,328 3,268 1,169 19,765
7.00- 8.99%......... 930 --- --- 930
------- ------ -------- --------
Total.......... $39,526 $5,784 $ 1,722 $ 47,032
======= ====== ======== ========
- ------------------
(1) After two years of fast growth (averaging 20% a year in 1997 and 1998),
management planned a "no -growth" strategy for deposits in the fiscal year
ending September 30, 1999, in order to gradually increase ratios of
capital to total assets and increase emphasis on profitability of First
Federal, both goals were accomplished by First Federal.
27
<PAGE>
The following table indicates the amount of First Federal's certificates
of deposit by time remaining until maturity as of September 30, 1999.
<TABLE>
<CAPTION>
Maturity
------------------------------------------------
3 Months 3 to 6 6 to 12 Over 12
or Less Months Months Months Total
------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Certificates of deposit less than
$100,000........................... $ 8,996 $ 9,128 $13,568 $ 7,104 $38,796
Certificates of deposit of
$100,000 or more................... 2,141 2,451 3,242 402 8,236
------- ------- ------- ------- -------
Total............................... $11,137 $11,579 $16,810 $ 7,506 $47,032
======= ======= ======= ======= =======
</TABLE>
Borrowings. First Federal's borrowings primarily have been advances from
the FHLB of Dallas. As a member of the FHLB of Dallas, First Federal is required
to own capital stock in the FHLB of Dallas and is authorized to apply for
advances from the FHLB of Dallas. Each FHLB credit program has its own interest
rate, which may be fixed or variable, and range of maturities.
On April 1, 1998, the Holding Company issued $3,629,000 of 11 1/2%
subordinated debentures due on March 31, 2003 (the "Debentures"). The proceeds
from the issuance of the Debentures were used to partially fund the acquisition
of First Federal stock by the Holding Company. Interest on the Debentures is
payable quarterly on the fifteenth day of January, April, July and October of
each year. See Note 13 to the Notes to Consolidated Financial Statements of the
Combined Company.
For additional information relating to borrowings, see Note 7 to the Notes
to Consolidated Financial Statements of the Combined Company.
The following table sets forth the maximum month-end balance and average
balance of FHLB advances and other borrowings during the periods indicated.
Year Ended September 30,
--------------------------------------
1999 1998 1997
--------------------------------------
(In Thousands)
Maximum Balance:
FHLB advances.......................... $ 800 $10,000 $10,000
Debentures............................. 3,629 3,629 ---
Average Balance:
FHLB advances.......................... $ 176 $ 3,984 $ 3,067
Debentures............................. 3,629 1,815 ---
28
<PAGE>
The following table sets forth certain information as to First Federal's
FHLB advances and other borrowings at the dates indicated.
September 30,
------------------------------
1999 1998 1997
------------------------------
(In Thousands)
FHLB advances.......................... $ --- $ 800 $10,000
Debentures............................. 3,629 3,629 ---
------ ------ -------
Total borrowings....................... $3,629 $4,429 $10,000
====== ====== =======
Weighted average interest rate of FHLB
advances............................... ---% 5.43% 5.55%
Weighted average interest rate on
Debentures............................. 11.50% 11.50% ---%
Service Corporation
Federally chartered institutions are permitted to invest in the capital
stock, obligations, or other specified types of securities of subsidiaries
(referred to as "service corporations") and to make loans to such subsidiaries,
and joint ventures in which such subsidiaries are participants, in an aggregate
amount not exceeding 2% of an institution's assets, plus an additional 1% of
assets if the amount over 2% is used for specified community or inner city
development purposes. Federal regulations also permit institutions to make
specified loans to such subsidiaries under its general lending authority. In
addition, such institutions are authorized to invest unlimited amounts in
subsidiaries that are engaged solely in activities in which the parent
institution may engage.
First Federal's service corporation, First Service Corporation of Bryan, is
currently inactive. At September 30, 1999, First Federal had a total investment
of $13,000 in its service corporation. In 1999, the Holding Company organized
Best of Texas, Inc., a proposed used car dealership organized for the purpose of
selling used cars, including First Federal's repossessed vehicles. At September
30, 1999, the Holding Company had a total investment of $1,000 in this
corporation. As of the same date, this corporation was inactive and in the
process of making application for a dealership license with the State of Texas.
See "Regulation - Federal Regulation of Thrift Institutions."
REGULATION
General
First Federal is a federally chartered thrift institution, the deposits of
which are federally insured and backed by the full faith and credit of the U.S.
government. Accordingly, First Federal is subject to broad federal regulation
and oversight extending to all its operations. First Federal is a member of the
FHLB of Dallas and is subject to certain limited regulation by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board"). As a
financial institution holding company of First Federal, the Holding Company also
is subject to federal regulation oversight. The purpose of the regulation of the
Holding Company and other holding companies is to protect subsidiary thrift
institution. First Federal is a member Savings Association Insurance Fund
("SAIF") and the deposits of First Federal are insured by the FDIC. As a result,
the FDIC has certain regulatory and examination authority over First Federal.
29
<PAGE>
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Thrift Institutions
The OTS has extensive authority over the operations of thrift
institutions. As part of this authority, First Federal is required to file
periodic reports with the OTS and is subject to periodic examination by the OTS
and the FDIC. The last regular OTS examination of First Federal began March 15,
1999, for books and records as of December 31, 1998. Under agency scheduling
guidelines, it is likely that another examination will be initiated within 12
months of the last exam. When these examinations are conducted by the OTS and
the FDIC, the examiners may require First Federal to provide for higher general
or specific loan loss reserves. All thrift institutions are subject to a
semi-annual assessment, based upon the thrift institution's total assets, to
fund the operations of the OTS. First Federal's OTS assessment for the expense
of examinations for the fiscal year ended September 30, 1999, was $26,000.
The OTS also has extensive enforcement authority over all thrift
institutions and their holding companies, including First Federal and the
Holding Company. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of First
Federal is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no thrift institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal thrift institutions are also generally authorized
to branch nationwide. First Federal is in compliance with the noted
restrictions.
First Federal's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At September 30, 1999, First Federal's legal
lending limit under this restriction was $874,000. First Federal is in
compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action. First Federal has adopted these OTS
guidelines.
30
<PAGE>
Insurance of Accounts and Regulation by the FDIC
First Federal is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. government. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the SAIF or the BIF. The FDIC also
has the authority to initiate enforcement actions against thrift institutions,
after giving the OTS an opportunity to take such action, and may terminate the
deposit insurance if it determines that the institution has engaged in unsafe or
unsound practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well-capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the U.S. Treasury or for any other reason deemed necessary
by the FDIC.
Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points. However, SAIF-insured
institutions are required to pay a Financing Corporation (FICO) assessment, in
order to fund the interest on bonds issued to resolve bank and thrift failures
in the 1980s, equal to approximately 6.00 basis points for each $100 in domestic
deposits, while BIF-insured institutions pay an assessment equal to
approximately 1.00 basis points for each $100 in domestic deposits. The
assessment is expected to be reduced to about 2.00 basis points no later than
January 1, 2000, when BIF insured institutions fully participate in the
assessment. These assessments, which may be revised based upon the level of BIF
and SAIF deposits will continue until the bonds mature in the year 2015.
Regulatory Capital Requirements
Federally insured thrift institutions, such as First Federal, are required
to maintain a minimum level of regulatory capital. The OTS has established
capital standards, including a tangible capital requirement, a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable to
such thrift institutions. These capital requirements must be generally as
stringent as the comparable capital requirements for national banks. The OTS is
also authorized to
31
<PAGE>
impose capital requirements in excess of these standards on individual
associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At September 30, 1999, the Bank did not have any intangible
assets.
The OTS regulations establish special capitalization requirements for
thrift institutions that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. First Federal was not subject to any such deduction at
September 30, 1999.
At September 30, 1999, First Federal had tangible capital of $5.8 million,
or 7.2% of adjusted total assets, which is approximately $2.6 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a thrift institution must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At September 30, 1999,
First Federal had no intangibles which were subject to these tests.
At September 30, 1999, First Federal had core capital equal to $5.8
million, or 7.2% of adjusted total assets, which is $2.6 million above the
minimum leverage ratio requirement of 4% as in effect on that date.
The OTS risk-based requirement requires thrift institutions to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a thrift institution to maintain an additional
amount of total capital to account for concentration of credit risk and the risk
of non-traditional activities. At September 30, 1999, First Federal had no
capital instruments that qualify as supplementary capital and $326,000 of
general loss reserves, which was less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80%
32
<PAGE>
loan-to-value ratio and reciprocal holdings of qualifying capital instruments.
First Federal had no such exclusions from capital and assets at September 30,
1999.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan-to-value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS regulations also require that every thrift institution with more than
normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a thrift institution, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which thrift institutions may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any thrift institution with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise.
On September 30, 1999, First Federal had total capital of $6.2 million and
risk-weighted assets of $67.7 million, or total capital of 9.1% of risk-weighted
assets. This amount was $734,000 above the 8% requirement in effect on that
date. First Federal has very recently initiated a strategy to profitably sell
some of its 100% risk-weighted loans in order to continue to increase its
risk-weight capital ratio. This strategy was implemented in fiscal year ending
September 30, 1999, resulting in profitable sales of 90% loan participations of
Second Chance Auto Loans, which assisted in increasing risk-weight capital from
8.52% at September 30, 1998 to 9.08% at September 30, 1999.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against thrift institutions that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any thrift institution that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital
33
<PAGE>
ratio of less than 6%) must be made subject to one or more of additional
specified actions and operating restrictions which may cover all aspects of its
operations and include a forced merger or acquisition of the association. An
association that becomes "critically undercapitalized" (i.e., a tangible capital
ratio of 2% or less) is subject to further mandatory restrictions on its
activities in addition to those applicable to significantly undercapitalized
associations. In addition, the OTS must appoint a receiver (or conservator with
the concurrence of the FDIC) for a thrift institution, with certain limited
exceptions, within 90 days after it becomes critically undercapitalized.
At September 30, 1999, First Federal fell within the regulatory definition
of "adequately capitalized".
Regulatory Guidance on Subprime Lending
In March 1999, the federal banking agencies issued an interagency guidance
on subprime lending, which is defined in the guidance as extending credit to
borrowers who have a significantly higher risk of default than traditional bank
lending customers. The guidance applies to direct extensions of credit; the
purchase of subprime loans from other lenders, including delinquent or credit
impaired loans purchased at a discount; the purchase of subprime automobile or
other financing paper from lenders or dealers; and the purchase of loan
companies that originate subprime loans. The guidance provides that institutions
should recognize the additional risks inherent in subprime lending and determine
if these risks are acceptable and controllable given the institution's staff,
financial condition, size and level of capital support. Institutions that engage
in subprime lending in any significant way should have board-approved policies
and procedures, as well as internal controls that identify, measure, monitor and
control these additional risks. The agencies believe that the following items
are essential components of a well-structured risk management program for
subprime lenders:
o adequate planning and strategy;
o sufficient staff expertise;
o appropriate lending policy;
o thorough purchase evaluation;
o strong loan administration procedures;
o ongoing loan review and monitoring;
o special care to comply with consumer protection laws and
regulations;
o adequate planning with respect to securitization and sale
of subprime loans; and
o periodic evaluation of the institution's subprime lending
program.
If the risks associated with this activity are not properly controlled,
the banking agencies consider subprime lending a high-risk activity that is
unsafe and unsound. In light of the higher risks associated with this type of
lending, the agencies may impose higher minimum capital requirements on
institutions engaging in subprime lending. Due to the high-risk nature of
subprime lending, banking examiners will carefully evaluate this activity during
regular and special examinations. We believe that the Bank is conducting its
subprime lending operations in accordance with the guidance and that the
guidance will have no material effect on the Bank's operations.
34
<PAGE>
Any undercapitalized association is also subject to the general
enforcement authority of the OTS and the FDIC, including the appointment of a
conservator or a receiver.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Holding Company or First Federal may have a substantial adverse effect on the
Combined Company's operations and
profitability.
Limitations on Dividends and Other Capital Distributions
The OTS imposes various restrictions on savings institutions with respect
to their ability to make distributions of capital, which include dividends,
stock redemptions or repurchases, cash-out mergers and other transactions
charged to the capital account. The OTS also prohibits a savings institution
from declaring or paying any dividends or from repurchasing any of its stock if,
as a result of such action, the regulatory capital of the institution would be
reduced below the amount required to be maintained for the liquidation account
established in connection with the institution's mutual to stock conversion.
First Federal may make a capital distribution without the approval of the
OTS provided it notifies the OTS, 30 days before it declares the capital
distribution and meets the following requirements: (i) has a regulatory rating
in one of the two top examination categories, (ii) is not of supervisory
concern, and will remain adequately- or well-capitalized, as defined in the OTS
prompt corrective action regulations, following the proposed distribution, and
(iii) the distribution does not exceed the institution's net income for the
calendar year-to-date plus retained net income for the previous two calendar
years (less any dividends previously paid). If First Federal do not meet the
above stated requirements, it must obtain the prior approval of the OTS before
declaring any proposed distributions.
Liquidity
All thrift institutions, including First Federal, are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what First Federal
includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
thrift institutions. At the present time, the minimum regulatory liquid asset
ratio is 4%.
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term U.S Treasury obligations) currently
must constitute at least 1% of the association's average daily balance of net
withdrawable deposit accounts and current borrowings. Penalties may be imposed
upon associations for violations of either liquid asset ratio requirement.
35
<PAGE>
At September 30, 1999, First Federal was in compliance with both requirements,
with an overall liquid asset ratio of 6.18% and a short-term liquid assets ratio
of 6.18%.
Accounting
An OTS policy statement applicable to all thrift institutions clarifies
and re-emphasizes that the investment activities of a thrift institution must be
in compliance with approved and documented investment policies and strategies,
and must be accounted for in accordance with GAAP. Under the policy statement,
management must support its classification of and accounting for loans (i.e.,
whether held for investment, sale or trading) and securities (held-to-maturity
available-for-sale or trading) with appropriate documentation. First Federal is
in compliance with these amended rules.
The OTS accounting regulations, which may be made more stringent than GAAP
by the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must incorporate any other accounting regulations or orders prescribed by the
OTS.
Qualified Thrift Lender Test
All thrift institutions, including First Federal are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a thrift institution to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the thrift institution may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under
either test, such assets primarily consist of residential housing related loans
and investments. At September 30, 1999, First Federal met the test at 72.06%
QTL, and has always met the test since its effectiveness.
Any thrift institution that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a thrift institution and a national bank, and it is limited
to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "-- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC-insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet
36
<PAGE>
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of First Federal, to assess
the institution's record of meeting the credit needs of its community and to
take such record into account in its evaluation of certain applications, such as
a merger or the establishment of a branch, by First Federal. An unsatisfactory
rating may be used as the basis for the denial of an application by the OTS. Due
to the heightened attention being given to the CRA in the past few years, First
Federal may be required to devote additional funds for investment and lending in
its local community.
First Federal was examined for CRA compliance in 1998 and received a
rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a thrift institution or its subsidiaries
and its affiliates are required to be on terms as favorable to the association
as transactions with non-affiliates. In addition, certain of these transactions,
such as loans to an affiliate, are restricted to a percentage of the
association's capital. Affiliates of First Federal include the Holding Company
and any company which is under common control with First Federal. In addition, a
thrift institution may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates. First Federal's subsidiaries are not deemed affiliates; however, the
OTS has the discretion to treat subsidiaries of thrift institutions as
affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation
The Holding Company is a unitary savings and loan holding company and can
engage in any safe and sound business that is lawful to conduct, subject to
regulatory oversight by the OTS. As such, the Holding Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Holding Company and its non-thrift institution subsidiaries which also permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the subsidiary thrift institution. Otherwise, the Holding Company can
engage in any safe and sound business, which is lawful to conduct for any type
of business. The Holding Company is exploring offering a related business
through another subsidiary of the Holding Company.
As a unitary savings and loan holding company, the Holding Company
generally is not subject to activity restrictions. If the Holding Company
acquires control of another thrift institution as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Holding Company and any of its subsidiaries (other than First Federal or any
other
37
<PAGE>
SAIF-insured thrift institution) would become subject to such restrictions
unless such other institutions each qualify as a QTL and were acquired in a
supervisory acquisition.
If First Federal fails the QTL test, the Holding Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure the Holding Company must register as, and will
become subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are much more limited than are
the activities authorized for a unitary or multiple savings and loan holding
company. See "--Qualified Thrift Lender Test."
The Holding Company must obtain approval from the OTS before acquiring
control of any other SAIF-insured institution. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling thrift institutions in more than one state. However, such interstate
acquisitions are permitted based on specific state authorization or in a
supervisory acquisition of a failing thrift institution.
Federal Securities Law
The stock of the Holding Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Holding
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
The Holding Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Holding Company may not
be resold without registration or unless sold in accordance with certain resale
restrictions. If the Holding Company meets specified current public information
requirements, each affiliate of the Holding Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain
noninterest bearing reserves at specified levels against their transaction
accounts (primarily checking and NOW checking accounts). At September 30, 1999,
First Federal was in compliance with these reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements that may be imposed by the OTS.
See "-- Liquidity."
Thrift institutions are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
38
<PAGE>
Federal Home Loan Bank System
First Federal is a member of the FHLB of Dallas, which is one of 12
regional FHLBs, that administers the home financing credit function of thrift
institutions. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, First Federal is required to purchase and maintain stock in
the FHLB of Dallas. At September 30, 1999, First Federal had $404,000 in FHLB
stock, which was in compliance with this requirement. In past years, First
Federal has received substantial dividends on its FHLB stock. Over the past five
fiscal years such dividends have averaged 6.0% and were 5.5% for fiscal year
1999.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled thrift institutions and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of First Federal's FHLB stock may result in a corresponding
reduction in First Federal's capital.
For the year ended September 30, 1999, dividends paid by the FHLB of
Dallas to First Federal totaled $21,000, which constitute a $17,000 decrease
from the amount of dividends received in fiscal year 1998. The $21,000 dividend
received for the year ended September 30, 1999 reflects an annualized rate of
5.5%, or .48% below the rate for fiscal 1998.
Federal and State Taxation
Thrift institutions such as First Federal that meet certain definitional
tests relating to the composition of assets and other conditions prescribed by
the Internal Revenue Code of 1986, as amended (the "Code"), are permitted to
establish reserves for bad debts and to make annual additions thereto which may,
within specified formula limits, be taken as a deduction in computing taxable
income for federal income tax purposes. The amount of the bad debt reserve
deduction is computed under the experience method.
Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually sustained
by the thrift institution over a period of years.
In August 1996, legislation was enacted that repealed the percentage of
taxable income method used by many thrifts, including First Federal, to
calculate their bad debt reserve for federal income tax purposes. As a result,
small thrifts such as First Federal must recapture that portion of the reserve
that exceeds the amount that could have been taken under the experience method
for tax
39
<PAGE>
years beginning after December 31, 1987. The recapture will occur over a
six-year period, the commencement of which will be delayed until the first
taxable year beginning after December 31, 1997, provided the institution meets
certain residential lending requirements. The management of the Combined Company
does not believe that the legislation will have a material impact on the
Combined Company. At September 30, 1999, First Federal had approximately
$257,000 in bad debt reserves subject to recapture for federal income tax
purposes. The deferred tax liability related to the recapture has been
previously established so there will be no effect on future net income.
In addition to the regular income tax, corporations, including thrift
institutions such as First Federal, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income.
A portion of First Federal's reserves for losses on loans may not, without
adverse tax consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of September 30, 1999, the portion of First Federal's reserves
subject to this treatment for tax purposes totaled approximately $643,000.
The Combined Company files a consolidated federal income tax return with
First Federal on a fiscal year basis using the accrual method of accounting.
Management is not aware of any examination of issues related to still open
federal income tax returns (including returns of subsidiaries and predecessors
of, or entities merged into, First Federal) which would result in a deficiency
that could have a material adverse effect on the financial condition of the
Combined Company.
Texas Taxation. The State of Texas does not have a corporate income tax,
but it does have a corporate franchise tax to which First Federal is subject.
The tax is the higher of 0.25% of taxable capital (usually the amount of
paid in capital plus retained earnings) or 4.5% of "net taxable earned surplus."
"Net taxable earned surplus" is net income for federal income tax purposes
increased by the compensation of directors and executive officers.
Delaware Taxation. As a Delaware holding company, the Holding Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Holding Company
is also subject to an annual franchise tax imposed by the state of Delaware.
Competition
After two years of growth averaging 20% a year in 1997 and 1998, First
Federal planned a "no-growth" or slight reduction in deposits during fiscal year
ending September 30, 1999, in order
40
<PAGE>
to gradually increase its regulatory capital ratios and increase profitability.
This plan was successful by increasing net profits from $628,000 in fiscal year
ending September 30, 1998, to $814,000 in fiscal year ending September 30, 1999,
with capital ratios increasing during this same period of time. As a result,
First Federal's deposits decreased .43% in the fiscal year ending September 30,
1999, and its loan-to-deposit ratio was 97.9%, as of September 30, 1999;
however, First Federal faces strong competition both in originating loans and in
attracting deposits. Competition in originating loans comes primarily from other
thrift institutions, commercial banks and mortgage companies who also make loans
located in First Federal's primary market area. First Federal competes for loans
principally on the basis of the interest rates and loan fees it charges, the
types of loans it originates and the quality of service it provides to
borrowers.
First Federal faces substantial competition in attracting deposits from
other thrift institutions, commercial banks, money market and mutual funds,
credit unions and other investment vehicles. The ability of First Federal to
attract and retain deposits depends on its ability to provide an investment
opportunity that satisfies the requirements of investors as to rate of return,
liquidity, risk and other factors. First Federal competes for these deposits by
offering a variety of deposit accounts at competitive rates and convenient
business hours.
Checking accounts introduced by First Federal include accounts targeted to
those individuals age 50 or over ("Golden Eagle Account") and age 30 to 49 ("30
Something Account"), both of which include special benefits and planned trips,
along with its special "Working People's" checking account designed for the
working people of the Brazos Valley.
At September 30, 1999 there was one local, community-owned thrift
institution (First Federal), one state savings bank and seven commercial banks
with retail offices in Bryan-College Station, Texas, where First Federal's
principal offices and full-service branches are located.
Employees
At September 30, 1999, the Combined Company had a total of 63 full-time
and 19 part-time employees. None of the Combined Company's employees are
represented by any collective bargaining agreement. Management considers its
employee relations to be good, with a staff committed to the goals of the
Combined Company.
Executive Officers Who are Not Directors
The following information as to the business experience during the past
five years is supplied with respect to each executive officer of the Bank. There
are no arrangements or understandings between the persons named and any other
person pursuant to which such officers were selected.
William Wantuck. Mr. Wantuck joined First Federal in January 1999 as
Executive Vice President and Chief Financial Officer. Mr. Wantuck supervises the
accounting, regulatory reporting, loan administration, branch banking
operations, management information systems and secondary mortgage loan marketing
functions. Mr. Wantuck has been in banking since 1976, primarily with
independent financial institutions, and has extensive experience in most
operational areas of banking. Mr. Wantuck is a certified public accountant, a
certified internal auditor and a certified financial services auditor. Mr.
Wantuck is a member of the Audit Committee, the Asset Review Committee, the
41
<PAGE>
Regulatory Compliance Committee, the Investment/Insurance and Finance Committee
and is Chairperson of the Asset/Liability Committee.
Mary L. Hegar. Ms. Hegar joined First Federal in 1977 and became Assistant
Secretary/Treasurer in 1987 and was promoted to Senior Vice President/Financial
and Regulatory. Ms. Hegar primarily coordinates the accounting functions of the
Bank, monitors First Federal's investments and is responsible for regulatory
reporting. Ms. Hegar is a member of the Asset/Liability Committee.
Item 2. Description of Property
Offices
First Federal owns the building and land for the Holding Company's and its
executive office at 2900 Texas Avenue, Bryan, Texas, which was built in 1956 and
acquired by First Federal in 1978. This office now has approximately 8,700
square feet and is situated on almost an acre of land with over 200 feet of
frontage situated on the principal thoroughfare in Bryan-College Station. The
depreciated net book value of this office and land (with recent improvements)
was $732,000 at September 30, 1999. An expansion of 800 square feet was added in
1995, and additional drive-in facilities were added in 1994 and 1997. Additional
land was acquired in fiscal 1998, located near First Federal's principal
offices, to construct a new, larger drive-in facility when the need arises in
the future. An additional expansion of approximately 1,000 square feet was added
in fiscal 1999 to institute safe deposit service with over 700 new safe deposit
boxes and increased spaces for its growing Note Department and for additional
customer service.
First Federal also opened and owns a branch office at 2202 Longmire in
College Station in March of 1994, located adjacent to one of the key highway
intersections in College Station. This office was renovated and expanded after
its acquisition by First Federal from the FDIC. The office has approximately
2320 square feet and is situated on almost two acres of land, with adequate
expansion space for the growth of the branch and the offices of First Federal's
expanding Second Chance Auto Loan Program. The book value of this office and
land was $301,000 at September 30, 1999.
First Federal also acquired in fiscal 1998 approximately one acre of land
at a key intersection of two major highways in north Bryan, as the site for its
north Bryan full-service branch. It opened in June 1998, with a special bank
modular facility pending construction of the permanent facility, which is
tentatively schedule to commence before December 31, 1999. First Federal is very
pleased to date with the acceptance by the community of this new facility. This
branch is intended to better serve the Hispanic and minority community, working
class population and other residents in this part of the community not presently
served by a nearby banking facility. Management believes its current check
clearing capability can service these additional accounts. The book value of
this office and land was $302,000 at September 30, 1999.
The Bank maintains a database of depositor and borrower customer
information. The net book value of the data processing and computer equipment
and software utilized by the Bank at September 30, 1999 was $164,000.
42
<PAGE>
Item 3. Legal Proceedings
The Combined Company is, from time to time, a party to certain lawsuits
arising in the ordinary course of its business. The Combined Company believes
that none of these lawsuits would, if adversely determined, have a material
adverse effect on its financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the three months ended September
30, 1999.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Pages 56 and 57 of the Combined Company's 1999 Annual Report to
Stockholders is incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
Pages 6 through 24 of the Combined Company's 1999 Annual Report to
Stockholders is incorporated herein by reference.
Item 7. Financial Statements
Pages 26 through 55 of the Combined Company's 1999 Annual Report to
Stockholders are incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
There has been no current report on Form 8-K filed within 24 months prior
to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
Information concerning Directors of the Combined Company is incorporated
herein by reference from the definitive proxy statement for the annual meeting
of stockholders to be held on February 24, 2000, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
43
<PAGE>
To the Combined Company's knowledge, based solely on a review of the
copies of such reports furnished to the Combined Company and written
representations that no other reports are required, during the fiscal year ended
September 30, 1999, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10 percent beneficial owners were complied
with.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the definitive proxy statement for the annual meeting of
stockholders to be held on February 24, 2000, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the definitive proxy
statement for the annual meeting of stockholders to be held on February 24,
2000, a copy of which will be filed not later than 120 days after the close of
the fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions is
incorporated herein by reference from the definitive proxy statement for the
annual meeting of stockholders to be held on February 24, 2000, a copy of which
will be filed not later than 120 days after the close of the fiscal year.
44
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Reference to
Prior Filing
or Exhibit
Regulation Number
S-B Exhibit Attached
Number Document Hereto
---------- ----------------------------------------- ------------
2 Plan of acquisition, reorganization, None
arrangement, liquidation or succession
3(a) Certificate of Incorporation *
3(b) By-Laws *
4 Instruments defining the rights of securit *
holders, including debentures
9 Voting Trust Agreement None
10 Material contracts *
11 Statement re: computation of per share Not required
12 Statement re: computation of ratios Not required
13 Annual Report to Security Holders 13
16 Letter re: change in certifying None
accountants
18 Letter re: change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted None
to vote of security holders
23 Consents of Experts and Counsel Not required
24 Power of Attorney Not required
27 Financial Data Schedule 27
99 Additional Exhibits None
- ---------------------
* Filed as exhibits to the Combined Company's Form S-1 registration
statement (File No. 333-28179) filed on May 30, 1997 pursuant to Section 5
of the Securities Act of 1933. All of such previously filed documents are
hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-B.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended September
30, 1999.
45
<PAGE>
SIGNATURES
Pursuant to the requirements of section 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly
authorized.
THE BRYAN-COLLEGE STATION
FINANCIAL HOLDING COMPANY
Date: January 7, 2000 By:/s/ J. Stanley Stephen
--------------- -----------------------------------
J. Stanley Stephen, President and
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following person in the capacities and
on the dates indicated.
By:/s/ Richard L. Peacock By:/s/ J. Stanley Stephen
------------------------------ ------------------------------
Richard L. Peacock J. Stanley Stephen, President
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Date: January 7, 2000 Date: January 7, 2000
--------------------------- ---------------------------
By:/s/ Ken L. Hayes By:/s/ Ernest A. Wentrek
------------------------------ ------------------------------
Ken L. Hayes, Director Ernest A. Wentrek, Director
and Vice Chairman of the Board
Date: January 7, 2000 Date: January 7, 2000
--------------------------- ---------------------------
By:/s/ Charles Neelley By:/s/ George Koenig
------------------------------- ------------------------------
Charles Neelley George Koenig, Director
Director, Secretary and Treasurer and Executive Vice President
of the Board of Directors
Date: January 7, 2000 Date: January 7, 2000
--------------------------- ---------------------------
<PAGE>
By:/s/ Roland Ruffino By:/s/ Robert H. Conaway
--------------------------------- ------------------------------
Roland Ruffino Robert H. Conaway
Director Director
Date: January 7, 2000 Date: January 7, 2000
--------------------------- ---------------------------
By:/s/ Joseph W. Krolczyk By:/s/ Gary A. Snoe
---------------------------------- -----------------------------
Joseph W. Krolczyk Gary A. Snoe
Director Director
Date: January 7, 2000 Date: January 7, 2000
--------------------------- ---------------------------
By:/s/ William Wantuck By:/s/ Helen Chavarria
------------------------------------ -----------------------------
William Wantuck Helen Chavarria
Chief Financial Officer Director
(Principal Financial and Accounting
Officer)
Date: January 7, 2000 Date: January 7, 2000
--------------------------- ---------------------------
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT
- --------------------------------------------------------------------------------
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
BRYAN, TEXAS
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
President's Message......................................................... 1
Selected Consolidated Financial Data........................................ 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 6
Consolidated Financial Statements........................................... 26
Corporate Information....................................................... 56
<PAGE>
[THE BRYAN-COLLEGE STATION FINANCIAL
HOLDING COMPANY'S LETTERHEAD]
December 22, 1999
Dear Friend and Stockholder:
We wish to take this opportunity to express our gratitude and appreciation
for the moral and financial support you have given THE BRYAN-COLLEGE STATION
FINANCIAL HOLDING COMPANY (the "Holding Company") and its principal operating
subsidiary, FIRST FEDERAL SAVINGS BANK ("First Federal"). As we completed our
first full year of operations with the new holding company, we thank each and
every one of you for your personal encouragement and involvement over these
eight years while we transitioned this financial institution into full-service
banking with multiple branches and offices, converted it into a federal stock
financial institution in the early '90's , and organized our new holding company
in 1998. Your trust and confidence has been invaluable during this period of
time -- and we intend to continue to honor that trust.
Thanks to you, First Federal is the only publicly-traded independent
financial institution in this area. It has enjoyed an excellent growth and
community acceptance over these past eight years, and has loaned to the people
in the community more of its deposits than any other financial institution in
this immediate area -- with relatively low loan losses over the past three
fiscal years.
The stockholders of the Holding Company (parent of its principal operating
subsidiary, First Federal) will be pleased to know that during the Holding
Company's first full year of operations, and after paying the interest on its
$3.6 million of debentures, amortizing its initial organization costs and
deducting the normal operating expenses, the Combined Company earned
(after-taxes) $245,000.
First Federal had grown very fast in 1997 and 1998. In 1999, management
pursued a strategy to control its growth in order to emphasize increased
profitability and gradually increase its capital ratios. This strategy was
successfully accomplished as First Federal's net profits increased 30% from last
year, to $815,000 this year. In addition, we increased the capital ratios of
First Federal.
<PAGE>
First Federal began its transition to full-service banking in 1994 and
1995, and incurred the expenses associated therewith (such as new data
processing, tellers, and drive-in facilities). As a result, net income was
$193,000 in 1994 and $211,000 in 1995. In 1996, net income rose to $454,000
before a one-time charge of $220,000 to recapitalize the Savings Association
Insurance Fund. In 1997, net income rose to $605,000 and to $628,000 in 1998. In
the fiscal year 1999, net income increased to $815,000.
Our beautiful new permanent north Bryan banking facility, strategically
located at the intersection of the two major highways in our community, has just
been completed and opened for business on December 20, 1999. This new facility
has everyone excited and enthusiastic about First Federal's opportunities in
that large portion of Bryan-College Station. For the first time, we are now
offering safe deposit service at our principal offices -- with over 700 new safe
deposit boxes recently installed. Plus, we have also completed expansion of a
larger customer-service area, new Note Department offices and a large vault to
accommodate the growth in our principal offices.
To provide for continued profitable growth in the Bryan-College Station
area, and also to implement our new three year strategic plan to carefully
expand into the growing "Texas Triangle" generally bordered by Houston,
Austin-San Antonio, and Dallas-Ft. Worth, we have just hired the former
President of a successful automobile lending firm to manage and expand our
profitable Second Chance Auto Loan Program with selected auto dealers located
throughout this "Texas Triangle." In addition, in 1999 we hired an experienced
and seasoned Small Business Administration ("SBA") loan specialist in order to
expand our SBA guaranteed loan program throughout the "Texas Triangle," by
utilizing our recent designation as a Certified SBA Lender. Our mortgage lending
offices have also just begun their expansion into this same general area. This
strategy is designed to diversify First Federal's business opportunities over
the next three years into what we believe to be one of the fastest-growing areas
of the State of Texas, in order to enhance our franchise value and thus,
increased value for you, the stockholders of our Holding Company.
We have expended much time, energy and expense to prepare First Federal
for the Year 2000 issue. We believe that we are truly ready for any eventuality
(including any unexpected loss of electricity). In order to protect First
Federal against anticipated increases in interest rates this next year, at
September 30, 1999, our loan portfolio and deposits were positioned to absorb a
2% additional increase in interest rates without any change in our net portfolio
value, and if interest rates were to increase by 3%, then we would have only a
2% decrease in our net portfolio value. Thus, we believe First Federal to be in
an enviable position to meet any unanticipated changes, and we intend to
maintain that same management discipline in the years ahead.
During this past year, we lost a true friend and wonderful director,
Arthur Davila. Recently, we welcomed Helen Chavarria to the Board of Directors
of the Holding Company and First Federal. Helen is a well-known and respected
former member of the Bryan City Council, where she served for several terms. She
is also active in numerous community affairs.
The unique and valuable corporate charter of our Holding Company gives us
an ability to enter into any type of safe, sound, and lawful business (subject
to regulatory oversight), whether or not related to financial services such as
banking (unlike bank holding companies). To benefit from this valuable charter,
our plans are to carefully diversify our Holding Company into different types of
safe, sound, lawful and profitable businesses throughout this "Texas Triangle"
- -- so that we can
2
<PAGE>
further enhance our franchise value. This is truly an exciting opportunity, and
we are very enthusiastic about the future of our Holding Company, as well as the
future of First Federal.
We are most fortunate to have a committed and dedicated Board of
Directors, and a highly motivated staff who work many hours "over and above" the
normal call of duty in order to accomplish our goals. We could not exist and
prosper without them, and without you, our owners and stockholders. Our genuine
appreciation to each of you for your confidence by your investment in our stock
and in our future.
We pledge to each of you our untiring efforts, and a commitment to use our
very best efforts in order to maximize the return on your investment as we
implement our strategic plan over these next three years.
Sincerely,
Stan Stephen
President/CEO
BOARD OF DIRECTORS:
Richard L. Peacock, Chairman of the Board/Retired/ Owner/Office Supply Business
Ernest Wentrcek, Vice Chairman of the Board/Retired Texas A&M and Realtor
Charles Neelley, Secretary-Treasurer of the Board/ Retired Texas A&M and former
owner of Travel Business
Helen Chavarria, Housing Management Specialist for the Brazos Valley Council
of Government, and area recruiter for Amnesty and Instructional Assistant
for Region IV Educational Service Center located in Huntsville, Texas
J. Stanley Stephen, President/CEO, First Federal Savings Bank
Ken Hays, Owner, Aggieland Travel
Roland Ruffino, Co-Owner/Readfield Wholesale Meats & Readfield Retail Meats
Robert Conaway, Owner/Progress Supply
George Koenig, Executive Vice President & Manager/Construction Lending & Bank
Facilities
Joseph W. Krolczyk, Owner/President, KESCO Restaurant Equipment Supply Inc.
Gary A. Snoe, Owner/President, Snoe Inc. Specialty Tool & Die
3
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables present selected consolidated financial data for The
Bryan-College Station Financial Holding Company (the "Holding Company"),
organized as of April 1, 1998 and its principal operating wholly-owned
subsidiary, First Federal Savings Bank ("First Federal" or the "Bank") at the
dates and for the periods indicated. This information is derived in part from,
and should be read in conjunction with, the Consolidated Financial Statements of
the Holding Company included elsewhere in this 1999 Annual Report.
At September 30,
----------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------
(In Thousands)
Selected Financial
Condition Data:
Total assets(1)............ $81,869 $82,634 $75,089 $57,597 $61,432
Loans receivable, net(2).. 70,438 71,994 65,237 49,579 48,605
Mortgage-backed securities. 692 954 1,150 1,292 2,278
Investment securities...... --- --- --- 1,000 1,000
Deposits................... 73,240 73,554 58,808 51,677 54,939
Debentures................. 3,629 3,629 --- --- ---
Other borrowings........... --- 800 10,000 --- 1,088
Stockholders' equity....... 2,115 1,870 4,834 4,316 4,170
(1) After two years of fast growth (averaging 20% in deposits a year in 1997
and 1998), management planned a strategy of "no growth" in deposits for
1999, in order to gradually increase ratios of capital to total assets and
increase emphasis on profitability. Both goals were accomplished by First
Federal.
(2) Including loans held for sale at month end of $2.5 million, $328,000,
$204,000, $419,000 and $1.8 million at September 30, 1999, 1998, 1997, 1996
and 1995, respectively.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Selected Operations Data:
Total interest income........................ $7,543 $6,891 $5,597 $4,828 $4,698
Total interest expense....................... 3,558 3,417 2,659 2,363 2,294
------ ------ ------- ------ ------
Net interest income......................... 3,985 3,474 2,938 2,465 2,404
Provision for loan losses.................... 104 79 25 (52) 27
------ ------ ------- ------ ------
Net interest income after provision for
loan losses................................. 3,881 3,395 2,913 2,517 2,377
Service charges.............................. 744 602 585 527 355
Gain on sales of loans, mortgage servicing
rights, mortgage-backed securities and
investment securities....................... 787 229 148 343 213
Income from operation of foreclosed real
estate...................................... (17) (20) (20) (9) (2)
Other noninterest income..................... 269 120 62 12 26
SAIF Special Assessment...................... --- --- --- 333 ---
Other noninterest expenses (operating expenses) 5,220 3,870 2,771 2,715 2,648
------ ------ ------- ------ ------
Income before income taxes................... 444 456 917 342 321
Income tax expense .......................... 199 164 312 108 110
------ ------ ------- ------ ------
Net income................................... $ 245 $ 292 $ 605 $ 234 $ 211
====== ====== ======= ====== ======
Dividends on bank preferred stock............ $ --- $ (44) $ (87) $ (88) $ (88)
====== ====== ======= ====== ======
Net income available to common stockholders.. $ 245 $ 248 $ 518 $ 146 $ 123
====== ====== ======= ====== ======
</TABLE>
4
<PAGE>
At or for the
Year Ended September 30,
---------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------
Other Data:
Interest rate spread information:
Average during period(1)....... 4.84% 4.49% 4.47% 4.11% 3.97%
End of period(2)............... 5.94 5.10 4.56 4.67 4.17
Net interest margin for the
period(3)....................... 5.10 4.80 4.85 4.45 4.29
Average interest-earning assets
as a percentage of average
interest-bearing liabilities.... 105.67 106.51 108.61 108.01 107.95
Non-performing assets to total
assets at end of period(4)....... 3.31 1.62 1.71 1.50 .62
Total equity to total assets
(end of period).................. 2.58 2.26 6.44 7.49 6.79
Total equity to assets ratio
(ratio of average equity to average
total assets)..................... 2.48 4.54 7.23 7.26 6.91
Return on assets (ratio of net
income to average total assets)... .29 .38 .94 .40 .36
Return on assets, excluding
special SAIF assessment........... --- --- --- .77 ---
Return on total equity (ratio of
net income to average equity)..... 11.73 8.40 13.03 5.46 5.15
Return on total equity,
excluding special SAIF assessment. --- --- --- 10.60 ---
Non-interest expenses to average
total assets...................... 6.19 5.05 4.32 5.17 4.47
Non-interest expense to average
total assets excluding special
SAIF assessment................... --- --- --- 4.60 ---
Ratio of earnings to fixed
charges including interest on
deposits(5)....................... 1.12 1.12 1.30 1.10 1.10
Ratio of earnings to fixed
charges excluding interest
on deposits(5).................... 2.03 1.86 4.25 3.73 1.99
Earnings per share................. .57(6) .46(7) .79(7) .22(7) .19(7)
Number of deposit accounts......... 11,087 10,203 8,783 7,903 7,266
Number of full-service offices(8).. 4 3 2 2 2
(1) Represents the difference between the average yield received on
interest-earning assets (primarily loans) and the average rate paid on
interest-bearing liabilities (primarily deposits).
(2) Represents the weighted average yield on interest-earning assets
(primarily loans) at the end of the period minus the weighted average cost
of liabilities (primarily deposits) at the end of the period.
(3) Net interest income divided by average interest-earning assets (primarily
loans).
(4) Non-performing assets include loans that are 90 days or more delinquent
as well as repossessed assets.
(5) The ratio of earnings to fixed charges is computed by dividing fixed
charges into earnings from continuing operations before income taxes and
extraordinary items plus fixed charges. Fixed charges include interest
expensed and Bank preferred stock dividends.
(6) Adjusted to reflect one 10% stock dividend previously paid to the
stockholders in fiscal year ending September 30, 1999.
(7) Adjusted to reflect one 10% stock dividend previously paid to the
stockholders, and to reflect the 2.5 exchange ratio of Holding Company
common stock for Bank common stock.
(8) Includes full-service mortgage lending offices.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Bryan-College Station Financial Holding Company (the "Holding Company"
and, with its subsidiary the "Combined Company"), a Delaware corporation, was
formed to act as the 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 Holding 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 Combined
Company, unless otherwise indicated, at or before April 1, 1998, refer to the
Bank.
The Combined Company is headquartered in Bryan, Texas and operates through
its principal operating subsidiary First Federal. First Federal's major goals
are to provide high quality full-service "niche" retail banking on a profitable
basis to primarily the middle-class and blue-collar population through its
offices located in Bryan/College Station, Texas. The Combined Company is
currently in the process of expanding its products and services into the general
trade area bordered by the "Texas Triangle" of Houston, Austin -- San Antonio,
and Dallas. First Federal intends to continue to focus primarily on one-to
four-family residential loans, indirect consumer lending through its Second
Chance Auto Loan Program from selected auto dealers generally from the "Texas
Triangle" (and partially insured against loss by credit-default insurance),
Small Business Administration ("SBA") guaranteed loans in the "Texas Triangle"
through its new designation as a Certified SBA Lender, and to a lesser degree
through direct consumer automobile and personal loans, home improvement loans,
residential construction loans, and small to medium size commercial business
loans. In addition, First Federal seeks to continue maintaining and improving
its asset quality and continuing to minimize to the extent possible, its
vulnerability to changes in interest rates in order to continue to maintain an
attractive 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 much lesser extent mortgage-backed securities and other
securities ("interest-earning assets") and the average interest 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. At September 30,
1997, 1998, and 1999, the Combined Company's interest rate spread was 4.56%,
5.10%, and 5.94%, respectively, as compared to our peer group of similar sized
savings institutions in the nation which had an average 3.35% spread at
September 30, 1999, and 3.76% for all similar sized savings institutions in the
State of Texas.
6
<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 by
utilizing a fully-staffed residential loan department and SBA business loan
staff, and generally profitable sale of loan participations in its Second Chance
Auto Loan portfolio, along with income from service charges and fees on checking
accounts from its recent transition to full-service retail banking, while
continuing to manage operating expenses necessarily incurred in this type of
lending, 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 this 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) continuing to upgrade its entire staff by
hiring a new, experienced Chief Financial Officer and also upgrading its tellers
and supervisors with more experienced, full-time professionals; (ii) building a
new permanent full-service branch in north Bryan, adjacent to a key intersection
of two major highways and in the heart of a large, expanding area where many of
First Federal's targeted middle class and blue-collar customers live, and in an
area not presently served by a permanent banking facility; (iii) adding space to
its principal offices to expand customer service and installing over 700 new
safe deposit boxes; (iv) increasing the size of its staff and hiring a new,
experienced manager for its growing, profitable Second Chance Auto Lending
Program (which loans are also secured by credit-default insurance up to $6,000
per loan for losses due to the borrower's loan default); (v) adding to the staff
of its active residential lending department, in its new and larger offices on
the main east-west artery in College Station, in order to enable it to expand
throughout the "Texas Triangle" over the next three years; (vi) addressing all
of the challenges of the Year 2000 issue ("Y2K"), by expending much time and
expense; and (vii) hiring a seasoned SBA loan specialist, to expand First
Federal's SBA loan program throughout the "Texas Triangle" with its new
designation as a "Certified SBA Lender." As a result, the Combined Company's
noninterest expenses increased slightly from 5.05% of average assets for the
year ended September 30, 1998 to 6.19% for the year ending September 30, 1999.
Management believes that this strategy will enable the Combined Company to
continue enhancing profitability in the future and meet the needs of its
customers in a highly competitive market. Despite all the above-described
expansion, new staffing, Y2K, and other expenses, the Combined Company earned
during its full year of operations net income of $245,000 and First Federal's
net income (after tax) increased 30% to $815,000), from $628,000 last year. In
addition, ratios of capital to total assets gradually increased over this past
year.
First Federal's restructuring and expansion, as described above, in order
to provide additional full-service banking and convenience to its customers in
fiscal 1999 and to provide for further growth, has caused some 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 fiscal year ending September 30, 1999.
7
<PAGE>
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 the generally profitable
sale of Second Chance Auto Loan participations, and to increase its service
charges, and fee income from additional checking accounts resulting from its
transition to full-service banking. Total noninterest income increased from
$931,000 in 1998 to $1.8 million in 1999, while noninterest expense increased
from $3.9 million in 1998 to $5.2 million in 1999 primarily due to all of the
reasons described above. Noninterest expense (operating expenses, including Y2K
expenses and all other expenses of the Combined Company other than interest paid
on deposit accounts and borrowings) increased from 5.05% of average assets for
the year ended September 30, 1998 to 6.19% for the year ended September 30,
1999. However, net income of the Combined Company during its first full year of
operations was $245,000 and net income of the Bank increased $187,000 (30%) over
last year to $815,000.
Asset/Liability Management
First Federal, like all financial institutions, is subject to interest
rate risk to the degree that its interest-bearing liabilities mature or reprice
more rapidly, or on a different basis, than its interest-earning assets, some of
which may be longer term or fixed interest rate. Loans maturing within five
years total $56.8 million or 78.8% of total loans, while loans maturing over
five years total $15.3 million or 21.2% of total loans. 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. At September 30, 1999, First Federal's loan portfolio
enabled it to have a favorable interest rate risk, so that if interest rates
were to increase 200 basis points (2%) the Bank would not have any change in its
net portfolio value. If interest rates were to have increased 300 basis points
(3%), First Federal would have only a 2% change in its net portfolio value.
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, Executive Vice President/Chief Financial Officer, Senior Vice
President/Accounting and three 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,
First Federal 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 in
order to reduce First Federal's overall sensitivity to changes in interest
rates. First Federal places its primary emphasis on maximizing net interest
margin, while striving to better match the interest rate sensitivity of its
assets and liabilities. There can be no assurance that this strategy will
achieve the desired results and will not result in substantial losses in the
event of an increase in interest rate risk.
As part of this strategy, management has continued to emphasize growth in
noninterest-bearing deposits such as checking accounts or lower interest-bearing
savings deposits
8
<PAGE>
by offering full-service retail banking. 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 and 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. Management has also recently implemented an
additional strategy of generally profitable sales of loan participations in its
Second Chance Auto Loans.
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.
If a capital deduction was required for the September, 1999 reporting period,
the deduction for risk-based capital purposes would not be material to First
Federal.
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, 1999, 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 300 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.
9
<PAGE>
Change in
Interest Rate At September 30,
Change in 1999
Interest Rate Estimated ------------------
(Basis Points) NPV $ Change % Change
- -------------------------------------------------
(Dollars in Thousands)
+300 $8,322 $(152) (2)%
+200 8,474 --- ---
+100 8,539 65 1
0 8,474
-100 8,319 (155) (2)
-200 8,289 (186) (2)
-300 8,516 42 ---
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.
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 300 basis point change in interest rates, First Federal would
experience no change in NPV in a declining rate environment and a 2% decrease in
a rising rate environment. As of September 30, 1999, an increase in interest
rates of 200 basis points would have resulted in no change in the portfolio
value of First Federal's assets, while a change in the interest rates of
negative 200 basis points would have resulted in 2% decrease in the portfolio
value of First Federal's assets.
10
<PAGE>
Average Balances, Interest Rates and Yields
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities
and the interest rates, expressed both in dollars and rates and the net interest
margin. No tax equivalent adjustments were made. Average balances are the
beginning balance for the year plus the ending balance for each month divided by
thirteen, and include the balances of non-accruing loans. The yield includes
fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
For the Fiscal Year Ended September 30,
-----------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------
Average Average Average
Outstanding Interest Outstanding Interest Outstanding Interest
Balance Earned Yield Balance Earned Yield Balance Earned Yield
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-earning assets:
Loans receivable, net...... $72,826 $7,334 10.07% $68,050 $6,686 9.83% $56,090 $5,351 9.54%
Mortgage-backed securities. 842 45 5.34 1,053 63 5.98 1,221 73 5.98
Interest bearing deposits
with Federal Home Loan
Bank....................... 3,838 134 3.49 2,613 96 3.67 2,402 115 4.79
Other interest-earning
assets..................... 610 30 4.92 640 46 7.19 864 58 6.71
------- ------ ------- ------ ------- ------
Total interest-earning
assets..................... 78,116 7,543 9.66 72,356 6,891 9.52 60,577 5,597 9.24
Noninterest-earning assets.. 6,226 4,248 3,620
------- ------- -------
Total assets............... $84,342 $76,604 $64,197
======= ======= =======
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
For the Fiscal Year Ended September 30,
-----------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------
Average Average Average
Outstanding Interest Outstanding Interest Outstanding Interest
Balance Earned Yield Balance Earned Yield Balance Earned Yield
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-bearing liabilities:
Deposits.................... $70,118 $3,125 4.46% $62,133 $ 2,981 4.80 $52,707 $2,491 4.73%
FHLB advances............... 176 8 4.55 3,984 226 5.67 3,067 168 5.48
Notes payable............... 3,629 425 11.71 1,815 210 11.57 --- --- ---
------- ------ ------- ------- ------- ------
Total interest-bearing
liabilities.............. 73,923 3,558 4.81 67,932 3,417 5.03 55,774 2,659 4.77
------ ------- ------
Other liabilities(2)........ 8,330 5,195 3,780
------- ------- -------
Total liabilities .......... 82,253 73,127 59,554
Stockholders' equity........ 2,089 3,477 4,643
------- ------- -------
Total liabilities and
stockholders' equity....... $84,342 $76,604 $64,197
======= ======= =======
Net interest income;
interest rate spread......... $3,985 4.84% $ 3,474 4.49% $2,938 4.47%
====== ===== ======= ===== ====== =====
Net interest margin(1)....... 5.10% 4.80% 4.85
===== ===== =====
Average interest-earning
assets to average
interest-bearing
liabilities.................. 105.67% 106.51% 108.61%
======= ====== ======
</TABLE>
(1) Net interest margin is net interest income divided by average
interest-earning assets (primarily loans).
(2) Including noninterest-bearing deposits.
12
<PAGE>
The following table sets forth the yields on loans, mortgage-backed
securities, securities and other interest-earning assets, the rates on savings
deposits and borrowings and the resultant interest rate spreads at the dates and
for the periods indicated.
At September 30,
-------------------------
1999 1998 1997
----- ----- ----
Weighted average yield on:
Loans receivable................................... 10.95% 10.55% 9.75%
Mortgage-backed securities......................... 6.12 6.63 6.63
Other interest-earning assets...................... 5.48 5.37 6.13
Combined weighted average yield on
interest-earning assets........................... 10.78 10.23 9.48
Weighted average rate paid on:
Deposits........................................... 4.48 4.81 4.80
Borrowings......................................... --- 5.43 5.55
Notes payable...................................... 11.50 11.50 ---
Combined weighted average rate paid on
interest-bearing liabilities...................... 4.84 5.13 4.92
Spread............................................. 5.94% 5.10% 4.56%
<TABLE>
<CAPTION>
For the Fiscal Year Ended
September 30,
-------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable.................................... 10.07% 9.83% 9.54%
Mortgage-backed securities.......................... 5.34 5.98 5.98
Other interest-earning assets....................... 3.69 4.37 5.30
Combined weighted average yield on
interest-earning assets........................... 9.66 9.52 9.24
Weighted average rate paid on:
Deposits............................................ 4.46 4.80 4.73
FHLB advances....................................... 4.55 5.67 5.48
Notes payable....................................... 11.71 11.57 ---
Combined weighted average rate paid on
interest-bearing liabilities...................... 4.81 5.03 4.77
Spread............................................... 4.84 4.49 4.47
Net interest margin (net interest-earnings divided
by average interest-earning assets, with net
interest-earnings equaling the difference
between the dollar amount of interest-earned on
assets and interest paid on deposits and FHLB
advances)........................................... 5.10% 4.80% 4.85%
</TABLE>
13
<PAGE>
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets
(primarily loans) and interest-bearing liabilities (primarily deposits) for the
periods shown. It distinguishes between the increase in interest income and
interest expense related to higher outstanding balances and to the levels and
volatility of interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in rate (i.e., changes in rate multiplied by old volume) and (ii)
changes in volume (i.e., changes in volume multiplied by old rate). For purposes
of this table, changes attributable to both rate and volume have been allocated
proportionately to the change due to volume and rate.
<TABLE>
<CAPTION>
For the Fiscal Year Ended September 30,
--------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
--------------------------------------------------------------
Increase Total Increase Total
(Decrease) Increase (Decrease) Increase
Due To (Decrease) Due To (Decrease)
--------------------------------------------------------------
Volume Rate Volume Rate
----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-earning assets:
Loans........................ $ 469 $ 179 $ 648 $1,171 $164 $1,335
Mortgage-backed securities... (13) (5) (18) (11) --- (11)
Interest bearing deposits
with FHLB................... 45 (7) 38 9 (28) (19)
Other interest-earning assets (2) (14) (16) (16) 5 (11)
---- ----- ----- ------ ---- ------
Total interest-earning assets 499 153 652 1,153 141 1,294
Interest-bearing liabilities:
Deposits..................... 383 (239) 144 444 46 490
FHLB advances ............... (216) (2) (218) 52 6 58
Notes payable................ 210 5 215 210 --- 210
----- ----- ----- ------ ---- ------
Total interest-bearing
liabilities............... 377 (236) 141 706 52 758
----- ----- ----- ------ ---- ------
Net interest income........... $ 122 $ 389 $ 447 $ 89
===== ===== ====== ====
Net increase in net interest
income....................... $ 511 $ 536
===== ======
</TABLE>
Results of Operations
The Combined Company's results of operations are primarily dependent on
its net interest income which is the difference between interest income on
interest-earning assets (primarily loans) and interest expense on
interest-bearing liabilities (primarily deposits). Interest income is a function
of the average balances of interest-earning assets (primarily loans) outstanding
during the period and the average yields earned on such assets. Interest expense
is a function of the average amount of interest-bearing liabilities outstanding
(primarily deposits) during the period and the average rates paid on such
liabilities. The Combined 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 residential mortgages and sales of
loan participations of Second Chance Auto loans and servicing rights. The
Combined 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.
14
<PAGE>
Comparison of Fiscal Year Ended September 30, 1999 to September 30, 1998
The Combined Company reported consolidated net income of $245,000 for its
first full year of operations ended September 30, 1999, as compared to $292,000
for the year ended September 30, 1998, a decrease of $47,000, or 16%. The
decrease in net income was primarily due to costs associated with the
termination of the defined benefit pension plan at the Bank level and an
increase in the professional staff of the Bank in order to increase loan
originations and service its customers as the Bank expands in the Bryan-College
Station area and begins its expansion generally into the "Texas Triangle"
bordered by Houston, Austin -San Antonio, and Dallas, in order to increase its
franchise value and thus stockholder value. The terminated plan was replaced
with a less expensive 401(k) profit-sharing plan.
Net interest income increased by $511,000 to $4.0 million for the year
ended September 30, 1999 from $3.5 million for the year ended September 30,
1998. This increase primarily resulted from increases in the average balance and
average yield of the loan portfolio, offset in part by increases in the volume
of deposits and other borrowings. The average yield on First Federal's loans
increased 24 basis points as a result of an increase in the volume of
credit-default insured consumer automobile loans which yield a higher rate than
traditional residential mortgage loans. The average balance of loans increased
as a result of a concerted effort to increase the consumer loan portfolio
through building additional relationships with automobile dealerships and
promoting the innovative and profitable Second Chance Auto Loan Program. These
increases were partially offset by an increase in the cost of funds resulting
from a $8.0 million increase in the average balance of deposits and a $1.8
million increase in the average balance of notes payable. In addition, the
average cost of funds decreased 22 basis points as a result of increased
emphasis on transactional deposit accounts. As a result, the Combined Company's
interest margin increased to 5.10% for the year ended September 30, 1999 from
4.80% for the year ended September 30, 1998. The ratio of interest-earning
assets to interest-bearing liabilities declined to 105.67% at September 30, 1999
from 106.51% at September 30, 1998. The average net interest spread for the
fiscal year ending September 30, 1999, increased to 4.84% from 4.49% for the
same periods.
The Combined Company recorded a $104,000 provision (expense) for loan
losses for the year ended September 30, 1999 as compared to a $79,000 provision
for loan losses for the year ended September 30, 1998. The increase in the
provision for loan losses was largely a result of an increase in gross loans
during the year. The Combined Company continued to have low levels of
charge-offs relative to the allowance for loan losses and the use of
credit-default insurance coverage for Second Chance automobile loans to limit
the Combined Company's loan loss exposure.
Noninterest income increased $852,000 to $1,783,000 for the year ended
September 30, 1999 from $931,000 for the year ended September 30, 1998. This was
primarily a result of increased profits on sales of loans and servicing rights
of $558,000 combined with an increase in service charges of $142,000 as a result
of an increase in transactional deposit accounts. In addition, other income
increased $83,000 primarily as a result of insurance reimbursements for casualty
losses.
15
<PAGE>
Noninterest expense increased $1.3 million from $3.9 million for the year
ended September 30, 1998 to $5.2 million for the year ended September 30, 1999.
The increase primarily resulted from the restructuring and expansion of the
Combined Company. Compensation and benefits increased $689,000 as a result of a
curtailment loss of $172,000 relative to the termination of the Bank's pension
plan, increases in compensation to hire the former President of an auto finance
company as the new manager of Second Chance auto lending in order to gradually
expand this loan program with selected auto dealers throughout the State of
Texas, the hiring of five new loan collection and servicing officers in order to
significantly strengthen the long-term loan collection and servicing of the
Second Chance Auto Loan Program, and the hiring of a marketing representative
for this loan program. Also, First Federal hired a new Executive Vice
President/Chief Financial Officer with over 20 years experience in banking, in
order to provide this expertise for the Bank and the Holding Company and to
provide for succession in senior management in the future. In addition, First
Federal strengthened the staff of its mortgage lending department with an
experienced secondary market residential loan specialist, along with two new
support personnel. Also, a highly-qualified new manager of the Bank's Note
Department was hired in 1999, along with a seasoned specialist in SBA lending in
order to expand First Federal's SBA lending program throughout the "Texas
Triangle" with its new designation as a Certified SBA Lender. These new,
important additions, have significantly strengthened the professional staff of
the Bank and the Holding Company. Occupancy expense increased $76,000 primarily
as a result of the opening of an additional branch in north Bryan, the expansion
of the principal office of First Federal to provide new safe deposit box service
with over 700 new safe deposit boxes and expanded customer service and Note
Department areas, and the expansion of the credit-default insured Second Chance
Automobile Lending Program. Professional fees increased $172,000 as a result of
legal fees relating to the organization and initial full year of the operation
of the Holding Company. Data processing costs increased $68,000 as a result of
increased loan origination production, an increased number of items processed
for the Bank and the costs associated the Y2K issue. Other expense increased
$302,000, which consisted of various items, including $75,000 of amortization of
debt issue costs and organizational costs related to the formation of the
Holding Company. The Combined Company had increased expenses of $80,000 related
to valuation adjustments and losses for non-interest bearing assets (primarily
repossessed vehicles). It is anticipated that these same expenses will increase
as the Second Chance Auto Loan Program expands in the future. Various other
expenses also increased primarily as a result of the overall growth of the
Combined Company's infrastructure and increased loan origination production of
the Combined Company during fiscal 1999.
Income tax expense increased $35,000 from $164,000 for the year ended
September 30, 1998 to $199,000 for the year ended September 30, 1999. Income tax
expense reflected a tax rate of 45% for the year ended September 30, 1999 as
compared to 36% for the year ended September 30, 1998. The effective tax rate
increased as a result of an increase in nondeductible expenses.
Comparison of Fiscal Year Ended September 30, 1998 to September 30, 1997
The Combined Company reported consolidated net income of $292,000 for the
year ending September 30, 1998. This compares to $605,000 for the year ended
September 30, 1997, for First Federal (prior to the Holding Company's formation)
a decrease of $313,000, or 51.7%.
16
<PAGE>
The decrease in net income was primarily due to costs and expenses related to
the initial formation of the Holding Company, in addition to interest expense of
$138,000 on the Holding Company debentures, amortization of costs associated
with the original issuance of the debentures, Holding Company organizational
costs of $50,000, and franchise taxes of $21,000, all of which are after tax. In
addition, compensation and benefits at the Bank level increased as a result of
an increase in the professional staff of First Federal in order to increase its
loans and services to its customers as the Bank expands in Bryan-College Station
and begins its expansion generally into the "Texas Triangle" bordered by
Houston, Austin - San Antonio, and Dallas, in order to increase its franchise
value.
Net interest income increased by $536,000 to $3.5 million for the year
ended September 30, 1998 from $2.9 million for the year ended September 30,
1997. This increase primarily resulted from increases in the average balance and
average yield of the loan portfolio, offset in part by increases in the volume
and cost of deposits and advances from the FHLB of Dallas. In addition, the
Holding Company issued debentures in April of 1998, resulting in an increased
volume of notes payable. The average yield on First Federal's loans increased 29
basis points 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 residential mortgage loans. The average balance of loans also
increased as a result of a concerted effort to increase the consumer loan
portfolio through building additional relationships with auto dealerships and
promoting First Federal's innovative and profitable Second Chance Auto Loan
Program. These increases were partially offset by an increase in the cost of
funds resulting from a $9.4 million increase in the average balance of deposits
and a $2.7 million increase in the average balance of FHLB advances and notes
payable. In addition, the average cost of funds increased 26 basis points as a
result of increased interest rates in order to remain competitive on savings,
certificates of deposit and other interest-bearing accounts, and due to the 11
1/2% debentures due March 2003 ("Debentures") issued in connection with the
acquisition of the Bank by the Holding Company. As a result, the Combined
Company's interest margin slightly decreased to 4.80% for the year ended
September 30, 1998 from 4.85% for the year ended September 30, 1997. The ratio
of interest-earning assets to interest-bearing liabilities declined to 106.51%
at September 30, 1998 from 108.61% at September 30, 1997. The net interest
spread increased slightly to 4.49% from 4.47% for the same periods.
The Combined Company recorded a $75,000 provision (expense) for loan
losses for the year ended September 30, 1998 compared to a $25,000 provision for
loan losses for the year ended September 30, 1997. The increase in the provision
for loan losses was largely a result of a $5.1 million increase in gross loans
during the year. The Combined Company continued to have 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
Combined Company's loan loss exposure.
Noninterest income increased $156,000 to $931,000 for the year ended
September 30, 1998 from $775,000 for the year ended September 30, 1997. This was
primarily a result of increased profits on sales of loans and mortgage servicing
rights of $81,000 combined with an increase in service charges of $17,000 as a
result of an increase in transactional deposit accounts. In addition, other
income increased $58,000 primarily as a result of the recognition of excess
dealer reserves maintained on older insured automobile loans that were paid off
during the year.
17
<PAGE>
Noninterest expense including Y2K expenses increased $1.1 million from $2.8
million for the year ended September 30, 1997 to $3.9 million for the year ended
September 30, 1998. The increase primarily resulted from the restructuring and
expansion of the Combined Company. Compensation and benefits increased $438,000
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 Program departments.
Occupancy expense increased $115,000 primarily as a result of the opening of the
new branch. Office supplies increased $48,000 and data processing fees also
increased $21,000 as a result of increased production and increased number of
transactions. The increase in the volume of consumer loans has resulted in
additional telephone and postage costs of $62,000, related largely to
collections. Other expense increased $334,000, which consisted of various items,
including $67,000 of amortization of debt issue costs and organizational costs
related to the formation of the Holding Company and franchise tax expense of
$32,000 for the Holding Company. The Combined Company had increased expenses of
$86,000 related to the establishment of a $59,000 reserve for repossessed assets
and the remainder for losses on repossessed assets. Various other expenses also
increased primarily as a result of the overall growth and increased loan
production of the Combined Company during fiscal 1998.
Income tax expense decreased $148,000 from $312,000 for the year ended
September 30, 1997 to $164,000 for the year ended September 30, 1998 primarily
as a result of the $461,000 decrease in pretax income. Income tax expense
reflected a tax rate of 35.9% for the year ended September 30, 1998 compared to
34.0% for the year ended September 30, 1997.
Financial Condition
After two years of fast growth in 1997 and 1998 (averaging 20% deposit
growth a year), management pursued a strategy to control growth in 1999, in
order to increase emphasis on profitability and gradually increase capital
ratios to total assets -- both goals were successful were successfully met.
Thus, the Combined Company's total assets decreased $765,000, or .1%, to $81.9
million at September 30, 1999 from $82.6 million at September 30, 1998.
Net loans receivable (excluding loans held for sale) decreased $3.7
million to $68.0 million at September 30, 1999 from $71.7 million at September
30, 1998. The decrease resulted primarily from an increase in the category of
loans held for sale in the Bank's generally profitable Second Chance Auto Loan
Program as a result of profitable sales of loan participations in that program
and from a strategy to control growth in 1999.
Deposits decreased $314,000, or.4%. The decrease was a result of a
strategy to control the Bank's growth in 1999, in order to gradually increase
capital ratios to total assets and emphasize increased profitability.
Liquidity and Capital Resources
The Bank'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,
proceeds from sales of credit-default insured consumer
18
<PAGE>
automobile loans and other funds provided from operations. Additionally, the
Bank has borrowed funds from the FHLB of Dallas or utilized 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, and general economic
conditions.
The Bank 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.
Federal regulations require insured institutions to maintain minimum
levels of liquid assets. At September 30, 1999, First Federal's regulatory
liquidity ratio was 6.18% or 2.18% above the 4% regulatory requirement. 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. First Federal's core and risk-based
capital ratios were 7.16% and 9.08%, which exceeded the minimum required capital
ratios of 4.0% and 8.0%, respectively.
At September 30, 1999, the Bank had commitments to originate loans,
including loans in process, totaling $5.9 million. The Bank also had $701,000 of
outstanding unused lines of credit and $452,000 of letters of credit. The Bank
considers its liquidity and capital resources to be adequate to meet its
foreseeable short and long-term needs. The Bank 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 on a profitable basis in order to maintain First Federal's
capital compliance and liquidity requirements. At September 30, 1999, the Bank
had no advances outstanding from the FHLB.
The Bank's liquidity, represented by cash equivalents, is a product of its
operating, investing and financing activities. These activities are summarized
below for the periods indicated.
19
<PAGE>
Year Ended
September 30,
--------------------
1999 1998
--------------------
(In Thousands)
Operating Activities:
Net income...................................... $ 245 $ 292
Adjustment to reconcile net income or loss to net
cash provided by operating activities.......... (2,564) 836
------- ------
Net cash (used in) provided by operating
activities...................................... (2,319) 1,128
Net cash provided by (used in) investing
activities...................................... 2,856 (6,524)
Net cash provided by (used in) financing
activities...................................... (1,159) 6,292
------- ------
Net increase (decrease) in cash and cash
equivalents..................................... (622) 896
Cash and cash equivalents at beginning of period 5,327 4,431
------- ------
Cash and cash equivalents at end of period...... $ 4,705 $5,327
======= ======
The primary investing activity of the Bank is lending. Loans originated
net of repayments and sales provided (used) $3.3 million and $(6.6) million in
cash for the years ended September 30, 1999 and September 30, 1998,
respectively. Deposits decreased $314,000 during the year ended September 30,
1999 as compared to a $14.7 million increase during the year ended September 30,
1998, as a result of a "no-growth" policy established by management for fiscal
year 1999. FHLB advances decreased in 1999 by $800,000 as compared to a
decrease of $9.2 million in 1998.
Year 2000 Issue
General. The year 2000 ("Y2K") issue confronting the Combined 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.
20
<PAGE>
Risks. Like most financial service providers, the Combined Company and its
operations may be significantly affected by the Y2K issue due to the Combined
Company's dependence on technology and date-sensitive data. Computer software
and hardware and other equipment, both within and outside the Combined Company's
direct control, and third parties with whom the Combined Company electronically
or operationally interface (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
Combined 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 Combined 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 Combined
Company's operations and, in turn, its financial condition and results of
operations.
State of Readiness. During October 1997, the Combined Company formulated
its plan to address the Y2K issue. Since that time and with significant time and
expense, the Combined 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 Established 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 Combined Company's
Y2K plan:
Awareness Phase. The Combined 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 complete.
Assessment Phase. The Combined 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 Combined
Company's Y2K exposure. A corporate inventory (which is periodically updated as
new technology is acquired and as systems
21
<PAGE>
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 Combined Company identified
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 complete.
The Combined Company completed Y2K discussions with its larger borrowers.
All credits greater than $50,000 were evaluated for Y2K exposure by a
relationship account officer using a questionnaire developed by the Combined
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, Combined Company personnel met 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 Combined 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 been validated.
Validation Phase. The validation phase is designed to test the ability of
hardware and software to accurately process date-sensitive data. The Combined
Company has completed the validation testing of each mission critical system.
The Combined 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 were
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 Combined Company's Y2K project team was
assigned the task of ensuring that all systems across the Combined Company were
identified, analyzed for Y2K compliance, corrected if necessary, tested, and
have the changes into service by the end of 1999. This has been completed. The
Y2K project team members represent all functional areas of the Combined Company,
including branches, data processing, loan administration, accounting, item
processing and operations, compliance, internal audit, human resources, and
marketing. An executive vice president who reports directly to a member of the
Combined Company's senior management heads the team. The Combined Company's
Board of Directors oversees the Y2K plan and provides guidance and resources to,
and receives monthly updates from, the Y2K team.
The Combined 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 Combined Company is estimated to be no less
than $220,000. The Combined Company does not expect significant increases in
future data processing costs related to Y2K compliance.
22
<PAGE>
Contingency Plans. During the assessment phase, the Combined Company
developed back-up or contingency plans for each of its mission critical systems.
Virtually all of the Combined Company's mission critical systems are dependent
upon third party vendors or service providers. In each case, realistic trigger
dates have been established to allow for orderly and successful conversions, if
necessary. 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 Combined Company's mission critical system falls into
the categories of its core-banking software and its proof of deposit system. The
Combined Company has received warranties from vendors to the effect that the
proof of deposit and core-banking system is Y2K ready.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles ("GAAP"), which require the measurement of financial position and
results of operations in terms of historical dollars without considering changes
in the relative purchasing power of money over time because of inflation.
Unlike industrial companies, virtually all of the Combined Company's
assets and liabilities are monetary in nature. As a result, interest rates
generally have a more significant impact on a financial institution's
performance than the effects of general inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the prices of
goods and services. In the current interest rate environment, the liquidity,
maturity structure and quality of the Combined Company's assets and liabilities
are critical to the maintenance of acceptable performance levels.
Effect of New Accounting Standards
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS No. 130") "Reporting Comprehensive Income". This statement
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Income tax effects must also
be shown. This statement is effective for fiscal years beginning after December
15, 1997. The adoption of SFAS No. 130 did not have a material impact on the
results of operations or financial condition of the Combined Company.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS No. 131") "Disclosures about Segments of an Enterprise and
Related Information". SFAS No. 131 establishes 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
23
<PAGE>
services, geographic areas, and major customers. This statement is effective for
financial statements for periods beginning after December 15, 1997. Management
does not believe that the provisions of this Statement are applicable to the
Combined Company, since substantially all of the Combined Company's operations
are banking services.
In June 1999, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 standardizes the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts. Under the standard, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The accounting
for changes in the fair value (i.e. gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and, if so, on the reason for holding it. If certain conditions are
met, entities may elect to designate a derivative instrument as a hedge of
exposures to changes in fair value, cash flows, or foreign currencies. If the
hedged exposure is a fair value exposure, the gain or loss on the derivative
instrument is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item attributable to the risk being
hedged. If the hedged exposure is a cash flow exposure, the effective portion of
the gain or loss on the derivative instrument is reported initially as a
component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amount excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss is reported in earnings immediately.
Accounting for foreign currency hedges is similar to accounting for fair value
and cash flow hedges. If the derivative instrument is not designated as a hedge,
the gain or loss is recognized in earnings in the period of change. This
statement is effective for fiscal years beginning after June 15, 2000. Early
adoption is permitted as of the beginning of an entities fiscal quarter. This
statement will have no effect on the Combined Company, as it owns no derivative
instruments and engages in no hedging activities.
Statement of Financial Accounting Standards No. 134 ("SFAS 134") on
mortgage banking allows mortgage loans that are securitized to be classified as
trading, available for sale, or in certain circumstances, held to maturity.
Previously these were classified as trading. SFAS 134 became effective in the
first quarter of 1999. Since the Combined Company has not securitized loans,
SFAS 134 will not impact the Combined Company.
AICPA-Statement of Position 98-5, effective in fiscal 2000, requires all
start-up, pre-opening, and organization costs to be expensed as incurred. Any
such costs previously capitalized for financial reporting purposes must be
charged to income in the first quarter of fiscal 2000. Although this $100,300
charge occurred during the month of October, 1999 (the first month of fiscal
year ending September 30, 2000), the Combined Company does not believe this will
have a material impact on the results of operations or financial condition of
the Combined Company.
Forward-Looking Statements
When used in this Annual Report to shareholders or future filings by the
Combined Company with the Securities and Exchange Commission (the "Commission"),
in the Combined Company's press releases or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result", "are expected to",
"will continue", "is anticipated", "estimated", "project", "believe" or
24
<PAGE>
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. The
Combined Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and to
advise readers that various factors including regional and national economic
conditions, changes in levels of market interest rates, credit risks of lending
activities, acceptance of new products, and competitive and regulatory factors
could affect the Combined Company's financial performance and could cause the
Combined Company's actual results for future periods to differ materially from
those anticipated or projected. Additional risks and factors are detailed from
time to time in the Combined Company's reports filed with the Commission,
including the Annual Report on Form 10-KSB for the year ended September 30,
1999.
The Combined Company does not undertake and specifically disclaims any
obligation to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Bryan-College Station Financial Holding Company
Bryan, Texas
We have audited the accompanying consolidated statements of financial condition
of The Bryan-College Station Financial Holding Company and its wholly-owned
subsidiaries, First Federal Savings Bank of Bryan and Best of Texas, Inc., as of
September 30, 1999 and 1998 and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Bryan-College
Station Financial Holding Company and its wholly-owned subsidiaries, as of
September 30, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1999 in
conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
November 12, 1999
26
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1999 and 1998
(In thousands, except share and per share data)
1999 1998
--------- ---------
ASSETS
Cash and due from banks $ 3,086 $ 1,435
Interest-bearing deposits in other financial
institutions 1,619 3,892
-------- -------
Total cash and cash equivalents 4,705 5,327
Securities available-for-sale 5 5
Securities held-to-maturity, at cost (fair value: 1999
- $667; 1998 - $945) 692 954
Loans held for sale 2,464 328
Loans receivable, net 67,974 71,666
Federal Home Loan Bank stock 404 382
Servicing rights 545 -
Foreclosed real estate (net of allowance for losses:
1999 - $25; 1998 - $0) 548 282
Repossessed assets (net of allowance for losses:
1999 - $21; 1998 - $60) 937 419
Premises and equipment 2,099 1,636
Accrued interest receivable 613 608
Other assets 883 1,027
-------- -------
$ 81,869 $82,634
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 73,240 $73,554
Advance payments by borrowers for insurance and
taxes 818 863
Advances from Federal Home Loan Bank - 800
Debentures 3,629 3,629
Deferred income taxes 175 198
Accrued interest payable and other liabilities 1,019 847
-------- -------
78,881 79,891
Minority interest 873 873
Stockholders' equity
Common stock - par value $.01 per share;
authorized 1,500,000 shares, issued 428,409
shares at September 30, 1999 and 1998 4 4
Additional paid-in capital 2,060 1,849
Retained earnings, substantially restricted 51 17
-------- -------
2,115 1,870
-------- -------
$ 81,869 $82,634
======== =======
See accompanying notes to consolidated financial statements.
27
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1999, 1998, and 1997
(In thousands, except share and per share data)
1999 1998 1997
---- ---- ----
Interest income
Loans $ 7,334 $ 6,686 $ 5,351
Mortgage-backed securities 45 63 73
Other 164 142 173
------- ------- -------
Total interest income 7,543 6,891 5,597
Interest expense
Deposits 3,125 2,981 2,491
Debentures 425 210 -
FHLB advances 8 226 168
------- ------- -------
Total interest expense 3,558 3,417 2,659
------- ------- -------
NET INTEREST INCOME 3,985 3,474 2,938
Provision for loan losses 104 79 25
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,881 3,395 2,913
Noninterest income
Service charges 744 602 585
Gain on sale of mortgage loans 167 116 54
Gain on sale of consumer loans 478 - -
Gain on sale of mortgage servicing rights 142 113 94
Servicing fee income, net of amortization 66 - -
Operation of foreclosed real estate (17) (20) (20)
Other 203 120 62
------- ------- -------
Total noninterest income 1,783 931 775
Noninterest expense
Compensation and benefits 2,495 1,806 1,368
Occupancy and equipment expense 547 471 356
Federal insurance premiums 65 43 45
Net (gain) loss on real estate owned,
including provision for losses 26 27 (12)
Loan expense 44 56 24
Office supplies 142 122 74
Professional fees 313 141 134
Advertising 77 83 78
Data processing 260 192 171
Telephone 121 99 61
Postage 106 108 84
Other 1,024 722 388
------- ------- -------
Total noninterest expense 5,220 3,870 2,771
------- ------- -------
(Continued)
28
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1999, 1998, and 1997
(In thousands, except share and per share data)
1999 1998 1997
---- ---- ----
INCOME BEFORE INCOME TAX EXPENSE $ 444 $ 456 $ 917
Income tax expense 199 164 312
------- ------- -------
NET INCOME 245 292 605
Dividends on Bank preferred stock - (44) (87)
------- ------- -------
Net income available to common stockholders $ 245 $ 248 $ 518
======= ======= =======
Earnings per share basic and diluted $ .57 $ .46 $ .79
======= ======= =======
See accompanying notes to consolidated financial statements.
29
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 1999, 1998, and 1997
(In thousands, except share and per share data)
Additional
Preferred Common Paid-In Retained
Stock Stock Capital Earnings Total
--------- ------ ---------- --------- -------
Balance at October 1, 1996 $ 1 $ 2 $ 2,743 $ 1,570 $4,316
Net income - - - 605 605
Dividends ($1.00 per preferred
share) - - - (87) (87)
------ ------ ------ ------ ------
Balance at September 30, 1997 1 2 2,743 2,088 4,834
Issuance of 200,000 shares of
Company common stock, net
of stock issue cost of $276 - 2 1,722 - 1,724
Purchase of fractional shares
of Bank stock and stock of
dissenting stockholders - - (1,744) (2,199) (3,943)
Minority interest (1) - (872) - (873)
Cash dividends paid by Bank
($.50 per common share,
$.50 per preferred share) - - - (164) (164)
Net income - - - 292 292
------ ------ ------ ------ ------
Balance at September 30, 1998 - 4 1,849 17 1,870
Issuance of 10% stock dividend - - 211 (211) -
Net income - - - 245 245
------ ------ ------ ------ ------
Balance at September 30, 1999 $ - $ 4 $2,060 $ 51 $2,115
====== ====== ====== ====== ======
See accompanying notes to consolidted financial statements.
30
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1999, 1998, and 1997
(In thousands)
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 245 $ 292 $ 605
Adjustments to reconcile net income to net
cash provided by
(used in) operating activities
Depreciation 324 232 166
Amortization of premiums and discounts
on mortgage-
backed securities, net 5 4 4
Amortization of debt issue costs 100 67 -
Net change in loans held for sale (1,491) (8) 269
Origination of loan servicing rights (642) - -
Amortization of loan servicing rights 97 - -
Change in net deferred loan origination fees 52 124 39
Change in deferred income taxes (23) (21) 133
Net (gains) losses on sales of
Foreclosed real estate 1 27 (12)
Mortgage loans (167) (116) (54)
Mortgage servicing rights (142) (113) (94)
Consumer loans (478) - -
Provision for loan losses and foreclosed real
estate 129 79 25
Federal Home Loan Bank stock dividend (22) (38) (51)
Change in
Accrued interest receivable (5) (71) (208)
Other assets (474) 190 (956)
Accrued interest payable and other
liabilities 172 480 (369)
----- ------- -------
Net cash (used in) provided by operating
activities (2,319) 1,128 (503)
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in loans receivable 3,291 (6,613) (15,960)
Purchase of securities available-for-sale - (5) -
Principal payments on mortgage-backed securities 257 192 138
Proceeds from maturities of securities held-to
-maturity - - 1,000
Proceeds from sale of mortgage servicing rights 142 113 94
Proceeds from redemption of Federal Home Loan
Bank stock - 552 -
Capital expenditures on premises and equipment
, net (787) (751) (359)
Capital expenditures on foreclosed real estate (77) (40) (67)
Proceeds from sale of foreclosed real estate 30 28 159
----- ------- -------
Net cash provided by (used in) investing
activities 2,856 (6,524) (14,995)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (314) 14,746 7,131
Net increase (decrease) in advance payments
by borrowers for insurance (45) 1 79
Net increase (decrease) in Federal Home Loan
Bank Advances (800) (9,200) 10,000
Net proceeds from issuance of debentures - 3,128 -
Net proceeds from issuance of common stock - 1,724 -
Purchase and retirement of Bank stock - (3,943) -
Dividends paid on preferred and common stock - (164) (87)
----- ------- -------
Net cash (used in) provided by financing
activities (1,159) 6,292 17,123
----- ------- -------
(Continued)
31
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1999, 1998, and 1997
(In thousands)
1999 1998 1997
---- ---- ----
Change in cash and cash equivalents $ (622) $ 896 $ 1,625
Cash and cash equivalents at beginning of year 5,327 4,431 2,806
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,705 $ 5,327 $ 4,431
======= ======= =======
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 3,550 $ 3,305 $ 2,628
Income taxes 254 156 165
Supplemental disclosure of noncash investing
activities
Net transfer between loans and foreclosed
real estate 245 223 23
See accompanying notes to consolidated financial statements.
32
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying consolidated financial statements for
the year ended September 30, 1999 include the accounts of The Bryan-College
Station Financial Holding Company (the "Company") and its wholly-owned
subsidiaries First Federal Savings Bank (the "Bank") and Best of Texas, Inc.
(the "Dealership"). On April 1, 1998, the Company was capitalized through the
issuance of 200,000 shares of common stock at $10 per share. The Bank
concurrently became a wholly-owned subsidiary of the Company in a
stock-for-stock exchange with bank stockholders. Stock of dissenting
stockholders and fractional shares were purchased by the Company for $24.07 per
share. Since the transaction was an internal reorganization, the historical cost
basis of accounting is continued for the Bank. On August 30, 1999, the
Dealership was capitalized through the issuance of 500 shares of common stock at
$.01 per share.
The 1999 and 1998 consolidated financial statements include the accounts and
results of operations of the Company, the Bank, and the Bank's wholly-owned
subsidiary First Service Corporation of Bryan. The 1999 consolidated financial
statements also include the accounts of the Dealership. The September 30, 1997
consolidated financial statements include the accounts of the Bank and its
wholly-owned subsidiary. All significant intercompany transactions and balances
have been eliminated in consolidation.
NATURE OF OPERATIONS: The only business of the Company is the ownership of the
Bank and the Dealership. The Bank is a federally chartered stock savings bank
and a member of the Federal Home Loan Bank (FHLB) system which maintains
insurance on deposit accounts with the Savings Association Insurance Fund (SAIF)
of the Federal Deposit Insurance Corporation. The Bank makes residential,
commercial real estate, and consumer loans primarily in Brazos County Texas.
Substantially all loans are secured by specific items of collateral, including
real estate, residences, and consumer assets. The Dealership was capitalized but
had not begun operations as of September 30, 1999.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates. The collectibility of loans, fair value of financial
instruments, and status of contingencies are particularly subject to change.
SECURITIES: Securities are classified as held-to-maturity when management has
the intent and the Company has the ability to hold those securities to maturity.
All other securities are classified as available-for-sale since the Company may
decide to sell those securities in response to changes in market interest rates,
liquidity needs, changes in yields or alternative
(Continued)
33
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
investments, and for other reasons. These securities are carried at fair value
with unrealized gains and losses charged or credited, net of income taxes, to a
valuation allowance included as a separate component of stockholders' equity.
Premiums and discounts are recognized in interest income using methods that
approximate the level-yield method. Realized gains and losses on disposition are
based on the net proceeds and the adjusted carrying amounts of the securities
sold, using the specific identification method.
LOANS RECEIVABLE: Loans receivable are stated at unpaid principal balances,
less the allowance for loan losses and deferred loan origination fees and
discounts.
ALLOWANCE FOR LOAN LOSSES: Because some loans may not be repaid in full, the
Company has established an allowance for loan losses. Increases to the allowance
are recorded by a provision for loan losses charged to expense. Estimating the
risk of the loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate to cover possible losses that are currently anticipated based on past
loss experience, general economic conditions, information about specific
borrower situations including their financial position and collateral values,
and other factors and estimates which are subject to change over time. While
management may periodically allocate portions of the allowance for specific
problem loan situations, the whole allowance is available for any loan
charge-offs that occur. A loan is charged-off against the allowance by
management as a loss when deemed uncollectible, although collection efforts
continue and future recoveries may occur.
The Company measures impaired loans based on the present value of expected cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of collateral
if the loan is collateral dependent. Loans considered to be impaired are reduced
to the present value of expected future cash flows or to the fair value of
collateral, by allocating a portion of the allowance for loan losses to such
loans. If these allocations cause the allowance for loan losses to be increased,
such increase is reported as a provision for loan losses.
Smaller balance homogeneous loans are defined as residential first mortgage
loans secured by one-to-four-family residences, residential construction loans,
and consumer loans and are evaluated collectively for impairment. Commercial
real estate loans are evaluated individually for impairment. Normal loan
evaluation procedures, as described in the second preceding paragraph, are used
to identify loans which must be evaluated for impairment.
In general, loans classified as "doubtful" or "loss" are considered impaired
while loans classified as "substandard" are individually evaluated for
impairment. Depending on the relative size of the credit relationship, late or
insufficient payments of 30 to 90 days will cause management to
(Continued)
34
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
reevaluate the credit under its normal loan evaluation procedures. While the
factors which identify a credit for consideration for measurement of impairment,
or nonaccrual, are similar, the measurement considerations differ. A loan is
impaired when the economic value estimated to be received is less than the value
implied in the original credit agreement. A loan is placed in nonaccrual when
payments are more than 90 days past due unless the loan is adequately
collateralized and in the process of collection. Although impaired loan and
nonaccrual loan balances are measured differently, impaired loan disclosures do
not differ significantly from nonaccrual and renegotiated loan disclosures.
RECOGNITION OF INCOME ON LOANS: Interest on loans is accrued over the term of
the loans based on the principal balance outstanding. Where serious doubt exists
as to the collectibility of a loan, the accrual of interest is discontinued.
LOAN FEES AND COSTS: The Company defers loan origination fees, net of certain
direct loan origination costs. The net amount deferred is netted against loans
in the balance sheet and is recognized in interest income as a yield adjustment
over the contractual term of the loan, adjusted for prepayments.
LOAN SALES: The Company sells a portion of its mortgage loan production in the
secondary market with servicing released. The Company obtains sales commitments
on these loans immediately prior to making the origination commitment. The
Company also sells a portion of its consumer indirect loans with servicing
retained on these loans. Loans classified as held for sale are carried at the
lower of cost or market value in the aggregate. Net unrealized losses are
recognized by charges to income.
SERVICING RIGHTS: The Bank originates mortgage and consumer loans for sale to
the secondary market. When servicing on sold loans is retained, the Bank
capitalizes the cost of servicing rights.
The consumer loans are sold at a rate less than the original coupon rate. The
servicing asset is recorded at the present value of the remaining payment stream
to the Bank with assumptions such as estimated life, delinquencies, and other
risks factored into the discount rate. The capitalized cost of loan servicing
rights is amortized in proportion to and over the period of estimated net future
revenue.
PREMISES AND EQUIPMENT: The Company's premises and equipment are stated at cost
less accumulated depreciation. The Company's premises and related furniture and
equipment are depreciated using the straight-line method over their estimated
useful lives. Maintenance and repairs are charged to expense, and improvements
are capitalized.
(Continued)
35
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FORECLOSED REAL ESTATE: Real estate acquired through foreclosure and similar
proceedings is carried at the lower of cost (fair value of the asset at the date
of foreclosure) or fair value less estimated costs to sell. Losses on
disposition, including expenses incurred in connection with the disposition, are
charged to operations. Valuation allowances are recognized when the fair value
less selling expenses is less than the cost of the asset. Changes in the
valuation allowance are charged or credited to income.
STATEMENT OF CASH FLOWS: Cash and cash equivalents are defined to include the
Company's cash on hand, demand balances, interest-bearing deposits with
financial institutions, and investments in certificates of deposit with original
maturities of less than three months.
INCOME TAXES: The Company records income tax expense based on the amount of
taxes due on its tax return plus deferred taxes computed on the expected future
tax consequences of temporary differences between the carrying amounts and tax
bases of assets and liabilities, using enacted tax rates.
EARNINGS PER COMMON SHARE: Amounts reported as earnings per common share for
each of the three years ended September 30, 1999 reflect earnings available to
common stockholders for the year divided by the weighted average number of
common shares outstanding during the year. Earnings per share for the year ended
September 30, 1997 has been restated to reflect the 2.5 exchange ratio of
Company common stock for Bank common stock. Weighted average common shares were
428,409, 543,656, and 658,933 for the years ended September 30, 1999, 1998, and
1997 adjusted for a 10% stock dividend in 1999. The warrants attached to the
3,629 units issued by the Company on April 1, 1998 have an exercise price of
$12.50 per share and the stock options granted on May 25, 1999 have an exercise
price of $8.00 per share. The warrants and stock options are not included in
diluted earnings per share since the exercise price exceeds the market price of
the stock.
In future years, outstanding stock options and warrants may be exercised which
would increase the weighted average common shares outstanding and, thereby,
dilute earnings per share. In addition, if the average common stock price were
to exceed the exercise price of outstanding options and warrants in a future
year, the assumed exercise of the options and warrants would have a dilutive
effect on earnings per share for that future year. However, previously reported
earnings per share and diluted earnings per share are not restated to reflect
change in the status of changes in the relationship between exercise prices and
average stock prices.
(Continued)
36
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 2 - SECURITIES
The amortized cost and fair values of securities at September 30 are as follows:
..................1 9 9 9..............
Gross Gross
Amortized Unrealized Unrealized Fair
COST GAINS LOSSES VALUE
AVAILABLE-FOR-SALE
Equity stock $ 5 $ - $ - $ 5
======== ======= ======== =======
HELD-TO-MATURITY
FHLMC certificates $ 447 $ - $ (22) $ 425
FNMA certificates 245 2 (5) 242
-------- ------- -------- -------
$ 692 $ 2 $ (27) $ 667
======== ======= ======== =======
..................1 9 9 8..............
Gross Gross
Amortized Unrealized Unrealized Fair
COST GAINS LOSSES VALUE
AVAILABLE-FOR-SALE
Equity stock $ 5 $ - $ - $ 5
======== ======= ======== =======
HELD-TO-MATURITY
FHLMC certificates $ 655 $ 2 $ (14) $ 643
FNMA certificates 299 4 (1) 302
-------- ------- -------- -------
$ 954 $ 6 $ (15) $ 945
======== ======= ======== =======
Mortgage-backed securities have varying maturities. Expected maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
(Continued)
37
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 3 - LOANS
Loans receivable at September 30 are summarized as follows:
1999 1998
First mortgage loans
Principal balances:
Secured by one-to-four-family residences $ 33,436 $32,846
Secured by other properties 5,865 4,616
Construction loans 4,800 6,166
-------- -------
44,101 43,628
Less:
Undisbursed portion of loans (1,669) (2,089)
Net deferred loan origination fees (159) (140)
Deferred gain (3) (3)
-------- -------
Total first mortgage loans 42,270 41,396
Consumer and other loans
Principal balances:
Automobile loans 18,529 24,636
Home equity and second mortgage 12 37
Loans secured by deposit accounts 1,080 951
Commercial loans 2,988 3,024
Other consumer loans 2,961 1,199
-------- -------
25,570 29,847
Net deferred loan origination costs 77 110
Net premiums on indirect loans 383 620
-------- -------
Total consumer and other loans 26,030 30,577
Less allowance for loan losses (326) (307)
-------- -------
$ 67,974 $71,666
======== =======
(Continued)
38
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 3 - LOANS (Continued)
A summary of the activity in the allowance for loan losses follows:
1999 1998 1997
---- ---- ----
Balance at beginning of year $ 307 $ 273 $ 247
Provision charged to operations 104 79 25
Charge-offs (92) (75) (5)
Recoveries 7 30 6
------- -------- -------
Balance at end of year $ 326 $ 307 $ 273
======= ======== =======
There were no impaired loans during the three years ended September 30, 1999.
Nonaccrual loans totaled approximately $32,000 and $8,000 at September 30,
1999 and 1997, respectively. The approximate amounts of interest income that
would have been recorded under the original terms of such loans and the interest
income actually recognized for the years ended September 30 are not material.
There were no nonaccrual loans at September 30, 1998.
The largest portion of the Company's loans are originated for the purpose of
enabling borrowers to purchase residential real estate property secured by first
liens on such property. At September 30, 1999, approximately 49% of the
Company's loans were secured by owner-occupied, one-to-four-family residential
property. The Company requires collateral on all loans and generally maintains
loan-to-value ratios of 80% or less. The Company also originates a significant
amount of automobile loans which totaled approximately 27% of the Company's
loans at September 30, 1999. Approximately 69% of the automobile loans are those
originated under the Company's Second Chance Loan program. These loans are made
to individuals with a less than perfect credit history, which results in a
higher interest rate to the Company. These loans are insured for credit default
as a means of reducing the risk of loss to the Company.
The Company has granted loans to certain officers and directors of the Bank and
Company. Related-party loans are made on substantially the same terms as
comparable transactions with unrelated persons.
(Continued)
39
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 3 - LOANS (Continued)
Activity in the loan accounts of executive officers, directors, and principal
stockholders is as follows:
1999 1998
Balance at beginning of year $ 649 $ 678
Loans disbursed 381 379
Principal repayments (241) (251)
Change in persons classified as related parties (61) (157)
-------- -------
Balance at end of year $ 728 $ 649
======== =======
NOTE 4 - SECONDARY MARKET OPERATIONS
The following summarizes the Company's secondary market activities:
1999 1998 1997
---- ---- ----
MORTGAGE
Proceeds from sale of mortgage loans $16,980 $ 11,526 $ 7,821
======= ======== =======
Gain on sale of mortgage loans $ 167 $ 116 $ 54
Gain on sale of mortgage servicing rights 142 113 94
------- -------- -------
$ 309 $ 229 $ 148
======= ======== =======
Loans serviced for others $ 1,819 $ 1,966 $ 1,588
======= ======== =======
CONSUMER
Proceeds from sale of consumer loans $ 5,693 $ - $ -
======= ======== =======
Gain on sale of consumer loans $ 478 $ - $ -
======= ======== =======
Loans serviced for others $ 4,959 $ - $ -
======= ======== =======
(Continued)
40
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 4 - SECONDARY MARKET OPERATIONS (Continued)
Following is an analysis of the change in servicing rights for the year ended
September 30, 1999:
Balance, September 30, 1998 $ -
Additions 642
Amortization (97)
--------
Balance, September 30, 1999 $ 545
========
NOTE 5 - PREMISES AND EQUIPMENT
A summary of premises and equipment at September 30 is as follows:
1999 1998
---- ----
Land $ 441 $ 423
Buildings and improvements 1,394 987
Furniture and equipment 1,915 1,730
Construction in process 162 -
-------- -------
Total cost 3,912 3,140
Accumulated depreciation (1,813) (1,504)
-------- -------
$ 2,099 $ 1,636
======== =======
The Bank is in the process of constructing a full-service branch facility in
north Bryan, Texas. At September 30, 1999, the Bank was committed to pay the
remaining cost of $234,000 for completion of the building.
NOTE 6 - DEPOSITS
Certificate of deposit accounts with a minimum denomination of $100,000 or more
totaled $8,236,000 and $9,109,000 at September 30, 1999 and 1998, respectively.
At September 30, 1999, scheduled maturities of certificates of deposit are as
follows:
Year Ending
-----------
2000 $ 39,526
2001 5,784
2002 922
2003 254
2004 546
--------
$ 47,032
========
(Continued)
41
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK AND DEBENTURES
At September 30, 1998 secured advances from the Federal Home Loan Bank were as
follows:
Interest Rate Maturity Date Balance
------------- ------------- -------
5.52% 10/2/98 $ 500
5.29 10/5/98 300
------
$ 800
======
The maximum amount of credit available, secured by a blanket lien on first
mortgages, is the lesser of 75% of qualifying collateral or 35% of total assets
of the Bank. At September 30, 1999, the Bank had the ability, if needed, to
borrow up to $28.5 million from the Federal Home Loan Bank of Dallas.
The Bank maintains a collateral pledge agreement covering secured advances
whereby the Bank has agreed to at all times keep on hand, free of all other
pledges, liens, and encumbrances, first mortgage loans on residential property
(not more than 90 days delinquent), aggregating no less than 133% of the
outstanding secured advances from the Federal Home Loan Bank of Dallas.
Debentures consist of 3,629 units, each unit consisting of a $1,000 debenture
and nine detachable warrants exercisable at an exercise price of $12.50 per
share. At September 30, 1999 and 1998, notes payable total $3,629,000, bear an
interest rate of 11.5%, and mature on March 31, 2003.
(Continued)
42
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 8 - BENEFIT PLANS
During 1999, the Company's Board of Directors adopted a stock option and
incentive plan (the Plan) under the terms of which 40,000 shares of common stock
were reserved for issuance. The options become exercisable immediately upon date
of grant and expiration terms will be no greater than ten years for incentive
stock options, and no greater than fifteen years for non-qualified stock
options.
A summary of the status of the Corporation's stock option plan and changes
during the year are presented below:
Weighted-
Average
1999 Exercise
Shares Price
---------- ---------
Outstanding at beginning of year - $ -
Granted 27,250 8.00
Exercised - -
Forfeited - -
--------- -------
Outstanding at end of year 27,250 $ 8.00
========= =======
Options exercisable at end of year 27,250
Weighted-average fair value of
options granted during year $ .97
Average remaining option term 11.9 years
The Corporation applies APB Opinion 25 and related Interpretations in accounting
for its stock option plan. Accordingly, no compensation cost has been recognized
at the date of grant. Had compensation cost been determined based on the fair
value at the grant dates for awards under the plan consistent with the method of
SFAS No. 123, "Accounting for Stock-Based Compensation," the Corporation's net
income and earnings per share would have been reduced to the pro forma amounts
in the table below. For purposes of pro forma disclosure, the estimated fair
value of the options is amortized to expense over the options' vesting period.
(Continued)
43
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 8 - BENEFIT PLANS (Continued)
September 30,
1999
----
Net income as reported $ 245
Pro forma net income 225
Earnings per share as reported
Basic and diluted .57
Pro forma earnings per share
Basic and diluted .53
The Black-Scholes option pricing valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its stock
options.
Incentive Non-Qualified
Stock Stock
Options Options
--------- -------------
Date of grant 5/25/99 5/25/99
Options granted 15,250 12,000
Estimated fair value stock of options granted: $ .48 $ 1.60
Assumptions used:
Risk-free interest rate 5.61% 5.61%
Expected option life 10 years 15 years
Expected stock price volatility N/A N/A
Expected dividend yield N/A N/A
In 1999, the Company curtailed and initiated termination of its defined benefit
pension plan which covers substantially all employees. A curtailment loss of
approximately $172,000 was recognized in 1999.
The Bank's plan covers substantially all of the employees. The benefits are
based on years of service and an employee's compensation during the highest five
years out of the last ten years of employment. The Bank's funding policy is to
contribute each year an amount which satisfies the regulatory funding standards.
The contributions are invested in a Lincoln National Group Variable Annuity
Contract.
(Continued)
44
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 8 - BENEFIT PLANS (Continued)
The funded status of the plan at September 30 is as follows:
1999 1998
---- ----
Change in benefit obligation:
Beginning benefit obligation $ 676 $ 595
Service cost 69 82
Interest cost 47 41
Actuarial (gain) loss 20 (6)
Benefits paid (57) (36)
-------- -------
Ending benefit obligation $ 755 $ 676
======== =======
Change in plan assets:
Beginning fair value $ 542 $ 437
Actual return 32 21
Employer contribution 62 120
Benefits paid (57) (36)
-------- -------
Ending fair value $ 579 $ 542
======== =======
Funded status $ (176) $ (134)
Unrecognized net actuarial loss - 55
Unrecognized net transition obligation - 104
-------- -------
Prepaid (accrued) benefit cost $ (176) $ 25
======== =======
..YEAR ENDED SEPTEMBER 30,..
1999 1998 1997
---- ---- ----
Net pension cost includes the following
components:
Service cost earned during the period $ 69 $ 82 $ 69
Interest cost 47 42 35
Expected return on plan assets (38) (31) (23)
Net amortization and deferral 13 16 9
Curtailment loss 172 - -
------- -------- -------
Net periodic pension cost $ 263 $ 109 $ 90
======= ======== =======
(Continued)
45
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 8 - BENEFIT PLANS (Continued)
The assumptions used to develop the net periodic pension cost were:
..YEAR ENDED SEPTEMBER 30,..
1999 1998 1997
------ ------ ------
Discount rate 7% 7% 7%
Expected long-term rate of return on assets 7% 7% 7%
Rate of increase in compensation levels 5% 5% 5%
An employee 401(k) profit sharing plan was approved by the Board of Directors
effective January 1, 1999. The plan covers employees having completed three
months of service and who are at least 21 years of age. Discretionary and
matching contributions to the profit sharing plan are determined and approved
annually by the Company's Board of Directors. There were no contributions for
the year ended September 30, 1999.
The Bank entered into an employment, consulting, and supplemental retirement
agreement on July 1, 1997 with the President and Chief Executive Officer of the
Bank. The employment and consulting portions of the agreement have a combined
term of five years from the commencement date of July 1, 1997. The consulting
portion commences upon completion of the three-year employment period and calls
for annual consulting fees equal to $58,200 payable in equal monthly
installments. The supplemental retirement agreement commences on the later of
the retirement date or July 1, 2002 and is based on services commencing on July
1, 1997. The President's salary is reduced by 50% of the amount of the
retirement expense incurred each month by the Bank.
NOTE 9 - REGULATORY AND CAPITAL MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
(Continued)
46
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 9 - REGULATORY AND CAPITAL MATTERS (Continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital as defined in the regulations to risk-weighted assets as defined and of
Tier I capital to average assets as defined. As of September 30, 1999, the most
recent notification from the Office of Thrift Supervision categorized the Bank
as adequately capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios. At September
30, 1999 and 1998, the Bank did not meet the minimum requirement to be well
capitalized under prompt corrective action regulations.
At year end, actual capital levels of the Bank and minimum required levels were:
<TABLE>
<CAPTION>
Minimum Required
to Be Well
Minimum Required Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1999
- ----
Total capital (to risk-weighted assets) $6,154 9.08% $5,419 8.00% $6,774 10.00%
Tier 1 (core) capital (to risk-weighted
assets) 5,828 8.62 2,709 4.00 4,064 6.00
Tier 1 (core) capital (to adjusted total
assets) 5,828 7.16 3,257 4.00 4,071 5.00
1998
- ----
Total capital (to risk-weighted assets) $5,563 8.52% $5,226 8.00% $6,533 10.00%
Tier 1 (core) capital (to risk-weighted
assets) 5,256 8.04 2,615 4.00 3,922 6.00
Tier 1 (core) capital (to adjusted total
assets) 5,256 6.43 3,269 4.00 4,088 5.00
</TABLE>
Accordingly, management considers the capital requirements to have been met.
Regulations also include restrictions on loans to one borrower; certain types of
investments and loans; loans to officers, directors, and principal stockholders;
brokered deposits; and transactions with affiliates.
Federal regulations require the Bank to comply with a Qualified Thrift Lender
(QTL) test which requires that 65% of assets be maintained in housing-related
finance and other specified assets. If the QTL test is not met, limits are
placed on growth, branching, new investments, FHLB advances, and dividends or
the institution must convert to a commercial bank charter. Management considers
the QTL test to have been met.
(Continued)
47
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 9 - REGULATORY AND CAPITAL MATTERS (Continued)
Bank Series A preferred stock has a $ .01 par value, is nonvoting, and entitles
the holder to a $10 per share liquidation preference. The stock bears
non-cumulative quarterly dividends at an annual rate of 10%. At the Bank's
option, the stock can be redeemed after two years. The Bank preferred stock is
reflected as minority interest in the consolidated statements of financial
condition.
NOTE 10 - COMMITMENTS, CONTINGENT LIABILITIES, AND CONCENTRATIONS
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments consist of commitments to make loans and fund lines
of credit and loans-in-process. The Company's exposure to credit loss in the
event of nonperformance by the other party to these financial instruments is
represented by the contractual amount of these instruments. The Company follows
the same credit policy to make such commitments as it uses for on-balance-sheet
items.
At September 30, these financial instruments are summarized as follows:
Contract
Amount
------
1999 1998
---- ----
Financial instruments whose contract amounts
represent credit risk:
Commitments to make loans $ 4,244 $ 3,197
Loans-in-process 1,669 2,089
Lines of credit 701 974
Letters of credit 452 73
The Company had $4,244,000 of fixed rate commitments to originate loans, ranging
from 7.375% to 10% at September 30, 1999. The commitments have terms of 75 days.
Since many commitments to make loans expire without being used, the amount above
does not necessarily represent future cash commitments. Collateral may be
obtained upon exercise of a commitment. The amount of collateral is determined
by management and may include commercial and residential real estate and other
business and consumer assets.
Financial instruments which potentially subject the Company to concentrations of
credit risk include interest-bearing deposit accounts in other financial
institutions and loans. At September 30, 1999, the Company had deposit accounts
with balances totaling approximately $1.6 million at the Federal Home Loan Bank
of Dallas. Concentrations of loans are described in Note 3.
(Continued)
48
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 10 - COMMITMENTS, CONTINGENT LIABILITIES, AND CONCENTRATIONS
(Continued)
The Company is, from time to time, a party to certain lawsuits arising in the
ordinary course of its business. The Bank believes that none of these lawsuits
would, if adversely determined, have a material adverse effect on its financial
condition, results of operations, or capital.
During September 1996, the Company entered into a noncancelable operating lease
for office space relating to mortgage operations. The lease expired August 31,
1998 and the Company is leasing the space month to month until December 31,
1999. The Company has entered into a new noncancelable operating lease for
office space for the mortgage operations effective January 1, 1999 with a term
of three years and one option to renew for an additional three years. The
Company also entered into a noncancelable operating lease for premises to be
used for the purpose of automobile sales related to the Dealership. The lease
became effective August 1, 1999 with a term to expire on May 14, 2001. The lease
provides for continual options to renew for two-year terms until the death of
the lessor. In addition, the Company paid $10,000 for an option to purchase the
property upon the death of the lessor for a minimum price of $110,000 adjusted
by any increase in the Consumer Price Index. Rental expense was approximately
$25,000 and $29,000 for the years ended September 30, 1999 and 1998,
respectively. Projected minimum payments under the terms of the leases, not
including insurance and maintenance, are as follows:
2000 $ 45
2001 37
2002 5
2003 -
------
$ 87
======
NOTE 11 - INCOME TAX EXPENSE
The provision for income tax expense consists of the following:
...YEAR ENDED SEPTEMBER 30,..
1999 1998 1997
---- ---- ----
Current income tax expense $ 222 $ 185 $ 179
Deferred income tax expense (benefit) (23) (21) 133
------- -------- -------
$ 199 $ 164 $ 312
======= ======== =======
(Continued)
49
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 11 - INCOME TAX EXPENSE (Continued)
The provision for income tax differs from that computed at the statutory
corporate tax rate as follows:
...YEAR ENDED SEPTEMBER 30,..
1999 1998 1997
---- ---- ----
Tax expense at statutory rate (34%) $ 151 $ 155 $ 312
Nondeductible reorganization costs 17 6 -
Preferred stock dividends 29 15 -
Other tax effects 2 (12) -
------- -------- -------
$ 199 $ 164 $ 312
======= ======== =======
The Bank has qualified under provisions of the Internal Revenue Code which
permit it to deduct from taxable income a provision for bad debts which differs
from the provision charged to income in the financial statements. Retained
earnings at September 30, 1999 include approximately $643,000, representing tax
bad debt provisions through 1987, for which no deferred federal income tax
liability has been recorded.
Deferred tax assets (liabilities) are comprised of the following at September
30:
1999 1998
---- ----
Supplemental employee retirement agreement $ 61 $ 34
Pension liability 59 -
Loans, principally due to allowance for losses 24 -
Depreciation 12 8
-------- -------
Total deferred tax assets 156 42
Federal Home Loan Bank stock dividends (69) (141)
Loans, principally due to allowance for losses - (99)
Servicing rights (262) -
-------- -------
Total deferred tax liabilities (331) (240)
-------- -------
Net deferred tax liabilities $ (175) $ (198)
======== =======
(Continued)
50
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The approximate carrying amount and estimated fair value of financial
instruments at September 30 is as follows:
........1999....... .......1998........
---- ----
Approximate Approximate
Carrying Estimated Carrying Estimated
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ---------- ----------- ----------
Financial assets
Cash and cash equivalents $ 4,705 $ 4,705 $ 5,327 $ 5,327
Securities 697 672 959 950
Loans, net of allowance for
loan losses 67,974 69,775 71,666 72,589
Loans held for sale 2,464 2,464 328 328
Federal Home Loan Bank stock 404 404 382 382
Accrued interest receivable 613 613 608 608
Financial liabilities
Demand deposits (21,079) (21,079) (18,797) (18,797)
Savings deposits (5,129) (5,129) (5,199) (5,199)
Time deposits (47,032) (47,132) (49,558) (49,719)
Advance payments by borrowers
for taxes and insurance (818) (818) (863) (863)
Federal Home Loan Bank Advances - - (800) (800)
Debentures (3,629) (3,661) (3,629) (3,752)
Accrued interest payable (176) (176) (168) (168)
For the purposes of above, the following assumptions were used:
CASH AND CASH EQUIVALENTS: The estimated fair values for cash and cash
equivalents are based on their carrying values due to the short-term nature of
these assets.
SECURITIES: The fair values of securities are based on the quoted market
value for the individual security or its equivalent.
LOANS: The estimated fair value for loans has been determined by calculating the
present value of future cash flows based on the current rate the Company would
charge for similar loans with similar maturities, applied for an estimated time
period until the loan is assumed to be repriced or repaid.
(Continued)
51
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
FEDERAL HOME LOAN BANK STOCK: The fair value of Federal Home Loan Bank stock
is assumed to approximate its carrying value.
DEPOSIT LIABILITIES: The estimated fair value for time deposits has been
determined by calculating the present value of future cash flows based on
estimates of rates the Company would pay on such deposits, applied for the time
period until maturity. The estimated fair values of interest-bearing demand and
savings deposits are assumed to approximate their carrying values as management
establishes rates on these deposits at a level that approximates the local
market area. Additionally, these deposits can be withdrawn on demand.
ACCRUED INTEREST: The fair values of accrued interest receivable and payable
are assumed to equal their carrying values.
FEDERAL HOME LOAN BANK ADVANCES AND ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND
INSURANCE: The fair values are assumed to approximate the carrying values.
DEBENTURES: The estimated fair value of debentures is based on calculating the
present value of future cash flows using the current rate for a note with
similar risk characteristics and similar length to maturity. The current rate
was obtained from inquiry of investment bankers familiar with the thrift
industry and the risk associated with debentures based on recent issuance of
similar debentures.
OFF-BALANCE-SHEET INSTRUMENTS: Off-balance-sheet items consist principally
of unfunded loan commitments. The fair value of these commitments is not
material.
Other assets and liabilities of the Company not defined as financial
instruments, such as property and equipment, are not included in the above
disclosures. Also not included are nonfinancial instruments typically not
recognized in financial statements such as the value of core deposits and
similar items.
While the above estimates are based on management's judgment of the most
appropriate factors, there is no assurance that if the Company disposed of these
items on September 30, 1999, the fair value would have been achieved, because
the market value may differ depending on the circumstances. The estimated fair
values at September 30, 1999 should not necessarily be considered to apply at
subsequent dates.
(Continued)
52
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 13 - MERGER AND FORMATION OF HOLDING COMPANY
On April 1, 1998, First Federal Savings Bank became a wholly-owned subsidiary of
The Bryan-College Station Financial Holding Company through an agreement and
plan of merger. The Company issued 200,000 shares of common stock at a price of
$10 per share and 3,629 units, each unit consisting of a $1,000 debenture
bearing an interest rate of 11.5% due March 31, 2003 and nine detachable
warrants. Each warrant entitles the unit holder to purchase one share of Company
common stock for $12.50 through March 31, 2003. Existing stockholders of First
Federal Savings Bank exchanged one share of existing First Federal common stock
for two and one-half shares of new holding company stock or sold their common
stock for cash of $24.07 per share. The Bank preferred stock was not affected by
the reorganization and is recorded as minority interest in the consolidated
statements of financial condition.
Delaware law generally limits dividends of the Company to an amount equal to the
excess of its net assets over its paid-in capital or, if there is no such
excess, to its net profits for the current and immediately preceding fiscal
year. In addition, the Company is prohibited from paying dividends on junior
securities such as the Company's common stock unless all interest payments with
respect to the debentures have been made.
Issuance costs totaling $276,000 were deducted from the proceeds of the shares
sold in the formation of the new holding company.
NOTE 14 - PARENT COMPANY ONLY FINANCIAL INFORMATION
CONDENSED BALANCE SHEET
September 30, 1999 and 1998
ASSETS
Cash $ 27 $ 441
Equity interest in bank subsidiary 5,828 5,256
Other assets 860 764
---------- ---------
$ 6,715 $ 6,461
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 3,629 $ 3,629
Accrued interest and other liabilities 98 89
---------- ---------
Total liabilities 3,727 3,718
Minority interest 873 873
Stockholders' equity
Common stock 4 4
Additional paid-in capital 2,060 1,849
Retained earnings 51 17
---------- ---------
Total stockholders' equity 2,115 1,870
---------- ---------
$ 6,715 $ 6,461
========== =========
(Continued)
53
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 14 - PARENT COMPANY ONLY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENT OF INCOME
For the year ending September 30, 1999
and the period April 1, 1998 through September 30, 1998
1999 1998
---- ----
Income
Interest income $ 8 $ 3
Dividends from bank subsidiary 156 -
Other income - 10
---------- ---------
Total income 164 13
Expenses
Interest expense 425 210
Other expenses 290 256
---------- ---------
Total expenses 715 466
---------- ---------
LOSS BEFORE EQUITY IN UNDISTRIBUTED (551) (453)
EARNINGS OF SUBSIDIARY
Equity in undistributed earnings of Bank
subsidiary 572 310
---------- ---------
Income (loss) before income tax benefit 21 (143)
Income tax benefit (224) (160)
---------- ---------
Net income $ 245 $ 17
========== =========
(Continued)
54
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 14 - PARENT COMPANY ONLY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENT OF CASH FLOWS
For the year ending September 30, 1999
and the period April 1, 1998 through September 30, 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 245 $ 17
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of
subsidiary (572) (310)
Amortization of debt issuance and
reorganization costs 100 67
Increase in other assets, net of
liabilities (187) (242)
Net cash used in operating activities (414) (468)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock - 1,724
Net proceeds from issuance of debentures - 3,128
Purchase and retirement of Bank stock - (3,943)
---------- ---------
Net cash provided by financing activities - 909
---------- ---------
Change in cash and cash equivalents (414) 441
Cash and cash equivalents at beginning of period 441 -
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 27 $ 441
========== =========
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 417 $ 121
(Continued)
55
<PAGE>
CORPORATE INFORMATION
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Annual Meeting
The annual meeting of the Holding Company will be held on February 24, 2000
at 3:00 p.m., Bryan, Texas time, at the main office of the Holding Company
located at 2900 Texas Avenue, Bryan, Texas.
Market Information
The Holding Company's common stock is listed on the OTC Electronic
Bulletin Board under the symbol "BCSF."
The following table sets forth the high and low bid prices of the Holding
Company's common stock for the periods indicated. The information set forth in
the table below was provided by the OTC Electronic Bulletin Board. The
information reflects inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
Fiscal 1999 Fiscal 1998
----------------------------------------------------
High Low Dividends High Low Dividends
----------------------------------------------------
First Quarter $10.000 $8.000 $--- $ N/A N/A $---
Second Quarter 8.265 7.273 --- N/A N/A ---
Third Quarter 7.159 7.159 --- N/A N/A ---
Fourth Quarter 5.568 5.000 --- 10.375 8.000 ---
At December 24, 1999 there were 595 holders of the Holding Company's
common stock and 428,409 shares of common stock issued and outstanding.
At December 29, 1999, the last known sales price of the Holding
Company's common stock was $9.25 per share.
The Holding Company pays dividends upon the determination of the Board of
Directors in its discretion that such payment is consistent with the long-term
interests of the Combined Company. The factors affecting this determination
include the Combined Company's consolidated financial condition and results of
operations, tax considerations, industry standards, economic conditions,
regulatory restrictions, general business practices and other relevant factors.
The Holding Company did not declare cash dividends on its common stock during
fiscals 1998 and 1999. However, First Federal paid an aggregate of $ 88,000 in
quarterly cash dividends on its preferred stock in 1999.
First Federal may not declare or pay a cash dividend or repurchase shares
of its stock if the effect thereof would be to cause its regulatory capital to
be reduced below the amount required for the liquidation account or to meet
applicable regulatory capital requirements. Federal regulations limit the Bank's
capital distributions such that the proposed distribution, combined with
dividends already paid for the year, does not exceed its net income for the
calendar year- to- date plus retained net income for the previous two years. In
addition, the Bank must give the OTS thirty days notice prior to the declaration
of a dividend.
56
<PAGE>
Annual Report on Form 10-KSB and Other Investor Information
The Bryan-College Station Financial Holding Company will furnish upon
written request at no charge to any stockholder a copy of its Annual Report on
Form 10-KSB for the year ended September 30, 1999 and the exhibits thereto
required to be filed with the SEC under the Securities Exchange Act of 1934 by
writing to:
George Koenig
Executive Vice President and
Stockholder Relations Officer
The Bryan-College Station Financial Holding Company
2900 Texas Avenue
Bryan, Texas 77802
(409) 779-2900
Please provide a copy of the written request to J. Stanley Stephen,
President and CEO of the Company at the address stated above.
Transfer Agent and Registrar
Harris Trust and Savings Bank
700 Louisiana Street, Suite 3350
Houston, Texas 77002
(713) 546-9705
Auditors
Crowe, Chizek and Company LLP
One Mid America Plaza
P.O. Box 3697
Oak Brook, Illinois 60522-3697
Special Counsel
Silver Freedman & Taff, L.L.P.
(a partnership including professional corporations)
1100 New York Avenue, N.W.
Suite 700
Washington, D.C. 20006
57
<PAGE>
THE BRYAN-COLLEGE STATION
FINANCIAL HOLDING COMPANY
BOARD OF DIRECTORS:
Richard L. Peacock, Chairman of the Board/Retired
Owner/Office Supply
Ernest Wentrcek, Vice Chairman of the
Board/Retired Texas A&M and Owner/W&W Realty
Charles Neelley, Secretary-Treasurer of the Board of
Directors for the Holding Company and the Bank/
Retired Texas A&M and Travel/Business
J. Stanley Stephen, President/CEO, First Federal
Savings Bank
Ken L. Hays, Owner, Aggieland Travel
Roland Ruffino, Co-Owner/Readfield Meats
Robert Conaway, Owner/Progress Supply
George Koenig, Executive Vice President,
First Federal Savings Bank
Joseph W. Krolczyk, Owner/President, KESCO
Restaurant Equipment Supply Inc.
Gary A. Snoe, Owner/President, Snoe Inc. Specialty
Tool and Die
Helen Chavarria, Housing Management Specialist for
the Brazos Valley Council of Government, and area
recruiter for Amnesty and Instructional, Assistant for
Region IV Educational Service Center located in
Huntsville, Texas
OFFICERS OF THE BRYAN-COLLEGE STATION FINANCIAL
HOLDING COMPANY
J. Stanley Stephen, President and Chief Executive
Officer
William Wantuck, Chief Financial Officer
58
SUBSIDIARIES OF THE REGISTRANT
State of
Percentage Incorporation
of or
Parent Subsidiary Ownership Organization
- -------------------------------------------------------------------------------
The Bryan-College First Federal Savings 100% Delaware
Station Financial Bank, Bryan, Texas
Holding Company
The Bryan-College Best of Texas, Inc. 100% Delaware
Station Financial Bryan, Texas
Holding Company
First Federal First Service Corporation 100% Texas
Bank, Bryan, Texas of Bryan
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
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<LOANS-PAST> 1,146
<LOANS-TROUBLED> 1,558
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