UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0 - 21328
FORT BEND HOLDING CORP.
A DELAWARE CORPORATION I.R.S. EMPLOYER IDENTIFICATION
NO. 76-0391720
ADDRESS TELEPHONE NUMBER
3400 AVENUE H (281) 342-5571
ROSENBERG, TEXAS 77471
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
----- -----
There were 1,993,156 shares and 1,816,808 shares of Common Stock ($0.01 par
value) issued and outstanding, respectively, as of August 4, 1998.
1 of 24
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FORT BEND HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS JUNE 30, 1998 MARCH 31, 1998
Cash and due from banks $ 6,298 $ 6,260
Short-term investments 26,037 20,484
Certificates of deposit 400 300
------------------ -----------------
TOTAL CASH AND CASH EQUIVALENTS 32,735 27,044
Investment securities available for sale, at market 2,987 2,962
Investment securities held to maturity (estimated market value of
$7,987 and $8,984 at June 30, 1998 and
March 31, 1998, respectively) 8,245 9,244
Mortgage-backed securities available for sale, at market 261 282
Mortgage-backed securities held to maturity (estimated market
value of $76,001 and $83,222 at June 30, 1998
and March 31, 1998, respectively) 75,669 82,815
Loans held for sale 13,852 12,920
Loans receivable, net 164,984 160,062
Premises and equipment, net 4,735 4,738
Mortgage servicing rights, net 7,361 7,603
Prepaid expenses and other assets 6,286 7,680
Goodwill, net 1,233 1,256
------------------ -----------------
TOTAL ASSETS $ 318,348 $ 316,606
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 267,602 $ 268,991
Convertible Subordinated Debentures 10,415 11,405
Borrowings 4,472 3,985
Advances from borrowers for taxes and insurance 7,151 4,619
Accounts payable, accrued expenses and other liabilities 3,325 3,646
------------------ -----------------
TOTAL LIABILITIES 292,965 292,646
------------------ -----------------
Minority interest in consolidated subsidiary 2,630 2,556
------------------ -----------------
Stockholders' equity:
Serial preferred stock, $.01 par value - 1,000,000 shares authorized,
none outstanding
Common Stock, $.01 par value, 4,000,000 shares authorized,
1,993,156 shares issued and 1,816,808 shares outstanding at
June 30, 1998 and 1,899,654 shares issued and 1,723,306
shares outstanding at March 31, 1998 20 19
Additional paid-in capital 10,901 9,927
Unearned employee stock ownership plan shares (118) (118)
Deferred compensation (99) (83)
Net unrealized appreciation on available for sale securities 2 7
Retained earnings (substantially restricted) 13,503 13,108
Treasury stock, at cost - 176,348 shares (1,456) (1,456)
------------------ -----------------
TOTAL STOCKHOLDERS' EQUITY 22,753 21,404
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 318,348 $ 316,606
================== =================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
FORT BEND HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1998 1997
INTEREST INCOME:
Loans $ 3,800 $ 3,364
Short-term investments 384 159
Investment securities 179 241
Mortgage-backed securities 1,285 1,576
-------- --------
TOTAL INTEREST INCOME 5,648 5,340
-------- --------
INTEREST EXPENSE:
Deposits 2,765 2,668
Borrowings 273 337
-------- --------
TOTAL INTEREST EXPENSE 3,038 3,005
-------- --------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 2,610 2,335
PROVISION FOR LOAN LOSSES 45 63
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,565 2,272
-------- --------
NONINTEREST INCOME:
Loan fees and charges 1,075 728
Loan servicing income, net 206 297
Service charges on deposit accounts 224 210
Gain on sales of loans 297 97
Other income 207 189
-------- --------
TOTAL NONINTEREST INCOME 2,009 1,521
-------- --------
NONINTEREST EXPENSE:
Compensation and benefits 2,001 1,749
Office occupancy and equipment 488 447
Federal insurance premiums 43 40
Data processing fees 173 126
Other expense 838 555
-------- --------
TOTAL NONINTEREST EXPENSE 3,543 2,917
-------- --------
INCOME BEFORE INCOME TAX EXPENSE AND MINORITY INTEREST 1,031 876
INCOME TAX EXPENSE 336 278
-------- --------
INCOME BEFORE MINORITY INTEREST 695 598
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED SUBSIDIARY 123 79
-------- --------
NET INCOME $ 572 $ 519
======== ========
EARNINGS PER COMMON SHARE $ 0.32 $ 0.31
======== ========
EARNINGS PER COMMON SHARE - ASSUMING DILUTION $ 0.24 $ 0.24
======== ========
DIVIDENDS PER COMMON SHARE $ 0.10 $ 0.035
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
FORT BEND HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS)
(UNAUDITED)
1998 1997
NET INCOME $ 572 $ 519
-------- -------
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation) on available for sale securities (8) 9
Income tax (provision) benefit 3 (3)
-------- -------
Other comprehensive income (5) 6
-------- -------
COMPREHENSIVE INCOME $ 567 $ 525
-------- -------
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
FORT BEND HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
OPERATING ACTIVITIES: 1998 1997
Net income $ 572 $ 519
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 45 63
Depreciation 159 145
Compensation charge related to release of ESOP shares --- 166
Amortization 462 408
Minority interest in income of consolidated subsidiary 123 79
Gain on sales of loans, net (297) (97)
Origination of loans held for sale and mortgage servicing rights (35,739) (25,601)
Proceeds from sales of loans held for sale 34,882 13,293
Other, net 761 (7)
--------------- --------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 968 (11,032)
--------------- --------------
INVESTING ACTIVITIES:
Purchase of investment securities available for sale (32) (33)
Purchase of investment securities held to maturity --- (1,992)
Proceeds from maturities of investment securities held to maturity 1,000 ---
Principal collected on mortgage-backed securities 7,146 3,243
Net increase in loans receivable (4,896) (7,017)
Purchase of premises and equipment (156) (53)
Proceeds from sale of real estate 90 200
Proceeds from redemption of Federal Home Loan Bank stock 169 512
Other, net (12) (14)
---------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 3,309 (5,154)
---------------- --------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits (1,389) 18,360
Net increase in short-term borrowings --- 2,000
Proceeds from long-term borrowings 500 ---
Increase in advances from borrowers for taxes and insurance 2,532 2,778
Dividends paid (177) (58)
Other, net (52) (62)
---------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,414 23,018
---------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,691 6,832
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 27,044 20,790
---------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 32,735 $ 27,622
================ ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Real estate acquired in settlement of loans $ 23 $ 9
Loans originated related to sales of real estate --- 240
Issuance of common stock to RRP 24 62
Subordinated debentures converted to common stock 990 50
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
FINANCIAL STATEMENTS, CONTINUED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited information as of June 30, 1998 and for the three months
ended June 30, 1998 and 1997 includes the results of operations of Fort
Bend Holding Corp. (the "Holding Corp.") and its wholly-owned subsidiary
Fort Bend Federal Savings and Loan Association of Rosenberg (the
"Association"). The Association's financial statements include its 51%
owned subsidiary Mitchell Mortgage Company, L.L.C. ("Mitchell") (see Note
3). In the opinion of management, the information reflects all adjustments
(consisting only of normal recurring adjustments) which are necessary for a
fair presentation of the results of operations for such periods but should
not be considered as indicative of results for a full year.
The March 31, 1998 condensed consolidated statement of financial condition
data was derived from the audited financial statements, but does not
include all disclosures required by generally accepted accounting
principles. Accordingly, the condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements.
Certain previously reported amounts have been reclassified to conform to
the fiscal 1999 financial statement presentation. These reclassifications
had no effect on net income or stockholders' equity.
2. COMMON STOCK SPLIT
On August 21, 1997, the Board of Directors declared a two-for-one stock
split in the form of a 100% stock dividend payable October 1, 1997 to
shareholders of record on September 11, 1997. The effect of the split is
presented retroactively within stockholders' equity by transferring the par
value for the additional shares issued from the additional paid-in capital
account to the common stock account.
All share and per share data have been retroactively restated to reflect
the stock split.
3. BUSINESS COMBINATION
On January 2, 1997 the Association executed an agreement with The Woodlands
Corporation to acquire a controlling interest in Mitchell, a new limited
liability company. Mitchell was formed for the purpose of engaging in the
mortgage banking business, including the origination and servicing of
single-family purchase loans, single-family construction loans and
commercial and multifamily real estate loans. The Woodlands Corporation
contributed certain mortgage loans and its mortgage servicing portfolio and
liabilities of its wholly-owned mortgage banking subsidiary, Mitchell
Mortgage Company ("Old Mitchell"), in exchange for a 49% ownership interest
in Mitchell and the Association contributed cash of approximately $2.6
million in exchange for a 51% ownership interest in Mitchell. In
connection with the transaction, Old Mitchell (and The Woodlands Land
Development Company, L.P., as successor) was granted an option to convert,
upon the occurrence of certain events, its ownership interest in Mitchell
into shares of the common stock of the Holding Corp. at a rate of 82.304
shares for each $1,000 of ownership interest in Mitchell, or $12.15 per
share, in an amount not to exceed 9.9% of the Company's outstanding common
stock after conversion. Any amount that would otherwise be required to be
issued exceeding 9.9% of the Holding Corp.'s outstanding common stock would
be paid in cash. The option becomes exercisable on January 2, 1999 and
expires on January 2, 2002.
6
FINANCIAL STATEMENTS, CONTINUED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
The Association has guaranteed Mitchell's performance with the Government
National Mortgage Association and has insured that Mitchell will maintain a
required minimum net worth or the Association will infuse additional
capital to cure any deficiency.
4. RECOGNITION AND RETENTION PLAN
The Holding Corp. has established a Recognition and Retention Plan
("RRP") as a method of providing key officers with a proprietary interest
in the Holding Corp. in a manner designed to encourage such individuals to
remain with the Holding Corp. or the Association. All outstanding awards
vest at a rate of 20% per year. A total of 52,650 shares have been
authorized of which 49,904 shares had been granted under the RRP as of June
30, 1998.
5. NON-PERFORMING ASSETS
Impaired loans decreased $5,000 during the three months ended June 30,
1998. The decline resulted from loan amortization from scheduled payments
made on the two loans. Each of these loans was previously classified as
impaired. Foreclosed assets decreased $46,000 during the three months
ended June 30, 1998, which primarily reflected the sale of a single-family
house.
The following table summarizes impaired loan information as of June 30,
1998 (in thousands).
Impaired loans $ 653
Impaired loans with a specific reserve of $111
for loan losses calculated under SFAS 114 $ 267
Impaired loans which do not have a specific
reserve for loan losses calculated under
SFAS 114 $ 386
7
FINANCIAL STATEMENTS, CONTINUED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
6. CONVERTIBLE SUBORDINATED DEBENTURES AND OTHER BORROWINGS
In December 1995, the Holding Corp. issued $12.1 million of 8% Convertible
Subordinated Debentures due December 1, 2005. Interest is payable June 1
and December 1 of each year through maturity. The debentures are
convertible at any time prior to maturity at the rate of 92.592 shares of
common stock for each $1,000 of principal, or $10.80 per common share.
Total shares issuable with the conversion of the debentures was 964,345 at
June 30, 1998. The debentures may be redeemed at the option of the Holding
Corp., in whole or in part, at any time on or after December 1, 1998.
During the three months ended June 30, 1998 and 1997, debenture holders
converted debentures with a principal balance of $990,000 and $50,000,
respectively.
Borrowings at June 30, 1998 included two advances from the Federal
Home Loan Bank of Dallas (the "FHLB"), a $4.0 million advance and a
$500,000 advance. The $4.0 million advance, which had a balance of
$3,854,000 at June 30, 1998, bears interest at a rate of 6.205%, amortizes
based on a 30 year term and matures on July 3, 2000. The $500,000 advance,
which had a balance of $500,000 at June 30, 1998, bears interest at a rate
of 5.76%, amortizes based on a 30 year term and matures on June 27, 2008.
These advances are collateralized by mortgage-backed securities.
Borrowings also included an Employee Stock Ownership Plan ("ESOP") loan
with a balance of $118,000 at June 30, 1998. This loan, which has semi-
annual principal payments of $43,875 plus interest at a variable rate due
each June 30 and December 31, matures June 30, 2001. Principal payments on
the ESOP loan are not required for the fiscal year ended March 31, 1999,
and none have been made, as prepayments occurred during the fiscal year
ended March 31, 1998.
The following is a schedule by fiscal year of future principal
payments required under the amortizing advance agreements and the ESOP loan
(in thousands):
$4.0 Million $500,000
FHLB Advance FHLB Advance ESOP Loan
------------ ------------ ---------
1999 $ 42 $ 4 $ --
2000 59 7 118
2001 3,753 7
2002 7
2003 8
Thereafter 467
8
FINANCIAL STATEMENTS, CONTINUED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
7. EARNINGS PER COMMON SHARE
The following table reconciles earnings per common share to earnings
per common share - assuming dilution (in thousands, except share and per
share data).
THREE MONTHS ENDED
JUNE 30,
1998 1997
EARNINGS PER COMMON SHARE
Net income applicable to common stock $ 572 $ 519
Weighted average number of common
shares outstanding 1,764,066 1,653,616
------------ -------------
Earnings per common share $ 0.32 $ 0.31
============ =============
EARNINGS PER COMMON SHARE - ASSUMING DILUTION (a)
Net income applicable to common stock $ 572 $ 519
Effect of dilutive securities:
Interest on 8% convertible debentures,
net of tax 139 173
------------ -------------
Net income, adjusted $ 711 $ 692
============ =============
Weighted average common shares
outstanding 1,764,066 1,653,616
Effect of dilutive securities:
Weighted average common shares issuable
under the stock option plan 134,848 73,389
Weighted average common shares
issuable with the conversion of the 8%
convertible debentures to common stock 1,016,340 1,114,696
------------ -------------
Weighted average common shares, adjusted 2,915,254 2,841,701
============ =============
Earnings per common share -
assuming dilution $ 0.24 $ 0.24
============ =============
(b) The assumed conversion of the minority ownership interest in Mitchell into
shares of common stock (Note 3) has an antidilutive effect on earnings per
share. Thus, it is excluded from the calculation of earnings per share-
assuming dilution.
9
FINANCIAL STATEMENTS, CONTINUED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
8. SUBSEQUENT EVENTS
On July 22, 1998, the Holding Corp. declared a cash dividend of $.10
per common share payable on September 2, 1998 to shareholders of record on
August 12, 1998.
10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Fort Bend Holding Corp. (the "Holding Corp.") was incorporated under the laws of
the State of Delaware to become a savings and loan holding company with Fort
Bend Federal Savings and Loan Association of Rosenberg (the "Association") as
its subsidiary. The Holding Corp. was incorporated at the direction of the
Board of Directors of the Association, and on June 30, 1993, acquired all of the
capital stock of the Association upon its conversion from mutual to stock form
(the "Conversion"). Prior to the Conversion, the Holding Corp. did not engage
in any material operations and at June 30, 1998 it had no significant assets or
liabilities other than the investment in the capital stock of the Association, a
participation purchased in a multifamily loan originated by Mitchell, investment
securities, deferred charges from the subordinated debenture issue, cash and
cash equivalents and the subordinated debentures. In January, 1997 the
Association acquired, and has consolidated in its financial statements, a 51%
ownership interest in Mitchell. Unless the context otherwise requires, all
references herein to the Holding Corp. include the Holding Corp. and the
Association on a consolidated basis.
The Association is principally engaged in the business of attracting retail
savings deposits from the general public and investing those funds in first
mortgage loans on owner occupied, single-family residences, mortgage-backed
securities and investment securities. The Association originates residential
construction loans, land acquisition and development loans and commercial real
estate loans. The Association also originates consumer loans, including loans
for the purchase of automobiles and home improvement loans. Mitchell engages in
similar lending activities with an emphasis on construction and multifamily
lending and loan servicing.
The most significant outside factors influencing the operations of the
Association and other banks and savings institutions include general economic
conditions, competition in the local market place and the related monetary and
fiscal policies of agencies that regulate financial institutions. More
specifically, the cost of funds, primarily consisting of deposits, is influenced
by interest rates offered on competing investments and general market rates of
interest. Lending activities are influenced by the demand for real estate
financing and other types of loans, which in turn is affected by the interest
rates at which such loans may be offered and other factors affecting loan demand
and funds availability.
In November 1997, home equity lending was approved in Texas. Since January
1998, the Association has been lending on the equity in homesteads in Texas
through a home equity lending program and, at June 30, 1998, principal
outstanding on home equity loans was approximately $4.1 million.
In order to meet the financial services needs of the communities it serves, the
Association's growth strategy has been to grow in a reasonable, prudent manner
which may include expansion of the branch network or the acquisition of other
financial institutions and related companies operating generally within a 100
mile radius of Rosenberg, Texas. In furtherance of this growth strategy, the
Association has increased the portfolio allocation of single-family
construction lending, including the origination of speculative loans to
qualified builders, commercial real estate lending and consumer lending.
Residential construction loans to owner-occupants are generally underwritten
using the same criteria as for one- to four-family residential loans. Loan
proceeds are disbursed in increments as construction progresses and inspections
warrant. On December 17, 1997, the Association received approval, from the
Office of Thrift Supervision, to open a new branch in The Woodlands, Texas. The
branch facility initially will be located in the offices of Mitchell and is
expected to open in fiscal 1999.
11
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
Loan servicing has been one of the stable income providers for the Association
and will continue to be expanded, to the extent possible, through the retention
of servicing for loans originated and sold into the secondary market, as well as
through the purchase of mortgage servicing rights, to the extent deemed
appropriate (and subject to market conditions at the time). At June 30, 1998,
the Association serviced approximately $295 million of loans for others and
Mitchell serviced approximately $599 million of loans for others for a total of
$894 million of loans serviced for others. Management believes purchases of
loan servicing rights may allow the Holding Corp. to take advantage of some
economies of scale related to servicing.
Interest rates have decreased slightly subsequent to March 31, 1998. The
impact of these changes may be a higher volume of permanent single-family
lending activity, higher prepayment rates, and increased amortization of
mortgage service rights. It is difficult to determine the impact of changing
interest rates on the net interest margin. The Association's one year interest
sensitivity gap was a positive 20.40% at June 30, 1998. A positive gap
indicates there are more interest-earning assets repricing during a stated
period than interest-bearing liabilities, potentially resulting in an increase
in the spread on such assets and liabilities in a rising rate environment and a
decrease in the spread in a declining rate environment. A negative gap would
have the opposite effect.
At June 30, 1998, the Holding Corp. had unrealized gains and losses in its
investment securities and mortgage-backed securities which are being held to
maturity. The Holding Corp. has both the intent and ability to hold these
securities until maturity. Management believes the Holding Corp. will be able
to collect all amounts due according to the contractual terms of the debt
securities and is not aware of any information that would indicate the inability
of any issuer of such securities to make contractual payments in a timely
manner. Therefore, management believes that none of the unrealized losses
should be considered other than temporary.
Most of the mortgage-backed securities are agency securities and are either
guaranteed by the full faith and credit of the United States Government (i.e.
GNMA) or are insured by a Government Sponsored Enterprise (i.e. FNMA or FHLMC).
Private issue mortgage-backed securities consist of the "A" piece of "A-B"
structured securities where the "B" piece is subordinate to the "A" piece and
which were initially rated one of the two highest categories by one or more of
the rating agencies. Most of these securities have pool insurance and/or
reserve funds in addition to the subordination of the "B" piece. Collateral
for these securities is whole mortgage loans. None of these securities are
considered "high risk" as defined by the Office of Thrift Supervision and none
have failed to pass the Federal Financial Institution Examination
Council ("FFIEC") mandatory test for "high risk" securities. The Association
does not invest in "high risk" securities.
The management of the investment portfolio is not designed to be the primary
source of funds for the Association's operations. Rather, it is viewed as a use
of funds generated by the Association to be invested in interest-earning
assets to be held to maturity. Cash flow mismatches between sources and uses of
funds should not require any of the securities to be liquidated. While cash
flows from the securities vary depending on the prepayment speeds associated
with each particular security, the variance in the prepayment speeds does not
impact the over-all cash flow requirements of the Association since the
Association has the ability to borrow funds from the Federal Home Loan Bank of
Dallas. As of June 30, 1998, the Association had the ability to borrow up to an
additional $142 million from the Federal Home Loan Bank of Dallas if cash flow
requirements cannot be met by attracting deposits from its customer base (its
primary source of funds) or from repayment of loans and other sources.
12
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
The following schedule provides detail of the investment securities and the
mortgage-backed securities which are held to maturity, along with the related
unrealized gains and losses, at June 30, 1998 and March 31, 1998.
13
SCHEDULE OF INVESTMENT AND MORTGAGE-BACKED SECURITIES
HELD TO MATURITY
(IN THOUSANDS) JUNE 30, 1998 MARCH 31, 1998
------------------------------------------------ -----------------------------------------------
UNREALIZED UNREALIZED
BOOK MARKET ---------------------- BOOK MARKET ---------------------
TYPE OF SECURITY VALUE VALUE GAINS LOSSES VALUE VALUE GAINS LOSSES
--------- --------- --------- --------- --------- --------- --------- --------
INVESTMENT SECURITIES:
U.S. Treasury Notes $ 999 $ 1,005 $ 6 $ --- $ 999 $ 1,007 $ 8 $---
World Bank Bond and
FHLB Debentures 4,250 4,005 --- 245 5,249 5,008 4 245
FNMA and FHLMC Debentures 2,996 2,977 7 26 2,996 2,969 9 36
------- -------- -------- -------- -------- --------- ----- -----
TOTAL HELD TO MATURITY $ 8,245 $ 7,987 $ 13 $ 271 $ 9,244 $ 8,984 $ 21 $ 281
======= ======== ======== ======== ======== ========= ===== =====
MORTGAGE-BACKED SECURITIES:
FNMA
Fixed $ 7,711 $ 7,992 $ 284 $ 3 $ 8,225 $ 8,553 $ 332 $ 4
Adjustable 11,663 11,711 104 56 12,309 12,360 112 61
FHLMC
Fixed 3,496 3,566 73 3 4,040 4,125 89 4
Adjustable 12,381 12,407 87 61 13,101 13,121 89 69
GNMA
Fixed 1,818 1,914 96 --- 2,015 2,138 123 ---
Adjustable 4,895 4,965 71 1 5,406 5,484 78 ---
Private Issue
Adjustable 2,624 2,613 8 19 2,790 2,779 9 20
CMO
Fixed
FNMA 9,936 9,931 13 18 10,992 11,006 24 10
FHLMC 7,838 7,845 19 12 9,211 9,223 27 15
Private 2,060 2,076 16 --- 2,975 3,004 29 ---
Adjustable
FNMA 2,935 2,887 --- 48 2,935 2,859 --- 76
FHLMC 6,431 6,235 12 208 6,582 6,358 11 235
Private 1,881 1,859 --- 22 2,234 2,212 --- 22
------- -------- -------- -------- -------- --------- ----- -----
TOTAL HELD TO MATURITY $75,669 $ 76,001 $ 783 $ 451 $ 82,815 $ 83,222 $ 923 $ 516
======= ======== ======== ======== ======== ========= ===== =====
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Association's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations including, among
other things, a temporary inability to process transactions or engage in normal
business activities.
The Association outsources its primary data processing functions. To date, the
Association has solicited confirmations from its primary vendors that plans have
been developed by them to address and correct the issues associated with the
Year 2000. Most vendors have responded with the status of their efforts to
become Year 2000 compliant. The Association has established a management
committee to identify all of its functions potentially affected by the Year 2000
issue and to ensure that re-programming and testing of the affected systems will
be substantially completed by December 31, 1998, thus allowing adequate time for
implementation. Management believes that, with modifications to existing
hardware and software and conversions to new software, the Year 2000 issue will
not pose a significant operational problem for the Association. However,
because most computer systems are, by their very nature, interdependent, it is
possible that non-compliant third party computers could "reinfect" the
Association's computer systems. The Association could be adversely affected by
the Year 2000 issue if it or unrelated parties fail to successfully address this
issue. It is currently estimated that the Association will spend approximately
$100,000 on the Year 2000 issue.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-QSB, the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Holding Corp.'s market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Holding Corp.'s market area and competition, that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. The Holding Corp. wishes to caution readers not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made. The Holding Corp. wishes to advise readers that the factors listed above
could affect the Holding Corp.'s financial performance and could cause the
Holding Corp.'s actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Holding Corp. does not undertake - and specifically disclaims any obligation
- - to publicly release the results of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 AND 1997
The Holding Corp. had net income of $572,000, or $0.32 earnings per common share
and $0.24 earnings per common share - assuming dilution, for the three months
ended June 30, 1998 compared to net income of $519,000, or $0.31 earnings per
common share and $0.24 earnings per common share - assuming dilution, for the
same period in fiscal 1998.
Net interest income, before provision for loan losses, increased $275,000 to
$2.6 million during the three months ended June 30, 1998. Interest income
increased $308,000 to $5.6 million and primarily reflected a $20.5 million
increase in the average balance of interest-earning assets, partially offset by
a decrease of .12% in the average yield on interest-earning assets to 7.65% for
the three months ended June 30, 1998 compared to 7.77% for the three months
ended June 30, 1997. An increase of $25.4 million in the average balance of
loans receivable and $11.9 million in investments, partially offset by a
decrease of $16.8 million in mortgage-backed securities, contributed to the
increase in interest-earning assets. The increase in the average loan
balance reflected an increase of approximately $23.6 million from the Mitchell
loan portfolio, of which $9.3 million were construction loans. The decrease in
average yield reflected a decrease in yields on loans receivable of .29% to
8.62% for the three months ended June 30, 1998 compared to 8.91% for the three
months ended June 30, 1997. This decrease was partially offset by the
reinvestment of principal repayments on mortgage-backed securities with an
average rate of 6.54% into portfolio loans with an average rate of 8.62%.
Interest expense increased $33,000 and primarily reflected an increase of $7.5
million in the average balance of interest-bearing liabilities. Average
deposits increased $9.4 million reflecting an increase in average time deposits
of $5.5 million and increased escrow deposits associated with the increase in
loans receivable and loans serviced for others and average borrowings decreased
$1.9 million primarily reflecting a decrease in the average convertible
subordinated debenture and Federal Home Loan Bank advance balances of $1.2
million and $553,000, respectively. For the quarter ended June 30, 1998, the
average rate paid on deposits was 4.54% and the average rate paid on borrowings
was 7.28% compared to 4.56% and 7.98%, respectively, for the quarter ended June
30, 1997.
Management determines the amount of the allowance for loan losses which covers
specific loans as well as estimated losses inherent in the loan portfolio. The
level of the allowance is based on such factors as the amount of non-performing
assets, historical loss experience, regulatory policies, general economic
conditions, the estimated fair value of the underlying collateral and other
factors related to the collectibility of the loans. The provision for loan
losses for the three months ended June 30, 1998 was $45,000 compared to $63,000
for the same period in the last fiscal year and was provided for estimated
losses believed by management to be inherent in the loan portfolio. Included in
the provision for loan losses for the three months ended June 30, 1997 were
$45,000 in specific reserves. See "Asset Quality" for a further discussion of
the allowance for loan losses and the Association's non-performing assets at
June 30, 1998.
Non-interest income increased $488,000 to $2.0 million for the three months
ended June 30, 1998 compared to $1.5 million for the same period in fiscal 1998.
The increase reflects an increase in loan fees and charges of $347,000 to $1.1
million which primarily reflected increased commercial, multifamily and
construction lending. The Association originated $55 million of commercial and
multifamily loans and $34 million of construction
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CONTINUED
loans during the three months ended June 30, 1998 compared to $35 million of
commercial and multifamily loans and $27 million of construction loans during
the same period in fiscal 1998. Gain on sales of loans increased $200,000. The
principal balance of loans sold during the three months ended June 30, 1998 was
$34.6 million compared to $13.2 million for the same period in fiscal 1998.
These increases were partially offset by a decrease in loan servicing income,
net of amortization, of $91,000 to $206,000 for the three months ended June 30,
1998 compared to $297,000 for the same period in fiscal 1998. This decrease is
primarily caused by an increase in the amortization of mortgage servicing rights
of $80,000 to $487,000 compared to $407,000 for the same period in fiscal 1998.
This increase in amortization is the result of increased run off in the loan
servicing portfolio due to the current favorable interest rate environment. The
Holding Corp. originated $35.7 million of loans held for sale and mortgage
servicing rights during the three months ended June 30, 1998 compared to $25.6
million for the same period in fiscal 1998.
Non-interest expense increased $626,000 to $3.5 million for the three months
ended June 30, 1998 compared to $2.9 million for the same period in fiscal 1998.
This increase reflects an increase in compensation and benefits of $252,000
resulting from normal salary adjustments within the Association, increased
overtime, and commissions on loan originations due to the higher loan volume in
the current year. Office occupancy and equipment increased $41,000 to $488,000
for the three months ended June 30, 1998 compared to $447,000 for the same
period in fiscal 1998. This increase is primarily due to an increase in
depreciation of $10,000 related to fiscal 1998 equipment additions and an
increase in telephone charges of $13,000 related to the installation of a new
phone system. Data processing fees increased $47,000 to $173,000 for the three
months ended June 30, 1998 compared to $126,000 for the same period in fiscal
1998. The increase was primarily due to data processing fees associated with
computer upgrades and increased service bureau costs. Also, the Holding Corp.
incurred $9,000 of costs related to the Year 2000 issue during the three months
ended June 30, 1998. Other expense increased $283,000 to $838,000 for the three
months ended June 30, 1998 compared to $555,000 for the same period in fiscal
1998. The increase was primarily due to an increase of $129,000 in loan
origination and service charges, such as appraisals, flood data services, and
credit reports, associated with the higher loan volume in the current year.
Legal expenses increased $37,000 when compared to the prior year primarily as a
result of costs incurred related to the unsolicited acquisition offer received
in March 1998. Such costs may reoccur if the Holding Corp. receives another
offer. Also, the Holding Corp. recognized certain other acquisition related
expenses which had been previously deferred.
Income tax expense was $336,000 for the three months ended June 30, 1998
compared to $278,000 for the same period in fiscal 1998. The increase primarily
reflected the increase in income before tax.
Minority interest in net income of consolidated subsidiary increased $44,000 to
$123,000 for the three months ended June 30, 1998 compared to $79,000 for the
same period in fiscal 1998. The increase reflected an increase in net income of
Mitchell of approximately $90,000 to $252,000 for the three months ended June
30, 1998 from $162,000 for the same period in fiscal 1998.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
ASSET/LIABILITY MANAGEMENT
The Holding Corp. attempts to maximize net interest income by achieving a
positive interest rate spread that can be sustained during fluctuations in
prevailing interest rates. The Holding Corp.'s policies are designed to reduce
the impact of changes in interest rates on its net interest income by
maintaining a favorable match between the maturities or repricing dates of its
interest-earning assets and interest-bearing liabilities (interest
sensitivity gap). The Holding Corp. has implemented these policies by
generally selling long-term fixed rate mortgage loan originations, retaining its
adjustable rate mortgage and construction loans, originating and retaining
short-term consumer loans and purchasing adjustable rate or short-term maturity
loans. Through Mitchell, fixed rate commercial real estate loans are originated
and sold in the secondary market. Servicing is retained on most of these loans.
As a result of these policies, the Holding Corp.'s cumulative one year
interest sensitivity gap at June 30, 1998 was a positive 20.40%. Changes in
interest rates, prepayment rates and early withdrawal levels will affect the
interest sensitivity gap of the Holding Corp.
ASSET QUALITY
The allowance for loan losses is established through a provision for loan losses
based on management's quarterly asset classification review and evaluation of
the risk inherent in its loan portfolio and changes in the nature and volume of
its loan activity.
As a result of this review process, management recorded an additional provision
of $45,000 for loan losses during the three months ended June 30, 1998. Net
charge-offs for the three months ended June 30, 1998 totaled $14,000 and were
attributable to six consumer loans. The Association's allowance for loan losses
increased to $1,623,000 or .97% of total loans at June 30, 1998, compared to
$1,592,000 or 0.99% of total loans at March 31, 1998. The Association's
allowance for loan losses as a percent of total non-performing assets was 188%
at June 30, 1998 compared to 136% at March 31, 1998. While management believes
it uses the best information available to make determinations regarding the
adequacy of the allowance, there is no assurance that the subsequent evaluations
of the loan portfolio may not require additional provisions for loan losses.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CONTINUED
The non-performing assets to total assets ratio is one indicator of the exposure
to credit risk. Non-performing assets of the Association consist of non-
accruing loans, troubled debt restructurings, and real estate and automobiles
which were acquired as a result of foreclosure. The following table summarizes
the various categories of the Association's non-performing assets (in
thousands).
June 30, 1998 March 31, 1998
Non-accruing loans $ 271 $ 528
Troubled debt restructurings 542 547
Foreclosed assets 51 97
---------------- ---------------
Total non-performing assets $ 864 $ 1,172
================ ===============
Total non-performing assets as a
percentage of total assets 0.27% 0.37%
Total non-performing assets decreased $308,000 for the three months ended June
30, 1998. The decrease in nonaccrual loans is primarily the result of a
$197,000 decrease in residential loans and a $61,000 decrease in consumer loans
over 90 days delinquent. The residential loan decrease consists primarily of
the removal of five loans totaling $219,000 which were paid current partially
offset by the addition of five loans with an aggregate principal balance of
$22,000. The decrease in foreclosed assets was primarily the result of the sale
of a single-family residence which totaled $45,000.
At June 30, 1998, foreclosed assets consisted of a 5% participation held in 33
residential lots and three repossessed autos. All of the foreclosed assets are
being marketed for sale.
LIQUIDITY AND CAPITAL RESOURCES
The Association's primary sources of funds are deposits, sales of mortgage
loans, principal and interest payments on loans and mortgage-backed securities,
borrowings and funds provided by operations. While scheduled loan and mortgage-
backed securities principal repayments are a relatively predictable source of
funds, deposit flows, prepayments of loan and mortgage-backed securities
principal, and sales of mortgage loans are greatly influenced by general
interest rates, economic conditions, and competition. Current Office of Thrift
Supervision ("OTS") regulations require the Association to maintain cash and
eligible investments in an amount equal to at least 4% of customer accounts and
short-term borrowings to assure its ability to meet demands for withdrawals and
repayment of short-term borrowings. As of June 30, 1998, the Association's
liquidity ratio was 14.7%, which was in excess of the minimum regulatory
requirements. The Association's liquidity ratio was 12.2% at March 31, 1998.
The increase in the liquidity ratio was primarily due to repayments on loans and
mortgage-backed securities not yet reinvested in new loans.
During the three months ended June 30, 1998, total deposits decreased
approximately $1.4 million. This attrition may be the result of the
Association's efforts to control liability costs through the rates paid on time
and other deposits. The Association's market rates are not the highest rates
available in the market area.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
The Association uses its capital resources principally to meet its ongoing
commitments to fund maturing certificates of deposit and loan commitments,
maintain its liquidity and meet operating expenses. At June 30, 1998, the
Association had commitments to originate loans totaling $17 million. The
Association considers its liquidity and capital resources to be adequate to meet
its foreseeable short- and long-term needs. The Association expects to be able
to fund or refinance, on a timely basis, its material commitments and long-term
liabilities.
During the three months ended June 30, 1998, borrowings from the Federal Home
Loan Bank of Dallas increased $487,000. It is anticipated that the amount of
outstanding borrowings will fluctuate during the 1999 fiscal year depending upon
cash flows from the various sources of funds and financing to be provided to
Mitchell.
On July 2, 1998 the Holding Corp. declared a cash dividend of $0.10 per share
payable on September 2, 1998 to the shareholders of record on August 12, 1998.
The Association is required to maintain specific amounts of regulatory capital
pursuant to regulations of the OTS. As of July 7, 1998, the Association was
notified by the OTS that based on its reported capital position, the Association
is considered to be "well capitalized" in accordance with the Prompt Corrective
Action provision of Section 38 of the Federal Deposit Insurance Act. The
table below presents the Association's capital position at June 30, 1998
relative to the existing regulatory capital requirements. Such requirements may
increase if proposed capital regulations are implemented. Management believes
the Association will meet the requirements of the proposed capital regulations.
Amount Percent of
(000's) Assets (1)
Tangible capital $ 23,795 7.6 %
Tangible capital requirement 4,700 1.5
------------- ---------------
Excess $ 19,095 6.1 %
============= ===============
Core capital $ 23,795 7.6 %
Capital requirement 12,535 4.0
------------- ---------------
Excess $ 11,260 3.6 %
============= ===============
Total capital (i.e., core & supplemental capital) $ 25,222 14.6 %
Risk-based capital requirement 13,859 8.0
------------- ---------------
Excess $ 11,363 6.6 %
============= ===============
(1) Based upon adjusted assets for purposes of the tangible capital and core
capital requirements, and risk-weighted assets for purposes of the risk-based
capital requirement.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINUED
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
Statement 131 is effective for year end financial statements for fiscal years
beginning after December 15, 1998, with earlier application encouraged.
Statement 131 specifies revised guidelines for determining an entity's operating
segments and the type and level of financial information to be disclosed.
In February 1998, the Financial Accounting Standards Board issued Statement No.
132, "Employees' Disclosures about Pensions and Other Postretirement Benefits."
Statement 132 is effective for fiscal years beginning after December 15, 1997,
with earlier application encouraged. Statement 132 specifies revised financial
statement disclosure requirements from those that were required under Statement
No. 87, "Employers' Accounting for Pensions," Statement No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits," and Statement No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." As the Holding Corp. does not
provide pensions or other postretirement benefits as defined by Statement 132,
this standard is not applicable to the Holding Corp.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Statement 133
is effective for fiscal years beginning after June 15, 1999, with earlier
application encouraged. Statement 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities.
The adoption of these statements is not expected to have a material impact on
financial condition, results of operations or cash flows reported by the Holding
Corp. The Holding Corp. does not anticipate early adoption of any of these new
accounting standards.
21
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
There are no material legal proceedings to which the Holding Corp. or
the Association is a party or of which any of their property is
subject. From time-to-time, the Association is a party to various
legal proceedings incident to its business.
ITEM 2. - CHANGES IN SECURITIES
None
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 28, 1998 the Holding Corp. held its annual meeting at which
three directors were nominated and re-elected to a three year term.
For Withheld
--------- --------
Ron L. Workman 1,456,147 186,807
George C. Brady 1,449,037 193,917
William A. Little 1,453,866 189,088
Directors who will continue serving until their terms expire are: R.
W. Lindsey, Lane Ward, J. Patrick Gubbels, Wayne O. Poldrack, and
Doyle G. Callender.
Other matters voted upon at the meeting were as follows:
Ratification of the appointment of PricewaterhouseCoopers LLP,
formerly known as Coopers and Lybrand L.L.P., as independent
accountants for the Holding Corp. for the fiscal year ending March 31,
1999.
For Against Withheld
---------------- ----------------- -----------------
1,636,577 4,229 2,148
ITEM 5. - OTHER INFORMATION
None
22
PART II - OTHER INFORMATION
CONTINUED
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
Fort Bend Holding Corp. filed the following Forms 8-K during the
three months ended June 30, 1998.
May 6, 1998 - The registrant issued a earnings release announcing
the declaration of a cash dividend and earnings for the fourth quarter
ended March 31, 1998.
May 21, 1998 - The registrant issued a press release announcing
that Millers Mutual Fire Insurance Company has failed to pursue its
unsolicited expression of interest and that Fort Bend Federal Holding
Corp. has been advised through third party sources that Millers has
allowed its expression of interest to expire.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FORT BEND HOLDING CORP.
Registrant
Date: August 11, 1998 /s/ Lane Ward
-----------------------------------------
Lane Ward
Vice Chairman, President and Chief Executive
Officer
Date: August 11, 1998 /s/ David D. Rinehart
------------------------------------------
David D. Rinehart
Executive Vice President and Chief
Financial Officer
24