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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to ______________
Commission file number: 0-21328
FORT BEND HOLDING CORP.
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(Name of small business issuer as specified in its charter)
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<CAPTION>
<S> <C>
Delaware 76-0391720
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(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
3400 Avenue H, Rosenberg, Texas 77471
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 342-5571
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Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
The Nasdaq National Market Common Stock, par value $.01 per share
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(Name of each exchange on (Title of Class)
which registered)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such requirements for the past 90 days. YES X . NO .
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State the issuer's revenues for its most recent fiscal year: $28,594,172
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the closing price of such stock on the
Nasdaq Stock Market as of June 12, 1998 was $44 million. (The exclusion from
such amount of the market value of the shares owned by any person shall not be
deemed an admission by the Registrant that such person is an affiliate of the
Registrant.)
As of June 12, 1998, there were issued and outstanding 1,779,411 shares of
the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-KSB - Portions of Proxy Statement for
1998 Annual Meeting of Stockholders.
Transitional Small Business Disclosure Format: YES . NO X .
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PART I
ITEM.1 DESCRIPTION OF BUSINESS
GENERAL
Fort Bend Holding Corp. (the "Company") is a Delaware corporation which was
organized in 1993 for the purpose of becoming the savings and loan holding
company of Fort Bend Federal Savings and Loan Association of Rosenberg ("Fort
Bend" or the "Association"). The Company owns all of the outstanding stock of
the Association issued on June 30, 1993 in connection with the completion of the
Association's conversion from the mutual to the stock form of organization (the
"Conversion"). The Association, which was originally organized in 1933,
amended its charter in June 1993 in connection with the Conversion to become a
federal stock savings and loan association. All references to the Company,
unless otherwise indicated, at or before June 30, 1993 refer to the Association.
Unless the context otherwise requires, all references herein to the Association
or the Company include the Company and Association on a consolidated basis. The
Company's common stock, par value $.01 per share (the "Common Stock"), is quoted
on The Nasdaq National Market under the symbol "FBHC."
The Company and the Association are subject to comprehensive regulation,
examination and supervision by the Office of Thrift Supervision, Department of
the Treasury ("OTS") and the Federal Deposit Insurance Corporation ("FDIC").
The Association is a member of the Federal Home Loan Bank ("FHLB") System and
its deposits are insured by the Savings Association Insurance Fund ("SAIF") to
the maximum extent permitted by law.
The Company serves its primary market area, Fort Bend County, Texas and
portions of Harris, Montgomery, Waller, and Wharton Counties, Texas, through the
Association's five retail banking offices and the operations of Mitchell
Mortgage Company, L.L.C., a mortgage banking company in which the Association
acquired a majority interest in January 1997. At March 31, 1998, the Company
had total assets of $316.6 million, deposits of $269.0 million and stockholders'
equity of $21.4 million.
The Company has been, and intends to continue to be, a community-oriented
financial institution offering a variety of financial services to meet the needs
of the communities it serves. The Company attracts deposits from the general
public and uses such deposits, together with borrowings and other funds, to
originate single family residential loans, construction loans, and commercial
real estate loans. The Company also originates commercial loans and consumer
loans, including loans for the purchase of automobiles and home improvement
loans. The Company also invests in mortgage-backed securities which are insured
by or guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC"), the
Government National Mortgage Association ("GNMA") or the Federal National
Mortgage Association ("FNMA") or have an investment grade, and securities issued
by the U.S. government or agencies thereof.
The Company's revenues are derived principally from interest on loans and
securities, loan fees and charges, loan servicing income, income from deposit
account service charges and gains on the sales of loans. The Company's
operations may be materially affected by general economic
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conditions, competition in the Company's market area, the monetary and fiscal
policies of the federal government and the policies of the various regulatory
authorities, including the OTS and the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"). The Company's results of operations are
largely dependent upon its net interest income, which is the difference between
the interest it receives on its loan and its investment securities portfolios
and the interest it pays on its deposit accounts and borrowings.
The executive offices of the Company and the Association are located at
3400 Avenue H, Rosenberg, Texas 77471. The telephone number at that address is
(281) 342-5571.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-KSB or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project," "believe" or similar expressions are intended to identify "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. The Company wishes to caution readers not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made, and to advise readers that various factors, including regional and
national economic conditions, changes in levels of market interest rates, credit
risks of lending activities, and competitive and regulatory factors, could
affect the Company's financial performance and could cause the Company's actual
results for future periods to differ materially from those anticipated or
projected.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
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 Company'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.
The Company outsources its primary data processing functions. To date, the
Company has solicited confirmations from its primary vendors that plans have
been developed by them to address and correct the issues associated with the
Year 2000. The Company has established a management committee to identify all
of its functions potentially affected by the Year 2000 issue and to ensure that
re-programming and testing of the affected system will be substantially
completed by December 31, 1998, thus allowing adequate time for implementation.
Management
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believes that, with modifications to existing hardware and software and
conversions to new software, the Year 2000 issue will not pose a significant
operational problem for the Company. However, because most computer systems are,
by their very nature, interdependent, it is possible that non-compliant third
party computers could "reinfect" the Company's computer systems. The Company
could be adversely affected by the Year 2000 issue if it or unrelated parties
fail to successfully address this issue. It is currently estimated that the
Company will spend approximately $100,000 on the Year 2000 issue.
Subsequent to year end, the OTS reviewed the Association's plan to address
the Year 2000 issue and found the Association's progress to date to be
satisfactory.
ACQUISITIONS
MITCHELL MORTGAGE. On January 2, 1997, the Association completed its
purchase of a 51% interest in the assets of Mitchell Mortgage Company ("Old
Mitchell"), a full-service mortgage banking affiliate of The Woodlands
Corporation. The transaction was effected through the transfer of certain
assets of Old Mitchell to a newly incorporated limited liability company,
Mitchell Mortgage Company, L.L.C. ("Mitchell"), in which the Association
acquired a 51% interest in exchange for approximately $2.6 million in cash. Old
Mitchell received the remaining 49% interest in Mitchell in exchange for certain
mortgage loans and its mortgage servicing portfolio and the liabilities of Old
Mitchell.
In connection with the transaction, Old Mitchell (and The Woodlands Land
Development Company, L.P., as successor) was granted an option to convert, upon
the occurrence of certain events, its ownership interest in Mitchell into shares
of the common stock of the Company, at a rate of 82.304 shares for each $1,000
of ownership interest in Mitchell, in an amount not to exceed 9.9% of the
Company's outstanding common stock after conversion. Any amount that would
otherwise be required to be issued exceeding 9.9% of the Company's outstanding
common stock will be paid in cash. The option becomes exercisable on January 2,
1999 and expires on January 2, 2002.
Mitchell, as did Old Mitchell, engages in the mortgage banking business,
including the origination and servicing of single family purchase loans, single
family construction loans and commercial and multi-family real estate loans.
Old Mitchell was formed in 1974 and had a mortgage banking relationship with
the Company for seven years prior to the purchase. At March 31, 1998,
Mitchell's loan servicing portfolio was approximately $625.5 million, of which
$37.6 million was being serviced for the Association.
FIRSTBANC SAVINGS. On August 16, 1996, the Company completed its
acquisition of FirstBanc Savings Association of Texas ("FirstBanc"), a Texas-
chartered savings and loan association with one full service office, located in
Missouri City, Texas. Upon consummation of the transaction, FirstBanc was
merged with and into the Association, with the Association as the surviving
entity. As of August 16, 1996, FirstBanc reported unaudited total assets and
deposits of approximately $30.0 million and $26.8 million, respectively.
LENDING ACTIVITIES
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GENERAL. Since the mid 1980s, in order to reduce its exposure to changes
in interest rates, the Company 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 Company's portfolio with assets which
more frequently reprice or which have shorter maturities. In response to strong
customer demand, however, the Company continues to originate conventional fixed-
rate mortgages generally for sale in the secondary market.
The Company'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 March 31, 1998, the
Company's net loan portfolio totaled $173.0 million.
Loan applications are initially considered at various levels of authority,
depending on the type, amount and loan-to-value ratio of the loan. Most single-
family residential mortgage loans underwritten to FHLMC or FNMA guidelines are
approved by the Company's chief loan underwriter, then reviewed by the loan and
appraisal review committee. All other portfolio mortgage real estate loan
commitments generally must be approved by a majority vote of the members of the
Company's loan and appraisal review committee. Other loans up to $600,000 with
confirmed take out commitments may be approved by an underwriter of the Company.
The members of the Company's loan and appraisal review committee include
Chairman of the Board Robert W. Lindsey, Vice Chairman of the Board and
President Lane Ward, Director Wayne O. Poldrack, Executive Vice President David
D. Rinehart, Senior Vice President Larry J. Dobrava, and Vice President Duane
Boenig. The members of the Mitchell loan committee and appraisal review
committee include Chairman of the Board Lane Ward, Director William A. Little
and President Dale Andreas. Generally, unsecured consumer loans and consumer
loans secured by assets other than real estate in amounts less than $5,000 and
$30,000, respectively, are approved by the reviewing loan officer. Loans in
excess of these amounts generally require the additional approval of either one
or two members of the Company's loan and appraisal review committee.
All of the Company'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 Company's written appraisal policy) by independent
appraisers (generally with respect to loans in excess of $250,000) or by the
Company'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 Company's
staff appraiser. The Company 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 Company may also require
flood insurance to protect the property securing its interest.
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The aggregate amount of loans that the Company 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. See "Regulation - Federal Regulation of Savings Associations." At
March 31, 1998, the maximum amount which the Company could lend to any one
borrower and the borrower's related entities was approximately $3.6 million. At
March 31, 1998, the principal balance of the largest amount outstanding to any
one borrower, or group of related borrowers, was approximately $3.0 million.
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LOAN PORTFOLIO COMPOSITION. The following table shows the composition of
the Company's loan portfolio (including loans held for sale) in dollar amounts
and in percentages (before deductions for loans in process, deferred fees and
discounts and allowances for losses) as of the dates indicated.
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March 31,
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1998 1997 1996 1995 1994
-------------------- ------------------- ------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------- --------- --------- --------- --------- --------- ---------- --------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
- ------------------
One- to four-family $ 77,937 36.75% $ 77,736 47.72% $59,637 59.93% $49,157 58.87% $47,970 59.32%
Multi-family 9,024 4.25 3,241 1.99 4,565 4.59 4,522 5.42 6,889 8.52
Commercial 7,293 3.44 7,411 4.55 7,999 8.04 7,757 9.29 9,197 11.37
Construction, development
and land 85,592 40.35 48,888 30.01 8,708 8.75 7,832 9.38 4,105 5.08
-------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Total real estate loans 179,846 84.79 137,276 84.27 80,909 81.31 69,268 82.96 68,161 84.29
-------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Other Loans:
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Consumer and Other Loans:
Deposit account 4,141 1.95 3,191 1.96 2,718 2.73 2,571 3.08 2,838 3.51
Automobile 12,288 5.79 10,469 6.42 10,116 10.17 7,726 9.25 6,646 8.22
Home improvement 5,225 2.46 5,304 3.26 4,240 4.26 3,253 3.90 2,813 3.48
Other - secured 9,070 4.28 5,394 3.31 761 0.77 347 0.41 239 .30
Other - unsecured 1,549 0.73 1,275 0.78 757 0.76 332 0.40 172 .20
-------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Total consumer and other
loans 32,273 15.21 25,633 15.73 18,592 18.69 14,229 17.04 12,708 15.71
-------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Total gross loans 212,119 100.00% 162,909 100.00% 99,501 100.00% 83,497 100.00% 80,869 100.00%
====== ====== ====== ====== ======
Less:
- -----
Loans in process 36,671 19,381 3,437 4,116 1,629
Deferred fees and discounts 874 939 930 827 451
Allowance for losses 1,592 1,701 1,350 1,650 1,712
-------- -------- ------- ------- -------
Total loans receivable, net $172,982 $140,888 $93,784 $76,904 $77,077
======== ======== ======= ======= =======
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The following table shows the composition of the Company's loan portfolio
(including loans held for sale) by fixed-and adjustable-rate categories at the
dates indicated.
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March 31,
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1998 1997 1996
-------------------- --------------------- -------------------
Amount Percent Amount Percent Amount Percent
-------- ----------- --------- ----------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
- -----------------
Real estate:
One- to four-family $ 29,753 14.03% $ 23,347 14.33% $21,853 21.96%
Multi-family 8,470 3.99 2,671 1.64 4,464 4.49
Commercial 4,209 1.99 4,963 3.05 5,652 5.68
Construction, development and land 13,606 6.41 5,879 3.61 1,341 1.35
-------- ------ -------- ------ ------- ------
Total real estate loans 56,038 26.42 36,860 22.63 33,310 33.48
Consumer and other 31,948 15.06 25,250 15.50 18,523 18.62
-------- ------ -------- ------ ------- ------
Total fixed-rate loans 87,986 41.48 62,110 38.13 51,833 52.10
-------- ------ -------- ------ ------- ------
Adjustable-Rate Loans:
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Real estate:
One- to four-family 48,184 22.72 54,389 33.39 37,784 37.97
Multi-family 554 0.26 570 0.35 101 0.10
Commercial 3,084 1.45 2,448 1.50 2,347 2.36
Construction, development and land 71,986 33.94 43,009 26.40 7,367 7.40
-------- ------ -------- ------ ------- ------
Total real estate loans 123,808 58.37 100,416 61.64 47,599 47.83
Consumer and other 325 0.15 383 .23 69 0.07
-------- ------ -------- ------ ------- ------
Total adjustable-rate loans 124,133 58.52 100,799 61.87 47,668 47.90
-------- ------ -------- ------ ------- ------
Total gross loans 212,119 100.00% 162,909 100.00% 99,501 100.00%
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Less:
- -----
Loans in process 36,671 19,381 3,437
Deferred fees and discounts 874 939 930
Allowance for loan losses 1,592 1,701 1,350
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Total loans receivable, net $172,982 $140,888 $93,784
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</TABLE>
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The following schedule illustrates the maturities of the Company's loan
portfolio at March 31, 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 prepayments or
enforcement of due-on-sale clauses.
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<CAPTION>
Real Estate
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Other Consumer
One- to Four-Family Mortgage Loans Construction and Other Total
-------------------- ---------------------- ------------------- -------------------- --------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
-------- ----------- ---------- ----------- ---------- -------- --------- ---------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Maturity:
- ---------
Zero to twelve months $ 403 8.89% $ 2,964 9.42% $71,750 9.41% $ 5,398 8.98% $ 80,515 9.38%
More than one year
through three years 720 8.76 6,091 8.87 --- --- 8,134 10.04 14,945 9.50
More than three years
through five years 3,641 8.43 4,080 8.56 --- --- 10,121 9.06 17,842 8.82
More than five years
through ten years 9,676 8.54 14,632 8.49 --- --- 3,307 8.29 27,615 8.49
More than ten years
through twenty years 22,137 7.81 7,370 8.78 --- --- 88 10.44 29,595 8.06
More than twenty years 41,360 7.51 247 9.00 --- --- --- 41,607 7.52
------- ------- ------- ---- ------- --------
Total $77,937 7.79% $35,384 8.71% $71,750 9.41% $27,048 9.26% $212,119 8.68%
======= ======= ======= ======= ========
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As of March 31, 1998, the total amount of loans due after March 31, 1999
which had fixed interest rates was $78.1 million while the total amount of loans
due after such date which had floating or adjustable interest rates was $53.5
million.
ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LENDING. Residential loan
originations are generated by the Company's marketing efforts, its present
customers, walk-in customers and referrals from real estate brokers and
builders. The Company has focused its lending efforts primarily on the
origination of loans secured by first mortgages on owner-occupied, single-family
residences in its market area. The Association uses the table funding method to
close a substantial portion of its single family loans. This method requires
that, prior to the closing, the Association prepare and send checks along with
any closing documents and instructions to the title company. Once the title
company has all the required documents it arranges for the closing and, upon
completion of the closing, returns the executed documents to the Association and
disburses the checks to the appropriate parties. The closing normally occurs at
the offices of the title company and the title company has sole discretion for
the timing of the closing. At March 31, 1998, the Company's one-to four-family
residential mortgage loans, excluding mortgage-backed securities, totaled $77.9
million, or 36.8% of the Company's loan portfolio before net items,
substantially all of which are conventional loans secured by properties located
in the Company's primary market area. At March 31, 1998, $6.6 million of these
residential mortgage loans were held for sale and carried at the lower of cost
or market.
The Company's fixed-rate loans conform to secondary market standards (i.e.,
FHLMC and FNMA standards) and, since 1990, have been primarily originated for
sale in the secondary market. Most of the Company's fixed-rate residential loans
have contractual terms to maturity of 30 years. As a part of its asset/liability
management strategy, the Company also originates 15-year, fully amortizing
loans. Interest rates charged on these fixed-rate loans are competitively priced
according to market conditions.
The Company has offered ARM loans at rates, terms and fees determined in
accordance with market and competitive factors. The programs currently offered
primarily meet the standards and requirements of the secondary market for
residential loans. The Company's current one- to four-family residential ARMs
are fully amortizing loans with contractual maturities of up to 30 years. The
interest rates on the ARMs originated by Fort Bend are subject to adjustment at
stated intervals and are subject to annual and lifetime adjustment limits below
and above the initial rate. Most of the Company's ARMs have interest rates
which adjust annually, although the Company offers ARM loans with initial
adjustments occurring after a three or five year period. Adjustments are based
on a margin generally over the one-year U.S. Treasury Security Constant Maturity
Index. These loans' annual and lifetime caps on interest rate increases reduce
the extent to which they can protect the Company against interest rate risk.
The Company has from time to time offered ARMs at below the fully-indexed rate;
however, borrowers of adjustable-rate loans are qualified at the lower of the
maximum first year adjustment or fully-indexed rates. Certain of the Company's
ARMs by their terms may permit convertibility into fixed-rate loans.
The Company retains ARMs in its portfolio consistent with its ongoing
asset/liability objectives. ARM loans decrease the risks associated with
changes in interest rates but involve other risks, primarily because as interest
rates rise, the payment by the borrower rises to the extent permitted by the
terms of the loan, thereby increasing the potential for default. At the same
time, the
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marketability of the underlying property may be adversely affected by higher
interest rates. The Company believes that these risks, which have not had a
material adverse effect on the Company to date, generally are less than the
risks associated with holding fixed-rate loans in an increasing interest rate
environment. In this regard, the Company's delinquency experience on its ARMs
has generally been similar to its experience on fixed-rate residential loans.
The Company evaluates both the borrower's ability to make principal,
interest and escrow payments and the value of the property that will secure the
loan. Fort Bend originates residential mortgage loans with loan-to-value ratios
up to 95%. On any mortgage loan exceeding an 80% loan-to-value ratio at the
time of origination, Fort Bend generally will require private mortgage insurance
in an amount intended to reduce the Company's exposure to 80% or less of the
appraised value of the underlying property.
The Company's general loan policy is to limit residential mortgage loans to
the FHLMC and FNMA maximum, currently $227,150. As of March 31, 1998, the
Company had 52 residential mortgage loans with original balances in excess of
$227,150 ("jumbo loans") having an aggregate balance of $15.4 million. The
Company's delinquency experience on its jumbo residential loans has been similar
to its experience on its other residential loans.
The Company's residential mortgage loans have customarily included a due-
on-sale clause giving the Company the right to declare the loan immediately due
and payable in the event that, among other things, the borrower sells or
otherwise disposes of the property subject to the mortgage and the loan is not
repaid. The Company has generally enforced due-on-sale clauses in its mortgage
contracts for the purpose of increasing its loan portfolio yield. The yield
increase is obtained through the authorization of assumptions of existing loans
at higher rates of interest, assuming the current rates are higher than the
existing note rate, and the imposition of assumption fees. ARM loans may be
assumed provided home buyers meet the Company's underwriting standards and the
applicable fees are paid.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. At March 31, 1998, the
Company had $9.0 million and $7.3 million in multi-family and commercial real
estate loans, respectively, representing 4.3% and 3.4%, respectively, of the
Company's loan portfolio before net items. The Company's multi-family and
commercial real estate loan portfolio includes loans secured by apartment
buildings, office buildings, retail stores and other properties located in the
Company's primary market area. At March 31, 1998, most of the Company's multi-
family and commercial real estate loan portfolio was seasoned. Since 1990, the
Company had no significant originations of such loans for portfolio, except for
loans to facilitate the sale of real estate owned secured by property located in
the Company's market area.
The Board of Directors revised the Company's loan policy in fiscal 1996 to
permit the origination of new commercial real estate loans in individual amounts
of up to $1.0 million with the approval of the Company's loan and appraisal
review committee. Commercial real estate loans in excess of $1.0 million must
be approved by the Board of Directors. During fiscal 1998, the Company
originated 10 multi-family real estate loans totaling $33.3 million with an
original principal balance in excess of $1.0 million. Any loan originated with
an original principal balance in excess of the maximum amount that the Company
could lend to one borrower was participated at least to the
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extent necessary to comply with federal regulations. Seven of these loans, with
an aggregate original principal balance of $27.0 million, were sold during the
period and the remaining three loans were held for sale at March 31, 1998.
The Company also acts as a broker in the origination of multi-family and
commercial real estate loans. During fiscal 1998, the Company brokered 12
multi-family real estate loans with an original principal balance of $43.7
million and 11 commercial real estate loans with an original principal balance
of $37.6 million. The Company generally collects an origination fee in the
amount of 1% of the original principal balance of brokered loans. However, the
actual fees charged on each loan are negotiated on a case by case basis.
The Company intends to originate a limited amount of multi-family and
commercial real estate loans in the future for its loan portfolio, subject to
regulatory restrictions; however, through Mitchell, the Company expects to
originate a significant amount of multi-family loans for resale in the secondary
market and may also broker loans to third party lenders. During fiscal 1998,
Mitchell originated $30.0 million in multi-family loans. One of these loans,
with an original principal balance of $75,000, was originated for portfolio.
Multi-family and commercial real estate loans generally are originated in
amounts up to 80% of the appraised value of the property securing the loan.
Commercial and multi-family loans are made at both fixed and adjustable interest
rates for terms of up to 25 years. Currently, the other terms of multi-family
and commercial real estate loans are negotiated on a case-by-case basis.
Appraisals on properties securing multi-family and commercial real estate
loans originated by the Company are performed by either an independent appraiser
or, subject to regulatory guidelines, the Company's staff appraiser. All
appraisals on multi-family and commercial real estate loans are reviewed by the
Company's management and staff appraiser. In addition, the Company's
underwriting procedures generally require verification of the borrower's credit
history, income and financial statements, banking relationships, references and
income projections for the property. Personal guarantees are generally obtained
for the multi-family and commercial real estate loans originated for portfolio.
The Company's largest multi-family and commercial real estate loans at
March 31, 1998 were $3 million and $1.1 million, respectively. At such date, the
Company had three other large loans with a book value in excess of $1.0 million
which had an aggregate principal balance of $4.5 million. Each of these loans
was secured by multi-family residential properties. At March 31, 1998, these
loans were current and not classified.
Multi-family and commercial real estate lending affords the Company an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential lending. Nevertheless, loans secured by
such properties are generally larger and involve a greater degree of risk than
one- to four-family residential mortgage loans. Because payments on loans
secured by multi-family and commercial real estate properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to adverse conditions in the real estate market or
the economy. If the cash flow from the project is reduced (for example, if
leases are not obtained or renewed), the borrower's ability to repay the loan
may be impaired. In addition, adjustable-rate multi-family and commercial real
estate loans are subject to
12
<PAGE>
increased risk of delinquency or default as interest rates increase. The Company
has attempted to minimize these risks through its underwriting standards and by
lending primarily on existing income-producing properties.
The Company also maintains an escrow account for most of its loans secured
by real estate (as well as for loans serviced for others), in order to ensure
that the borrower provides funds to cover property taxes in advance of the
required payment. These accounts are analyzed annually to confirm that adequate
funds are available. For loans which do not include an escrow requirement, an
annual review of tax payments is performed by the Company in order to confirm
payment. In order to monitor the adequacy of cash flows on income-producing
properties, the borrower or lead lender is notified periodically and asked to
provide financial information including rental rates and income, maintenance
costs and an update of real estate property tax payments.
CONSTRUCTION LENDING. The Company originates and purchases participations
in loans to finance the construction of single-family residences. Many of these
loans are made to individuals who will ultimately be the owner-occupier of the
residence. Such loans are generally made with permanent financing on the
constructed property to be provided by the Company, although that is not a
requirement. Construction loans are generally made with up to a nine-month term
on an adjustable-rate, interest-only basis. During fiscal 1997 and prior to the
acquisition of Mitchell, the Company purchased $8.3 million of construction
loans and participations in construction loans secured by single-family
residential properties from Old Mitchell. The participations comply with Fort
Bend's underwriting guidelines, including the loan draw procedures, and
generally are reviewed prior to purchase on an individual basis. As of March
31, 1998, the Company had $123,000 of such loans outstanding.
The Company's construction loan portfolio has increased substantially as a
result of the purchases of Mitchell and, to a lesser extent, FirstBanc in fiscal
1997. As of March 31, 1998 and 1997, Mitchell had $44.2 million and $26.7
million, respectively, of such loans outstanding. FirstBanc initially
contributed $12.2 million of construction loans to the Company's loan portfolio.
At March 31, 1998, the Company had loans to finance the construction of
single-family residences totaling $69.7 million, or 32.9% of the Company's loan
portfolio before net items, of which approximately $64.4 million were loans to
61 different builders. The Company's policy is to generally limit loans to any
builder to a maximum of $3.6 million. The Company generally limits the amount
of speculative loans to any one builder to 50 percent of the total loan
commitment. Of the Company's total construction loans at March 31, 1998, $5.4
million were to borrowers who represented that they intended to live in the
properties upon completion of construction. 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.
At March 31, 1998, the Company had loans to finance the construction of
multi-family and commercial real estate totaling $1.8 million and $233,000,
respectively, representing 0.85% and 0.11%, respectively, of the Company's loan
portfolio before net items. Multi-family and commercial construction loans are
generally underwritten using the same criteria as for multi-family and
13
<PAGE>
commercial real estate loans. Loan proceeds are disbursed in increments as
construction progresses and inspections warrant.
Construction loans afford the Company the opportunity to charge loan
origination fees, to increase the frequency of repricing of its loan portfolio
and to earn yields higher than those obtainable on loans secured by existing
one- to four-family residential properties. The higher yields reflect the
higher risks associated with construction lending, which include principally the
difficulty in evaluating accurately the total funds required to complete a
project and the post-completion value of the project. As a result, the Company
places a strong emphasis upon the borrower's ability to repay and the experience
and expertise of the builder who has contracted to construct the property.
LAND AND LAND DEVELOPMENT LENDING. The Company originates and purchases
participations in loans to finance the acquisition and development of land. At
March 31, 1998, the Company had $13.8 million in land and land development
loans, representing 6.5% of the Company's loan portfolio before net items. Land
and land development loans include loans on building lots and sites for the
borrower's principal residence and loans on lots and sites intended for other
development by the borrower. Land and development loans originated for
commercial purposes totaled approximately $3.4 million at March 31, 1998. The
remaining land and land development loans were lot loans primarily originated to
acquire land for the borrower's principal residence.
Land acquisition loans on building lots and sites for the borrower's
principal residence generally are originated in amounts up to 90% of the
appraised value of the property securing the loan. These loans are made at both
fixed and adjustable interest rates for terms of up to 15 years. Land
acquisition and development loans on building lots and sites for other than a
borrower's principal residence are generally originated in amounts up to 80% of
the appraised value of the property securing the loan. These land acquisition
and development loans are made at both fixed and adjustable rates for terms of
up to three and eight years, respectively. The Company intends to originate a
limited amount of land and land development loans in the future for its loan
portfolio for other than a borrower's principal residence, subject to regulatory
restrictions.
Appraisals on properties securing land and land development loans
originated by the Company are performed by either an independent appraiser or,
subject to regulatory guidelines, the Company's staff appraiser. All appraisals
on land and land development loans are reviewed by the Company's management and
staff appraiser. In addition, the Company's underwriting procedures generally
require verification of the borrower's credit history, income and financial
statements, banking relationships, and references.
The Company also maintains an escrow account for most of its loans secured
by real estate in order to ensure that the borrower provides funds to cover
property taxes in advance of the required payment. These accounts are analyzed
annually to confirm that adequate funds are available. For loans which do not
include an escrow requirement, an annual review of tax payments is performed by
the Company in order to confirm payment.
CONSUMER AND OTHER LENDING. Management considers consumer and other
lending to be an important component of its strategic plan. These loans
generally have shorter terms to maturity (thus reducing the Company's exposure
to changes in interest rates) and carry higher rates of interest
14
<PAGE>
than do one- to four-family residential mortgage loans. In addition, management
believes that the offering of consumer and other loan products helps to expand
and create stronger ties to its existing customer base by increasing the number
of customer relationships and providing cross-marketing opportunities. At March
31, 1998, the Company's consumer and other loan portfolio totaled $32.3 million,
or 15.2% of its loan portfolio before net items.
The Company offers a variety of secured consumer loans, including home
improvement loans, auto loans and loans secured by savings deposits. In
addition to consumer loans made to individuals, the Company offers secured non-
real estate commercial loans and lines of credit. The Company also offers a
limited amount of unsecured loans. The Company currently originates all of its
consumer and other non-real estate commercial loans in its market area. The
Company's home improvement loans comprised approximately 16.2% of the Company's
total consumer and other loan portfolio at March 31, 1998. These loans are
generally originated in amounts, together with the amount of the existing first
mortgage, of up to 90% of the appraised value of the property securing the loan.
The term to maturity on such loans may be up to 15 years. Other consumer and
commercial non-real estate loan terms vary according to the type of collateral,
length of contract and creditworthiness of the borrower. The Company's consumer
and other loans generally have fixed rates of interest. The Company does not
currently originate any consumer loans on an indirect basis (i.e., where loan
contracts are purchased from retailers of goods or services which have extended
credit to their customers).
The Company's commercial non-real estate loans totaled approximately $4.7
million, or 14.7% of the Company's total consumer and other loan portfolio at
March 31, 1998. During fiscal 1998, the Company purchased a participation in
one large commercial non-real estate loan with an original principal balance of
$3.25 million. This purchase complied with the Company's underwriting
guidelines and was reviewed prior to the purchase on an individual basis. This
loan is secured by the assignment of fees payable to the borrower under certain
utility contracts. This loan had a principal outstanding balance of $2.9
million at March 31, 1998. No other consumer and other loan had a principal
balance in excess of $1.0 million at March 31, 1998.
The underwriting standards employed by the Company for consumer and other
loans include a determination of the applicant's payment history on other debts
and an assessment of the ability to meet existing obligations and payments on
the proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
Consumer and other loans may entail greater risk than do residential
mortgage loans, particularly in the case of loans which are unsecured, or
secured by rapidly depreciable assets, such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be affected by adverse personal circumstances. Furthermore, the
application of various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Although the level of delinquencies in the Company's consumer and other loan
portfolio generally has been low (at March 31, 1998, $405,000, or approximately
1.26% of the consumer and other loan portfolio, was
15
<PAGE>
60 days or more delinquent), there can be no assurance that delinquencies will
not increase in the future.
MORTGAGE-BACKED SECURITIES. The Company has a substantial portfolio of
mortgage-backed securities and utilizes the portfolio as collateral for
borrowings when required to fund heavy loan demand. At March 31, 1998,
mortgage-backed securities totaled $83.1 million, including $282,000 available
for sale and carried at market value. At that date, mortgage-backed securities
represented 26.2% of the Company's total assets. For information regarding the
carrying and market values of the Company's mortgage-backed securities
portfolio, see Note 3 of the Notes to Consolidated Financial Statements
contained in Part II, Item 7.
Historically, most of the Company's mortgage-backed securities were long-
term, fixed-rate federal agency securities. In recent years, the Company has
purchased other types of mortgage-backed securities consistent with its
asset/liability management and balance sheet objectives. In this regard, the
Company emphasizes the purchase of adjustable-rate or short or intermediate
term fixed-rate mortgage-backed securities for asset/liability management
purposes and to supplement the Company's origination of ARM loans. At March 31,
1998, $45.6 million, or 54.9% of the Company's mortgage-backed securities
carried adjustable rates of interest. The Company also has pooled fixed-rate
loans in its existing loan portfolio to create mortgage-backed securities. At
March 31, 1998, $7.1 million, or 8.5%, of the Company's mortgage-backed
securities were secured by loans originated by the Company.
The Company also has purchased adjustable-rate or short and intermediate
term fixed-rate CMOs and real estate mortgage investment conduits ("REMICs")
having estimated average lives of five years (ten years with respect to
adjustable-rate CMOs and REMICs). CMOs and REMICs are securities derived by
reallocating cash flows from mortgage pass-through securities or from pools of
mortgage loans. These securities are subjected to annual tests required by the
Company's regulatory authority and applied to determine if any of the CMOs or
REMICs are "high risk." At March 31, 1998, none of the Company's securities
failed the annual test and none were considered "high risk." The CMOs and
REMICs acquired by the Company are not interest-only, principal-only or residual
interests. At March 31, 1998, the book value of these securities was $34.9
million.
Under the OTS' risk-based capital requirements, GNMA mortgage-backed
securities have a zero percent risk-weighting and FNMA, FHLMC and AA- or higher
rated mortgage-backed securities have a 20% risk-weighting, in contrast to the
50% risk-weighting carried by performing one- to four-family residential
mortgage loans. None of the mortgage-backed securities held by the Company had
a risk-weight for regulatory capital purposes above 20%. All of the Company's
mortgage-backed securities are backed by FHLMC, GNMA or FNMA, or rated AA or
higher. Accordingly, management believes that the Company's mortgage-backed
securities generally are resistant to credit problems.
The following table sets forth the carrying values and contractual
maturities of the Company's mortgage-backed securities held to maturity at March
31, 1998.
16
<PAGE>
<TABLE>
<CAPTION>
Due in
---------------------------------------------------------------------- March 31, 1998
6 Months 6 Months 1 to 3 to 5 5 to 10 10 to 20 Over 20 Carrying
or Less to 1 Year 3 Years Years Years Years Years Value
-------- --------- ------- ------ ------- -------- ------- --------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AA- and AAA-
Private Issue
Securities $ --- $ --- $ --- $ --- $ 313 $ 125 $ 2,352 $ 2,790
CMO's and REMIC's --- --- 487 988 9,652 8,917 14,885 34,929
FHLMC --- 481 1,046 689 998 3,575 10,352 17,141
FNMA --- 910 1,929 --- --- 5,141 12,554 20,534
GNMA --- --- --- --- --- 2,015 5,406 7,421
-------- ------ ------ ------ ------- ------- ------- -------
Total $ --- $1,391 $3,462 $1,677 $10,963 $19,773 $45,549 $82,815
======== ====== ====== ====== ======= ======= ======= =======
</TABLE>
ORIGINATIONS, PURCHASES AND SALES OF LOANS AND MORTGAGE-BACKED SECURITIES
As described previously, the Company originates real estate loans through
marketing efforts, the Company's customer base, walk-in customers, and referrals
from real estate brokers and builders. The Company originates both adjustable-
rate and fixed-rate loans. Its ability to originate loans is dependent upon the
relative customer demand for fixed-rate or ARM loans in the origination market,
which is affected by the term structure of interest rates (short-term compared
to long-term) as well as the current and expected future level of interest
rates.
The Company purchased $1.5 million of land loans and $3.3 million of non-
real estate commercial loans during fiscal 1998, and management may consider
making additional purchases in the future depending upon market conditions. At
March 31, 1998, the Company had no commitments to purchase or sell mortgage-
backed securities from its held to maturity portfolio. At March 31, 1998, the
Company had an option to sell $3.0 million of fixed rate mortgage-backed
securities under its hedging program for loans available for sale. At that same
date, the Company had loan commitments of approximately $13.9 million and
forward commitments to sell loans of $8.9 million. At March 31, 1998, the
Company had $12.9 million of loans held for sale.
The Company generally sells its long-term, fixed-rate loan originations.
When loans are sold, the Company generally retains the responsibility for
servicing such loans. The Company had $898.9 million in loans serviced for
others as of March 31, 1998, and $384,000 in loans serviced by others at that
date.
17
<PAGE>
The following table sets forth the loan origination, purchase, sale and
repayment activities of the Company for the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
(In Thousands)
Originations by type:
- ---------------------
Adjustable rate:
Real estate - one- to four-family $139,702 $ 49,792 $16,552
- multi-family 1,801 --- 102
- commercial 1,233 176 1,175
- land 1,611 --- ---
-------- -------- -------
Total adjustable rate 144,347 49,968 17,829
-------- -------- -------
Fixed rate:
Real estate - one- to four-family 67,888 20,309 14,925
- multifamily 33,382 2,482 ---
- commercial --- 720 640
- land 8,363 1,932 715
Non-real estate - consumer 18,285 17,928 14,777
- commercial 1,907 1,596 652
-------- -------- -------
Total fixed-rate 129,825 44,967 31,709
-------- -------- -------
Total loans originated 274,172 94,935 49,538
-------- -------- -------
Purchases:
- ----------
Real estate - one- to four-family --- 15,228 16,401
Real estate - land 1,471 968 ---
Non-real estate commercial 3,250 --- ---
Mortgage-backed securities (excluding --- ---
REMICs and CMOs) --- --- 2,456
-------- -------- -------
Total purchased 4,721 16,196 18,857
-------- -------- -------
Sales and Repayments:
- ---------------------
Real estate:
Sales/(1)/ 99,360 27,272 14,116
Principal repayments 151,071 78,225 48,653
-------- -------- -------
Total reductions 250,431 105,497 62,769
-------- -------- -------
Increase due to Acquisition --- 37,612 ---
Decrease in other items, net (5,007) (4,514) (663)
-------- -------- -------
Net increase $ 23,455 $ 38,732 $ 4,963
======== ======== =======
</TABLE>
_________________
(1) In 1997 and 1996, sales consisted primarily of one- to four-family
residential loans. In 1998, due to the acquisition of Mitchell, loans
sales also included multi-family loans.
18
<PAGE>
ASSET QUALITY
The Company's loans delinquent 60 days or more increased from .50% of total
loans at March 31, 1997 to .55% at March 31, 1998. When a borrower fails to
make a required payment on a loan, the Company attempts to cause the delinquency
to be cured by contacting the borrower. In the case of residential loans, a
late notice is sent 16 days after the due date. If the delinquency is not cured
within 30 days, contact with the borrower is made by phone or a letter is sent.
Additional written and verbal contacts are made with the borrower between 35 and
70 days after the due date.
In the event a real estate loan payment is past due for 45 days or more,
the Company generally performs an in-depth review of the loan status, the
condition of the property and the circumstances of the borrower. Based upon the
results of its review, the Company may negotiate and accept a repayment program
with the borrower, accept a voluntary deed in lieu of foreclosure or, when
deemed necessary, initiate foreclosure proceedings. If foreclosed on, real
property is sold at a public sale and the Company may bid on the property to
protect its interest. A decision as to whether and when to initiate foreclosure
proceedings is based on such factors as the amount of the outstanding loan in
relation to the original indebtedness, the extent of delinquency and the
borrower's ability and willingness to cooperate in curing delinquencies.
Delinquent consumer loans are handled in a generally similar manner, except
that initial contacts are made when the payment is 10 days past due and
telephone contact begins when a loan is 30 days past due. If these efforts fail
to bring the loan current, appropriate action may be taken to collect any loan
payment that remains delinquent. The Company's procedures for repossession and
sale of consumer collateral are subject to various requirements under Texas
consumer protection laws.
Loans are placed on non-accrual status after 90 days delinquency. When a
loan is placed on non-accrual status, the Company's general policy is to reverse
and charge against current income previously accrued but unpaid interest.
Interest income on such loans is subsequently recognized only to the extent that
cash is received and future collection of principal is deemed by management to
be probable.
19
<PAGE>
DELINQUENT LOANS. The following table sets forth the Company's loan
delinquencies by type, by amount and by percentage of type at March 31, 1998
<TABLE>
<CAPTION>
Loans Delinquent For:
-------------------------------------------------------
Total Loans
60-89 Days 90 Days and Over Delinquent 60 Days or More
-------------------------- ------------------------- ---------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family 11 $177 .23% 9 $340 .43% 20 $ 517 .66%
Construction,
development and land 5 249 .29 7 3 .00 12 252 .29
Consumer and other 28 219 .68 35 186 .58 63 405 1.26
-- ---- --- -- ---- --- -- ------ ----
Total 44 $645 .30% 51 $529 .25% 95 $1,174 .55%
== ==== === == ==== === == ====== ====
</TABLE>
20
<PAGE>
The table below sets forth the amounts and categories of non-performing
assets in the Company's loan portfolio. Loans are placed on non-accrual status
after 90 days delinquency. Foreclosed assets include assets acquired in
settlement of loans.
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family $ 340 $ 71 $ 105 $ 43 $ 161
Commercial real estate --- 268 592 1,626 210
Construction, development and land 3 106 --- --- ---
Consumer and other 186 44 32 29 17
------ ------ ------ ------ ------
Total 529 489 729 1,698 388
------ ------ ------ ------ ------
Troubled Debt Restructurings:
Multi-family --- --- 2,037 2,036 2,353
Commercial real estate 547 405 271 --- 1,437
------ ------ ------ ------ ------
Total 547 405 2,308 2,036 3,790
------ ------ ------ ------ ------
Foreclosed assets:
One- to four-family 45 143 123 68 68
Commercial real estate --- 180 --- --- ---
Construction, development and land 34 8 --- --- ---
Consumer and other 18 27 --- --- ---
------ ------ ------ ------ ------
Total 97 358 123 68 68
------ ------ ------ ------ ------
Total non-performing assets $1,173 $1,252 $3,160 $3,802 $4,246
====== ====== ====== ====== ======
Total non-performing assets as a 0.37% 0.42% 1.29% 1.66% 2.00%
percentage of total assets ====== ====== ====== ====== ======
</TABLE>
For the year ended March 31, 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 $108,000. The amount
that was included in interest income on such loans was $81,000 for the year
ended March 31, 1998.
NON-ACCRUING LOANS. As of March 31, 1998, the Company had $529,000 of non-
accruing loans. Of this balance, $340,000 is secured by single family
residential real estate. The remainder consisted of $186,000 in consumer loans,
primarily secured by automobiles, and $3,000 in land loans. See "Management's
Discussion and Analysis or Plan of Operation -- Asset Quality," filed as Part
II, Item 6.
TROUBLED DEBT RESTRUCTURINGS. As of March 31, 1998 the Association had two
loans with a net book value of $547,000 classified as a troubled debt
restructuring. These loans are secured by commercial properties located in
Houston, Texas and Rosenberg, Texas. See "Management's Discussion and Analysis
or Plan of Operation -- Asset Quality," contained in Part II, Item 6.
21
<PAGE>
FORECLOSED ASSETS. As of March 31, 1998, the Association had net book
value of $97,000 in foreclosed assets, which consisted of one single-family
residence, a 5% participation held by Mitchell in 33 residential lots and three
repossessed automobiles. Three of the Mitchell residential lots are under
contract for sale. Subsequent to March 31, 1998, the single-family residence
was sold at a price in excess of the net book value. See "Management's
Discussion and Analysis or Plan of Operation -- Asset Quality," contained in
Part II, Item 6.
CLASSIFIED ASSETS. Federal regulations provide for the classification of
loans and other assets, such as debt and equity securities considered by the OTS
to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Management also
classifies as "special mention" assets which do not currently expose the insured
institution to sufficient risk to warrant classification in one of the
aforementioned categories but nonetheless possess certain weaknesses.
When an insured institution classifies problem assets as either substandard
or doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances
which have been established to recognize the inherent risk associated with
lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge-off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the regulatory authorities, which may order the
establishment of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Company regularly
reviews the problem loans in its portfolio to determine whether any loans
require classification in accordance with applicable regulations. Classified
assets of the Company at March 31, 1998 were as follows:
<TABLE>
<CAPTION>
March 31,
1998
--------------
(In Thousands)
<S> <C>
Substandard(1) $1,901
Doubtful ---
Loss ---
------
Total classified assets 1,901
Special mention assets 945
------
Total criticized assets(1) $2,846
======
</TABLE>
__________________
/(1)/ Includes foreclosed assets of $97,000.
22
<PAGE>
ALLOWANCE FOR LOAN LOSSES. 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. Such evaluation,
which includes a review by management of all loans of which full collectibility
may not be reasonably assured, considers, among other matters, the estimated
value of the underlying collateral, economic conditions, cash flow analyses,
historical loan loss experience, discussions held with delinquent borrowers and
other factors that warrant recognition in providing for an adequate loan
allowance. Although management believes it uses the best information available
to make such determinations, future adjustments to reserves may be necessary,
and net income could be significantly affected, if circumstances differ
substantially from the assumptions used in making the initial determinations.
The Company's quarterly asset classification review determines which loans to
charge-off. At March 31, 1998, management believed the Company's allowance for
loan losses of $1.6 million to be adequate.
There are no agreements or understandings with the regulators to provide
additions to the allowance for loan losses nor were additional loss provisions
required as a result of their examination of the Association as of March 31,
1998. Recoveries on charge-offs are limited because the Company generally
recognizes recoveries as a gain on the sale of foreclosed assets. Net gains on
sales of foreclosed assets totaled $46,000, $212,000 and $80,000 for the years
ended March 31, 1998, 1997 and 1996, respectively. Gains on sale of foreclosed
assets have generally been limited because the number of foreclosed assets sold
has declined and because such sales were generally made at approximately
carrying value, which approximated market value. Net loan charge-offs decreased
from $708,000 in fiscal 1997 to $205,000 in fiscal 1998. The decrease in
charge-offs in fiscal 1998 was attributable to a declining level of problem
assets.
The Company defines a loan as impaired when, based on current information
and events, it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement. The
Company uses the same criteria in placing a loan on nonaccrual status, exclusive
of residential mortgage loans and consumer loans which are placed on nonaccrual
status when they become 90 days past due. When interest accrual is
discontinued, all unpaid accrued interest is reversed. Interest income is
subsequently recognized only to the extent cash payments are received. At March
31, 1998 and 1997, the Company had impaired loans totaling approximately
$658,000 and $807,000, respectively, with $111,000 related allowance for loan
losses at March 31, 1998 and no related allowance for loan losses at March 31,
1997. See Note 4 of the Notes to Consolidated Financial Statements contained in
Part II, Item 7.
23
<PAGE>
The following table sets forth an analysis of the Company's allowance for
loan losses at the dates indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 1,701 $ 1,350 $1,650 $1,712 $1,742
Charge-offs:
One- to four-family 50 --- --- --- ---
Consumer 93 22 --- 6 ---
Commercial Real Estate 62 203 430 360 32
Multi-family ---- 582 --- --- ---
------- ------- ------ ------ ------
Total 205 807 430 366 32
------- ------- ------ ------ ------
Recoveries:
One- to four-family/1/ --- --- --- 45 ---
Consumer --- 99 --- 1 ---
Commercial Real Estate --- --- 3 --- ---
Multi-family --- --- 4 --- ---
------- ------- ------ ------ ------
Net charge-offs 205 708 423 320 32
Additions charged to operations 96 324 123 258 2
Addition due to acquisitions --- 735 --- --- ---
------- ------- ------ ------ ------
Balance at end of period $ 1,592 $ 1,701 $1,350 $1,650 $1,712
======= ======= ====== ====== ======
Ratio of net charge-offs during the period to average
loans, excluding mortgage-backed securities,
outstanding during the period 0.13% 0.60% 0.49% 0.42% 0.04%
======= ======= ====== ====== ======
Allowance for loan losses to non-performing loans, at
the end of the period 148.06% 190.20% 44.46% 44.17% 40.98%
======= ======= ====== ====== ======
Allowance for loan losses to total loans, excluding
loans held for sale at end of period 0.99% 1.22% 1.43% 2.10% 2.21%
======= ======= ====== ====== ======
</TABLE>
_____________________
/1/ The Company generally recognizes recoveries as gains on the sale of
foreclosed assets.
24
<PAGE>
The distribution of the Company's allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ -------------------- -------------------- --------------------- ------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------- --------- ------- --------- ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family $ 291 36.75% $ --- 47.72% $ 20 59.93% $ 42 58.87% $ 37 59.32%
Multi-family 153 4.25 102 1.99 504 4.59 653 5.42 754 8.52
Commercial 434 3.44 184 4.55 769 8.04 899 9.29 859 11.37
Construction, develop-
ment and land 374 40.35 1,264 30.01 --- 8.75 --- 9.38 --- 5.08
Consumer 340 15.21 151 15.73 57 18.69 56 17.04 62 15.71
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $1,592 100.00% $1,701 100.00% $1,350 100.00% $1,650 100.00% $1,712 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
INVESTMENT ACTIVITIES
Fort Bend must maintain minimum levels of investments that qualify as
liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Association has
maintained liquid assets at levels above the minimum requirements imposed by the
OTS regulations and at levels believed adequate to meet the requirements of
normal operations, including repayments of maturing debt and potential deposit
outflows. Cash flow projections are regularly reviewed and updated to ensure
that adequate liquidity is maintained. At March 31, 1998, the Association's
liquidity ratio (liquid assets as a percentage of net withdrawable savings
deposits and current borrowings) was 12.24%.
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds the assets of which
conform to the investments that a federally chartered savings institution is
otherwise authorized to make directly.
Generally, the investment policy of the Company is to invest funds among
various categories of investments and maturities based upon the Company's
asset/liability management policies, investment quality and marketability,
liquidity needs and performance objectives. It is the Company's general policy
to purchase investment securities which are U.S. Government securities and
federal agency obligations and other issues that are rated investment grade or
have credit enhancements.
At March 31, 1998, the Company's interest-bearing deposits with banks
totaled $20.8 million, or 6.6% of total assets, and its investment securities
totaled $12.2 million, or 3.9% of total assets. As of such date, the Company
also had a $1.5 million investment in FHLB stock, satisfying its requirement for
membership in the FHLB of Dallas. At March 31, 1998, the average term to
maturity or repricing of the investment securities portfolio was 0.61 years.
25
<PAGE>
The following table sets forth the composition of the Company's investment
portfolio at the dates indicated.
<TABLE>
<CAPTION>
March 31,
----------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
---------- ------- ---------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Investment Securities:
U.S. government securities $ 499 16.85% $ 490 17.44% $ 491 18.29%
Equity securities 2,463 83.15 2,320 82.56 2,194 81.71
------- ------ ------- ------ ------- ------
$ 2,962 100.00% $ 2,810 100.00% $ 2,685 100.00%
======= ====== ======= ====== ======= ======
HELD TO MATURITY:
Investment Securities:
U.S. government securities $ 999 3.17% $ 999 3.62% $ 997 4.08%
Federal agency obligations 8,245 26.14 10,236 37.10 8,237 33.71
------- ------ ------- ------ ------- ------
Total investment securities 9,244 29.31 11,235 40.72 9,234 37.79
FHLB stock 1,509 4.79 1,933 7.01 1,460 5.97
------- ------ ------- ------ ------- ------
Total investment securities
and FHLB stock 10,753 34.10 13,168 47.73 10,694 43.76
-------- ------ ------- ------ ------- ------
Average remaining life of
investment securities/(1)/ 1.31 years 2.05 years 3.02 years
Other Interest-Earning Assets:
Interest-bearing deposits
with banks 20,784 65.90 14,421 52.27 13,742 56.24
------- ------ ------- ------ ------- ------
Total $31,537 100.00% $27,589 100.00% $24,436 100.00%
======= ====== ======= ====== ======= ======
Average remaining life or term
to repricing of investment
securities and other interest-
earning assets excluding
FHLB stock/(1)/ 0.61 years 0.79 years 1.02 years
</TABLE>
_________________________
/(1)/ The average remaining lives of securities with "call" features are
calculated using the date of maturity.
26
<PAGE>
The composition and maturities of the investment securities portfolio,
excluding FHLB of Dallas stock and equity securities, are indicated in the
following table.
<TABLE>
<CAPTION>
March 31, 1998
-----------------------------------------------------
Less Than 1 to 5 5 to 10 Over Total Investment
1 Year Years Years 10 Years Securities
----------- ----------- ----------- ----------- --------------------------
Book Value Book Value Book Value Book Value Book Value Market Value
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
AVAILABLE FOR SALE:
U.S. government securities $ 500 $ --- $ --- $ --- $ 500 $ 499
Equity securities 2,451 --- --- --- 2,451 2,463
------ ---------- ---------- ---------- ------ ------
Total $2,951 $ --- $ --- $ --- $2,951 $2,962
====== ========== ========== ========== ====== ======
Weighted average yield 5.69% ---% ---% ---% 5.69%
HELD TO MATURITY:
U.S. government securities $ 999 $ --- $ --- $ --- $ 999 $1,007
Federal agency obligations 3,996 2,249 2,000 --- 8,245 7,976
------ ---------- ---------- ---------- ------ ------
Total $4,995 $2,249 $2,000 $ --- $9,244 $8,983
====== ========== ========== ========== ====== ======
Weighted average yield 5.88% 5.19% 3.54% ---% 5.20%
</TABLE>
The Company's investment securities portfolio at March 31, 1998 contained
neither tax-exempt securities nor securities of any issuer with an aggregate
book value in excess of 10% of the Company's retained earnings, excluding
securities issued by the United States government, or its agencies. The
Company's investment securities portfolio is managed in accordance with a
written investment policy adopted by the Board of Directors. Investments may be
made by the Company's Investment Committee.
SOURCES OF FUNDS
GENERAL. The Company's primary sources of funds are deposits, amortization
and prepayment of loan principal (including mortgage-backed securities), sales
or maturities of loans, maturities of investment securities, mortgage-backed
securities and short-term investments, borrowings and funds provided from
operations.
Borrowings, predominantly from the FHLB of Dallas, may be used on a short-
term basis to compensate for seasonal reductions in deposits or deposit inflows
at less than projected levels, and may be used in the future on a longer-term
basis to support lending and investing activities. FHLB borrowings are
collateralized through pledges of loans and other assets.
DEPOSITS. The Company offers a variety of deposit accounts having a wide
range of interest rates and terms. The Company's deposits consist of passbook,
statement savings, NOW accounts and money market and certificate accounts. The
Company relies primarily on advertising, competitive pricing policies and
customer service to attract and retain these deposits. The Company solicits
deposits from its primary market area only, and does not use brokers to obtain
deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. During the fiscal year ended March 31, 1998, total
27
<PAGE>
deposits increased by $18.8 million. The Company manages the pricing of its
deposits in keeping with its asset/liability management and profitability
objectives.
Based on its experience, the Company believes that its passbook, statement
savings, NOW and non-interest-bearing checking accounts are relatively stable
sources of deposits. However, the ability of the Company 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 Company at the dates indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Transactions and Savings Deposits:
- ----------------------------------
Passbook and Statement Savings
Accounts $ 23,034 8.56% $ 22,806 9.11% $ 21,045 10.32%
NOW Accounts 50,207 18.67 38,774 15.50 20,076 9.85
Money Market Accounts 23,423 8.71 24,000 9.59 17,426 8.55
-------- ------ -------- ------ -------- ------
Total Non-Certificates 96,664 35.94 85,580 34.20 58,547 28.72
-------- ------ -------- ------ -------- ------
Certificates:
- -------------
0.00 - 2.99% 448 0.16 587 0.24 642 0.31
3.00 - 4.99% 21,805 8.11 25,424 10.16 37,079 18.18
5.00 - 6.99% 143,171 53.22 131,622 52.60 99,150 48.62
7.00 - 8.99% 6,900 2.57 7,005 2.80 8,496 4.17
9.00 - 10.99% 3 --- --- --- --- ---
-------- ------ -------- ------ -------- ------
Total Certificates 172,327 64.06 164,638 65.80 145,367 71.28
-------- ------ -------- ------ -------- ------
Total Deposits $268,991 100.00% $250,218 100.00% $203,914 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
28
<PAGE>
The following table sets forth the savings flows at the Company during the
periods indicated. Net deposits (withdrawals) refers to the amount of deposits
during a period less the amount of withdrawals during the period. 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>
Year Ended March 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
(Dollars in Thousands)
Opening balance $250,218 $203,914 $194,467
Acquired deposits --- 26,767 ---
Deposits 947,116 443,163 230,208
Withdrawals 938,452 431,945 228,424
Interest credited 10,109 8,319 7,663
-------- -------- --------
Ending balance $268,991 $250,218 $203,914
======== ======== ========
Net increase $ 18,773 $ 46,304 $ 9,447
======== ======== ========
Percent increase 7.50% 22.71% 4.86%
======== ======== ========
</TABLE>
The following table shows rate and maturity information for the Company's
certificates of deposit as of March 31, 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
----- ------ ------- ----- ------ ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts maturing
in quarter ending:
- -----------------------------
June 30, 1998 $ 162 $ 8,489 $ 25,124 $ --- $ --- $ 33,775 19.60%
September 30, 1998 3 11,621 22,852 43 --- 34,519 20.03
December 31, 1998 1 797 19,639 13 --- 20,450 11.87
March 31, 1999 13 635 11,930 --- --- 12,578 7.30
June 30, 1999 -- 248 15,246 8 --- 15,502 9.00
September 30, 1999 4 15 17,341 --- 3 17,363 10.08
December 31, 1999 50 --- 3,606 70 --- 3,726 2.16
March 31, 2000 53 --- 2,790 6,576 --- 9,419 5.47
June 30, 2000 3 --- 4,522 109 --- 4,634 2.69
September 30, 2000 --- --- 2,886 --- --- 2,886 1.67
December 31, 2000 6 --- 1,606 --- --- 1,612 0.93
March 31, 2001 98 --- 1,318 --- --- 1,416 0.82
Thereafter 55 --- 14,311 81 --- 14,447 8.38
------ ------- -------- ------ ------ -------- ------
Total $ 448 $21,805 $143,171 $6,900 $ 3 $172,327 100.00%
====== ======= ======== ====== ====== ======== ======
Percent of total 0.26% 12.65% 83.08% 4.01% 0.00%
====== ======= ======== ====== ======
</TABLE>
29
<PAGE>
The following table indicates the amount of the Company's certificates of
deposit by time remaining until maturity as of March 31, 1998.
<TABLE>
<CAPTION>
Maturity
---------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- ------ ------- --------- -----
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Certificates of deposit less
than $100,000 $28,869 $30,138 $28,405 $60,260 $147,672
Certificates of deposit of
$100,000 or more 4,822 4,367 4,408 10,735 24,332
Public funds/(1)/ 84 14 215 10 323
------- ------- ------- ------- --------
Total certificates of
deposit and public funds $33,775 $34,519 $33,028 $71,005 $172,327
======= ======= ======= ======= ========
</TABLE>
_______________
/(1)/ Certificates of deposit from governmental and other public entities.
From time to time the Company has had varying amounts of public funds. The
largest amount of public funds held by the Company since 1990 was $418,000. The
Company is required to pledge collateral against such funds equal to 110% of
such funds. For additional information regarding the composition of the
Company's deposits, see Note 7 of the Notes to Consolidated Financial Statements
contained in Part II, Item 7.
BORROWINGS. Although deposits are the Company's primary source of funds,
the Company's policy has been to utilize borrowings when there is a net outflow
of deposits, when advances are a less costly source of funds or when funds from
advances can be invested at a positive spread. In addition, the Company has
relied upon selected borrowings for short-term liquidity needs.
The Company may obtain advances from the FHLB of Dallas upon the security
of its capital stock of the FHLB of Dallas and certain of its mortgage loans,
investment securities and mortgage-backed securities. Such advances may be made
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. At March 31, 1998, the Company had $3.9
million in FHLB borrowings outstanding and the ability to borrow up to an
additional $149 million.
In December 1995, the Company issued $12.1 million of 8% Convertible
Subordinated Debentures due December 1, 2005 (the "Debentures"). The Debentures
are redeemable, in whole or in part, as of December 1, 1998, are convertible at
any time prior to maturity, unless previously redeemed, into Common Stock of the
Company at a conversion rate of 92.592 shares of Common Stock for each $1,000
principal amount of Debentures (subject to adjustment in certain events), have
no sinking fund and are unsecured general obligations of the Company. The
Company used the net proceeds for general corporate purposes. As of March 31,
1998, $695,000 in Debentures had been converted into 64,334 shares of the
Company's Common Stock. See Note 8 of the Notes to Consolidated Financial
Statements contained in Part II, Item 7.
30
<PAGE>
The following table sets forth the maximum month-end balance and average
daily balance of FHLB advances, Debentures and other borrowings for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
(In Thousands)
Maximum Balance:
- ----------------
FHLB advances $ 8,407 $13,928 $11,500
Debentures 12,080 12,100 12,100
Other borrowings 307 395 483
Average Daily Balance:
- ----------------------
FHLB advances $ 4,027 $ 4,974 $ 5,873
Debentures 11,996 12,097 3,879
Other borrowings 214 351 440
</TABLE>
The following table sets forth certain information as to the Company's FHLB
advances, Debentures and other borrowings at the dates indicated.
<TABLE>
<CAPTION>
March 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
(In Thousands)
FHLB advances $ 3,867 $ 3,920 $ 3,969
Debentures 11,405 12,080 12,100
Other borrowings 118 307 395
------- ------- -------
Total borrowings $15,390 $16,307 $16,464
======= ======= =======
Weighted average interest rate
of FHLB advances, Debentures and
other borrowings 7.96% 7.87% 7.54%
</TABLE>
SUBSIDIARY AND OTHER ACTIVITIES
As a federally chartered savings and loan association, Fort Bend is
permitted by OTS regulations to invest up to 2% of its assets, or $6.3 million
at March 31, 1998, in the stock of, or in unsecured loans to, service
corporation subsidiaries. As of such date, the net book value of Fort Bend's
investment in and unsecured loans to its service corporations was $263,000.
Fort Bend may invest an additional 1% of its assets in service corporations
where such additional funds are used for inner-city or community development
purposes.
One of Fort Bend's active wholly owned subsidiaries, Fairview, Inc.
("Fairview"), is engaged in the sale of developed lots, lending, and providing
appraisal and other real estate related services. Fairview has developed
Cambridge Village, a single-family residential development located in Rosenberg,
Texas, consisting of 235 developed residential lots and eight acres of
additional land. At March 31, 1998, only one residential lot remained unsold.
At March 31, 1998, Fort Bend's
31
<PAGE>
investment in Fairview was $263,000, of which $10,000 was classified as
substandard due to the slower than expected sale of the remaining property.
Fairview recognized net income of $48,000, $155,000 and $48,000 for the
fiscal years ended March 31, 1998, 1997 and 1996, respectively. As required by
federal law, the Association has been deducting its investment in Fairview from
capital, over a six-year period beginning July 1, 1990, for purposes of
determining the Association's capital requirements. See "- Regulation -
Regulatory Capital Requirements."
Beginning in the third quarter of fiscal 1996, the Company, through
Fairview, began to offer its customers and members of the general public various
financial services in the form of mutual funds, annuity and brokerage services
through a third-party registered broker-dealer.
The Association also leases space in its Rosenberg branch to an insurance
agency and provides financial and related services to the agency. The
Association primarily provides accounting, administrative and other ministerial
support to the insurance agency. Revenues received from such services totaled
$197,000, $358,000 and $78,000 for the years ended March 31, 1998, 1997 and
1996, respectively.
As noted elsewhere in this Report, on January 2, 1997, the Association
acquired a 51% interest in Mitchell Mortgage Company, L.L.C., which is engaged
in the mortgage banking business. See "-- Acquisitions--Mitchell Mortgage."
Mitchell was formed for the purpose of engaging in the mortgage banking
business, including the origination and servicing of single family purchase
loans, single family construction loans and commercial and multi-family real
estate loans. Mitchell Mortgage Company had a loan servicing portfolio of
approximately $588 million and a loan portfolio of approximately $44.5 million
as of March 31, 1998.
REGULATION
GENERAL
Fort Bend is a federally chartered savings and loan association, the
deposits of which are federally insured and backed by the full faith and credit
of the United States government. Accordingly, Fort Bend is subject to broad
federal regulation and oversight extending to all of its operations. The
Association is a member of the FHLB of Dallas and is subject to certain limited
regulation by the Federal Reserve Board. As the savings and loan holding
company of Fort Bend, the Company also is subject to federal regulation and
oversight. The purpose of the regulation of the Company and other holding
companies is to protect subsidiary savings associations. The Association is a
member of the SAIF and the deposits of the Association are insured by the FDIC.
As a result, the FDIC has certain regulatory and examination authority over the
Association.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS
The OTS has extensive authority over the operations of savings
associations. As part of this authority, Fort Bend is required to file periodic
32
<PAGE>
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS and FDIC examinations of the Association were as of
March 31, 1998 and January 31, 1992, respectively. When these examinations are
conducted by the OTS and the FDIC, the examiners may require the Association to
provide for higher general or specific loan loss reserves. All savings
associations are subject to a semi-annual assessment, based upon the savings
association's total assets. The Association's OTS assessment for the fiscal
year ended March 31, 1998 was $77,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Fort Bend and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Association is prescribed by federal laws, and the Association is prohibited
from engaging in any activities not permitted by such laws. For instance, no
savings institution may invest in non-investment grade corporate debt
securities. In addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may not exceed
400% of total capital, except with approval of the OTS. Federal savings
associations are also generally authorized to branch nationwide. Fort Bend is
in compliance with the noted restrictions.
The Association's general permissible lending limit for loans-to-one-
borrower is equal to the greater of $500,000 or 15% of unimpaired capital and
surplus (except for loans fully secured by certain readily marketable
collateral, in which case this limit is increased to 25% of unimpaired capital
and surplus). At March 31, 1998, the Association's lending limit under this
restriction was $3.6 million. The Association is in compliance with its loans-
to-one-borrower limitation. See "Business - Lending Activities."
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any
institution which fails to comply with these standards must submit a compliance
plan. A failure to submit a plan or to comply with an approved plan will subject
the institution to further enforcement action. The OTS and the other federal
banking agencies have also proposed additional guidelines on asset quality and
earnings standards. No assurance can be given as to whether or in what form the
proposed regulations will be adopted.
33
<PAGE>
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
Fort Bend is a member of the SAIF, which is administered by the FDIC. Fort
Bend's deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. The FDIC also may prohibit any FDIC-insured institution from
engaging in any activity the FDIC determines by regulation or order to pose a
serious risk to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings associations, after giving the OTS an
opportunity to take such action, and may terminate the institution's deposit
insurance if it determines that the institution has engaged in unsafe or unsound
practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified
as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier
1 or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium, while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC also may impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
In order to equalize the deposit insurance premium schedules for BIF and
SAIF insured institutions, the FDIC imposed a one-time special assessment on all
SAIF-assessable deposits pursuant to federal legislation enacted on September
30, 1996. The Association's special assessment, which was $1.5 million, was
paid in November 1996, and included in federal deposit insurance expense for the
fiscal year ended March 31, 1997. Effective January 1, 1997, the premium
schedule for BIF and SAIF insured institutions ranged from 0 to 27 basis points.
However, SAIF-insured institutions are required to pay a Financing Corporation
(FICO) assessment, in order to fund the interest on bonds issued to resolve
thrift failures in the 1980s, equal to 6.48 basis points for each $100 in
domestic deposits, while BIF-insured institutions pay an assessment equal to
1.52 basis points for each $100 in domestic deposits. The assessment is
expected to be reduced to 2.43 no later than January 1, 2000, when BIF insured
institutions fully participate in the assessment. These assessments, which may
be revised based upon the level of BIF and SAIF deposits, will continue until
the bonds mature in the year 2017.
34
<PAGE>
REGULATORY CAPITAL REQUIREMENTS
Federally insured savings associations, such as Fort Bend, are required to
maintain a minimum level of regulatory capital. The OTS has established capital
standards, including a tangible capital requirement, a leverage ratio (or core
capital) requirement and a risk-based capital requirement applicable to such
savings associations. These capital requirements must be generally as stringent
as the comparable capital requirements for national banks. The OTS is also
authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries, the debt and equity investments in such subsidiaries are deducted
from assets and capital. At March 31, 1998, the Association had tangible
capital of $22.9 million, or 7.32% of adjusted total assets, which was
approximately $18.2 million above the minimum requirement of 1.5% of adjusted
total assets in effect on that date.
The capital standards also require core capital equal to at least 4% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At March 31, 1998, the
Association had intangible assets in the form of $1.3 million of goodwill which
were subject to these tests.
At March 31, 1998, the Association had core capital equal to $22.9 million,
or 7.32% of adjusted total assets, which was $10.4 million above the minimum
leverage ratio requirement of 4.0% as in effect on that date.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be
used to satisfy the risk-based requirement only to the extent of core capital.
The OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At March 31, 1998, the Association
had no capital instruments that qualify as supplementary capital and $1.4
million of general loss reserves, which was less than 1.25% of risk-weighted
assets.
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<PAGE>
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Association had
$263,000 of investments in and advances to nonincludable subsidiaries and
$760,000 of excess qualifying purchased or originated mortgage loan servicing
which were excluded from capital and assets for the purpose of calculating total
capital at March 31, 1998.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan to value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by the FNMA or FHLMC.
The OTS has adopted a final rule that requires every savings association
with more than normal interest rate risk exposure to deduct from its total
capital, for purposes of determining compliance with such requirement, an amount
equal to 50% of its interest-rate risk exposure multiplied by the present value
of its assets. This exposure is a measure of the potential decline in the net
portfolio value of a savings association, greater than 2% of the present value
of its assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and off-
balance sheet contracts. The rule provides for a two-quarter lag between
calculating interest rate risk and recognizing any deduction from capital. The
rule will not become effective until the OTS evaluates the process by which
savings associations may appeal an interest rate risk deduction determination.
It is uncertain as to when this evaluation may be completed.
At March 31, 1998, Fort Bend had total capital of $24.3 million (including
$22.9 million in core capital and $1.4 million in qualifying supplementary
capital) and risk-weighted assets of $171.2 million; or total capital of 14.2%
of risk-weighted assets. This amount was $10.6 million above the 8% requirement
in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1 risked-
based capital ratio or an 8% risk-based capital ratio). Any such association
must submit a capital restoration plan and until such plan is approved by the
OTS may not increase its assets, acquire another institution, establish a branch
or engage in any new activities, and generally may not make capital
distributions. The OTS is authorized to impose the additional restrictions that
are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital
36
<PAGE>
ratio of less than 6%) must be made subject to one or more of additional
specified actions and operating restrictions which may cover all aspects of its
operations and include a forced merger or acquisition of the association. An
association that becomes "critically undercapitalized" (i.e., a tangible capital
ratio of 2% or less) is subject to further mandatory restrictions on its
activities in addition to those applicable to significantly undercapitalized
associations. In addition, the OTS must appoint a receiver (or conservator with
the concurrence of the FDIC) for a savings association, with certain limited
exceptions, within 90 days after it becomes critically undercapitalized. Any
undercapitalized association is also subject to the general enforcement
authority of the OTS and the FDIC, including the appointment of a conservator or
a receiver.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on Fort Bend
may have a substantial adverse effect on the Company's operations and
profitability. Company stockholders do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Company.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
OTS regulations impose various restrictions on savings associations with
respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.
Generally, savings associations, such as Fort Bend, that before and after
the proposed distribution meet their capital requirements, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus 50% of the amount by which the lesser of the
association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. Fort Bend may
pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. Savings
associations that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain OTS
approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
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<PAGE>
LIQUIDITY
All savings associations, including Fort Bend, are required to maintain an
average daily balance of liquid assets equal to a certain percentage of the sum
of its average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. This liquid asset ratio requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the minimum liquid
asset ratio is 4%.
ACCOUNTING
An OTS policy statement applicable to all savings associations clarifies
and re-emphasizes that the investment activities of a savings association must
be in compliance with approved and documented investment policies and
strategies, and must be accounted for in accordance with generally accepted
accounting principles. Under the policy statement, management must support its
classification of and accounting for loans and securities (i.e., whether held
for investment, sale or trading) with appropriate documentation. Fort Bend is
in compliance with these amended rules.
The OTS has adopted an amendment to its accounting regulations, which the
OTS may make more stringent than generally accepted accounting principles, to
require that transactions be reported in a manner that best reflects their
underlying economic substance and inherent risk and that financial reports must
incorporate any other accounting regulations or orders prescribed by the OTS.
QUALIFIED THRIFT LENDER TEST
All savings associations, including the Association, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of
its portfolio assets (as defined by regulation) in qualified thrift investments
on a monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the savings association may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under
either test, such assets primarily consist of residential housing related loans
and investments. As March 31, 1998, the Association met the test and has always
met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "-- Holding Company Regulation."
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<PAGE>
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of the
Association, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by Fort Bend.
An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.
The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the
past few years, the Association may be required to devote additional funds for
investment and lending in its local community. The Association was last
examined for CRA compliance in March 31, 1998 and received a rating of
satisfactory.
TRANSACTIONS WITH AFFILIATES
Generally, transactions between a savings association or its subsidiaries
and its affiliates are required to be on terms as favorable to the association
as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the association's capital. Affiliates of Fort Bend include the Company and any
company which is under common control with Fort Bend. In addition, a savings
association may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of most affiliates. The
Association's subsidiaries are not deemed affiliates. The OTS, however, has the
discretion to treat subsidiaries of savings associations as affiliates on a
case-by-case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
HOLDING COMPANY REGULATION
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and
its non-savings association subsidiaries which also permits the OTS to restrict
or prohibit activities that are determined to be a serious risk to the
subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than Fort Bend or any other SAIF-insured savings
39
<PAGE>
association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
If the Association fails the QTL test, the Company must obtain the approval
of the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See "-
Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control of
any other SAIF-insured association. Such acquisitions are generally prohibited
if they result in a multiple savings and loan holding company controlling
savings associations in more than one state. However, such interstate
acquisitions are permitted based on specific state authorization or in a
supervisory acquisition of a failing savings association.
FEDERAL SECURITIES LAW
The stock of the Company is registered with the Commission under the
Exchange Act. The Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the Commission under the
Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to maintain
non-interest bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts). At March
31, 1998, the Association was in compliance with these reserve requirements.
The balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements that may be imposed
by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM
The Association is a member of the FHLB of Dallas, which is one of 12
regional FHLBs that administer the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members
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<PAGE>
(i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately-priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Association's FHLB stock may result in a corresponding
reduction in the Association's capital.
As a member of the FHLB of Dallas, the Association is required to purchase
and maintain stock in the FHLB of Dallas. At March 31, 1998, the Association
had $1.5 million in FHLB stock, which was in compliance with this requirement.
Fort Bend has received dividends on its FHLB stock, which have averaged 5.28%
over the past five calendar years and were 5.94% for calendar year 1997.
For the fiscal year ended March 31, 1998, stock dividends paid by the FHLB
of Dallas to the Association totaled $88,000, which constitutes a $16,000
decrease from the amount of dividends received in fiscal year 1997. The $22,000
dividend received for the quarter ended March 31, 1998 reflects an annualized
rate of 6.0%, or .06% above the rate for calendar 1997.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. Prior to the enactment of legislation in August 1996
(discussed below), savings associations such as the Association that met certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), had
been permitted to establish reserves for bad debts and to make annual additions
thereto which could, within specified formula limits, be taken as a deduction in
computing taxable income for federal income tax purposes. The amount of the bad
debt reserve deduction for "non-qualifying loans" was computed under the
experience method. The amount of the bad debt reserve deduction for "qualifying
real property loans" (generally loans secured by improved real estate) is
computed under the experience method.
In August 1996, legislation was enacted that repealed the percentage of
taxable income method of accounting used by many thrifts to calculate their bad
debt reserve for federal income tax purposes. As a result, small thrifts such
as the Association must recapture that portion of the reserve that exceeds the
amount that could have been taken under the experience method for post-1987 tax
years. The legislation also requires thrifts to account for bad debts for
federal income tax purposes on the same basis as commercial banks for tax years
beginning after December 31, 1995. The recapture will occur over a six-year
period, the commencement of which was delayed until the first taxable year
beginning after December 31, 1997, for institutions which met certain
residential lending requirements. The management of the Association does not
believe that the legislation will have a material impact on the Association.
In addition to regular income tax, corporations, including savings
associations such as the Association, generally are subject to a minimum tax.
An alternative minimum tax is imposed at a
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minimum tax rate of 20% on alternative minimum taxable income, which is the sum
of a corporation's regular taxable income (with certain adjustments) and tax
preference items, less any available exemption. The alternative minimum tax is
imposed to the extent it exceeds the corporation's regular income tax and net
operating losses can offset no more than 90% of alternative minimum taxable
income.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a stockholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of March 31, 1998, the Association's Excess for tax purposes
totaled approximately $1.5 million. Under present law should the Association
cease to be a savings institution, the Company would be required to recapture
the Association's bad debt reserves in its Excess.
The Company files consolidated federal income tax returns with the
Association and its subsidiaries on a fiscal year basis using the accrual method
of accounting. The Company and its consolidated subsidiaries have been audited
by the IRS with respect to consolidated federal income tax returns through March
31, 1985. With respect to years examined by the IRS, either all deficiencies
have been satisfied or sufficient reserves have been established to satisfy
asserted deficiencies. In the opinion of management, any examination of still
open returns (including returns of subsidiaries and predecessors of, or entities
merged into, the Association) would not result in a deficiency which could have
a material adverse effect on the financial condition or results of operations of
the Company and its consolidated subsidiaries.
TEXAS TAXATION. The State of Texas does not have a corporate income tax,
but it does have a corporate franchise tax. Legislation enacted in August 1991
subjected savings and loan associations to such franchise tax effective January
1, 1992. The tax is the higher of 0.25% of taxable capital (usually the total
of stated capital, paid in capital and retained earnings) or 4.5% of "net
taxable earned surplus." "Net taxable earned surplus" is net income for federal
income tax purposes increased by the compensation of directors and executive
officers and decreased by interest on obligations guaranteed by the U.S.
government. Net income cannot be reduced by net operating loss carryforwards
from years prior to 1991, and operating loss carryovers are limited to five
years. To the extent that the Company has "Texas" taxable income, it also will
be subject to taxation.
DELAWARE TAXATION. As a Delaware holding company, the Company is exempted
from Delaware corporate income tax but is required to file an annual report with
and pay an annual fee to the State of Delaware. The Company is also subject to
an annual franchise tax imposed by the State of Delaware.
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COMPETITION
Fort Bend faces strong competition, both in originating real estate and
other loans and in attracting deposits. Competition in originating real estate
loans comes primarily from mortgage bankers, other savings institutions,
commercial banks and credit unions located in the Association's market areas.
Other commercial banks, savings institutions, and credit unions provide vigorous
competition in consumer lending.
The Association attracts all of its deposits through its branch offices,
primarily from the communities in which those branch offices are located;
therefore, competition for those deposits is principally from other savings
institutions and commercial banks located in the same communities as well as
brokerage firms. The Association competes for these deposits by offering a
variety of deposit accounts at competitive rates, convenient business hours, and
convenient branch locations with interbranch deposit and withdrawal privileges
at each. An automated teller machine ("ATM") facility is available at the
Rosenberg, Needville, East Bernard and Missouri City branches.
EMPLOYEES
At March 31, 1998, the Company and its subsidiaries had a total of 175
employees, including 29 part-time employees. Such employees are not represented
by any collective bargaining group. Management considers its employee relations
to be good.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following is a description of the Company's and the Association's
executive officers who were not also directors as of March 31, 1998.
Larry J. Dobrava. Mr. Dobrava, age 58, is the Senior Vice President of the
Association in charge of loan operations. His primary responsibilities include
overall administration of the Association's lending operations, including real
estate, construction, consumer and commercial lending. Mr. Dobrava joined the
Association in 1966 and served in several capacities in the Association's
lending department prior to being promoted to his present position in 1981.
David D. Rinehart. Mr. Rinehart, age 56, joined the Association in 1988 as
Senior Vice President and Chief Financial Officer. Mr. Rinehart is primarily
responsible for planning and directing the Association's accounting, savings and
investment functions. He is also responsible for the overall administration of
branch operations, internal audit/compliance and data processing of the
Association. The Board of Directors of the Company elected Mr. Rinehart Senior
Vice President and Chief Financial Officer of the Company in 1993 and Executive
Vice President in 1996.
Sandra C. Samford. Ms. Samford, age 48, has been Vice President in charge
of corporate planning and investor relations and the Association's Corporate
Secretary since 1988. In this capacity, she is responsible for planning and
coordinating the Association's management information system. Ms. Samford has
been employed by the Association since 1970. The Board of Directors of the
Company elected Ms. Samford Vice President and Secretary of the Company in 1993.
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ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth information relating to each of the
Association's current offices. The total net book value of the Association's
premises and equipment at March 31, 1998 was $4.7 million.
<TABLE>
<CAPTION>
Date Net Book Value Branch
Location Acquired at March 31, 1998 Deposits
- ------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Main Office:
3400 Avenue H 1965 $2,945 $172,810
Rosenberg, Texas
Branch Offices:
3328 School Street 1994 364 34,474
Needville, Texas
10881 Bissonnet (1) 26 13,391
Houston, Texas
9212 Highway 60 1995 335 15,821
East Bernard, Texas
919 Avenue C (2) 87 8,028
Katy, Texas
5819 Highway 6, Suite 100 (3) 555 24,467
Missouri City, Texas
Mitchell Office:
10077 Grogan's Mill Road (4) 426 ---
Suite 300
The Woodlands, Texas
</TABLE>
___________________
(1) This location is leased through March 1999.
(2) This location is leased through February 1999.
(3) This location is leased through June 2001.
(4) This location is leased through July 1999.
The Association maintains depositor and borrower customer files on an on-
line basis with Fiserv Financial Systems Inc., Beaumont, Texas and Excelis,
Inc., Dallas, Texas. The net book value of the data processing and computer
equipment utilized by the Association at March 31, 1998 was approximately
$645,000.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries, from time to time, are involved as
plaintiff or defendant in various legal actions arising in the normal course of
their businesses. While the ultimate outcome of any such proceedings cannot be
predicted with certainty, it is the opinion of management that no proceedings
exist which, if determined adversely to the Company and its subsidiaries, would
have a material effect on Fort Bend's consolidated results of operations.
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended March 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK PRICE INFORMATION
Fort Bend Holding Corp.'s common stock is listed on the Nasdaq National Market
under the symbol "FBHC". As of June 12, 1998, the Company had approximately
1,779,411 shares of common stock outstanding and 515 shareholders of record.
The number of shareholders of record does not reflect shares held in nominee or
"street" name.
The table below shows the reported high and low price range of the common stock
during the fiscal year ended March 31, 1998. The stock was phased into the
NASDAQ National Market on October 16, 1996, which reports the high and low price
range. The stock began trading on June 30, 1993.
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------
High Low Dividends High Low Dividends
------ ------ --------- ----- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
First Quarter 15 1/4 11 7/8 $0.035 9 1/4 8 3/4 $0.035
Second Quarter 20 1/8 14 3/4 $0.050 9 3/4 8 3/8 $0.035
Third Quarter 24 1/4 19 $0.100 13 9 3/8 $0.035
Fourth Quarter 30 3/4 20 1/2 $0.100 12 3/8 11 $0.035
</TABLE>
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In addition, listed below are the Company's dividends on common stock
payout ratio for the years indicated:
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------
1998 1997 1996
----------- --------- -----------
<S> <C> <C> <C>
Dividends Paid $ 475,703 $229,457 $ 237,298
Net Income $2,018,017 $774,773 $1,687,036
Dividend Payout Ratio 23.57% 29.62% 14.07%
</TABLE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING INFORMATION
When used in this report, the words "believes," "anticipates," "expect" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially, including, but not limited to, those set
forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. Fort
Bend Holding Corp. (the "Holding Corp.") undertakes no obligation to publicly
release the results of any revisions to these forward-looking statements which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
GENERAL
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 March 31, 1998, had no significant assets or
liabilities other than the investment in the capital stock of the Association,
investment securities, deferred charges from the subordinated debt issue, cash
and cash equivalents and the subordinated debentures. However, during the
fiscal year, the Holding Corp. did participate in multi-family loans originated
by Mitchell Mortgage Company, L.L.C. ("Mitchell") for sale to the Federal Home
Loan Mortgage Corporation and Federal National Mortgage Association. It is
anticipated that this will continue in fiscal year 1999. In January, 1997 the
Association acquired, and has consolidated in its financial statements, a 51%
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
deposits from the general public and investing those funds in first mortgage
loans on owner occupied, single-family residences, mortgage-backed securities
and investment securities. The Association originates residential construction
loans, land acquisition and development loans and commercial real estate loans.
The Association also originates commercial 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
multi-family 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 on competing investments and general market rates of interest.
Lending activities are influenced by the demand for
46
<PAGE>
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 March 31, 1998, principal
outstanding on home equity loans was approximately $2.2 million.
Since conversion to stock form, in order to meet the financial services needs of
the communities it serves, the Association's intention has been to grow in a
reasonable, prudent manner and has included expansion of the branch network and
the acquisition of other financial institutions and related companies operating
generally within a 100 mile radius of Rosenberg, Texas. As a part of this
growth, 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. Two additional branch offices, in Katy, Texas and Missouri City,
Texas, were added during fiscal 1997. Management believes that this has resulted
in the expansion of the Association's core deposit base and lending activities.
In addition, a new branch in The Woodlands, Texas has been approved by the
Office of Thrift Supervision. The branch facility initially will be located in
the offices of Mitchell and is expected to open in the early part of fiscal
1999.
Continued growth of the Association may be financed by either increasing the
deposit portfolio or from borrowed funds. The acquisition of branches from
other financial institutions in the Association's geographic area is one other
possible source. In addition, the use of borrowed funds to purchase short
duration, mortgage-backed securities or single family mortgage loans may be
considered to add to the Association's portfolio.
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 March 31, 1998,
the Association serviced approximately $311 million of loans for others and
Mitchell serviced approximately $588 million of loans for others for a total of
$899 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.
The Holding Corp.'s strategic plan will continue to be reviewed quarterly for
progress by the Board of Directors. The Board will modify the plan as deemed
appropriate to reflect the operational environment of the Association and the
best interest of shareholders.
Interest rates decreased slightly during the fiscal year ended March 31, 1998.
The impact of this change was a higher volume of permanent single family lending
activity, resulting in an increase in net gain on sale of loans and an increase
to loans receivable, net. In a declining rate environment, prices for loans
sold in the secondary market normally increase and generally create a gain when
the loans are sold. In addition, the Association has been able to generate new
sources of single family construction lending, consumer lending, and commercial
real estate lending to
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<PAGE>
compliment the volume of permanent single family lending.
It is difficult to determine the exact impact of declining interest rates on the
net interest margin. Prepayment tendencies on loans and mortgage-backed
securities may vary from historical experience and depositors' preference for
various deposit products and maturities may also vary. The Association's
favorable liquidity position of 12.24% allows some flexibility in adjusting to
cash flow requirements brought on by interest rate changes. The Association's
one year interest-rate sensitivity gap was a positive 17.57% of total assets at
March 31, 1998. A positive gap indicates there are more interest-earning assets
repricing during a stated period than interest-bearing liabilities. This
suggests that in a declining rate environment the net interest margin would
decrease and in a rising rate environment the margin would increase. See
"Interest Rate Risk Management".
At March 31, 1998, the Holding Corp. had unrealized gains and losses in its
investment securities and mortgage-backed securities portfolio which are being
held to maturity. The Holding Corp. has both the intent and ability to hold
these securities until maturity. In addition, 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. As such, the Holding Corp. believes that these
unrealized losses will not ultimately be realized and, therefore, should not be
recognized in the financial statements since such losses are not other than
temporary.
Most of the Association's mortgage-backed securities are agency securities and
are either guaranteed by the full faith and credit of the United States
Government (GNMA) or are insured by a Government Sponsored Enterprise (FNMA &
FHLMC). In addition, the Association holds some private issue mortgage-backed
securities which consist of the "A" piece of "A-B" structured securities, where
the "B" piece is subordinate to the "A" piece, and which have been rated one of
the two highest categories by one or more of the rating agencies. These
securities have pool insurance and/or reserve funds in addition to the
subordination of the "B" piece. Collateral for these securities is mortgage
whole loans. None of these securities are considered "high risk" as defined by
the Office of Thrift Supervision ("OTS") 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 such "high risk"
securities.
Management of the investment portfolio is not designed to be the primary source
of funds for the Holding Corp.'s operations. Rather, it is viewed as a use of
funds generated by the Holding Corp. to be invested in interest-earning assets
to be held to maturity or available for sale. 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 needs of the Holding
Corp. since the Association has the ability to borrow funds from the Federal
Home Loan Bank of Dallas. Currently, the Association has the ability to borrow
up to an additional $149 million 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. See "Liquidity and Capital
Resources".
48
<PAGE>
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 Holding
Corp.'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.
The Holding Corp. outsources its primary data processing functions. To date, the
Holding Corp. has solicited confirmations from its primary vendors that plans
have been developed by them to address and correct the issues associated with
the Year 2000. The Holding Corp. has established a management committee to
identify all of its functions potentially affected by the Year 2000 and to
ensure that re-programming and testing of the affected systems will be
substantially completed by December 31, 1998, thus allowing adequate time for
implementation. Management believes that, with modifications to existing
hardware and software and conversions to new software, the Year 2000 issue will
not pose a significant operational problem for the Holding Corp. However,
because most computer systems are, by their very nature, interdependent, it is
possible that non-compliant third party computers could "reinfect" the Holding
Corp.'s computer systems. The Holding Corp. could be adversely affected by the
Year 2000 issue if it or unrelated parties fail to successfully address this
issue. It is currently estimated that the Holding Corp. will spend approximately
$100,000 on the Year 2000 issue.
49
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEARS ENDED
MARCH 31, 1998 AND 1997
Net income for the fiscal year ended March 31, 1998 was $2,018,000, or $1.21 per
common share, compared to $775,000, or $0.47 per common share, for fiscal 1997.
Earnings per common share - assuming dilution were $0.94 and $0.46 for the
fiscal year ended March 31, 1998 and 1997, respectively. The significant
earnings increase for fiscal 1998 as compared to fiscal 1997 is partially
attributable to the special assessment of $1,493,000 recorded by the Company on
September 30, 1996 as a result of the Economic Growth and Regulatory Paperwork
Reduction Act.
Also contributing to increased earnings for the fiscal year have been the
results of the Association's single family construction lending, consumer
lending, loan servicing, and the activity of the Association's subsidiary,
Mitchell.
NET INTEREST INCOME. Net interest income before provision for loan losses
increased $2.0 million to $9.4 million for the fiscal year 1998 compared to $7.4
million in fiscal 1997. The increase primarily reflects an increase in average
net interest-earning assets of $17.0 million from $13.0 million in fiscal 1997
to $30.0 million in fiscal 1998. Net interest income in fiscal 1998 was
favorably impacted by an increase of $38.2 million in the average balance of
loans receivable, primarily due to the acquisition of Mitchell in January 1997.
The average balance of Mitchell's loan portfolio was $30.0 million in fiscal
1998. Further contributing to the increased loans receivable balance was an
increase in the average balance of construction loans of $15.9 million from
$13.1 million in fiscal 1997 to $29.0 million in fiscal 1998 and an increase in
the average balance of installment and non-mortgage loans of $4.8 million from
$17.5 million in fiscal 1997 to $22.3 million in fiscal 1998. Partially
offsetting the increase in loans receivable was a decrease in the average
balance of mortgage-backed securities of $13.9 million. The Association's loan
demand was given preference over investments in mortgage-backed securities
during fiscal 1998. Average deposits increased $20.2 million and primarily
reflects the addition of the Katy branch in May 1996, the acquisition of
FirstBanc Savings Association of Texas ("FirstBanc") in August 1996, and the
escrow deposits of Mitchell. Average borrowings decreased $1.3 million and
primarily reflect a decrease in average monthly Federal Home Loan Bank advances
of $968,000. Also contributing to the increase in net interest income is a .34%
increase in the net yield on average interest-earning assets to 3.29% in fiscal
1998 compared to 2.95% for fiscal 1997. The improvement in net yield primarily
reflects an increase of .09% in the yield on average interest-earning assets to
7.60% for fiscal 1998 compared to 7.51% for fiscal 1997 partially offset by an
increase of .01% in the cost of interest-bearing liabilities in fiscal 1998
compared to fiscal 1997. The increase in the yield on average interest-earning
assets was primarily caused by the increase in the average loans receivable
balances discussed above and the reinvestment of principal repayments on
mortgage-backed securities with an average rate of 6.61% into portfolio loans
with an average rate of 8.64%.
PROVISION FOR LOAN LOSSES. The provision for loan losses for fiscal 1998
decreased $228,000 to $96,000 for the fiscal year 1998 from $324,000 for fiscal
1997. In fiscal 1997, a loan loss provision was primarily established in
recognition of the increase in
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<PAGE>
the loan portfolio from the acquisitions of FirstBanc and Mitchell. The
allowance for loan losses to total loans receivable was .99% at March 31, 1998
compared to 1.22% at March 31, 1997. The allowance for loan losses to total
loans receivable has decreased over the past five years, reflecting positive
trends in the Company's asset quality ratios. Non-performing assets to total
assets has steadily fallen from a high of 2.00% at March 31, 1994 to .37% at
March 31, 1998. Non-performing loans to total loans receivable have shown
positive trends over the same time period, with a high of 5.40% at March 31,
1994 and a low of .64% at March 31, 1997. Non-performing loans to total loans
receivable at March 31, 1998 was .67%. The allowance for loan losses to total
loans receivable at March 31, 1998 is 148.06%. See "Selected Financial Data".
Management maintains an allowance for loan losses in an amount which, in
management's judgment, is adequate to absorb reasonable foreseeable losses
inherent in the loan portfolio. The amount of the provision is based on
management's regular review of the loan portfolio and consideration of such
factors as historical loss experience, generally prevailing economic conditions,
changes in size and composition of the loan portfolio and considerations
relating to specific loans, including the ability of the borrower to repay the
loan and the estimated value of the underlying collateral. The decrease in the
allowance for loan losses is consistent with the Association's historical loss
experience. Ultimately, the adequacy of the allowance is dependent upon the
economy, changes in real estate values and interest rates and regulatory
requirements regarding asset classifications. See "Asset Quality."
NONINTEREST INCOME. Noninterest income increased $3.5 million to $6.9 million
in fiscal 1998 compared to $3.4 million in fiscal 1997. Loan fees and charges
increased $2.6 million primarily reflecting an increase of $2.5 million in fees
generated by Mitchell's activities. Gain on sales of loans in fiscal 1998 was
$870,000 compared to $568,000 in fiscal 1997. The volume of loan sales
increased $47.1 million in fiscal 1998 compared to fiscal 1997. The increase in
volume was directly related to the acquisition of Mitchell, which actively sells
mortgage loans in the secondary market. Loan servicing income increased
$363,000 which primarily reflected an increase of $30.8 million in loans
serviced for others to $898.8 million at March 31, 1998 compared to $868.0
million at March 31, 1997. The unpaid principal balance of mortgage loans
serviced for others acquired with the acquisition of Mitchell in January 1997
was $600 million. Service charges on deposit accounts increased $126,000
primarily reflecting an increase in the number of transaction accounts resulting
from the acquisition of FirstBanc and the new branch office opened in Katy,
Texas. Other income increased $96,000 primarily reflecting an increase in other
income from Mitchell of $288,000. This increase was partially offset by a
decrease in the earnings from the sales of insurance products and discount
brokerage services of $161,000 caused by a decrease in sales volume in fiscal
1998.
NONINTEREST EXPENSE. Noninterest expense increased $3.5 million to $12.7
million in fiscal 1998 compared to $9.2 million in fiscal 1997. Compensation
and benefits increased $2.7 million and primarily reflected additional personnel
retained from the acquisitions of FirstBanc and Mitchell and the opening of the
Katy branch and normal salary increases within the Association. Employee stock
ownership plan expense increased $282,000, primarily due to the appreciation in
the market value of ESOP shares released from collateral on the ESOP debt. This
non-cash pretax charge increased $248,000 to $383,000, which represents $0.23
per common share outstanding, for fiscal 1998 compared to $135,000 for fiscal
1997. The increase is primarily attributable to an increase in the
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<PAGE>
number of shares released and an increase in Fort Bend Holding Corp.'s stock
price to $27.00 per share at March 31, 1998 compared to $12.38 per share at
March 31, 1997. The cost of the stock to the ESOP is $5.00 per share. Office
occupancy increased $680,000 to $1.8 million for fiscal 1998 compared to $1.1
million for fiscal 1997 and primarily reflected an increase in Mitchell's
occupancy expense of $504,000. In addition, the Association experienced an
increase of $103,000 in depreciation, $45,000 in rent and utilities and $25,000
in telephone expense associated with the addition of the new branch in Katy,
Texas and the acquisition of FirstBanc. Data processing fees increased $276,000
to $569,000 for fiscal 1998 compared to $293,000 for fiscal 1997. The increase
was primarily due to increased fees for Mitchell of $151,000. In addition, the
Association experienced an increase in data processing fees associated with
computer upgrades and increased service bureau charges. Other expenses increased
$1.1 million to $2.8 million for fiscal 1998 compared to $1.7 million for fiscal
1997. The increase was primarily due to increased expenses of Mitchell of
$858,000, the largest of which was an increase in credit report and appraisal
fees of $180,000. Partially offsetting these increased expenses is the one time
Savings Association Insurance Fund assessment of $1.5 million recorded on
September 30, 1996 with no similar charge recorded in fiscal 1998.
INCOME TAX EXPENSE. Income tax expense increased $732,000 in fiscal 1998
compared to fiscal 1997. The increase primarily reflected the increase in
income before tax. At March 31, 1998 and 1997, the Holding Corp. has recorded a
net deferred tax asset of $105,000 and $306,000, respectively. A valuation
allowance has not been recorded since the Holding Corp. has generated sufficient
levels of taxable income to insure realization of the deferred tax asset.
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED SUBSIDIARY. Minority interest
in net income of consolidated subsidiary increased $315,000 to $373,000 for
fiscal 1998 compared to $58,000 for fiscal 1997. The increase reflected an
increase in net income of Mitchell of approximately $643,000 from $118,000 in
fiscal 1997 to $761,000 in fiscal 1998. The fiscal 1998 financial statement
include the results of Mitchell for the full year.
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<PAGE>
COMPARISON OF FISCAL YEARS ENDED
MARCH 31, 1997 AND 1996
Net income for the fiscal year ended March 31, 1997 was $775,000, or $0.47 per
common share, compared to $1,687,000, or $1.00 per common share, for fiscal
1996. Earnings per common share - assuming dilution were $0.46 and $0.91 for the
fiscal year ended March 31, 1997 and 1996, respectively. The decrease in net
income resulted from an increase in noninterest expense of $3.6 million, a
substantial part of which was a one-time assessment on all SAIF insured
institutions, partially offset by increases of $1.5 million and $974,000 in
noninterest income and net interest income, before provision for loan losses,
respectively.
NET INTEREST INCOME. Net interest income before provision for loan losses
increased $974,000 to $7.4 million for the fiscal year 1997 compared to $6.4
million in fiscal 1996. The increase primarily reflects a .14% increase in net
yield on average earning assets to 2.95% in fiscal 1997 compared to 2.81% for
fiscal 1996. The improvement in net yield primarily reflects an increase of
.28% in the yield on average interest-earning assets to 7.51% for fiscal 1997
compared to 7.23% for fiscal 1996 partially offset by an increase of .02% in
cost of interest-bearing liabilities in fiscal 1997 compared to fiscal 1996.
Net interest income in fiscal year 1997 was favorably impacted by an increase of
$32.3 million in the average balance of loans receivable representing the loans
acquired in the FirstBanc and Mitchell acquisitions. The gross amount of loans
included in the calculation of the average monthly balance for FirstBanc and
Mitchell was approximately $21 million and $19.2 million, respectively.
Partially offsetting the increase in loans receivable growth was a decrease in
the average balance of mortgage-backed securities of $13.4 million. The
Association's loan demand was given preference over investments in mortgage-
backed securities. Average deposits increased $20.6 million and primarily
reflects the gross deposits acquired from FirstBanc in August 1996. Average
borrowings increased $7.1 million and primarily reflects a full year of the
$12.1 million, 8% Convertible Subordinated Debentures issued in December 1995.
PROVISION FOR LOAN LOSSES. Provision for loan losses for fiscal 1997 increased
$201,000 to $324,000 from $123,000 for fiscal 1996. In fiscal 1997, loan loss
provisions were primarily established in recognition of the $45 million increase
in the loan portfolio from March 31, 1996 to March 31, 1997 and the decrease of
.21% to 1.22% in allowance for loan losses to total loans at March 31, 1997.
Non-performing assets to total assets decreased to .42% at March 31, 1997
compared to 1.29% at March 31, 1996.
NONINTEREST INCOME. Noninterest income increased $1.5 million to $3.4 million
in fiscal 1997 compared to $1.9 million in fiscal 1996. Gain on sales of loans
in fiscal 1997 was $568,000 compared to $313,000 in fiscal 1996. The volume of
loan sales increased $10.5 million in fiscal 1997 compared to fiscal 1996. The
increase in volume was directly related to the acquisition of Mitchell, which
actively sells mortgage loans in the secondary market, in January 1997. Loan
fees and charges increased $337,000 primarily reflecting increases in appraisal
fees of $133,000, construction loan fees of $44,000, most of which reflected the
$15.8 million increase in loan originations, late payment fees of $50,000 and
$114,000 of construction loan fees at Mitchell. Loan servicing income increased
$477,000 which primarily reflected the $147 million of purchased and originated
servicing and the $600 million of servicing acquired with the acquisition of
Mitchell.
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Service charges on deposit accounts increased $158,000 primarily reflecting fees
on transaction accounts which reflects an increase in the number of accounts
resulting from the acquisition of FirstBanc and the new branch office opened in
Katy, Texas. Other income increased $231,000 primarily reflecting an increase in
the earnings from the sales of insurance products and discount brokerage
services of $263,000 reflecting renewal commissions earned on approximately $6
million of fixed annuities. The increase was partially offset by a decrease of
$30,000 in earnings from the sale of developed lots.
NONINTEREST EXPENSE. Noninterest expense increased $3.6 million to $9.2 million
in fiscal 1997 compared to $5.6 million in fiscal 1996. A significant portion
of the increase was the result of a one-time assessment of $1.5 million by the
Savings Association Insurance Fund ("SAIF"), which is administered by the
Federal Deposit Insurance Corporation. In addition to the SAIF assessment,
compensation and benefits increased $1.2 million and primarily reflected
additional personnel retained from the acquisition of FirstBanc in August 1996
and Mitchell Mortgage in January 1997, staffing for a new branch office opened
in Katy, Texas, normal salary increases and other additions to staff, partially
offset by a decrease in contributions to the retirement plan. Office occupancy
increased $465,000 and primarily reflected increases of $122,000 in rent and
utilities relating to the acquisition of FirstBanc and opening of the Katy
Branch office, $133,000 in depreciation relating to remodeling of the Katy
Branch, acquisition of FirstBanc, and upgrading computer and telephone systems,
$122,000 relating to office occupancy costs at Mitchell and $38,000 in building
taxes and maintenance contracts. Data processing fees increased $101,000 and
primarily reflected costs associated with the addition of FirstBanc and the new
branch office opened in Katy, Texas, creation of a wide area network connecting
all branch and main offices into one system and the fees incurred by Mitchell
for data processing. Real estate operations, net decreased $195,000 and
primarily reflected a $167,000 gain on sale of a multifamily property previously
held as foreclosed real estate. Other expense increased $526,000 and primarily
reflected an increase in stationery and supplies of $54,000 and postage of
$30,000 all of which represent expenses associated with the Katy branch
expansion and the acquisition of FirstBanc. Approximately $60,000 of other
expenses were related to Mitchell. Capitalized loan origination costs decreased
$73,000 since most loans were originated for sale, eliminating the ability to
defer the associated loan origination cost. Goodwill amortization of $51,000,
associated with the FirstBanc acquisition, was recognized in fiscal year 1997.
INCOME TAX EXPENSE. Income tax expense decreased approximately $550,000 in
fiscal 1997 compared to fiscal 1996. The decrease reflected lower net income,
primarily as a result of the one-time SAIF assessment. At March 31, 1997 and
1996, the Holding Corp. has recorded a net deferred tax asset of $306,000 and
$419,000, respectively. A valuation allowance has not been recorded since the
Holding Corp. has generated sufficient levels of taxable income to insure
realization of the deferred tax asset.
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED SUBSIDIARY. Minority interest
in net income of consolidated subsidiary was approximately $58,000 in fiscal
1997. This balance represents the interest of The Woodlands Corporation in net
income of Mitchell. The Association acquired a 51% ownership interest in
Mitchell in January 1997.
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AVERAGE BALANCES, INTEREST YIELDS AND RATES
The following table presents for the periods indicated the total dollar amount
of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
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>
YEAR ENDED MARCH 31,
(DOLLARS IN THOUSANDS)
1998 1997 1996
---------------------------------- -------------------------------- ------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield
Balance Paid Rate Balance Paid Rate Balance Paid Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable (1) $ 156,764 $ 13,549 8.64% $ 118,560 $ 10,251 8.65% $ 86,289 $ 7,375 8.55%
Mortgage-backed securities 90,177 5,962 6.61 104,070 6,925 6.65 117,444 7,719 6.57
Investment securities and other
interest-earning assets 38,663 2,203 5.70 27,137 1,590 5.86 23,476 1,323 5.64
-------- ------- ----- -------- ------- ----- ------- ------- -----
Total interest-earning
assets (1) $ 285,604 $ 21,714 7.60% $ 249,767 $ 18,766 7.51% $ 227,209 $ 16,417 7.23%
======== ======= ===== ======== ======= ===== ======= ======= =====
Interest-Bearing Liabilities:
NOW deposits $ 24,886 $ 544 2.19% $ 21,437 $ 491 2.29% $ 17,049 $ 401 2.35%
Savings deposits and MMA 45,372 1,285 2.83 42,456 1,185 2.79 38,140 1,046 2.74
Certificates of deposit 169,249 9,200 5.44 155,453 8,350 5.37 143,508 7,847 5.47
Borrowings 16,191 1,297 8.01 17,468 1,372 7.86 10,370 730 7.04
-------- ------- ----- -------- ------- ----- ------- ------- -----
Total interest-bearing
liabilities $ 255,698 $ 12,326 4.82% $ 236,814 $ 11,398 4.81% $ 209,067 $ 10,024 4.79%
======== ======= ===== ======== ======= ===== ======= ======= =====
Net interest income $ 9,388 $ 7,368 $ 6,393
======= ======= =======
Net interest rate spread 2.78% 2.70% 2.44%
===== ===== =====
Net interest-earning assets $ 29,906 $ 12,953 $ 18,142
======== ======== =======
Net yield on average
interest-earning assets 3.29% 2.95% 2.81%
===== ===== =====
Average interest-earning
assets to average interest-
bearing liabilities 111.70% 105.47% 108.68%
======= ======= =======
</TABLE>
(1) Calculated net of deferred loan fees, loans in process and allowance for
losses
55
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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 increase related to
higher 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>
YEAR ENDED MARCH 31
(DOLLARS IN THOUSANDS)
1998 v 1997 1997 V 1996
Increase (Decrease) due to Increase (Decrease) due to
----------------------------------- -----------------------------------
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Interest-Earnings Assets:
Loans receivable $ 3,310 $ (12) $ 3,298 $ 2,789 $ 87 $ 2,876
Mortgage-backed securities (921) (42) (963) (889) 95 (794)
Investment securities and
other interest-earning assets 656 (43) 613 214 53 267
-------- -------- -------- -------- ------- -------
Total interest-earning assets $ 3,045 $ (97) $ 2,948 $ 2,114 $ 235 $ 2,349
======== ======== ======== ======== ======= =======
Interest-Bearing Liabilities:
NOW deposits $ 74 $ (21) $ 53 $ 100 $ (10) $ 90
Savings deposits and MMA 83 17 100 120 19 139
Certificates of deposit 741 109 850 645 (142) 503
Borrowings (101) 26 (75) 549 94 643
-------- -------- -------- -------- ------- -------
Total interest-bearing liabilities $ 797 $ 131 $ 928 $ 1,414 $ (39) $ 1,375
======== ======== ======== ========= ======= =======
Net interest income $ 2,020 $ 974
======== =======
</TABLE>
56
<PAGE>
AVERAGE YIELDS EARNED AND RATES PAID
The following table presents the weighted average yields earned on loans,
investments, and other interest-earning assets, and the weighted average rates
paid on deposits and borrowings and the resultant interest rate spreads at the
dates indicated. Weighted average balances are based on the balances at the end
of the period presented.
AT MARCH 31,
------------------------
1998 1997 1996
WEIGHTED AVERAGE YIELD ON:
Loans receivable 8.53% 8.61% 8.37%
Mortgage-backed securities 6.67% 6.74% 6.79%
Investment securities and other
interest-earnings assets 5.43% 5.86% 5.07%
COMBINED WEIGHTED AVERAGE YIELD ON
INTEREST-EARNINGS ASSETS 7.66% 7.65% 7.24%
WEIGHTED AVERAGE RATE PAID ON:
Savings deposits 2.50% 2.77% 2.74%
NOW deposits 2.44% 2.25% 2.34%
Certificates of deposit 5.42% 5.42% 5.46%
Borrowings 7.61% 7.54% 7.54%
COMBINED WEIGHTED AVERAGE RATE PAID ON
INTEREST-BEARING LIABILITIES 4.73% 4.76% 4.88%
SPREAD 2.93% 2.89% 2.36%
57
<PAGE>
INTEREST RATE RISK MANAGEMENT
The Association 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. The Association has
implemented these policies by generally selling long term fixed-rated mortgage
loans that are originated, retaining adjustable-rate mortgage loans and
short-term consumer loans that are originated, and purchasing adjustable rate or
short-term to maturity loans, mortgage-backed securities or collateralized
mortgage obligations. As of March 31, 1998, the Association had 52.2% of its
total loans and mortgage-backed securities in adjustable rate instruments
compared to 55.2% at March 31, 1997. Loans held for sale, which are primarily
fixed-rate mortgage loans, increased $10.3 million to $12.9 million at March 31,
1998 compared to $2.6 million at March 31, 1997. As a result of these policies,
the Association's cumulative one year interest-rate sensitivity gap at March 31,
1998 was a positive 17.57%. A positive gap would expose the Association to a
decrease in the net interest margin in a declining interest rate environment as
interest earned on assets may decline more rapidly than interest expense paid on
deposits. An increase in rates would be expected to cause interest income to
increase more rapidly than interest expense.
The following table sets forth the assumed repricing and maturity periods of the
Association's interest-earning assets and interest-bearing liabilities at March
31, 1998 and the interest rate sensitivity gap percentages at the dates
indicated. The interest rate sensitivity gap is defined as the amount by which
assets repricing within the respective periods exceed liabilities repricing
within such periods. All loans, mortgage and consumer, are assumed to prepay at
annual rate of 6% per year. Adjustable-rate mortgage-backed securities with
current market indices (treasury yields, LIBOR, prime) are assumed to prepay at
annual rates ranging from 1% to 19% per year. Adjustable-rate mortgage-backed
securities with lagging indices (cost of funds) are assumed to prepay at annual
rates ranging from 5% to 15% per year. Fixed-rate mortgage-backed securities are
assumed to prepay at annual rates ranging from 9% to 18% per year. The decay
rate on savings and NOW accounts is assumed to be 60% within the next three
years, 20% between years four and five, and 20% between years six and ten. The
decay rate on money market accounts, which are more rate sensitive, is assumed
to be 50% between months four and twelve and 50% between years two and three. It
is assumed that fixed-rate certificates of deposit will not be withdrawn prior
to maturity.
The effect of these assumptions is to quantify the dollar amount of items that
are interest-rate sensitive and can be repriced within each of the periods
specified. Such repricing can occur in one of three ways: (1) the rate of
interest to be paid on an asset or liability may adjust periodically on the
basis of an index; (2) an asset or liability such as a mortgage loan may
amortize, permitting reinvestment of cash flows at the then-prevailing interest
rates; or (3) an asset or liability may mature, at which time the proceeds can
be reinvested at current market rates.
58
<PAGE>
<TABLE>
<CAPTION>
Maturing or Repricing Amount
--------------------------------------------------------------------
Within Over 1 to 3 Over 3 to 5 Over
One Year Years Years 5 Years Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Fixed-rate one- to four-family (including
mortgage-backed securities),
commercial real estate & construction
loans $ 20,850 $ 31,159 $ 14,966 $ 27,070 $ 94,045
Adjustable-rate one- to four-family
(including mortgage-backed
securities), commercial real estate
and construction loans 112,637 12,509 9,510 481 135,137
Consumer loans 9,561 13,555 4,127 2,146 29,389
Investment securities & other 28,741 2,247 -- 2,999 33,987
-------- -------- ------- ------- -------
Total interest-earning assets 171,789 59,470 28,603 32,696 292,558
-------- -------- ------- ------- -------
Savings deposits & MMA 11,709 25,534 4,606 4,608 46,457
Demand & NOW deposit -- 15,619 5,205 5,204 26,028
Certificates of deposit 104,303 53,577 14,437 10 172,327
Borrowings 118 3,867 -- -- 3,985
-------- -------- ------- ------- -------
Total interest-bearing liabilities 116,130 98,597 24,248 9,822 248,797
-------- -------- ------- ------- -------
Interest-earning assets less
interest-bearing liabilities $ 55,659 $ (39,127) $ 4,355 $ 22,874 $ 43,761
======== ======== ======= ======= =======
Cumulative interest-rate sensitivity gap $ 16,532 $ 20,887 $ 43,761
======== ======= =======
Cumulative interest-rate sensitivity gap
as a percentage of total assets at
March 31, 1998 17.57% 5.17% 6.55% 13.80%
Cumulative interest-rate sensitivity gap
as a percentage of total assets at
March 31, 1997 11.69% 1.99% 5.33% 11.00%
</TABLE>
As prepayment activity changes however, the resulting gap is expected to be
affected. A decrease in prepayment speeds would be expected to move the gap
towards a matched or negative position. The opposite would be expected to occur
if prepayment speeds increase. Prepayment speeds are influenced by fluctuation
in interest rates and may not produce the same results as reflected in the
previous table. Also, certain assets and liabilities may have similar maturities
or repricing periods but could react differently to changes in interest rates.
Assets which have adjustable-rate features may have a limitation on the periodic
interest rate adjustments and could result in a rate that is still below
existing market rates. This same feature may also limit the downward adjustment
in a declining rate environment.
The Office of Thrift Supervision ("OTS") provides a Net Portfolio Value ("NPV")
approach to the quantification of interest rate risk. 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.
The OTS issued a regulation, effective January 1, 1994, which uses a net market
value methodology to measure the interest rate risk exposure of thrift
institutions. OTS has delayed the implementation of the regulation pending the
testing of an OTS appeals process for certain institutions. 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. Thrift
institutions with greater than "normal" interest rate exposure must take a
deduction from their total capital available to meet their risk-based capital
requirement. The amount of that deduction is one-half of the difference between
(i) the
59
<PAGE>
institution's actual calculated exposure to a 200 basis point interest rate
increase or decrease (whichever results in the greater proforma decrease in NPV)
and (ii) its "normal" level of exposure which is 2% of the present value of its
assets. Because of the Association's asset size and level of risk-based capital,
the Association is exempt from this requirement. As of March 31, 1998, a change
in interest rates of a positive 200 basis points would have resulted in a .36%
decrease in the present value of the Association's assets, while a change in
interest rates of a negative 200 basis points would have resulted in a .94%
decrease in the present value of the Association's assets. Under OTS guidelines,
the Association's level of interest rate risk as of March 31, 1998 would be
considered "normal".
Presented on the table that follows as of March 31, 1998 is an analysis of the
Association's interest rate risk as measured by changes in NPV for instantaneous
and sustained parallel shifts in the yield curve, in 100 basis point increments,
up and down 400 basis points in accordance with OTS regulations. As illustrated
in the table, the Association's NPV is more sensitive to rising rates than
declining rates. This occurs principally because, as rates rise, the market
value of fixed-rate loans declines due to both the rate increase and slowing
prepayments (and the NPV focuses on the Association's entire portfolio, not just
assets that are subject to adjustment or maturity within one year). When rates
decline, the Association does not experience a significant rise in market value
for these loans because borrowers prepay at relatively high rates.
Net Portfolio Value
Change in At March 31, 1998
Interest Rate -----------------
(Basis Points) $ Change % Change
(000's)
+400 -6,027 -16
+300 -3,557 -9
+200 -1,599 -4
+100 -316 -1
0 0 0
-100 -1,087 -3
-200 -3,116 -8
-300 -4,356 -11
-400 -3,735 -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 by management in conjunction with NPV measures to identify excessive
interest rate risk.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing tables. 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. Additionally, certain assets, such as adjustable-rate mortgage loans,
have features which restrict changes in interest rates on a short-term basis and
over the life of the asset. 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. Finally, the ability of many borrowers
to service their debt may decrease in the event of an interest rate increase.
60
<PAGE>
In addition, the previous tables do not necessarily indicate the impact of
general interest rate movements on the Association's net interest income because
the repricing of certain categories of assets and liabilities is subject to
competitive and other pressures beyond the Association's control. As a result,
certain assets and liabilities indicated as maturing or otherwise repricing
within a stated period may in fact mature or reprice at different times and at
different volumes.
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. Such evaluation, which includes a review of all loans for
which full collectibility may not be reasonably assured, considers, among other
matters, the estimated fair value of the underlying collateral, economic
conditions, cash flow analysis, historical loan loss experience, discussions
held with delinquent borrowers and other factors that warrant recognition in
providing for allowance for loan losses.
As a result of the review process, management recorded a $95,980 provision for
loan losses during the fiscal year ended March 31, 1998. The Holding Corp.'s
allowance for loan losses decreased to $1.6 million, or 0.99% of total loans
receivable, at March 31, 1998, as compared to $1.7 million, or 1.22% of total
loans receivable, at March 31, 1997. Net charge-offs for the fiscal year ended
March 31, 1998 totaled $205,000, attributed primarily to one commercial real
estate loan, which was written down at payoff and the charge off of fifteen
consumer loans. 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.
The non-performing assets to total assets ratio is one indicator of the exposure
to credit risk. Non-performing assets of the Holding Corp. consist of
non-accruing loans, troubled debt restructurings, and real estate and
automobiles which were acquired as a result of foreclosure. The following table
summarizes the various categories of the Holding Corp.'s non-performing assets.
March 31,
-------------------------
1998 1997
Non-accruing loans $ 528,521 $ 489,251
Troubled debt restructurings 547,012 405,097
Foreclosed assets 96,890 357,880
--------- ---------
Total non-performing assets $1,172,423 $1,252,228
========= =========
Total non-performing assets
as a percentage of total
assets 0.37% 0.42%
Total non-performing assets decreased by $80,000 for the fiscal year ended
March 31, 1998. The increase in nonaccrual loans is primarily the result of a
$168,000 increase in residential loans and a $143,000 increase in consumer loans
over 90 days delinquent. The residential loan increase includes one loan held by
Mitchell, with a balance of approximately $119,000, which was brought current
subsequent to year end, with the remainder consisting of Fort Bend Federal
loans. This increase was offset by the transfer of a $275,000 commercial real
estate loan from nonaccrual to troubled debt restructurings. A specific reserve
of $111,000 was set up against this loan balance at the date of the transfer
to troubled debt restructurings. The decrease in foreclosed assets was primarily
the result of the sale of a single family residence and a commercial real estate
property, which totaled $323,000, partially offset by the foreclosure of another
single family residence totaling $45,000.
61
<PAGE>
At March 31, 1998, foreclosed assets consisted primarily of one single family
residence, a 5% participation held by Mitchell in 33 residential lots, and three
repossessed automobiles. All of the foreclosed real estate assets and the
repossessed automobiles are being marketed for sale. Three of the Mitchell
residential lots are under contract for sale. The single family residence was
subsequently sold at a gain of approximately $14,000 on April 21, 1998.
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 principal on loans and
mortgage-backed securities, and sales of mortgage loans are greatly influenced
by general interest rates, economic conditions, and competition. Current 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 March 31, 1998, the Association's liquidity ratio was 12.24%
which was in excess of the minimum regulatory requirements.
During the fiscal year ended March 31, 1998, total deposits increased by $18.8
million. This growth primarily reflects the addition of two branches in fiscal
1997 and the deposit of custodial accounts by Mitchell.
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 March 31, 1998, the
Association had commitments to originate loans totaling $13.9 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 fiscal year ended March 31, 1998, the Association decreased its
borrowings from the Federal Home Loan Bank of Dallas by $52,000. It is
anticipated that the amount of outstanding borrowings will fluctuate during the
next fiscal year depending upon cash flows from the various sources of funds and
financing to be provided to Fort Bend's subsidiary, Mitchell.
In fiscal 1998, the Holding Corp. paid dividends of $0.285 per share. On
April 22, 1998, the Holding Corp. declared a cash dividend of $0.10 per share
payable on June 3, 1998 to the shareholders of record on May 13, 1998.
The Association is required to maintain specific amounts of regulatory capital
pursuant to regulations of the OTS. The table below presents the Association's
capital position at March 31, 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.
62
<PAGE>
Amount Percent of
(000's) Assets (1)
Tangible capital $22,921 7.32%
Tangible capital requirement 4,698 1.50
------- -----
Excess $18,223 5.82%
======= =====
Core capital $22,921 7.32%
Core capital requirement 12,528 4.00
------- -----
Excess $10,393 3.32%
======= =====
Total capital (i.e., core &
supplemental capital) $24,314 14.20%
Risk-based capital requirement 13,698 8.00
------- -----
Excess $10,616 6.20%
======= =====
(1) Based upon adjusted assets for purposes of the tangible capital an core
capital requirements, and risk-weighted assets for purposes of the risk-based
capital requirements.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1997, the Company adopted the provisions of FASB Statement No. 128,
"Earnings per Share" ("Statement 128"). Statement 128 specifies the computation,
presentation, and disclosure requirements for earnings per share for entities
with publicly held common stock. It replaces the presentation of primary
earnings per share with a presentation of earnings per common share and fully
diluted earnings per share with earnings per common share - assuming dilution.
All earnings per share data is stated to reflect the adoption of Statement 128.
In June 1997, the FASB issued Statement No. 130, "Accounting for Comprehensive
Income" ("Statement 130") which is effective for fiscal years beginning after
December 15, 1997 with earlier application permitted. Statement 130 defines
comprehensive income as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources.
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("Statement 131") which is effective for
fiscal years beginning after December 15, 1997 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.
The adoption of Statements 130 and 131 is not expected to have a material
impact on financial conditions, results of operations or cash flows reported by
the Company. The Company did not adopt either of these new accounting standards
early.
63
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Fort Bend Holding Corp.:
We have audited the accompanying consolidated statement of financial condition
of Fort Bend Holding Corp. and its subsidiaries as of March 31, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Fort Bend Holding
Corp. and its subsidiaries as of March 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1998, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for mortgage servicing rights effective April
1, 1995.
/s/ Coopers & Lybrand L.L.P.
Houston, Texas
May 5, 1998
64
<PAGE>
FORT BEND HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
March 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
<S> <C> <C>
Cash and due from banks $ 6,259,939 $ 6,369,675
Short-term investments 20,483,775 14,220,516
Certificates of deposit 300,000 200,000
------------ ------------
Total cash and cash equivalents 27,043,714 20,790,191
Securities available for sale 3,244,221 3,331,139
Securities held to maturity (fair value of $92,205,137 and
$107,473,870 at March 31, 1998 and 1997, respectively) 92,058,573 108,319,264
Loans held for sale 12,920,011 2,660,415
Loans receivable, net 160,062,098 138,227,705
Mortgage servicing rights, net 7,603,486 7,537,571
Premises and equipment, net 4,738,238 4,970,011
Other assets 8,936,205 9,243,802
------------ ------------
Total assets $316,606,546 $295,080,098
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Deposits $268,990,525 $250,218,152
Convertible subordinated debentures 11,405,000 12,080,000
Borrowings 3,985,223 4,226,676
Advances from borrowers for taxes and insurance 4,619,011 4,750,945
Other liabilities 3,646,248 2,868,177
------------ ------------
Total liabilities 292,646,007 274,143,950
------------ ------------
Commitments and contingencies
Minority interest in consolidated subsidiary 2,556,167 2,508,214
Stockholders' equity:
Serial preferred stock, $.01 par value, 1,000,000 shares authorized,
none issued and outstanding
Common stock, $.01 par value, 4,000,000 shares authorized, 1,899,654
shares issued and 1,723,306 shares outstanding at March 31, 1998,
and 1,820,950 shares issued and 1,644,602 shares outstanding at
March 31, 1997 18,996 18,209
Additional paid-in capital 9,927,373 8,695,882
Deferred compensation (83,050) (82,324)
Unearned employee stock ownership plan shares (118,078) (307,125)
Retained earnings (substantially restricted) 13,108,214 11,565,900
Net unrealized appreciation (depreciation) on securities available for
sale, net of tax 7,418 (6,107)
Treasury stock, at cost, 176,348 shares (1,456,501) (1,456,501)
------------ ------------
Total stockholders' equity 21,404,372 18,427,934
------------ ------------
Total liabilities and stockholders' equity $316,606,546 $295,080,098
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
65
<PAGE>
FORT BEND HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
for the years ended March 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest income:
Loans $13,549,068 $10,251,364 $ 7,375,117
Short-term investments 1,363,948 809,779 544,684
Investment securities 839,223 779,993 778,603
Mortgage-backed securities 5,961,904 6,924,939 7,718,765
----------- ----------- -----------
Total interest income 21,714,143 18,766,075 16,417,169
----------- ----------- -----------
Interest expense:
Deposits 11,028,451 10,025,946 9,293,724
Borrowings 1,297,382 1,372,403 729,979
----------- ----------- -----------
Total interest expense 12,325,833 11,398,349 10,023,703
----------- ----------- -----------
Net interest income after provision for loan losses 9,388,310 7,367,726 6,393,466
Provision for loan losses 95,980 324,000 123,053
----------- ----------- -----------
Net interest income after provision for loan losses 9,292,330 7,043,726 6,270,413
----------- ----------- -----------
Noninterest income:
Loan servicing income 1,178,277 815,466 338,183
Service charges on deposit accounts 883,470 757,027 599,287
Loan fees and charges 3,296,427 659,331 322,207
Gain on sales of loans, net 870,127 567,776 313,438
Other income 651,728 555,486 324,034
----------- ----------- -----------
Total noninterest income 6,880,029 3,355,086 1,897,149
----------- ----------- -----------
Noninterest expenses:
Compensation and benefits 6,889,664 4,176,074 2,955,567
Employee stock ownership plan expense 519,276 237,152 152,396
Office occupancy and equipment 1,804,033 1,121,085 656,541
SAIF special assessment 1,492,686
Deposit insurance premiums 165,827 406,877 465,421
Data processing fees 568,862 292,887 192,066
Real estate operations, net (54,398) (213,127) (18,029)
Other expense 2,793,009 1,689,468 1,163,135
----------- ----------- -----------
Total noninterest expenses 12,686,273 9,203,102 5,567,097
----------- ----------- -----------
Income before income tax expense and minority interest 3,486,086 1,195,710 2,600,465
----------- ----------- -----------
Income tax expense 1,095,247 363,009 913,429
----------- ----------- -----------
Income before minority interest in net income of
consolidated subsidiary 2,390,839 832,701 1,687,036
----------- ----------- -----------
Minority interest in net income of consolidated subsidiary 372,822 57,928
----------- ----------- -----------
Net income $ 2,018,017 $ 774,773 $ 1,687,036
=========== =========== ===========
Earnings per common share $ 1.21 $ 0.47 $ 1.00
=========== =========== ===========
Earnings per common share - assuming dilution $ 0.94 $ 0.46 $ 0.91
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
66
<PAGE>
FORT BEND HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
for the years ended March 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Net
Unrealized
Unearned Appreciation
Number of Shares Employee (Depreciation)
------------------ Stock on
Common Common Additional Ownership Securities
Stock Stock in Common Paid-In Deferred Plan Retained Available
Issued Treasury Stock Capital Compensation Shares Earnings for Sale
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995 1,806,144 90,306 $18,060 $8,397,537 $(118,792) $(482,625) $9,570,846
Issuance of common stock to the
recognition and retention plan 3,000 30 22,470 (22,500)
Deferred compensation
amortization 42,624
Release of employee stock
ownership plan shares 87,750
Appreciation in employee stock
ownership plan shares released 70,020
Exercise of stock options 2,000 20 15,480
Purchase of treasury stock 86,042
Net income 1,687,036
Cash dividends ($.14 per
common share) (237,298)
Depreciation, net of deferred
taxes of $11,224 $ (21,786)
--------- ------- ------- ---------- ---------- ---------- ----------- ---------
Balance at March 31, 1996 1,811,144 176,348 $18,110 $8,505,507 $ (98,668) $ (394,875) $11,020,584 $ (21,786)
Issuance of common stock to the
recognition and retention plan 3,600 36 32,814 (32,850)
Deferred compensation
amortization 49,194
Release of employee stock
ownership plan shares 87,750
Appreciation in employee stock
ownership plan shares released 101,784
Exercise of stock options 4,356 44 36,982
Conversion of convertible
subordinated debentures 1,850 19 18,795
Net income 774,773
Cash dividends ($.14 per common share) (229,457)
Appreciation, net of deferred
taxes of $7,234 15,679
--------- ------- ------- ---------- --------- --------- ----------- ---------
Balance at March 31, 1997 1,820,950 176,348 $18,209 $8,695,882 $ (82,324) $(307,125) $11,565,900 $ (6,107)
</TABLE>
<TABLE>
<CAPTION>
Total
Treasury Stockholders'
Stock Equity
<S> <C> <C>
Balance at March 31, 1995 (666,007) $16,719,019
Issuance of common stock to the
recognition and retention plan
Deferred compensation
amortization 42,624
Release of employee stock
ownership plan shares 87,750
Appreciation in employee stock
ownership plan shares released 70,020
Exercise of stock options 15,500
Purchase of treasury stock (790,494) (790,494)
Net income 1,687,036
Cash dividends ($.14 per
common share) (237,298)
Depreciation, net of deferred
taxes of $11,224 (21,786)
----------- -----------
Balance at March 31, 1996 $(1,456,501) $17,572,371
Issuance of common stock to the
recognition and retention plan
Deferred compensation
amortization 49,194
Release of employee stock
ownership plan shares 87,750
Appreciation in employee stock
ownership plan shares released 101,784
Exercise of stock options 37,026
Conversion of convertible
subordinated debentures 18,814
Net income 774,773
Cash dividends ($.14 per common share) (229,457)
Appreciation, net of deferred
taxes of $7,234 15,679
----------- -----------
Balance at March 31, 1997 $(1,456,501) $18,427,934
</TABLE>
continued
67
<PAGE>
FORT BEND HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY, Continued
for the years ended March 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Net
Unrealized
Unearned Appreciation
Number of Shares Employee (Depreciation)
------------------ Stock on
Common Common Additional Ownership Securities
Stock Stock in Common Paid-In Deferred Plan Retained Available
Issued Treasury Stock Capital Compensation Shares Earnings for Sale
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997 1,820,950 176,348 $18,209 $8,695,882 $(82,324) $(307,125) $11,565,900 $ (6,107)
Issuance of common stock to the
recognition and retention plan 5,200 52 62,348 (62,400)
Deferred compensation
amortization 61,674
Release of employee stock
ownership plan shares 189,047
Appreciation in employee stock
ownership plan shares released 438,202
Exercise of stock options 11,020 110 92,160
Conversion of convertible
subordinated debentures 62,484 625 638,781
Net income 2,018,017
Cash dividends ($.285 per
common share) (475,703)
Appreciation, net of deferred
taxes of $7,812 13,525
--------- ------- ------- ---------- ---------- ---------- ----------- --------
Balance at March 31, 1998 1,899,654 176,348 $18,996 $9,927,373 $ (83,050) $ (118,078) $13,108,214 $ 7,418
========= ======= ======= ========== ========== ========== =========== ========
</TABLE>
<TABLE>
<CAPTION>
Total
Treasury Stockholders'
Stock Equity
<S> <C> <C>
Balance at March 31, 1997 $(1,456,501) $18,427,934
Issuance of common stock to the
recognition and retention plan
Deferred compensation
amortization 61,674
Release of employee stock
ownership plan shares 189,047
Appreciation in employee stock
ownership plan shares released 438,202
Exercise of stock options 92,270
Conversion of convertible
subordinated debentures 639,406
Net income 2,018,017
Cash dividends ($.285 per
common share) (475,703)
Appreciation, net of deferred
taxes of $7,812 13,525
----------- -----------
Balance at March 31, 1998 $(1,456,501) $21,404,372
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
68
<PAGE>
FORT BEND HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended March 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Operating activities:
Net income $ 2,018,017 $ 774,773 $ 1,687,036
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Provision for loan losses 95,980 324,000 123,053
Depreciation 574,071 359,674 198,719
Compensation charge related to release of ESOP
shares 438,202 101,784 70,020
Amortization of deferred compensation 61,674 49,194 42,624
Amortization of debt issue costs 81,277 79,085 25,791
Amortization of premiums and discounts on
securities, net 29,156 15,300 77,310
Amortization of loan premiums, discounts, and
deferred fees, net (355,331) (231,412) (179,878)
Amortization of goodwill 93,277 51,196
Amortization of mortgage servicing rights 1,616,090 475,864 207,646
Deferred income taxes 192,971 115,096 97,162
Minority interest in net income of consolidated subsidiary 372,822 57,928
Gain on sales of real estate, net (46,430) (211,683) (79,707)
Gain on sales of loans, net (870,127) (567,776) (313,438)
Dividends on Federal Home Loan Bank Stock (87,600) (103,200) (89,800)
Origination of loans held for sale and servicing rights (82,248,713) (23,692,912) (14,831,325)
Proceeds from sales of loans held for sale 71,991,092 24,585,408 14,156,206
Other, net (48,566) (1,065,971) 161,235
------------ ------------ ------------
Net cash provided by (used in) operating activities (6,092,138) 1,116,348 1,352,654
------------ ------------ ------------
Investing activities:
Purchase of investment securities available for sale (130,546) (120,577) (2,200,000)
Purchase of investment securities held to maturity (1,991,953) (6,987,394) (2,485,347)
Proceeds from maturities of investment securities
held to maturity 4,000,000 5,000,000 5,000,000
Principal repayment of mortgage-backed securities 14,462,368 13,746,412 13,523,742
Net increase in loans receivable (21,420,824) (10,958,495) (15,841,794)
Purchase of premises and equipment (342,298) (594,146) (136,449)
Proceeds from sale of premises and equipment 2,964
Purchase of mortgage servicing rights (813,853) (1,505,166) (300,778)
Improvements to real estate (19,398) (135,741) (2,130)
Proceeds from sale of real estate 210,734 1,275,196 85,102
Proceeds from redemption of Federal Home Loan Bank stock 511,700
Acquisition of FirstBanc Savings Association of Texas, net 3,569,943
Investment in Mitchell Mortgage Company, L.L.C., net (395,405)
------------ ------------ ------------
Net cash provided by (used in) investing activities (5,534,070) 2,897,591 (2,357,654)
------------ ------------ ------------
</TABLE>
continued
69
<PAGE>
FORT BEND HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
for the years ended March 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Financing activities:
Net increase in deposits $18,772,373 $ 19,537,844 $ 9,446,211
Net decrease in short-term borrowings (20,079,203) (11,500,000)
Proceeds from long-term borrowings 15,295,640
Payments on long-term borrowings (52,406) (49,262) (31,187)
Increase (decrease) in advances from borrowers for
taxes and insurance (131,934) 365,642 (832,022)
Net proceeds from issuance of common stock 92,270 37,026 15,500
Dividends paid to minority stockholder (324,869)
Dividends paid (475,703) (229,457) (237,298)
Purchase of treasury stock (790,494)
----------- ------------ ------------
Net cash provided by (used in) financing activities 17,879,731 (417,410) 11,366,350
----------- ------------ ------------
Net increase in cash and cash equivalents 6,253,523 3,596,529 10,361,350
Cash and cash equivalents at beginning of year 20,790,191 17,193,662 6,832,312
----------- ------------ ------------
Cash and cash equivalents at end of year $27,043,714 $ 20,790,191 $ 17,193,662
=========== ============ ============
Supplemental Cash Flow Information:
Interest paid $12,367,673 $ 11,327,730 $ 9,629,276
Income taxes paid 774,000 420,000 755,000
Non-cash investing and financing activities:
Loans transferred to foreclosed real estate 85,703 2,521,538 190,859
Loans to facilitate sale of foreclosed real estate 240,000 1,743,816 297,349
Transfer of securities held to maturity to
securities available for sale 1,515,363
Issuance of common stock of RRP 62,400 32,850 22,500
Reduction of ESOP debt by the ESOP 189,047 87,750 87,750
Subordinated debentures converted to common stock 675,000 20,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
70
<PAGE>
FORT BEND HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS
Fort Bend Holding Corp. ("Holding Corp."), through its wholly-owned
subsidiary, Fort Bend Federal Savings and Loan Association of Rosenberg
("Association"), is principally engaged in the business of attracting
retail deposits from the general public and investing those funds in first
mortgage single family residential loans and in mortgage-backed securities.
In addition, the Association originates residential construction loans,
commercial real estate loans, consumer loans and services loans for others.
Mitchell Mortgage Company, L.L.C. ("Mitchell") is engaged in the mortgage
banking business, including the origination and servicing of single family
purchase loans, single family construction loans and commercial and
multifamily real estate loans.
PRINCIPLES OF CONSOLIDATION
The Holding Corp. is a savings and loan holding company with one
subsidiary, the Association. The Association has two subsidiaries,
Fairview, Inc. ("Fairview") and Mitchell. Fairview is a wholly-owned
subsidiary of the Association. Mitchell is 51% owned by the Association and
49% owned by The Woodlands Land Development Company, L.P., successor in
interest to The Woodlands Corporation. The Holding Corp. and the
Association are collectively referred to as the "Company" herein. All
significant intercompany transactions and balances have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and notes thereto. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts deposited with
other financial institutions and short-term liquid investments with
original maturities of three months or less.
SECURITIES HELD TO MATURITY
Bonds, notes and mortgage-backed securities for which the Company has the
positive intent and ability to hold to maturity are reported at cost,
adjusted for premiums and discounts that are recognized in interest income
using the interest method over the period to maturity.
71
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of bonds, notes, mortgage-backed
securities and certain equity securities not classified as trading
securities nor as securities held to maturity. Unrealized holding gains
and losses, net of tax, are reported as a net amount in a separate
component of stockholders' equity until realized. Gains and losses are
determined using the specific-identification method. Premiums and
discounts are recognized in interest income using the interest method over
the period to maturity.
Declines in the fair value of individual held-to-maturity and available-
for-sale securities below their cost that are other than temporary would
result in write-downs of the individual securities to their fair value.
Management believes that none of the unrealized losses should be considered
other than temporary.
LOANS HELD FOR SALE
Loans held for sale are carried at the lower of cost or market in the
aggregate. Net unrealized losses are recognized in a valuation allowance
by charges to income. If loans receivable are transferred to loans held
for sale, the lower of cost or market method is applied at the time of
transfer.
LOANS RECEIVABLE
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal balance net of allowance for loan losses, undisbursed
construction loans in process, and unearned discounts, premiums and loan
fees.
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield of the related loan.
The Company defines a loan as impaired when, based on current information
and events, it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement. The
Company uses the same criteria in placing a loan on nonaccrual status,
exclusive of residential mortgage loans and consumer loans which are placed
on nonaccrual status when they become 90 days past due. When interest
accrual is discontinued, all unpaid accrued interest is reversed. Interest
income is subsequently recognized only to the extent cash payments are
received.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on past loan loss
experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions.
72
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
REAL ESTATE OWNED
Real estate owned ("REO"), which is included in other assets, includes
properties on which the Company has foreclosed and taken title. REO is
reported at the lower of the carrying value of the loan or the fair value
of the property obtained, less estimated selling costs. The excess, if
any, of the loan over the fair value of the property at the time of
transfer from loans to REO is charged to allowance for loan losses.
Subsequent declines in the fair value of the property and net operating
results of the property are recorded in noninterest expenses.
PREMISES AND EQUIPMENT
Land is carried at cost. Premises and equipment are carried at cost, less
accumulated depreciation, computed principally by the straight-line method
over the estimated useful lives of the related assets. Buildings and
improvements have estimated useful lives ranging from three to fifty years,
furniture, fixtures and equipment have estimated useful lives ranging from
two to ten years and automobiles have useful lives of three years.
PURCHASE METHOD OF ACCOUNTING
Net assets of entities acquired in purchase transactions are recorded at
fair value at the date of acquisition. The excess of cost over net assets
purchased (goodwill) is amortized using the straight-line method over 15
years. On a periodic basis, the Company reviews its recorded goodwill for
events or changes in circumstances that may indicate that the carrying
amount of the asset may not be recoverable.
LOAN SERVICING
Mortgage servicing rights are amortized in proportion to, and over the
period of, estimated net servicing income which approximates the level-
yield method. The Company stratifies mortgage servicing rights based on
one or more of the predominant risk characteristics of the underlying
loans. The Company periodically evaluates the carrying value of the
mortgage servicing rights in relation to the present value of the estimated
future net servicing revenue based on management's best estimate of
remaining loan lives. Impairment is recognized through a valuation
allowance for an individual stratum, and the amount of impairment is the
amount by which the mortgage servicing rights for a stratum exceed their
fair value.
For originated mortgage loans, the Company allocates the total cost of the
loans between mortgage servicing rights and the loans (without the mortgage
servicing rights) based on their relative fair values. Fair values are
based on quoted market prices in active markets for loans and loan
servicing rights. For purchased mortgage servicing rights, the cost of
acquiring loan servicing contracts is capitalized to the extent such costs
do not exceed the amount by which the present value of estimated future
servicing revenue exceeds the present value of expected future servicing
costs.
73
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
LOAN SERVICING, CONTINUED
On April 1, 1995, the Company adopted the requirements of FASB Statement
No. 122, "Accounting for Mortgage Servicing Rights" ("Statement 122").
Statement 122 requires that the Company recognize as separate assets rights
to service mortgage loans for others, regardless of how those mortgage
servicing rights are acquired. This eliminates the distinction between
purchased servicing rights which are capitalized and originated servicing
rights, for which no value could be capitalized under the previous
standard. The adoption of Statement 122 increased gain on sale of loans by
approximately $114,000 during 1996. Statement 122 also requires that
capitalized mortgage servicing rights be evaluated for impairment based on
the fair value of those rights on a disaggregated basis.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes,
whereby deferred income taxes are recognized for the tax consequences in
future years of differences in the tax bases of assets and liabilities and
their financial reporting amounts based on enacted tax laws and statutory
tax rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, if
necessary, to reduce deferred tax assets to the amount expected to be
realized.
COMMON STOCK SPLIT
On August 21, 1997, the Board of Directors declared a two-for-one stock
split in the form of a 100% stock dividend payable October 1, 1997 to
shareholders of record on September 11, 1997. The effect of the split is
presented retroactively within stockholders' equity by transferring the par
value for the additional shares issued from the additional paid-in capital
account to the common stock account.
All share and per share data have been retroactively restated to reflect
the stock split.
EARNINGS AND DIVIDENDS PER COMMON SHARE
In December 1997, the Company adopted the provisions of FASB Statement No.
128, "Earnings per Share" ("Statement 128"). Statement 128 specifies the
computation, presentation, and disclosure requirements for earnings per
share for entities with publicly held common stock. It replaces the
presentation of primary earnings per share with a presentation of earnings
per common share and fully diluted earnings per share with earnings per
common share - assuming dilution. All earnings per share data is stated to
reflect the adoption of Statement 128.
74
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
EARNINGS AND DIVIDENDS PER COMMON SHARE, CONTINUED
Earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Earnings per common share - assuming dilution is computed by increasing the
weighted average number of common shares outstanding during the period by
the number of additional common shares that would have been outstanding if
all dilutive potential common shares had been issued. Dilutive potential
common shares of the Company include stock options, the Mitchell option
(See Note 2), and the convertible subordinated debentures. In addition,
the numerator is adjusted to add back the after-tax amount of interest
associated with the convertible subordinated debentures and the minority
interest in net income of Mitchell.
Cash dividends per common share represent the historical cash dividends of
the Company.
On April 22, 1998, the Company declared a cash dividend of $.10 per share
payable on June 3, 1998 to shareholders of record on May 13, 1998.
STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and related interpretations in
accounting for its stock-based compensation plans.
In 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation" ("Statement 123") which was effective for fiscal years
beginning after December 15, 1995. Under Statement 123, the Company may
elect to recognize stock-based compensation expense based on the fair value
of the awards or continue to account for stock-based compensation under APB
25 and provide pro forma net income and pro forma earnings per share
disclosures for awards made in 1996 and future years as if the fair-value
method defined in Statement 123 had been applied. The Company has elected
to continue to apply the provisions of APB 25.
EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
The debt of the ESOP is recorded as debt and the shares pledged as
collateral are reported as unearned ESOP shares in the statement of
financial condition. As shares are released from collateral, the Company
reports compensation expense equal to the difference between the current
market price of the Company's stock and the price at which the stock was
acquired for the establishment of the ESOP times the number of shares being
released. In addition, compensation expense is recognized for debt service
and discretionary contributions.
All ESOP shares are considered outstanding for earnings per share
computations. Dividends on allocated ESOP shares are recorded as a
reduction of retained earnings; dividends on unallocated ESOP shares are
recorded as a reduction of debt and accrued interest.
75
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
IMPACT ON NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement No. 130, "Accounting for
Comprehensive Income" ("Statement 130") which is effective for fiscal years
beginning after December 15, 1997, with earlier application permitted.
Statement 130 defines comprehensive income as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from nonowner sources.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("Statement 131") which
is effective for fiscal years beginning after December 15, 1997, 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.
The adoption of these statements is not expected to have a material impact
on financial conditions, results of operations or cash flows reported by
the Company. The Company has not early adopted either of these new
accounting standards.
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform to
the 1998 financial statement presentation. These reclassifications had no
effect on net income or stockholders' equity.
2. BUSINESS COMBINATIONS:
FIRSTBANC SAVINGS ASSOCIATION OF TEXAS
On August 16, 1996, the Company acquired all of the outstanding shares of
FirstBanc Savings Association of Texas ("FirstBanc") for approximately $4.2
million in cash. The FirstBanc acquisition was recorded using the purchase
method of accounting and, accordingly, the purchase price of approximately
$4.2 million was allocated to the assets based on their estimated fair
values at the date of acquisition. The operating results of FirstBanc have
been included in the Company's results of operations commencing August 16,
1996. The excess of purchase price over the fair value of net assets
acquired was approximately $1.4 million and has been recorded as goodwill.
FirstBanc had assets of approximately $30 million as of the acquisition
date.
76
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. BUSINESS COMBINATIONS, CONTINUED:
FirstBanc Savings Association of Texas, continued
The purchase price has been allocated to the assets purchased and the
liabilities assumed based upon the fair values on the date of acquisition,
as follows:
Loans $ 20,756,113
Premises and equipment, net 690,069
Goodwill 1,370,428
Other assets 1,055,414
Deposits (26,766,593)
Other liabilities (675,374)
------------
Cash received in excess of
purchase price $ (3,569,943)
============
MITCHELL MORTGAGE COMPANY, L.L.C.
On January 2, 1997 the Association executed an agreement with The Woodlands
Corporation to acquire a controlling interest in a new limited liability
company, Mitchell Mortgage Company, L.L.C. ("Mitchell"). Mitchell was
formed for the purpose of engaging in the mortgage banking business,
including the origination and servicing of single family purchase loans,
single family construction loans and commercial and multifamily real estate
loans. The Woodlands Corporation contributed certain mortgage loans and
its mortgage servicing portfolio and liabilities of its wholly-owned
mortgage banking subsidiary, Mitchell Mortgage Company ("Old Mitchell"), in
exchange for a 49% ownership interest in Mitchell and the Association
contributed cash of approximately $2.6 million in exchange for a 51%
ownership interest in Mitchell.
The purchase price has been allocated to the assets purchased and the
liabilities assumed based upon the fair values on the date of acquisition,
as follows:
Loans $ 16,856,498
Premises and equipment, net 413,388
Mortgage servicing rights 5,000,583
Other assets 961,045
Borrowings (20,079,203)
Other liabilities (2,756,906)
------------
Purchase price in excess of
cash received $ 395,405
============
77
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. BUSINESS COMBINATIONS, CONTINUED:
Mitchell Mortgage Company, L.L.C., continued
In connection with the transaction, Old Mitchell (and The Woodlands Land
Development Company, L.P., as successor) was granted an option to convert,
upon the occurrence of certain events, its ownership interest in Mitchell
into shares of the common stock of the Company, at a rate of 82.304 shares
for each $1,000 of ownership interest in Mitchell, or $12.15 per share, in
an amount not to exceed 9.9% of the Company's outstanding common stock
after conversion. Any amount that would otherwise be required to be issued
exceeding 9.9% of the Company's outstanding common stock would be paid in
cash. The option becomes exercisable on January 2, 1999 and expires on
January 2, 2002.
The Association has guaranteed Mitchell's performance with the Government
National Mortgage Association and has insured that Mitchell will maintain a
required minimum net worth or the Association will infuse additional
capital to cure any deficiency.
3. DEBT AND EQUITY SECURITIES:
The carrying amount of securities and their approximate fair values were as
follows:
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
COST --------------------------------- VALUE
GAINS LOSSES
<S> <C> <C> <C> <C>
Available for sale:
U.S. government securities $ 499,949 $ 1,043 $ 498,906
Mortgage-backed securities 281,901 281,901
---------- ------------ -------- ----------
781,850 0 1,043 780,807
Equity securities 2,451,131 $ 12,283 2,463,414
---------- ------------ -------- ----------
$ 3,232,981 $ 12,283 $ 1,043 $ 3,244,221
========== ============ ======== ==========
Held to maturity:
U.S. government securities $ 9,243,525 $ 21,284 $ 281,258 $ 8,983,551
Mortgage-backed securities 82,815,048 922,660 516,122 83,221,586
---------- ------------ -------- ----------
$ 92,058,573 $ 943,944 $ 797,380 $ 92,205,137
========== ============ ======== ==========
</TABLE>
78
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. DEBT AND EQUITY SECURITIES, CONTINUED:
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
COST --------------------------------- VALUE
GAINS LOSSES
<S> <C> <C> <C> <C>
Available for sale:
U.S. government securities $ 499,870 $ 9,245 $ 490,625
Mortgage-backed securities 520,869 520,869
----------- ------------ --------- -----------
1,020,739 0 9,245 1,011,494
Equity securities 2,320,497 $ 3,000 3,852 2,319,645
----------- ------------ --------- -----------
$ 3,341,236 $ 3,000 $ 13,097 $ 3,331,139
=========== ============ ========= ===========
Held to maturity:
U.S. government securities $ 11,234,763 $ 5,468 $ 450,791 $ 10,789,440
Mortgage-backed securities 97,084,501 853,590 1,253,661 96,684,430
----------- ------------ --------- -----------
$ 108,319,264 $ 859,058 $ 1,704,452 $ 107,473,870
=========== ============ ========= ===========
</TABLE>
The scheduled maturities of debt securities were as follows:
MARCH 31, 1998
---------------------------
AMORTIZED FAIR
COST VALUE
Available for sale:
Due within one year $ 499,949 $ 498,906
Mortgage-backed securities 281,901 281,901
---------- ----------
$ 781,850 $ 780,807
========== =========
Held to maturity:
Due within one year $ 4,994,817 $ 5,012,821
Due after one year through five years 2,248,708 2,203,130
Due after five years through ten years 2,000,000 1,767,600
---------- ----------
9,243,525 8,983,551
Mortgage-backed securities 82,815,048 83,221,586
---------- ----------
$92,058,573 $92,205,137
========== ==========
Mortgage-backed securities carried at approximately $2,100,000 and
$2,500,000 were pledged to collateralize certain deposits at March 31, 1998
and March 31, 1997, respectively. Certain securities, with a carrying value
of approximately $94,500,000 and $109,000,000 at March 31, 1998 and 1997,
respectively, also collateralize a FHLB Advance.
79
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. LOANS RECEIVABLE:
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------------
1998 1997
<S> <C> <C>
Mortgage loans (approximately $69.2 million and $75.6
million, respectively, are single family residential) $ 81,239,794 $ 86,749,042
Construction, development and land loans (primarily single
family residential) 88,553,992 50,246,522
Consumer 29,389,406 25,633,233
------------ ------------
199,183,192 162,628,797
Less:
Net deferred loan fees, premiums and discounts 857,499 811,117
Undisbursed construction and land development
loans in process 36,671,143 21,888,967
Allowance for loan losses 1,592,452 1,701,008
------------ ------------
$ 160,062,098 $ 138,227,705
============ ============
</TABLE>
At March 31, 1998, loans receivable included approximately $4,163,000 in
participations with affiliates of The Woodlands Land Development Company,
L.P., successor in interest to The Woodlands Corporation.
The following is a summary of changes in the allowance for loan losses:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Balance, beginning of year $ 1,701,008 $ 1,350,222 $ 1,649,591
Allowance associated with acquisitions 735,284
Loans charged off (204,776) (807,702) (430,519)
Recoveries 240 99,204 8,097
Provision for loan losses 95,980 324,000 123,053
----------- ----------- -----------
Balance, end of year $ 1,592,452 $ 1,701,008 $ 1,350,222
=========== =========== ===========
</TABLE>
The following table summarizes impaired loan information:
MARCH 31,
-----------------------
1998 1997
Recorded investment in impaired loans $ 658,311 $ 807,317
Average recorded investment in impaired loans 711,108 691,090
Interest income on impaired loans 59,083 58,574
The recorded investment in impaired loans at March 31, 1998 includes an
impaired loan of $268,921 with a specific valuation allowance of $111,000.
There were no recorded specific valuation allowances against impaired loans
at March 31, 1997.
80
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. LOAN SERVICING:
Mortgage loans serviced for others are not included in the consolidated
statement of financial condition. The unpaid principal balance of mortgage
loans serviced for others was approximately $898,855,000 and $868,016,000
at March 31, 1998 and 1997, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were approximately $14,100,000
and $12,600,000 at March 31, 1998 and 1997, respectively.
Following is an analysis of the changes in mortgage loan servicing rights:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Balance, beginning of year $ 7,537,571 $ 1,235,714 $ 1,028,577
Rights acquired from Old Mitchell 5,000,583
Purchased rights 813,853 1,505,166 300,778
Originated rights 868,152 271,972 114,005
Amortization (1,616,090) (475,864) (207,646)
----------- ----------- -----------
Balance, end of year $ 7,603,486 $ 7,537,571 $ 1,235,714
=========== =========== ===========
</TABLE>
6. PREMISES AND EQUIPMENT:
Premises and equipment are summarized as follows:
MARCH 31,
-----------------------
1998 1997
Land $ 670,477 $ 670,477
Buildings and improvements 4,981,630 4,963,291
Furniture, fixtures and equipment 3,256,813 3,226,263
Automobiles 38,369 38,369
Construction in progress 1,015 315
---------- ---------
8,948,304 8,898,715
Less accumulated depreciation (4,210,066) (3,928,704)
---------- ---------
$ 4,738,238 $4,970,011
========== =========
The Association has commitments under long-term operating leases,
principally for building space, certain branch premises and office
equipment. The initial lease terms generally cover periods from two to
twenty years. Two operating leases for branch locations include renewal
options for additional periods.
81
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. PREMISES AND EQUIPMENT, CONTINUED:
The following is a schedule by fiscal year of future minimum rental
payments required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year:
1999 $ 469,581
2000 221,813
2001 114,021
2002 28,505
Rental expense for the years ended March 31, 1998, 1997 and 1996 was
$537,784, $215,584, and $27,243, respectively.
7. DEPOSITS:
A summary of deposits by type of account is as follows:
MARCH 31,
---------------------------
1998 1997
NOW and money market accounts $ 73,629,581 $ 62,774,720
Savings 23,033,888 22,805,744
Certificates of deposit 172,327,056 164,637,688
----------- -----------
$268,990,525 $250,218,152
=========== ===========
Included in savings and NOW accounts are approximately $24,179,000 and
$16,350,000 of noninterest bearing deposits at March 31, 1998 and 1997,
respectively. The scheduled maturities of certificates of deposit
outstanding at March 31, 1998 were as follows:
YEAR ENDING
MARCH 31,
1999 $ 101,321,644
2000 46,011,470
2001 10,547,446
2002 4,105,251
2003 and thereafter 10,341,245
------------
$ 172,327,056
============
The aggregate amount of deposit accounts with a minimum denomination of
$100,000 was approximately $49,671,000 and $32,564,000 at March 31, 1998
and 1997, respectively.
82
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. DEPOSITS, CONTINUED:
Interest expense by type of deposit is as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
NOW and money market accounts $ 1,262,941 $ 1,104,852 $ 920,303
Savings 565,052 570,929 526,713
Certificates of deposit 9,200,458 8,350,165 7,846,708
----------- ----------- ---------
$ 11,028,451 $ 10,025,946 $ 9,293,724
=========== =========== =========
</TABLE>
Certain executive officers and directors had amounts on deposit with the
Company of $3,086,513 and $3,809,240 at March 31, 1998 and 1997,
respectively.
8. CONVERTIBLE SUBORDINATED DEBENTURES:
On December 5, 1995, the Holding Corp. issued $12,100,000 of 8% Convertible
Subordinated Debentures, with interest payable June 1 and December 1 of
each year through maturity, and principal due December 1, 2005. They may
be converted at any time prior to maturity at a conversion rate of 92.592
shares of common stock for each $1,000 principal amount of debentures or
$10.80 per share. The debentures are redeemable, in whole or in part, at
the option of the Holding Corp. at any time on or after December 1, 1998,
at the redemption prices set forth below plus accrued interest. The
debentures are subordinated to all senior indebtedness and all general
obligations of the Holding Corp. The covenants of the Debenture restrict
the Holding Corp. from paying dividends or other distributions on any
junior securities of the Holding Corp. if a default in payment of interest
or principal exists on any security.
The following are redemption prices, expressed as a percentage of principal
amount, during the twelve month period beginning December 1 of the years
indicated:
1998 105.6% 2002 102.4%
1999 104.8% 2003 101.6%
2000 104.0% 2004 100.8%
2001 103.2%
83
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. BORROWINGS:
Borrowings are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
FHLB advance $3,867,145 $3,919,551
Employee stock ownership plan debt 118,078 307,125
---------- ----------
$3,985,223 $4,226,676
========== ==========
</TABLE>
FHLB ADVANCE
The advance from the FHLB, originated at $4.0 million, bears interest at a
rate of 6.2% amortizing based on a 30-year term and matures on June 20,
2000. The advance is collateralized by all FHLB stock owned by the Company,
amounts on deposit with the FHLB and all of the securities owned by the
Company which are held in safekeeping by the FHLB. In addition, a Floating
Blanket Lien has been executed whereby qualifying 1-4 family residential
loans are pledged as collateral for the advances obtained from the FHLB.
At March 31, 1998, the Company had the ability to borrow an additional
$148,500,000 from the FHLB.
EMPLOYEE STOCK OWNERSHIP PLAN DEBT
The Holding Corp. established an employee stock ownership plan financed by
a third-party loan from a bank in the amount of $614,250 collateralized by
the outstanding shares. The borrowing is guaranteed by the Holding Corp.
but does not constitute a legally binding contribution commitment by the
Association. The borrowing is payable in semi-annual principal payments of
$43,875 over a 7-year period plus interest at a variable rate determined by
the creditor (6.5% at March 31, 1998). The borrowing is governed by
various debt covenants, the most restrictive of which is the maintenance of
certain regulatory capital ratios by the Association.
FUTURE REPAYMENTS
The following is a schedule by fiscal year of future principal payments
required under the Company's borrowings:
<TABLE>
<S> <C>
1999 $ 55,752
2000 177,390
2001 3,752,081
----------
$3,985,223
==========
</TABLE>
Payments on the ESOP are not required for the year ended March 31, 1999 as
prepayments occurred during the year ended March 31, 1998.
84
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. INCOME TAXES:
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------------
1998 1997 1996
<S> <C> <C> <C>
Current $ 902,276 $247,913 $816,267
Deferred 192,971 115,096 97,162
---------- -------- --------
$1,095,247 $363,009 $913,429
========== ======== ========
</TABLE>
The reasons for the difference between income tax expense and the amount
computed by applying the statutory federal income tax rate of 34% to income
before tax expense were as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------
1998 1997
<S> <C> <C>
Income before income tax expense $3,113,264 $1,137,782
========== ==========
Federal income tax expense at statutory rate $1,058,510 $ 386,846
Appreciation in employee stock ownership plan shares
released 76,607 39,414
Other (39,870) (63,251)
---------- ----------
$1,095,247 $ 363,009
========== ==========
</TABLE>
The income tax expense reported in the statement of income for 1996
approximated income tax expense based upon the statutory rate.
85
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. INCOME TAXES, CONTINUED:
Deferred tax assets and liabilities included in other assets consisted of
the following:
<TABLE>
<CAPTION>
March 31,
------------------------------------------------
1998 1997
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 492,894 $ 459,343
Vacation accrual 53,691 52,329
Capitalized interest on loans 34,655 35,917
Deferred loan fees 38,976 29,862
Other 38,849 22,317
--------- ---------
659,065 599,768
--------- ---------
Deferred tax liabilities:
Depreciation (152,080) (125,017)
Originated mortgage servicing rights (85,307) (68,943)
Contributed mortgage servicing rights (137,374) (28,914)
FHLB stock dividends (88,629) (55,743)
Other (90,496) (15,190)
--------- ---------
(553,886) (293,807)
--------- ---------
Net deferred tax asset $ 105,179 $ 305,961
========= =========
</TABLE>
It is expected that the Company's deferred tax assets at March 31, 1998
will be realized from the reversal of existing deferred tax liabilities and
from the recognition of future taxable income, without relying on tax
planning strategies that the Company might not ordinarily follow.
Retained earnings at March 31, 1998 includes approximately $1,531,000 for
which no deferred income tax liability has been recognized. This amount
represents an allocation of income to bad-debt deductions for tax purposes
only. Reduction of amounts so allocated for purposes other than tax bad-
debt losses or adjustments arising from carryback of net operating losses
would create income for tax purposes only, which would be subject to the
then-current corporate income tax rate.
86
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. EARNINGS PER COMMON SHARE:
A reconciliation of earnings per common share to earnings per common share
- assuming dilution is as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------------------
1998 1997 1996
<S> <C> <C> <C>
EARNINGS PER COMMON SHARE
-------------------------
Net income applicable to common stock $2,018,017 $ 774,773 $1,687,036
========== ========== ==========
Weighted average number of common shares outstanding 1,665,123 1,639,904 1,694,312
========== ========== ==========
Earnings per common share $ 1.21 $ 0.47 $ 1.00
========== ========== ==========
EARNINGS PER COMMON SHARE - ASSUMING DILUTION (b)
-------------------------------------------------
Net income applicable to common stock $2,018,017 $ 774,773 $1,687,036
Effect of dilutive securities:
Interest on 8% convertible debentures, net of tax 682,792 (a) 223,660
---------- ---------- ----------
Net income, adjusted $2,700,809 $ 774,773 $1,910,696
========== ========== ==========
Weighted average common shares outstanding 1,665,123 1,639,904 1,694,312
Effect of dilutive securities:
Weighted average common shares issuable under the
employee stock option plan 103,277 52,472 43,740
Weighted average common shares issuable with the
conversion of the 8% convertible debentures
to common stock 1,107,630 (a) 362,292
---------- ---------- ----------
Weighted average common shares, adjusted 2,876,030 1,692,376 2,100,344
========== ========== ==========
Earnings per common share - assuming dilution $ 0.94 $ 0.46 $ 0.91
========== ========== ==========
</TABLE>
(a) The assumed conversion of the 8% convertible debentures has an
antidilutive effect on earnings per share for the fiscal year ended
March 31, 1997. Accordingly, it is excluded from the calculation of
earnings per common share - assuming dilution.
(b) The assumed conversion of the minority ownership interest in Mitchell
into shares of common stock (See Note 2.) has an antidilutive effect
on earnings per share. Accordingly, it is excluded from the
calculation of earnings per share - assuming dilution.
87
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. STOCK-BASED COMPENSATION PLANS:
INCENTIVE STOCK OPTIONS
The Company sponsors the 1993 Stock Option and Incentive Plan (the "Plan"),
a stock-based compensation plan which is described below. Under the Plan,
the Company is authorized to issue 257,730 shares of common stock pursuant
to "Awards" granted to officers, key employees and directors in the form of
incentive stock options qualified under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), nonqualified stock options not
qualified under Section 422 of the Code, stock appreciation rights, limited
stock appreciation rights, and restricted stock. The Company granted
incentive stock options in the numbers shown in the table below.
The incentive stock options granted have an exercise price equal to or
greater than the fair market value of the common stock on the date of
grant. All the options granted have contractual terms of 10 years. The
stock options vest according to various schedules. In accordance with APB
25, the Company has not recognized any compensation cost for the stock
options granted.
A summary of the status of the Company's stock options as of March 31, 1998
and March 31, 1997 and the changes for the years then ended is presented
below:
<TABLE>
<CAPTION>
Stock Options
-------------------------------------------------------------
Year ended Year ended
March 31, 1998 March 31, 1997
------------------------------ -----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Options outstanding, beginning of year 149,278 $ 6.82 102,278 $ 5.11
Granted 86,002 15.61 51,356 10.38
Exercised (11,020) 8.37 (4,356) 8.50
------- -------
Options outstanding, end of year 224,260 10.14 149,278 6.82
======= =======
Options exercisable, end of year 133,790 7.07 118,278 5.57
======= =======
Weighted average fair market value of
options granted during the year $ 3.72 $ 2.20
</TABLE>
88
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. STOCK-BASED COMPENSATION PLANS, CONTINUED:
INCENTIVE STOCK OPTIONS, CONTINUED
The fair value of each stock option granted was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------------------------------
1998 1997
<S> <C> <C>
Dividend yield 1.79% 2.80%
Expected volatility 18.76% 18.81%
Risk-free interest rates 5.97 to 6.56% 6.05 to 6.56%
Expected lives 5 years 5 years
</TABLE>
The following table summarizes information about stock options outstanding:
<TABLE>
<CAPTION>
March 31, 1998
------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life (Years) Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$5.00 to $7.50 97,878 5.54 $ 5.00 97,878 $ 5.00
$7.75 to $11.625 40,380 7.88 10.93 19,610 10.18
$15.375 to $15.875 86,002 9.38 15.61 16,302 15.79
</TABLE>
<TABLE>
<CAPTION>
March 31, 1997
------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life (Years) Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$5.00 to $7.50 98,278 6.25 $ 5.00 98,278 $ 5.00
$7.75 to $11.625 51,000 9.46 10.33 20,000 8.33
</TABLE>
RESTRICTED STOCK
The Company established a Recognition and Retention Plan ("RRP") as a
method of providing key officers with a proprietary interest in the Company
in a manner designed to encourage such individuals to remain with the
Company. Pursuant to the RRP, restricted stock awards for shares
representing an aggregate of approximately 2% of the shares of common stock
issued during the conversion were granted. This amounted to an additional
33,704 shares being issued as of the conversion date. Stockholders' equity
is reduced by unearned compensation in the amount of $83,050 and $82,324
which represents the unvested portion of the RRP at March 31, 1998 and
1997, respectively.
89
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. STOCK-BASED COMPENSATION PLANS, CONTINUED:
RESTRICTED STOCK, CONTINUED
All shares of restricted stock vest at the rate of 20% per year, beginning
on the first anniversary of the date of grant. The fair value of the
restricted stock awarded by the Company during 1998 and 1997 was $12.00 and
$9.13, respectively. In accordance with APB 25, the Company has recognized
a compensation cost of $61,674, $49,194, and $42,624 in 1998, 1997 and
1996, respectively.
A summary of the status of the Company's restricted stock shares as of
March 31, 1998 and 1997, and the changes for the years then ended, is
presented below:
<TABLE>
<CAPTION>
Restricted Stock
----------------------------------------------------------
Year ended Year ended
March 31, 1998 March 31, 1997
-------------------------- ---------------------------
Weighted Weighted
Average Average
Fair Fair
Market Market
Shares Value Shares Value
<S> <C> <C> <C> <C>
Share balance, beginning of year 43,704 $ 5.63 40,104 $5.32
Awards 5,200 12.00 3,600 9.13
------ ------
Share balance, end of year 48,904 6.31 43,704 5.63
====== ======
Vested, end of year 30,923 5.29 22,182 5.16
====== ======
</TABLE>
PRO FORMA NET INCOME AND NET INCOME PER COMMON SHARE
Had the compensation cost for the Company's stock-based compensation plans
been determined consistent with Statement 123, the Company's net income and
net income per common share for 1998, 1997 and 1996 would approximate the
pro forma amounts below:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Net income - as reported $2,018,017 $774,773 $1,687,036
Net income - pro forma 1,996,419 782,730 1,715,168
Earnings per common share - as reported 1.21 0.47 1.00
Earnings per common share - pro forma 1.20 0.48 1.01
</TABLE>
The effects of applying Statement 123 in this pro forma disclosure are not
indicative of future amounts. Statement 123 does not apply to awards prior
to 1996.
90
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. EMPLOYEE BENEFIT PLANS:
The Company sponsors a leveraged ESOP that covers all full-time employees
who have attained the age of 21 and completed twelve consecutive months of
service. The Company makes annual contributions to the ESOP at least equal
to the ESOP's debt service less dividends received by the ESOP. All
dividends received by the ESOP are used to pay debt service. The ESOP
shares are initially placed as collateral for its debt. As the debt is
repaid, shares are released from collateral and allocated to eligible
employees, based on the proportion of debt service paid in the year. The
ESOP shares are summarized as follows:
<TABLE>
<CAPTION>
March 31,
-------------------------------
1998 1997
<S> <C> <C>
Allocated shares 101,938 67,412
Unreleased shares 20,912 55,438
-------- --------
Total ESOP shares 122,850 122,850
======== ========
Fair value of unreleased shares $564,624 $665,256
======== ========
</TABLE>
A noncontributory trusteed profit sharing plan covering substantially all
employees provides for lump sum distributions in cash upon termination or
retirement in accordance with the plan's vesting provisions.
Contributions, if any, are funded annually, and are determined by the board
of directors. No profit sharing contributions were made in 1998 or 1997.
During 1996, $29,000 in contributions were recorded.
An incentive savings plan has been established which is a qualified profit
sharing plan under Section 401(k) of the Internal Revenue Code.
Contributions to the incentive savings plan are determined by the Board of
Directors. Employees may also make contributions to the incentive savings
plan based upon a percentage of qualified compensation in accordance with
the Internal Revenue Service rules and regulations. No contributions were
made to this plan in 1998, 1997, or 1996.
14. REGULATORY MATTERS:
The Association is subject to various regulatory capital requirements
administered by the federal banking authorities. 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 Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Association must meet specific capital guidelines
that involve quantitative measures of the Association's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Association's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
91
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. REGULATORY MATTERS, CONTINUED:
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth
in the table below) of tangible and core capital (as defined in the
regulations) to total assets (as defined), and of risk-based capital (as
defined) to risk-weighted assets (as defined). Management believes, as of
March 31, 1998, that the Association meets all capital adequacy
requirements to which it is subject.
As of March 31, 1998, the most recent notification from the Office of
Thrift Supervision categorized the Association as well capitalized under
the regulatory framework for prompt corrective action. To be categorized
as well capitalized the Association must maintain minimum total tangible,
core and risk-based capital ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category. The Association's actual capital
amounts (in thousands) and ratios are presented in the following table:
<TABLE>
<CAPTION>
March 31, 1998
--------------------------------------------------------------------------------------
To be Well Capitalized
Minimum for Capital for Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------- ------------------------- ---------------------------
Ratio Amount Ratio Amount Ratio Amount
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity, and ratio
to total assets 7.19% $ 22,701
Minority interest 2,556
Intangible assets (1,305)
Other (1,031)
--------
Tangible capital, and ratio to
adjusted total assets 7.32% $ 22,921 1.5% $ 4,698
======== =======
Tier 1 (core) capital, and ratio
to adjusted total assets 7.32% $ 22,921 4.0% $12,528 5.0% $15,660
======== ======= =======
Tier 1 capital, and ratio to
risk-weighted assets 13.39% $ 22,921 6.0% $10,274
=======
Allowance for loan losses-
Tier 2 capital 1,393
--------
Total risk-based capital, and
ratio to risk-weighted assets 14.20% $ 24,314 8.0% $13,698 10.0% $17,123
======== ======= =======
Total assets $315,529
========
Adjusted total assets $313,193
========
Risk-weighted assets $171,228
========
</TABLE>
92
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. REGULATORY MATTERS, CONTINUED:
<TABLE>
<CAPTION>
March 31, 1997
--------------------------------------------------------------------------------------
To be Well Capitalized
Minimum for Capital for Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------- ------------------------- ---------------------------
Ratio Amount Ratio Amount Ratio Amount
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity, and ratio
to total assets 6.59% $ 19,324
Minority interest 2,508
Intangible assets (1,348)
Other (969)
--------
Tangible capital, and ratio to
adjusted total assets 6.71% $ 19,515 1.5% $ 4,365
======== =======
Tier 1 (core) capital, and ratio
to adjusted total assets 6.71% $ 19,515 3.0% $ 8,730 5.0% $14,550
======== ======= =======
Tier 1 capital, and ratio to
risk-weighted assets 13.69% $ 19,515 6.0% $ 8,551
=======
Allowance for loan losses-
Tier 2 capital 1,540
--------
Total risk-based capital, and
ratio to risk-weighted assets 14.77% $ 21,055 8.0% $11,401 10.0% $14,252
======== ======= =======
Total assets $293,307
========
Adjusted total assets $290,990
========
Risk-weighted assets $142,516
========
</TABLE>
15. CONCENTRATIONS OF CREDIT RISK:
The Company invests a portion of its cash in deposit accounts with various
financial institutions in amounts which may exceed the insured amount of
$100,000. The Company has not experienced any losses on these investments
which typically are payable on demand. The Company performs ongoing
evaluations of the financial institutions in which it invests deposits and
periodically assesses its credit risk with respect to these accounts.
The Company originates commercial, residential, home improvement,
construction and consumer loans primarily to customers in the greater
Houston, Texas area and, accordingly, a substantial portion of its debtors'
ability to honor their contracts is dependent upon the local Houston
economy and real estate market.
93
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. COMMITMENTS AND CONTINGENCIES:
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers and to reduce exposure to fluctuation in interest rates. These
financial instruments include commitments to extend credit and sell loans.
Those instruments involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the consolidated statement of financial
condition. The contract or notional amounts of these instruments as
detailed below reflect the extent of involvement in particular classes of
financial instruments.
The exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Company
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. For forward
commitments, the Company is exposed to credit loss in the event of
nonperformance by the counter parties. However, the Company does not
anticipate nonperformance by the counter parties.
Financial instruments with off-balance-sheet risk include the following:
<TABLE>
<CAPTION>
Contract or Notional
Amounts (in thousands)
March 31,
--------------------------------
1998 1997
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $13,930 $13,757
Forward commitments to sell loans 8,893 1,858
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments
may expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
The Company evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary upon
extension of credit is based on management's credit evaluation of the
counter party. Collateral obtained upon funding of the commitment consists
primarily of residential and commercial real estate.
94
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. COMMITMENTS AND CONTINGENCIES, CONTINUED:
LITIGATION
The Company is involved in various litigation arising from an acquired
entity as well as in the normal course of business. In the opinion of
management, the ultimate liability, if any, from these actions will not be
material to the consolidated financial statements.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The assumptions used in estimating fair values were based upon subjective
assessments of market conditions and perceived risks of the financial
instruments at a certain point in time. The fair value estimates can be
subject to significant variability with changes in assumptions.
Furthermore, these fair value estimates do not reflect any premium or
discount that could result from offering for sale at one time the Company's
entire holdings of a particular financial instrument, nor are the tax
ramifications related to the realization of unrealized gains and losses
permitted to be considered in the estimation of fair value. In addition,
fair value estimates are based solely on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Examples would include
portfolios of loans serviced for others, investments in real estate,
premises and equipment, and deferred tax assets. Fair value estimates,
methods and assumptions are set forth below for the Company's financial
instruments.
CASH AND CASH EQUIVALENTS
The carrying amounts of cash and cash equivalents approximate their fair
value.
DEBT AND EQUITY SECURITIES
Fair values for U.S. Government and agency obligations, equity securities
and mortgage-backed securities are based on quoted market prices.
LOANS HELD FOR SALE
Fair values of loans held for sale are estimated based on outstanding
commitments from investors or current market prices for similar loans.
LOANS RECEIVABLE
Fair values are estimated for portfolios of loans with similar financial
characteristics. Mortgage loans are segregated by type, including but not
limited to residential, commercial and construction. Consumer loans are
segregated by type, including but not limited to home improvement loans,
automobile loans, loans secured by deposits and secured and unsecured
personal loans. Each loan category may be segmented, as appropriate, into
fixed and adjustable interest rate terms, ranges of interest rates,
performing and nonperforming, and repricing frequency.
95
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
LOANS RECEIVABLE, CONTINUED
For certain homogeneous categories of loans, such as some residential
mortgages, fair value is estimated using the quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. The fair values of other types of loans are estimated by
discounting the future scheduled and unscheduled cash flows using the
current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities. Unscheduled
cash flows take the form of estimated prepayments and may be based upon
historical experience as well as anticipated experience derived from
current and prospective economic and interest rate environments. For
certain types of loans, anticipated prepayment experience exists in
published tables from securities dealers.
The fair value of significant nonperforming mortgage loans is based on
estimated value of the collateral. Where appraisals are not available,
estimated cash flows are discounted using a rate commensurate with the
credit risk associated with those cash flows. Assumptions regarding credit
risk, cash flows and discount rates are judgmentally determined using
available market information and specific borrower information. The fair
value of nonperforming consumer loans is based on historical experience
with such loans.
FEDERAL HOME LOAN BANK STOCK
The fair value of stock in the Federal Home Loan Bank of Dallas is
estimated to be equal to its carrying amount given it is not a publicly
traded equity security, it has an adjustable dividend rate, and
transactions in the stock have been executed at the stated par value.
DEPOSITS AND ADVANCES FROM BORROWERS FOR TAXES AND INSURANCE
The fair value of deposits with no stated maturity, such as interest-
bearing or non-interest-bearing checking accounts, passbook and statement
savings accounts, money market accounts and advances from borrowers for
taxes and insurance is equal to the amount payable upon demand. The fair
value of certificates of deposit is based on the lower of redemption or
discounted value of contractual cash flows. Discount rates for
certificates of deposit are estimated using current market rates.
BORROWINGS AND CONVERTIBLE SUBORDINATED DEBENTURES
Borrowings include the ESOP debt, the amortizing FHLB advance and
convertible subordinated debentures. The estimated fair value of the ESOP
debt, FHLB advance and convertible subordinated debentures is based upon
the discounted value of the differences between contractual interest rates
and current market rates for similar agreements.
ACCRUED INTEREST
The fair values of accrued interest approximates their carrying values.
96
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers
the difference between current levels of interest rates and the committed
rates. The fair value of guarantees and letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to
terminate them or otherwise settle the obligations with the counterparties
at the reporting date.
The fair value of off-balance sheet financial instruments is estimated to
equal the carrying amount at March 31, 1998 and 1997.
The carrying values and estimated fair values of financial instruments are
as follows:
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
--------------------------------------- --------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 27,043,714 $ 27,043,714 $ 20,790,191 $ 20,790,191
Securities available for sale 3,244,221 3,244,221 3,331,139 3,331,139
Securities held to maturity 92,058,573 92,205,137 108,319,264 107,473,870
Loans held for sale 12,920,011 12,920,011 2,660,415 2,660,415
Loans receivable, net 160,062,098 160,918,162 138,227,705 139,438,499
Federal Home Loan Bank stock 1,508,900 1,508,900 1,933,000 1,933,000
Accrued interest receivable 1,827,267 1,827,267 1,816,415 1,816,415
Financial liabilities:
Deposits 268,990,525 270,269,189 250,218,152 251,113,824
Convertible subordinated debentures 11,405,000 11,651,316 12,080,000 11,420,717
Borrowings 3,985,223 3,874,371 4,226,676 4,093,764
Advance from borrowers for taxes
and insurance 4,619,011 4,619,011 4,750,945 4,750,945
Accrued interest payable 515,161 515,161 638,278 638,278
</TABLE>
97
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS:
The following condensed statement of financial condition as of March 31,
1998 and 1997 and statements of income and cash flows for the three years
ended March 31, 1998 for the Holding Corp. should be read in conjunction
with the consolidated financial statements and notes thereto.
<TABLE>
<CAPTION>
Statement of Financial Condition
March 31,
-------------------------------------
1998 1997
<S> <C> <C>
Assets:
Cash and cash equivalents $ 8,248,731 $ 5,587,194
Securities available for sale 498,906 490,625
Investment in subsidiary 22,813,256 19,323,927
Receivable from Association 5,000 4,233,750
Other assets 1,674,909 1,381,878
----------- -----------
Total assets $33,240,802 $31,017,374
=========== ===========
Liabilities:
Convertible subordinated debentures $11,405,000 $12,080,000
Other liabilities 348,380 427,116
----------- -----------
Total liabilities 11,753,380 12,507,116
----------- -----------
Stockholders' equity:
Common stock 18,996 18,209
Additional paid-in capital 9,927,373 8,695,882
Unearned ESOP shares (118,078) (307,125)
Retained earnings 13,108,214 11,565,900
Net unrealized appreciation (depreciation)
on securities available for sale, net of tax 7,418 (6,107)
Treasury stock (1,456,501) (1,456,501)
----------- -----------
Total stockholders' equity 21,487,422 18,510,258
----------- -----------
Total liabilities and stockholders'
equity $33,240,802 $31,017,374
=========== ===========
</TABLE>
98
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS, CONTINUED:
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------------------
Statement of Income 1998 1997 1996
<S> <C> <C> <C>
Interest income $ 90,437 $ 43,621 $ 25,775
Interest expense 1,034,534 1,048,428 338,878
----------- ----------- -----------
Net interest income (944,097) (1,004,807) (313,103)
Other expense, net 326,354 307,922 239,931
Income tax benefit (434,500) (446,300) (152,800)
Equity in earnings of Association 2,853,968 1,641,202 2,087,270
----------- ----------- -----------
Net income $ 2,018,017 $ 774,773 $ 1,687,036
=========== =========== ===========
Years Ended March 31,
---------------------------------------------------
Statement of Cash Flows 1998 1997 1996
Operating activities:
Net income $ 2,018,017 $ 774,773 $ 1,687,036
Equity in earnings of Association, less
dividends (2,853,968) (1,641,202) (1,237,270)
Changes in other assets and other liabilities (347,829) (353,255) 297,838
Decrease (increase) in accounts receivable
from Association 4,228,750 (4,233,750)
----------- ----------- -----------
Net cash provided by (used in)
operating activities 3,044,970 (5,453,434) 747,604
----------- ----------- -----------
Financing activities:
Net proceeds from issuance of convertible
subordinated debentures 11,295,640
Net proceeds from issuance of common stock 92,270 69,876 38,000
Dividends paid (475,703) (229,457) (237,298)
Purchase of treasury stock (790,494)
----------- ----------- -----------
Net cash provided by (used in)
financing activities (383,433) (159,581) 10,305,848
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 2,661,537 (5,613,015) 11,053,452
Cash and cash equivalents at beginning of year 5,587,194 11,200,209 146,757
----------- ----------- -----------
Cash and cash equivalents at end of year $ 8,248,731 $ 5,587,194 $11,200,209
=========== =========== ===========
</TABLE>
99
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS
Information concerning Directors of the Company is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on July 28, 1998, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
EXECUTIVE OFFICERS
Information regarding the business experience of the executive officers of
the Company and the Association who are not also directors contained in Part I
of this Form 10-KSB is incorporated herein by reference.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than 10% stockholders are required
by SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
100
<PAGE>
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended March 31, 1998, the Company
complied with all Section 16(a) filing requirements applicable to its officers,
directors and greater than 10% beneficial owners.
ITEM 10. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on July 28,1998, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Stockholders to be held on July 28,
1998, a copy of which will be filed not later than 120 days after the close of
the fiscal year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held on July 28, 1998, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
101
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
REFERENCE TO
PRIOR FILING OR
REGULATION EXHIBIT NUMBER
S-B EXHIBIT ATTACHED
NUMBER DOCUMENT HERETO
- ---------- -------- ---------------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement,
liquidation or succession None
3 (a) Certificate of Incorporation *
(a)(i) Certificate of Amendment to Certificate of 3(a)(i)
Incorporation
(b) By-Laws *
4 Instruments defining the rights of securityholders,
including debentures
(a) Form of Common Stock Certificate *
(b) Form of Indenture dated as of December 5, 1995
with respect to the Registrant's 8% Convertible
Subordinated Debentures, due December 1, 2005 **
(c) Form of Debenture **
9 Voting Trust Agreement None
10 Material contracts
(a) 1993 Stock Option and Incentive Plan *
(b) Employment Agreement with Lane Ward *
(c) Employment Agreement with David D. Rinehart *
(d) Employment Agreement with Larry J. Dobrava *
(e) Recognition and Retention Plan *
(f) Profit Sharing Plan and Trust *
12 Statement re: computation of ratios 12
13 Portions of Annual Report to Security Holders None
16 Letter re: change in certifying accountants None
18 Letter re: change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to vote
of security holders None
23 Consent of Independent Accountants 23
24 Power of Attorney Not required
27 Financial Data Schedule 27
_____________________
* Filed as an exhibit to the Registrant's Form S-1 registration statement
(File No. 33-57722) and incorporated herein by reference in accordance with
Item 601 of Regulation S-B.
** Filed as an exhibit to the Registrant's Form SB-2 registration statement (File No. 33-97920) and incorporated herein by
reference in accordance with Item 601 of Regulation S-B.
</TABLE>
102
<PAGE>
(B) REPORTS ON FORM 8-K
There were two reports on Form 8-K filed during the quarter ended March 31,
1998:
1) a) Report dated January 27, 1998.
b) Item 5 - Reporting the issuance of a press release announcing the
declaration of a cash dividend and earnings for the quarter ended
December 31, 1997.
c) No financial statements were filed.
2) a) Report dated March 22, 1998.
b) Item 5 - Reporting the issuance of a press release announcing an
unsolicited acquisition offer.
c) No financial statements were filed.
103
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FORT BEND HOLDING CORP.
Date: June 29, 1998 By: /s/Lane Ward
--------------- ---------------------------------
Lane Ward, Vice Chairman, President,
Chief Executive Officer and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
/s/Lane Ward /s/Robert W. Lindsey
- ------------ --------------------
Lane Ward, Vice Chairman, President, Robert W. Lindsey, Chairman
Chief Executive Officer and Director of the Board
(Principal Executive Officer)
Date: June 29, 1998 Date: June 29, 1998
-------------------- ------------------
/s/David D. Rinehart /s/George C. Brady
- -------------------- ------------------
David D. Rinehart, Executive Vice George C. Brady, Director
President and Chief Financial
Officer (Principal Financial
and Accounting Officer)
Date: June 29, 1998 Date: June 29, 1998
-------------------- ------------------
/s/J. Patrick Gubbels /s/William A. Little
- --------------------- --------------------
J. Patrick Gubbels, Director William A. Little, Director
Date: June 29, 1998 Date: June 29, 1998
-------------------- ------------------
/s/Wayne O. Poldrack /s/Doyle G. Callender
- -------------------- ----------------------------
Wayne O. Poldrack, Director Doyle G. Callender, Director
Date: June 29, 1998 Date: June 29, 1998
-------------------- ------------------
/s/Ron L. Workman
- ----------------------------
Ron L. Workman, Director
Date: June 29, 1998
--------------------
104
<PAGE>
EXHIBIT 3(a)(i)
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
Fort Bend Holding Corp., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of Fort Bend Holding
Corp., resolutions were adopted setting forth a proposed amendment to the
Certificate of Incorporation of said corporation, declaring said amendment to be
advisable and directing that such amendment be considered at the next Annual
Meeting of Stockholders of said corporation. The resolution setting forth the
proposed amendment is as follows:
RESOLVED, that Section A of Article Fourth of the Certificate of
Incorporation of the Corporation be amended to read as follows:
FOURTH:
A. The total number of shares of all classes of stock which the
Corporation shall have the authority to issue five million (5,000,000)
consisting of:
1. One million (1,000,000) shares of preferred stock, par value one
cent ($.01) per share (the "Preferred Stock"); and
2. Four million (4,000,000) shares of common stock, par value one
cent ($.01) per share (the "Common Stock");
SECOND: That thereafter, at the Annual Meeting of Stockholders of said
corporation held on July 29, 1997, pursuant to notice in accordance with Section
222 of the General Corporation Law of the State of Delaware, the necessary
number of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
applicable provisions of Section 242 of the General Corporation Law of the State
of Delaware.
IN WITNESS WHEREOF, said Fort Bend Holding Corp. has caused this
certificate to be signed by Lane Ward, its President and Chief Executive
Officer, this 12th day of August, 1997.
FORT BEND HOLDING CORP.
By:/s/ Lane Ward
--------------------------------
Lane Ward
President and Chief Executive Officer
<PAGE>
EXHIBIT 12
FORT BEND HOLDING CORP.
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
EXCLUDING INTEREST ON DEPOSITS:
Income before income tax and cumulative effect
of account charge $ 3,113 $ 1,138 $ 2,600 $ 2,741 $ 2,436
Fixed charges:
Interest on borrowings 1,297 1,372 730 362 34
Estimated interest component of
rentals 83 67 9 9 10
------- ------- ------- ------- -------
Total fixed charges 1,380 1,439 739 371 44
------- ------- ------- ------- -------
Earnings before income tax, cumulative
effect of accounting change, and
fixed charges $ 4,493 $ 2,577 $ 3,339 $ 3,112 $ 2,480
======= ======= ======= ======= =======
Ratio of earnings to fixed charges 3.26 1.79 4.52 8.39 56.36
======= ======= ======= ======= =======
INCLUDING INTEREST ON DEPOSITS:
Income before income tax and
cumulative effect of accounting
change $ 3,113 $ 1,138 $ 2,600 $ 2,741 $ 2,436
Fixed Charges:
Interest on deposits 11,028 10,026 9,294 7,346 7,575
Interest on borrowings 1,297 1,372 730 362 34
Estimated interest components of 83 67 9 9 10
rentals ------- ------- ------- ------- -------
Total fixed charges 12,408 11,465 10,033 7,717 7,619
------- ------- ------- ------- -------
Earnings before income tax, cumulative effect of
accounting change, and fixed charges $15,521 $12,603 $12,633 $10,458 $10,055
======= ======= ======= ======= =======
Ratio of earnings to fixed charges 1.25 1.10 1.26 1.36 1.32
======= ======= ======= ======= =======
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OF
PERCENTAGE INCORPORATION
OF OR
PARENT SUBSIDIARY OWNERSHIP ORGANIZATION
- ---------------------------- ------------------------------ ----------- -------------
<S> <C> <C> <C>
Fort Bend Holding Corp. Fort Bend Federal Savings 100% Federal
and Loan Association of
Rosenberg
Fort Bend Federal Savings Fairview, Inc. 100% Texas
and Loan Association of
Rosenberg
Fort Bend Federal Mitchell Mortgage 51% Texas
Savings and Loan Corporation,
Association of Rosenberg L.L.C.
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Fort Bend Holding Corp. on Form S-8 (File No. 333-27839 and File No. 33-
85674) of our report which includes an explanatory paragraph related to an
accounting change, dated May 5, 1997, on our audits of the consolidated
financial statements of Fort Bend Holding Corp. and Subsidiaries as of March
31, 1998 and 1997, and for the years ended March 31, 1998, 1997 and 1996, which
report is included in this Annual Report on Form 10-KSB.
/s/ Coopers & Lybrand L.L.P.
------------------------------------
COOPERS & LYBRAND L.L.P.
Houston, Texas
June 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORT BEND
HOLDING CORP'S 3/31/98 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 6,259,939
<INT-BEARING-DEPOSITS> 20,783,775
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,244,221
<INVESTMENTS-CARRYING> 92,058,573
<INVESTMENTS-MARKET> 92,205,137
<LOANS> 174,574,561
<ALLOWANCE> 1,592,452
<TOTAL-ASSETS> 316,606,546
<DEPOSITS> 268,990,525
<SHORT-TERM> 0
<LIABILITIES-OTHER> 8,265,259
<LONG-TERM> 15,390,223
0
0
<COMMON> 18,996
<OTHER-SE> 23,035,587
<TOTAL-LIABILITIES-AND-EQUITY> 316,606,546
<INTEREST-LOAN> 13,549,068
<INTEREST-INVEST> 8,165,075
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 21,714,143
<INTEREST-DEPOSIT> 11,028,451
<INTEREST-EXPENSE> 12,325,833
<INTEREST-INCOME-NET> 9,388,310
<LOAN-LOSSES> 95,980
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,793,009
<INCOME-PRETAX> 3,113,264
<INCOME-PRE-EXTRAORDINARY> 3,113,264
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,018,017
<EPS-PRIMARY> 1.21
<EPS-DILUTED> 0.94
<YIELD-ACTUAL> 3.29
<LOANS-NON> 528,521
<LOANS-PAST> 0
<LOANS-TROUBLED> 547,012
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,701,008
<CHARGE-OFFS> 204,776
<RECOVERIES> 240
<ALLOWANCE-CLOSE> 1,592,452
<ALLOWANCE-DOMESTIC> 199,231
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,393,221
</TABLE>
