<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0 - 21328
FORT BEND HOLDING CORP.
A Delaware Corporation I.R.S. Employer Identification
No. 76-0391720
Address Telephone Number
3400 Avenue H (281) 342-5571
Rosenberg, Texas 77471
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 preceding 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 [_]
There were 2,044,964 shares and 1,868,616 shares of Common Stock ($0.01 par
value) issued and outstanding, respectively, as of October 27, 1998.
1 of 36
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FORT BEND HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS SEPTEMBER 30, 1998 MARCH 31, 1998
<S> <C> <C>
Cash and due from banks $ 7,399 $ 6,260
Short-term investments 47,126 20,484
Certificates of deposit 400 300
--------------------- -----------------
TOTAL CASH AND CASH EQUIVALENTS 54,925 27,044
Investment securities available for sale, at market 3,023 2,962
Investment securities held to maturity (estimated market value of
$6,025 and $8,984 at September 30, 1998 and
March 31, 1998, respectively) 6,247 9,244
Mortgage-backed securities available for sale, at market 224 282
Mortgage-backed securities held to maturity (estimated market
value of $69,177 and $83,222 at September 30, 1998
and March 31, 1998, respectively) 68,673 82,815
Loans held for sale 10,104 12,920
Loans receivable, net 165,710 160,062
Premises and equipment, net 4,666 4,738
Mortgage servicing rights, net 7,367 7,603
Prepaid expenses and other assets 5,347 7,680
Goodwill, net 1,209 1,256
--------------------- -----------------
TOTAL ASSETS $ 327,495 $ 316,606
===================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 275,695 $ 268,991
Convertible Subordinated Debentures 9,910 11,405
Borrowings 4,457 3,985
Advances from borrowers for taxes and insurance 7,828 4,619
Accounts payable, accrued expenses and other liabilities 3,336 3,646
--------------------- -----------------
TOTAL LIABILITIES 301,226 292,646
--------------------- -----------------
Minority interest in consolidated subsidiary 2,673 2,556
--------------------- -----------------
Stockholders' equity:
Serial preferred stock, $.01 par value - 1,000,000 shares authorized, none outstanding
Common Stock, $.01 par value, 4,000,000 shares authorized,
2,042,652 shares issued and 1,866,304 shares outstanding at
September 30, 1998 and 1,899,654 shares issued and 1,723,306
shares outstanding at March 31, 1998 20 19
Additional paid-in capital 11,427 9,927
Unearned employee stock ownership plan shares (118) (118)
Deferred compensation (136) (83)
Net unrealized appreciation on available for sale securities 5 7
Retained earnings (substantially restricted) 13,854 13,108
Treasury stock, at cost - 176,348 shares (1,456) (1,456)
--------------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 23,596 21,404
--------------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 327,495 $ 316,606
===================== =================
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
FORT BEND HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
<S> <C> <C> <C> <C>
INTEREST INCOME: 1998 1997 1998 1997
Loans $ 3,839 $ 3,367 $ 7,639 $ 6,731
Short-term investments 531 436 915 595
Investment securities 151 215 330 457
Mortgage-backed securities 1,163 1,524 2,448 3,099
--------- --------- --------- ---------
TOTAL INTEREST INCOME 5,684 5,542 11,332 10,882
--------- --------- --------- ---------
INTEREST EXPENSE:
Deposits 2,787 2,787 5,552 5,455
Borrowings 291 324 564 661
--------- --------- --------- ---------
TOTAL INTEREST EXPENSE 3,078 3,111 6,116 6,116
--------- --------- --------- ---------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 2,606 2,431 5,216 4,766
PROVISION FOR LOAN LOSSES 45 15 90 78
--------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,561 2,416 5,126 4,688
--------- --------- --------- ---------
NONINTEREST INCOME:
Loan fees and charges 1,009 754 2,084 1,481
Loan servicing income, net 199 275 405 573
Service charges on deposit accounts 227 220 451 430
Gain on sales of loans 508 156 805 253
Other income 160 128 367 316
--------- --------- --------- ---------
TOTAL NONINTEREST INCOME 2,103 1,533 4,112 3,053
--------- --------- --------- ---------
NONINTEREST EXPENSE:
Compensation and benefits 2,009 1,630 4,007 3,224
Employee stock ownership plan expense 140 173 143 328
Office occupancy and equipment 498 436 986 883
Federal insurance premiums 43 40 86 80
Data processing fees 164 131 337 257
Other expense 782 667 1,620 1,220
--------- --------- --------- ---------
TOTAL NONINTEREST EXPENSE 3,636 3,077 7,179 5,992
--------- --------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE AND MINORITY INTEREST 1,028 872 2,059 1,749
INCOME TAX EXPENSE 331 269 667 547
--------- --------- --------- ---------
INCOME BEFORE MINORITY INTEREST 697 603 1,392 1,202
MINORITY INTEREST IN NET INCOME OF SUBSIDIARY 165 100 288 180
--------- --------- --------- ---------
NET INCOME $ 532 $ 503 $ 1,104 $ 1,022
========= ========= ========= =========
EARNINGS PER COMMON SHARE $ 0.29 $ 0.30 $ 0.62 $ 0.62
========= ========= ========= =========
EARNINGS PER COMMON SHARE - ASSUMING DILUTION $ 0.23 $ 0.24 $ 0.48 $ 0.48
========= ========= ========= =========
DIVIDENDS PER COMMON SHARE $ 0.10 $ 0.05 $ 0.20 $ 0.085
========= ========= ========= =========
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
FORT BEND HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
<S> <C> <C> <C> <C>
1998 1997 1998 1997
NET INCOME $ 532 $ 503 $ 1,104 $ 1,022
--------- --------- --------- ---------
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation) on available
for sale securities 4 12 (4) 22
Income tax (provision) benefit (1) (4) 1 (7)
--------- --------- --------- ---------
Other comprehensive income 3 8 (3) 15
--------- --------- --------- ---------
COMPREHENSIVE INCOME $ 535 $ 511 $ 1,101 $ 1,037
========= ========= ========= =========
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
FORT BEND HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
<S> <C> <C>
OPERATING ACTIVITIES: 1998 1997
Net income $ 1,104 $ 1,022
Adjustment to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses 90 78
Depreciation 324 275
Amortization 884 788
Minority interest in net income of consolidated subsidiary 288 180
Gain on sales of loans, net (805) (253)
Origination of loans held for sale and mortgage servicing rights (60,970) (35,193)
Proceeds from sales of loans 63,906 30,899
Other, net 1,644 532
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 6,465 (1,672)
--------- ---------
INVESTING ACTIVITIES:
Purchase of investment securities available for sale (65) (66)
Purchase of investment securities held to maturity --- (1,992)
Proceeds from maturities of investment securities held to maturity 3,000 3,000
Principal collected on mortgage-backed securities 14,161 6,720
Net increase in loans receivable (5,570) (2,995)
Purchase of premises and equipment (252) (108)
Proceeds from sale of real estate 120 205
Proceeds from redemption of Federal Home Loan Bank stock 169 512
Other, net (13) (36)
--------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 11,550 5,240
--------- ---------
FINANCING ACTIVITIES:
Net increase in deposits 6,704 18,866
Proceeds from long-term borrowings 500 ---
Increase in advances from borrowers for taxes and insurance 3,209 4,176
Dividends paid (358) (141)
Other, net (189) (146)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,866 22,755
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 27,881 26,323
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 27,044 20,790
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 54,925 $ 47,113
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Real estate acquired in settlement of loans $ 42 $ 28
Loans originated related to sales of real estate --- 240
Issuance of common stock to RRP 71 62
Subordinate debentures converted to common stock 1,495 60
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
5
<PAGE>
FINANCIAL STATEMENTS, CONTINUED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The unaudited information as of September 30, 1998 and for the three and
six months ended September 30, 1998 and 1997 includes the results of
operations of Fort Bend Holding Corp. (the "Holding Corp.") and its
wholly-owned subsidiary Fort Bend Federal Savings and Loan Association of
Rosenberg (the "Association"). The Association's financial statements
include its 51% owned subsidiary Mitchell Mortgage Company, L.L.C.
("Mitchell"). In the opinion of management, the information reflects all
adjustments (consisting only of normal recurring adjustments) which are
necessary for a fair presentation of the results of operations for such
periods but should not be considered as indicative of results for a full
year.
The March 31, 1998 condensed consolidated statement of financial condition
data was derived from the audited financial statements, but does not
include all disclosures required by generally accepted accounting
principles. Accordingly, the condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements.
Certain previously reported amounts have been reclassified to conform to
the fiscal 1999 financial statement presentation. These reclassifications
had no effect on net income or stockholders' equity.
2. RECOGNITION AND RETENTION PLAN
The Holding Corp. has established a Recognition and Retention Plan ("RRP")
as a method of providing key officers with a proprietary interest in the
Holding Corp. in a manner designed to encourage such individuals to remain
with the Holding Corp. or the Association. All outstanding awards vest at a
rate of 20% per year. A total of 52,650 shares have been authorized, all of
which had been granted under the RRP as of September 30, 1998. Awards for
3,746 shares were granted during the six months ended September 30, 1998.
6
<PAGE>
FINANCIAL STATEMENTS, CONTINUED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
3. EARNINGS PER COMMON SHARE
The following table reconciles earnings per common share to earnings per
common share - assuming dilution (in thousands, except share and per share
data).
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
<S> <C>
EARNINGS PER COMMON SHARE
Net income applicable to common stock $ 532 $ 503 $ 1,104 $ 1,022
Weighted average number of common
shares outstanding 1,823,142 1,655,321 1,793,765 1,654,473
----------- ----------- ----------- -----------
Earnings per common share $ 0.29 $ 0.30 $ 0.62 $ 0.62
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE - ASSUMING DILUTION (a)
Net income applicable to common stock $ 532 $ 503 $ 1,104 $ 1,022
Effect of dilutive securities:
Interest on 8% convertible debentures,
net of tax 146 172 286 345
----------- ----------- ----------- -----------
Net income, adjusted $ 678 $ 675 $ 1,390 $ 1,367
=========== =========== =========== ===========
Weighted average common shares outstanding 1,823,142 1,655,321 1,793,765 1,654,473
Effect of dilutive securities:
Weighted average common shares issuable
under the stock option plan 109,891 90,404 122,370 81,897
Weighted average common shares
issuable with the conversion of the 8%
convertible debentures to common stock 958,906 1,113,167 987,623 1,113,931
----------- ----------- ----------- -----------
Weighted average common shares, adjusted 2,891,939 2,858,892 2,903,758 2,850,301
=========== =========== =========== ===========
Earnings per common share -
assuming dilution $ 0.23 $ 0.24 $ 0.48 $ 0.48
=========== =========== =========== ===========
(a) The assumed conversion of the minority ownership interest in Mitchell into shares of common stock has an antidilutive
effect on earnings per share. Thus, it is excluded from the calculation of earnings per share-assuming dilution.
</TABLE>
7
<PAGE>
FINANCIAL STATEMENTS, CONTINUED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
4. SUBSEQUENT EVENTS
On October 27, 1998, the Holding Corp. declared a cash dividend of $.10 per
common share payable on December 8, 1998 to shareholders of record on
November 17, 1998.
On October 20, 1998, the Holding Corp. entered into an Agreement and Plan
of Merger (the "Merger Agreement") with Southwest Bancorporation of Texas,
Inc. ("SWBT") whereby the Holding Corp. will merge into SWBT. The Merger
Agreement, which is subject to approval of the shareholders of the Holding
Corp. and various regulatory authorities, provides for the exchange of 1.45
of shares of SWBT's common stock for each share of Holding Corp. common
stock. The transaction is expected to be accounted for as a pooling of
interests.
8
<PAGE>
ITEM 2.
Management's Discussion and Analysis of Financial Condition And Results Of
Operations
GENERAL
Fort Bend Holding Corp. (the "Holding Corp.") was incorporated under the laws of
the State of Delaware to become a savings and loan holding company with Fort
Bend Federal Savings and Loan Association of Rosenberg (the "Association") as
its subsidiary. The Holding Corp. was incorporated at the direction of the
Board of Directors of the Association, and on June 30, 1993, acquired all of the
capital stock of the Association upon its conversion from mutual to stock form
(the "Conversion"). Prior to the Conversion, the Holding Corp. did not engage
in any material operations and at September 30, 1998 it had no significant
assets or liabilities other than the investment in the capital stock of the
Association, participations purchased in two construction loans originated by
Mitchell, investment securities, deferred charges from the subordinated
debenture issue, cash and cash equivalents and the subordinated debentures. In
January, 1997 the Association acquired, and has consolidated in its financial
statements, a 51% ownership interest in Mitchell. Unless the context otherwise
requires, all references herein to the Holding Corp. include the Holding Corp.
and the Association on a consolidated basis.
The Association is principally engaged in the business of attracting retail
savings deposits from the general public and investing those funds in first
mortgage loans on owner occupied, single-family residences, residential
construction loans, mortgage-backed securities and investment securities. The
Association also originates land acquisition and development loans, commercial
real estate loans, and consumer loans, including loans for the purchase of
automobiles and home improvement loans. Mitchell engages in similar lending
activities with an emphasis on construction and multifamily lending and loan
servicing.
The most significant outside factors influencing the operations of the
Association and other banks and savings institutions include general economic
conditions, competition in the local market place and the related monetary and
fiscal policies of agencies that regulate financial institutions. More
specifically, the cost of funds, primarily consisting of deposits, is influenced
by interest rates offered on competing investments and general market rates of
interest. Lending activities are influenced by the demand for real estate
financing and other types of loans, which in turn is affected by the interest
rates at which such loans may be offered and other factors affecting loan demand
and funds availability.
In November 1997, home equity lending was approved in Texas. Since January
1998, the Association has been lending on the equity in homesteads in Texas
through a home equity lending program and, at September 30, 1998, principal
outstanding on home equity loans was approximately $5.5 million.
In order to meet the financial services needs of the communities it serves, the
Association's growth strategy has been to grow in a reasonable, prudent manner
which may include expansion of the branch network or the acquisition of other
financial institutions and related companies operating generally within a 100
mile radius of Rosenberg, Texas. In furtherance of this growth strategy, the
Association has increased the portfolio allocation of single-family
construction lending, including the origination of speculative loans to
qualified builders, commercial real estate lending and consumer lending.
Residential construction loans to owner-occupants are generally underwritten
using the same criteria as for one- to four-family residential loans. Loan
proceeds are disbursed in increments as construction progresses and inspections
warrant. On December 17, 1997, the Association received approval, from the
Office of Thrift Supervision, to open a new branch in The Woodlands, Texas. The
branch facility initially will be located in the offices of Mitchell and is
expected to open in fiscal 1999. On October 20, 1998, the Holding Corp. entered
into an Agreement and Plan of Merger with Southwest Bancorporation of Texas,
Inc. (see Note 4 to the Condensed Consolidated Financial Statements).
9
<PAGE>
ITEM 2.
Management's Discussion and Analysis of Financial Condition And Results Of
Operations
LENDING ACTIVITIES
Since the mid 1980s, in order to reduce its exposure to changes in interest
rates, the Holding Corp. has emphasized the origination and retention of
Adjustable Rate Mortgage ("ARM") loans and loans with shorter terms to maturity
than traditional 30-year, fixed-rate loans. Management's strategy has been to
increase the percentage of assets in the Holding Corp.'s portfolio with assets
which more frequently reprice or which have shorter maturities. In response to
strong customer demand, however, the Holding Corp. continues to originate
conventional fixed-rate mortgages generally for sale in the secondary market.
The Holding Corp.'s primary focus in lending activities is on the origination of
loans secured by first mortgages on owner-occupied, one- to four-family
residences, residential construction, land, commercial real estate and consumer
loans in its market area. Mitchell engages in similar lending activities with
an emphasis on construction and multi-family lending. At September 30, 1998,
the Holding Corp.'s net loan portfolio totaled $175.8 million. The strong
economy and low interest rates have been primarily responsible for the increase
in construction lending. At September 30, 1998, the construction loan portfolio
was 68% contract and 32% speculative loans.
The following table shows the composition of the loan portfolio (including loans
held for sale) in dollar amounts and in percentages (before deductions for loans
in process, deferred fees and discounts and allowance for losses) as of the
dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1998 1998
------------------------- ---------------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Real Estate Loans:
One- to four-family $ 72,349 31.12% $ 77,937 36.75%
Multi-family 6,548 2.82 9,024 4.25
Commercial 8,293 3.57 7,293 3.44
Construction, development and
land 113,616 48.88 85,592 40.35
---------- ------ ------------ ------
Total real estate loans 200,806 86.39 179,846 84.79
---------- ------ ------------ ------
Other Loans:
Consumer and other loans:
Deposit account 4,186 1.80 4,141 1.95
Automobile 12,572 5.41 12,288 5.79
Home Improvement 4,743 2.04 5,225 2.46
Other - secured 8,500 3.65 9,070 4.28
Other - unsecured 1,639 0.71 1,549 0.73
---------- ------ ------------ ------
Total consumer and other loans 31,640 13.61 32,273 15.21
---------- ------ ------------ ------
Total gross loans 232,446 100.00% 212,119 100.00%
====== ======
Less:
Loans in process 53,820 36,671
Deferred fees and discounts 1,147 874
Allowance for losses 1,665 1,592
---------- ------------
Total loans receivable, net $ 175,814 $ 172,982
========== ============
</TABLE>
10
<PAGE>
ITEM 2.
Management's Discussion and Analysis of Financial Condition And Results Of
Operations
All of the Holding Corp.'s lending is subject to its written underwriting
standards and to loan origination procedures. Decisions on loan applications
are made on the basis of detailed applications and property valuations
(consistent with the Holding Corp.'s written appraisal policy) by independent
appraisers (generally with respect to loans in excess of $250,000) or by the
Holding Corp.'s staff appraiser. The loan applications are designed primarily
to determine the borrower's ability to repay, and are verified through use of
credit reports, financial statements, tax returns and/or confirmations.
An appraisal of the security property is obtained on all loans secured by real
property from Board-approved independent fee appraisers or the Holding Corp.'s
staff appraiser. The Holding Corp. requires evidence of marketable title and
lien position as well as appropriate title insurance on all loans secured by
real property, and requires fire and extended coverage casualty insurance in
amounts at least equal to the principal amount of the loan or the value of
improvements on the property, depending on the type of loan. The Holding Corp.
may also require flood insurance to protect the property securing its interest.
The aggregate amount of loans that the Holding Corp. is permitted to make under
applicable federal regulations to any one borrower, including related entities,
is limited generally to the greater of 15% of unimpaired capital and surplus or
$500,000. At September 30, 1998, the maximum amount which the Holding Corp.
could lend to any one borrower and the borrower's related entities was
approximately $3.9 million. At September 30, 1998, the largest amount committed
to any one borrower, or group of related borrowers, was approximately $3.6
million.
11
<PAGE>
ITEM 2.
Management's Discussion and Analysis of Financial Condition And Results Of
Operations
The following shows the composition of the loan portfolio (including loans held
for sale) by fixed- and adjustable-rate categories at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 MARCH 31, 1998
--------------------------- -------------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- --------- --------- ---------
Fixed-rate Loans: (Dollars in thousands)
<S> <C> <C> <C> <C>
Real Estate:
One- to four-family $ 26,123 11.24% $ 29,753 14.03%
Multi-family 6,001 2.58 8,470 3.99
Commercial 5,478 2.36 4,209 1.99
Construction, development and land 16,271 7.00 13,606 6.41
--------- --------- --------- ---------
Total real estate loans 53,873 23.18 56,038 26.42
Consumer and other 31,181 13.41 31,948 15.06
--------- --------- --------- ---------
Total fixed-rate loans 85,054 36.59 87,986 41.48
--------- --------- --------- ---------
Adjustable-rate loans:
Real Estate:
One- to four-family 46,226 19.89 48,184 22.72
Multi-family 547 0.23 554 0.26
Commercial 2,815 1.21 3,084 1.45
Construction, development and land 97,345 41.88 71,986 33.94
--------- --------- --------- ---------
Total real estate loans 146,933 63.21 123,808 58.37
Consumer and other 459 0.20 325 0.15
--------- --------- --------- ---------
Total adjustable-rate loans 147,392 63.41 124,133 58.52
--------- --------- --------- ---------
Total gross loans 232,446 100.00% 212,119 100.00%
========= =========
Less:
Loans in process 53,820 36,671
Deferred fees and discounts 1,147 874
Allowance for loan losses 1,665 1,592
--------- ---------
Total loans receivable, net $ 175,814 $ 172,982
========= =========
</TABLE>
12
<PAGE>
ITEM 2.
Management's Discussion and Analysis of Financial Condition And Results Of
Operations
The following schedule illustrates the maturities of the loan portfolio at
September 30, 1998. Mortgages which have adjustable or renegotiable interest
rates are shown as maturing in the period during which the contract is due. The
schedule does not reflect the effects of possible repayments or enforcement of
due-on-sale clauses.
<TABLE>
<CAPTION>
REAL ESTATE LOANS
-------------------------------------------------------------
CONSTRUCTION, CONSUMER
ONE- TO DEVELOPMENT AND OTHER
FOUR-FAMILY MULTI-FAMILY COMMERCIAL AND LAND OTHER TOTAL
--------------- ------------ ---------- --------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Maturity:
Due in one year or less $ 73 $ --- $ 1,175 $ 94,133 $ 5,389 $ 100,770
Due after one year through
five years 3,092 3,636 3,504 9,317 19,518 39,067
Due after five years 69,184 2,912 3,614 10,166 6,733 92,609
----------- ------------ ---------- ---------- -------- ---------
Total gross loans $ 72,349 $ 6,548 $ 8,293 $ 113,616 $ 31,640 $ 232,446
=========== ============ ========== ========== ======== =========
</TABLE>
At September 30, 1998, the principal balance of adjustable rate loans due after
one year was $59.3 million while the principal balance of fixed rate loans due
after one year was $72.4 million.
Loan servicing has been one of the stable income providers for the Association
and will continue to be expanded, to the extent possible, through the retention
of servicing for loans originated and sold into the secondary market, as well as
through the purchase of mortgage servicing rights, to the extent deemed
appropriate (and subject to market conditions at the time). At September 30,
1998, the Association serviced approximately $280 million of loans for others
and Mitchell serviced approximately $634 million of loans for others for a total
of $914 million of loans serviced for others. Management believes purchases of
loan servicing rights may allow the Holding Corp. to take advantage of some
economies of scale related to servicing.
Interest rates have decreased slightly subsequent to March 31, 1998. The impact
of these changes may be a higher volume of permanent single-family lending
activity, higher prepayment rates, and increased amortization of mortgage
service rights. It is difficult to determine the impact of changing interest
rates on the net interest margin. The Association's one year interest
sensitivity gap was a positive 20.40% at June 30, 1998 (the most recent
available). A positive gap indicates there are more interest-earning assets
repricing during a stated period than interest-bearing liabilities, potentially
resulting in an increase in the spread on such assets and liabilities in a
rising rate environment and a decrease in the spread in a declining rate
environment. A negative gap would have the opposite effect.
INVESTMENT ACTIVITIES
At September 30, 1998, the Holding Corp. had unrealized gains and losses in its
investment securities and mortgage-backed securities which are being held to
maturity. The Holding Corp. has both the intent and ability to hold these
securities until maturity. Management believes the Holding Corp. will be able to
collect all amounts due according to the contractual terms of the debt
securities and is not aware of any information that would indicate the inability
of any issuer of such securities to make contractual payments in a timely
manner. Therefore, management believes that none of the unrealized losses should
be considered other than temporary.
13
<PAGE>
ITEM 2.
Management's Discussion and Analysis of Financial Condition And Results Of
Operations
Most of the mortgage-backed securities are agency securities and are either
guaranteed by the full faith and credit of the United States Government (i.e.
GNMA) or are insured by a Government Sponsored Enterprise (i.e. FNMA or FHLMC).
Private issue mortgage-backed securities consist of the "A" piece of "A-B"
structured securities where the "B" piece is subordinate to the "A" piece and
which were initially rated one of the two highest categories by one or more of
the rating agencies. Most of these securities have pool insurance and/or reserve
funds in addition to the subordination of the "B" piece. Collateral for these
securities is whole mortgage loans. None of these securities are considered
"high risk" as defined by the Office of Thrift Supervision and none have failed
to pass the Federal Financial Institution Examination Council ("FFIEC")
mandatory test for "high risk" securities. The Association does not invest in
"high risk" securities.
The management of the investment portfolio is not designed to be the primary
source of funds for the Association's operations. Rather, it is viewed as a use
of funds generated by the Association to be invested in interest-earning assets
to be held to maturity. Cash flow mismatches between sources and uses of funds
should not require any of the securities to be liquidated. While cash flows from
the securities vary depending on the prepayment speeds associated with each
particular security, the variance in the prepayment speeds does not impact the
over-all cash flow requirements of the Association since the Association has the
ability to borrow funds from the Federal Home Loan Bank of Dallas. As of
September 30, 1998, the Association had the ability to borrow up to an
additional $154 million from the Federal Home Loan Bank of Dallas if cash flow
requirements cannot be met by attracting deposits from its customer base (its
primary source of funds) or from repayment of loans and other sources.
The following schedule provides detail of the investment securities and the
mortgage-backed securities which are held to maturity, along with the related
unrealized gains and losses, at September 30, 1998 and March 31, 1998.
14
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENT AND MORTGAGE-BACKED SECURITIES
HELD TO MATURITY
(IN THOUSANDS)
SEPTEMBER 30, 1998
---------------------------------------------------
UNREALIZED
AMORTIZED MARKET ----------------------
TYPE OF SECURITY COST VALUE GAINS LOSSES
------------ --------- --------- ---------
INVESTMENT SECURITIES:
<S> <C> <C> <C> <C>
U.S. Treasury Notes $ 999 $ 1,008 $ 9 $ ---
World Bank Bond and
FHLB Debentures 3,250 3,005 --- 245
FNMA and FHLMC Debentures 1,998 2,012 14 ---
------------ --------- --------- ---------
TOTAL HELD TO MATURITY $ 6,247 $ 6,025 $ 23 $ 245
============ ========= ========= =========
MORTGAGE-BACKED SECURITIES:
FNMA
Fixed $ 6,856 $ 7,129 $ 273 $ ---
Adjustable 10,824 10,884 100 40
FHLMC
Fixed 2,985 3,052 67 ---
Adjustable 11,712 11,759 89 42
GNMA
Fixed 1,769 1,861 92 ---
Adjustable 4,508 4,572 65 1
Private Issue
Adjustable 2,362 2,352 8 18
CMO
Fixed
FNMA 8,840 8,892 54 2
FHLMC 6,727 6,797 70 ---
Private 1,477 1,506 29 ---
Adjustable
FNMA 2,879 2,838 --- 41
FHLMC 6,144 5,954 11 201
Private 1,590 1,581 -- 9
------------ --------- --------- ---------
TOTAL HELD TO MATURITY $ 68,673 $ 69,177 $ 858 $ 354
============ ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------------------------------------------------
UNREALIZED
AMORTIZED MARKET ------------------------
TYPE OF SECURITY COST VALUE GAINS LOSSES
--------- --------- --------- -----------
INVESTMENT SECURITIES:
<S> <C> <C> <C> <C>
U.S. Treasury Notes $ 999 $ 1,007 $ 8 $ ---
World Bank Bond and
FHLB Debentures 5,249 5,008 4 245
FNMA and FHLMC Debentures 2,996 2,969 9 36
--------- --------- --------- -----------
TOTAL HELD TO MATURITY $ 9,244 $ 8,984 $ 21 $ 281
========= ========= ========= ===========
MORTGAGE-BACKED SECURITIES:
FNMA
Fixed $ 8,225 $ 8,553 $ 332 $ 4
Adjustable 12,309 12,360 112 61
FHLMC
Fixed 4,040 4,125 89 4
Adjustable 13,101 13,121 89 69
GNMA
Fixed 2,015 2,138 123 ---
Adjustable 5,406 5,484 78 ---
Private Issue
Adjustable 2,790 2,779 9 20
CMO
Fixed
FNMA 10,992 11,006 24 10
FHLMC 9,211 9,223 27 15
Private 2,975 3,004 29 ---
Adjustable
FNMA 2,935 2,859 --- 76
FHLMC 6,582 6,358 11 235
Private 2,234 2,212 --- 22
--------- --------- --------- -----------
TOTAL HELD TO MATURITY $ 82,815 $ 83,222 $ 923 $ 516
========= ========= ========= ===========
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
The following schedule sets forth the contractual maturities of the Holding
Corp.'s investment securities and mortgage-backed securities at September 30,
1998.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 TOTAL
-------------------------------------------------------------------------------------
1 YEAR OVER 1 YEAR OVER 5 YEARS OVER
OR LESS TO 5 YEARS TO 10 YEARS 10 YEARS
----------- ----------- ----------- -----------
TYPE OF SECURITY AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED MARKET
COST COST COST COST COST VALUE
----------- ----------- ----------- ----------- ----------- ----------
(Dollars in thousands)
INVESTMENT SECURITIES:
AVAILABLE FOR SALE:
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Notes $ 500 $ --- $ --- $ --- $ 500 $ 500
Equity Securities 2,516 --- --- --- 2,516 2,523
------------ ----------- ----------- ----------- ----------- ----------
Total $ 3,016 $ --- $ --- $ --- $ 3,016 $ 3,023
============ =========== =========== =========== =========== ==========
HELD TO MATURITY:
U.S. Treasury Notes $ 999 $ --- $ --- $ --- $ 999 $ 1,008
World Bank Bond and
FHLB Debentures --- 3,250 --- --- 3,250 3,005
FNMA and FHLMC
Debentures 999 999 --- --- 1,998 2,012
------------ ----------- ----------- ----------- ----------- ----------
Total $ 1,998 $ 4,249 $ --- $ --- $ 6,247 $ 6,025
============ =========== =========== =========== =========== ==========
MORTGAGE-BACKED SECURITIES:
AVAILABLE FOR SALE:
Private Issue $ --- $ --- $ --- $ 224 $ 224 $ 224
============ =========== =========== =========== =========== ==========
HELD TO MATURITY:
FNMA $ 5,494 $ 845 $ 596 $ 10,745 $ 17,680 $ 18,013
FHLMC 414 993 827 12,463 14,697 14,811
GNMA --- --- --- 6,277 6,277 6,433
Private Issue --- --- 276 2,086 2,362 2,352
CMO
FNMA --- --- 3,017 8,702 11,719 11,730
FHLMC --- --- 7,636 5,235 12,871 12,751
Private Issue --- 990 488 1,589 3,067 3,087
------------ ----------- ----------- ----------- ----------- ----------
Total $ 5,908 $ 2,828 $ 12,840 $ 47,097 $ 68,673 $ 69,177
============ =========== =========== =========== =========== ==========
</TABLE>
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Association's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations including, among
other things, a temporary inability to process transactions or engage in normal
business activities commencing upon January 1, 2000.
In May 1997, the Federal Financial Institutions Examination Council ("FFIEC")
issued an interagency statement to the chief executive officers of all federally
supervised financial institutions regarding Year 2000 project management
awareness. The FFIEC has highly prioritized Year 2000 compliance in order to
avoid
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
major disruptions to the operations of financial institutions and the country's
financial systems when the new century results in two digit dates for the year
being below the prior year's value. The FFIEC statement provides guidance to
financial institutions, providers of data services, and all examining personnel
of the federal banking agencies regarding the Year 2000 issue. The federal
banking agencies have been conducting Year 2000 compliance examinations, and the
failure to implement an adequate Year 2000 program can be identified as an
unsafe and unsound banking practice. The OTS has established an examination
procedure which contains three categories of ratings: "Satisfactory", "Needs
Improvement", and "Unsatisfactory". Institutions that receive a Year 2000 rating
of Unsatisfactory may be subject to formal enforcement action, supervisory
agreements, cease and desist orders, civil money penalties, or the appointment
of a conservator. In addition, federal banking agencies will be taking into
account Year 2000 compliance programs when reviewing applications and may deny
an application based on Year 2000 related issues.
The Association, similar to most financial services providers, is significantly
subject to the potential impact of the Year 2000 issue due to the nature of
financial information. Potential impacts to the Association may arise from
software, computer hardware, and other equipment both within the Association's
direct control and outside of the Association's ownership, yet with which the
Association electronically or operationally interfaces. Financial institution
regulators have intensively focused upon Year 2000 exposures, issuing guidance
concerning the responsibilities of senior management and directors. Year 2000
testing and certification is being addressed as a key safety and soundness issue
in conjunction with regulatory exams.
In order to address the Year 2000 issue, the Association has developed and
implemented a five phase plan divided into the following major components:
1. Awareness
2. Assessment
3. Renovation
4. Validation
5. Implementation
The Association has completed the first two phases of the plan and is currently
working internally and with external vendors on the final three phases. However,
on October 20, 1998, the Association announced the execution of a definitive
agreement to be acquired by Southwest Bancorporation of Texas, Inc. While the
Association has previously identified critical Information Technology (IT)
systems and has requested that third party vendors represent their products and
services to be Year 2000 compliant, resources are being redirected to determine
what IT systems and third party vendors will remain after the merger of the two
companies in early 1999. Once these IT systems are identified, renovation,
testing and implementation will commence on these systems. All systems are
targeted to have validation substantially completed by December 31, 1998 but may
extend to March 31, 1999.
The Board of Directors has established a Year 2000 subcommittee to monitor
progress with achieving and certifying Year 2000 compliance. In addition, the
Association has utilized an external consulting firm to assist with its Year
2000 program.
Following the completion of the assessment phase, the Association determined
that a significant portion of its computer hardware and software required
updating or replacement to achieve Year 2000 compliance. For the six months
ended September 30, 1998, the Association had incurred costs of approximately
$44,000 and has
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
budgeted $140,000 for the fiscal year ending March 31, 1999 which is based on
currently available information.
As indicated previously, the Holding Corp. contemplates merging into Southwest
Bancorporation of Texas, Inc. which may eliminate the expense of upgrading
systems which may not be in place after the merger. At this time management
cannot accurately determine if future costs for Year 2000 compliance are within
budget estimates, but it believes differences, if any, will not materially
impact the financial statements.
The Association has no internally generated programmed software coding to
correct, as substantially all of the software utilized by the Association is
purchased or licensed from external providers. The Association has determined
that it has little to no exposure to contingencies related to the Year 2000
issue for products it has sold.
The Association has initiated formal communications with all of its significant
suppliers and customers to determine the extent to which the Association is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Association is requesting that third party vendors represent their
products and services to be Year 2000 compliant and that they have a program to
test for that compliance. However, the response of certain third parties is
beyond the control of the Association. To the extent that the Association does
not receive adequate responses by December 31, 1998, it is prepared to develop
contingency plans, with completion of these plans scheduled for no later than
March 31, 1999. At this time, the Association cannot estimate the additional
cost, if any, that might develop from such contingency plans. The Association
is prepared to curtail credit availability to customers identified as having
material exposure to the Year 2000 issue. However, the Association's ability to
exercise such curtailment may be limited by various factors, including existing
legal agreements and potential concerns regarding lender liability.
Despite the Association's activities in regards to the Year 2000 issue, there
can be no assurance that partial or total systems interruptions or the costs
necessary to update hardware and software would not have a material adverse
effect upon the Association's business, financial condition, results of
operations, and business prospects.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-QSB, the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Holding Corp.'s market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Holding Corp.'s market area and competition, that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. The Holding Corp. wishes to caution readers not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made. The Holding Corp. wishes to advise readers that the factors listed above
could affect the Holding Corp.'s financial performance and could cause the
Holding Corp.'s actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Holding Corp. does not undertake - and specifically disclaims any
obligation - to publicly release the results of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The Holding Corp. had net income of $532,000, or $0.29 earnings per common share
and $0.23 earnings per common share - assuming dilution, for the three months
ended September 30, 1998 compared to net income of $503,000, or $0.30 earnings
per common share and $0.24 earnings per common share - assuming dilution, for
the same period in fiscal 1998. Returns on average assets were 0.66% and 0.64%
and returns on average equity were 9.21% and 10.35% for the three months ended
September 30, 1998 and 1997, respectively. Average equity to average assets was
7.12% and 6.14% and the dividend payout ratio was 34.48% and 16.67% for the
three months ended September 30, 1998 and 1997, respectively.
Net interest income, before provision for loan losses, increased $175,000 to
$2.6 million during the three months ended September 30, 1998. Interest income
increased $142,000 to $5.7 million and primarily reflected an $11.3 million
increase in the average balance of interest-earning assets, partially offset by
a decrease of .10% in the average yield on interest-earning assets to 7.50% for
the three months ended September 30, 1998 compared to 7.60% for the three months
ended September 30, 1997. An increase of $30.2 million in the average balance of
loans receivable and $1.7 million in investments, partially offset by a decrease
of $20.6 million in mortgage-backed securities, contributed to the increase in
interest-earning assets. The increase in the average loan balance reflected an
increase of approximately $24.1 million from the Mitchell loan portfolio, of
which $8.4 million were construction loans. The decrease in average yield
reflected a decrease in yields on loans receivable of .45% to 8.53% for the
three months ended September 30, 1998 compared to 8.98% for the three months
ended September 30, 1997. This decrease was partially offset by the reinvestment
of principal repayments on mortgage-backed securities with an average rate of
6.52% into portfolio loans with an average rate of 8.53%.
Interest expense decreased $33,000 to $3.1 million during the three months ended
September 30, 1998 and primarily reflected a decrease of $1.5 million in the
average balance of borrowings. The average balance of the 8% convertible
subordinated debentures decreased $1.8 million for the three months ended
September 30, 1998 when compared to the same period in fiscal 1998. This
decrease was partially offset by an increase in the average Federal Home Loan
Bank advance of $446,000 between the two periods. Average deposits increased
$5.3 million primarily reflecting an increase in escrow deposits associated with
the increase in loans receivable and loans serviced for others. The increase in
deposit balances was offset by a decrease in the average rate paid on deposits
of .10% to 4.56% for the quarter ended September 30, 1998 from 4.66% for the
same period in fiscal 1998.
Management determines the amount of the allowance for loan losses which covers
specific loans as well as estimated losses inherent in the loan portfolio. The
level of the allowance is based on such factors as the amount of non-performing
assets, historical loss experience, regulatory policies, general economic
conditions, the estimated fair value of the underlying collateral and other
factors related to the collectibility of the loans. The provision for loan
losses for the three months ended September 30, 1998 was $45,000 compared to
$15,000 for the same period in the last fiscal year and was provided for
estimated losses believed by management to be inherent in the loan portfolio.
See "Asset Quality" for a further discussion of the allowance for loan losses
and the Association's non-performing assets at September 30, 1998.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
Noninterest income increased $570,000 to $2.1 million for the three months ended
September 30, 1998 compared to $1.5 million for the same period in fiscal 1998.
The increase reflects an increase in loan fees and charges of $255,000 to $1.0
million which primarily reflected increased commercial, multifamily and
construction lending. The Holding Corp. originated $66 million of commercial and
multifamily loans and $34 million of construction loans during the three months
ended September 30, 1998 compared to $18 million of million of commercial and
multifamily loans and $28 million of construction loans during the same period
in fiscal 1998. Gain on sales of loans increased $352,000 to $508,000 for the
three months ended September 30, 1998 compared to $156,000 for the same period
in fiscal 1998. The principal balance of loans sold during the three months
ended September 30, 1998 was $28.5 million compared to $17.3 million for the
same period in fiscal 1998. These increases were partially offset by a decrease
in loan servicing income, net of amortization, of $76,000 to $199,000 for the
three months ended September 30, 1998 compared to $275,000 for the same period
in fiscal 1998. This decrease is primarily caused by an increase in the
amortization of mortgage servicing rights of $51,000 to $473,000 compared to
$422,000 for the same period in fiscal 1998. This increase in amortization is
the result of increased run off in the loan servicing portfolio due to
refinancings caused by the current favorable interest rate environment. The
Holding Corp. originated $25.2 million of loans held for sale and mortgage
servicing rights during the three months ended September 30, 1998 compared to
$9.6 million for the same period in fiscal 1998.
Noninterest expense increased $559,000 to $3.6 million for the three months
ended September 30, 1998 compared to $3.1 million for the same period in fiscal
1998. This increase reflects an increase in compensation and benefits of
$379,000 resulting from normal salary adjustments within the Association,
increased overtime, and commissions on loan originations due to the higher loan
volume in the current year. Office occupancy and equipment increased $62,000 to
$498,000 for the three months ended September 30, 1998 compared to $436,000 for
the same period in fiscal 1998. This increase is primarily due to an increase in
depreciation of $26,000 related to fiscal 1998 and 1999 equipment additions.
Data processing fees increased $33,000 to $164,000 for the three months ended
September 30, 1998 compared to $131,000 for the same period in fiscal 1998. The
increase was primarily due to data processing fees associated with computer
upgrades and increased service bureau costs. Also, the Holding Corp. incurred
$11,000 of costs related to the Year 2000 issue during the three months ended
September 30, 1998. Other expense increased $115,000 to $782,000 for the three
months ended September 30, 1998 compared to $667,000 for the same period in
fiscal 1998. The increase was primarily due to an increase of $69,000 in loan
origination and service charges, such as appraisals, flood data services, and
credit reports, associated with the higher loan volume in the current year.
Income tax expense was $331,000 for the three months ended September 30, 1998
compared to $269,000 for the same period in fiscal 1998. The increase primarily
reflected the increase in income before income tax expense.
Minority interest in net income of consolidated subsidiary increased $65,000 to
$165,000 for the three months ended September 30, 1998 compared to $100,000 for
the same period in fiscal 1998. The increase reflected an increase in net income
of Mitchell of approximately $132,000 to $337,000 for the three months ended
September 30, 1998 from $205,000 for the same period in fiscal 1998.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
COMPARISON OF SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The Holding Corp. had net income of $1.1 million or $0.62 earnings per share and
$0.48 earnings per common share - assuming dilution, for the six months ended
September 30, 1998 compared to a net income of $1.0 million or $0.62 earnings
per common share and $0.48 earnings per common share - assuming dilution, for
the same period in fiscal 1998. Returns on average assets were 0.68% and 0.66%
and returns on average equity were 9.79% and 10.73% for the six months ended
September 30, 1998 and 1997, respectively. Average equity to average assets was
6.99% and 6.18% and the dividend payout ratio was 32.26% and 13.71% for the six
months ended September 30, 1998 and 1997, respectively.
Net interest income, before provision for loan losses, increased $450,000 to
$5.2 million during the six months ended September 30, 1998. Interest income
increased $450,000 to $11.3 million and primarily reflected a $15.9 million
increase in the average balance of interest-earning assets, partially offset by
a decrease of .10% in the average yield on interest-earning assets to 7.58% for
the six months ended September 30, 1998 compared to 7.68% for the six months
ended September 30, 1997. An increase of $27.8 million in the average balance of
loans receivable and $6.8 million in investments, partially offset by a decrease
of $18.7 million in mortgage-backed securities, contributed to the increase in
interest-earning assets. The increase in the average loan balance reflected
approximately $23.8 million from the Mitchell loan portfolio, of which $8.9
million were construction loans. The decrease in average yield reflected a
decrease in the average yield on loans receivable of .38% to 8.57% for the six
months ended September 30, 1998 compared to 8.95% for the six months ended
September 30, 1997. This decrease was partially offset by the reinvestment of
principal repayments on mortgage-backed securities with an average rate of 6.53%
into portfolio loans with an average rate of 8.57%.
Interest expense was unchanged at $6.1 million for the six months ended
September 30, 1998 and 1997. Interest paid on deposits increased $97,000 to $5.6
million for the six months ended September 30, 1998 compared to $5.5 million for
the same period in fiscal 1998. Average deposits increased $7.4 million
reflecting an increase in average time deposits of $3.4 million and increased
escrow deposits associated with the increase in loans receivable and loans
serviced for others. Partially offsetting this increase was a decrease in the
average rate paid on deposits to 4.55% for the six months ended September 30,
1998 compared to 4.61% for the same period in fiscal 1998. Interest paid on
borrowings decreased $97,000 to $564,000 for the six months ended September 30,
1998 compared to $661,000 for the same period in fiscal 1998. Average borrowings
decreased $1.7 million primarily reflecting a decrease in the average
convertible subordinated debenture balance of $1.5 million due to increased
debenture conversions in the current year. For the six months ended
September 30, 1998, the average rate paid on borrowings was 7.60% compared to
8.01% for the same period in fiscal 1998.
Management determines the amount of the allowance for loan losses which covers
specific loans as well as estimated losses inherent in the loan portfolio. The
level of the allowance is based on such factors as the amount of non-performing
assets, historical loss experience, regulatory policies, general economic
conditions, the estimated fair value of the underlying collateral and other
factors related to the collectibility of the loans. The provision for loan
losses for the six months ended September 30, 1998 was $90,000 compared to
$78,000 for the same period in the last fiscal year and was provided for
estimated losses believed by management to be inherent in the loan portfolio.
Included in the provision for loan losses for the six months ended September 30,
1997 were $45,000 in specific reserves. See "Asset Quality" for a further
discussion of the allowance for loan losses and the Association's non-performing
assets at September 30, 1998.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
Noninterest income increased $1.0 million to $4.1 million for the six months
ended September 30, 1998 compared to $3.1 million for the same period in fiscal
1998. The increase reflects an increase in loan fees and charges of $603,000 to
$2.1 million which primarily reflected increased commercial, multifamily and
construction lending. The Holding Corp. originated $121 million of commercial
and multifamily loans and $68 million of construction loans during the six
months ended September 30, 1998 compared to $53 million of commercial and
multifamily loans and $55 million of construction loans during the same period
in fiscal 1998. Gain on sales of loans increased $552,000 to $805,000 for the
six months ended September 30, 1998 compared to $253,000 for the same period in
fiscal 1998. The principal balance of loans sold during the six months ended
September 30, 1998 was $63.1 million compared to $30.6 million for the same
period in fiscal 1998. These increases were partially offset by a decrease in
loan servicing income, net of amortization, of $168,000 to $405,000 for the six
months ended September 30, 1998 compared to $573,000 for the same period in
fiscal 1998. This decrease was primarily caused by an increase in the
amortization of mortgage servicing rights of $130,000 to $959,000 compared to
$829,000 for the same period in fiscal 1998. This increase in amortization is
the result of increased run off in the loan servicing portfolio due to
refinancing caused by the current favorable interest rate environment. The
Holding Corp. originated $61.0 million of loans held for sale and mortgage
servicing rights during the six months ended September 30, 1998 compared to
$35.2 million for the same period in fiscal 1998.
Noninterest expense increased $1.2 million to $7.2 million for the six months
ended September 30, 1998 compared to $6.0 million for the same period in fiscal
1998. This increase reflects an increase in compensation and benefits of
$783,000 resulting from normal salary adjustments within the Association,
increased overtime, and commissions on loan originations due to the higher loan
volume in the current year. Office occupancy and equipment increased $103,000 to
$986,000 for the six months ended September 30, 1998 compared to $883,000 for
the same period in fiscal 1998. This increase is primarily due to an increase in
depreciation of $48,000 related to fiscal 1998 and 1999 equipment additions and
an increase in telephone charges of $18,000 primarily due to the installation of
a new phone system. Data processing fees increased $80,000 to $337,000 for the
six months ended September 30, 1998 compared to $257,000 for the same period in
fiscal 1998. The increase was primarily due to data processing fees associated
with computer upgrades and increased service bureau costs. Also, the Holding
Corp. incurred $20,000 of costs related to the Year 2000 issue during the six
months ended September 30, 1998. Other expense increased $400,000 to $1.6
million for the six months ended September 30, 1998 compared to $1.2 million for
the same period in fiscal 1998. The increase was primarily due to an increase of
$198,000 in loan origination and service charges, such as appraisals, flood data
services, and credit reports, associated with the higher loan volume in the
current year. Accounting and audit fees increased $31,000 when compared to the
prior year due to increased audit fees related to Mitchell and increased quality
review costs related to the increased loan volume in the current year. Legal
expenses increased $30,000 when compared to the prior year primarily as a result
of costs incurred that related to the unsolicited acquisition offer received in
March 1998. Also, the Holding Corp. recognized certain other acquisition related
expenses which had been previously deferred.
Income tax provision was $667,000 for the six months ended September 30, 1998
compared to $547,000 for the same period in fiscal 1998. The increase primarily
reflected the increase in income before income tax expense.
Minority interest in net income of consolidated subsidiary increased $108,000 to
$288,000 for the six months ended September 30,1998 compared to $180,000 for the
same period in fiscal 1998. The increase reflected an increase in net income of
Mitchell of approximately $222,000 to $589,000 for the six months ended
September 30, 1998 from $367,000 for the same period in fiscal 1998.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
AVERAGE BALANCES, INTEREST YIELDS AND RATES
The following table presents for the periods indicated the total dollar amount
of interest income from average interest-earnings assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made and
all average balances are monthly average balances. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
--------------------------------- ----------------------------------
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
--------------------------------- ----------------------------------
(DOLLARS IN THOUSANDS)
Interest-Earning Assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable (1) $ 180,119 $ 3,839 8.53% $ 149,904 $ 3,367 8.98%
Mortgage-backed securities 71,354 1,163 6.52% 92,024 1,524 6.62%
Investment securities and
other interest-earning assets 51,605 682 5.29% 49,889 651 5.22%
----------- -------- ----- ----------- -------- -----
Total interest-earning assets 303,078 5,684 7.50% 291,817 5,542 7.60%
-------- ----- -------- -----
Non interest-earning assets 21,234 24,939
----------- -----------
Total assets (1) $ 324,312 $ 316,756
=========== ===========
Interest-Bearing Liabilities:
NOW deposits $ 26,771 $ 121 1.81% $ 24,499 $ 142 2.32%
Savings deposits and MMA 47,042 338 2.87% 45,222 325 2.87%
Certificates of deposit 170,604 2,328 5.46% 169,407 2,320 5.48%
Borrowings 14,682 291 7.93% 16,137 324 8.03%
----------- -------- ----- ----------- -------- -----
Total interest-bearing
liabilities 259,099 3,078 4.75% 255,265 3,111 4.87%
-------- ----- -------- -----
Non interest-bearing liabilities:
Non interest-bearing demand
deposits 27,663 27,922
Other liabilities 14,455 14,125
----------- -----------
Total liabilities 301,217 297,312
Stockholders' equity 23,095 19,444
----------- -----------
Total liabilities and stockholders'
equity $ 324,312 $ 316,756
=========== ===========
Net interest income $ 2,606 $ 2,431
======== ========
Net interest rate spread 2.75% 2.73%
===== =====
Net interest-earning assets $ 43,979 $ 36,552
=========== ===========
Net yield on average
interest-earning assets 3.44% 3.33%
===== =====
Average interest-earning
assets to average interest-
bearing liabilities 116.97% 114.32%
======== ========
(1) Calculated net of deferred loan fees, loans in process and allowance for losses
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
--------------------------------- ----------------------------------
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
--------------------------------- ----------------------------------
(DOLLARS IN THOUSANDS)
Interest-Earning Assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable (1) $ 178,276 $ 7,639 8.57% $ 150,493 $ 6,731 8.95%
Mortgage-backed securities 74,946 2,448 6.53% 93,689 3,099 6.62%
Investment securities and
other interest-earning assets 45,931 1,245 5.42% 39,108 1,052 5.38%
----------- -------- ----- ----------- -------- ------
Total interest-earning
assets 299,153 11,332 7.58% 283,290 10,882 7.68%
-------- ----- -------- ------
Non interest-earning assets 23,553 24,915
----------- -----------
Total assets (1) $ 322,706 $ 308,205
=========== ===========
Interest-Bearing Liabilities:
NOW deposits $ 26,657 $ 241 1.81% $ 23,997 $ 277 2.31%
Savings deposits and MMA 46,953 670 2.85% 45,611 649 2.85%
Certificates of deposit 170,423 4,641 5.45% 167,064 4,529 5.42%
Borrowings 14,835 564 7.60% 16,510 661 8.01%
----------- -------- ----- ----------- -------- ------
Total interest-bearing
liabilities 258,868 6,116 4.73% 253,182 6,116 4.83%
-------- ----- -------- ------
Non interest-bearing liabilities:
Non interest-bearing demand
deposits 26,887 23,052
Other liabilities 14,405 12,916
----------- -----------
Total liabilities 300,160 289,150
Stockholders' equity 22,546 19,055
----------- -----------
Total liabilities and stockholder's
equity $ 322,706 $ 308,205
=========== ===========
Net interest income $ 5,216 $ 4,766
======== ========
Net interest rate spread 2.85% 2.85%
===== ======
Net interest-earning assets $ 40,285 $ 30,108
=========== ===========
Net yield on average interest-
earning assets 3.49% 3.36%
===== ======
Average interest-earning
assets to average interest-
bearing liabilities 115.56% 111.89%
======== ========
(1) calculated net of deferred loan fees, loans in process and allowance for losses
</TABLE>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
RATE/VOLUME ANALYSIS
The following schedule presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities and distinguishes between the change related to
changes in outstanding balances and the 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 volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of the table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------------------------- -----------------------------------------
1998 V 1997 1998 V 1997
----------------------------------------- -----------------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
----------------------------------------- -----------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
----------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-Earnings Assets:
Loans receivable $ 628 $ (156) $ 472 $ 1,179 $ (271) $ 908
Mortgage-backed securities (338) (23) (361) (610) (41) (651)
Investment securities and other
interest-earning assets 23 8 31 185 8 193
------ ------ ------ ------- ------ ------
Total interest-earning assets $ 313 $ (171) $ 142 $ 754 $ (304) $ 450
====== ====== ====== ======= ====== ======
Interest-Bearing Liabilities:
NOW deposits $ 15 $ (36) $ (21) $ 38 $ (74) $ (36)
Savings deposits and MMA 14 (1) 13 19 2 21
Certificates of deposit 17 (9) 8 88 24 112
Borrowings (29) (4) (33) (64) (33) (97)
------ ------ ------ ------- ------ ------
Total interest-bearing liabilities $ 17 $ (50) $ (33) $ 81 $ (81) $ 0
====== ====== ====== ======= ====== ======
Net interest income $ 175 $ 450
====== ======
</TABLE>
ASSET/LIABILITY MANAGEMENT
The Holding Corp. attempts to maximize net interest income by achieving a
positive interest rate spread that can be sustained during fluctuations in
prevailing interest rates. The Holding Corp.'s policies are designed to reduce
the impact of changes in interest rates on its net interest income by
maintaining a favorable match between the maturities or repricing dates of its
interest-earning assets and interest-bearing liabilities (interest sensitivity
gap). The Holding Corp. has implemented these policies by generally selling
long-term fixed rate mortgage loan originations, retaining its adjustable rate
mortgage and construction loans, originating and retaining short-term consumer
loans and purchasing adjustable rate or short-term maturity loans. Through
Mitchell, fixed rate commercial real estate loans are originated and sold in the
secondary market. Servicing is retained on most of these loans. As a result of
these policies, the Holding Corp.'s cumulative one year interest sensitivity gap
at June 30, 1998 (the most recent available) was a positive 20.40%. Changes in
interest rates, prepayment rates and early withdrawal levels will affect the
interest sensitivity gap of the Holding Corp. Also
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
affecting the one year interest sensitivity gap will be the remittance during
the quarter ending December 31, 1998, of approximately $25 million for real
estate taxes to various taxing authorities. These funds are currently held in
escrow accounts in the Holding Corp. and are invested in short-term investments.
ASSET QUALITY
The allowance for loan losses is established through a provision for loan losses
based on management's quarterly asset classification review and evaluation of
the risk inherent in its loan portfolio and changes in the nature and volume of
its loan activity.
As a result of this review process, management recorded an additional provision
of $90,000 for loan losses during the six months ended September 30, 1998. Net
charge-offs for the six months ended September 30, 1998 totaled $17,000 and were
attributable to eight consumer loans. The Association's allowance for loan
losses increased to $1,665,000 or 0.99% of total loans at September 30, 1998,
compared to $1,592,000 or 0.99% of total loans at March 31, 1998. The
Association's allowance for loan losses as a percent of total non-performing
assets was 108% at September 30, 1998 compared to 136% at March 31, 1998. While
management believes it uses the best information available to make
determinations regarding the adequacy of the allowance, there is no assurance
that the subsequent evaluations of the loan portfolio may not require additional
provisions for loan losses.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
The following table sets forth an analysis of the Association's allowance for
loan losses at the dates indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1998 MARCH 31, 1998
------------------ --------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance at beginning of period $ 1,592 $ 1,701
Charge-offs:
One- to four-family --- 50
Multi-family --- ---
Commercial real estate --- 62
Construction, development and land --- ---
Consumer and other 17 93
----------- ----------
Total 17 205
----------- ----------
Recoveries --- ---
----------- ----------
Net charge-offs 17 205
Additions charged to operations 90 96
----------- ----------
Balance at end of period $ 1,665 $ 1,592
=========== ==========
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.01% 0.13%
=========== ==========
Allowance for loan losses to non-performing loans
at the end of the period 112.50% 148.06%
=========== ==========
Allowance for loan losses to total loans, excluding
loans held for sale, at end of period 0.99% 0.99%
=========== ==========
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
The distribution of the allowance for loan losses at the dates indicated is
summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 MARCH 31, 1998
--------------------------------------- ------------------------------------
PERCENT OF LOANS PERCENT OF LOANS
IN EACH CATEGORY IN EACH CATEGORY
AMOUNT TO TOTAL LOANS AMOUNT TO TOTAL LOANS
------------ --------------------- ------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
One- to four-family $ 368 31.12% $ 291 36.75%
Multi-family 124 2.82 153 4.25
Commercial real estate 289 3.57 434 3.44
Construction, development and
land 471 48.88 374 40.35
Consumer and other 413 13.61 340 15.21
----------- ------------- ----------- -------------
Total $ 1,665 100.00% $ 1,592 100.00%
=========== ============= =========== =============
</TABLE>
The non-performing assets to total assets ratio is one indicator of the exposure
to credit risk. Non-performing assets of the Association consist of non-accruing
loans, troubled debt restructurings, and real estate and automobiles which were
acquired as a result of foreclosure. Loans are placed on nonaccrual status after
90 days delinquency. Foreclosed assets include assets acquired in settlement of
loans. The following table sets forth the amounts and categories of
non-performing assets in the Association's loan portfolio.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 MARCH 31, 1998
------------------------ ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-accruing loans:
One- to four-family $ 851 $ 340
Construction, development and land 7 3
Consumer and other 86 186
----------- -----------
Total 944 529
----------- -----------
Troubled debt restructurings:
Commercial real estate 536 547
----------- -----------
Total 536 547
----------- -----------
Foreclosed assets:
One- to four-family --- 45
Construction, development and land 31 34
Consumer and other 36 18
----------- -----------
Total 67 97
----------- -----------
Total non-performing assets $ 1,547 $ 1,173
=========== ===========
Total non-performing assets as a
percentage of total assets 0.47% 0.37%
=========== ===========
</TABLE>
For the six months ended September 30, 1998, gross interest income which would
have been recorded had the non-accruing loans and troubled-debt restructurings
been current in accordance with their original terms amounted to $67,000. The
amount that was included in interest income on such loans was $49,000 for the
six months ended September 30, 1998.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
Total non-performing assets increased $374,000 for the six months ended
September 30, 1998. The increase in nonaccrual loans is primarily the result of
a $512,000 increase in residential loans and a $95,000 decrease in consumer
loans over 90 days delinquent. The residential loan increase consists primarily
of the addition of fourteen loans totaling $732,000 partially offset by the
removal of five loans with an aggregate principal balance of $220,000 which were
paid current. The decrease in foreclosed assets was primarily the result of the
sale of a single-family residence which totaled $45,000 partially offset by a
$19,000 increase in the balance of repossessed assets.
At September 30, 1998, foreclosed assets consisted of a 5% participation held in
36 residential lots, one wholly-owned residential lot, and four repossessed
autos. All of the foreclosed and repossessed assets are being marketed for sale.
LIQUIDITY AND CAPITAL RESOURCES
The Association's primary sources of funds are deposits, sales of mortgage
loans, principal and interest payments on loans and mortgage-backed securities,
borrowings and funds provided by operations. While scheduled loan and mortgage-
backed securities principal repayments are a relatively predictable source of
funds, deposit flows, prepayments of loan and mortgage-backed securities
principal, and sales of mortgage loans are greatly influenced by general
interest rates, economic conditions, and competition. Current Office of Thrift
Supervision ("OTS") regulations require the Association to maintain cash and
eligible investments in an amount equal to at least 4% of customer accounts and
short-term borrowings to assure its ability to meet demands for withdrawals and
repayment of short-term borrowings. As of September 30, 1998, the Association's
liquidity ratio was 20.0%, which was in excess of the minimum regulatory
requirements. The Association's liquidity ratio was 12.2% at March 31, 1998. The
increase in the liquidity ratio was primarily due to repayments on loans and
mortgage-backed securities not yet reinvested in new loans.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
During the six months ended September 30, 1998, total deposits increased
approximately $6.7 million. This increase primarily reflects an increase of
$10.4 million in escrow deposits of Mitchell. Partially offsetting the increase
in escrow deposits is some attrition in the deposit base, possibly due to the
Association's efforts to control liability costs through the rates paid on time
and other deposits. The Association's market rates are not the highest rates
available in the market area. Escrow deposits will be paid out over the next
quarter ending December 31, 1998.
Based on its experience, the Association believes that its passbook, statement
savings, NOW and non-interest-bearing checking accounts are relatively stable
sources of deposits. However, the ability of the Association to attract and
maintain certificates of deposit, and the rates paid on these deposits, has been
and will continue to be significantly affected by market conditions.
The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs offered by the Association at the dates
indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 MARCH 31, 1998
----------------------------- ---------------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
------------ ------------- ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
TRANSACTION AND SAVINGS DEPOSITS:
Passbook and Statement Savings Accounts $ 23,272 8.44% $ 23,034 8.56%
NOW Accounts 57,410 20.82 50,207 18.67
Money Market Accounts 23,201 8.42 23,423 8.71
-------------- ----------- ----------- ----------
Total Non-Certificates 103,883 37.68 96,664 35.94
-------------- ----------- ----------- ----------
CERTIFICATES:
0.00 - 2.99% 356 0.13 448 0.16
3.00 - 4.99% 28,805 10.45 21,805 8.11
5.00 - 6.99% 135,682 49.21 143,171 53.22
7.00 - 8.99% 6,966 2.53 6,900 2.57
9.00 - 10.99% 3 --- 3 ---
-------------- ----------- ----------- ----------
Total Certificates 171,812 62.32 172,327 64.06
-------------- ----------- ----------- ----------
Total Deposits $ 275,695 100.00% $ 268,991 100.00%
============== =========== =========== ==========
</TABLE>
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
The following table sets forth the savings flows at the Association during the
periods indicated. Deposit flows at savings institutions may also be
influenced by external factors such as governmental credit policies and,
particularly in recent periods, depositors' perceptions of the adequacy of
federal insurance of accounts.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, MARCH 31,
1998 1998
---------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Opening balance $268,991 $250,218
Deposits 673,835 947,116
Withdrawals 672,677 938,452
Interest credits 5,546 10,109
-------- --------
Ending balance $275,695 $268,991
======== ========
Net increase $ 6,704 $ 18,773
======== ========
Percent increase 2.49% 7.50%
======== ========
</TABLE>
The following table shows rate and maturity information for the Association's
certificates of deposit as of September 30, 1998.
<TABLE>
<CAPTION>
0.00 - 3.00 - 5.00 - 7.00 - 9.00% - PERCENT
2.99% 4.99% 6.99% 8.99% 10.99% TOTAL OF TOTAL
CERTIFICATE ACCOUNTS --------- --------- ---------- --------- --------- ---------- --------
MATURING IN QUARTER ENDING: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1998 $ 121 $ 9,489 $ 21,590 $ 13 $ --- $ 31,213 18.17%
March 31, 1999 11 9,897 13,486 --- --- 23,394 13.62
June 30, 1999 --- 3,172 18,229 8 --- 21,409 12.46
September 30, 1999 4 4,629 21,969 --- 3 26,605 15.48
December 31, 1999 50 577 19,207 72 --- 19,906 11.58
March 31, 2000 3 857 11,545 6,676 --- 19,081 11.10
June 30, 2000 3 --- 4,752 113 --- 4,868 2.83
September 30, 2000 --- 12 3,280 --- --- 3,292 1.92
December 31, 2000 6 --- 2,737 --- --- 2,743 1.60
March 31, 2001 99 171 2,250 --- --- 2,520 1.47
June 30, 2001 16 --- 564 --- --- 580 0.34
September 30, 2001 11 --- 1,029 --- --- 1,040 0.61
Thereafter 32 1 15,044 84 --- 15,161 8.82
------ --------- ---------- --------- --------- ---------- ------
Total $ 356 $ 28,805 $ 135,682 $ 6,966 $ 3 $ 171,812 100.00%
====== ========= ========== ========= ========= ========== ======
Percent of total 0.21% 16.77% 78.97% 4.05% 0.00%
====== ========= ========== ========= =========
</TABLE>
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
The following table indicates the amount of the Association's certificates of
deposit by time remaining until maturity as of September 30, 1998.
<TABLE>
<CAPTION>
Maturity
------------------------------------------------------------------------
3 Months Over 3 to Over 6 to Over
or Less 6 Months 12 Months 12 Months Total
------------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Certificates of deposit less
than $100,000 $ 25,545 $ 20,379 $ 41,550 $ 57,775 $ 145,249
Certificates of deposit
$100,000 or more 5,461 2,993 6,455 11,334 26,243
Public funds (1) 207 21 10 82 320
------------- ----------- ----------- ----------- ----------
Total Certificates of deposit $ 31,213 $ 23,393 $ 48,015 $ 69,191 $ 171,812
============= =========== =========== =========== ==========
</TABLE>
(1) Certificates of deposit from governmental and other public entities.
The Association uses its capital resources principally to meet its ongoing
commitments to fund maturing certificates of deposit and loan commitments,
maintain its liquidity and meet operating expenses. At September 30, 1998, the
Association had commitments to originate loans totaling $12 million. The
Association considers its liquidity and capital resources to be adequate to meet
its foreseeable short- and long-term needs. The Association expects to be able
to fund or refinance, on a timely basis, its material commitments and long-term
liabilities.
During the six months ended September 30, 1998, borrowings from the Federal
Home Loan Bank of Dallas increased $472,000. It is anticipated that the amount
of outstanding borrowings will fluctuate during the 1999 fiscal year depending
upon cash flows from the various sources of funds and financing to be provided
to Mitchell.
On October 27, 1998 the Holding Corp. declared a cash dividend of $0.10 per
share payable on December 8, 1998 to the shareholders of record on November 17,
1998.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
The Association is required to maintain specific amounts of regulatory capital
pursuant to regulations of the OTS. As of July 7, 1998, the Association was
notified by the OTS that based on its reported capital position, the Association
is considered to be "well capitalized" in accordance with the Prompt Corrective
Action provision of Section 38 of the Federal Deposit Insurance Act. The
table below presents the Association's capital position at September 30,
1998 relative to the existing regulatory capital requirements. Such
requirements may increase if proposed capital regulations are implemented.
Management believes the Association will meet the requirements of the proposed
capital regulations.
<TABLE>
<CAPTION>
Amount Percent of
(000's) Assets (1)
<S> <C> <C>
Tangible capital $ 24,526 7.6%
Tangible capital requirement 4,865 1.5
------------- ---------------
Excess $ 19,661 6.1%
============= ===============
Core capital $ 24,526 7.6%
Capital requirement 12,972 4.0
------------- ---------------
Excess $ 11,554 3.6%
============= ===============
Total capital (i.e., core & supplemental capital) $ 26,052 14.9%
Risk-based capital requirement 14,004 8.0
------------- ---------------
Excess $ 12,048 6.9%
============= ===============
</TABLE>
(1) Based upon adjusted assets for purposes of the tangible capital and core
capital requirements, and risk-weighted assets for purposes of the risk-based
capital requirement.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board the ("FASB") issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Statement 131 is effective for year end financial statements for
fiscal years beginning after December 15, 1998, with earlier application
encouraged. Statement 131 specifies revised guidelines for determining an
entity's operating segments and the type and level of financial information to
be disclosed.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Statement 133 is effective for fiscal
years beginning after June 15, 1999, with earlier application encouraged.
Statement 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Statement 133 requires that an entity
recognize those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for the changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
In October 1998, the FASB issued Statement No. 134, "Accounting for Mortgage-
Backed Securities Retained after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise." Statement 134 is effective for fiscal
quarters beginning after December 15, 1998, with earlier application encouraged.
Statement 134 requires that, after the securitization of mortgage loans held for
sale, any retained mortgage backed securities shall be classified in accordance
with the provisions of Statement No. 115, "Accounting for Certain Investments in
Debt and Equity Securities."
The adoption of these statements is not expected to have a material impact on
financial condition, results of operations or cash flows reported by the Holding
Corp. The Holding Corp. does not anticipate early adoption of any of these new
accounting standards.
34
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
There are no material legal proceedings to which the Holding Corp. or the
Association is a party or of which any of their property is subject. From
time-to-time, the Association is a party to various legal proceedings
incident to its business.
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
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
Fort Bend Holding Corp. filed the following Forms 8-K during the
three months ended September 30, 1998.
July 28, 1998 - The registrant issued a earnings release announcing
the declaration of a cash dividend and earnings for the first quarter
ended June 30, 1998.
35
<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 hereunto duly authorized.
FORT BEND HOLDING CORP.
Registrant
Date: November 9, 1998 /s/ Lane Ward
------------------------------------------------
Lane Ward
Vice Chairman, President and Chief Executive
Officer
/s/ David D. Rinehart
------------------------------------------------
Date: November 9, 1998 David D. Rinehart
Executive Vice President and Chief
Financial Officer
36
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORT BEND
HOLDING CORP.'S 9/30/98 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 7,399
<INT-BEARING-DEPOSITS> 47,526
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,247
<INVESTMENTS-CARRYING> 74,920
<INVESTMENTS-MARKET> 75,202
<LOANS> 177,479
<ALLOWANCE> 1,665
<TOTAL-ASSETS> 327,495
<DEPOSITS> 275,695
<SHORT-TERM> 0
<LIABILITIES-OTHER> 11,164
<LONG-TERM> 14,367
0
0
<COMMON> 20
<OTHER-SE> 25,251
<TOTAL-LIABILITIES-AND-EQUITY> 327,495
<INTEREST-LOAN> 7,639
<INTEREST-INVEST> 3,693
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 11,332
<INTEREST-DEPOSIT> 5,552
<INTEREST-EXPENSE> 6,116
<INTEREST-INCOME-NET> 5,216
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,620
<INCOME-PRETAX> 1,771
<INCOME-PRE-EXTRAORDINARY> 1,771
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,104
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.48
<YIELD-ACTUAL> 3.49
<LOANS-NON> 944
<LOANS-PAST> 0
<LOANS-TROUBLED> 536
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,592
<CHARGE-OFFS> 17
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,665
<ALLOWANCE-DOMESTIC> 142
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,523
</TABLE>
