1999 ANNUAL REPORT
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
BRYAN, TEXAS
TABLE OF CONTENTS
President's Message......................................................... 1
Selected Consolidated Financial Data........................................ 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 6
Consolidated Financial Statements........................................... 26
Corporate Information....................................................... 56
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[THE BRYAN-COLLEGE STATION FINANCIAL
HOLDING COMPANY'S LETTERHEAD]
December 22, 1999
Dear Friend and Stockholder:
We wish to take this opportunity to express our gratitude and appreciation
for the moral and financial support you have given THE BRYAN-COLLEGE STATION
FINANCIAL HOLDING COMPANY (the "Holding Company") and its principal operating
subsidiary, FIRST FEDERAL SAVINGS BANK ("First Federal"). As we completed our
first full year of operations with the new holding company, we thank each and
every one of you for your personal encouragement and involvement over these
eight years while we transitioned this financial institution into full-service
banking with multiple branches and offices, converted it into a federal stock
financial institution in the early '90's , and organized our new holding company
in 1998. Your trust and confidence has been invaluable during this period of
time -- and we intend to continue to honor that trust.
Thanks to you, First Federal is the only publicly-traded independent
financial institution in this area. It has enjoyed an excellent growth and
community acceptance over these past eight years, and has loaned to the people
in the community more of its deposits than any other financial institution in
this immediate area -- with relatively low loan losses over the past three
fiscal years.
The stockholders of the Holding Company (parent of its principal operating
subsidiary, First Federal) will be pleased to know that during the Holding
Company's first full year of operations, and after paying the interest on its
$3.6 million of debentures, amortizing its initial organization costs and
deducting the normal operating expenses, the Combined Company earned
(after-taxes) $245,000.
First Federal had grown very fast in 1997 and 1998. In 1999, management
pursued a strategy to control its growth in order to emphasize increased
profitability and gradually increase its capital ratios. This strategy was
successfully accomplished as First Federal's net profits increased 30% from last
year, to $815,000 this year. In addition, we increased the capital ratios of
First Federal.
First Federal began its transition to full-service banking in 1994 and
1995, and incurred the expenses associated therewith (such as new data
processing, tellers, and drive-in facilities). As a result, net income was
$193,000 in 1994 and $211,000 in 1995. In 1996, net income rose to $454,000
before a one-time charge of $220,000 to recapitalize the Savings Association
Insurance Fund. In 1997, net income rose to $605,000 and to $628,000 in 1998. In
the fiscal year 1999, net income increased to $815,000.
Our beautiful new permanent north Bryan banking facility, strategically
located at the intersection of the two major highways in our community, has just
been completed and opened for business on December 20, 1999. This new facility
has everyone excited and enthusiastic about First Federal's opportunities in
that large portion of Bryan-College Station. For the first time, we are now
offering safe deposit service at our principal offices -- with over 700 new safe
deposit boxes recently installed. Plus, we have also completed expansion of a
larger customer-service area, new Note Department offices and a large vault to
accommodate the growth in our principal offices.
To provide for continued profitable growth in the Bryan-College Station
area, and also to implement our new three year strategic plan to carefully
expand into the growing "Texas Triangle" generally bordered by Houston,
Austin-San Antonio, and Dallas-Ft. Worth, we have just hired the former
President of a successful automobile lending firm to manage and expand our
profitable Second Chance Auto Loan Program with selected auto dealers located
throughout this "Texas Triangle." In addition, in 1999 we hired an experienced
and seasoned Small Business Administration ("SBA") loan specialist in order to
expand our SBA guaranteed loan program throughout the "Texas Triangle," by
utilizing our recent designation as a Certified SBA Lender. Our mortgage lending
offices have also just begun their expansion into this same general area. This
strategy is designed to diversify First Federal's business opportunities over
the next three years into what we believe to be one of the fastest-growing areas
of the State of Texas, in order to enhance our franchise value and thus,
increased value for you, the stockholders of our Holding Company.
We have expended much time, energy and expense to prepare First Federal
for the Year 2000 issue. We believe that we are truly ready for any eventuality
(including any unexpected loss of electricity). In order to protect First
Federal against anticipated increases in interest rates this next year, at
September 30, 1999, our loan portfolio and deposits were positioned to absorb a
2% additional increase in interest rates without any change in our net portfolio
value, and if interest rates were to increase by 3%, then we would have only a
2% decrease in our net portfolio value. Thus, we believe First Federal to be in
an enviable position to meet any unanticipated changes, and we intend to
maintain that same management discipline in the years ahead.
During this past year, we lost a true friend and wonderful director,
Arthur Davila. Recently, we welcomed Helen Chavarria to the Board of Directors
of the Holding Company and First Federal. Helen is a well-known and respected
former member of the Bryan City Council, where she served for several terms. She
is also active in numerous community affairs.
The unique and valuable corporate charter of our Holding Company gives us
an ability to enter into any type of safe, sound, and lawful business (subject
to regulatory oversight), whether or not related to financial services such as
banking (unlike bank holding companies). To benefit from this valuable charter,
our plans are to carefully diversify our Holding Company into different types of
safe, sound, lawful and profitable businesses throughout this "Texas Triangle"
-- so that we can
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further enhance our franchise value. This is truly an exciting opportunity, and
we are very enthusiastic about the future of our Holding Company, as well as the
future of First Federal.
We are most fortunate to have a committed and dedicated Board of
Directors, and a highly motivated staff who work many hours "over and above" the
normal call of duty in order to accomplish our goals. We could not exist and
prosper without them, and without you, our owners and stockholders. Our genuine
appreciation to each of you for your confidence by your investment in our stock
and in our future.
We pledge to each of you our untiring efforts, and a commitment to use our
very best efforts in order to maximize the return on your investment as we
implement our strategic plan over these next three years.
Sincerely,
Stan Stephen
President/CEO
BOARD OF DIRECTORS:
Richard L. Peacock, Chairman of the Board/Retired/ Owner/Office Supply Business
Ernest Wentrcek, Vice Chairman of the Board/Retired Texas A&M and Realtor
Charles Neelley, Secretary-Treasurer of the Board/ Retired Texas A&M and former
owner of Travel Business
Helen Chavarria, Housing Management Specialist for the Brazos Valley Council
of Government, and area recruiter for Amnesty and Instructional Assistant
for Region IV Educational Service Center located in Huntsville, Texas
J. Stanley Stephen, President/CEO, First Federal Savings Bank
Ken Hays, Owner, Aggieland Travel
Roland Ruffino, Co-Owner/Readfield Wholesale Meats & Readfield Retail Meats
Robert Conaway, Owner/Progress Supply
George Koenig, Executive Vice President & Manager/Construction Lending & Bank
Facilities
Joseph W. Krolczyk, Owner/President, KESCO Restaurant Equipment Supply Inc.
Gary A. Snoe, Owner/President, Snoe Inc. Specialty Tool & Die
3
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables present selected consolidated financial data for The
Bryan-College Station Financial Holding Company (the "Holding Company"),
organized as of April 1, 1998 and its principal operating wholly-owned
subsidiary, First Federal Savings Bank ("First Federal" or the "Bank") at the
dates and for the periods indicated. This information is derived in part from,
and should be read in conjunction with, the Consolidated Financial Statements of
the Holding Company included elsewhere in this 1999 Annual Report.
At September 30,
----------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------
(In Thousands)
Selected Financial
Condition Data:
Total assets(1)............ $81,869 $82,634 $75,089 $57,597 $61,432
Loans receivable, net(2).. 70,438 71,994 65,237 49,579 48,605
Mortgage-backed securities. 692 954 1,150 1,292 2,278
Investment securities...... --- --- --- 1,000 1,000
Deposits................... 73,240 73,554 58,808 51,677 54,939
Debentures................. 3,629 3,629 --- --- ---
Other borrowings........... --- 800 10,000 --- 1,088
Stockholders' equity....... 2,115 1,870 4,834 4,316 4,170
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(1) After two years of fast growth (averaging 20% in deposits a year in 1997
and 1998), management planned a strategy of "no growth" in deposits for
1999, in order to gradually increase ratios of capital to total assets and
increase emphasis on profitability. Both goals were accomplished by First
Federal.
(2) Including loans held for sale at month end of $2.5 million, $328,000,
$204,000, $419,000 and $1.8 million at September 30, 1999, 1998, 1997, 1996
and 1995, respectively.
Year Ended September 30,
--------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------
(In Thousands)
Selected Operations Data:
Total interest income........................ $7,543 $6,891 $5,597 $4,828 $4,698
Total interest expense....................... 3,558 3,417 2,659 2,363 2,294
------ ------ ------- ------ ------
Net interest income......................... 3,985 3,474 2,938 2,465 2,404
Provision for loan losses.................... 104 79 25 (52) 27
------ ------ ------- ------ ------
Net interest income after provision for
loan losses................................. 3,881 3,395 2,913 2,517 2,377
Service charges.............................. 744 602 585 527 355
Gain on sales of loans, mortgage servicing
rights, mortgage-backed securities and
investment securities....................... 787 229 148 343 213
Income from operation of foreclosed real
estate...................................... (17) (20) (20) (9) (2)
Other noninterest income..................... 269 120 62 12 26
SAIF Special Assessment...................... --- --- --- 333 ---
Other noninterest expenses (operating expenses) 5,220 3,870 2,771 2,715 2,648
------ ------ ------- ------ ------
Income before income taxes................... 444 456 917 342 321
Income tax expense .......................... 199 164 312 108 110
------ ------ ------- ------ ------
Net income................................... $ 245 $ 292 $ 605 $ 234 $ 211
====== ====== ======= ====== ======
Dividends on bank preferred stock............ $ --- $ (44) $ (87) $ (88) $ (88)
====== ====== ======= ====== ======
Net income available to common stockholders.. $ 245 $ 248 $ 518 $ 146 $ 123
====== ====== ======= ====== ======
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4
At or for the
Year Ended September 30,
---------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------
Other Data:
Interest rate spread information:
Average during period(1)....... 4.84% 4.49% 4.47% 4.11% 3.97%
End of period(2)............... 5.94 5.10 4.56 4.67 4.17
Net interest margin for the
period(3)....................... 5.10 4.80 4.85 4.45 4.29
Average interest-earning assets
as a percentage of average
interest-bearing liabilities.... 105.67 106.51 108.61 108.01 107.95
Non-performing assets to total
assets at end of period(4)....... 3.31 1.62 1.71 1.50 .62
Total equity to total assets
(end of period).................. 2.58 2.26 6.44 7.49 6.79
Total equity to assets ratio
(ratio of average equity to average
total assets)..................... 2.48 4.54 7.23 7.26 6.91
Return on assets (ratio of net
income to average total assets)... .29 .38 .94 .40 .36
Return on assets, excluding
special SAIF assessment........... --- --- --- .77 ---
Return on total equity (ratio of
net income to average equity)..... 11.73 8.40 13.03 5.46 5.15
Return on total equity,
excluding special SAIF assessment. --- --- --- 10.60 ---
Non-interest expenses to average
total assets...................... 6.19 5.05 4.32 5.17 4.47
Non-interest expense to average
total assets excluding special
SAIF assessment................... --- --- --- 4.60 ---
Ratio of earnings to fixed
charges including interest on
deposits(5)....................... 1.12 1.12 1.30 1.10 1.10
Ratio of earnings to fixed
charges excluding interest
on deposits(5).................... 2.03 1.86 4.25 3.73 1.99
Earnings per share................. .57(6) .46(7) .79(7) .22(7) .19(7)
Number of deposit accounts......... 11,087 10,203 8,783 7,903 7,266
Number of full-service offices(8).. 4 3 2 2 2
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(1) Represents the difference between the average yield received on
interest-earning assets (primarily loans) and the average rate paid on
interest-bearing liabilities (primarily deposits).
(2) Represents the weighted average yield on interest-earning assets
(primarily loans) at the end of the period minus the weighted average cost
of liabilities (primarily deposits) at the end of the period.
(3) Net interest income divided by average interest-earning assets (primarily
loans).
(4) Non-performing assets include loans that are 90 days or more delinquent
as well as repossessed assets.
(5) The ratio of earnings to fixed charges is computed by dividing fixed
charges into earnings from continuing operations before income taxes and
extraordinary items plus fixed charges. Fixed charges include interest
expensed and Bank preferred stock dividends.
(6) Adjusted to reflect one 10% stock dividend previously paid to the
stockholders in fiscal year ending September 30, 1999.
(7) Adjusted to reflect one 10% stock dividend previously paid to the
stockholders, and to reflect the 2.5 exchange ratio of Holding Company
common stock for Bank common stock.
(8) Includes full-service mortgage lending offices.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Bryan-College Station Financial Holding Company (the "Holding Company"
and, with its subsidiary the "Combined Company"), a Delaware corporation, was
formed to act as the holding company for First Federal Savings Bank, Bryan,
Texas ("First Federal" or the "Bank") by acquiring 100% of the stock of First
Federal through the exchange of approximately 32% of First Federal common stock
for Holding Company common stock and the purchase of approximately 68% of First
Federal common stock for cash (the "Acquisition"). The Holding Company received
approval from the Office of Thrift Supervision (the "OTS") to acquire all of the
common stock of the Bank outstanding upon completion of the Acquisition. The
Acquisition was completed on April 1, 1998. All references to the Combined
Company, unless otherwise indicated, at or before April 1, 1998, refer to the
Bank.
The Combined Company is headquartered in Bryan, Texas and operates through
its principal operating subsidiary First Federal. First Federal's major goals
are to provide high quality full-service "niche" retail banking on a profitable
basis to primarily the middle-class and blue-collar population through its
offices located in Bryan/College Station, Texas. The Combined Company is
currently in the process of expanding its products and services into the general
trade area bordered by the "Texas Triangle" of Houston, Austin -- San Antonio,
and Dallas. First Federal intends to continue to focus primarily on one-to
four-family residential loans, indirect consumer lending through its Second
Chance Auto Loan Program from selected auto dealers generally from the "Texas
Triangle" (and partially insured against loss by credit-default insurance),
Small Business Administration ("SBA") guaranteed loans in the "Texas Triangle"
through its new designation as a Certified SBA Lender, and to a lesser degree
through direct consumer automobile and personal loans, home improvement loans,
residential construction loans, and small to medium size commercial business
loans. In addition, First Federal seeks to continue maintaining and improving
its asset quality and continuing to minimize to the extent possible, its
vulnerability to changes in interest rates in order to continue to maintain an
attractive spread between its average yield on loans and securities and its
average cost of interest paid on deposits and borrowings.
First Federal's net interest income has historically been dependent largely
upon the difference ("spread") between the average yield earned primarily on
loans, and to a much lesser extent mortgage-backed securities and other
securities ("interest-earning assets") and the average interest rate paid on
savings and other deposits and borrowings ("interest-bearing liabilities"), as
well as the relative amounts of such assets and liabilities. The interest rate
spread between interest-earning assets and interest-bearing liabilities is
impacted by several factors, including economic and competitive conditions that
influence interest rates, loan demand, deposit flows, regulatory developments
and the types of assets and liabilities on its balance sheet. At September 30,
1997, 1998, and 1999, the Combined Company's interest rate spread was 4.56%,
5.10%, and 5.94%, respectively, as compared to our peer group of similar sized
savings institutions in the nation which had an average 3.35% spread at
September 30, 1999, and 3.76% for all similar sized savings institutions in the
State of Texas.
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Like all financial institutions, First Federal has always been subject to
interest rate risk because its interest-bearing liabilities (primarily deposits)
mature or reprice at different times, or on a different basis than its
interest-earning assets (primarily loans). First Federal's net income is also
affected by gains and losses on the sale of loans, loan servicing rights and
investments, provisions expensed for loan and other losses on repossessed
assets, service charge fees, loan servicing income, fees for other financial
services rendered, operating expenses and income taxes. First Federal believes
that building its earnings from net interest income and noninterest income, such
as the profitable sale of long-term, fixed rate loans to the secondary market by
utilizing a fully-staffed residential loan department and SBA business loan
staff, and generally profitable sale of loan participations in its Second Chance
Auto Loan portfolio, along with income from service charges and fees on checking
accounts from its recent transition to full-service retail banking, while
continuing to manage operating expenses necessarily incurred in this type of
lending, can provide a stable foundation for successful operations. Noninterest
income can provide an excellent source of secondary income through fees charged
to customers for services rendered and the sale of loans, without requiring
additional capital.
During this past fiscal year, management has transitioned First Federal to
prepare for future growth and in order to provide more convenient banking
services to its customers, by (i) continuing to upgrade its entire staff by
hiring a new, experienced Chief Financial Officer and also upgrading its tellers
and supervisors with more experienced, full-time professionals; (ii) building a
new permanent full-service branch in north Bryan, adjacent to a key intersection
of two major highways and in the heart of a large, expanding area where many of
First Federal's targeted middle class and blue-collar customers live, and in an
area not presently served by a permanent banking facility; (iii) adding space to
its principal offices to expand customer service and installing over 700 new
safe deposit boxes; (iv) increasing the size of its staff and hiring a new,
experienced manager for its growing, profitable Second Chance Auto Lending
Program (which loans are also secured by credit-default insurance up to $6,000
per loan for losses due to the borrower's loan default); (v) adding to the staff
of its active residential lending department, in its new and larger offices on
the main east-west artery in College Station, in order to enable it to expand
throughout the "Texas Triangle" over the next three years; (vi) addressing all
of the challenges of the Year 2000 issue ("Y2K"), by expending much time and
expense; and (vii) hiring a seasoned SBA loan specialist, to expand First
Federal's SBA loan program throughout the "Texas Triangle" with its new
designation as a "Certified SBA Lender." As a result, the Combined Company's
noninterest expenses increased slightly from 5.05% of average assets for the
year ended September 30, 1998 to 6.19% for the year ending September 30, 1999.
Management believes that this strategy will enable the Combined Company to
continue enhancing profitability in the future and meet the needs of its
customers in a highly competitive market. Despite all the above-described
expansion, new staffing, Y2K, and other expenses, the Combined Company earned
during its full year of operations net income of $245,000 and First Federal's
net income (after tax) increased 30% to $815,000), from $628,000 last year. In
addition, ratios of capital to total assets gradually increased over this past
year.
First Federal's restructuring and expansion, as described above, in order
to provide additional full-service banking and convenience to its customers in
fiscal 1999 and to provide for further growth, has caused some increase in First
Federal's operating expense levels which, despite the recent increase in net
interest income, resulted in First Federal's operating expenses exceeding its
net interest income for the fiscal year ending September 30, 1999.
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Since 1991, First Federal has relied primarily on its noninterest income
for net income. While First Federal's noninterest income has been a relatively
steady source of income, it is highly dependent upon the ability of First
Federal to originate loans and realize profits on the sale of these loans and
related servicing rights to the secondary market and the generally profitable
sale of Second Chance Auto Loan participations, and to increase its service
charges, and fee income from additional checking accounts resulting from its
transition to full-service banking. Total noninterest income increased from
$931,000 in 1998 to $1.8 million in 1999, while noninterest expense increased
from $3.9 million in 1998 to $5.2 million in 1999 primarily due to all of the
reasons described above. Noninterest expense (operating expenses, including Y2K
expenses and all other expenses of the Combined Company other than interest paid
on deposit accounts and borrowings) increased from 5.05% of average assets for
the year ended September 30, 1998 to 6.19% for the year ended September 30,
1999. However, net income of the Combined Company during its first full year of
operations was $245,000 and net income of the Bank increased $187,000 (30%) over
last year to $815,000.
Asset/Liability Management
First Federal, like all financial institutions, is subject to interest
rate risk to the degree that its interest-bearing liabilities mature or reprice
more rapidly, or on a different basis, than its interest-earning assets, some of
which may be longer term or fixed interest rate. Loans maturing within five
years total $56.8 million or 78.8% of total loans, while loans maturing over
five years total $15.3 million or 21.2% of total loans. As a continuing part of
its financial strategy, First Federal continually considers methods of managing
any such asset/liability mismatch, consistent with maintaining acceptable levels
of net interest income. At September 30, 1999, First Federal's loan portfolio
enabled it to have a favorable interest rate risk, so that if interest rates
were to increase 200 basis points (2%) the Bank would not have any change in its
net portfolio value. If interest rates were to have increased 300 basis points
(3%), First Federal would have only a 2% change in its net portfolio value.
In order to monitor and manage interest rate sensitivity and interest rate
spread, First Federal created an Asset/Liability Committee ("ALCO"), composed of
its President, Executive Vice President/Chief Financial Officer, Senior Vice
President/Accounting and three outside directors. The responsibilities of the
ALCO are to assess First Federal's asset/liability mix and recommend strategies
that will enhance income while managing First Federal's vulnerability to changes
in interest rates.
First Federal's asset/liability management strategy has two goals. First,
First Federal seeks to build its net interest income and noninterest income
while adhering to its underwriting and lending guidelines. Second, and to a
lesser extent, First Federal seeks to increase the interest rate sensitivity of
its assets and decrease the interest rate sensitivity of its liabilities in
order to reduce First Federal's overall sensitivity to changes in interest
rates. First Federal places its primary emphasis on maximizing net interest
margin, while striving to better match the interest rate sensitivity of its
assets and liabilities. There can be no assurance that this strategy will
achieve the desired results and will not result in substantial losses in the
event of an increase in interest rate risk.
As part of this strategy, management has continued to emphasize growth in
noninterest-bearing deposits such as checking accounts or lower interest-bearing
savings deposits
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by offering full-service retail banking. In order to minimize the possible
adverse impact that a rise in interest rates may have on net interest income,
First Federal has developed several strategies to manage its interest rate risk.
Primarily, First Federal is currently selling all newly-originated one-to
four-family residential mortgage loans, which are saleable in the secondary
market and most of which are long-term fixed-rate loans. In addition, First
Federal currently offers three-year fixed rate balloon loans and other
adjustable rate loans, and has implemented an active, diversified short-term
consumer lending program, giving First Federal an opportunity to reprice its
loans on a more frequent basis. Management has also recently implemented an
additional strategy of generally profitable sales of loan participations in its
Second Chance Auto Loans.
Net Portfolio Value
The OTS, First Federal's primary regulator, has issued a proposed rule for
the calculation of an interest rate risk component for institutions with a
greater than "normal" (i.e., greater than 2%) level of interest rate risk
exposure ("NPV"). The OTS has not yet implemented the capital deduction for
interest rate risk. NPV is the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet contracts.
This approach calculates the difference between the present value of expected
cash flows from assets and the present value of expected cash flows from
liabilities, as well as cash flows from off-balance sheet contracts. Under OTS
regulations, an institution's "normal" level of interest rate risk in the event
of an assumed change in interest rates is a decrease in the institution's NPV in
an amount not exceeding 2% of the present value of its assets. The amount of
that deduction is one-half of the difference between (a) the institution's
actual calculated exposure to a 200 basis point interest rate increase or
decrease (whichever results in the greater pro forma decrease in NPV) and (b)
its "normal" level of exposure which is 2% of the present value of its assets.
If a capital deduction was required for the September, 1999 reporting period,
the deduction for risk-based capital purposes would not be material to First
Federal.
It has been, and continues to be, an objective of First Federal's Board of
Directors and management to manage interest rate risk. First Federal's
asset/liability policy, established by the Board of Directors, dictates
acceptable limits on the amount of change in NPV given certain changes in
interest rates. See "-- Asset/Liability Management."
Presented below, as of September 30, 1999, is an analysis of First
Federal's interest rate risk as measured by changes in NPV for instantaneous and
sustained parallel shifts in the yield curve, in 100 basis point increments, up
and down 300 basis points in accordance with OTS regulations. As illustrated in
the table, NPV is more sensitive to rising rates than declining rates. This
occurs principally because, as rates rise, the market value of fixed-rate loans
declines due to both the rate increase and slowing prepayments. When rates
decline, First Federal does not experience a significant rise in market value
for these loans because borrowers prepay at relatively high rates. OTS
assumptions are used in calculating the amounts in this table.
9
Change in
Interest Rate At September 30,
Change in 1999
Interest Rate Estimated ------------------
(Basis Points) NPV $ Change % Change
-------------------------------------------------
(Dollars in Thousands)
+300 $8,322 $(152) (2)%
+200 8,474 --- ---
+100 8,539 65 1
0 8,474
-100 8,319 (155) (2)
-200 8,289 (186) (2)
-300 8,516 42 ---
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In evaluating First Federal's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing
tables must be considered. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Further, in the event of a change in interest rates, prepayment
and early withdrawal levels would likely deviate significantly from those
assumed in calculating the table. For example, projected passbook, money market
and checking account maturities may also materially change if interest rates
change. Finally, the ability of many borrowers to service their debt may
decrease in the event of an interest rate increase. First Federal considers all
of these factors in monitoring its exposure to interest rate risk.
Management reviews the OTS measurements on a quarterly basis. In addition
to monitoring selected measures on NPV, management also monitors effects on net
interest income resulting from increases or decreases in rates. This measure is
used in conjunction with NPV measures to identify excessive interest rate risk.
In the event of a 300 basis point change in interest rates, First Federal would
experience no change in NPV in a declining rate environment and a 2% decrease in
a rising rate environment. As of September 30, 1999, an increase in interest
rates of 200 basis points would have resulted in no change in the portfolio
value of First Federal's assets, while a change in the interest rates of
negative 200 basis points would have resulted in 2% decrease in the portfolio
value of First Federal's assets.
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Average Balances, Interest Rates and Yields
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities
and the interest rates, expressed both in dollars and rates and the net interest
margin. No tax equivalent adjustments were made. Average balances are the
beginning balance for the year plus the ending balance for each month divided by
thirteen, and include the balances of non-accruing loans. The yield includes
fees which are considered adjustments to yields.
For the Fiscal Year Ended September 30,
-----------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------
Average Average Average
Outstanding Interest Outstanding Interest Outstanding Interest
Balance Earned Yield Balance Earned Yield Balance Earned Yield
-----------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable, net...... $72,826 $7,334 10.07% $68,050 $6,686 9.83% $56,090 $5,351 9.54%
Mortgage-backed securities. 842 45 5.34 1,053 63 5.98 1,221 73 5.98
Interest bearing deposits
with Federal Home Loan
Bank....................... 3,838 134 3.49 2,613 96 3.67 2,402 115 4.79
Other interest-earning
assets..................... 610 30 4.92 640 46 7.19 864 58 6.71
------- ------ ------- ------ ------- ------
Total interest-earning
assets..................... 78,116 7,543 9.66 72,356 6,891 9.52 60,577 5,597 9.24
Noninterest-earning assets.. 6,226 4,248 3,620
------- ------- -------
Total assets............... $84,342 $76,604 $64,197
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For the Fiscal Year Ended September 30,
-----------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------
Average Average Average
Outstanding Interest Outstanding Interest Outstanding Interest
Balance Earned Yield Balance Earned Yield Balance Earned Yield
-----------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest-bearing liabilities:
Deposits.................... $70,118 $3,125 4.46% $62,133 $ 2,981 4.80 $52,707 $2,491 4.73%
FHLB advances............... 176 8 4.55 3,984 226 5.67 3,067 168 5.48
Notes payable............... 3,629 425 11.71 1,815 210 11.57 --- --- ---
------- ------ ------- ------- ------- ------
Total interest-bearing
liabilities.............. 73,923 3,558 4.81 67,932 3,417 5.03 55,774 2,659 4.77
------ ------- ------
Other liabilities(2)........ 8,330 5,195 3,780
------- ------- -------
Total liabilities .......... 82,253 73,127 59,554
Stockholders' equity........ 2,089 3,477 4,643
------- ------- -------
Total liabilities and
stockholders' equity....... $84,342 $76,604 $64,197
======= ======= =======
Net interest income;
interest rate spread......... $3,985 4.84% $ 3,474 4.49% $2,938 4.47%
====== ===== ======= ===== ====== =====
Net interest margin(1)....... 5.10% 4.80% 4.85
===== ===== =====
Average interest-earning
assets to average
interest-bearing
liabilities.................. 105.67% 106.51% 108.61%
======= ====== ======
|
(1) Net interest margin is net interest income divided by average
interest-earning assets (primarily loans).
(2) Including noninterest-bearing deposits.
12
The following table sets forth the yields on loans, mortgage-backed
securities, securities and other interest-earning assets, the rates on savings
deposits and borrowings and the resultant interest rate spreads at the dates and
for the periods indicated.
At September 30,
1999 1998 1997
----- ----- ----
Weighted average yield on:
Loans receivable................................... 10.95% 10.55% 9.75%
Mortgage-backed securities......................... 6.12 6.63 6.63
Other interest-earning assets...................... 5.48 5.37 6.13
Combined weighted average yield on
interest-earning assets........................... 10.78 10.23 9.48
Weighted average rate paid on:
Deposits........................................... 4.48 4.81 4.80
Borrowings......................................... --- 5.43 5.55
Notes payable...................................... 11.50 11.50 ---
Combined weighted average rate paid on
interest-bearing liabilities...................... 4.84 5.13 4.92
Spread............................................. 5.94% 5.10% 4.56%
|
For the Fiscal Year Ended
September 30,
-------------------------
1999 1998 1997
---- ---- ----
Weighted average yield on:
Loans receivable.................................... 10.07% 9.83% 9.54%
Mortgage-backed securities.......................... 5.34 5.98 5.98
Other interest-earning assets....................... 3.69 4.37 5.30
Combined weighted average yield on
interest-earning assets........................... 9.66 9.52 9.24
Weighted average rate paid on:
Deposits............................................ 4.46 4.80 4.73
FHLB advances....................................... 4.55 5.67 5.48
Notes payable....................................... 11.71 11.57 ---
Combined weighted average rate paid on
interest-bearing liabilities...................... 4.81 5.03 4.77
Spread............................................... 4.84 4.49 4.47
Net interest margin (net interest-earnings divided
by average interest-earning assets, with net
interest-earnings equaling the difference
between the dollar amount of interest-earned on
assets and interest paid on deposits and FHLB
advances)........................................... 5.10% 4.80% 4.85%
|
13
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets
(primarily loans) and interest-bearing liabilities (primarily deposits) for the
periods shown. It distinguishes between the increase in interest income and
interest expense related to higher outstanding balances and to the levels and
volatility of interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in rate (i.e., changes in rate multiplied by old volume) and (ii)
changes in volume (i.e., changes in volume multiplied by old rate). For purposes
of this table, changes attributable to both rate and volume have been allocated
proportionately to the change due to volume and rate.
For the Fiscal Year Ended September 30,
--------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
--------------------------------------------------------------
Increase Total Increase Total
(Decrease) Increase (Decrease) Increase
Due To (Decrease) Due To (Decrease)
--------------------------------------------------------------
Volume Rate Volume Rate
----------------- ----------------
(Dollars in Thousands)
Interest-earning assets:
Loans........................ $ 469 $ 179 $ 648 $1,171 $164 $1,335
Mortgage-backed securities... (13) (5) (18) (11) --- (11)
Interest bearing deposits
with FHLB................... 45 (7) 38 9 (28) (19)
Other interest-earning assets (2) (14) (16) (16) 5 (11)
---- ----- ----- ------ ---- ------
Total interest-earning assets 499 153 652 1,153 141 1,294
Interest-bearing liabilities:
Deposits..................... 383 (239) 144 444 46 490
FHLB advances ............... (216) (2) (218) 52 6 58
Notes payable................ 210 5 215 210 --- 210
----- ----- ----- ------ ---- ------
Total interest-bearing
liabilities............... 377 (236) 141 706 52 758
----- ----- ----- ------ ---- ------
Net interest income........... $ 122 $ 389 $ 447 $ 89
===== ===== ====== ====
Net increase in net interest
income....................... $ 511 $ 536
===== ======
|
Results of Operations
The Combined Company's results of operations are primarily dependent on
its net interest income which is the difference between interest income on
interest-earning assets (primarily loans) and interest expense on
interest-bearing liabilities (primarily deposits). Interest income is a function
of the average balances of interest-earning assets (primarily loans) outstanding
during the period and the average yields earned on such assets. Interest expense
is a function of the average amount of interest-bearing liabilities outstanding
(primarily deposits) during the period and the average rates paid on such
liabilities. The Combined Company also generates noninterest income, such as
income from service charges and fees on checking accounts, loan servicing and
other fees and charges, and gains on sales of residential mortgages and sales of
loan participations of Second Chance Auto loans and servicing rights. The
Combined Company's net income is also affected by the level of its noninterest
expenses, such as employee salaries and benefits, occupancy and equipment
expenses, and federal deposit insurance premiums.
14
Comparison of Fiscal Year Ended September 30, 1999 to September 30, 1998
The Combined Company reported consolidated net income of $245,000 for its
first full year of operations ended September 30, 1999, as compared to $292,000
for the year ended September 30, 1998, a decrease of $47,000, or 16%. The
decrease in net income was primarily due to costs associated with the
termination of the defined benefit pension plan at the Bank level and an
increase in the professional staff of the Bank in order to increase loan
originations and service its customers as the Bank expands in the Bryan-College
Station area and begins its expansion generally into the "Texas Triangle"
bordered by Houston, Austin -San Antonio, and Dallas, in order to increase its
franchise value and thus stockholder value. The terminated plan was replaced
with a less expensive 401(k) profit-sharing plan.
Net interest income increased by $511,000 to $4.0 million for the year
ended September 30, 1999 from $3.5 million for the year ended September 30,
1998. This increase primarily resulted from increases in the average balance and
average yield of the loan portfolio, offset in part by increases in the volume
of deposits and other borrowings. The average yield on First Federal's loans
increased 24 basis points as a result of an increase in the volume of
credit-default insured consumer automobile loans which yield a higher rate than
traditional residential mortgage loans. The average balance of loans increased
as a result of a concerted effort to increase the consumer loan portfolio
through building additional relationships with automobile dealerships and
promoting the innovative and profitable Second Chance Auto Loan Program. These
increases were partially offset by an increase in the cost of funds resulting
from a $8.0 million increase in the average balance of deposits and a $1.8
million increase in the average balance of notes payable. In addition, the
average cost of funds decreased 22 basis points as a result of increased
emphasis on transactional deposit accounts. As a result, the Combined Company's
interest margin increased to 5.10% for the year ended September 30, 1999 from
4.80% for the year ended September 30, 1998. The ratio of interest-earning
assets to interest-bearing liabilities declined to 105.67% at September 30, 1999
from 106.51% at September 30, 1998. The average net interest spread for the
fiscal year ending September 30, 1999, increased to 4.84% from 4.49% for the
same periods.
The Combined Company recorded a $104,000 provision (expense) for loan
losses for the year ended September 30, 1999 as compared to a $79,000 provision
for loan losses for the year ended September 30, 1998. The increase in the
provision for loan losses was largely a result of an increase in gross loans
during the year. The Combined Company continued to have low levels of
charge-offs relative to the allowance for loan losses and the use of
credit-default insurance coverage for Second Chance automobile loans to limit
the Combined Company's loan loss exposure.
Noninterest income increased $852,000 to $1,783,000 for the year ended
September 30, 1999 from $931,000 for the year ended September 30, 1998. This was
primarily a result of increased profits on sales of loans and servicing rights
of $558,000 combined with an increase in service charges of $142,000 as a result
of an increase in transactional deposit accounts. In addition, other income
increased $83,000 primarily as a result of insurance reimbursements for casualty
losses.
15
Noninterest expense increased $1.3 million from $3.9 million for the year
ended September 30, 1998 to $5.2 million for the year ended September 30, 1999.
The increase primarily resulted from the restructuring and expansion of the
Combined Company. Compensation and benefits increased $689,000 as a result of a
curtailment loss of $172,000 relative to the termination of the Bank's pension
plan, increases in compensation to hire the former President of an auto finance
company as the new manager of Second Chance auto lending in order to gradually
expand this loan program with selected auto dealers throughout the State of
Texas, the hiring of five new loan collection and servicing officers in order to
significantly strengthen the long-term loan collection and servicing of the
Second Chance Auto Loan Program, and the hiring of a marketing representative
for this loan program. Also, First Federal hired a new Executive Vice
President/Chief Financial Officer with over 20 years experience in banking, in
order to provide this expertise for the Bank and the Holding Company and to
provide for succession in senior management in the future. In addition, First
Federal strengthened the staff of its mortgage lending department with an
experienced secondary market residential loan specialist, along with two new
support personnel. Also, a highly-qualified new manager of the Bank's Note
Department was hired in 1999, along with a seasoned specialist in SBA lending in
order to expand First Federal's SBA lending program throughout the "Texas
Triangle" with its new designation as a Certified SBA Lender. These new,
important additions, have significantly strengthened the professional staff of
the Bank and the Holding Company. Occupancy expense increased $76,000 primarily
as a result of the opening of an additional branch in north Bryan, the expansion
of the principal office of First Federal to provide new safe deposit box service
with over 700 new safe deposit boxes and expanded customer service and Note
Department areas, and the expansion of the credit-default insured Second Chance
Automobile Lending Program. Professional fees increased $172,000 as a result of
legal fees relating to the organization and initial full year of the operation
of the Holding Company. Data processing costs increased $68,000 as a result of
increased loan origination production, an increased number of items processed
for the Bank and the costs associated the Y2K issue. Other expense increased
$302,000, which consisted of various items, including $75,000 of amortization of
debt issue costs and organizational costs related to the formation of the
Holding Company. The Combined Company had increased expenses of $80,000 related
to valuation adjustments and losses for non-interest bearing assets (primarily
repossessed vehicles). It is anticipated that these same expenses will increase
as the Second Chance Auto Loan Program expands in the future. Various other
expenses also increased primarily as a result of the overall growth of the
Combined Company's infrastructure and increased loan origination production of
the Combined Company during fiscal 1999.
Income tax expense increased $35,000 from $164,000 for the year ended
September 30, 1998 to $199,000 for the year ended September 30, 1999. Income tax
expense reflected a tax rate of 45% for the year ended September 30, 1999 as
compared to 36% for the year ended September 30, 1998. The effective tax rate
increased as a result of an increase in nondeductible expenses.
Comparison of Fiscal Year Ended September 30, 1998 to September 30, 1997
The Combined Company reported consolidated net income of $292,000 for the
year ending September 30, 1998. This compares to $605,000 for the year ended
September 30, 1997, for First Federal (prior to the Holding Company's formation)
a decrease of $313,000, or 51.7%.
16
The decrease in net income was primarily due to costs and expenses related to
the initial formation of the Holding Company, in addition to interest expense of
$138,000 on the Holding Company debentures, amortization of costs associated
with the original issuance of the debentures, Holding Company organizational
costs of $50,000, and franchise taxes of $21,000, all of which are after tax. In
addition, compensation and benefits at the Bank level increased as a result of
an increase in the professional staff of First Federal in order to increase its
loans and services to its customers as the Bank expands in Bryan-College Station
and begins its expansion generally into the "Texas Triangle" bordered by
Houston, Austin - San Antonio, and Dallas, in order to increase its franchise
value.
Net interest income increased by $536,000 to $3.5 million for the year
ended September 30, 1998 from $2.9 million for the year ended September 30,
1997. This increase primarily resulted from increases in the average balance and
average yield of the loan portfolio, offset in part by increases in the volume
and cost of deposits and advances from the FHLB of Dallas. In addition, the
Holding Company issued debentures in April of 1998, resulting in an increased
volume of notes payable. The average yield on First Federal's loans increased 29
basis points as a result of an increase in the volume of insured consumer
automobile loans and direct consumer loans which yield a higher rate than
traditional residential mortgage loans. The average balance of loans also
increased as a result of a concerted effort to increase the consumer loan
portfolio through building additional relationships with auto dealerships and
promoting First Federal's innovative and profitable Second Chance Auto Loan
Program. These increases were partially offset by an increase in the cost of
funds resulting from a $9.4 million increase in the average balance of deposits
and a $2.7 million increase in the average balance of FHLB advances and notes
payable. In addition, the average cost of funds increased 26 basis points as a
result of increased interest rates in order to remain competitive on savings,
certificates of deposit and other interest-bearing accounts, and due to the 11
1/2% debentures due March 2003 ("Debentures") issued in connection with the
acquisition of the Bank by the Holding Company. As a result, the Combined
Company's interest margin slightly decreased to 4.80% for the year ended
September 30, 1998 from 4.85% for the year ended September 30, 1997. The ratio
of interest-earning assets to interest-bearing liabilities declined to 106.51%
at September 30, 1998 from 108.61% at September 30, 1997. The net interest
spread increased slightly to 4.49% from 4.47% for the same periods.
The Combined Company recorded a $75,000 provision (expense) for loan
losses for the year ended September 30, 1998 compared to a $25,000 provision for
loan losses for the year ended September 30, 1997. The increase in the provision
for loan losses was largely a result of a $5.1 million increase in gross loans
during the year. The Combined Company continued to have low levels of
charge-offs relative to the allowance for loan losses and the use of
credit-default insurance coverage for certain automobile loans to limit the
Combined Company's loan loss exposure.
Noninterest income increased $156,000 to $931,000 for the year ended
September 30, 1998 from $775,000 for the year ended September 30, 1997. This was
primarily a result of increased profits on sales of loans and mortgage servicing
rights of $81,000 combined with an increase in service charges of $17,000 as a
result of an increase in transactional deposit accounts. In addition, other
income increased $58,000 primarily as a result of the recognition of excess
dealer reserves maintained on older insured automobile loans that were paid off
during the year.
17
Noninterest expense including Y2K expenses increased $1.1 million from $2.8
million for the year ended September 30, 1997 to $3.9 million for the year ended
September 30, 1998. The increase primarily resulted from the restructuring and
expansion of the Combined Company. Compensation and benefits increased $438,000
as a result of an increase in the number of employees due primarily to the
opening of a new branch and increased expenses related to the expansion of the
mortgage lending and Second Chance Automobile Lending Program departments.
Occupancy expense increased $115,000 primarily as a result of the opening of the
new branch. Office supplies increased $48,000 and data processing fees also
increased $21,000 as a result of increased production and increased number of
transactions. The increase in the volume of consumer loans has resulted in
additional telephone and postage costs of $62,000, related largely to
collections. Other expense increased $334,000, which consisted of various items,
including $67,000 of amortization of debt issue costs and organizational costs
related to the formation of the Holding Company and franchise tax expense of
$32,000 for the Holding Company. The Combined Company had increased expenses of
$86,000 related to the establishment of a $59,000 reserve for repossessed assets
and the remainder for losses on repossessed assets. Various other expenses also
increased primarily as a result of the overall growth and increased loan
production of the Combined Company during fiscal 1998.
Income tax expense decreased $148,000 from $312,000 for the year ended
September 30, 1997 to $164,000 for the year ended September 30, 1998 primarily
as a result of the $461,000 decrease in pretax income. Income tax expense
reflected a tax rate of 35.9% for the year ended September 30, 1998 compared to
34.0% for the year ended September 30, 1997.
Financial Condition
After two years of fast growth in 1997 and 1998 (averaging 20% deposit
growth a year), management pursued a strategy to control growth in 1999, in
order to increase emphasis on profitability and gradually increase capital
ratios to total assets -- both goals were successful were successfully met.
Thus, the Combined Company's total assets decreased $765,000, or .1%, to $81.9
million at September 30, 1999 from $82.6 million at September 30, 1998.
Net loans receivable (excluding loans held for sale) decreased $3.7
million to $68.0 million at September 30, 1999 from $71.7 million at September
30, 1998. The decrease resulted primarily from an increase in the category of
loans held for sale in the Bank's generally profitable Second Chance Auto Loan
Program as a result of profitable sales of loan participations in that program
and from a strategy to control growth in 1999.
Deposits decreased $314,000, or.4%. The decrease was a result of a
strategy to control the Bank's growth in 1999, in order to gradually increase
capital ratios to total assets and emphasize increased profitability.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, checking accounts,
principal and interest payments on loans and mortgage-related securities,
proceeds from sales of long term, fixed-rate residential mortgage loans,
proceeds from sales of credit-default insured consumer
18
automobile loans and other funds provided from operations. Additionally, the
Bank has borrowed funds from the FHLB of Dallas or utilized particular sources
of funds based on need, comparative costs and availability at the time.
While scheduled loan and mortgage-backed securities repayments, short-term
investments, and FHLB borrowings are relatively stable sources of funds, deposit
flows are unpredictable and are a function of external factors including
competition, the general level of interest rates, and general economic
conditions.
The Bank maintains investments in liquid assets based on management's
assessment of cash needs, expected deposit flows, availability of advances from
the FHLB, available yield on liquid assets (both short-term and long-term) and
the objectives of its asset/liability management program. Several options are
available to increase liquidity, including reducing loan originations,
increasing deposit marketing activities, and increasing borrowings from the
FHLB.
Federal regulations require insured institutions to maintain minimum
levels of liquid assets. At September 30, 1999, First Federal's regulatory
liquidity ratio was 6.18% or 2.18% above the 4% regulatory requirement. First
Federal uses its capital resources principally to meet its ongoing commitments
to fund maturing certificates of deposits and deposit withdrawals, repay
borrowings, fund existing and continuing loan commitments, maintain its
liquidity and meet operating expenses. First Federal's core and risk-based
capital ratios were 7.16% and 9.08%, which exceeded the minimum required capital
ratios of 4.0% and 8.0%, respectively.
At September 30, 1999, the Bank had commitments to originate loans,
including loans in process, totaling $5.9 million. The Bank also had $701,000 of
outstanding unused lines of credit and $452,000 of letters of credit. The Bank
considers its liquidity and capital resources to be adequate to meet its
foreseeable short and long-term needs. The Bank expects to be able to fund or
refinance, on a timely basis, its material commitments and long-term
liabilities. First Federal intends to expand its Second Chance Auto Loan Program
with additional select automobile dealers throughout the State of Texas,
retaining a portion of these loans for its own portfolio, and selling excess
loan originations on a profitable basis in order to maintain First Federal's
capital compliance and liquidity requirements. At September 30, 1999, the Bank
had no advances outstanding from the FHLB.
The Bank's liquidity, represented by cash equivalents, is a product of its
operating, investing and financing activities. These activities are summarized
below for the periods indicated.
19
Year Ended
September 30,
--------------------
1999 1998
--------------------
(In Thousands)
Operating Activities:
Net income...................................... $ 245 $ 292
Adjustment to reconcile net income or loss to net
cash provided by operating activities.......... (2,564) 836
------- ------
Net cash (used in) provided by operating
activities...................................... (2,319) 1,128
Net cash provided by (used in) investing
activities...................................... 2,856 (6,524)
Net cash provided by (used in) financing
activities...................................... (1,159) 6,292
------- ------
Net increase (decrease) in cash and cash
equivalents..................................... (622) 896
Cash and cash equivalents at beginning of period 5,327 4,431
------- ------
Cash and cash equivalents at end of period...... $ 4,705 $5,327
======= ======
|
The primary investing activity of the Bank is lending. Loans originated
net of repayments and sales provided (used) $3.3 million and $(6.6) million in
cash for the years ended September 30, 1999 and September 30, 1998,
respectively. Deposits decreased $314,000 during the year ended September 30,
1999 as compared to a $14.7 million increase during the year ended September 30,
1998, as a result of a "no-growth" policy established by management for fiscal
year 1999. FHLB advances decreased in 1999 by $800,000 as compared to a
decrease of $9.2 million in 1998.
Year 2000 Issue
General. The year 2000 ("Y2K") issue confronting the Combined Company and
its suppliers, customers, customers' suppliers and competitors centers on the
inability of computer systems to recognize the year 2000. Many existing computer
programs and systems originally were programmed with six digit dates that
provided only two digits to identify the calendar year in the date field. With
the impending new millennium, these programs and computers will recognize "00"
as the year 1900 rather than the year 2000.
Financial institution regulators recently have increased their focus upon
Y2K compliance issues and have issued guidance concerning the responsibilities
of senior management and directors. The Federal Financial Institutions
Examination Council has issued several interagency statements on Y2K project
management awareness. These statements require financial institutions to, among
other things, examine the Y2K implications of their reliance on vendors and with
respect to the data exchange and the potential impact of the Y2K issue on their
customers, suppliers, and borrowers. These statements also require each
federally regulated institution to survey its exposure, measure its risk and
prepare a plan to address the Y2K issue. In addition, the federal banking
regulators have issued safety and soundness guidelines to be followed by insured
depository institutions, such as the Bank, to assure resolution of any Y2K
problems. The federal banking agencies have assessed that Y2K testing and
certification is a key safety and soundness issue in conjunction with regulatory
exams and thus, that an institution's failure to address appropriately the Y2K
issue could result in supervisory action, including reduction of the
institution's supervisory ratings, the denial of applications for approval of
mergers or acquisitions or the imposition of civil money penalties.
20
Risks. Like most financial service providers, the Combined Company and its
operations may be significantly affected by the Y2K issue due to the Combined
Company's dependence on technology and date-sensitive data. Computer software
and hardware and other equipment, both within and outside the Combined Company's
direct control, and third parties with whom the Combined Company electronically
or operationally interface (including without limitation its customers and third
party vendors) are likely to be affected. If computer systems are not modified
in order to be able to identify the year 2000, many computer applications could
fail or create erroneous results. As a result, many calculations, which rely on
date field information such as interest, payment on due dates, and all operating
functions, could generate results which are significantly misstated, and the
Combined Company could experience an inability to process transactions, prepare
statements or engage in similar normal business activities. Likewise, under
certain circumstances, a failure to adequately address the Y2K issue could
adversely affect the viability of the Combined Company's suppliers and creditors
and the creditworthiness of its borrowers. Thus, if not adequately addressed,
the Y2K issue could result in a significant adverse impact on the Combined
Company's operations and, in turn, its financial condition and results of
operations.
State of Readiness. During October 1997, the Combined Company formulated
its plan to address the Y2K issue. Since that time and with significant time and
expense, the Combined Company has taken the following steps:
o Established senior management advisory and review responsibilities;
o Completed a company-wide inventory of applications and system
software;
o Built an internal tracking database for applications and system
software;
o Developed compliance plans and schedules for all lines of business;
o Completed a computer network, hardware, and software upgrade;
o Completed in-house testing of all systems;
o Obtained data processor vendor compliance certification;
o Completed data processor vendor testing;
o Established awareness and educational activities for employees through
existing internal communication channels; and
o Developed a process to respond to customer inquiries as well as help
educate customers on the Y2K issue.
The following paragraphs summarize the phases of the Combined Company's
Y2K plan:
Awareness Phase. The Combined Company formally established a Y2K plan that
is headed by a senior manager, and a project team was assembled for management
of the Y2K project. The project team created a plan of action that includes
milestones, budget estimates, strategies, and methodologies to track and report
the status of the project. Members of the project team also attended conferences
and information sharing sessions to gain more insight into the Y2K issue and
potential strategies for addressing it. This phase is complete.
Assessment Phase. The Combined Company's strategies were further developed
with respect to how the objectives of the Y2K plan would be achieved, and a Y2K
business risk assessment was conducted to quantify the extent of the Combined
Company's Y2K exposure. A corporate inventory (which is periodically updated as
new technology is acquired and as systems
21
progress through subsequent phases) was developed to identify and monitor Y2K
readiness for information systems (hardware, software, vendors, and utilities)
as well as environmental systems (security systems, facilities, etc.). Systems
were prioritized based on business impacts and available alternatives. Mission
critical systems supplied by vendors were researched to determine Y2K readiness.
If Y2K ready versions were not available, the Combined Company identified
functional replacements which were either upgradable or Y2K ready, and a formal
plan was developed to repair, upgrade or replace all mission critical systems.
This phase is complete.
The Combined Company completed Y2K discussions with its larger borrowers.
All credits greater than $50,000 were evaluated for Y2K exposure by a
relationship account officer using a questionnaire developed by the Combined
Company's credit administration staff. As part of the current credit approval
process, all new and renewed loans are evaluated for Y2K risk. During the course
of these evaluations, Combined Company personnel met with each of its larger
borrowers to discuss and obtain information regarding each borrower's dependence
on information technology and third party vendors and the nature of steps being
taken by the borrowers to address their own Y2K issues.
Renovation Phase. The Combined Company's corporate inventory revealed that
Y2K upgrades were available for all vendor supplied mission critical systems,
and all these Y2K ready versions have been delivered and placed into production
and have been validated.
Validation Phase. The validation phase is designed to test the ability of
hardware and software to accurately process date-sensitive data. The Combined
Company has completed the validation testing of each mission critical system.
The Combined Company hired two outside firms to perform this phase. These firms
tested independent of each other verifying the other's validation of all
systems. During the validation testing process, no significant Y2K problems were
identified relating to any modified or upgraded mission critical systems.
Implementation Phase. Y2K ready modified or upgraded versions have been
installed and placed into production with respect to all mission critical
systems.
Company Resources Invested. The Combined Company's Y2K project team was
assigned the task of ensuring that all systems across the Combined Company were
identified, analyzed for Y2K compliance, corrected if necessary, tested, and
have the changes into service by the end of 1999. This has been completed. The
Y2K project team members represent all functional areas of the Combined Company,
including branches, data processing, loan administration, accounting, item
processing and operations, compliance, internal audit, human resources, and
marketing. An executive vice president who reports directly to a member of the
Combined Company's senior management heads the team. The Combined Company's
Board of Directors oversees the Y2K plan and provides guidance and resources to,
and receives monthly updates from, the Y2K team.
The Combined Company is expensing all costs associated with required
system changes as those costs are incurred, and such costs are being funded
through operating cash flows. The total cost of the Y2K conversion project since
commencement in October 1997 for the Combined Company is estimated to be no less
than $220,000. The Combined Company does not expect significant increases in
future data processing costs related to Y2K compliance.
22
Contingency Plans. During the assessment phase, the Combined Company
developed back-up or contingency plans for each of its mission critical systems.
Virtually all of the Combined Company's mission critical systems are dependent
upon third party vendors or service providers. In each case, realistic trigger
dates have been established to allow for orderly and successful conversions, if
necessary. For some systems, contingency plans consist of using spreadsheet
software or reverting to manual systems until system problems can be corrected.
The majority of the Combined Company's mission critical system falls into
the categories of its core-banking software and its proof of deposit system. The
Combined Company has received warranties from vendors to the effect that the
proof of deposit and core-banking system is Y2K ready.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles ("GAAP"), which require the measurement of financial position and
results of operations in terms of historical dollars without considering changes
in the relative purchasing power of money over time because of inflation.
Unlike industrial companies, virtually all of the Combined Company's
assets and liabilities are monetary in nature. As a result, interest rates
generally have a more significant impact on a financial institution's
performance than the effects of general inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the prices of
goods and services. In the current interest rate environment, the liquidity,
maturity structure and quality of the Combined Company's assets and liabilities
are critical to the maintenance of acceptable performance levels.
Effect of New Accounting Standards
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS No. 130") "Reporting Comprehensive Income". This statement
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Income tax effects must also
be shown. This statement is effective for fiscal years beginning after December
15, 1997. The adoption of SFAS No. 130 did not have a material impact on the
results of operations or financial condition of the Combined Company.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS No. 131") "Disclosures about Segments of an Enterprise and
Related Information". SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and
23
services, geographic areas, and major customers. This statement is effective for
financial statements for periods beginning after December 15, 1997. Management
does not believe that the provisions of this Statement are applicable to the
Combined Company, since substantially all of the Combined Company's operations
are banking services.
In June 1999, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 standardizes the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts. Under the standard, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The accounting
for changes in the fair value (i.e. gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and, if so, on the reason for holding it. If certain conditions are
met, entities may elect to designate a derivative instrument as a hedge of
exposures to changes in fair value, cash flows, or foreign currencies. If the
hedged exposure is a fair value exposure, the gain or loss on the derivative
instrument is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item attributable to the risk being
hedged. If the hedged exposure is a cash flow exposure, the effective portion of
the gain or loss on the derivative instrument is reported initially as a
component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amount excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss is reported in earnings immediately.
Accounting for foreign currency hedges is similar to accounting for fair value
and cash flow hedges. If the derivative instrument is not designated as a hedge,
the gain or loss is recognized in earnings in the period of change. This
statement is effective for fiscal years beginning after June 15, 2000. Early
adoption is permitted as of the beginning of an entities fiscal quarter. This
statement will have no effect on the Combined Company, as it owns no derivative
instruments and engages in no hedging activities.
Statement of Financial Accounting Standards No. 134 ("SFAS 134") on
mortgage banking allows mortgage loans that are securitized to be classified as
trading, available for sale, or in certain circumstances, held to maturity.
Previously these were classified as trading. SFAS 134 became effective in the
first quarter of 1999. Since the Combined Company has not securitized loans,
SFAS 134 will not impact the Combined Company.
AICPA-Statement of Position 98-5, effective in fiscal 2000, requires all
start-up, pre-opening, and organization costs to be expensed as incurred. Any
such costs previously capitalized for financial reporting purposes must be
charged to income in the first quarter of fiscal 2000. Although this $100,300
charge occurred during the month of October, 1999 (the first month of fiscal
year ending September 30, 2000), the Combined Company does not believe this will
have a material impact on the results of operations or financial condition of
the Combined Company.
Forward-Looking Statements
When used in this Annual Report to shareholders or future filings by the
Combined Company with the Securities and Exchange Commission (the "Commission"),
in the Combined Company's press releases or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result", "are expected to",
"will continue", "is anticipated", "estimated", "project", "believe" or
24
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. The
Combined Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and to
advise readers that various factors including regional and national economic
conditions, changes in levels of market interest rates, credit risks of lending
activities, acceptance of new products, and competitive and regulatory factors
could affect the Combined Company's financial performance and could cause the
Combined Company's actual results for future periods to differ materially from
those anticipated or projected. Additional risks and factors are detailed from
time to time in the Combined Company's reports filed with the Commission,
including the Annual Report on Form 10-KSB for the year ended September 30,
1999.
The Combined Company does not undertake and specifically disclaims any
obligation to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
25
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Bryan-College Station Financial Holding Company
Bryan, Texas
We have audited the accompanying consolidated statements of financial condition
of The Bryan-College Station Financial Holding Company and its wholly-owned
subsidiaries, First Federal Savings Bank of Bryan and Best of Texas, Inc., as of
September 30, 1999 and 1998 and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Bryan-College
Station Financial Holding Company and its wholly-owned subsidiaries, as of
September 30, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1999 in
conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
November 12, 1999
26
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1999 and 1998
(In thousands, except share and per share data)
1999 1998
--------- ---------
ASSETS
Cash and due from banks $ 3,086 $ 1,435
Interest-bearing deposits in other financial
institutions 1,619 3,892
-------- -------
Total cash and cash equivalents 4,705 5,327
Securities available-for-sale 5 5
Securities held-to-maturity, at cost (fair value: 1999
- $667; 1998 - $945) 692 954
Loans held for sale 2,464 328
Loans receivable, net 67,974 71,666
Federal Home Loan Bank stock 404 382
Servicing rights 545 -
Foreclosed real estate (net of allowance for losses:
1999 - $25; 1998 - $0) 548 282
Repossessed assets (net of allowance for losses:
1999 - $21; 1998 - $60) 937 419
Premises and equipment 2,099 1,636
Accrued interest receivable 613 608
Other assets 883 1,027
-------- -------
$ 81,869 $82,634
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 73,240 $73,554
Advance payments by borrowers for insurance and
taxes 818 863
Advances from Federal Home Loan Bank - 800
Debentures 3,629 3,629
Deferred income taxes 175 198
Accrued interest payable and other liabilities 1,019 847
-------- -------
78,881 79,891
Minority interest 873 873
Stockholders' equity
Common stock - par value $.01 per share;
authorized 1,500,000 shares, issued 428,409
shares at September 30, 1999 and 1998 4 4
Additional paid-in capital 2,060 1,849
Retained earnings, substantially restricted 51 17
-------- -------
2,115 1,870
-------- -------
$ 81,869 $82,634
======== =======
|
See accompanying notes to consolidated financial statements.
27
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1999, 1998, and 1997
(In thousands, except share and per share data)
1999 1998 1997
---- ---- ----
Interest income
Loans $ 7,334 $ 6,686 $ 5,351
Mortgage-backed securities 45 63 73
Other 164 142 173
------- ------- -------
Total interest income 7,543 6,891 5,597
Interest expense
Deposits 3,125 2,981 2,491
Debentures 425 210 -
FHLB advances 8 226 168
------- ------- -------
Total interest expense 3,558 3,417 2,659
------- ------- -------
NET INTEREST INCOME 3,985 3,474 2,938
Provision for loan losses 104 79 25
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,881 3,395 2,913
Noninterest income
Service charges 744 602 585
Gain on sale of mortgage loans 167 116 54
Gain on sale of consumer loans 478 - -
Gain on sale of mortgage servicing rights 142 113 94
Servicing fee income, net of amortization 66 - -
Operation of foreclosed real estate (17) (20) (20)
Other 203 120 62
------- ------- -------
Total noninterest income 1,783 931 775
Noninterest expense
Compensation and benefits 2,495 1,806 1,368
Occupancy and equipment expense 547 471 356
Federal insurance premiums 65 43 45
Net (gain) loss on real estate owned,
including provision for losses 26 27 (12)
Loan expense 44 56 24
Office supplies 142 122 74
Professional fees 313 141 134
Advertising 77 83 78
Data processing 260 192 171
Telephone 121 99 61
Postage 106 108 84
Other 1,024 722 388
------- ------- -------
Total noninterest expense 5,220 3,870 2,771
------- ------- -------
(Continued)
|
28
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1999, 1998, and 1997
(In thousands, except share and per share data)
1999 1998 1997
---- ---- ----
INCOME BEFORE INCOME TAX EXPENSE $ 444 $ 456 $ 917
Income tax expense 199 164 312
------- ------- -------
NET INCOME 245 292 605
Dividends on Bank preferred stock - (44) (87)
------- ------- -------
Net income available to common stockholders $ 245 $ 248 $ 518
======= ======= =======
Earnings per share basic and diluted $ .57 $ .46 $ .79
======= ======= =======
|
See accompanying notes to consolidated financial statements.
29
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 1999, 1998, and 1997
(In thousands, except share and per share data)
Additional
Preferred Common Paid-In Retained
Stock Stock Capital Earnings Total
--------- ------ ---------- --------- -------
Balance at October 1, 1996 $ 1 $ 2 $ 2,743 $ 1,570 $4,316
Net income - - - 605 605
Dividends ($1.00 per preferred
share) - - - (87) (87)
------ ------ ------ ------ ------
Balance at September 30, 1997 1 2 2,743 2,088 4,834
Issuance of 200,000 shares of
Company common stock, net
of stock issue cost of $276 - 2 1,722 - 1,724
Purchase of fractional shares
of Bank stock and stock of
dissenting stockholders - - (1,744) (2,199) (3,943)
Minority interest (1) - (872) - (873)
Cash dividends paid by Bank
($.50 per common share,
$.50 per preferred share) - - - (164) (164)
Net income - - - 292 292
------ ------ ------ ------ ------
Balance at September 30, 1998 - 4 1,849 17 1,870
Issuance of 10% stock dividend - - 211 (211) -
Net income - - - 245 245
------ ------ ------ ------ ------
Balance at September 30, 1999 $ - $ 4 $2,060 $ 51 $2,115
====== ====== ====== ====== ======
|
See accompanying notes to consolidted financial statements.
30
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1999, 1998, and 1997
(In thousands)
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 245 $ 292 $ 605
Adjustments to reconcile net income to net
cash provided by
(used in) operating activities
Depreciation 324 232 166
Amortization of premiums and discounts
on mortgage-
backed securities, net 5 4 4
Amortization of debt issue costs 100 67 -
Net change in loans held for sale (1,491) (8) 269
Origination of loan servicing rights (642) - -
Amortization of loan servicing rights 97 - -
Change in net deferred loan origination fees 52 124 39
Change in deferred income taxes (23) (21) 133
Net (gains) losses on sales of
Foreclosed real estate 1 27 (12)
Mortgage loans (167) (116) (54)
Mortgage servicing rights (142) (113) (94)
Consumer loans (478) - -
Provision for loan losses and foreclosed real
estate 129 79 25
Federal Home Loan Bank stock dividend (22) (38) (51)
Change in
Accrued interest receivable (5) (71) (208)
Other assets (474) 190 (956)
Accrued interest payable and other
liabilities 172 480 (369)
----- ------- -------
Net cash (used in) provided by operating
activities (2,319) 1,128 (503)
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in loans receivable 3,291 (6,613) (15,960)
Purchase of securities available-for-sale - (5) -
Principal payments on mortgage-backed securities 257 192 138
Proceeds from maturities of securities held-to
-maturity - - 1,000
Proceeds from sale of mortgage servicing rights 142 113 94
Proceeds from redemption of Federal Home Loan
Bank stock - 552 -
Capital expenditures on premises and equipment
, net (787) (751) (359)
Capital expenditures on foreclosed real estate (77) (40) (67)
Proceeds from sale of foreclosed real estate 30 28 159
----- ------- -------
Net cash provided by (used in) investing
activities 2,856 (6,524) (14,995)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (314) 14,746 7,131
Net increase (decrease) in advance payments
by borrowers for insurance (45) 1 79
Net increase (decrease) in Federal Home Loan
Bank Advances (800) (9,200) 10,000
Net proceeds from issuance of debentures - 3,128 -
Net proceeds from issuance of common stock - 1,724 -
Purchase and retirement of Bank stock - (3,943) -
Dividends paid on preferred and common stock - (164) (87)
----- ------- -------
Net cash (used in) provided by financing
activities (1,159) 6,292 17,123
----- ------- -------
(Continued)
|
31
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1999, 1998, and 1997
(In thousands)
1999 1998 1997
---- ---- ----
Change in cash and cash equivalents $ (622) $ 896 $ 1,625
Cash and cash equivalents at beginning of year 5,327 4,431 2,806
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,705 $ 5,327 $ 4,431
======= ======= =======
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 3,550 $ 3,305 $ 2,628
Income taxes 254 156 165
Supplemental disclosure of noncash investing
activities
Net transfer between loans and foreclosed
real estate 245 223 23
|
See accompanying notes to consolidated financial statements.
32
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying consolidated financial statements for
the year ended September 30, 1999 include the accounts of The Bryan-College
Station Financial Holding Company (the "Company") and its wholly-owned
subsidiaries First Federal Savings Bank (the "Bank") and Best of Texas, Inc.
(the "Dealership"). On April 1, 1998, the Company was capitalized through the
issuance of 200,000 shares of common stock at $10 per share. The Bank
concurrently became a wholly-owned subsidiary of the Company in a
stock-for-stock exchange with bank stockholders. Stock of dissenting
stockholders and fractional shares were purchased by the Company for $24.07 per
share. Since the transaction was an internal reorganization, the historical cost
basis of accounting is continued for the Bank. On August 30, 1999, the
Dealership was capitalized through the issuance of 500 shares of common stock at
$.01 per share.
The 1999 and 1998 consolidated financial statements include the accounts and
results of operations of the Company, the Bank, and the Bank's wholly-owned
subsidiary First Service Corporation of Bryan. The 1999 consolidated financial
statements also include the accounts of the Dealership. The September 30, 1997
consolidated financial statements include the accounts of the Bank and its
wholly-owned subsidiary. All significant intercompany transactions and balances
have been eliminated in consolidation.
NATURE OF OPERATIONS: The only business of the Company is the ownership of the
Bank and the Dealership. The Bank is a federally chartered stock savings bank
and a member of the Federal Home Loan Bank (FHLB) system which maintains
insurance on deposit accounts with the Savings Association Insurance Fund (SAIF)
of the Federal Deposit Insurance Corporation. The Bank makes residential,
commercial real estate, and consumer loans primarily in Brazos County Texas.
Substantially all loans are secured by specific items of collateral, including
real estate, residences, and consumer assets. The Dealership was capitalized but
had not begun operations as of September 30, 1999.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates. The collectibility of loans, fair value of financial
instruments, and status of contingencies are particularly subject to change.
SECURITIES: Securities are classified as held-to-maturity when management has
the intent and the Company has the ability to hold those securities to maturity.
All other securities are classified as available-for-sale since the Company may
decide to sell those securities in response to changes in market interest rates,
liquidity needs, changes in yields or alternative
(Continued)
33
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
investments, and for other reasons. These securities are carried at fair value
with unrealized gains and losses charged or credited, net of income taxes, to a
valuation allowance included as a separate component of stockholders' equity.
Premiums and discounts are recognized in interest income using methods that
approximate the level-yield method. Realized gains and losses on disposition are
based on the net proceeds and the adjusted carrying amounts of the securities
sold, using the specific identification method.
LOANS RECEIVABLE: Loans receivable are stated at unpaid principal balances,
less the allowance for loan losses and deferred loan origination fees and
discounts.
ALLOWANCE FOR LOAN LOSSES: Because some loans may not be repaid in full, the
Company has established an allowance for loan losses. Increases to the allowance
are recorded by a provision for loan losses charged to expense. Estimating the
risk of the loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate to cover possible losses that are currently anticipated based on past
loss experience, general economic conditions, information about specific
borrower situations including their financial position and collateral values,
and other factors and estimates which are subject to change over time. While
management may periodically allocate portions of the allowance for specific
problem loan situations, the whole allowance is available for any loan
charge-offs that occur. A loan is charged-off against the allowance by
management as a loss when deemed uncollectible, although collection efforts
continue and future recoveries may occur.
The Company measures impaired loans based on the present value of expected cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of collateral
if the loan is collateral dependent. Loans considered to be impaired are reduced
to the present value of expected future cash flows or to the fair value of
collateral, by allocating a portion of the allowance for loan losses to such
loans. If these allocations cause the allowance for loan losses to be increased,
such increase is reported as a provision for loan losses.
Smaller balance homogeneous loans are defined as residential first mortgage
loans secured by one-to-four-family residences, residential construction loans,
and consumer loans and are evaluated collectively for impairment. Commercial
real estate loans are evaluated individually for impairment. Normal loan
evaluation procedures, as described in the second preceding paragraph, are used
to identify loans which must be evaluated for impairment.
In general, loans classified as "doubtful" or "loss" are considered impaired
while loans classified as "substandard" are individually evaluated for
impairment. Depending on the relative size of the credit relationship, late or
insufficient payments of 30 to 90 days will cause management to
(Continued)
34
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
reevaluate the credit under its normal loan evaluation procedures. While the
factors which identify a credit for consideration for measurement of impairment,
or nonaccrual, are similar, the measurement considerations differ. A loan is
impaired when the economic value estimated to be received is less than the value
implied in the original credit agreement. A loan is placed in nonaccrual when
payments are more than 90 days past due unless the loan is adequately
collateralized and in the process of collection. Although impaired loan and
nonaccrual loan balances are measured differently, impaired loan disclosures do
not differ significantly from nonaccrual and renegotiated loan disclosures.
RECOGNITION OF INCOME ON LOANS: Interest on loans is accrued over the term of
the loans based on the principal balance outstanding. Where serious doubt exists
as to the collectibility of a loan, the accrual of interest is discontinued.
LOAN FEES AND COSTS: The Company defers loan origination fees, net of certain
direct loan origination costs. The net amount deferred is netted against loans
in the balance sheet and is recognized in interest income as a yield adjustment
over the contractual term of the loan, adjusted for prepayments.
LOAN SALES: The Company sells a portion of its mortgage loan production in the
secondary market with servicing released. The Company obtains sales commitments
on these loans immediately prior to making the origination commitment. The
Company also sells a portion of its consumer indirect loans with servicing
retained on these loans. Loans classified as held for sale are carried at the
lower of cost or market value in the aggregate. Net unrealized losses are
recognized by charges to income.
SERVICING RIGHTS: The Bank originates mortgage and consumer loans for sale to
the secondary market. When servicing on sold loans is retained, the Bank
capitalizes the cost of servicing rights.
The consumer loans are sold at a rate less than the original coupon rate. The
servicing asset is recorded at the present value of the remaining payment stream
to the Bank with assumptions such as estimated life, delinquencies, and other
risks factored into the discount rate. The capitalized cost of loan servicing
rights is amortized in proportion to and over the period of estimated net future
revenue.
PREMISES AND EQUIPMENT: The Company's premises and equipment are stated at cost
less accumulated depreciation. The Company's premises and related furniture and
equipment are depreciated using the straight-line method over their estimated
useful lives. Maintenance and repairs are charged to expense, and improvements
are capitalized.
(Continued)
35
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FORECLOSED REAL ESTATE: Real estate acquired through foreclosure and similar
proceedings is carried at the lower of cost (fair value of the asset at the date
of foreclosure) or fair value less estimated costs to sell. Losses on
disposition, including expenses incurred in connection with the disposition, are
charged to operations. Valuation allowances are recognized when the fair value
less selling expenses is less than the cost of the asset. Changes in the
valuation allowance are charged or credited to income.
STATEMENT OF CASH FLOWS: Cash and cash equivalents are defined to include the
Company's cash on hand, demand balances, interest-bearing deposits with
financial institutions, and investments in certificates of deposit with original
maturities of less than three months.
INCOME TAXES: The Company records income tax expense based on the amount of
taxes due on its tax return plus deferred taxes computed on the expected future
tax consequences of temporary differences between the carrying amounts and tax
bases of assets and liabilities, using enacted tax rates.
EARNINGS PER COMMON SHARE: Amounts reported as earnings per common share for
each of the three years ended September 30, 1999 reflect earnings available to
common stockholders for the year divided by the weighted average number of
common shares outstanding during the year. Earnings per share for the year ended
September 30, 1997 has been restated to reflect the 2.5 exchange ratio of
Company common stock for Bank common stock. Weighted average common shares were
428,409, 543,656, and 658,933 for the years ended September 30, 1999, 1998, and
1997 adjusted for a 10% stock dividend in 1999. The warrants attached to the
3,629 units issued by the Company on April 1, 1998 have an exercise price of
$12.50 per share and the stock options granted on May 25, 1999 have an exercise
price of $8.00 per share. The warrants and stock options are not included in
diluted earnings per share since the exercise price exceeds the market price of
the stock.
In future years, outstanding stock options and warrants may be exercised which
would increase the weighted average common shares outstanding and, thereby,
dilute earnings per share. In addition, if the average common stock price were
to exceed the exercise price of outstanding options and warrants in a future
year, the assumed exercise of the options and warrants would have a dilutive
effect on earnings per share for that future year. However, previously reported
earnings per share and diluted earnings per share are not restated to reflect
change in the status of changes in the relationship between exercise prices and
average stock prices.
(Continued)
36
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 2 - SECURITIES
The amortized cost and fair values of securities at September 30 are as follows:
..................1 9 9 9..............
Gross Gross
Amortized Unrealized Unrealized Fair
COST GAINS LOSSES VALUE
AVAILABLE-FOR-SALE
Equity stock $ 5 $ - $ - $ 5
======== ======= ======== =======
HELD-TO-MATURITY
FHLMC certificates $ 447 $ - $ (22) $ 425
FNMA certificates 245 2 (5) 242
-------- ------- -------- -------
$ 692 $ 2 $ (27) $ 667
======== ======= ======== =======
..................1 9 9 8..............
Gross Gross
Amortized Unrealized Unrealized Fair
COST GAINS LOSSES VALUE
AVAILABLE-FOR-SALE
Equity stock $ 5 $ - $ - $ 5
======== ======= ======== =======
HELD-TO-MATURITY
FHLMC certificates $ 655 $ 2 $ (14) $ 643
FNMA certificates 299 4 (1) 302
-------- ------- -------- -------
$ 954 $ 6 $ (15) $ 945
======== ======= ======== =======
|
Mortgage-backed securities have varying maturities. Expected maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
(Continued)
37
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 3 - LOANS
Loans receivable at September 30 are summarized as follows:
1999 1998
First mortgage loans
Principal balances:
Secured by one-to-four-family residences $ 33,436 $32,846
Secured by other properties 5,865 4,616
Construction loans 4,800 6,166
-------- -------
44,101 43,628
Less:
Undisbursed portion of loans (1,669) (2,089)
Net deferred loan origination fees (159) (140)
Deferred gain (3) (3)
-------- -------
Total first mortgage loans 42,270 41,396
Consumer and other loans
Principal balances:
Automobile loans 18,529 24,636
Home equity and second mortgage 12 37
Loans secured by deposit accounts 1,080 951
Commercial loans 2,988 3,024
Other consumer loans 2,961 1,199
-------- -------
25,570 29,847
Net deferred loan origination costs 77 110
Net premiums on indirect loans 383 620
-------- -------
Total consumer and other loans 26,030 30,577
Less allowance for loan losses (326) (307)
-------- -------
$ 67,974 $71,666
======== =======
(Continued)
|
38
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 3 - LOANS (Continued)
A summary of the activity in the allowance for loan losses follows:
1999 1998 1997
---- ---- ----
Balance at beginning of year $ 307 $ 273 $ 247
Provision charged to operations 104 79 25
Charge-offs (92) (75) (5)
Recoveries 7 30 6
------- -------- -------
Balance at end of year $ 326 $ 307 $ 273
======= ======== =======
|
There were no impaired loans during the three years ended September 30, 1999.
Nonaccrual loans totaled approximately $32,000 and $8,000 at September 30,
1999 and 1997, respectively. The approximate amounts of interest income that
would have been recorded under the original terms of such loans and the interest
income actually recognized for the years ended September 30 are not material.
There were no nonaccrual loans at September 30, 1998.
The largest portion of the Company's loans are originated for the purpose of
enabling borrowers to purchase residential real estate property secured by first
liens on such property. At September 30, 1999, approximately 49% of the
Company's loans were secured by owner-occupied, one-to-four-family residential
property. The Company requires collateral on all loans and generally maintains
loan-to-value ratios of 80% or less. The Company also originates a significant
amount of automobile loans which totaled approximately 27% of the Company's
loans at September 30, 1999. Approximately 69% of the automobile loans are those
originated under the Company's Second Chance Loan program. These loans are made
to individuals with a less than perfect credit history, which results in a
higher interest rate to the Company. These loans are insured for credit default
as a means of reducing the risk of loss to the Company.
The Company has granted loans to certain officers and directors of the Bank and
Company. Related-party loans are made on substantially the same terms as
comparable transactions with unrelated persons.
(Continued)
39
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 3 - LOANS (Continued)
Activity in the loan accounts of executive officers, directors, and principal
stockholders is as follows:
1999 1998
Balance at beginning of year $ 649 $ 678
Loans disbursed 381 379
Principal repayments (241) (251)
Change in persons classified as related parties (61) (157)
-------- -------
Balance at end of year $ 728 $ 649
======== =======
|
NOTE 4 - SECONDARY MARKET OPERATIONS
The following summarizes the Company's secondary market activities:
1999 1998 1997
---- ---- ----
MORTGAGE
Proceeds from sale of mortgage loans $16,980 $ 11,526 $ 7,821
======= ======== =======
Gain on sale of mortgage loans $ 167 $ 116 $ 54
Gain on sale of mortgage servicing rights 142 113 94
------- -------- -------
$ 309 $ 229 $ 148
======= ======== =======
Loans serviced for others $ 1,819 $ 1,966 $ 1,588
======= ======== =======
CONSUMER
Proceeds from sale of consumer loans $ 5,693 $ - $ -
======= ======== =======
Gain on sale of consumer loans $ 478 $ - $ -
======= ======== =======
Loans serviced for others $ 4,959 $ - $ -
======= ======== =======
|
(Continued)
40
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 4 - SECONDARY MARKET OPERATIONS (Continued)
Following is an analysis of the change in servicing rights for the year ended
September 30, 1999:
Balance, September 30, 1998 $ -
Additions 642
Amortization (97)
--------
Balance, September 30, 1999 $ 545
========
|
NOTE 5 - PREMISES AND EQUIPMENT
A summary of premises and equipment at September 30 is as follows:
1999 1998
---- ----
Land $ 441 $ 423
Buildings and improvements 1,394 987
Furniture and equipment 1,915 1,730
Construction in process 162 -
-------- -------
Total cost 3,912 3,140
Accumulated depreciation (1,813) (1,504)
-------- -------
$ 2,099 $ 1,636
======== =======
|
The Bank is in the process of constructing a full-service branch facility in
north Bryan, Texas. At September 30, 1999, the Bank was committed to pay the
remaining cost of $234,000 for completion of the building.
NOTE 6 - DEPOSITS
Certificate of deposit accounts with a minimum denomination of $100,000 or more
totaled $8,236,000 and $9,109,000 at September 30, 1999 and 1998, respectively.
At September 30, 1999, scheduled maturities of certificates of deposit are as
follows:
Year Ending
-----------
2000 $ 39,526
2001 5,784
2002 922
2003 254
2004 546
--------
$ 47,032
========
(Continued)
41
|
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK AND DEBENTURES
At September 30, 1998 secured advances from the Federal Home Loan Bank were as
follows:
Interest Rate Maturity Date Balance
------------- ------------- -------
5.52% 10/2/98 $ 500
5.29 10/5/98 300
------
$ 800
======
|
The maximum amount of credit available, secured by a blanket lien on first
mortgages, is the lesser of 75% of qualifying collateral or 35% of total assets
of the Bank. At September 30, 1999, the Bank had the ability, if needed, to
borrow up to $28.5 million from the Federal Home Loan Bank of Dallas.
The Bank maintains a collateral pledge agreement covering secured advances
whereby the Bank has agreed to at all times keep on hand, free of all other
pledges, liens, and encumbrances, first mortgage loans on residential property
(not more than 90 days delinquent), aggregating no less than 133% of the
outstanding secured advances from the Federal Home Loan Bank of Dallas.
Debentures consist of 3,629 units, each unit consisting of a $1,000 debenture
and nine detachable warrants exercisable at an exercise price of $12.50 per
share. At September 30, 1999 and 1998, notes payable total $3,629,000, bear an
interest rate of 11.5%, and mature on March 31, 2003.
(Continued)
42
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 8 - BENEFIT PLANS
During 1999, the Company's Board of Directors adopted a stock option and
incentive plan (the Plan) under the terms of which 40,000 shares of common stock
were reserved for issuance. The options become exercisable immediately upon date
of grant and expiration terms will be no greater than ten years for incentive
stock options, and no greater than fifteen years for non-qualified stock
options.
A summary of the status of the Corporation's stock option plan and changes
during the year are presented below:
Weighted-
Average
1999 Exercise
Shares Price
---------- ---------
Outstanding at beginning of year - $ -
Granted 27,250 8.00
Exercised - -
Forfeited - -
--------- -------
Outstanding at end of year 27,250 $ 8.00
========= =======
Options exercisable at end of year 27,250
Weighted-average fair value of
options granted during year $ .97
Average remaining option term 11.9 years
|
The Corporation applies APB Opinion 25 and related Interpretations in accounting
for its stock option plan. Accordingly, no compensation cost has been recognized
at the date of grant. Had compensation cost been determined based on the fair
value at the grant dates for awards under the plan consistent with the method of
SFAS No. 123, "Accounting for Stock-Based Compensation," the Corporation's net
income and earnings per share would have been reduced to the pro forma amounts
in the table below. For purposes of pro forma disclosure, the estimated fair
value of the options is amortized to expense over the options' vesting period.
(Continued)
43
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 8 - BENEFIT PLANS (Continued)
September 30,
1999
----
Net income as reported $ 245
Pro forma net income 225
Earnings per share as reported
Basic and diluted .57
Pro forma earnings per share
Basic and diluted .53
|
The Black-Scholes option pricing valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its stock
options.
Incentive Non-Qualified
Stock Stock
Options Options
--------- -------------
|
Date of grant 5/25/99 5/25/99
Options granted 15,250 12,000
Estimated fair value stock of options granted: $ .48 $ 1.60
Assumptions used:
Risk-free interest rate 5.61% 5.61%
Expected option life 10 years 15 years
Expected stock price volatility N/A N/A
Expected dividend yield N/A N/A
|
In 1999, the Company curtailed and initiated termination of its defined benefit
pension plan which covers substantially all employees. A curtailment loss of
approximately $172,000 was recognized in 1999.
The Bank's plan covers substantially all of the employees. The benefits are
based on years of service and an employee's compensation during the highest five
years out of the last ten years of employment. The Bank's funding policy is to
contribute each year an amount which satisfies the regulatory funding standards.
The contributions are invested in a Lincoln National Group Variable Annuity
Contract.
(Continued)
44
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 8 - BENEFIT PLANS (Continued)
The funded status of the plan at September 30 is as follows:
1999 1998
---- ----
Change in benefit obligation:
Beginning benefit obligation $ 676 $ 595
Service cost 69 82
Interest cost 47 41
Actuarial (gain) loss 20 (6)
Benefits paid (57) (36)
-------- -------
Ending benefit obligation $ 755 $ 676
======== =======
Change in plan assets:
Beginning fair value $ 542 $ 437
Actual return 32 21
Employer contribution 62 120
Benefits paid (57) (36)
-------- -------
Ending fair value $ 579 $ 542
======== =======
Funded status $ (176) $ (134)
Unrecognized net actuarial loss - 55
Unrecognized net transition obligation - 104
-------- -------
Prepaid (accrued) benefit cost $ (176) $ 25
======== =======
..YEAR ENDED SEPTEMBER 30,..
1999 1998 1997
---- ---- ----
Net pension cost includes the following
components:
Service cost earned during the period $ 69 $ 82 $ 69
Interest cost 47 42 35
Expected return on plan assets (38) (31) (23)
Net amortization and deferral 13 16 9
Curtailment loss 172 - -
------- -------- -------
Net periodic pension cost $ 263 $ 109 $ 90
======= ======== =======
|
(Continued)
45
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 8 - BENEFIT PLANS (Continued)
The assumptions used to develop the net periodic pension cost were:
..YEAR ENDED SEPTEMBER 30,..
1999 1998 1997
------ ------ ------
Discount rate 7% 7% 7%
Expected long-term rate of return on assets 7% 7% 7%
Rate of increase in compensation levels 5% 5% 5%
|
An employee 401(k) profit sharing plan was approved by the Board of Directors
effective January 1, 1999. The plan covers employees having completed three
months of service and who are at least 21 years of age. Discretionary and
matching contributions to the profit sharing plan are determined and approved
annually by the Company's Board of Directors. There were no contributions for
the year ended September 30, 1999.
The Bank entered into an employment, consulting, and supplemental retirement
agreement on July 1, 1997 with the President and Chief Executive Officer of the
Bank. The employment and consulting portions of the agreement have a combined
term of five years from the commencement date of July 1, 1997. The consulting
portion commences upon completion of the three-year employment period and calls
for annual consulting fees equal to $58,200 payable in equal monthly
installments. The supplemental retirement agreement commences on the later of
the retirement date or July 1, 2002 and is based on services commencing on July
1, 1997. The President's salary is reduced by 50% of the amount of the
retirement expense incurred each month by the Bank.
NOTE 9 - REGULATORY AND CAPITAL MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
(Continued)
46
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 9 - REGULATORY AND CAPITAL MATTERS (Continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital as defined in the regulations to risk-weighted assets as defined and of
Tier I capital to average assets as defined. As of September 30, 1999, the most
recent notification from the Office of Thrift Supervision categorized the Bank
as adequately capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios. At September
30, 1999 and 1998, the Bank did not meet the minimum requirement to be well
capitalized under prompt corrective action regulations.
At year end, actual capital levels of the Bank and minimum required levels were:
Minimum Required
to Be Well
Minimum Required Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
1999
----
Total capital (to risk-weighted assets) $6,154 9.08% $5,419 8.00% $6,774 10.00%
Tier 1 (core) capital (to risk-weighted
assets) 5,828 8.62 2,709 4.00 4,064 6.00
Tier 1 (core) capital (to adjusted total
assets) 5,828 7.16 3,257 4.00 4,071 5.00
1998
----
Total capital (to risk-weighted assets) $5,563 8.52% $5,226 8.00% $6,533 10.00%
Tier 1 (core) capital (to risk-weighted
assets) 5,256 8.04 2,615 4.00 3,922 6.00
Tier 1 (core) capital (to adjusted total
assets) 5,256 6.43 3,269 4.00 4,088 5.00
|
Accordingly, management considers the capital requirements to have been met.
Regulations also include restrictions on loans to one borrower; certain types of
investments and loans; loans to officers, directors, and principal stockholders;
brokered deposits; and transactions with affiliates.
Federal regulations require the Bank to comply with a Qualified Thrift Lender
(QTL) test which requires that 65% of assets be maintained in housing-related
finance and other specified assets. If the QTL test is not met, limits are
placed on growth, branching, new investments, FHLB advances, and dividends or
the institution must convert to a commercial bank charter. Management considers
the QTL test to have been met.
(Continued)
47
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 9 - REGULATORY AND CAPITAL MATTERS (Continued)
Bank Series A preferred stock has a $ .01 par value, is nonvoting, and entitles
the holder to a $10 per share liquidation preference. The stock bears
non-cumulative quarterly dividends at an annual rate of 10%. At the Bank's
option, the stock can be redeemed after two years. The Bank preferred stock is
reflected as minority interest in the consolidated statements of financial
condition.
NOTE 10 - COMMITMENTS, CONTINGENT LIABILITIES, AND CONCENTRATIONS
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments consist of commitments to make loans and fund lines
of credit and loans-in-process. The Company's exposure to credit loss in the
event of nonperformance by the other party to these financial instruments is
represented by the contractual amount of these instruments. The Company follows
the same credit policy to make such commitments as it uses for on-balance-sheet
items.
At September 30, these financial instruments are summarized as follows:
Contract
Amount
------
1999 1998
---- ----
Financial instruments whose contract amounts
represent credit risk:
Commitments to make loans $ 4,244 $ 3,197
Loans-in-process 1,669 2,089
Lines of credit 701 974
Letters of credit 452 73
|
The Company had $4,244,000 of fixed rate commitments to originate loans, ranging
from 7.375% to 10% at September 30, 1999. The commitments have terms of 75 days.
Since many commitments to make loans expire without being used, the amount above
does not necessarily represent future cash commitments. Collateral may be
obtained upon exercise of a commitment. The amount of collateral is determined
by management and may include commercial and residential real estate and other
business and consumer assets.
Financial instruments which potentially subject the Company to concentrations of
credit risk include interest-bearing deposit accounts in other financial
institutions and loans. At September 30, 1999, the Company had deposit accounts
with balances totaling approximately $1.6 million at the Federal Home Loan Bank
of Dallas. Concentrations of loans are described in Note 3.
(Continued)
48
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 10 - COMMITMENTS, CONTINGENT LIABILITIES, AND CONCENTRATIONS
(Continued)
The Company is, from time to time, a party to certain lawsuits arising in the
ordinary course of its business. The Bank believes that none of these lawsuits
would, if adversely determined, have a material adverse effect on its financial
condition, results of operations, or capital.
During September 1996, the Company entered into a noncancelable operating lease
for office space relating to mortgage operations. The lease expired August 31,
1998 and the Company is leasing the space month to month until December 31,
1999. The Company has entered into a new noncancelable operating lease for
office space for the mortgage operations effective January 1, 1999 with a term
of three years and one option to renew for an additional three years. The
Company also entered into a noncancelable operating lease for premises to be
used for the purpose of automobile sales related to the Dealership. The lease
became effective August 1, 1999 with a term to expire on May 14, 2001. The lease
provides for continual options to renew for two-year terms until the death of
the lessor. In addition, the Company paid $10,000 for an option to purchase the
property upon the death of the lessor for a minimum price of $110,000 adjusted
by any increase in the Consumer Price Index. Rental expense was approximately
$25,000 and $29,000 for the years ended September 30, 1999 and 1998,
respectively. Projected minimum payments under the terms of the leases, not
including insurance and maintenance, are as follows:
2000 $ 45
2001 37
2002 5
2003 -
------
$ 87
======
|
NOTE 11 - INCOME TAX EXPENSE
The provision for income tax expense consists of the following:
...YEAR ENDED SEPTEMBER 30,..
1999 1998 1997
---- ---- ----
Current income tax expense $ 222 $ 185 $ 179
Deferred income tax expense (benefit) (23) (21) 133
------- -------- -------
$ 199 $ 164 $ 312
======= ======== =======
(Continued)
|
49
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 11 - INCOME TAX EXPENSE (Continued)
The provision for income tax differs from that computed at the statutory
corporate tax rate as follows:
...YEAR ENDED SEPTEMBER 30,..
1999 1998 1997
---- ---- ----
Tax expense at statutory rate (34%) $ 151 $ 155 $ 312
Nondeductible reorganization costs 17 6 -
Preferred stock dividends 29 15 -
Other tax effects 2 (12) -
------- -------- -------
$ 199 $ 164 $ 312
======= ======== =======
|
The Bank has qualified under provisions of the Internal Revenue Code which
permit it to deduct from taxable income a provision for bad debts which differs
from the provision charged to income in the financial statements. Retained
earnings at September 30, 1999 include approximately $643,000, representing tax
bad debt provisions through 1987, for which no deferred federal income tax
liability has been recorded.
Deferred tax assets (liabilities) are comprised of the following at September
30:
1999 1998
---- ----
Supplemental employee retirement agreement $ 61 $ 34
Pension liability 59 -
Loans, principally due to allowance for losses 24 -
Depreciation 12 8
-------- -------
Total deferred tax assets 156 42
Federal Home Loan Bank stock dividends (69) (141)
Loans, principally due to allowance for losses - (99)
Servicing rights (262) -
-------- -------
Total deferred tax liabilities (331) (240)
-------- -------
Net deferred tax liabilities $ (175) $ (198)
======== =======
(Continued)
|
50
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The approximate carrying amount and estimated fair value of financial
instruments at September 30 is as follows:
........1999....... .......1998........
---- ----
Approximate Approximate
Carrying Estimated Carrying Estimated
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ---------- ----------- ----------
Financial assets
Cash and cash equivalents $ 4,705 $ 4,705 $ 5,327 $ 5,327
Securities 697 672 959 950
Loans, net of allowance for
loan losses 67,974 69,775 71,666 72,589
Loans held for sale 2,464 2,464 328 328
Federal Home Loan Bank stock 404 404 382 382
Accrued interest receivable 613 613 608 608
Financial liabilities
Demand deposits (21,079) (21,079) (18,797) (18,797)
Savings deposits (5,129) (5,129) (5,199) (5,199)
Time deposits (47,032) (47,132) (49,558) (49,719)
Advance payments by borrowers
for taxes and insurance (818) (818) (863) (863)
Federal Home Loan Bank Advances - - (800) (800)
Debentures (3,629) (3,661) (3,629) (3,752)
Accrued interest payable (176) (176) (168) (168)
|
For the purposes of above, the following assumptions were used:
CASH AND CASH EQUIVALENTS: The estimated fair values for cash and cash
equivalents are based on their carrying values due to the short-term nature of
these assets.
SECURITIES: The fair values of securities are based on the quoted market
value for the individual security or its equivalent.
LOANS: The estimated fair value for loans has been determined by calculating the
present value of future cash flows based on the current rate the Company would
charge for similar loans with similar maturities, applied for an estimated time
period until the loan is assumed to be repriced or repaid.
(Continued)
51
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
FEDERAL HOME LOAN BANK STOCK: The fair value of Federal Home Loan Bank stock
is assumed to approximate its carrying value.
DEPOSIT LIABILITIES: The estimated fair value for time deposits has been
determined by calculating the present value of future cash flows based on
estimates of rates the Company would pay on such deposits, applied for the time
period until maturity. The estimated fair values of interest-bearing demand and
savings deposits are assumed to approximate their carrying values as management
establishes rates on these deposits at a level that approximates the local
market area. Additionally, these deposits can be withdrawn on demand.
ACCRUED INTEREST: The fair values of accrued interest receivable and payable
are assumed to equal their carrying values.
FEDERAL HOME LOAN BANK ADVANCES AND ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND
INSURANCE: The fair values are assumed to approximate the carrying values.
DEBENTURES: The estimated fair value of debentures is based on calculating the
present value of future cash flows using the current rate for a note with
similar risk characteristics and similar length to maturity. The current rate
was obtained from inquiry of investment bankers familiar with the thrift
industry and the risk associated with debentures based on recent issuance of
similar debentures.
OFF-BALANCE-SHEET INSTRUMENTS: Off-balance-sheet items consist principally
of unfunded loan commitments. The fair value of these commitments is not
material.
Other assets and liabilities of the Company not defined as financial
instruments, such as property and equipment, are not included in the above
disclosures. Also not included are nonfinancial instruments typically not
recognized in financial statements such as the value of core deposits and
similar items.
While the above estimates are based on management's judgment of the most
appropriate factors, there is no assurance that if the Company disposed of these
items on September 30, 1999, the fair value would have been achieved, because
the market value may differ depending on the circumstances. The estimated fair
values at September 30, 1999 should not necessarily be considered to apply at
subsequent dates.
(Continued)
52
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 13 - MERGER AND FORMATION OF HOLDING COMPANY
On April 1, 1998, First Federal Savings Bank became a wholly-owned subsidiary of
The Bryan-College Station Financial Holding Company through an agreement and
plan of merger. The Company issued 200,000 shares of common stock at a price of
$10 per share and 3,629 units, each unit consisting of a $1,000 debenture
bearing an interest rate of 11.5% due March 31, 2003 and nine detachable
warrants. Each warrant entitles the unit holder to purchase one share of Company
common stock for $12.50 through March 31, 2003. Existing stockholders of First
Federal Savings Bank exchanged one share of existing First Federal common stock
for two and one-half shares of new holding company stock or sold their common
stock for cash of $24.07 per share. The Bank preferred stock was not affected by
the reorganization and is recorded as minority interest in the consolidated
statements of financial condition.
Delaware law generally limits dividends of the Company to an amount equal to the
excess of its net assets over its paid-in capital or, if there is no such
excess, to its net profits for the current and immediately preceding fiscal
year. In addition, the Company is prohibited from paying dividends on junior
securities such as the Company's common stock unless all interest payments with
respect to the debentures have been made.
Issuance costs totaling $276,000 were deducted from the proceeds of the shares
sold in the formation of the new holding company.
NOTE 14 - PARENT COMPANY ONLY FINANCIAL INFORMATION
CONDENSED BALANCE SHEET
September 30, 1999 and 1998
ASSETS
Cash $ 27 $ 441
Equity interest in bank subsidiary 5,828 5,256
Other assets 860 764
---------- ---------
$ 6,715 $ 6,461
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 3,629 $ 3,629
Accrued interest and other liabilities 98 89
---------- ---------
Total liabilities 3,727 3,718
Minority interest 873 873
Stockholders' equity
Common stock 4 4
Additional paid-in capital 2,060 1,849
Retained earnings 51 17
---------- ---------
Total stockholders' equity 2,115 1,870
---------- ---------
$ 6,715 $ 6,461
========== =========
(Continued)
|
53
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 14 - PARENT COMPANY ONLY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENT OF INCOME
For the year ending September 30, 1999
and the period April 1, 1998 through September 30, 1998
1999 1998
---- ----
Income
Interest income $ 8 $ 3
Dividends from bank subsidiary 156 -
Other income - 10
---------- ---------
Total income 164 13
Expenses
Interest expense 425 210
Other expenses 290 256
---------- ---------
Total expenses 715 466
---------- ---------
LOSS BEFORE EQUITY IN UNDISTRIBUTED (551) (453)
EARNINGS OF SUBSIDIARY
Equity in undistributed earnings of Bank
subsidiary 572 310
---------- ---------
Income (loss) before income tax benefit 21 (143)
Income tax benefit (224) (160)
---------- ---------
Net income $ 245 $ 17
========== =========
|
(Continued)
54
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1999, 1998, and 1997
(Table amounts in thousands)
NOTE 14 - PARENT COMPANY ONLY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENT OF CASH FLOWS
For the year ending September 30, 1999
and the period April 1, 1998 through September 30, 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 245 $ 17
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of
subsidiary (572) (310)
Amortization of debt issuance and
reorganization costs 100 67
Increase in other assets, net of
liabilities (187) (242)
Net cash used in operating activities (414) (468)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock - 1,724
Net proceeds from issuance of debentures - 3,128
Purchase and retirement of Bank stock - (3,943)
---------- ---------
Net cash provided by financing activities - 909
---------- ---------
Change in cash and cash equivalents (414) 441
Cash and cash equivalents at beginning of period 441 -
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 27 $ 441
========== =========
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 417 $ 121
|
(Continued)
55
CORPORATE INFORMATION
Annual Meeting
The annual meeting of the Holding Company will be held on February 24, 2000
at 3:00 p.m., Bryan, Texas time, at the main office of the Holding Company
located at 2900 Texas Avenue, Bryan, Texas.
Market Information
The Holding Company's common stock is listed on the OTC Electronic
Bulletin Board under the symbol "BCSF."
The following table sets forth the high and low bid prices of the Holding
Company's common stock for the periods indicated. The information set forth in
the table below was provided by the OTC Electronic Bulletin Board. The
information reflects inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
Fiscal 1999 Fiscal 1998
----------------------------------------------------
High Low Dividends High Low Dividends
----------------------------------------------------
First Quarter $10.000 $8.000 $--- $ N/A N/A $---
Second Quarter 8.265 7.273 --- N/A N/A ---
Third Quarter 7.159 7.159 --- N/A N/A ---
Fourth Quarter 5.568 5.000 --- 10.375 8.000 ---
|
At December 24, 1999 there were 595 holders of the Holding Company's
common stock and 428,409 shares of common stock issued and outstanding.
At December 29, 1999, the last known sales price of the Holding
Company's common stock was $9.25 per share.
The Holding Company pays dividends upon the determination of the Board of
Directors in its discretion that such payment is consistent with the long-term
interests of the Combined Company. The factors affecting this determination
include the Combined Company's consolidated financial condition and results of
operations, tax considerations, industry standards, economic conditions,
regulatory restrictions, general business practices and other relevant factors.
The Holding Company did not declare cash dividends on its common stock during
fiscals 1998 and 1999. However, First Federal paid an aggregate of $ 88,000 in
quarterly cash dividends on its preferred stock in 1999.
First Federal may not declare or pay a cash dividend or repurchase shares
of its stock if the effect thereof would be to cause its regulatory capital to
be reduced below the amount required for the liquidation account or to meet
applicable regulatory capital requirements. Federal regulations limit the Bank's
capital distributions such that the proposed distribution, combined with
dividends already paid for the year, does not exceed its net income for the
calendar year- to- date plus retained net income for the previous two years. In
addition, the Bank must give the OTS thirty days notice prior to the declaration
of a dividend.
56
Annual Report on Form 10-KSB and Other Investor Information
The Bryan-College Station Financial Holding Company will furnish upon
written request at no charge to any stockholder a copy of its Annual Report on
Form 10-KSB for the year ended September 30, 1999 and the exhibits thereto
required to be filed with the SEC under the Securities Exchange Act of 1934 by
writing to:
George Koenig
Executive Vice President and
Stockholder Relations Officer
The Bryan-College Station Financial Holding Company
2900 Texas Avenue
Bryan, Texas 77802
(409) 779-2900
Please provide a copy of the written request to J. Stanley Stephen,
President and CEO of the Company at the address stated above.
Transfer Agent and Registrar
Harris Trust and Savings Bank
700 Louisiana Street, Suite 3350
Houston, Texas 77002
(713) 546-9705
Auditors
Crowe, Chizek and Company LLP
One Mid America Plaza
P.O. Box 3697
Oak Brook, Illinois 60522-3697
Special Counsel
Silver Freedman & Taff, L.L.P.
(a partnership including professional corporations)
1100 New York Avenue, N.W.
Suite 700
Washington, D.C. 20006
57
THE BRYAN-COLLEGE STATION
FINANCIAL HOLDING COMPANY
BOARD OF DIRECTORS:
Richard L. Peacock, Chairman of the Board/Retired
Owner/Office Supply
Ernest Wentrcek, Vice Chairman of the
Board/Retired Texas A&M and Owner/W&W Realty
Charles Neelley, Secretary-Treasurer of the Board of
Directors for the Holding Company and the Bank/
Retired Texas A&M and Travel/Business
J. Stanley Stephen, President/CEO, First Federal
Savings Bank
Ken L. Hays, Owner, Aggieland Travel
Roland Ruffino, Co-Owner/Readfield Meats
Robert Conaway, Owner/Progress Supply
George Koenig, Executive Vice President,
First Federal Savings Bank
Joseph W. Krolczyk, Owner/President, KESCO
Restaurant Equipment Supply Inc.
Gary A. Snoe, Owner/President, Snoe Inc. Specialty
Tool and Die
Helen Chavarria, Housing Management Specialist for
the Brazos Valley Council of Government, and area
recruiter for Amnesty and Instructional, Assistant for
Region IV Educational Service Center located in
Huntsville, Texas
OFFICERS OF THE BRYAN-COLLEGE STATION FINANCIAL
HOLDING COMPANY
J. Stanley Stephen, President and Chief Executive
Officer
William Wantuck, Chief Financial Officer
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