UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(X) Quarterly Report pursuant to Section 13 or 15 (d) of the Securities and
Exchange Act of 1934 For the quarterly period ended June 30, 2000
( ) Transition Report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from -------------- to -----------------
Commission File Number: 0-23323
THE BRYAN COLLEGE STATION FINANCIAL HOLDING COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 36-4153491
(State or other jurisdiction (I.R.S. Employer
of incorporation of organization) Identification No.)
2900 TEXAS AVENUE, BRYAN, TEXAS 77802
(Address of principal executive offices) (Zip Code)
(979) 779-2900
(Registrants telephone number, including area code)
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the proceeding 12 months (or for such shorter period that the issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. No ( ) Yes (X)
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Shares Outstanding
Class As of August 8, 2000
------------ --------------------
Common Stock 471,406
1
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THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
BRYAN, TEXAS
FORM 10-QSB
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Page
Consolidated Statements of Financial Condition..........................3
Consolidated Statements of Income/ (Loss)...............................4
Consolidated Statements of Cash Flows...................................5
Notes to Consolidated Financial Statements..............................6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..............................8
PART II - OTHER INFORMATION
Other Information........................................................15
Signatures...............................................................16
2
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THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
BRYAN/COLLEGE STATION, TEXAS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2000 and September 30, 1999
(Unaudited)
In thousands, except share and per share data
--------------------------------------------------------------------------------
June 30, September 30,
2000 1999
------------ ------------
ASSETS
Cash and due from banks $ 4,172 $ 3,086
Interest-bearing deposits in other
financial institutions 1,748 1,619
----------- -----------
Total cash and cash equivalents 5,920 4,705
Securities available-for-sale 5 5
Securities held-to-maturity 559 692
Loans held for sale 4,196 2,464
Loans receivable, net 68,502 67,974
Federal Home Loan Bank stock 429 404
Servicing rights 345 545
Real estate owned 142 548
Repossessed assets, net 500 937
Premises and equipment 2,208 2,099
Accrued interest receivable 605 613
Other assets 954 883
----------- -----------
$ 84,365 $ 81,869
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 76,555 $ 73,240
Advance payments by borrowers for
insurance and taxes 571 818
Debentures (11.5%) 3,629 3,629
Accrued interest payable and other
liabilities 1,127 1,194
----------- -----------
81,882 78,881
Minority interest 873 873
Stockholders' equity
Common stock - par value $.01 per share;
authorized 1,500,000 shares;
428,409 shares issued at
September 30, 1999 and 471,406 issued
at June 30, 2000 5 4
Additional paid-in capital 2,117 2,060
Retained earnings (deficit) (512) 51
----------- -----------
1,610 2,115
----------- -----------
$ 84,365 $ 81,869
=========== ===========
See accompanying notes to consolidated financial statements
3
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THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
BRYAN/COLLEGE STATION, TEXAS
CONSOLIDATED STATEMENTS OF INCOME/(LOSS)
For the nine months and three months ended June 30,
2000 and 1999
(Unaudited)
In thousands, except per share data
--------------------------------------------------------------------------------
Nine Months Ended Three Months Ended
June 30, June 30,
----------------- ------------------
2000 1999 2000 1999
------ ------ ------ ------
Interest income
Loans $5,565 $5,508 $1,959 $1,835
Mortgage-backed securities 25 37 8 12
Other 105 139 51 32
------ ------ ------ ------
Total interest income 5,695 5,684 2,018 1,879
Interest expense
Deposits 2,380 2,378 845 754
Other borrowings 350 324 106 107
------ ------ ------ ------
Total interest expense 2,730 2,702 951 861
------ ------ ------ ------
NET INTEREST INCOME 2,965 2,982 1,067 1,018
Provision for loan losses 257 74 20 24
------ ------ ------ ------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,708 2,908 1,047 994
Noninterest income
Service charges 528 565 202 204
Gain on sale of loans and mortgage
servicing rights 176 447 76 96
Servicing fee income, net of
amortization 148 - 33 -
Other 30 264 4 49
------ ------ ------ ------
Total noninterest income 882 1,276 315 349
Noninterest expense
Compensation and benefits 1,990 1,737 677 594
Occupancy and equipment expense 396 406 120 131
Federal insurance premiums 35 48 10 16
Net loss on real estate owned,
including provision 9 19 7 2
Net loss on repossessed assets,
including provision 316 141 18 129
Professional fees 210 227 95 91
Data processing 216 190 75 65
Office supplies 113 108 36 37
Telephone 93 89 32 32
Postage 99 80 33 26
Other 647 700 192 132
------ ------ ------ ------
Total noninterest expense 4,144 3,745 1,295 1,255
------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE (554) 439 67 88
Income tax (benefit) expense (149) 144 30 40
------ ------ ------ ------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE (405) 295 37 48
Cumulative effect of a change in
accounting principle (100) --- --- ---
------ ------ ------ ------
NET INCOME (LOSS) $ (505) $ 295 $ 37 $ 48
====== ====== ====== ======
EARNINGS (LOSS) PER SHARE:
Earnings/(loss) per share
before cumulative effect of a
change in accounting principle $ (.86) $ .69 $ .08 $ .10
Cumulative effect of a change in
accounting principle (.21) --- --- ---
------ ------ ------ ------
Earnings/(loss) per share $(1.07) $ .69 $ .08 $ .10
====== ====== ====== ======
See accompanying notes to consolidated financial statements
4
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THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
BRYAN/COLLEGE STATION, TEXAS
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended June 30, 2000 and 1999
(Unaudited)
In thousands
--------------------------------------------------------------------------------
Nine Months Ended
June 30,
---------------------
2000 1999
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (505) $ 295
Adjustments to reconcile net income
(loss) to net cash from operating
activities
Depreciation 182 250
Amortization of premiums and discounts on
investment and mortgage-backed
securities, net 2 4
Net change in loans held for sale (1,601) (3,506)
Net change in servicing rights 200 (261)
Change in deferred loan origination fees 37 39
Net (gains) losses on sales of
Mortgage loans (131) (336)
Mortgage servicing rights (45) (111)
Real estate owned 9 (1)
Repossessed assets 316 141
Provision for losses on loans 257 74
Federal Home Loan Bank stock dividend (25) (16)
Cumulative effect of a change in
accounting principle 100 ---
Change in
Repossessed assets 121 (665)
Accrued interest receivable 8 (49)
Other assets (171) (118)
Accrued interest payable and
other liabilities (67) 275
------- -------
Net cash used in operating activities (1,313) (3,985)
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans receivable (678) 2,352
Principal payments on mortgage-backed
securities and collateralized
mortgage obligations 131 146
Proceeds from sale of mortgage
servicing rights 45 111
Investment in office properties and
equipment, net (291) (307)
Proceeds from sale of foreclosed
real estate 311 205
Capital expenditures on foreclosed
real estate (58) (24)
------- -------
Net cash (used in) provided
by investing activities (540) 2,483
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 3,315 315
Net decrease in advance payments by
borrowers for insurance and taxes (247) (240)
Net change in Federal Home Loan Bank advances --- 200
------- --------
Net cash provided by financing activities 3,068 275
------- --------
Change in cash and cash equivalents 1,215 (1,227)
Cash and cash equivalents at beginning of period 4,705 5,327
------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,920 $ 4,100
======= ========
See accompanying notes to consolidated financial statements
5
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, the unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial condition of The
Bryan-College Station Financial Holding Company (the "Company") and its
wholly-owned subsidiary, First Federal Savings Bank, Bryan/College Station,
Texas ("First Federal" or the "Bank") as of June 30, 2000 and September 30,
1999, and the results of its operations for the three-month and nine-month
periods ended June 30, 2000 and 1999.
NOTE 2 - ALLOWANCE FOR LOAN LOSSES
The summary of changes in the allowance for loan losses is as follows:
Nine Months Ended
June 30,
------------------
2000 1999
------- ------
(In thousands)
Balances, beginning of period $ 326 $ 307
Provision charged to operations 257 74
Charge-offs (117) (31)
Recoveries 24 1
----- -----
Balances, end of period $ 490 $ 351
===== =====
NOTE 3 - RESERVE FOR LOSSES ON REPOSSESSED ASSETS
The Company had a "Second Chance" loan program that originated loans to
individuals with less than prime credit that was discontinued in the quarter
ending June 30, 2000. These loans are insured by credit-default insurance for
losses due to charge-offs and sales of repossessed assets. Repossessed assets
are carried at the lower of cost or fair value adjusted for expected
credit-default insurance proceeds. The activity in the reserve for repossessed
assets was as follows:
Nine Months Ended
June 30,
-----------------
(In thousands)
2000 1999
------ -------
Beginning balance $ 21 $ 60
Provision 282 141
Charge-offs (247) (60)
----- -----
Ending balance $ 56 $ 141
===== =====
6
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NOTE 4 - CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. In May 2000 the Office of Thrift Supervision
(the OTS) formally designated the Bank to be in "troubled condition" and a
"problem association" due to its total capital to risk-weighted assets ratio
being only marginally above the minimum required amount. Because of this
designation the OTS has applied various restrictions as further explained under
Item 2-Management's Discussion and Analysis of Financial Condition and Results
of Operation -LIQUIDITY AND CAPITAL RESOURCES.
At June 30, actual capital levels of the Bank and minimum required levels
were:
<TABLE>
<CAPTION>
Minimum Required Minimum Required
for Capital to Be Well
Actual Adequacy Purposes Capitalized
---------------- ------------------ ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
2000
----
Total capital (to risk-weighted assets) $6,252 9.13% $5,480 8.00% $6,850 10.00%
Tier 1 (core) capital (to risk-weighted assets) 5,762 8.41 2,740 4.00 4,110 6.00
Tier 1 (core) capital (to adjusted total assets) 5,762 6.85 3,362 4.00 4,203 5.00
1999
----
Total capital (to risk-weighted assets) $6,239 9.03% $5,528 8.00% $6,910 10.00%
Tier 1 (core) capital (to risk-weighted assets) 5,888 8.52 2,764 4.00 4,146 6.00
Tier 1 (core) capital (to adjusted total assets) 5,888 7.12 3,307 4.00 4,134 5.00
</TABLE>
NOTE 5 - EARNINGS/(LOSS) PER COMMON SHARE
A reconciliation of the numerator and denominator of the earnings (loss)
per common share computation for the periods ended June 30, 2000 and 1999 is
presented below. The weighted average common shares have been restated to
reflect the stock dividend of 10% in January of 2000.
Nine Months Ended Three Months Ended
-------------------- -------------------
June 30, June 30,
-------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(Dollars in thousands)
EPS COMPUTATION
Net income (loss) $ (505) $ 295 $ 37 $ 48
-------- -------- -------- --------
Weighted average
shares outstanding 471,406 471,406 471,406 471,406
-------- -------- -------- --------
Earnings (loss) per
common share $ (1.07) $ .63 $ .08 $ .10
======== ======== ======== ========
The effect of stock options could potentially dilute basic earnings (loss)
per share in the future but were not included in the computation of diluted
earnings (loss) per share for the nine months and three months ended June 30,
2000 and 1999 because to do so would have been anti-dilutive.
7
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NOTE 6 - ORGANIZATION COSTS
During 1999, a new accounting standard was effective which required the
Company to charge the September 30, 1999 unamortized balance of $100,000 to
expense in the first quarter of the 2000 fiscal year. The additional
amortization was disclosed in the consolidated statements of income/(loss) as a
cumulative effect of a change in accounting principle.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding the
financial condition and results of operations of The Bryan/College Station
Financial Holding Company. The discussion includes comments relating to First
Federal Savings Bank, Bryan, Texas since the Bank is wholly owned by the Company
and comprises a majority of the assets and sources of income for the Company.
FINANCIAL CONDITION
The Company's total assets increased by $2.5 million to $84.4 million at
June 30, 2000 from $81.9 million at September 30, 1999. Net loans receivable
(excluding loans held for sale) increased $0.5 million to $68.5 million at June
30, 2000, compared to $68.0 million at September 30, 1999. During the nine
months ended June 30, 2000, the Company originated $22.0 million of mortgage
loans, including $17.8 million secured by one- to four-family residential loans.
In addition, the Company originated $17.6 million in consumer loans, of which
$7.0 million were Second Chance Auto Loan Program loans, and $6.9 million in
commercial business loans.
Repossessed assets decreased from $937,000 at September 30, 1999 to
$500,000 at June 30, 2000. This decrease was due primarily to the following: o
In the quarter ended March 31, 2000, the Bank aggressively reviewed the
repossessed vehicle valuation estimates and determined that the estimates of
value were not supported and wrote down the balances based on the claim
experience obtained with the credit default insurance coverage. Prior to this
time, the Bank had little history with submitting claims with the credit default
insurance, and carried the repossessed assets at their expected recovery value.
o The Bank also was more aggressive in pricing and selling repossessed vehicles
beginning in the quarter ended March 31, 2000.
Real estate owned decreased from $548,000 at September 30, 1999 to $142,000
at June 30, 2000 due to sales that resulted in a net loss of $9,000.
Deposits increased $3.4 million to $76.6 million at June 30, 2000, compared
to $73.2 million at September 30, 1999, offset by a seasonal decrease in
escrowed funds for property taxes related to real estate loans held by the Bank.
8
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Stockholders' equity in the Company decreased $505,000 to $1.6 million at
June 30, 2000 from $2.1 million at September 30, 1999 due to the net loss in the
first nine months of the fiscal year. In addition, during the nine months ended
June 30, 2000, the Company issued a stock dividend of 42,997 shares.
ASSET/LIABILITY MANAGEMENT
The Company's subsidiary, First Federal, like all financial institutions,
is subject to interest rate risk to the degree that its interest-bearing
liabilities (deposits) mature or reprice more rapidly, or on a different basis,
than its interest-earning assets (loans), some of which may be longer term or
fixed interest rate. As a continuing part of its financial strategy, First
Federal continually considers methods of managing any such asset/liability
mismatch, consistent with maintaining acceptable levels of net interest income
and interest rate risk.
In order to monitor and manage interest rate sensitivity and interest rate
spread, First Federal created an Asset/Liability Committee ("ALCO"), composed of
its President/Chief Executive Officer, Executive Vice President/CFO, Senior Vice
President/Financial and 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,
the Bank seeks to build its net interest income and noninterest income, while
adhering to its underwriting and lending guidelines. Second, First Federal seeks
to increase the matching of its interest-earning assets with its interest-paying
liabilities so as to reduce First Federal's overall sensitivity to changes in
interest rates. There can be no assurance that this strategy will achieve the
desired results and will not result in substantial losses in the event of an
increase in interest rate risk.
As part of this strategy, management continues to emphasize growth in
noninterest-bearing deposits such as checking accounts or lower interest-bearing
savings deposits by offering full service retail banking to its targeted
customer base. In order to minimize the possible adverse impact that a rise in
interest rates may have on net interest income, First Federal has developed
several strategies to manage its interest rate risk. Primarily, First Federal is
currently selling all newly originated one-to four-family residential mortgage
loans which are saleable in the secondary market--most of which are long-term
fixed-rate loans. In addition, First Federal currently offers three-year fixed
rate balloon loans and other adjustable rate loans, and has implemented an
active, diversified short-term consumer lending program, giving First Federal an
opportunity to reprice its loans on a more frequent basis.
9
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NET PORTFOLIO VALUE
The OTS, First Federal's primary regulator has issued a proposed rule for
the calculation of an interest rate risk component for institutions with a
greater than "normal" (i.e., greater than 2%) level of interest rate risk
exposure ("NPV"). The OTS has not yet implemented the capital deduction for
interest rate risk. NPV is the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet contracts.
This approach calculates the difference between the present value of expected
cash flows from assets and the present value of expected cash flows from
liabilities, as well as cash flows from off-balance sheet contracts. Under OTS
regulations, an institution's "normal" level of interest rate risk in the event
of an assumed change in interest rates is a decrease in the institution's NPV in
an amount not exceeding 2% of the present value of its assets. The amount of
that deduction is one-half of the difference between (a) the institution's
actual calculated exposure to a 200 basis point interest rate increase or
decrease (whichever results in the greater pro forma decrease in NPV) and (b)
its "normal" level of exposure which is 2% of the present value of its assets.
It has been, and continues to be, an objective of First Federal's Board of
Directors and management to manage interest rate risk. First Federal's
asset/liability policy, established by the Board of Directors, dictates
acceptable limits on the amount of change in NPV given certain changes in
interest rates.
Presented below, as of March 31, 2000, the latest date for which
information is available, 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. OTS assumptions are used in calculating the
amounts in this table.
Acceptable Limits
Change in At Established by
Interest Rate Estimated March 31, 2000 Board of Directors
------------- --------- ------------------ ------------------
(Basis Points) NPV $ Change % Change % Change
(Dollars in Thousands)
+300 8,929 -762 -8% -10%
+200 9,252 -439 -5% -8
+100 9,518 -172 -2% -6
0 9,691 0 0% 0
-100 9,722 +32 0% -6
-200 9,699 +8 0% -8
-300 9,852 +162 +2% -10
10
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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 200 basis point change in interest rates, First Federal would
experience a 5% decrease in the NPV in a rising rate environment. As of March
31, 2000, a decrease in interest rates of 200 basis points would have resulted
in no change in the NPV of First Federal. While the above estimates are based on
data provided as of March 31, 2000, management believes that the Bank's interest
rate risk as of June 30, 2000 has not significantly changed from the level
indicated in the above table.
In evaluating First Federal's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing
tables must be considered. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Further, in the event of a change in interest rates, prepayment
and early withdrawal levels would likely deviate significantly from those
assumed in calculating the table. For example, projected passbook, money market
and checking account maturities may also materially change if interest rates
change. Finally, the ability of many borrowers to service their debt may
decrease in the event of an interest rate increase. First Federal considers all
of these factors in monitoring its exposure to interest rate risk.
NON-PERFORMING ASSETS AND LOAN LOSS PROVISION
The provision for loan losses is based on management's periodic review of
the Company's loan portfolio which considers, among other factors, past actual
loan loss experience, the general prevailing economic conditions, changes in
composition and risks inherent in the loan portfolio, independent third-party
loan reviews and specific borrower considerations such as the ability to repay
the loan and the estimated value of the underlying collateral. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for estimated loan losses. Such
agencies may require the Company to provide additions to the allowance based
upon judgments that differ from those of management.
11
<PAGE>
The Company recorded a provision for loan losses in the amount of $257,000
for the nine months ended June 30, 2000, as compared to a $74,000 provision for
the same period in 1999. For the quarter ended June 30, 2000, the Company
recorded a provision for loan losses in the amount of $20,000, as compared to a
$24,000 provision for the same period in 1999. Management increased the loan
loss provision during the quarter ended March 31, 2000. As a result of these
loan losses, the Company has terminated its Second Chance Auto Lending program.
Prior to fiscal year 2000, the Bank did not provide an allowance for anticipated
loan losses on Second Chance Auto Loans. Management fully expected to collect
any potential losses from the credit default insurance coverage, based on their
interpretation of the policy coverage and based upon the expected recovery value
of the vehicles. During the quarter ended March 31, 2000, both the insurance
reimbursement realized on the repossessed vehicles and the actual recovery value
of the vehicles were lower than expected, resulting in actual losses that were
greater than anticipated. The allowance for loan losses is now calculated,
taking into account the recent loss experience associated on the Second Chance
Auto Loans.
Total non-performing assets decreased for the period ended June 30, 2000 to
$1.2 million or 1.45% of total assets as compared to $2.7 million or 3.31% of
total assets at September 30, 1999. Much of the decrease in non-performing
assets was primarily attributable to a $611,000 reduction in loan delinquencies,
a $406,000 reduction in real estate from foreclosure and a $437,000 reduction in
repossessed vehicles.
RESULTS OF OPERATIONS
The Company's results of operations are primarily dependent on its net
interest income, which is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Interest income is a function of the average balances of interest-earning assets
outstanding during the period and the average yields earned on such assets.
Interest expense is a function of the average amount of interest-bearing
liabilities outstanding during the period and the average rates paid on such
liabilities. The Company also generates noninterest income, such as income from
service charges and fees on checking accounts, loan servicing and other fees and
charges and gains on sales of loans and servicing rights. The Company's net
income is also affected by the level of its noninterest expenses, such as
employee salaries and benefits, occupancy and equipment expenses, and federal
deposit insurance premiums.
12
<PAGE>
COMPARISON OF NINE MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
The Company reported a net loss after taxes of $505,000 for the nine months
ended June 30, 2000, compared to net income of $295,000 reported for the nine
months ended June 30, 1999. The decrease in earnings, as discussed in more
detail below, resulted primarily from a $183,000 increase in the provision for
loan losses, a $394,000 decrease in the Company's noninterest income and a
$399,000 increase in noninterest expense.
Net interest income decreased $17,000 to $2,965,000 for the nine months
ended June 30, 2000 from $2,982,000 for the same period in 1999. The spread
between the average yield on interest earning assets and the average cost of
funds increased to 6.52% at June 30, 2000 from 5.61% at June 30, 1999. The
Company anticipates that this spread will decrease as lower yielding assets that
exhibit less credit risk replace higher yielding Second Chance Auto Loans
currently held in portfolio.
Noninterest income decreased $394,000 to $882,000 for the nine months ended
June 30, 2000 from $1,276,000 for the nine months ended June 30, 1999. This
decrease can be attributed to a decline in gains on sale of loans. For the nine
months ended June 30, 1999, the Company recorded a $211,000 gain on sale of
loans originated through its Second Chance Auto Loan Program, compared to none
in the current fiscal year to date, and a $236,000 gain on sale of loans and
servicing rights originated through its Mortgage Loan Production Office in the
nine months ended June 30, 1999, compared to $176,000 in the current fiscal year
to date. In addition, for the nine months ended June 30, 1999, the Company
recorded a $234,000 increase in other noninterest income primarily resulting
from the recording of a refund of credit default insurance from its insurer and
the recording of an after-tax casualty loss for hail damage to the premises of
the Bank and to Bank-owned vehicles.. These decreases in noninterest income were
partially offset by net servicing income of $148,000 related to servicing Second
Chance Auto Loan Program loan participations. The Company is substantially
dependent on its noninterest income in order to achieve net income. Gains on the
sales of loans are dependent on various factors that are not necessarily within
the control of the Company, including market and economic conditions. As a
result, there can be no assurance that the gains on sales of loans reported by
the Company in prior periods will be reported in future periods or that there
will not be substantial periodic variation in the results from such activities
that would affect the level of net income or loss reported by the Company.
Noninterest expense increased $399,000 to $4,144,000 for the nine months
ended June 30, 2000 from $3,745,000 for the nine months ended June 30, 1999.
Compensation and benefits increased $253,000 as a result of an increase in the
number of employees due primarily to the expansion of the Second Chance Auto
Loan Program and mortgage lending departments. The Second Chance Auto Lending
Program was ended before June 30, 2000. As a result, there was a reduction in
the number of employees and related compensation and benefit expenses The
Company anticipates a decline in compensation and benefits in future periods due
to the discontinuation of the Second Chance Auto Lending Program. Net loss on
repossessed assets increased $187,000 primarily as a result of the write-down of
asset valuation reflecting the change in the estimate of recovery value.
13
<PAGE>
Income tax expense (benefit) decreased $ 293,000 to $(149,000) for the nine
months ended June 30, 2000 from $144,000 for the nine months ended June 30, 1999
due to the loss recorded before the provision for income tax. The period
reflected tax rates of 27% and 33% for June 30, 2000 and June 30, 1999,
respectively.
The Company recognized the cumulative effect of a change in accounting
principle relating to the treatment of organization costs as a long-lived asset.
Due to a change in generally accepted accounting principles, the remaining value
of this asset, of $100,000, was fully amortized at October 1, 1999.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
The Company reported net income after taxes of $37,000 for the three months
ended June 30, 2000, compared to net income of $48,000 reported for the three
months ended June 30, 1999. The decrease in earnings, as discussed in more
detail below, resulted primarily from a $40,000 increase in the Company's
noninterest expense, partially offset by an increase in net interest income.
Net interest income increased $49,000 to $1,067,000 for the three months
ended June 30, 2000 from $1,018,000 for the same period in 1999. This increase
was attributable primarily to an increase of $139,000 in interest earned on
assets partially offset by an increase in interest rates paid for deposits of
$90,000. The spread between the average yield on interest earning assets and the
average cost of funds increased to 6.52% at June 30, 2000 from 5.61% at June 30,
1999. The Company anticipates that this spread will decrease as lower yielding
assets that exhibit less credit risk replace higher yielding Second Chance Auto
Loans currently held in portfolio.
Noninterest income decreased $34,000 to $315,000 for the three months ended
June 30, 2000 from $349,000 for the three months ended June 30, 1999. This
decrease can be partially attributed to a decline in gains on sale of loans. For
the three months ended June 30, 1999, the Company recorded a $96,000 gain on
sale of loans and servicing rights originated through its Mortgage Loan
Production Office in the three months ended June 30, 1999, compared to $76,000
in the three months ended June 30, 2000. In addition, for the three months ended
June 30, 1999, the Company recorded a $45,000 increase in other noninterest
income primarily resulting from the recording of a refund of credit default
insurance from its insurer.. This decrease in noninterest income was partially
offset by net servicing income of $33,000 related to servicing Second Chance
Auto Loan Program loan participations. The Company is substantially dependent on
its noninterest income in order to achieve net income. Gains on the sales of
loans are dependent on various factors that are not necessarily within the
control of the Company, including market and economic conditions. As a result,
there can be no assurance that the gains on sales of loans reported by the
Company in prior periods will be reported in future periods or that there will
not be substantial periodic variation in the results from such activities that
would affect the level of net income or loss reported by the Company.
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Noninterest expense increased $40,000 to $1,295,000 for the three months
ended June 30, 2000 from $1,255,000 for the three months ended June 30, 1999.
This increase was the result of increased compensation and benefits of $83,000
and a decline in net loss on repossessed assets from $18,000 for the quarter
ended June 30, 2000 from $129,000 for the quarter ended June 30, 1999.
Income tax expense (benefit) decreased $10,000 to $30,000 for the three
months ended June 30, 2000 from $40,000 for the three months ended June 30, 1999
due to the loss recorded for the period. The period reflected tax rates of 45%
for June 30, 2000 and June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, principal and interest
payments on loans and other funds provided from operations. Additionally, the
Company in the past has borrowed funds from the Federal Home Loan Bank of Dallas
or utilized particular sources of funds based on need, comparative costs and
availability at the time.
While scheduled loan repayments, short-term investments, and FHLB of Dallas
borrowings are relatively stable sources of funds, deposit flows are
unpredictable and are a function of external factors including competition, the
general level of interest rates, general economic conditions and most recently,
the restructuring occurring in the banking industry.
The Company maintains investments in liquid assets based on management's
assessment of cash needs, expected deposit flows, availability of advances from
the FHLB of Dallas, 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 of Dallas.
At June 30, 2000, the Company had commitments to originate loans, including
loans in process, totaling $2.5 million. The Company also had $602,000 of
outstanding unused lines of credit and $150,000 of letters of credit. The
Company considers its liquidity and capital resources to be adequate to meet its
foreseeable short and long-term needs. The Company expects to be able to fund or
refinance, on a timely basis, its material commitments and long-term
liabilities. The Company also has the ability, if needed, to borrow up to $29.4
million from the FHLB of Dallas for liquidity purposes. At June 30, 2000, the
Company had no advances outstanding from the FHLB of Dallas.
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Federal regulations require insured institutions to maintain minimum levels
of liquid assets. As of June 30, 2000, the minimum regulatory liquidity
requirement was 4% of the sum of First Federal's average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less. At
June 30, 2000, First Federal's regulatory liquidity ratio was 7.59%. First
Federal uses its capital resources principally to meet its ongoing commitments
to fund maturing certificates of deposits and deposit withdrawals, repay
borrowings, fund existing and continuing loan commitments, maintain its
liquidity and meet operating expenses.
At June 30, 2000, the Bank had Core Capital of $5.8 million, or 6.85% of
total assets, which was $2.4 million above the minimum capital requirement of
$3.4 million or 4% of total assets.
At June 30, 2000, the Bank had total Risk-based Capital of $6.3 million and
risk-weighted assets of $68.5 million or total Risk-based Capital of 9.13% of
risk-weighted assets. This amount was $772,000 above the minimum regulatory
requirement of $5.5 million, or 8.0% of risk-weighted assets.
In May 2000 the Office of Thrift Supervision formally designated the Bank
to be in "troubled condition" and a "problem association" due to its total
capital to risk-weighted assets ratio being only marginally above the minimum
required amount after taking into account the losses associated with repossessed
automobiles and the increase in the allowance for loan losses related to the
Second Chance Auto Loan Program. As a result, the Bank is subject to growth
restrictions limiting any increase in total assets during any quarter in excess
of an amount equal to interest credited on deposits during the quarter without
the prior written approval of the OTS, prior OTS review of all executive
compensation, prior notice to OTS of all transaction between the Bank and its
affiliates, such as the Company, and receipt of OTS approval prior to paying a
dividend from the Bank to the Company. The Company does not expect these
operating restrictions to have a material adverse effect on its operations;
however, the Company's 11 1/2% debentures due March 31, 2003 require quarterly
interest payments of approximately $105,000. The Company is dependent on
dividends from the Bank in order to pay the interest on the debentures, next due
October 15, 2000. Although the Company will apply to the OTS for a dividend from
the Bank in order to pay the interest on the debentures and operating expenses
of the Company, there can be no assurance that the OTS will approve the
dividend. Failure to timely pay the interest may result in a default under the
indenture governing the debentures resulting in acceleration of the maturity of
the outstanding $3,629,000 principal balance and a demand for payment from
debenture holders that the Company could not currently meet.
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NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133"), issued in June
1998, must be adopted as of October 1, 2001. This Statement establishes
accounting and reporting standards for derivative financial instruments and for
hedging activities. Upon adoption of the Statement, all derivatives must be
recognized at fair value as either assets or liabilities in the statement of
financial position. Changes in the fair value of derivatives not designated as
hedging instruments are to be recognized currently in earnings. Gains or losses
on derivatives designated as hedging instruments are either to be recognized
currently in earnings or are to be recognized as a component of other
comprehensive income, depending on the intended use of the derivatives and the
resulting designations. Upon adoption, retroactive application of this Statement
to financial statements of prior periods is not permitted. Management
anticipates the adoption of SFAS No. 133 will not have a material impact on the
financial condition or operations of the Bank.
SAFE HARBOR STATEMENT
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provision for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words believe, expect, intend, anticipate,
estimate, project or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse affect on the operations
and future prospects of the Company and the subsidiaries include, but are not
limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and could affect the Company's financial performance and cause the
Company's actual results for future periods to differ materially from those
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made.
The Company does not undertake, and specifically disclaims any obligation,
to revise any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements. Further information concerning the Company and its business,
including additional factors that could materially affect the Company's
financial results, is included in the Company's filings with the Securities and
Exchange Commission.
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PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is, from time to time, a party to certain lawsuits arising in
the ordinary course of its business. The Company believes that none of these
lawsuits would, if adversely determined, have a material adverse effect on its
financial condition.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
The Board of Directors has established February 28, 2001 as the date for
the 2000 annual meeting. In order to be eligible for inclusion in the Company's
proxy materials for the next Annual Meeting of Stockholders, any stockholder
proposal to take action at such a meeting must be received at the Company's main
office located at 2900 Texas Avenue, Bryan, Texas 77802, no later than September
18, 2000. Any such proposals shall be subject to the requirements of the proxy
rules adopted under the Securities Exchange Act of 1934, as amended. To be
considered for presentation at next years annual meeting, although not included
in the proxy statement, any shareholder proposal must be received at the
Company's executive office on or before November 30, 2000. All stockholder
proposals must comply with the Company's Bylaws and Delaware law.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE BRYAN COLLEGE STATION FINANCIAL
HOLDING COMPANY
Date: August 14, 2000 /s/ Gary Snoe
-------------------- ------------------------------------------
Gary Snoe
Chairman of the Board of Directors
Date: August 14, 2000 /s/ William L. Wantuck
-------------------- ------------------------------------------
William L. Wantuck
Executive Vice President, Chief Operating
Officer and Chief Financial Officer
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