UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(X) Quarterly Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended December 31, 1999
( ) Transition Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from -------------- to ------------------
Commission File Number: 0-23323
THE BRYAN COLLEGE STATION FINANCIAL HOLDING COMPANY
---------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE
--------
(State or other jurisdiction of incorporation of organization)
36-4153491
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(I.R.S. employer identification no.)
2900 TEXAS AVENUE, BRYAN, TEXAS 77802
-------------------------------------
(Address of principal executive offices) (Zip Code)
(409) 779-2900
--------------
(Registrants telephone number, including area code)
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the proceeding 12 months (or for such shorter period that the issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
No Yes X
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Shares Outstanding
Class as of January 24, 2000
----- ----------------------
Common Stock 428,409
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THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
BRYAN, TEXAS
FORM 10-QSB
THREE MONTHS ENDED DECEMBER 31, 1999
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Page
Consolidated Statements of Financial Condition.........................3
Consolidated Statements of Income......................................4
Consolidated Statements of Changes in Stockholders' Equity.............5
Consolidated Statements of Cash Flows..................................6
Notes to Consolidated Financial Statements.............................7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................9
PART II - OTHER INFORMATION
Other Information...........................................................17
Signatures..................................................................18
2
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<TABLE>
<CAPTION>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1999 and September 30, 1999
(Unaudited)
In thousands, except per share data
- -------------------------------------------------------------------------------------------
December 31, September 30,
1999 1999
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,743 $ 3,086
Interest-bearing deposits in other financial institutions 1,539 1,619
------- -------
Total cash and cash equivalents 6,282 4,705
Securities available for sale 5 5
Mortgage-backed securities held-to-maturity (fair value:
December 1999 - $636; September 1999 - $667) 659 692
Loans held for sale 3,379 2,464
Loans receivable, net 69,025 67,974
Federal Home Loan Bank stock 410 404
Servicing rights 479 545
Repossessed assets 590 937
Real estate owned and in judgment 530 548
Premises and equipment 2,294 2,099
Accrued interest receivable 641 613
Other assets 1,523 883
------- -------
$85,817 $81,869
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $73,614 $73,240
Advance payments by borrowers for insurance and taxes 244 818
Advance from Federal Home Loan Bank 4,000 --
Debentures 3,629 3,629
Accrued interest payable and other liabilities 1,509 1,194
------- -------
82,996 78,881
Minority Interest 873 873
Stockholders' equity
Common stock - par value $.01 per share;
authorized 1,500,000 shares, issued 428,409
at December 31, 1999 and September 30, 1999 4 4
Additional paid-in capital 1,849 2,060
Retained earnings, substantially restricted 95 51
------- -------
1,948 2,115
$85,817 $81,869
======= =======
</TABLE>
3
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THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
In thousands, except per share data
- --------------------------------------------------------------------------------
Three months ended
December 31,
------------------
1999 1998
---- ----
Interest income
Loans $ 1,785 $ 1,878
Mortgage-backed securities 9 13
Other 32 66
------- -------
Total interest income 1,826 1,957
Interest expense
Deposits 766 861
Other borrowings 121 109
------- -------
Total interest expense 887 970
------- -------
NET INTEREST INCOME 939 987
Provision for loan losses 30 20
------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN 909 967
Noninterest income
Service charges 173 198
Net gain on sale of loans and mortgage servicing rights 51 139
Servicing fee income net of amortization 60 --
Other 7 63
------- -------
Total noninterest income 291 400
Noninterest expenses
Compensation and benefits 666 548
Occupancy and equipment expense 124 133
Federal insurance premiums 16 15
Net loss on real estate owned 3 --
Professional fees 41 55
Data processing 67 62
Other 373 333
------- -------
Total noninterest expenses 1,290 1,146
------- -------
INCOME (LOSS) BEFORE INCOME TAX (BENEFIT) EXPENSE AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (90) 221
Income tax (benefit) expense (23) 86
------- -------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (67) 135
Cumulative effect of a change in accounting principle (100) --
------- -------
NET INCOME (LOSS) $ (167) $ 135
======= =======
EARNINGS (LOSS) PER SHARE:
BASIC AND DILUTED $ (.39) $ .32
======= =======
4
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THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
December 31, 1999 and 1998
(Unaudited)
In thousands, except per share data
- --------------------------------------------------------------------------------
Three months ended
December 31,
-------------------
1999 1998
---- ----
Balance at beginning of period $2,115 $1,870
Net income (loss) (167) 135
------ ------
Balance at December 31, $1,948 $2,005
====== ======
5
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THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
In thousands
- --------------------------------------------------------------------------------
Three months ended
December 31,
------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (167) $ 135
Adjustments to reconcile net income to net
cash from operating activities
Depreciation 70 61
Amortization of premiums and discounts on
mortgage-backed securities, net 1 1
Net change in loans held for sale (884) 165
Amortization of loan servicing rights 66 --
Amortization of deferred loan origination fees 186 12
Net gains on sales of
Mortgage loans (31) (110)
Mortgage servicing rights (20) (29)
Provision for losses on loans and real estate owned 30 20
Loss on sale of REO 3 --
Federal Home Loan Bank stock dividend (6) (6)
Change in
Accrued interest receivable (28) (54)
Other assets 140 (329)
Accrued interest payable and other liabilities (118) 51
------- -------
Net cash from operating activities (758) (83)
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans receivable (1,245) (583)
Principal payments on mortgage-backed securities
and collateralized mortgage obligations 32 52
Proceeds from maturity of securities -- 5
Proceeds from sale of mortgage servicing rights 20 29
Investment in office properties and equipment, net (265) (47)
Investment in real estate owned (9) (4)
Proceeds from sale of real estate owned 2 --
------- -------
Net cash from investing activities (1,465) (548)
Cash flows from financing activities
Net increase in deposits 374 1,563
Net decrease in advance payments by
borrowers for insurance and taxes (574) (625)
Net change in advances from Federal
Home Loan Bank 4,000 200
Dividends paid -- --
------- -------
Net cash from financing activities 3,800 1,138
------- -------
Net change in cash and cash equivalents 1,577 507
Cash and cash equivalents at beginning of period 4,705 5,327
------- -------
Cash and cash equivalents at end of period $ 6,282 $ 5,834
======= =======
6
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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 (the "Bank"), as of December 31, 1999 and September 30,
1999, and the results of its operations and cash flows for the three-month
periods ended December 31, 1999 and 1998.
NOTE 2 - ALLOWANCE FOR LOAN LOSSES
The summary of changes in the allowance for loan losses is as follows:
Three months ended
December 31,
------------------
(In thousands)
1999 1998
---- ----
Balances, beginning of period $ 326 $ 307
Provision charged to operations 30 20
Charge-offs (50) (10)
Recoveries 2 1
------ ------
Balances, end of period $ 308 $ 318
====== ======
NOTE 3 - CAPITAL REQUIREMENTS
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.
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 December 31, 1999, the most
recent notification from the Office of Thrift Supervision categorized the Bank
as adequately 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 December 31, 1999,
the Bank did not meet the minimum requirement to be well capitalized under
prompt corrective action regulations.
7
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The following is a reconciliation of the Bank's capital
under generally accepted accounting principles (GAAP) to regulatory capital at
December 31, 1999.
Core Risk based
Capital Capital
------- -------
(In thousands)
GAAP capital $5,663 $ 5,663
General valuation allowances - 308
------ --------
Regulatory capital 5,663 5,971
Minimum capital requirement 3,405 5,424
------ --------
Excess regulatory capital over
minimum requirement $2,258 $ 547
====== ========
NOTE 4 - EARNINGS PER COMMON SHARE
Amounts reported as Earnings Per Common Share for the two quarters ended
December 31, 1998 and 1998 reflect the earnings available to common stockholders
for the year divided by the weighted average number of common shares
outstanding. Diluted earnings per share shows the dilutive effect of additional
common shares issuable under stock options. Earnings per share for both periods
has been restated to reflect a 10% common stock dividend declared in January
1999. The weighted average shares outstanding used to calculate earnings per
share were 428,409 for the quarters ended December 31, 1999 and 1998,
respectively.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Bryan-College Station Financial Holding Company (the " Holding
Company", and with its subsidiary, the "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.
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. 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. 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 of First Federal's
transition to full-service banking, net income was $193,000 in fiscal year 1994
and $211,000 in fiscal year 1995. In fiscal year 1996, net income rose to
$454,000 before a one-time charge of $220,000 to recapitalize the Savings
Association Insurance Fund. In fiscal year 1997, net income rose to $605,000 and
to $628,000 in fiscal year 1998. Net income for First Federal for the fiscal
year ended September 30, 1999 was $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. The Second Chance Auto Loan Program is an
innovative loan program targeting non-prime vehicle loan borrowers. The Company.
These loans are insured for credit default, generally 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. In addition to its core residential
mortgage and Second Chance Auto Loan Program lending business, since fiscal 1994
First Federal has increased its focus on the following products:
O 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.
O Direct consumer lending.
O Commercial lending to small and medium-sized businesses, secured by
"hard collateral" such as real estate and automobiles.
O Commercial real estate lending, primarily to small and medium-sized
businesses
O 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 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,
9
<PAGE>
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 George
Bush Presidential Library, and a 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 FHLB of Dallas ("FHLB
of Dallas"). First Federal has a positive spread between the interest it earns
on its loans and the interest it pays for deposits of 6.12% at December 31, 1999
as compared to 5.94% at September 30, 1999.
FINANCIAL CONDITION
The Company's total assets increased by $3.9 million to $85.8 million at
December 31, 1999 from $81.9 million at September 30, 1999, due to a planned
growth in liquid assets to cover any extraordinary Y2K cash needs and prudent
growth of the Company's loan portfolio. This increase consisted primarily of an
increase in cash, loans held for sale, loans receivable and other assets.
Net loans receivable (excluding loans held for sale) increased $1.0
million to $69.0 million at December 31, 1999, compared to $68.0 million at
September 30, 1999. During the three months ended December 31, 1999, the Company
originated $8.2 million of mortgage loans, including $7.6 million secured by
one- to four-family residential loans. In addition, the Company originated $5.3
million in consumer loans, of which $2.8 million were Second Chance Auto Loan
Program loans and $1.4 million in commercial business loans.
Deposits increased $374,000 to $73.6 million at December 31, 1999,
compared to $73.2 million at September 30, 1999. Other liabilities increased
$3.8 million to $9.4 million at December 31, 1999, compared to $5.6 million at
September 30, 1999, primarily as a result of an increase in advances from the
FHLB of Dallas, offset by a decrease in escrowed funds for property taxes
related to real estate loans held by the Bank.
Stockholders' equity in the Company decreased $167,000 to $1.9 million at
December 31, 1999 from $2.1 million at September 30, 1999 due to the net loss in
the first quarter of the fiscal year.
ASSET/LIABILITY MANAGEMENT
The Holding Company's subsidiary, First Federal Savings Bank, like all
financial institutions, is subject to interest rate risk to the degree that its
interest-bearing liabilities (deposits) mature or reprice more rapidly, or on a
different basis, than its interest-earning assets (loans), some of which may be
longer term or fixed interest rate. As a continuing part of its financial
strategy, First Federal continually considers methods of managing any such
asset/liability mismatch, consistent with maintaining acceptable levels of net
interest income and interest rate risk.
In order to monitor and manage interest rate sensitivity and interest rate
spread, First Federal created an Asset/Liability Committee ("ALCO"), composed of
its President/Chief Executive Officer, Executive Vice President/CFO, Senior Vice
President/Financial and four outside Directors. The responsibilities of the ALCO
are to assess First Federal's asset/liability mix and recommend strategies that
will enhance income while managing First Federal's vulnerability to changes in
interest rates.
10
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First Federal's asset/liability management strategy has two goals. First,
the Bank seeks to build its net interest income and noninterest income, while
adhering to its underwriting and lending guidelines. Second, and to a lesser
extent, First Federal seeks to increase the interest rate sensitivity of its
assets and decrease the interest rate sensitivity of its liabilities so as to
reduce First Federal's overall sensitivity to changes in interest rates. There
can be no assurance that this strategy will achieve the desired results and will
not result in substantial losses in the event of an increase in interest rate
risk.
As part of this strategy, management continues to emphasize growth in
noninterest-bearing deposits such as checking accounts or lower interest-bearing
savings deposits by offering full service retail banking to its targeted
customer base. In order to minimize the possible adverse impact that a rise in
interest rates may have on net interest income, First Federal has developed
several strategies to manage its interest rate risk. Primarily, First Federal is
currently selling all newly originated one-to four-family residential mortgage
loans which are saleable in the secondary market--most of which are long-term
fixed-rate loans. In addition, First Federal currently offers three-year fixed
rate balloon loans and other adjustable rate loans, and has implemented an
active, diversified short-term consumer lending program, giving First Federal an
opportunity to reprice its loans on a more frequent basis.
NET PORTFOLIO VALUE
The OTS, First Federal's primary regulator has issued a proposed rule for
the calculation of an interest rate risk component for institutions with a
greater than "normal" (i.e., greater than 2%) level of interest rate risk
exposure ("NPV"). The OTS has not yet implemented the capital deduction for
interest rate risk. NPV is the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet contracts.
This approach calculates the difference between the present value of expected
cash flows from assets and the present value of expected cash flows from
liabilities, as well as cash flows from off-balance sheet contracts. Under OTS
regulations, an institution's "normal" level of interest rate risk in the event
of an assumed change in interest rates is a decrease in the institution's NPV in
an amount not exceeding 2% of the present value of its assets. The amount of
that deduction is one-half of the difference between (a) the institution's
actual calculated exposure to a 200 basis point interest rate increase or
decrease (whichever results in the greater pro forma decrease in NPV) and (b)
its "normal" level of exposure which is 2% of the present value of its assets.
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 September 30, 1999, 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. As illustrated in the table, the NPV of First
Federal is very rate insensitive. This occurs principally because, First Federal
has a small portfolio of long-term fixed rate loans and 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. Even though the information presented reflects the Bank's interest
rate risk position at the close of the prior quarter, management believes that
this information is helpful in assessing First Federal's current interest rate
risk position.
11
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Acceptable
Change in Limits
Interest Rate Estimated At September 30, Established
1999 by Board of
Directors
(Basis Points) NPV $ Change % Change % Change
(Dollars in Thousands)
+300 8,322 -152 -2% -10
+200 8,474 0 +0% -8
+100 8,539 +65 +1% -6
0 8,474 0 0% 0
-100 8,319 -155 -2% -6
-200 8,289 - 186 -2% -8
-300 8,516 +42 +0% -10
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 no change in NPV in a rising rate environment. As of September 30,
1999, a decrease in interest rates of 200 basis points would have resulted in a
2% decrease in the net portfolio value of First Federal.
In evaluating First Federal's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing
tables must be considered. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Further, in the event of a change in interest rates, prepayment
and early withdrawal levels would likely deviate significantly from those
assumed in calculating the table. For example, projected passbook, money market
and checking account maturities may also materially change if interest rates
change. Finally, the ability of many borrowers to service their debt may
decrease in the event of an interest rate increase. First Federal considers all
of these factors in monitoring its exposure to interest rate risk.
NON-PERFORMING ASSETS AND LOAN LOSS PROVISION
The provision for loan losses is based on management's periodic review of
the Company's loan portfolio which considers, among other factors, past actual
loan loss experience, the general prevailing economic conditions, changes in the
size, composition and risks inherent in the loan portfolio, independent
third-party loan reviews and specific borrower considerations such as the
ability to repay the loan and the estimated value of the underlying collateral.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for estimated
loan losses. Such agencies may require the Company to provide additions to the
allowance based upon judgments that differ from those of management.
The Company recorded a provision for loan losses in the amount of $30,000
for the three months ending December 31, 1999, as compared to a $20,000
provision for the same period in 1998. Management decided to increase the loan
loss provision to reflect the growth in the loan portfolio. Total non-performing
assets decreased during the three-month period ended December 31, 1999 to $2.0
million or 2.37% 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
attributable to aggressive efforts to sell repossessed vehicles originated under
the Second Chance Auto Loan Program. Included in the $2.7 million of
non-performing assets were $221,000 and $500,000 representing loans and
repossessed vehicles, respectively, from our Second Chance Auto Loan Program.
The Company may recover all or a portion of any losses incurred upon the sale of
any of these vehicles from its insurer.
12
<PAGE>
RESULTS OF OPERATIONS
The Company's results of operations are primarily dependent on its net
interest income, which is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Interest income is a function of the average balances of interest-earning assets
outstanding during the period and the average yields earned on such assets.
Interest expense is a function of the average amount of interest-bearing
liabilities outstanding during the period and the average rates paid on such
liabilities. The Company also generates noninterest income, such as income from
service charges and fees on checking accounts, loan servicing and other fees and
charges and gains on sales of loans and servicing rights. The Company's net
income is also affected by the level of its noninterest expenses, such as
employee salaries and benefits, occupancy and equipment expenses, and federal
deposit insurance premiums. The Company intends to expand its credit-default
insured Second Chance Auto Loan Program with additional select automobile
dealers throughout the State of Texas, retaining a portion of these loans for
its own portfolio while also selling loan participations in order to record
gains on the sale of these loan participations, to maintain capital compliance
and provide additional liquidity. As a part of expanding the Second Chance Auto
Loan Program, the Company has experienced increased noninterest expense as a
result of adding staff and other resources. The Company does not expect this
trend to continue past the second quarter of the Company's fiscal year. The
Company also anticipates increased loan sale activity beginning in the second
quarter of the Company's fiscal year.
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
The Company reported a net loss after taxes of $(167,000) for the three
months ended December 31, 1999, a decrease of $302,000 as compared to net income
of $135,000 reported for the three months ended December 31, 1998. The decrease
in earnings, as discussed in more detail below, resulted primarily from a
$131,000 decrease in the Company's interest income, a $109,000 decrease in
noninterest income and an increase of $144,000 in noninterest expense, partially
offset by a decrease of $83,000 in interest expense.
Net interest income decreased $48,000 to $939,000 for the three months
ended December 31, 1999 from $987,000 for the same period in 1998. This decrease
was attributable primarily to a decrease in interest earned on loans receivable,
primarily as a result of the sale of $2.6 million in loan participations in
Second Chance Auto Loan Program loans partially offset by a decline in rates
paid on the Bank's deposit liabilities. The spread between the average yield on
interest earning assets and the average cost of funds increased to 6.12% at
December 31, 1999 from 5.94% at September 30, 1999.
Noninterest income decreased $109,000 to $291,000 for the three months
ended December 31, 1999 from $400,000 for the three months ended December 31,
1998. This decrease can be attributed to a decline in gains on sale of loans.
The Company recorded an $88,000 gain on sale of loans originated through its
Second Chance Auto Loan Program in the three months ended December 31, 1998. In
addition, during the three months ended December 31, 1998 the Company recorded
$56,000 in other noninterest income resulting from a decrease in the credit
default insurance reserve it was required to maintain with its insurer. The
Company recorded net servicing income of $60,000 related to servicing Second
Chance Auto Loan Program loan participations.
Noninterest expense increased $144,000 to $1.3 million for the three
months ended December 31, 1999 from $1.1 million for the three months ended
December 31, 1998. Compensation and benefits increased $118,000 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. Other
noninterest expenses increased $40,000, which consisted of various items,
including $15,000 of advertising and marketing expenses, an uninsured $12,000
fraud loss and miscellaneous expenses related to the termination of the
Company's defined benefit pension plan and the administration of the Company's
new 401(k) pension plan. The Company expensed all costs associated with the year
2000 or Y2K issue as those costs were incurred. The total cost of the Y2K
project since commencement in October 1997 for the Company was approximately
$250,000. No disruptions in systems, service to customers or operation of the
Company were experienced as a result of reaching the year 2000. While unlikely,
problems associated with Y2K may still occur as a result of noncompliant third
parties. Management will continue to monitor all business systems and third
party relationships to ensure that all systems and processes continue to
function properly.
13
<PAGE>
Income tax expense decreased $ 109,000 to a benefit of $(23,000) for the
three months ended December 31, 1999 from $86,000 for the three months ended
December 31, 1998 due to the loss recorded before the provision for income tax
and the cumulative effect of a change in accounting principle. The period
reflected tax rates of 25.5% and 38.9% for December 31, 1999 and December 31,
1998, 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 this change in generally accepted accounting principles, the remaining
carrying value of this asset, of $100,000, was fully amortized on October 1,
1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, checking accounts,
principal and interest payments on loans and mortgage related securities,
proceeds from sales of long term, fixed-rate residential mortgage loans and
other funds provided from operations. Additionally, the Company in the past has
borrowed funds from the FHLB of Dallas or utilized particular sources of funds
based on need, comparative costs and availability at the time.
While scheduled loan and mortgage-backed securities 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 December 31, 1999, the Company had commitments to originate loans,
including loans in process, totaling $4.0 million. The Company also had $353,000
of outstanding unused lines of credit and $452,000 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 $28.5
million from the FHLB of Dallas for liquidity purposes. At December 31, 1999,
the Company had $4.0 million in advances outstanding from the FHLB of Dallas.
Federal regulations require insured institutions to maintain minimum
levels of liquid assets. As of December 31, 1999, 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 December 31, 1999, First Federal's regulatory liquidity ratio was 7.55%.
First Federal uses its capital resources principally to meet its ongoing
commitments to fund maturing certificates of deposits and deposit withdrawals,
repay borrowings, fund existing and continuing loan commitments, maintain its
liquidity and meet operating expenses.
At December 31, 1999, the Bank had Core Capital of $5.7 million, or 6.65%
of total assets, which was $2.3 million above the minimum capital requirement of
$3.4 million or 4% of total assets.
At December 31, 1999, the Bank had total Risk-based Capital of $6.0 million
and risk-weighted assets of $67.8 million or total Risk-based Capital of 8.81%
of risk-weighted assets. This amount was $547,000 above the minimum regulatory
requirement to be adequately capitalized of $5.4 million, or 8.0% of
risk-weighted assets.
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 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
14
<PAGE>
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. 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.
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 January 1, 2000. This Statement establishes
accounting and reporting standards for derivative financial instruments and for
hedging activities. Upon adoption of the Statement, all derivatives must be
recognized at fair value as either assets or liabilities in the statement of
financial position. Changes in the fair value of derivatives not designated as
hedging instruments are to be recognized currently in earnings. Gains or losses
on derivatives designated as hedging instruments are either to be recognized
currently in earnings or are to be recognized as a component of other
comprehensive income, depending on the intended use of the derivatives and the
resulting designations. Upon adoption, retroactive application of this Statement
to financial statements of prior periods is not permitted. Management
anticipates the adoption of SFAS No. 133 will not have a material impact on the
financial condition or operations of the Bank.
SAFE HARBOR STATEMENT
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provision for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words believe, expect, intend, anticipate,
estimate, project or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
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
15
<PAGE>
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.
16
<PAGE>
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE BRYAN COLLEGE STATION FINANCIAL
HOLDING COMPANY
Date: February 14, 2000 /s/ J. Stanley Stephen
----------------- --------------------------------------------
J. Stanley Stephen
President and Chief Executive Officer
Date: February 14, 2000 /s/ William Wantuck
----------------- --------------------------------------------
William Wantuck
Chief Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The following schedule contains summary financial information extracted from the
financial statements contained in the Registrant's quarterly report on Form
10-QSB for the period ended December 31, 1999 and is qualified in its entirety.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 4,743
<INT-BEARING-DEPOSITS> 1,539
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 3,379
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 659
<INVESTMENTS-MARKET> 0
<LOANS> 69,025
<ALLOWANCE> 308
<TOTAL-ASSETS> 85,817
<DEPOSITS> 73,614
<SHORT-TERM> 244
<LIABILITIES-OTHER> 1,509
<LONG-TERM> 4,502
0
0
<COMMON> 4
<OTHER-SE> 1,944
<TOTAL-LIABILITIES-AND-EQUITY> 85,817
<INTEREST-LOAN> 1,785
<INTEREST-INVEST> 9
<INTEREST-OTHER> 32
<INTEREST-TOTAL> 1,826
<INTEREST-DEPOSIT> 766
<INTEREST-EXPENSE> 887
<INTEREST-INCOME-NET> 939
<LOAN-LOSSES> 30
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,290
<INCOME-PRETAX> (190)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (167)
<EPS-BASIC> 0.39
<EPS-DILUTED> 0.39
<YIELD-ACTUAL> 5.75
<LOANS-NON> 0
<LOANS-PAST> 918
<LOANS-TROUBLED> 1,225
<LOANS-PROBLEM> 628
<ALLOWANCE-OPEN> 326
<CHARGE-OFFS> 50
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 308
<ALLOWANCE-DOMESTIC> 308
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 308
</TABLE>
