As filed with the Securities and Exchange Commission on May 30, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
(Exact name of registrant as specified in its charter)
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DELAWARE 6035 APPLIED FOR
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
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2900 TEXAS AVENUE, BRYAN, TEXAS 77802
(409) 779-2900
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
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J. STANLEY STEPHEN, PRESIDENT
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
2900 TEXAS AVENUE
BRYAN, TEXAS 77802
(409) 779-2900
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:
Dave M. Muchnikoff, P.C.
SILVER, FREEDMAN & TAFF, L.L.P.
(a limited liability partnership including professional corporations)
1100 New York Avenue, NW
Washington, DC 20005-3934
(202) 414-6100
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box. [X]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE (1) OFFERING PRICE(1) REGISTRATION FEE
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Common Stock, par value $.01 per share 294,500 shares $10.00 $2,945,000 $893(1)
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(1) Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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FIRST FEDERAL LETTERHEAD
__________, 1997
Dear Stockholder of First Federal:
On behalf of the Board of Directors and the management of First Federal
Savings Bank (sometimes referred to in this letter as "First Federal or the
"Institution"), I am very pleased to invite you to attend the ANNUAL MEETING OF
STOCKHOLDERS of First Federal, to be held at ______:00 a.m. local time, on
___________, 1997, at First Federal's principal office at 2900 Texas Avenue,
Bryan, Texas. Enclosed is our Annual Report for the fiscal year ending September
30, 1996, which reflects net earnings more than double that of fiscal year 1995,
if you exclude the one-time SAIF charge in September, 1996, and mandated by
Congress for deposit insurance. We look forward to reporting to you at the
Annual Meeting what we believe to be outstanding results of First Federal's
fiscal year ending September 30, 1996, the excellent progress of the institution
in its transition to full-service retail banking, and our exciting plans for the
future of First Federal!
The purpose of the Annual Meeting will be to ask our stockholders to
consider and vote on a proposal to organize a new holding company. This new
holding company will raise capital for the purpose of repurchasing shares
(subject to certain conditions) from some current stockholders who wish to sell
all or part of their shares, and will further assist First Federal to remain a
predominantly community owned independent financial institution. Your Board of
Directors believes it to be in the best interests of First Federal's
stockholders and of the institution. Stockholder and regulatory approval of this
proposal for the new holding company will also enable First Federal to consider
additional expansion of the institution through possible future acquisitions of
other financial institutions, and/or additional full-service branches for the
Bank in the Bryan-College Station area - - and in the triangle between Houston,
Dallas and Austin, and to consider further diversification of First Federal in
other financially-related businesses.
Our plans are to implement this proposal by the adoption of an
Agreement and Plan of Merger, dated _______________, 1997, between First
Federal, the new holding company (which will be named "The Bryan- College
Station Financial Holding Company") and an interim, temporary bank referred to
as "New Bank" - - to facilitate the formation of the new holding company and the
Merger of First Federal into the new holding company. Under the "Merger
Agreement" described in the enclosed information, First Federal would then
become a wholly-owned subsidiary of The Bryan-College Station Financial Holding
Company.
After the Merger (as described more in detail in the enclosed Joint
Proxy Statement/Prospectus, which preempts any language in this letter), you
will be given the option, subject to certain conditions, of either (1.)
exchanging each share of the existing common stock of First Federal which you
now own, for two and one-half shares of new common stock in The Bryan - College
Station Financial Holding Company and thus continuing to own all of your stock
through First Federal's new holding company, OR (2.) exchanging some of your
existing First Federal common stock for two and one-half shares of new common
stock in the holding company, and selling some of your existing First Federal
common stock for $24.07 cash per share and thus partially continue in your
ownership of First Federal through its new holding company, OR (3.) selling all
your existing First Federal common stock for $24.07 cash per share. (The cash
price to be offered for those common stockholders, who wish to sell some or all
of their shares, has been determined through a recent independent valuation of
the stock performed by an experienced, recognized and independent investment
banking firm.)
While we know that you will select the option described above which is
best suited for you, we hope you will seriously consider remaining as an owner
of this organization - - which is one of the very few remaining independent
banking institutions in Bryan-College Station and the Brazos Valley. We are
excited about what's going on at First Federal, and believe that we have a
wonderful opportunity in the years ahead!!
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The Board of Directors of First Federal are very proud of the history
of this institution, which is owned by over 250 stockholders in this area, - -
and particularly our history over the past 5 years as First Federal gained more
momentum and visibility in this community through its transition into
full-service retail banking. Our customer base has expanded with our new, very
attractive checking accounts - - and our successful two-year old full-service
branch bank on Longmire in College Station. We have just recently acquired an
excellent site for a full-service branch bank in northern Bryan, at the key
intersection of Highway 21 and Texas Avenue - - which we are anxious to open!!
WE SINCERELY BELIEVE THAT THIS BANK (WHICH YOU OWN) HAS A WONDERFUL
FUTURE, AS A PREDOMINANTLY COMMUNITY-OWNED, INDEPENDENT BANKING INSTITUTION IN
THIS AREA. THEREFORE, YOUR BOARD OF DIRECTORS HAS APPROVED THE AGREEMENT AND
PLAN OF MERGER, BELIEVES IT IS IN THE BEST INTERESTS OF FIRST FEDERAL AND ITS
STOCKHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR ITS APPROVAL.
In addition to the vote on the adoption of the Merger Agreement, First
Federal shareholders are asked to: (i) authorize the Board of Directors to
adjourn the meeting in order to solicit additional proxies in favor of the
Merger, if necessary; (ii) elect four directors; and (iii) ratify the
appointment of our current auditors, Crowe, Chizek & Company LLP, as First
Federal's independent auditors for the fiscal year ended September 30, 1997.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THESE
PROPOSALS.
We encourage you to attend the Annual Meeting in person. Whether or not
you plan to attend, however, please SIGN and DATE the enclosed PROXY and RETURN
IT TO US, PROMPTLY.
Thank you for your continuing support and interest in FIRST FEDERAL. We
look forward to working with you in the years ahead, so that together we can
grow First Federal into the type of independent financial institution which we
all want for ourselves and for our community.
Sincerely,
/s/ Stan Stephen
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Stan Stephen
President and Chief Executive Officer
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FIRST FEDERAL SAVINGS BANK
2900 TEXAS AVENUE
BRYAN, TEXAS 77802
(409) 779-2900
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be Held on ________, 1997
Notice is hereby given that the Annual Meeting of common stockholders
(the "Meeting") of First Federal Savings Bank ("First Federal" or the "Bank")
will be held at the principal office of the Bank located at 2900 Texas Avenue,
Bryan, Texas, at __:00 a.m. local time, on _______, 1997.
A Proxy Card and a Proxy Statement for the Meeting are enclosed.
The Meeting is for the purpose of considering and acting upon:
1. The election of four Directors of the Bank;
2. The adoption and approval of the Agreement and Plan of Merger
by and between First Federal and The Bryan - College Station
Financial Holding Company (the "Holding Company") attached as
Appendix A to this Proxy Statement, whereby the common stock
shareholders of First Federal would either receive in exchange
for each First Federal share two and one-half shares of common
stock of the Holding Company ("Holding Company Common Stock"),
cash consideration of $24.07 per share (up to a maximum of 80%
of existing First Federal common stock), or a combination of
cash and stock;
3. The ratification of the appointment of Crowe, Chizek and
Company LLP as auditors for the Bank for the fiscal year
ending September 30, 1997;
4. The adjournment of the Meeting in order to solicit additional
proxies in the event that sufficient votes are not cast in
favor of the Merger; and
such other matters as may properly come before the Meeting, or any adjournments
thereof. The Board of Directors is not aware at this time of any other business
to come before the Meeting.
Any action may be taken on the foregoing proposals at the Meeting on
the date specified above, or on any date or dates to which the Meeting may be
adjourned. Common stockholders of record at the close of business on ________,
1997, are the stockholders entitled to vote at the Meeting, and any adjournments
thereof.
You are requested to COMPLETE and SIGN the enclosed form of PROXY which
is solicited on behalf of the Board of Directors, and to MAIL IT PROMPTLY in the
enclosed envelope. The Proxy will not be used if you attend and vote at the
Meeting in person.
By Order of the Board of Directors
/s/ Richard L. Peacock
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Richard L. Peacock
Chairman of the Board
/s/ J. Stanley Stephen
--------------------------------
J. Stanley Stephen
President/Chief Executive Officer
Bryan, Texas
___________, 1997
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TABLE OF CONTENTS
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INTRODUCTION AND SUMMARY ........................ First Federal's Stock Option and Incentive
Introduction ........................... Plan........................................
Parties to the Merger .................. Rights of Dissenting Stockholders...........
Summary of Certain Aspects of the Fractional Shares...........................
Merger.................................. Exchange of Certificates....................
Representations and Warranties..............
GENERAL MEETING INFORMATION...................... Conditions to the Merger....................
Time and Date; Record Date.............. Regulatory Approval.........................
Matters to be Considered................ Waiver and Amendment; Termination...........
Vote Required and Proxy Information..... Conduct of Business of First Federal
Proxy Solicitation...................... Pending
Voting Rights........................... the Merger..................................
Summary of Certain Aspects of Merger.... Material Agreements Relating to the Merger
Holding Company Offering................ and Interests of Certain Persons............
Market and Dividend Information......... Federal Income Tax Consequences.............
Accounting Treatment........................
SELECTED CONSOLIDATED FINANCIAL DATA Comparison of Stockholder Rights............
................................................. Other Restrictions on Acquisitions of Stock.
Risk Factors Associated with the Holding
RECENT FINANCIAL DATA............................ Company.....................................
Regulatory Oversight........................
MANAGEMENT'S DISCUSSION OF RECENT Competition.................................
RESULTS.......................................... Limitations on Stock Ownership..............
Financial Condition.....................
Nonperforming Assets and Loan Loss THE OFFERING.........................................
Provision............................... Security Ownership of Certain Beneficial
Comparison of Three months ended Owners and Management.......................
December 31, 1996 to December 31, 1995.. Debentures..................................
Liquidity and Capital Resources......... Warrants....................................
Proposals for Annual Meeting............
PROPOSAL III - RATIFICATION OF THE
PROPOSAL I - ELECTION OF DIRECTORS APPOINTMENT OF AUDITORS..............................
General.................................
Voting Securities and Principal Holders PROPOSAL IV - ADJOURNMENT OF MEETING
Thereof................................. .....................................................
Meetings and Committees of the Board of
Directors............................... MANAGEMENT'S DISCUSSION AND ANALYSIS
Director Compensation................... OF FINANCIAL CONDITION AND RESULTS OF
Executive Compensation.................. OPERATIONS...........................................
Certain Transactions.................... General.....................................
Asset/Liability Management..................
PROPOSAL II - THE MERGER Net Portfolio Value.........................
General................................. Average Balances, Interest Rates and
Reasons for and Recommendation of the Yields......................................
Merger.................................. Results of Operations.......................
Consideration to be Received............ Comparison of Fiscal Year Ended September
First Federal Stockholder Election 30, 1996 to September 30, 1995..............
Procedures.............................. Comparison of Fiscal Year Ended September
Opinion of Financial Advisor............ 30, 1995 to September 30, 1994..............
Effective Date.......................... Financial Condition.........................
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Liquidity and Capital Resources.........
Impact of Inflation and Changing Prices.
Effect of New Accounting Standards......
BUSINESS.........................................
Market Area.............................
Lending Activities......................
General.................................
One-to-Four Residential Real Estate
Lending.................................
Mortgage-Back Securities................
Consumer Lending........................
Construction Lending....................
Commercial Real Estate Lending..........
Commercial Business Lending.............
Loan Delinquencies; Nonperforming Assets
and Classified Assets...................
Allowance for Losses on Loans...........
Investment Activities...................
Source of Funds.........................
Borrowings..............................
Service Corporation.....................
Competition.............................
Employees...............................
Description of Property-Owned...........
Legal Proceedings.......................
OTHER MATTERS....................................
FIRST FEDERAL SAVINGS BANKS INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS................
APPENDICES
Agreement and Plan of Merger............
Section 552.14 of Home Owners Loan Act
of 1993, as amended.....................
Opinion of Hoefer & Arnett, investment
bankers ................................
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PROXY STATEMENT
FIRST FEDERAL SAVINGS BANK
2900 TEXAS AVENUE
BRYAN, TEXAS 77802
(409) 779-2900
ANNUAL MEETING OF STOCKHOLDERS
____________, 1997
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PROSPECTUS OF THE BRYAN - COLLEGE STATION
FINANCIAL HOLDING COMPANY
SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Joint Proxy Statement/Prospectus. Certain capitalized terms
used in this summary are defined elsewhere in this Joint Proxy
Statement/Prospectus. This summary is not intended to be a complete description
of all material facts regarding First Federal, the Holding Company and the
matters to be considered at the stockholders' meetings and is qualified in its
entirety by, and reference is made to, the more detailed information contained
elsewhere in this Joint Proxy Statement/Prospectus, the accompanying Appendices
and the documents referred to and incorporated herein by reference.
INTRODUCTION
This Joint Proxy Statement/Prospectus, which is first being sent on or
about ________, 1997, is furnished to the holders of record on ________, 1997
(the "Record Date"), of shares of common stock of First Federal Savings Bank
("First Federal" or the "Bank"), $0.01 par value ("First Federal Common Stock"),
in connection with a solicitation on behalf of the Board of Directors of First
Federal of proxies to be voted at the annual meeting of stockholders of First
Federal to be held on ________ ___, 1997 (the "Annual Meeting"). The purpose of
the Annual Meeting is to consider and vote upon adoption of an Agreement and
Plan of Merger, dated _________, 1997 (the "Merger Agreement"), between First
Federal, The Bryan-College Station Financial Holding Company (the "Holding
Company"), a Delaware corporation, and New Bank, an interim banking subsidiary
formed temporarily to facilitate the Merger ("New Bank"), in substantially the
form set forth in Appendix A to this Joint Proxy Statement/Prospectus. The
Holding Company has received indications from its directors, executive officers
and members of their immediate families holding 44,080 shares, or approximately
18.4% of First Federal's Common Stock, that such holders will exchange their
First Federal Common Stock for approximately 110,000 shares of Holding Company
Common Stock.
As a result of the merger contemplated by the Merger Agreement (the
"Merger"), First Federal will become a wholly owned subsidiary of the Holding
Company. The stockholders of First Federal at the Effective Date (as defined
below) of the Merger (other than stockholders who have properly exercised
appraisal rights under the rules and regulations of the Office of Thrift
Supervision (the "OTS")) may elect to receive for each share of First Federal
Common Stock held either (i) two and one-half shares of Holding Company Common
Stock (fractional shares will be rounded up to the next whole number), or (ii) a
combination of Holding Company Common Stock at two and one-half shares of
Holding Company Common Stock for each share of First Federal Common Stock held
by the stockholder and cash at $24.07 per share for each other share of First
Federal Common Stock held by the stockholder, or (iii) all cash at $24.07 per
share of First Federal Common Stock; provided, however, that no more than 80% of
existing First Federal common stock can be sold for cash, and provided further,
that elections representing at least 20% and not more than 49% of the
consideration to be paid by the Holding Company in the
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Merger must consist of Holding Company Common Stock to ensure that the
transaction will be accounted for as a leveraged buyout. If shareholders approve
the Merger, but more than 49% or less than 20% of the shareholders elect to
receive Holding Company Common Stock, the Holding Company will be permitted to
allocate cash and stock pro rata to those shareholders who elect the
oversubscribed consideration subject to the requirement that in the event such
method would adversely affect the accounting or tax treatment of the Merger, the
Holding Company may pay cash for the amount of stock consideration elected
which, if granted, would result in the adverse accounting or tax treatment. (See
"PROPOSAL II - THE MERGER -- Consideration to be Received"). After the Merger,
First Federal stockholders who sell all of their shares will have no continuing
stockholder relationship with First Federal, the Holding Company, or New Bank.
In addition, stockholders are asked to: (i) elect four members of the
Bank's Board of Directors; (ii) ratify the appointment of First Federal's
current auditors, Crowe, Chizek and Company LLP, as auditors for the Bank for
the fiscal year ended September 30, 1997; and (iii) authorize the Board of
Directors to adjourn the Meeting to solicit additional proxies, if necessary.
YOUR BOARD OF DIRECTORS RECOMMENDS THAT FIRST FEDERAL STOCKHOLDERS
VOTE FOR ADOPTION OF THE AGREEMENT AND PLAN OF MERGER AND ALL OTHER PROPOSALS.
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PARTIES TO THE MERGER
First Federal Savings Bank. First Federal is a federally chartered
thrift institution, headquartered in Bryan- College Station, Texas, which began
operations in 1965. First Federal is predominantly a locally-based home lender,
originating loans primarily in Bryan-College Station and the surrounding trade
area, and to a much lesser extent other communities in the general area between
Houston, Austin and Dallas, Texas. First Federal also originates direct and
indirect consumer, construction, Small Business Administration ("SBA") partially
guaranteed loans, small commercial real estate and small to medium commercial
business loans. The institution's deposits are insured up to applicable limits
by the Savings Association Insurance Fund (the "SAIF") which is administered by
the Federal Deposit Insurance Corporation (the "FDIC"). At September 30, 1996,
First Federal had assets of $57.6 million, deposits of $51.7 million and total
stockholders' equity of $4.3 million. New senior management was installed in
early 1991 to recapitalize and convert First Federal from a mutual savings
institution to a federal stock institution. The conversion was completed through
a successful stock offering which became effective in April, 1993.
The Bryan-College Station Holding Company and New Bank. The Holding
Company is a newly formed company that was formed under the laws of Delaware to
acquire 100% of the stock of First Federal upon consummation of the Merger. The
principal executive offices of the Holding Company are located at 2900 Texas
Avenue, Bryan, Texas 77802, and its telephone number at that address is (409)
779-2900. The Holding Company upon consummation of the Merger will be a thrift
institution holding company under the Home Owners Loan Act of 1933, as amended
(the "HOLA") and, therefore, will be regulated and supervised by the Office of
Thrift Supervision (the "OTS").
New Bank is a federally chartered interim subsidiary that is wholly
owned by the Holding Company. New Bank was formed specifically for the purpose
of the acquisition of First Federal by the Holding Company and has the same
address as the Holding Company. New Bank will cease to exist after the Merger.
GENERAL MEETING INFORMATION
TIME AND DATE; RECORD DATE
The Annual Meeting will be held on __________, 1997, at ___ _.m., local
time, at First Federal's main office at 2900 Texas Avenue, Bryan, Texas. The
Board of Directors of First Federal has fixed ________, 1997, as the Record
Date. Only stockholders of record of First Federal Common Stock at the close of
business on the Record Date are entitled to notice of and to vote at the Annual
Meeting. As of the Record Date, there were 239,612 shares of First Federal
Common Stock outstanding and entitled to be voted at the Annual Meeting.
MATTERS TO BE CONSIDERED
At the Annual Meeting, the holders of First Federal Common Stock will
be asked to vote upon a proposal to approve the adoption of the Merger Agreement
and the transactions contemplated thereby, including the acquisition by exchange
of stock and the balance by purchase for cash of all of the outstanding shares
of First Federal by the Holding Company. In addition, First Federal stockholders
will be asked to: (i) elect directors for First Federal; (ii) ratify the
appointment of Crowe, Chizek and Company LLP as the Bank's auditors for the year
ended September 30, 1997; and (iii) authorize the Board of Directors to adjourn
the Meeting in order to solicit additional proxies, if necessary.
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VOTE REQUIRED AND PROXY INFORMATION
All shares of First Federal Common Stock represented at the Meeting by
properly executed proxies received prior to or at the Meeting, and not revoked,
will be voted at the Meeting in accordance with the instructions thereon. If no
instructions are indicated, properly executed proxies will be voted for the
nominees and the adoption of the proposal set forth in this Joint Proxy
Statement/Prospectus. First Federal does not know of any matters, other than as
described in the Notice of Meeting, that are to come before the Meeting. If any
other matters are properly presented at the Meeting for action, the persons
named in the enclosed form of proxy and acting thereunder will have the
discretion to vote on such matters in accordance with their best judgment.
An affirmative vote by a majority of the shares outstanding will be
required to approve the adoption of the Merger Agreement to effectuate the
Merger in which shareholders of First Federal (other than stockholders who have
properly exercised appraisal rights under the rules and regulations of the
Office of Thrift Supervision) may elect to receive for each share of First
Federal Common Stock held either (i) two and one-half shares of Holding Company
Common Stock (fractional shares will be rounded up to the next whole number), or
(ii) a combination of Holding Company Common Stock at two and one-half shares of
Holding Company Common Stock for each share of First Federal Common Stock held
by the stockholder and cash at $24.07 per share for each other share of First
Federal Common Stock held by the stockholder, or (iii) all cash at $24.07 per
share of First Federal Common Stock; provided, however, that no more than 80% of
existing First Federal common stock can be sold for cash, and provided further,
that elections representing at least 20% and not more than 49% of the
consideration to be paid by the Holding Company in the Merger must consist of
Holding Company Common Stock to ensure that the transaction will be accounted
for as a leveraged buyout. (See "PROPOSAL II - THE MERGER -- Consideration to be
Received"). After the Merger, First Federal stockholders who sell all of their
shares will have no continuing stockholder relationship with First Federal, the
Holding Company, or New Bank. If shareholders approve the Merger, but more than
49% or less than 20% of the shareholders elect to receive Holding Company Common
Stock, the Holding Company will be permitted to allocate cash and stock pro rata
to those shareholders who elect the oversubscribed consideration subject to the
requirement that in the event such method would adversely affect the accounting
or tax treatment of the Merger, the Holding Company may pay cash for the amount
of stock consideration elected which, if granted, would result in the adverse
accounting or tax treatment.
Directors shall be elected by a plurality of votes present in person or
represented by proxy at the Meeting and entitled to vote on the election of
Directors. In all matters other than the election of Directors, the affirmative
vote of the majority of shares present in person or represented by proxy at the
Meeting and entitled to vote on the matter shall be the act of the shareholders.
Proxies marked to abstain with respect to a proposal have the same effect as
votes against the proposal. Broker non-votes have no effect on the vote. A
majority of the shares of the Bank's Common Stock, present in person or
represented by proxy, shall constitute a quorum for purposes of the Meeting.
Abstentions and broker non-votes are counted for purposes of determining a
quorum.
A proxy given pursuant to the solicitation may be revoked at any time
before it is voted. Proxies may be revoked by: (i) filing with the Secretary of
First Federal's Board of Directors at or before the Meeting a written notice of
revocation bearing a later date than the proxy; (ii) duly executing a subsequent
proxy relating to the same shares and delivering it to the Secretary of First
Federal's Board of Directors at or before the Meeting; or (iii) attending the
Meeting and voting in person (although attendance at the Meeting will not in and
of itself constitute revocation of a proxy). Any written notice revoking a proxy
should be delivered to Charles Neelley, Secretary of the Board of Directors,
2900 Texas Avenue, Bryan, Texas 77802.
proxy solicitation
The board of directors, officers, and employees of First Federal will
initially solicit proxies by mail. If they deem it advisable, directors,
officers, and employees of First Federal may also solicit proxies in person by
telephone or by other forms of communication without additional compensation,
except for reimbursement of reasonable out-of-pocket expenses incurred in
connection with such solicitation. In addition, nominees and other
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fiduciaries may also solicit proxies. Such persons may, at the request of First
Federal's management, mail material to or otherwise communicate with the
beneficial owners of shares held by them. All expenses of solicitation of
proxies will be paid by First Federal.
VOTING RIGHTS
Each holder of record of First Federal Common Stock on the Record Date
will be entitled to one vote for each share registered in his, her, or its name
on each matter presented for a vote of the stockholders at the Annual Meeting.
The Merger must be approved by the affirmative vote of the holders of a majority
of the shares of First Federal Common Stock outstanding as of the Record Date.
For the purpose of counting votes on this proposal, failures to vote,
abstentions and broker non-votes will have the same effect as votes against
approval of the Merger Agreement.
SUMMARY OF CERTAIN ASPECTS OF THE MERGER
Directors' Approval and Recommendation of the Merger. At a Board of
Directors meeting held on _______, 1997, the First Federal Board of Directors
approved the Merger Agreement after considering the terms and conditions of the
Merger Agreement and obtaining the advice of its financial advisor and
investment banker, Hoefer & Arnett, Incorporated ("Hoefer & Arnett"), Austin,
Texas and San Francisco, California. THE FIRST FEDERAL BOARD OF DIRECTORS
BELIEVES THAT THE CONSIDERATION OFFERED PURSUANT TO THE TRANSACTION IS FAIR TO
THE STOCKHOLDERS OF FIRST FEDERAL AND, ACCORDINGLY, RECOMMENDS THAT STOCKHOLDERS
OF FIRST FEDERAL VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT. (For a discussion
of the circumstances surrounding the Merger and the factors considered by the
First Federal Board of Directors in making its recommendation, see "PROPOSAL II
- - THE MERGER -- Reasons for and the Recommendation of the Merger"). See "Opinion
of Hoefer & Arnett" attached as Appendix C hereto.
Certain members of First Federal's management and First Federal's Board
of Directors have interests in the Merger that are in addition to their
interests as stockholders of First Federal generally. (See "PROPOSAL II THE
MERGER -- Material Agreements Relating to the Merger and Interests of Certain
Persons").
Consideration to be Received in the Merger. Subject to the terms,
conditions and procedures set forth in the Merger Agreement the stockholders of
First Federal on the effective date of the Merger (other than the shares owned
by the Holding Company and stockholders who have properly exercised appraisal
rights under the OTS Rules and Regulations) may elect to receive for each share
of First Federal Common Stock held either (i) two and one-half shares of Holding
Company Common Stock (fractional shares will be rounded up to the next whole
number), or (ii) a combination of Holding Company Common Stock at two and
one-half shares of Holding Company Common Stock for each share of First Federal
Common Stock held by the stockholder and cash at $24.07 per share for each other
share of First Federal Common Stock held by the stockholder, or (iii) all cash
at $24.07 per share of First Federal Common Stock; provided, however, that no
more than 80% of existing First Federal Common Stock can be sold for cash, and
provided further, that elections representing at least 20% and not more than 49%
of the consideration to be paid by the Holding Company in the Merger must
consist of Holding Company Common Stock to ensure that the transaction will be
accounted for as a leveraged buyout. (See "PROPOSAL II - THE MERGER --
Consideration to be Received"). First Federal stockholders who sell all of their
shares in the Merger will have no continuing stockholder relationship with First
Federal, the Holding Company or New Bank.
Opinion of Financial Adviser. First Federal's financial adviser and
investment banker, Hoefer & Arnett, Incorporated ("Hoefer & Arnett"), Austin,
Texas with principal offices in San Francisco, California, has rendered an
opinion to First Federal's board of directors, dated as of __________, 1997, to
the effect that (as of such date) the consideration to be received in the Merger
is fair to First Federal stockholders from a financial point of view. This
opinion is attached in full as Appendix C to this Joint Proxy
Statement/Prospectus. First Federal stockholders
-5-
<PAGE>
are urged to read that opinion in its entirety for a description of the
procedures followed, assumptions made, matters considered, and qualifications on
the review undertaken by Hoefer & Arnett (See "PROPOSAL II - THE MERGER --
Opinion of Financial Advisor").
Vote Required. The affirmative vote of the holders of a majority of the
outstanding shares of First Federal Common Stock entitled to vote as of the
Record Date is required to adopt the Merger Agreement. As of the Record Date,
First Federal's directors and executive officers and their affiliates
beneficially owned 43.7 percent of the outstanding First Federal Common Stock.
As of the Record Date, the Holding Company has received indications from
directors, executive officers and their immediate families holding 44,080 or
approximately 18.4 percent of the outstanding First Federal Common Stock that
they will vote for the Merger and exchange their shares for Holding Company
Common Stock. No vote of the shareholders of the Holding Company is required to
adopt the Merger Agreement (See "GENERAL MEETING INFORMATION").
Effective Date. The Merger shall become effective at the time and on
the date specified in the certificate and articles of merger to be filed with
the Secretary of State of Delaware and with the OTS (the "Effective Date"). Such
filing will occur only after the receipt of all requisite regulatory approvals,
approval of the Merger Agreement by the requisite vote of First Federal
stockholders and the satisfaction or waiver of all other conditions to the
Merger. The closing of the Merger will occur on a date mutually agreed upon by
First Federal and the Holding Company. In the absence of such agreement, the
closing shall occur on the tenth business day after the last to occur of : (i)
the receipt of all requisite regulatory approvals and the expiration of all
applicable statutory waiting periods; and (ii) the requisite approval of the
Merger by stockholders of First Federal.
Appraisal Rights. Holders of First Federal Common Stock are entitled to
statutory rights of appraisal pursuant to Section 552 of the OTS Rules and
Regulations (See "PROPOSAL II - THE MERGER -- Rights of Dissenting
Stockholders").
Conditions to the Merger. The respective obligations of the parties to
consummate the Merger are subject to the fulfillment or waiver of certain
conditions specified in the Merger Agreement, including, among other things, the
receipt of the requisite regulatory and stockholder approvals, successful
completion of the Holding Company Offering (discussed below), the accuracy of
the representations and warranties contained therein, the legal opinions and
certain other conditions customary in transactions of this nature. See "PROPOSAL
II - THE MERGER -- Conditions to the Merger."
Regulatory Approval. The Merger is subject to the approval of the
Office of Thrift Supervision (the "OTS"). First Federal filed an application for
approval of the Merger with the OTS, and anticipates obtaining the approval of
the OTS in the third quarter of 1997. There can be no assurance as to the timing
of such approval or that the OTS will approve the Merger.
It is a condition to the consummation of the Merger that First Federal
and the Holding Company shall have received all applicable regulatory approvals
and consents to consummate the Merger Agreement. There can be no assurance that
such approvals or consents will not contain terms, conditions or requirements
which cause such approval to fail to satisfy such conditions to the consummation
of the Merger.
In addition, under federal law, a period of 30 days (subject to
reduction to 15 days) must expire following approval by the OTS within which
period the United States Department of Justice (the "Department of Justice") may
file objections to the Merger under the federal antitrust laws. The Department
of Justice could take such action under the antitrust laws as it deems necessary
or desirable in the public interest, including seeking to enjoin the Merger
unless divestiture of an acceptable number of branches to a competitively
suitable purchaser could be made. While First Federal believes that the
likelihood of such action by the Department of Justice is remote in this case,
there can be no assurance that the Department of Justice will not initiate such
a proceeding. (See "PROPOSAL II THE MERGER -- Regulatory Approval").
-6-
<PAGE>
Waiver and Amendment; Termination. Prior to the Effective Date, First
Federal and the Holding Company Boards may extend the time for performance of
any obligations under the Merger Agreement, waive any inaccuracies in the
representations and warranties contained in the Merger Agreement and waive
compliance with any agreements or conditions of the Merger Agreement.
Subject to applicable law, the Merger Agreement may be amended by
action of First Federal and the Holding Company Boards at any time before or
after approval of the Merger Agreement by the stockholders of First Federal and
the Holding Company. However, the Merger Agreement may not be amended after
stockholder approval which changes the form of consideration or the value of the
consideration to be received by the stockholders of First Federal without the
approval of the stockholders of First Federal. See "PROPOSAL II - THE MERGER --
Waiver and Amendment; Termination."
The Merger Agreement may be terminated at any time prior to the
Effective Date: (i) by the mutual written consent of the Board of Directors of
First Federal and the Holding Company; (ii) by First Federal or the Holding
Company if there is a final judicial or regulatory determination that any
material provision of the Merger Agreement is illegal, invalid or unenforceable
or denying any regulatory application the approval of which is a concern
precedent to First Federal or the Holding Company's obligations under the Merger
Agreement (iii) if the conditions precedent to the obligations of the other
party are rendered impossible to be satisfied or fulfilled; (iv) if the
stockholders of First Federal and the Holding Company fail to approve the
Merger; (v) the other party (either First Federal or the Holding Company) has
materially breached any representation, warranty, covenant or agreement set
forth in the Merger Agreement and has failed to or cannot in a timely manner
rectify such breach after receiving written notice of such breach; or (vi) if
the Merger is not consummated by the 270th day (360 days if there is a CRA
protest).
Conduct of Business Pending the Merger. Each of First Federal and the
Holding Company has agreed to conduct its business prior to the Effective Date
in accordance with certain guidelines set forth in the Merger Agreement. See
"PROPOSAL II - THE MERGER - Conduct of Business of First Federal Pending the
Merger."
Accounting Treatment. The Merger is expected to qualify as a "leveraged
buy-out" for accounting and financial reporting purposes. See "PROPOSAL II - THE
MERGER -- Accounting Treatment."
Federal Income Tax Consequences of the Merger. Crowe, Chizek and
Company LLP, accountants to the Holding Company, has delivered to the Holding
Company its opinion to the effect that, assuming the Merger occurs in accordance
with the Merger Agreement and conditioned on the accuracy of certain
representations made or to be made by the Holding Company and certain holders of
First Federal Common Stock, the exchange of First Federal Common Stock solely
for shares of Holding Company Common Stock in the Merger will be a nontaxable
exchange for federal income tax purposes and that, accordingly, no gain or loss
will be recognized by the Holding Company, First Federal, or First Federal
stockholders who exchange their shares of First Federal Common Stock solely for
shares of Holding Company Common Stock in the Merger. However, First Federal
stockholders who receive both shares and cash of Holding Company Common Stock in
exchange for First Federal Common Stock will recognize taxable income in an
amount not in excess of the amount of cash received. Gain or loss, if any, will
be recognized by First Federal stockholders who receive solely cash. Each First
Federal stockholder is urged to consult his or her own tax advisor to determine
the specific tax consequences of the Merger to such stockholder. See "PROPOSAL
II - THE MERGER -- Federal Income Tax Consequences of the Merger and --
Conditions to the Merger."
First Federal Stockholder Election Procedures. Each First Federal
stockholder will have the opportunity to elect whether to receive either two and
one-half shares of Holding Company Common Stock (the "Stock Distribution") per
share of First Federal Stock Common Stock (a "Stock Election, in which case,
such holder's shares shall be deemed to be "Stock Election Shares"), or a Stock
Distribution for those shares of First Federal Common Stock designated by the
holder as Stock Distribution Shares and cash (the "Cash Distribution") for the
-7-
<PAGE>
remaining shares equal to $24.07 per share for his or her First Federal Common
Stock (a "Cash Election," in which case, such holder's shares shall be deemed to
be "Cash Election Shares") or a Cash Distribution for all of the holder's
shares. Enclosed with this Joint Proxy Statement/Prospectus is an election form
for use by stockholders of First Federal (the "Election Form") whereby
stockholders may indicate a Stock Election, a combination of cash and stock or a
Cash Election. In order for an Election Form to be deemed to be effective, such
Election Form must be properly completed and duly executed by the First Federal
stockholder and returned to the Holding Company (in its capacity as exchange
agent) no later than the date of the First Federal Annual Meeting (the "Election
Deadline").
Any First Federal stockholder who fails to deliver a properly completed
and duly executed Election Form by the Election Deadline shall be deemed to have
made no election (a "No Election, " in which case, such holder's shares shall be
deemed to be "No Election Shares"). Unless the aggregate Cash Distribution
elected by the holders of Cash Election Shares is required to be reduced as
described below, No Election Shares will be treated as Cash Election Shares for
purposes of determining the type and amount of the Merger Consideration payable
pursuant to the Merger.
In order that the proposed Merger will qualify for a leveraged buy-out
and thus receive the appropriate accounting or tax treatment, the actual Merger
Consideration that will be paid to each First Federal common stockholder upon
consummation of the Merger may differ from the form of Merger Consideration
elected by such stockholder pursuant to his or her Election Form in the event
that (i) the aggregate number of shares of the Holding Company Common Stock to
be exchanged for First Federal Common Stock and issued pursuant to the Merger
would exceed 49% of the total value of the Merger Consideration (the "Maximum
Stock Consideration Shares") or (ii) the number of shares of Holding Company
Common Stock and exchanged for First Federal Common Stock and to be issued
pursuant to the Merger would be less than 20% of the total value of the Merger
Consideration (the "Minimum Stock Consideration Shares").
In the event that the number of shares of the Holding Company Common
Stock that would be issuable to Stock Election Shares on the basis of the
stockholders' elections exceeds the Maximum Stock Consideration Shares, the
Stock Distribution to all holders of Stock Election Shares will be reduced pro
rata (subject to the requirement that in the event such method would adversely
affect the accounting or tax treatment of the Merger, the Holding Company may
pay cash for the amount of stock consideration elected which, if granted, would
result in the adverse accounting or tax treatment) and such holders will receive
the Cash Distribution in lieu thereof such that the aggregate Stock Distribution
equals the Maximum Stock Consideration Shares.
In the event that the number of shares of First Federal Common Stock
that would be issuable to Stock Election Shares on the basis of the
stockholders' elections is less than the Minimum Stock Consideration Shares,
then the Cash Distribution payable, first, to all holders of the No Election
Shares will be converted to additional Stock Election Shares in a manner to the
extent possible to equal the Minimum Stock Consideration Shares (when added to
the original Stock Election Shares) but not to exceed the Maximum Stock
Consideration Shares. Then if necessary, the Cash Election Shares (other than
Dissenting Shares) will be reduced pro rata and be substituted with the Stock
Distribution such that the Minimum Stock Consideration Shares will be issued in
the Merger.
If necessary or appropriate to the receipt of a tax opinion by First
Federal and the Holding Company as of the Closing Date and notwithstanding
anything contained hereinabove to the contrary, First Federal and the Holding
Company shall have the right to pay solely the Cash Distribution to any holder
of 1% or more of First Federal Common Stock who does not timely elect the Stock
Distribution and timely execute and deliver to First Federal the tax
certification described below by the Election Deadline. In such event, any such
holder may be excluded from the pro rata or other conversion of Cash Election
Shares to additional Stock Election Shares.
The pro rata distribution is also subject to the requirement that in
the event such method would adversely affect the accounting or tax treatment of
the Merger, the Holding Company may pay cash for the amount of stock
consideration elected which, if granted, would result in the adverse accounting
or tax treatment. In all other cases,
-8-
<PAGE>
First Federal stockholders will receive the form of Merger Consideration for
their shares of First Federal Common Stock in the form that such stockholder has
elected on his or her Election Form or has deemed to elect in the case of No
Election Shares.
The actual Merger Consideration that will be paid to each First Federal
stockholder upon consummation of the Merger may differ from the form of Merger
Consideration elected by such stockholder pursuant to his or her Election Form
in the event that (i) the aggregate number of shares of the Holding Company
Common Stock to be issued pursuant to the Merger would exceed 49% of the total
value of the Merger Consideration (the "Maximum Stock Consideration Shares") or
(ii) the number of shares to be issued pursuant to the Merger would be less than
20% of the total value of the Merger Consideration (the "Minimum Stock
Consideration Shares").
In the event that the number of shares of the Holding Company Common
Stock that would be issuable to Stock Election Shares on the basis of the
stockholders' elections exceeds the Maximum Stock Consideration Shares, the
Stock Distribution to all holders of Stock Election Shares will be reduced pro
rata (subject to the requirement that in the event such method would adversely
affect the accounting or tax treatment of the Merger, the Holding Company may
pay cash for the amount of stock consideration elected which, if granted, would
result in the adverse accounting or tax treatment) and such holders will receive
the Cash Distribution in lieu thereof such that the aggregate Stock Distribution
equals the Maximum Stock Consideration Shares. In the event that the number of
shares of First Financial Common Stock that would be issuable to Stock Election
Shares on the basis of the stockholders' elections is less than the Minimum
Stock Consideration Shares, then the Cash Distribution payable, first, to all
holders of the No Election Shares will be converted to additional Stock Election
Shares in a manner to the extent possible to equal the Minimum Stock
Consideration Shares (when added to the original Stock Election Shares) but not
to exceed the Maximum Stock Consideration Shares, and then if necessary, the
Cash Election Shares (other than Dissenting Shares) will be reduced pro rata and
be substituted with the Stock Distribution such that the Minimum Stock
Consideration Shares will be issued in the Merger.
If necessary or appropriate to the receipt of a tax opinion by First
Federal and the Holding Company as of the Closing Date and notwithstanding
anything contained hereinabove to the contrary, First Federal and the Holding
Company shall have the right to pay solely the Cash Distribution to any holder
of 1% or more of First Federal Common Stock who does not timely elect the Stock
Distribution and timely execute and deliver to First Federal the tax
certification described below by the Election Deadline. In such event, any such
holder may be excluded from the pro rata or other conversion of Cash Election
Shares to additional Stock Election Shares. The pro rata distribution is also
subject to the requirement that in the event such method would adversely affect
the accounting or tax treatment of the Merger, the Holding Company may pay cash
for the amount of stock consideration elected which, if granted, would result in
the adverse accounting or tax treatment. In all other cases, First Federal
stockholders will receive the form of Merger Consideration for their shares of
First Federal Common Stock in the form that such stockholder has elected on his
or her Election Form or has deemed to elect in the case of No Election Shares.
Pursuant to the Merger Agreement, any holder of 1% or more of the First
Federal Common Stock (determined as of the Closing Date) that shall not, on or
before the Election Deadline, have delivered to First Federal a properly
executed certification regarding certain tax matters (which will be provided to
such holders with the Election Form) shall be deemed to have made a timely
election to receive the Cash Distribution, and all shares of First Federal
Common Stock held by such holder shall be deemed to be Cash Election Shares.
THIS PROVISION WILL PRECLUDE A HOLDER THAT ACQUIRES ADDITIONAL SHARES OF FIRST
FEDERAL COMMON STOCK AND BECOMES A HOLDER OF 1% OR MORE OF SUCH SHARES AFTER THE
ELECTION FROM RECEIVING THE STOCK DISTRIBUTION.
As soon as practicable after the Effective Date, the Holding Company
will allocate among the holders of First Federal Common Stock the right to
receive the Cash Distribution or the Stock Distribution pursuant to the Merger
Agreement.
-9-
<PAGE>
Comparison of Stockholder Rights. As a result of the Merger, holders of
First Federal Common Stock who elect to receive shares of the Holding Company
Common Stock will become stockholders of the Holding Company. Holders of First
Federal Common Stock, whose rights are presently governed by the Home Owners
Loan Act of 1933, as amended ("HOLA") and the Federal Stock Charter (the
"Charter") and Bylaws (the "First Federal Bylaws") of First Federal, will become
stockholders of the Holding Company, a Delaware corporation. Accordingly, their
rights will be governed by Delaware law ("DGCL"), the Holding Company
Certificate and the Holding Company Bylaws. Certain differences in the rights of
stockholders arise from distinctions between the First Federal Charter and First
Federal Bylaws, and the Holding Company Certificate of Incorporation and the
Holding Company Bylaws as well as Delaware law and the HOLA. Principally,
Delaware law provides certain anti-takeover protections that are not present
under the HOLA. For a more detailed comparison of the charter and bylaw
provisions of the Holding Company and First Federal governing the rights of the
Holding Company and First Federal stockholders, see "PROPOSAL II - THE MERGER -
Comparison of Stockholder Rights."
HOLDING COMPANY OFFERING
The Merger is contingent upon the Holding Company successfully
completing an offering (the "Offering") of a minimum of 150,000 shares and a
maximum of 200,000 shares of Holding Company Common Stock at $10.00 per share
and a minimum of 3,400 units and a maximum of 3,700 units (the "Unit"), each
Unit consisting of one $1,000 ____% Debenture and nine Warrants. See "The
Offering."
MARKET AND DIVIDEND INFORMATION
First Federal Common Stock is not listed on a national exchange and is
only traded infrequently. First Federal Common Stock was issued at $10.00 per
share in connection with the conversion of First Federal from mutual to stock
form on April 22, 1993. At March 31, 1997 there were 269 holders of First
Federal Common Stock and 239,612 shares of common stock issued and outstanding.
At March 31, 1997, the last known sales price of First Federal's common stock
was $11.00 per share.
First Federal 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 Bank. The factors affecting this determination include First
Federal's consolidated financial condition and results of operations, tax
considerations, industry standards, economic conditions, regulatory
restrictions, general business practices and other relevant factors. First
Federal has never declared cash dividends on its common stock; however, it has
declared 5% Common Stock dividends in 1993, 1994 and 1995. Since the issuance of
the preferred stock in 1993, First Federal has paid an aggregate of $88,000 per
year in quarterly cash dividends on its preferred stock.
The Merger is contingent upon the Holding Company successfully
completing an offering (the "Offering") of a minimum of 150,000 shares and a
maximum of 200,000 shares of Holding Company Common Stock at $10.00 per share
and a minimum of 3,400 and a maximum of 3,700 Units (the "Unit"), each Unit
consisting of $1,000 of ____% debentures due ____, 2002 (the "Debentures") and
seven warrants to purchase Holding Company Common Stock. See "The Offering."
For informational purposes only, the rights and conditions of First
Federal's 87,263 shares of existing Preferred Stock will remain unchanged by the
adoption of the proposed Agreement and Plan of Merger.
The Holding Company has never issued capital stock to the public and,
consequently, there is no existing market for the Holding Company Common Stock.
Although the Holding Company has received preliminary approval to list the
Holding Company Common Stock among the "Small-Cap Issues" on Nasdaq under the
symbol "____", there can be no assurance that the Holding Company will meet
Nasdaq listing requirements, which include a minimum market capitalization, a
minimum of 300 stockholders immediately upon the closing of the Offering and a
minimum of two market makers in the Holding Company Common Stock. Moreover,
there can be no assurance
-10-
<PAGE>
that an active or liquid trading market will develop, or that if a market
develops, it will continue. A public market having the desirable characteristics
of depth, liquidity and orderliness depends upon the presence in the marketplace
of both willing buyers and sellers of the Holding Company Common Stock at any
given time, which is not within the control of the Holding Company or any market
maker. Accordingly, there can be no assurance that purchasers will be able to
sell their shares at or above the price paid for the shares in the Offering.
Investors should consider, therefore, the potentially illiquid and long-term
nature of an investment in the Holding Company Common Stock.
-11-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables present selected consolidated financial data for
First Federal 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 First Federal included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands)
BALANCE SHEET DATA:
- -------------------
<S> <C> <C> <C> <C> <C>
Total assets..................................... $57,597(1) $61,432 $56,089 $52,549 $53,363
Loans receivable, net........................... 49,579(2) 48,605(2) 43,127(2) 41,081(2) 31,509(2)
Mortgage-backed securities....................... 1,292 2,278 2,693 4,441 9,447
Securities....................................... 1,000 1,000 1,000 1,000 3,554
Deposits......................................... 51,677 54,939 50,846 47,312 51,366
FHLB advances.................................... --- 1,088 --- 500 500
Stockholders' equity............................. 4,316 4,170 4,047 3,677 641
</TABLE>
- ----------
(1) Total assets declined from September 30, 1995 to September 30, 1996 as
a result of a planned reduction in deposits to lower excess cash.
(2) Including loans held for sale to the secondary market of $419,000, $1.8
million, $2.1 million, $6.6 million and $1.0 million at September 30,
1996, 1995, 1994, 1993 and 1992, respectively.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands)
STATEMENT OF INCOME DATA:
- -------------------------
<S> <C> <C> <C> <C> <C>
Total interest income...................................... $4,828 $4,698 $4,020 $3,794 $4,772
Total interest expense..................................... 2,363 2,294 1,758 1,945 3,124
----- ----- ----- ----- -----
Net interest income...................................... 2,465 2,404 2,262 1,849 1,648
Provision for loan losses.................................. (52) 27 (401)(2) --- 66
--- -- ---- -- ----- --
Net interest income after provision for loan losses....... 2,517 2,377 2,663 1,849 1,582
Service charges............................................ 527 355 202 150 62
Gain on sales of loans, mortgage servicing rights,
mortgage-backed securities and securities................. 343 213 908 853 478
Income (loss) from operation of foreclosed real estate..... (9) (2) --- 10 36
Other noninterest income................................... 12 26 14 84 7
SAIF special assessment.................................... 333 --- --- --- ---
Other noninterest expenses (operating expenses)............ 2,715 2,648 3,096 2,180 1,658
----- ----- ----- ----- -----
Income before income taxes............................... 342 321 691 766 507
Income tax expense ........................................ 108 110 234 221 112
--- --- --- --- ---
Income before extraordinary item and cumulative
effect of change in accounting for income taxes......... 234 211 457 545 395
Income tax benefit from utilizing net operating
loss carryforwards and cumulative effect of
change in accounting for income taxes.................... --- --- --- 137 106
--- --- --- --- ---
Net income............................................... $ 234(1) $ 211 $ 457 $ 682 $ 501
======== ===== ====== ====== ======
PER SHARE DATA:
- ---------------
Earnings per share(8)...................................... .61 .52 1.54 .47(7) N/A
</TABLE>
- -------------------
-12-
<PAGE>
(1) Excluding the nonrecurring September 1996 SAIF assessment, after tax
net income would have been $454,000.
(2) Reflects a negative loan loss expense from the settlement of a lawsuit
filed by First Federal which favorably impacted net income in fiscal
1994.
<TABLE>
<CAPTION>
At or for the
Year Ended September 30,
-----------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
BALANCE SHEET RATIOS:
- ---------------------
<S> <C> <C> <C> <C> <C>
Nonperforming assets to total
assets at end of year(6)...................... 1.46% .62% .87% .74% .76%
Total equity to total assets (end of year)..... 7.49 6.79 7.22 7.00 1.20
Total equity to assets ratio (ratio of
average equity to average total assets)....... 7.27 6.91 7.11 4.23 .66
EARNINGS PERFORMANCE DATA:
- --------------------------
Interest rate spread information:
Average during year(3)....................... 4.11 3.97 4.20 3.67 3.08
End of year(4)............................... 4.67 4.17 4.29 4.27 3.35
Net interest margin for the year(5)............ 4.45 4.29 4.40 3.73 2.93
Average interest-earning assets as
a percentage of average interest-
bearing liabilities........................... 108.01 107.95 106.00 101.51 97.45
Return on assets (ratio of net income to
average total assets)......................... .40 .36 .84 1.32 .85
Return on assets, excluding special SAIF
assessment................................... .77 .36 .84 1.32 .85
Return on total equity (ratio of net income
to average equity)............................ 5.46 5.15 11.87 31.70 129.12
Return on total equity, excluding special
SAIF assessment............................... 10.60 5.15 11.87 31.70 129.12
Noninterest expenses to average total assets... 5.17 4.47 5.71 4.21 2.83
Noninterest expense to average total assets
excluding special SAIF assessment............. 4.61 4.47 5.71 4.21 2.83
OTHER DATA:
- -----------
Number of deposit accounts..................... 7,903 7,266 5,073 4,345 4,465
Number of full-service offices................. 2 2 2 1 1
</TABLE>
(3) 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).
(4) Represents the weighted average yield on interest-earning assets at the
end of the period minus the weighted average cost of liabilities at the
end of the period.
(5) Net interest income divided by average interest-earning assets.
(6) Nonperforming assets include loans that are 90 days or more delinquent
as well as repossessed assets.
(7) Reflects earnings from the date First Federal converted to stock form.
(8) Adjusted to reflect stock dividends paid to First Federal stockholders.
-13-
<PAGE>
RECENT FINANCIAL DATA
The selected financial and other data of First Federal set forth below
at and for the three and six months ended March 31, 1997 and March 31, 1996 were
derived from unaudited financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the financial condition and results of operations for the
unaudited periods presented have been included. The results of operations and
other data presented for the six months ended March 31, 1997 are not necessarily
indicative of the results of operations which may be expected for the fiscal
year ending September 30, 1997. The information presented below is qualified in
its entirety by the detailed information and financial statements included
elsewhere in this Prospectus and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and the audited Financial Statements of First Federal
and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At March 31, At September 30,
------------ ----------------
1997 1996
------------ ----------------
(In Thousands)
<S> <C> <C> <C>
BALANCE SHEET:
- --------------
Total assets..................................... $ 62,681 57,597
Loans receivable, net........................... 54,372(1) 49,579(1)
Mortgage-backed securities....................... 1,219 1,292
Securities....................................... --- 1,000
Deposits......................................... 55,071 51,677
FHLB Advances.................................... 2,200 ---
Stockholders' equity............................. 4,567 4,316
</TABLE>
- ----------
(1) Including loans held for sale to the secondary market at month-end of
$1.4 million and $419,000, at March 31, 1997 and September 30, 1996,
respectively.
<TABLE>
<CAPTION>
For Three Months Ended For Six Months Ended
---------------------- --------------------
March 31, March 31, March 31, March 31,
1997 1996 1997 1996
-------- -------- -------- --------
(In Thousands) (In Thousands)
STATEMENT OF INCOME:
- --------------------
<S> <C> <C> <C> <C>
Total interest income...................................... $1,339 $1,196 $2,616 $2,412
Total interest expense..................................... 628 596 1,219 1,211
--- --- ----- -----
Net interest income...................................... 711 600 1,397 1,201
Provision for loan losses.................................. --- (6) 2 (5)
--- --- ----- -----
Net interest income after provision for loan losses...... 711 606 1,395 1,206
Service charges............................................ 146 119 314 244
Gain on sales of loans, mortgage servicing rights,
mortgage-backed securities and securities................ 11 87 59 174
Other noninterest income................................... 1 --- 9
Other noninterest expenses (operating expenses)............ 643 688 1,321 1,362
--- --- ----- -----
Income before income taxes................................. 225 120 447 271
Income tax expense ........................................ 77 41 152 92
-- -- --- --
Net income................................................. $ 148 $ 79 $ 295 $ 179
======= ======== ======= ======
Per Share Data:
Earnings per share(6)...................................... .53 .24 .53 .24
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
For Three Months Ended For Six Months Ended
---------------------- --------------------
March 31, March 31, March 31 March 31,
1997 1996 1997 1996
-------- -------- -------- --------
BALANCE SHEET RATIOS:
- ---------------------
<S> <C> <C> <C> <C>
Nonperforming assets to total
assets at end of period(4)................... 1.65% 1.66% 1.65% 1.66%
Total equity to total assets (end of period)... 7.29 7.29 7.29 7.29
Total equity to assets ratio (ratio of
average equity to average total assets)...... 7.26 7.25 7.35 7.15
EARNINGS PERFORMANCE DATA:
- --------------------------
Interest rate spread information:
Average during period(1)..................... 4.86 3.95 4.83 3.80
End of period(2)............................. 4.51 3.90 4.51 3.90
Net interest margin for the period(3).......... 4.87 4.40 4.91 4.27
Average interest-earning assets as a
percentage of average interest-bearing
liabilities.................................. 102.44 106.29 103.46 107.95
Return on assets (ratio of net income to
average total assets)........................ .95 .53 .97 .60
Return on total equity (ratio of net income
to average equity)........................... 13.05 7.36 13.20 8.40
Noninterest expenses to average total assets... 4.12 4.65 4.35 4.57
OTHER DATA:
- -----------
Number of deposit accounts..................... 7,381 6,707 7,381 6,707
Number of full-service offices................. 2 2 2 2
</TABLE>
- ----------
(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 at the
end of the period minus the weighted average cost of liabilities at the
end of the period.
(3) Net interest income divided by average interest-earning assets.
(4) Nonperforming assets include loans that are 90 days or more delinquent
as well as repossessed assets.
(5) Reflects earnings from the date First Federal converted to stock form.
(6) Adjusted to reflect stock dividends paid to First Federal stockholders.
-15-
<PAGE>
MANAGEMENT'S DISCUSSION OF RECENT RESULTS
FINANCIAL CONDITION
First Federal's total assets increased by $5.1 million to $62.7 million
at March 31, 1997 from $57.6 million at September 30, 1996. The increase was
primarily due to an increase in loans receivable, and to a lesser degree in
loans held for sale and cash.
Loans receivable (excluding loans held for sale) increased $3.8 million
to $53.0 million at March 31, 1997, compared to $49.2 million at September 30,
1996. During the six months ended March 31, 1997, First Federal originated $14.0
million of mortgage loans including $13.7 million secured by one- to four-family
residences, and $5.3 million in consumer loans. Approximately $1.3 million of
these mortgage loans represented refinancing of existing First Federal loans.
Deposits increased from $51.7 million at September 30, 1996 to $55.1
million at March 31, 1997 as a result of increased marketing of short-term
certificates of deposit. Accrued interest payable and other liabilities
increased $1.4 million from $1.6 million at September 30, 1996 to $3.0 million
at March 31, 1997 largely as a result of increased borrowings from the Federal
Home Loan Bank of Dallas to fund First Federal's increased consumer loan demand,
offset by the payment of escrowed funds in December 1996 for property taxes on
loans held by First Federal.
NONPERFORMING ASSETS AND LOAN LOSS PROVISION
Management establishes specific reserves for the estimated losses on
loans when it determines that losses are anticipated on these loans. The Bank
calculates any allowance for possible loan losses based upon its ongoing
evaluation of pertinent factors underlying the types and quality of its loans,
with particular emphasis on average historical loan losses during the preceding
three years. These factors include but are not limited to the current and
anticipated economic conditions, including uncertainties in the real estate
market, the level of classified assets, historical loan loss experience, a
detailed analysis of individual loans for which full collectability may not be
assured, a determination of the existence and fair value of collateral, the
ability of the borrower to repay and the guarantees securing such loans.
Management, as a result of this review process, recorded a provision for loan
losses in the amount of $2,000 for the three months ending March 31, 1997, as
compared to a $5,000 negative loan loss provision for the three months ending
March 31, 1996. The Bank's loan loss reserve balance as of March 31, 1997 was
$250,000 compared to the September 30, 1996 loan loss reserve of $247,000. Total
non-performing assets increased during the three month period ended March 31,
1997 to $1.0 million or 1.65% of total assets as compared to $863,000 or 1.05%
of total assets at September 30, 1996. The majority of this increase in
non-performing assets were automobile loans. Historical actual charge-offs from
loan losses over the past three years have averaged only $22,300 on an average
loan portfolio of $46.2 million.
COMPARISON OF SIX MONTHS ENDED MARCH 31, 1997 TO MARCH 31, 1996
First Federal reported net income after taxes of $295,000 for the six
months ended March 31, 1997, an increase of $116,000 or 6.48% as compared to
$179,000 in net income reported for the six months ended March 31, 1996. The
increase in earnings, as discussed in more detail below, resulted primarily from
an increase in First Federal's net interest margin and a decrease in operating
expenses, partially offset by a decrease in noninterest income.
Net interest income increased $196,000 to $1.4 million for the six
month period ended March 31, 1997 from $1.2 million for the prior period in
1996. This increase was attributable primarily to an increase in interest earned
on loans receivable, a decrease in rates paid on the Bank's deposit liabilities,
partially offset by interest paid on other borrowings. For the six months ended
March 31, 1997, the net interest margin (net interest income
-16-
<PAGE>
divided by average interest earning assets) increased to 4.91%, as compared to
4.27% in the first six months of 1996. The spread between the average yield on
interest earning assets and the average cost of funds was 4.51% at March 31,
1997 versus 3.90% at March 31, 1996. These increases resulted primarily from
higher yields on consumer loans and the upward repricing in the renewals of
3-year balloon loans.
Noninterest income decreased $54,000 to $373,000 for the six months
ended March 31, 1997 from $427,000 for the six months ended March 31, 1996. This
decrease can be attributed to a $13,000 decrease in net gain on sale of
securities, a $102,000 decrease in net gain on sale of loans and mortgage
servicing rights, reflecting reduced mortgage banking activity, and a $9,000
decrease in other noninterest income, partially offset by a $70,000 increase in
service charges, which can be attributable to an increase in interest-bearing
checking accounts and fees associated with these types of accounts.
Noninterest expense decreased $41,000 to $1.3 million for the six
months ended March 31, 1997 from $1.4 million for the six months ended March 31,
1996. This decrease can primarily be attributed to a $42,000 decrease in
compensation and benefits expense, a $35,000 decrease in federal insurance
premiums, a $3,000 decrease in gain/loss on the sale of real estate owned and
$5,000 decrease in professional fees. This was offset by a increase of $2,000 in
occupancy and equipment expense, a $13,000 increase in data processing and a
$29,000 increase in other noninterest expense.
Income tax expense increased $60,000 to $152,000 for the six months
ended March 31, 1997 compared to $92,000 for the six months ended March 31, 1996
as a result of increased earnings. The net earnings reflected a tax rate of
34.0% and 33.9% for March 31, 1997 and March 31, 1996, respectively.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 TO MARCH 31, 1996
First Federal reported net income after taxes of $148,000 for the three
months ended March 31, 1997, an increase of $69,000 or 87.3% as compared to
$79,000 in net income reported for the three months ended March 31, 1996. The
increase in earnings, as discussed in more detail below, resulted primarily from
an increase in First Federal's net interest margin and a decrease in operating
expenses, partially offset by a decrease in noninterest income.
Net interest income increased $111,000 to $711,000 for the three month
period ended March 31, 1997 from $600,000 for the prior period in 1996. This
increase was attributable primarily to an increase in interest earned on loans
receivable, offset by an increase on interest paid on other borrowings. For the
three months ended March 31, 1997, the net interest margin increased to 4.87% as
compared to 4.40% at March 31, 1996. The spread between the average yield on
interest earning assets and the average cost of funds was 4.51% at March 31,
1997 versus 3.90% at March 31, 1996. These increases resulted primarily from
higher yields on consumer loans and the upward repricing in the renewals of
3-year balloon loans.
Noninterest income decreased by $45,000 to $157,000 for the three
months ended March 31, 1997 from $202,000 for the three months ended March 31,
1996. This decrease can be attributed to a $76,000 decrease in net gain on sale
of loans and mortgage servicing rights, reflecting reduced mortgage banking
activity, and a $1,000 decrease in other noninterest income, partially offset by
a $32,000 increase in service charges, which can be attributable to an increase
in interest-bearing checking accounts.
Noninterest expense decreased $45,000 to $643,000 for the three months
ended March 31, 1997 from $688,000 for the three months ended March 31, 1996.
This decrease can primarily be attributed to a $49,000 decrease in compensation
and benefits expense, due to a decrease in staffing, a $24,000 decrease in
federal insurance premiums, and an $8,000 decrease in gain/loss on the sale of
real estate owned. This was offset by a increase of $9,000 in occupancy and
equipment expense, a $5,000 increase in data processing and a $23,000 increase
in other noninterest expense.
-17-
<PAGE>
Income tax expense increased $36,000 to $77,000 for the three months
ended March 31, 1997 compared to $41,000 for the three months ended March 31,
1996 as a result of increased earnings. The net earnings reflected a tax rate of
34.2% for both the March 31, 1997 and March 31, 1996 periods.
LIQUIDITY AND CAPITAL RESOURCES
First Federal's primary sources of funds are deposits and checking
accounts, principal and interest payments on loans and mortgage-backed
securities, proceeds from sales of loans and other funds provided from
operations. Additionally, First Federal may infrequently borrow funds from the
FHLB of Dallas or utilize other borrowings of funds based on need, comparative
costs and availability at the time.
While scheduled loan and mortgage-backed repayments and 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, general economic conditions
and most recently the restructuring occurring in the thrift institution
industry.
First Federal maintains investments in liquid assets based on
management's assessment of cash needs, expected deposit flows, 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 origination, increasing deposit marketing
activities, and increasing borrowings.
Federal regulations require insured institutions to maintain minimum
levels of liquid assets. As of March 31, 1997, the minimum regulatory liquidity
requirement was 5% of the sum of First Federal's average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less. At
March 31, 1997, First Federal's liquidity ratio was 7.32%. First Federal uses
its capital resources principally to meet its ongoing commitments to fund
maturing certificates of deposits and deposit withdrawals, repay borrowings,
fund existing and continuing loan commitments, maintain its liquidity and meet
operating expenses. At March 31, 1997, First Federal had commitments to
originate loans totalling $6.7 million. First Federal also had $473,000 of
outstanding unused lines of credit. If needed for liquidity purposes, at March
31, 1997, First Federal was eligible to borrow $21.9 million from the Federal
Home Loan Bank of Dallas, and had actually borrowed only $2.2 million. First
Federal considers its liquidity and capital resources to be adequate to meet its
foreseeable and long-term needs. First Federal expects to be able to fund or
refinance, on a timely basis, its material commitments and long-term
liabilities.
At March 31, 1997, the Bank had tangible capital of $4.6 million, or
7.27% of total assets which was $3.6 million above the minimum capital
requirement of $945,000 or 1.5% of total assets.
At March 31, 1997, the Bank had core capital of $4.6 million, or 7.27%
of total assets which was $2.7 million above the minimum capital requirement of
$1.9 million or 3.0%.
At March 31, 1997, the Bank had total risk based capital of $4.8
million and risk weighted assets of $45.4 million or total risk based capital of
10.59% of risk weighted assets. This amount was $1.2 million above the minimum
regulatory requirement of $3.6 million, or 8.0% of risk weighted assets.
-18-
<PAGE>
PROPOSAL I - ELECTION OF DIRECTORS
GENERAL
First Federal's Board of Directors currently consists of ten members.
The Board is divided into three classes, each of which contains approximately
one-third of the Board. Approximately one-third of the Directors is elected
annually, as is required by regulation. Directors of the Bank are generally
elected to serve for a three-year period or until their respective successors
are elected and qualified.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Common stockholders of record as of the close of business on ________,
1997, will be entitled to one vote for each share then held. As of that date,
First Federal had 239,612 shares of Common Stock issued and outstanding. The
following table sets forth information regarding share ownership of: (i) those
persons or entities known by management to beneficially own more than five
percent of First Federal's Common Stock and (ii) all Directors and officers as a
group.
<TABLE>
<CAPTION>
Beneficial Owner Shares Beneficially Owned Percent of Class
---------------- ------------------------- ----------------
<S> <C> <C>
Phil Hobson 23,152 9.66
Director, First Federal
John Winsauer 23,152 9.66
Directors and executive officers 104,667 43.68%
of the Bank as a group
(13 persons)(6)
</TABLE>
- -----------------------
(1) Includes shares held directly, as well as, jointly with family members, and
shares held in retirement accounts in a fiduciary capacity or by certain
family members, with respect to which shares the listed individuals or group
members may be deemed to have sole voting and investment power. This table
also includes 4,143 and 1,553 shares subject to options granted under the
Bank's Stock Option Plan to President Stephen and each non-employee
Director, respectively, which are exercisable within 60 days of December 1,
1996.
-19-
<PAGE>
The table below sets forth certain information, regarding the composition of
First Federal's Board of Directors, including each Director's term of office.
The Board of Directors, acting as the nominating committee, has recommended and
approved the nominees identified in the following table. It is intended that the
proxies solicited on behalf of the Board of Directors (other than proxies in
which the vote is withheld as to a nominee) will be voted at the Meeting FOR the
election of the nominees identified below. If a nominee is unable to serve, the
shares represented by all valid proxies will be voted for the election of such
substitute nominee as the Board of Directors may recommend. At this time, the
Board of Directors knows of no reason why any nominee may be unable to serve, if
elected. Except as disclosed herein, there are no arrangements or understandings
between the nominee and any other person pursuant to which the nominee was
selected.
<TABLE>
<CAPTION>
STOCK
POSITION(S) HELD DIRECTOR TERM TO BENEFICIALLY PERCENT
NAME AGE(1) IN THE BANK SINCE EXPIRE OWNED(2) OF CLASS
---- ------ ----------- ----- ------ -------- --------
NOMINEES
<S> <C> <C> <C> <C> <C>
J. Stanley Stephen 63 Director, President/Chief 1991 2000 7,771 3.24%
Executive Officer
Ken Hayes 57 Director 1993 2000 1,781 (3)
Charles Neelley 67 Director, Secretary/Treasurer 1993 2000 22,915 9.56
George Koenig 52 Director/Executive Vice 1996 2000 56 (3)
President
DIRECTORS CONTINUING IN OFFICE
Ernest A. Wentrcek 68 Vice Chairman of the Board 1965 1998 3,868 1.61
Robert H. Conaway 43 Director 1995 1998 18,135 7.57
Richard L. Peacock 78 Chairman of the Board 1965 1999 3,868 1.61
Jack W. Lester, Jr. 56 Director, Assistant 1992 1999 13,707 5.72
Secretary/Treasurer
Phil Hobson 64 Director 1993 1999 24,705 10.31
J. Roland Ruffino 46 Director 1995 1999 6,765 2.82
</TABLE>
- ----------
(1)At December 31, 1996.
(2)Amounts include shares held directly and jointly with family members, as well
as shares which are held in retirement accounts, or held by certain members
of the named individuals' families, or held by trusts of which the named
individual is a trustee or substantial beneficiary, with respect to which
shares the respective Directors may be deemed to have sole or shared voting
and/or investment power. Amounts also include stock option awards of 4,143
and 1,553 to President Stephen and each non-employee Director at the time of
the Bank's conversion from a mutual savings association to a federal stock
institution, respectively.
(3) Less than one percent.
The principal occupation of each Director of the Bank is set forth
below. All Directors have held their present position for at least five years
unless otherwise indicated.
J. Stanley Stephen. Mr. Stephen was appointed President and Chief
Executive Officer in February 1991. From 1965 until 1986, Mr. Stephen worked
with First Bank and Trust, Bryan, Texas and served as Executive Vice President,
President, Chairman and Chief Executive Officer and Senior Chairman until he
retired in 1986. From June 1986 until February 1990, Mr. Stephen was President
and Chief Executive Officer of University National Bank, College Station, Texas.
Mr. Stephen was a financial institutions consultant from March until October
1990.
-20-
<PAGE>
In the past five years, Mr. Stephen has been involved in several
lawsuits, most of which were commenced by him in the early 1980's against
financial institutions outside the Bryan-College Station area. The lawsuits
sought compensatory damages against those lenders for failure to honor loan
commitments and other related claims with respect to several real estate
partnerships of which Mr. Stephen was a partner but not a managing partner.
Those financial institutions filed counter-claims against the real estate
partnerships and their individual partners for amounts previously advanced.
Subsequent to the commencement of litigation by Mr. Stephen, certain of
those financial institutions were taken over by their respective Federal
regulatory agencies, including the FDIC.
In addition, the FDIC filed suit against the officers and directors of
certain failed institutions, including those with which Mr. Stephen was
previously associated with, alleging various civil causes of action arising from
their activities as directors and/or officers -- which Mr. Stephen and his
fellow directors and officers disputed. Mr. Stephen has never been accused of
any criminal wrongdoing by any regulatory agency. Currently all lawsuits in
which Mr. Stephen was a party have either been successfully dismissed or
settled. In addition, in June of 1994, Mr. Stephen successfully completed a
personal plan of reorganization under the federal bankruptcy laws. The OTS has
never objected to Mr. Stephen serving as President of First Federal since 1991.
Mr. Stephen has provided new senior management at First Federal, since
his arrival in early 1991, to successfully convert it from a mutual savings
association to a new, Federal stock institution through a community public stock
offering, as well as returning the institution to profitability. In addition,
under Mr. Stephen's direction, First Federal has now expanded its home,
consumer, and SBA lending in the Bryan-College Station market area, and now
meets the regulatory definition of a "well capitalized" financial institution.
Also, under his direction, First Federal opened a Loan Production Office in
Waco, Texas in 1993, a full-service banking facility in College Station, Texas
in early 1994, a loan production office in Huntsville, Texas in July 1995, and a
Mortgage Loan Production Office in College Station in 1996. Recently, a new site
located at a key intersection was acquired by First Federal for a future
full-service branch bank to serve the northern portion of Bryan-College Station.
During his tenure as President/CEO, he has re-structured First Federal to begin
providing full-service retail banking -- through the addition of experienced
personnel, re-training existing staff, converting data processing and adding
facilities to provide for the future, long-term profitable growth of the
institution.
Ken Hayes. Mr. Hayes is the owner of Aggieland Travel, located in
College Station, a full-service travel agency.
Charles Neelley. Mr. Neelley is retired from Texas A&M University and
the travel agency business. In November 1995, Mr. Neelley was elected
Secretary/Treasurer of the Board.
Richard L. Peacock. Mr. Peacock has been retired since 1983 from a
privately owned retail office supply and furniture business located in Bryan,
Texas. In November 1995, Mr. Peacock was elected Chairman of the Board.
Ernest A. Wentrcek. Mr. Wentrcek was the Secretary and/or Treasurer of
First Federal's Board of Directors until 1995 when he was elected Vice Chairman
of the Board of Directors. Mr. Wentrcek is the President and owner of W&W
Builders/Realtors, a real estate sales, rentals and property management company
located in Bryan, Texas. In September 1988, he retired as the Associate Director
for Business Affairs of the Texas Engineering Extension Service, Texas A&M
University System, a vocational education organization. He is the Vice Chairman
of the Finance Committee of the Supreme Lodge of the Slavonic Benevolent Order
of the State of Texas (SPJST). Mr. Wentrcek is a licensed Real Estate Broker and
a member of the Bryan-College Station Board of Realtors and the Multiple Listing
Service. He is also a member of the American Legion Post 159-Bryan.
-21-
<PAGE>
Jack W. Lester, Jr. Mr. Lester is currently retired. Prior to his
retirement, he was the owner and operator of a leading women's apparel store
located in Bryan, Texas. In November 1995, Mr. Lester was elected Assistant
Secretary/Treasurer of the Board.
Phil Hobson. Dr. Hobson is a professor of veterinary medicine at Texas
A&M University, a position he has held since 1965.
J. Roland Ruffino. Mr. Ruffino is a partner of Readfield Meats, Inc., a
long-time leading wholesale and retail meat distributor located in Bryan, Texas.
Robert H. Conaway. Mr. Conaway is the founder and President of Progress
Supply located in Bryan, Texas, a distributor of wholesale supply plumbing
fixtures.
George Koenig. Mr. Koenig is currently serving as executive vice
president of the Bank. Mr. Koenig was previously employed as an operating
officer with a local financial institution located in Bryan, Texas.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
Meetings of First Federal's Board of Directors are generally held on a
monthly basis, with Special Meetings held on an as needed basis. The Board of
Directors met 14 times during the fiscal year ended September 30, 1996. No
incumbent Director of First Federal attended fewer than 75% of the total number
of board meetings held by the Board of Directors and the total number of
meetings held by the committees of the Board of Directors on which he served,
during fiscal year 1996.
The Board of Directors has standing Executive, Audit, Asset/Liability,
Investments, Insurance and Finance, Loan, Personnel, Policy, Compliance, Stock
Option and Business Development committees.
The Executive Committee is currently composed of Directors Stephen
(Chairman), Wentrcek, Peacock, Neelley and Hobson. This Committee meets as
needed and handles major policy questions between regularly scheduled board
meetings. The Committee met two times during fiscal 1996.
The Audit Committee is currently composed of Directors Wentrcek
(Chairman), G. Williams, Peacock, Neelley, Lester and Hayes. The Committee
currently meets as necessary on matters concerning annual audits and internal
audit findings. This Committee met two times during fiscal 1996.
The Asset/Liability Committee is currently composed of Directors
Stephen (Chairman), Koenig and Hobson and Officer Hegar. The Committee meets
quarterly to deal with matters concerning asset/liability composition,
interest-rate risk exposure and liquidity investment. This Committee met five
times during fiscal 1996.
The Investment, Insurance and Finance Committee is currently composed
of Directors Stephen, Wentrcek and Ruffino and officer Hegar (Chairman). The
Committee usually meets quarterly to handle matters concerning investment
policies and decisions and insurance of First Federal's personnel and property.
This Committee met 12 times during fiscal 1996.
The Loan Committee consists of all members of the Board of Directors on
a rotating basis with three outside Directors constituting a quorum. The Loan
Committee approves all loans originated by First Federal in excess of $50,000
and ratifies all loans at the monthly meeting of the Board of Directors. The
Loan Committee met 18 times during fiscal 1996.
The Personnel Committee is currently composed of Directors Peacock
(Chairman), Stephen, Neelley, Peacock, Wentrcek and Hayes and Officer Hegar. The
Committee meets as needed to review staffing, compensation
-22-
<PAGE>
and comparative data to establish and recommend to the Board salary ranges for
employees and designated officers. This Committee met five times during fiscal
1996.
The Policy Committee consists of Directors Stephen (Chairman), Peacock,
G. Williams, Conaway and Wentrcek and meets as needed to review First Federal's
operating policies. The Policy Committee met three times during fiscal 1996.
The Compliance Committee is responsible for reviewing compliance
policies with First Federal's regulatory activities. It currently consists of
Directors Lester (Chairman), Hobson, Peacock and Officer Koenig. This Committee
met two times during fiscal 1996.
The Stock Option Committee is composed of Directors Wentrcek and
Peacock. This Committee is responsible for the administration of the stock
option and incentive plan. The Committee did not meet during fiscal 1996.
The Business Development Committee consists of Directors Neelley
(Chairman), Peacock, Conaway, Ruffino and Stephen. This Committee did not meet
during fiscal 1996.
The entire Board of Directors acts as a nominating committee for
selecting nominees for election as Directors. While the Board of Directors of
First Federal will consider nominees recommended by stockholders, the Board has
not actively solicited such nominations.
DIRECTOR COMPENSATION
Outside Directors received $150.00 for each board meeting attended and
$50.00 for each Loan Committee meeting attended in the fiscal year ending
September 30, 1996.
EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation paid
by First Federal to its Chief Executive Officer for services rendered during the
periods indicated. No executive officer of First Federal made in excess of
$100,000 during the fiscal year ended September 30, 1996. Mr. Stephen
voluntarily reduced his salary in 1995 and 1996.
<TABLE>
<CAPTION>
=============================================================================================================================
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
--------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
- ---------------------------------------------------------------------- -------------------- ----------
RESTRICTED
OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- ---------------------------------- ----------- ------------------------- ----------------------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J. Stanley Stephen 1996 $ 89,875 $--- $--- $--- --- --- $---
----
President and Chief 1995 91,233 --- --- --- --- --- ---
----
Executive Officer 1994 102,000 --- --- --- --- --- ---
----
=============================================================================================================================
</TABLE>
-23-
<PAGE>
The following table sets forth information regarding the number and
value of stock options at September 30, 1996 held by First Federal's Chief
Executive Officer. No stock options were exercised during fiscal 1996.
<TABLE>
<CAPTION>
======================================================================================================================
AGGREGATED OPTION/SAR EXERCISED IN LAST FISCAL YEAR
- ----------------------------------------------------------------------------------------------------------------------
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FY-END (#) FY-END ($)(1)
SHARES VALUE --------------------------- --------------------------------
NAME ACQUIRED REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
ON EXERCISE (#) ($)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
J. Stanley Stephen --- --- 4,143 --- $4,143 ---
======================================================================================================================
</TABLE>
- ----------
(1) Represents an option to purchase Common Stock awarded to the Bank's Chief
Executive Officer based upon the last available sale price of $11.00 per
share at March 31, 1996.
EMPLOYMENT AGREEMENTS
The Bank has entered into employment agreements with J. Stanley
Stephen, George Koenig, Mary L. Hegar and Kay Watson. The employment agreements
are designed to assist the Bank in maintaining a stable and competent management
team after the Merger. The continued success of the Bank depends to a
significant degree on the skills and competence of its officers. These
agreements have been filed with the OTS as part of the application of the
Holding Company for approval to become a thrift holding company. The employment
agreements provide for annual base salary in an amount not less than the
officer's salary as of that date. These agreements provide for an initial term
of two years in the case of Mr. Stephen and one year in the case of Mr. Koenig,
Ms. Hegar and Ms. Watson. The agreements provide for termination upon death,
termination of employment for cause or certain events specified by OTS
regulations.
The agreements provide that in the event the employee is involuntarily
terminated without cause, he or she shall receive one's year's base salary and
continued health benefits for one year. In the event that such termination of
employment occurs in connection with or within 12 months after a change in
control of the Bank, he or she shall receive instead a lump sum equal to 200% of
his or her "base amount" and continued health benefits for the remainder of the
term of the agreement, provided that such benefits are subject to reduction to
prevent any amount from becoming non-deductible by the Bank pursuant to Section
280G of the Internal Revenue Code of 1986, as amended. For purposes of the
employment agreements, a "change in control" is defined as an event that would
require the filing of an application or notice under 12 C.F.R. Part 574 or
certain other events which generally occur upon the acquisition of control of
10% or more of the Company's voting stock.
The Bank has also entered in a new employment agreement with Mr.
Stephen, which will supersede and replace the agreement described above,
effective July 1, 1997. The new agreement provides for an initial term of three
years, commencing July 1, 1997, and a base salary not less than his current
based salary, provided that the amount actually paid as salary shall be reduced
during the first five years of the agreement by one-half of the cost to the bank
of his supplemental retirement benefit. The agreement gives Mr. Stephen the
right to elect to cease serving as President and Chief Executive Officer and to
commence serving as a consultant to the bank at a fee of
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$58,200 per year. In addition, the agreement provides a supplemental retirement
benefit for Mr. Stephen, in an amount such that, when added to his benefit under
the qualified retirement plan, he will receive up to 70% of the average of his
annual salary and bonus during the three years out of the prior ten years in
which he received the highest salary and bonus. Mr. Stephen's right to the
supplemental retirement benefit vests at 20% per year commencing July 1, 1997,
and will vest completely if he discontinues his employment due to disability.
The agreement further provides that if the Bank terminates Mr. Stephen's
employment other than for cause, without his consent, it shall pay him his
salary for the then-remaining term of the agreement and consulting fees until
June 30, 2002.
Based on their current salaries, if Mr. Stephen, Mr. Koenig, Ms. Hegar
or Ms. Watson were terminated as of December 31, 1997, under circumstances
entitling him or her to severance pay as described above, he or she would have
been entitled to receive a lump sum cash payment of approximately $179,750,
$105,000, $93,000 and $70,000, respectively.
BENEFIT PLANS
First Federal currently provides health care benefits to its employees,
including hospitalization and comprehensive medical insurance, life and
disability insurance, subject to certain deductibles and other limitations.
DEFINED BENEFIT PENSION PLAN
First Federal also sponsors a defined benefit pension plan (the
"Pension Plan"). Employees are eligible to participate in the Pension Plan on
January 1, or July 1 following the completion of twelve months of service,
provided they have attained at least age 20 1/2.
Effective January 1, 1994 a participant's normal retirement benefit is
a monthly benefit equal to 2.1% of Average Monthly Compensation times Years of
Service not to exceed 15. The benefit is accrued fractionally over the
participant's Years of Service. The participant's accrued benefit is equal to
the greater of (a) the Frozen Accrued Benefit as of December 31, 1993, and (b)
the participants accrued benefit calculated using the formula as stated above.
In the event of total and permanent disability, a participant becomes
fully vested with respect to his accrued normal retirement benefit. The
participant may receive an actuarially reduced benefit at the time of his
disability retirement provided the participant is age 50 or older and has 15
years of service.
Participants make no contributions to the Pension Plan. The employer
pays the entire cost of the Pension Plan.
The following table illustrates annual pension benefits payable upon
retirement to employees based on various levels of compensation and years of
service and assuming payment in the form of a straight-life annuity.
<TABLE>
<CAPTION>
Average Annual
Compensation Years of Service
- --------------- ---------------------------------------------------------
10 20 30 40
----- ----- ----- -----
<S> <C> <C> <C> <C>
$40,000.......................... 667 667 987 1,234
50,000.......................... 833 833 1,234 1,542
60,000.......................... 1,000 1,000 1,481 1,851
80,000.......................... 1,333 1,333 1,974 2,468
100,000.......................... 1,667 1,667 2,468 3,085
120,000.......................... 2,000 2,000 2,962 3,703
</TABLE>
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CERTAIN TRANSACTIONS
First Federal, like many financial institutions, has followed a policy
of granting to officers, directors and employees, loans secured by the
borrower's residence, along with certain consumer loans, if the borrower is
credit-worthy. All loans to First Federal's officers and directors are made in
the ordinary course of business and on the same terms, including interest rate
and collateral, and conditions as those of comparable transactions prevailing at
the time, and do not involve more than the normal risk of collectibility or
present other unfavorable features.
PROPOSAL II - THE MERGER
The following discussion summarizes certain provisions of the Merger
Agreement and aspects of the Merger. This summary discussion is not intended to
be a complete description of the Merger and is qualified in its entirety by
reference to the Merger Agreement. The Merger Agreement is attached as Appendix
A and incorporated by reference in this Joint Proxy Statement/Prospectus.
GENERAL
First Federal shareholders will elect to receive Holding Company Common
Stock or cash, or a combination of both, in exchange for their First Federal
shares. Pursuant to the Merger Agreement, the Holding Company's subsidiary, New
Bank, will be merged with and into First Federal, with First Federal being the
surviving entity. "New Bank" is to be organized solely for the purpose of
facilitating the Merger, and will no longer be in existence after the Merger is
completed. As soon as possible after the conditions to consummation of the
Merger described below have been satisfied, those shareholders of First Federal
choosing to exchange those shares of First Federal Common Stock will receive
Holding Company Common Stock, those shareholders electing to exchange some of
their shares for new Holding Company Common Stock and to receive cash for some
of their shares will be notified how to so elect such a combination, and those
shareholders electing to receive cash in the Merger will be notified as to how
to exchange their shares for cash. The time at which the Merger becomes
effective is referred to as herein as the "Effective Date." It is presently
contemplated that the Effective Date will be as soon as practicable following
the fulfillment or waiver of each of the conditions to the Merger.
Upon consummation of the Merger, the stockholders of First Federal
shall be entitled to receive new Holding Company Common Stock and/or cash in the
Merger Consideration in exchange for their shares of First Federal Common Stock
held and thereupon shall cease to be stockholders of First Federal, and the
separate existence and corporate organization of New Bank shall cease. The
members of the Board of Directors of First Federal immediately prior to the
Effective Date shall be the members of the Board of Directors of First Federal
after the Effective Date. See also "--Material Agreements Relating to the Merger
and Interests of Certain Persons." Those First Federal shareholders who elect
stock will become shareholders of the Holding Company, which will own all of
First Federal, shareholders electing only cash will have no continuing interest
in First Federal, the Holding Company, or New Bank.
REASONS FOR AND RECOMMENDATION OF THE MERGER
The Board of Directors of First Federal has determined that the Merger
is in the best interest of its stockholders and accordingly, recommends that the
stockholders vote FOR the Merger. After review and due consideration, the Board
of Directors determined that it was in First Federal's best interest to remain
an independent community based financial institution.
In order to provide an opportunity for First Federal's common
stockholders who wish to continue their ownership in First Federal through its
new Holding Company, and also to provide an exit strategy for a majority
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of common stockholders of First Federal who had the confidence to invest in the
Institution's future in 1992 (when First Federal converted from a mutual savings
association to a Federal stock institution in order to recapitalize First
Federal), and who now need or wish to sell some or all of their First Federal
Common Stock for cash at this time at an appropriate premium over book value and
the current trading price and who previously indicated to management their
desire to sell the shares in First Federal, the Board of Directors consequently
decided to undertake the Merger and Offering. This Merger and Offering will
permit those stockholders to receive what the Board believes to be an
appropriate level of compensation at an appropriate premium over book value for
more than 51% of the outstanding common stock, based on an independent valuation
appraisal of all of First Federal Common Stock as of March 31, 1997, which
independent valuation is $24.07 per share (1.56% of the Bank's book value at
March 31, 1997).
In addition, the Merger and the formation of the Holding Company as an
independent thrift institution holding company offer First Federal and the
Holding Company various potential advantages, including broader investment
opportunities than those available to a Thrift institution and increased
organizational flexibility. Further, because the Holding Company will not be
subject to certain regulatory capital requirements, borrowing limitations and
other restrictions applicable to First Federal, the Holding Company may have
greater access to capital markets for financing the growth of First Federal and
possible future operating subsidiaries of the Holding Company. A holding company
structure would permit the Holding Company to repurchase shares of Holding
Company Common Stock without adverse tax consequences, should the Board of
Directors determine a repurchase program to be in the best interests of
stockholders. The Holding Company will be able to diversify its financial
services and business activities through the Holding Company or subsidiaries
which it may establish in the future, without being restricted by the 2% of
assets limitation on investments in service corporations which is generally
applicable to federally-chartered thrift institutions.
Also, the Holding Company could acquire other thrift institutions
located in Texas (and in certain circumstances outside Texas) and, as a multiple
thrift institution holding company, operate them as separate corporate entities.
For example, an acquired thrift institution could retain its own directors,
officers and corporate name as well as having representation on the Holding
Company's Board of Directors. This ability to offer more autonomous operations
could be decisive in negotiations with acquisition candidates. However, while
management continuously studies potential acquisition opportunities, there are
no specific plans, understandings or agreements at this time relating to the
acquisition of any other financial institutions by the Holding Company, and
management intends to concentrate its consideration of potential acquisition
opportunities primarily on situations where the Holding Company could remain as
a unitary rather than a multiple savings bank holding company. There can be no
assurance that such acquisition opportunities will be available in the future
or, if available, will be on terms deemed advantageous to the Holding Company.
The types of financial services and business activities currently
permitted to a thrift institution holding company are not substantially broader
than those permitted to service corporations of federal thrift institutions. If,
after becoming a multiple thrift institution holding company by acquiring and
holding as separate entities more than one insured institution, the Holding
Company in the future determines that a broader range of business activities is
desirable, it could, subject to tax, accounting and other considerations, merge
its insured institution subsidiaries into a single insured institution
subsidiary and thereby have authority to engage in virtually any legal business
activity. This ability to diversify on a limited basis while acquiring other
institutions through a multiple thrift institution holding company structure, or
to have complete authority to diversify as a unitary thrift institution holding
company, is believed by the Board of Directors of First Federal to be a
substantial operating advantage of the proposed holding company structure for
First Federal.
It is anticipated that (subject to the Holding Company's financial
condition) the Holding Company may purchase additional Common Stock issued by
First Federal to provide capital to First Federal when and if needed. If the
Holding Company were not formed, and First Federal sought additional capital
through the issuance of shares of First Federal Common Stock, stockholders
desiring to avoid dilution of their percentage ownership of First Federal would
have to purchase additional shares of First Federal Common Stock with their
personal funds. In
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contrast, such future infusions of capital may be made by the Holding Company,
through funds available from borrowing or from the operations of other
subsidiaries which may be acquired by the Holding Company in the future, without
affecting the percentage ownership of stockholders of the Holding Company. See
"PROPOSAL II -- THE MERGER -- Regulatory Oversight."
In the opinion of management, an independent, predominantly community
owned holding company will be in a better position to respond competitively in a
rapidly changing financial environment. Management and the Board of Directors
believe that operating as a holding company will serve the interests of the
public and of First Federal's stockholders, depositors and borrowers by
improving its capabilities for service in a highly competitive environment and
by permitting it to continue as one of the few remaining independent financial
institutions in the Bryan-College Station area.
CONSIDERATION TO BE RECEIVED
The common stockholders of First Federal at the Effective Date of the
Merger will elect to receive for each share of First Federal Common Stock held
either (i) two and one-half shares of Holding Company Common Stock (fractional
shares will be rounded up to the next whole number) or (ii) a combination of
Holding Company Common Stock at two and one-half shares of Holding Company
Common Stock for each share of First Federal Common Stock held by the
stockholder and cash at $24.07 per share for each other share of First Federal
Common Stock held by the stockholder, or (iii) all cash at $24.07 per share of
First Federal Common Stock. The Holding Company will be permitted to allocate
cash and stock pro rata to those shareholders who elect the oversubscribed
consideration subject to the requirement that in the event such method would
adversely affect the accounting or tax treatment of the Merger, the Holding
Company may pay cash for the amount of stock consideration elected which, if
granted, would result in the adverse accounting or tax treatment. First Federal
stockholders who do not elect to receive shares of Holding Company Common Stock
will have no continuing stockholder relationship with First Federal, the Holding
Company or New Bank.
If for any reason, between May 21, 1997 (the date of the Merger
Agreement) and the Effective Date, the number of shares of First Federal Common
Stock outstanding or the number of unexercised "Stock Options" outstanding (as
defined in the next section ("First Federal's Stock Option and Incentive Plan"))
changes for any reason other than exercise of existing options as of May 21
(whether or not in breach of the Merger Agreement), then the amount of cash into
which shares of First Federal Common Stock are to be converted will be adjusted
as provided in the Merger Agreement. The Board of Directors of First Federal has
no present intention of issuing additional shares of First Federal Common Stock
or additional stock options prior to the date of the Merger Agreement or the
Effective Date.
FIRST FEDERAL STOCKHOLDER ELECTION PROCEDURES
Each First Federal stockholder will have the opportunity to elect
whether to receive either two and one-half shares of Holding Company Common
Stock (the "Stock Distribution") per share of First Federal Stock Common Stock
(a "Stock Election, in which case, such holder's shares shall be deemed to be
"Stock Election Shares"), or a Stock Distribution for those shares of First
Federal Common Stock designated by the holder as Stock Distribution Shares and
cash (the "Cash Distribution") for the remaining shares equal to $24.07 per
share for his or her First Federal Common Stock (a "Cash Election," in which
case, such holder's shares shall be deemed to be "Cash Election Shares") or a
Cash Distribution for all of the holder's shares. Enclosed with this Joint Proxy
Statement/Prospectus is an election form for use by stockholders of First
Federal (the "Election Form") whereby stockholders may indicate a Stock
Election, a combination of cash and stock or a Cash Election. In order for an
Election Form to be deemed to be effective, such Election Form must be properly
completed and duly executed by the First Federal stockholder and returned to the
Holding Company (in its capacity as exchange agent) no later than the date of
the First Federal Annual Meeting (the "Election Deadline").
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Each separate entry on First Federal's list of stockholders shall be
presumed to represent a separate and distinct holder of record of First
Federal's Common Stock. Shares held of record by a bank, trust company, broker,
dealer or other recognized nominee shall be deemed to be held by a single holder
unless the nominee advises the Holding Company otherwise, in which case, each
beneficial owner will be treated as a separate holder and, either directly or
through such nominee, may submit a separate Election Form. Any election may be
revoked or changed by the person submitting an Election Form or any other person
to whom the subject shares are subsequently transferred by submission of a later
dated Election Form, properly completed and duly executed, and received by the
Holding Company by the Election Deadline.
Any First Federal stockholder who fails to deliver a properly completed
and duly executed Election Form by the Election Deadline shall be deemed to have
made no election (a "No Election, " in which case, such holder's shares shall be
deemed to be "No Election Shares"). Unless the aggregate Cash Distribution
elected by the holders of Cash Election Shares is required to be reduced as
described below, No Election Shares will be treated as Cash Election Shares for
purposes of determining the type and amount of the Merger Consideration payable
pursuant to the Merger.
In order that the proposed Merger will qualify for a leveraged buy-out
and thus receive the appropriate accounting or tax treatment, the actual Merger
Consideration that will be paid to each First Federal common stockholder upon
consummation of the Merger may differ from the form of Merger Consideration
elected by such stockholder pursuant to his or her Election Form in the event
that (i) the aggregate number of shares of First Federal Common Stock exchanged
for the Holding Company Common Stock and issued pursuant to the Merger would
exceed 49% of the total value of the Merger Consideration (the "Maximum Stock
Consideration Shares"); (ii) the number of shares of First Federal Common Stock
exchanged for Holding Company Common Stock and to be issued pursuant to the
Merger would be less than 20% of the total value of the Merger Consideration
(the "Minimum Stock Consideration Shares"); or (iii) in the event such
distribution would adversely affect the accounting or tax treatment of the
Merger, the Holding Company may pay cash for the amount of stock consideration
elected which, if granted, would result in the adverse accounting or tax
treatment.
In the event that the number of shares of the Holding Company Common
Stock that would be issuable to Stock Election Shares on the basis of the
stockholders' elections exceeds the Maximum Stock Consideration Shares, the
Stock Distribution to all holders of Stock Election Shares will be reduced pro
rata ( subject to the requirement that in the event such method would adversely
affect the accounting or tax treatment of the Merger, the Holding Company may
pay cash for the amount of stock consideration elected which, if granted, would
result in the adverse accounting or tax treatment) and such holders will receive
the Cash Distribution in lieu thereof such that the aggregate Stock Distribution
equals the Maximum Stock Consideration Shares.
In the event that the number of shares of the Holding Company Common
Stock that would be issuable to Stock Election Shares on the basis of the
stockholders' elections is less than the Minimum Stock Consideration Shares,
then the Cash Distribution payable, first, to all holders of the No Election
Shares will be converted to additional Stock Election Shares in a manner to the
extent possible to equal the Minimum Stock Consideration Shares (when added to
the original Stock Election Shares) but not to exceed the Maximum Stock
Consideration Shares. Then if necessary, the Cash Election Shares (other than
Dissenting Shares) will be reduced pro rata and be substituted with the Stock
Distribution such that the Minimum Stock Consideration Shares will be issued in
the Merger.
If necessary or appropriate to the receipt of a tax opinion by First
Federal and the Holding Company as of the Closing Date and notwithstanding
anything contained hereinabove to the contrary, First Federal and the Holding
Company shall have the right to pay solely the Cash Distribution to any holder
of 1% or more of First Federal Common Stock who does not timely elect the Stock
Distribution and timely execute and deliver to First Federal the tax
certification described below by the Election Deadline. In such event, any such
holder may be excluded from the pro rata or other conversion of Cash Election
Shares to additional Stock Election Shares.
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The pro rata distribution is subject to the requirement that in the
event such method would adversely affect the accounting or tax treatment of the
Merger, the Holding Company may pay cash for the amount of stock consideration
elected which, if granted, would result in the adverse accounting or tax
treatment. In all other cases, First Federal stockholders will receive the form
of Merger Consideration for their shares of First Federal Common Stock in the
form that such stockholder has elected on his or her Election Form or has deemed
to elect in the case of No Election Shares.
Pursuant to the Merger Agreement, any holder of 1% or more of the First
Federal Common Stock (determined as of the Closing Date) that shall not, on or
before the Election Deadline, have delivered to First Federal a properly
executed certification regarding certain tax matters (which will be provided to
such holders with the Election Form) shall be deemed to have made a timely
election to receive the Cash Distribution, and all shares of First Federal
Common Stock held by such holder shall be deemed to be Cash Election Shares.
THIS PROVISION WILL PRECLUDE A HOLDER THAT ACQUIRES ADDITIONAL SHARES OF FIRST
FEDERAL COMMON STOCK AND BECOMES A HOLDER OF 1% OR MORE OF SUCH SHARES AFTER THE
ELECTION FROM RECEIVING THE STOCK DISTRIBUTION.
A detailed description of the manner in which the Merger Consideration
will be paid to the First Federal stockholders upon consummation of the Merger,
including the terms and conditions under which a portion of the consideration
elected by the First Federal common stockholders will be reallocated into the
other category of Merger Consideration is set forth below.
As soon as practicable after the Effective Date, the Holding Company
will allocate among the holders of First Federal Common Stock the right to
receive the Cash Distribution or the Stock Distribution pursuant to the Merger
Agreement as follows:
If the number of shares of Holding Company Common Stock distributable
in respect of the Stock Election Shares is less than the number of the Minimum
Stock Consideration Shares then:
(i) all Stock Election Shares will be converted into the right to
receive the Stock Distribution;
(ii) all No Election Shares will be converted to Stock Election
Shares (the "Additional Stock Election Shares") provided that
the aggregate number of Stock Election Shares (including
Additional Stock Election Shares) is equal or approximately
equal to the number of Maximum Stock Consideration Shares; in
the event that the conversion of all No Election Shares to
Additional Stock Election Shares would cause the aggregate
number of Stock Election Shares (including Additional Stock
Election Shares) to exceed the number of Maximum Stock
Consideration Shares exchanged for the Stock Distribution, the
Additional Stock Election Shares shall be reduced so that the
aggregate number of Stock Election Shares (including
Additional Stock Election Shares) equals or approximately
equals the number of Maximum Stock Consideration Shares, with
the aggregate Additional Stock Election Shares created upon
the conversion of No Election Shares being allocated pro rata
to each holder of No Election Shares in the proportion that
the total No Election Shares of such holder bear to the total
number of No Election Shares of all holders;
(iii) in the event that conversion of all No Election Shares to
Additional Stock Election Shares pursuant to (ii) above would
cause the aggregate number of Stock Election Shares (including
Additional Stock Election Shares) to be less than the number
of Minimum Stock Consideration Shares, the Holding Company (in
addition to converting all No Election Shares) shall convert a
number of Cash Election Shares to Stock Election Shares and
exchange the same for the Stock Distribution such that the
aggregate number of Stock Election Shares (including
Additional Stock Election Shares) shall equal or be
approximately equal to the number of Minimum Stock
Consideration Shares, with the aggregate Stock Election Shares
that are to be created upon the conversion of Cash Election
Shares being allocated pro rata to each holder of Cash
Election Shares in the
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proportion that the total Cash Election Shares of such holder
bear to the total number of Cash Election Shares of all
holders;
(iv) after the allocations set forth in (ii) and (iii) above have
been made, all remaining shares of First Federal Common Stock
(other than Dissenting Shares) will be converted into the Cash
Distribution.
If the number of shares of Holding Company Common Stock distributable
in respect of the Stock Election Shares is greater than the number of Maximum
Stock Consideration Shares, then;
(i) all Cash Election Shares (including No Election Shares) will
be converted into the right to receive the Cash Distribution;
and
(ii) the Holding Company will reallocate the Merger Consideration
payable to each holder of Stock Election Shares pro rata
(based upon the number of Stock Election Shares owned by each
holder, as compared with the total number of Stock Election
Shares owned by all holders) such that the holders of Stock
Election Shares will receive, as Stock Distributions, the
number of shares of Holding Company Common Stock which in the
aggregate will be equal or approximately equal to the Maximum
Stock Consideration Shares and will receive the balance of the
Merger Consideration due to them in cash as Cash
Distributions.
First Federal common stockholders should carefully consider the tax
implications involved in electing to receive either cash, stock or a combination
of both. Cash proceeds are immediately taxable while taxation is deferred on
stock received by stockholders of First Federal in the exchange. For a detailed
discussion of the federal income tax consequences to First Federal common
stockholders, see "PROPOSAL II -- THE MERGER -- Federal Income Tax
Consequences." Also, First Federal common stockholders should consider the
liquidity of Holding Company Common Stock as well as the uncertainty as to the
future value of Holding Company Common Stock.
OPINION OF FINANCIAL ADVISOR
First Federal's Board of Directors retained Hoefer & Arnett,
Incorporated ("Hoefer & Arnett") to render written opinion (the "Fairness
Opinion") as investment bankers as to the fairness, from a financial point of
view, to the Board of Directors and shareholders of First Federal of the terms
of the proposed sale of First Federal Common Stock at a cash price of $24.07. No
limitations were imposed by the First Federal Board of Directors upon Hoefer &
Arnett with respect to the investigations made or procedures followed in
rendering the Fairness Opinion.
A copy of the Fairness Opinion of Hoefer & Arnett, dated as of April
16, 1997, which sets forth certain assumptions made, matters considered and
limits on the review undertaken by Hoefer & Arnett, is attached as an Exhibit to
this Proxy Statement/Prospectus. First Federal shareholders are urged to read
the Fairness Opinion in its entirety. The following summary of the procedures
and analysis performed, and assumptions used by Hoefer & Arnett is qualified in
its entirety by reference to the text of such Fairness Opinion. Hoefer &
Arnett's Fairness Opinion is directed to First Federal's Board of Directors only
and is directed only to the financial terms of the transaction and does not
constitute a recommendation to any First Federal shareholder as to how such
shareholder should vote at the First Federal Shareholder Meeting.
In arriving at its opinion, Hoefer & Arnett reviewed and analyzed,
among other things, the following: (i) the Merger Agreement; (ii) Annual Reports
to Shareholders of First Federal for the years ended September 30, 1995 and
September 30, 1996; (iii) Quarterly OTS Call reports for the quarters ended
December 31, 1996, and March 31, 1997; (iv) certain other publicly available
financial and other information concerning First Federal; (v) publicly available
information concerning other thrifts, banks and holding companies, the trading
markets for their securities and the nature and terms of certain other merger
transactions we believe relevant to our inquiry; and (vi) evaluations
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<PAGE>
and analyses prepared and presented to the Board of Directors of First Federal
or a committee thereof in connection with this business combination with Holding
Company. Hoefer & Arnett held discussions with senior management and the Board
of Directors of First Federal concerning its past and current operations,
financial condition and prospects, as well as the results of regulatory
examinations.
Hoefer & Arnett reviewed with senior management and the Board of
Directors of First Federal earnings projections for 1997 through 2001 for First
Federal as a stand-alone entity, assuming the Merger does not occur, prepared by
First Federal. Certain pro forma financial projections for the years 1997
through 2001 for the combined entity were derived by Hoefer & Arnett based
partially upon the information discussed above, as well as Hoefer & Arnett's
assessment of general economic, market and financial conditions.
In conducting its review and in arriving at its opinion, Hoefer &
Arnett relied upon and assumed the accuracy and completeness of the financial
and other information provided to it or publicly available, and did not attempt
to independently verify the same. Hoefer & Arnett relied upon the management and
the Board of Directors of First Federal as to the reasonableness of the
financial and operating forecasts, projections, and Hoefer & Arnett assumed that
such forecasts, projections reflect the best currently available estimates and
judgments of the management and the Board of Directors of First Federal. Hoefer
& Arnett also assumed, without independent verification, that the aggregate
allowances for loan losses for First Federal are adequate to cover such losses.
Hoefer & Arnett did not make or obtain any evaluations or appraisals of the
properties of First Federal, nor did it examine any individual loan credit
files. For purposes of its opinion, Hoefer & Arnett assumed that the Merger will
have the tax, accounting and legal effects described in the Prospectus and
relied, as to legal matters, exclusively on counsel to First Federal, as to the
accuracy of the disclosures set forth in the Prospectus. Hoefer & Arnett's
opinion is limited to the fairness, from a financial point of view, to the
holders of the Common Shares of First Federal of the terms of the proposed sale
of common stock to Holding Company and does not address First Federal's
underlying business decision to proceed with the Merger.
As more fully discussed below, Hoefer & Arnett considered such
financial and other factors as Hoefer & Arnett deemed appropriate under the
circumstances, including among others the following: (i) the historical and
current financial position and results of operations of First Federal, including
interest income, interest expense, net interest income, net interest margin,
provision for loan losses, non-interest income, non-interest expense, earnings,
dividends, internal capital generation, book value, intangible assets, return on
assets, return on shareholders' equity, capitalization, the amount and type of
non-performing assets, loan losses and the reserve for loan losses, all as set
forth in the financial statements for First Federal; (ii) the assets and
liabilities of First Federal, including the loan, investment and mortgage
portfolios, deposits, other liabilities, historical and current liability
sources and costs and liquidity; and (iii) the nature and terms of certain other
merger transactions involving thrifts, banks and bank holding companies. Hoefer
& Arnett also took into account its assessment of general economic, market and
financial conditions and its experience in other transactions, as well as its
experience in securities valuation and its knowledge of the banking industry
generally. Hoefer & Arnett's opinion is necessarily based upon conditions as
they existed and can be evaluated on the date of its opinion and the information
made available to it through that date.
In connection with rendering its Fairness Opinion to the First Federal
Board of Directors, Hoefer & Arnett performed certain financial analyses, which
are summarized below. Hoefer & Arnett believes that its analysis must be
considered as a whole and that selecting portions of such analysis and the
factors considered therein, without considering all factors and analysis, could
create an incomplete view of the analysis and the processes underlying Hoefer &
Arnett's Fairness Opinion. The preparation of a fairness opinion is a complex
process involving subjective judgments and is not necessarily susceptible to
partial analysis or summary description. In its analyses, Hoefer & Arnett made
numerous assumptions with respect to industry performance, business and economic
conditions, and other matters, many of which are beyond the control of First
Federal. Any estimates contained in Hoefer & Arnett's analyses are not
necessarily indicative of future results or values, which may be significantly
more or less favorable than such estimates. Estimates of values of companies do
not purport to be appraisals or necessarily reflect the prices at which
companies or their securities may actually be sold. None of the financial
analyses performed by Hoefer & Arnett was assigned a greater significance by
Hoefer & Arnett than any other.
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The financial forecasts and projections of First Federal prepared by
Hoefer & Arnett were based on projections provided by First Federal as well as
Hoefer & Arnett's own assessment of general economic, market and financial
conditions. All such information was reviewed with the management and Board of
Directors of First Federal. First Federal does not publicly disclose internal
management financial forecasts and projections of the type provided to Hoefer &
Arnett in connection with its review of the proposed Merger. The forecasts and
projections prepared by Hoefer & Arnett were based on numerous variables and
assumptions which are inherently uncertain, including, without limitation,
factors related to general economic and market conditions. Accordingly, actual
results could vary significantly from those set forth in such forecasts and
projections.
In order to determine the fairness of the proposed offer by Holding
Company, Hoefer & Arnett utilized net asset value, market value and investment
value approaches, as explained below.
Net asset value is the value of the net equity of a financial
institution, including every kind of property and value. This approach normally
assumes liquidation on the date of appraisal with recognition of securities
gains or loses, real estate appreciation or depreciation and any adjustments to
the loan loss reserve, discounts to the loan portfolio or changes in the net
value of other assets. As such, it is not the best approach to use when valuing
a going concern, because it is based on historical costs and varying accounting
methods. Even if the assets and liabilities are adjusted to reflect prevailing
prices and yields (which is often of limited accuracy because readily available
data is often lacking), it still results in a liquidation value for the concern.
Furthermore, since this method does not take into account the values
attributable to the going concern such as the interrelationship among the
company's assets, liabilities, customer relations, market presence, image and
reputation, and staff expertise and depth, little weight is given to the net
asset value method of valuation.
Market value is defined as the price, established on an "arm's-length"
basis, at which knowledgeable, unrelated buyers and sellers would agree. The
market value is frequently used to determine the price of a minority block of
stock when both the quantity and the quality of the "comparable" data are deemed
sufficient. However, the relative thinness of the specific market for the stock
of the financial institution being appraised may result in the need to review
alternative markets of comparative pricing purposes. The "hypothetical" market
value for a small financial institution with a thin market for its stock is
normally determined by comparison to the average price to earnings, price to
equity and dividend yield of local or regional publicly-traded bank issues,
adjusted for lack of marketability or liquidity.
The market value in connection with the evaluation of control of a
financial institution is determined by the previous sales of banks in the state
or region. In valuing a business enterprise, when sufficient comparable trade
data is available, the market value deserves greater weighting then the net
asset value and equal or possibly greater weighting than the investment value.
In analyzing the fair market value of First Federal, Hoefer & Arnett has
considered the market approach and has evaluated price to equity and price to
earnings multiples of thrifts that were sold in 1996. This data was obtained
from SNL Securities, L.P. and is shown on the chart on the following page.
Hoefer & Arnett calculated an "Adjusted Book Value" based on March 31,
1997 equity and the price to book value multiples paid for thrifts in 1996 at
$23.07. Hoefer & Arnett calculated an "Adjusted Earnings Value" based on First
Federal's estimated 1997 earnings and the price to earnings multiples paid for
thrifts in 1996 at $43.37. The financial performance characteristics of the
thrifts sold in 1996 vary, sometimes substantially from those of First Federal.
When the variance is significant for relevant performance factors, adjustment of
the values computed using price multiples is appropriate when comparing them to
the fair market value conclusion. These "Adjusted Book Value" and "Adjusted
Earnings Value" approaches are utilized in supporting the fairness of the cash
price to be offered for shares of First Federal's Common Stock.
Hoefer & Arnett analyzed the value of the aggregate consideration to be
received in the transactions that were announced in 1996 in relationship to the
stated book value and earnings as compared to the value of the aggregate
consideration to be received by holders of First Federal's Common Shares.
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Investment value is sometimes referred to as the income value or the
earnings value. The investment value is frequently defined as an estimate of the
present value of future benefits. Another popular investment value method is to
determine the level of the current annual benefits and then capitalize one or
more of the benefit types using an appropriate capitalization rate such as an
earnings or dividend yield. Using a net present value discount rate of 12%, an
acceptable discount rate considering the risk-return relationship most investors
would demand for an investment of this type as of the valuation date, the net
present value of future earnings equaled $44.17.
In order to analyze the reasonableness of the fair market value, the
return on investment is calculated to determine the return that would accrue to
a potential buyer at the fair market value. The return on investment assuming
sale at the current average multiple of book value in 2001 equaled 13.75%.
Additionally, the fair market value to assets was calculated and compared to the
average purchase price to assets for thrifts sold in 1996. Based on the proposed
offer of $24.07 per share, the price to assets equaled 9.16%. Lastly, Hoefer &
Arnett calculated the net present value to fair market value, as it has been
recognized that there is a relationship between the net present value of a
community financial institution and the fair market value of a majority block of
the financial institution's stock. The net present value to fair market value
ratio equaled 183.50%.
All of the market value and investment value approaches as discussed
above clearly support the fairness of the $24.07 per share offer, therefore, we
are of the opinion that the terms of the proposed sale of First Federal common
stock to Holding Company are fair, from a financial point of view, to the
holders of the Common Stock of First Federal.
EFFECTIVE DATE
The Merger shall become effective at the time and on the date specified
in the certificate and articles of merger to be filed with the Secretary of
State of Delaware and with the OTS (the "Effective Date"). Such filing will
occur only after the receipt of all requisite regulatory approvals, approval of
the Merger Agreement by the requisite vote of First Federal stockholders and the
satisfaction or waiver of all other conditions to the Merger. The closing of the
Merger will occur on a date mutually agreed upon by First Federal and the
Holding Company. In the absence of such agreement, the closing shall occur on
the tenth business day after the last to occur of : (i) the receipt of all
requisite regulatory approvals and the expiration of all applicable statutory
waiting periods; and (ii) the requisite approval of the Merger by stockholders
of First Federal.
FIRST FEDERAL'S STOCK OPTION AND INCENTIVE PLAN
Unless exercised, each option granted under the First Federal Savings
Bank 1993 Stock Option and Incentive Plan (the "Stock Option and Incentive
Plan") issued and outstanding immediately prior to the Effective Date (a "Stock
Option") will be converted into an option to purchase Holding Company Common
Stock. The exercise price of such options will be adjusted according to the
provisions of the Stock Option and Incentive Plan.
RIGHTS OF DISSENTING STOCKHOLDERS
If the Merger is approved by the required vote at the Meeting and is
consummated, any record holder of First Federal's Common stock may require First
Federal to pay the fair or appraised value of his or her Common Stock,
determined as of the effective date of the Merger (the "Effective Date"), by
complying with Section 552.14 of the Office of Thrift Supervision ("OTS") Rules
and Regulations. The computation of fair or appraised value will exclude any
element of value arising from the accomplishment or expectation of the Merger.
To perfect the rights of a dissenting stockholder, a holder of First
Federal Common Stock must:
(1) deliver to First Federal, before voting on the Merger, a
writing identifying himself or herself and stating his or her intention
thereby to demand appraisal of and payment for his or her shares (this
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demand must be in addition to and separate from any proxy or vote
against the Merger by the stockholder); and
(2) not vote in favor of the proposed Merger.
Any holder of Common Stock of First Federal who fails to comply with
the detailed procedures set forth in Section 552.14 may be bound by the terms of
the Merger. Neither a vote against the approval of the Merger nor the giving of
a proxy directing a negative vote will be sufficient to meet the requirement
described in clause (1) above. Further, because a proxy signed and left blank
will, unless revoked, be voted FOR approval of the Merger, a stockholder
electing to exercise rights as a dissenting stockholder who votes by proxy must
not leave his proxy blank, but must vote AGAINST approval of the Merger or
ABSTAIN from voting.
Within ten days after the effective date of the Merger, First Federal
must mail to each stockholder who has complied with the provisions of Section
552.14 written notice of the Effective Date of the Merger and make an offer to
pay for his or her First Federal Common Stock at a price deemed by First Federal
to be the fair value of such stock.
If within 60 days after the Effective Date of the Merger, First Federal
and any such stockholder do not agree as to the fair value, the stockholder may
then file a petition with the OTS, with a copy sent by registered or certified
mail to First Federal, demanding a determination of the fair market value of the
First Federal Common Stock held by such stockholder. A stockholder who fails to
file such petition within the 60-day period is deemed to have accepted the terms
offered in the Merger. However, if within 60 days of the Effective Date the fair
value is agreed upon between First Federal and any dissenting stockholder who
has complied with the procedures set forth in Section 552.14, payment therefor
shall be made within 90 days of the Effective Date.
Within such 60-day period, each stockholder demanding appraisal and
payment for his First Federal Common Stock must submit to First Federal his or
her Common Stock certificates for notation thereon that he or she is exercising
his or her appraisal rights. Any stockholder who fails to submit his or her
certificates for such notation will no longer be entitled to the appraisal
rights and will be deemed to have accepted the terms of the Merger.
The OTS will then, in the prescribed manner, appraise the First Federal
Common Stock to determine its fair market value as of the Effective Date of the
Merger, and will direct payment of the appraised fair market value. Payment will
then be made, with interest from the Effective Date, at a rate deemed equitable
by the OTS.
The cost and expenses of any proceedings in respect of the exercise of
dissenter or appraisal rights may be apportioned and assessed by the OTS as it
may deem equitable against all or some of the parties. Any stockholder who has
demanded appraisal rights shall thereafter not be entitled to vote such stock
for any purpose nor be entitled to the payment of dividends or other
distributions on the stock, unless such stockholder withdraws his demand for
appraisal rights.
At any time within 60 days after the Effective Date, any stockholder
may withdraw his demand for appraisal and accept the terms of the Agreement.
The foregoing summary does not purport to be a complete statement of
the provisions of the federal regulation relating to rights of dissenting
stockholders, and is qualified in its entirety by reference to such regulation,
a copy of which is attached hereto as Appendix B. Failure by a stockholder to
follow the steps required by the federal regulation for perfecting rights as a
dissenting stockholder may result in a loss of such rights. Stockholders'
notices of intent to demand appraisal of all payment for their shares should be
sent to: Charles Neelley, Secretary of the Board of Directors of First Federal,
2900 Texas Avenue, Bryan, Texas 77802.
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In addition, if the Bank should abandon its plans to consummate the
Merger, the right of a dissenting stockholder to be paid the fair value of his
shares shall cease. In the event that the holders of more than 10% of the Bank's
Common Stock perfect their rights to appraisal, First Federal may determine not
to consummate the Merger. See "-- Waiver and Amendment; Termination."
FRACTIONAL SHARES
No certificates representing fractional shares of the Holding Company
will be issued upon the surrender for exchange of certificates representing
First Federal Common Stock. Fractional shares will be rounded up to the next
whole share.
EXCHANGE OF CERTIFICATES
At the Effective Date, holders of certificates formerly representing
shares of First Federal Common Stock (other than shares held by First Federal
stockholders who have exercised appraisal rights) will cease to have any rights
as First Federal stockholders and their certificates automatically will
represent only the right to receive the shares of Holding Company Common Stock
or cash (or both), as elected by the shareholder, into which their shares of
First Federal Common Stock will have been converted by the Merger. Promptly
after the Effective Date, the Holding Company (acting as the exchange agent)
will send written instructions and a letter of transmittal to each holder of
record of First Federal Common Stock (other than stockholders who have exercised
appraisal rights), indicating the method for exchanging such holder's stock
certificates for cash in respect thereof. HOLDERS OF FIRST FEDERAL COMMON STOCK
SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE INSTRUCTIONS FROM THE
HOLDING COMPANY. The Holding Company, upon receipt of such certificates (or
affidavits of lost certificates and indemnity bonds) and a properly completed
letter of transmittal, will promptly pay the holder by check.
REPRESENTATIONS AND WARRANTIES
In the Merger Agreement, First Federal and the Holding Company have
made certain customary representations to each other relating to, among other
things, the parties' respective organization, capitalization, qualification to
do business and compliance with applicable law, authority relative to the Merger
Agreement, the timely filing of all regulatory reports, reliability of financial
statements, taxes, employee benefit plans, compliance, the truth or accuracy of
information prepared and provided by them in connection with the Merger, the
absence of certain legal proceedings and other events, including material
adverse changes in the parties' business, financial condition, operations or
properties. For detailed information on such representations and warranties, see
the Merger Agreement attached hereto as Appendix A.
CONDITIONS TO THE MERGER
The consummation of the Merger is conditioned upon, among other things:
(i) approval by the OTS (and any other applicable regulatory bodies) and the
stockholders of First Federal; (ii) the sale of a minimum of $1.5 million of
Holding Company Common Stock and a minimum of $3.4 million of Units required to
be sold by the Holding Company to finance the Merger; and (iii) the receipt of a
favorable opinion of counsel with respect to the matters summarized above under
the caption "-- Federal Income Tax Consequences." It is contemplated that these
conditions will be complied with before consummation of the Merger. See
"--Effective Date of the Merger." However, the Merger Agreement provides that
First Federal, the Holding Company and New Bank, without approval of their
stockholders, may waive any of the conditions (other than the necessary
approvals of stockholders and government authorities and the consummation of the
financing required) to their respective obligations to consummate the Merger.
Except with the specific approval of its stockholders, First Federal
will not, subsequent to the approval of the Merger by First Federal's
stockholders, waive any condition to the Merger set forth in the Merger
Agreement
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if, in the judgment of its Board of Directors, such waiver would be materially
adverse to First Federal or its stockholders.
An application has been filed with the OTS for approval of the proposed
Merger. It is anticipated, although there can be no assurance, that final
approval by the OTS will be received before approval of the Merger by First
Federal's stockholders. By approving the Merger, the stockholders will be
approving compliance by First Federal and the Company with any condition which
may be imposed by the OTS in connection with its approval of the Merger and
which is not deemed by First Federal to be materially adverse to First Federal
or its stockholders.
REGULATORY APPROVAL
The Merger is subject to the approval of the Office of Thrift
Supervision (the "OTS"). First Federal filed an application for approval of the
Merger with the OTS, and anticipates obtaining the approval of the OTS in the
third quarter of 1997. There can be no assurance as to the timing of such
approval or that the OTS will approve the Merger.
It is a condition to the consummation of the Merger that First Federal
and the Holding Company shall have received all applicable regulatory approvals
and consents to consummate the Merger Agreement. There can be no assurance that
such approvals or consents will not contain terms, conditions or requirements
which cause such approval to fail to satisfy such conditions to the consummation
of the Merger.
In addition, under federal law, a period of 30 days (subject to
reduction to 15 days) must expire following approval by the OTS within which
period the United States Department of Justice (the "Department of Justice") may
file objections to the Merger under the federal antitrust laws. The Department
of Justice could take such action under the antitrust laws as it deems necessary
or desirable in the public interest, including seeking to enjoin the Merger
unless divestiture of an acceptable number of branches to a competitively
suitable purchaser could be made. While First Federal believes that the
likelihood of such action by the Department of Justice is remote in this case,
there can be no assurance that the Department of Justice will not initiate such
a proceeding.
WAIVER AND AMENDMENT; TERMINATION
Prior to the Effective Date, the First Federal and Holding Company
Boards may extend the time for performance of any obligations under the Merger
Agreement, waive any inaccuracies in the representations and warranties
contained in the Merger Agreement and waive compliance with any agreements or
conditions of the Merger Agreement.
Subject to applicable law, the Merger Agreement may be amended by
action of First Federal and the Holding Company Boards at any time before or
after approval of the Merger Agreement by the stockholders of First Federal and
the Holding Company. However, the Merger Agreement may not be amended after
stockholder approval which changes the form of consideration or the value of the
consideration to be received by the common stockholders of First Federal without
the approval of the common stockholders of First Federal.
The Merger Agreement may be terminated at any time prior to the
Effective Date: (i) by the mutual written consent of the Board of Directors of
First Federal and the Holding Company; (ii) by First Federal or the Holding
Company if there is a final judicial or regulatory determination that any
material provision of the Merger Agreement is illegal, invalid or unenforceable
or denying any regulatory application the approval of which is a concern
precedent to First Federal or the Holding Company's obligations under the Merger
Agreement (iii) if the conditions precedent to the obligations of the other
party are rendered impossible to be satisfied or fulfilled; (iv) if the
stockholders of First Federal and the Holding Company fail to approve the
Merger; (v) the other party (First Federal or the Holding Company) has
materially breached any representation, warranty, covenant or agreement set
forth in the Merger Agreement and has failed to or cannot in a timely manner
rectify such breach after receiving written
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notice of such breach; or (vi) if the Merger is not consummated by the 270th day
(360 days if there is a CRA protest).
CONDUCT OF BUSINESS OF FIRST FEDERAL PENDING THE MERGER
The Merger Agreement contains covenants of First Federal concerning the
conduct of its business. The covenants remain in effect until the Effective Date
or until the Merger Agreement has been terminated. They include, among others,
an agreement that First Federal will (i) allow the Holding Company access to
certain information regarding First Federal's business; (ii) operate the
business in the ordinary course and consistent with past practices; (iii) advise
and cooperate with the Holding Company with respect to anticipated renewals or
extensions of existing data processing service and related agreements; (iv)
permit the Holding Company to conduct an environmental assessment of each parcel
of First Federal's real property and, at the Holding Company's option, any other
real estate formerly owned by First Federal or First Federal's subsidiaries; and
(v) promptly seek to obtain from each employee of First Federal who, as a result
of the change of control of First Federal in the Merger, would be entitled to an
"Excess Parachute Payment" (as defined below), a mutually satisfactory amendment
to any such agreement to adjust or otherwise modify the amount or timing of
compensation due.
Nothing contained in the Merger Agreement will preclude First Federal
from declaring and paying cash dividends on First Federal Preferred Stock
quarterly at a rate not to exceed $10.00 per share in a manner, on dates, and
with respect to record dates consistent with past practice. The Board of
Directors of First Federal is under no obligation to pay dividends on First
Federal Preferred Stock, but has elected to do so since the Preferred Stock was
issued approximately four years ago.
MATERIAL AGREEMENTS RELATING TO THE MERGER AND INTERESTS OF CERTAIN PERSONS
As of March 31, 1997, the Holding Company had received indications from
holders of 44,080 shares of First Federal Common Stock, or approximately 18.4%
of the First Federal Common Stock outstanding, that such holders will exchange
their First Federal Common Stock for Holding Company Common Stock. These shares,
when exchanged for Holding Company Common Stock, will represent approximately
44.1 percent of the anticipated total assuming 250,000 outstanding shares of
Holding Company Common Stock following the Merger and Offering.
First Federal and the Holding Company have agreed to certain treatment
of the Stock Options (See " -- First Federal's Stock Option and Incentive
Plan"). Those individuals who hold such Stock Options and the respective amount
held are set forth in "PROPOSAL I - ELECTION OF DIRECTORS -- Voting Securities
and Principal Holding Thereof" below.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the principal federal income tax
consequences of the merger to holders whose shares of First Federal Common Stock
are converted to shares of Holding Company Common Stock and/or cash in the
merger (including pursuant to the exercise of appraisal rights). The discussion
applies only to holders of shares of First Federal Common Stock in whose hands
shares of First Federal Common Stock are capital assets, and may not apply to
shares of First Federal Common Stock received pursuant to the exercise of
employee stock options or otherwise as compensation, or to holders of shares of
First Federal Common Stock who are in special tax situations (such as insurance
companies, tax-exempt organizations, or non-U.S. persons).
THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH BELOW ARE BASED UPON
CURRENT LAW. BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, THE FOREGOING
DISCUSSION MAY NOT APPLY TO EACH FIRST FEDERAL STOCKHOLDER AND EACH HOLDER OF
SHARES OF FIRST FEDERAL COMMON STOCK SHOULD CONSULT SUCH HOLDER'S OWN TAX
ADVISOR TO DETERMINE THE APPLICABILITY OF THE RULES DISCUSSED BELOW TO SUCH
STOCKHOLDER AND THE PARTICULAR TAX EFFECTS OF THE MERGER, INCLUDING THE
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APPLICATION AND EFFECT OF FOREIGN, STATE, LOCAL AND OTHER INCOME, AND OTHER TAX
LAWS.
The receipt solely of shares of Holding Company Common Stock will be a
non-taxable transaction for federal income tax purposes (and also may be a
non-taxable transaction under applicable foreign, state, local and other income,
and other tax laws). Accordingly, no gain or losses will be recognized by a
First Federal stockholder who exchanges shares of First Federal Common Stock
solely for shares of Holding Company Common Stock. In general, the adjusted tax
basis of the Holding Company Common Stock received by a First Federal
stockholder will be the same as the adjusted tax basis of the First Federal
Common Stock surrendered in exchange therefor. Also, the holding period of the
Holding Company Common Stock received by a First Federal stockholder will
include the period during which the First Federal Common Stock surrendered in
exchange therefor was held.
A First Federal stockholder whose shares of First Federal Common Stock
are converted into shares of Holding Company Common Stock and cash will
recognize gain, but not loss, in the transaction for federal income tax purposes
(determined separately as to each block of First Federal Common Stock
exchanged). The amount of gain recognized by the First Federal shareholder who
receives shares of Holding Company Common Stock and cash will equal the lesser
of: (i) the difference between his or her adjusted tax basis in the shares of
First Federal Common Stock converted to shares of Holding Company Common Stock
and cash and the sum of the fair market value of the shares of the Holding
Company Common Stock and the amount of cash received; or (ii) the amount of cash
received. In general, the adjusted tax basis of the Holding Company Common Stock
received by a First Federal stockholder who receives Holding Company Common
Stock and cash will be the same as the adjusted tax basis of the First Federal
Common Stock surrendered in exchange therefor, decreased by the amount of cash
received and increased by the amount of gain recognized on the exchange. Also,
the holding period of the Holding Company Common Stock received by a First
Federal stockholder will include the period during which the First Federal
Common Stock surrendered in exchange therefor was held.
The receipt solely of cash for shares of First Federal Common Stock
pursuant to the Merger (including pursuant to the exercise of appraisal rights)
will be a taxable transaction for federal income tax purposes (and also may be a
taxable transaction under applicable foreign, state, local and other income and
other tax laws). In general, for federal income tax purposes, a holder of shares
of First Federal Common Stock will recognize gain or loss equal to the
difference between his or her adjusted tax basis in the shares of First Federal
Common Stock converted to cash in the Merger and the amount of cash received
therefor. Gain or loss must be determined separately for each block of shares of
First Federal Common Stock (i.e., shares of First Federal Common Stock acquired
at the same cost in a single transaction) converted to cash in the Merger. Such
gain or loss will be capital gain or loss and will be long-term gain or loss if,
on the date of the Merger, the shares of First Federal Common Stock were held
for more than 1 year. With respect to stockholders exercising appraisal rights,
amounts, if any, that are or are deemed to be interest for federal income tax
purposes will be taxed as ordinary income.
Payments in connection with the Merger may be subject to "backup
withholding" at a rate of 31%. Backup withholding generally applies if a
stockholder (i) fails to furnish to the exchange agent his or her social
security number or taxpayer identification number ("TIN"), (ii) furnishes an
incorrect TIN, (iii) fails properly to include a reportable interest or dividend
payment on such stockholder's federal income tax return, or (iv) under certain
circumstances, fails to provide a certified statement, signed under penalties of
perjury, that the TIN provided is such stockholder's correct number and that
such stockholder is not subject to backup withholding. Backup withholding is not
an additional tax but merely an advance payment that may be refunded to the
extent it results in an overpayment of tax. Certain persons generally are
entitled to exemption from backup withholding, including corporations and
financial institutions. Certain penalties apply for failure to furnish correct
information and for failure to include reportable payments in income. Each
stockholder should consult with his or her own tax advisor as to qualification
for exemption from backup withholding and the procedure for obtaining such
exemption.
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ACCOUNTING TREATMENT
The proposed transaction will be accounted for as a leveraged buy-out,
with the common stock of the directors and executive officers contributed to the
Holding Company recorded at its carrying value. The assets acquired and
liabilities assumed in the acquisition for the remainder of the Bank will be
recorded at their estimated fair values, with the excess of the purchase price
over the net fair value recorded as goodwill. The new basis of accounting for
the purchased portion of the transaction will be recorded on the Holding
Company's books. The equity, assets and liabilities at the Bank will remain
unchanged. The equity of the Holding Company will be the carrying value of the
directors and executive officers' interest in First Federal plus the value of
the new shares issued, net of offering expenses. It is estimated that goodwill
and deposit intangibles of approximately $589,000 and $969,000, respectively,
will be recorded on the Holding Company's books.
COMPARISON OF STOCKHOLDER RIGHTS
Various features of the Certificate of Incorporation and Bylaws of the
Holding Company differ from those of First Federal. The following discussion
does not purport to be a complete statement of such differences but summarizes
the differences that are deemed by First Federal to be material. For additional
information, reference is made to the Certificate of Incorporation and the
Bylaws of the Holding Company and the Charter and Bylaws of First Federal, each
of which may be obtained by stockholders upon written request to the Secretary,
First Federal Savings Bank, 2900 Texas Avenue, Bryan, Texas 77802.
Choice of Delaware Law. For many years Delaware has followed a policy
of encouraging incorporation in that state. In furtherance of that policy, it
has adopted comprehensive, modern and flexible corporate laws which are
periodically updated and revised to meet changing business needs. As a result,
many major corporations, including a number of the largest and most successful
enterprises, choose Delaware for their domicile. Because of Delaware's
significance as the state of incorporation for many major domestic corporations,
the Delaware judiciary has become particularly familiar with matters of
corporate law and a substantial body of court decisions has developed construing
Delaware law. As a consequence, Delaware corporate law has been interpreted and
explained in a number of significant court decisions, which may provide greater
predictability with respect to the Holding Company's corporate legal affairs.
Issuance of Additional Capital Stock. First Federal has 3,000,000
shares of authorized common stock and 1,000,000 shares of authorized serial
preferred stock, of which 239,612 shares of common stock were issued and
outstanding as of March 31, 1997. Under First Federal's Charter, no shares of
capital stock may be issued, unless their issuance or the plan under which they
would be issued receives stockholder approval, directly or indirectly to
officers, directors or controlling persons of the Bank other than as part of a
general public offering or as qualifying shares to a director. Stockholder
approval under First Federal's Charter would require the affirmative vote of a
majority of the total votes eligible to be cast.
The Holding Company's Certificate of Incorporation authorizes 3,000,000
shares of common stock and 1,000,000 shares of preferred stock, issuable in
series, which may generally be issued by action of the Board of Directors
without stockholder approval.
Amendment of Governing Instruments. Amendments to First Federal's
Charter must be preliminarily approved by the OTS, and First Federal's Bylaw
amendments are required to be consistent with Preferred Stock OTS regulations
governing permitted Bylaw provisions. Amendments to the Holding Company's
Certificate of Incorporation and Bylaws are not subject to OTS approval.
Transactions With Affiliates. First Federal, as a federally-insured
thrift, is subject to certain restrictions, limitations, conditions and
prohibitions with respect to transactions with directors, officers and
affiliated persons. These include, but are not limited to, limitations upon
deposit relationships, loan services, loan procurements, and
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restrictions on loans and investments. These requirements and restrictions will
continue to apply to First Federal following the Merger.
Under Delaware law, no contract or transaction between a corporation
and one or more of its directors or between a corporation and another
organization in which one or more of its directors is a director or officer or
is financially interested shall be void or voidable solely for this reason,
provided that the material facts of the relationship of the party to the
transaction are disclosed and the contract or transaction is authorized by a
majority of the disinterested directors or by a majority of the stockholders
entitled to vote or, at the time of such authorization, the contract or
transaction was fair and reasonable to the corporation.
Additionally, the Holding Company will be subject to certain federal
regulations relating to transactions between insured thrift institutions and
their holding company.
Number of Directors. First Federal's Charter sets a range of number of
directors at a minimum of seven and a maximum of fifteen, while the Holding
Company's Certificate of Incorporation provides that the number of directors
shall be fixed by the Board of Directors pursuant to a resolution adopted by a
majority of the whole board. Under Delaware law, the Holding Company must have
at least one director, but no maximum number is specified.
Appraisal Rights. Holders of First Federal's Common Stock have certain
dissenter and appraisal rights for certain mergers, consolidations or sales of
assets, including the right to demand payment of the fair or appraised value of
their shares. These rights do not apply to certain transactions (such as the
proposed Merger) if First Federal's Common Stock is listed on a national
securities exchange or quoted on the Nasdaq-NMS and stockholders are required to
accept only "qualified" consideration (i.e., cash and/or stock listed on a
national securities exchange or quoted on the Nasdaq-NMS). The Holding Company's
Common Stock will not be listed on the Nasdaq-NMS.
Holders of the Holding Company Common Stock would have generally
similar dissenter and appraisal rights for any plan of corporate merger or
consolidation. Delaware law provides that unless the certificate of
incorporation of the corporation otherwise provides, no appraisal rights are
accorded to stockholders of any corporation involved in a merger or
consolidation if their stock is registered on a national securities exchange or
held of record by more than 2,000 stockholders or to stockholders of a
constituent corporation surviving a merger if the merger does not require the
approval of such stockholders, except that appraisal rights are provided to
stockholders of a constituent corporation if they are required to accept as
consideration anything other than (i) stock of the surviving or resulting
corporation, (ii) stock registered on a national exchange or held of record by
more than 2,000 stockholders, (iii) cash in lieu of fractional shares, or (iv)
any combination of cash and stock of the types described in the foregoing
clauses (i) and (ii). However, under Delaware law these dissenter and appraisal
rights do not exist with respect to sale of assets transactions.
Reports to Stockholders. First Federal is required to transmit proxy
materials and annual reports containing financial statements to its
stockholders. Following the Merger, these obligations will be assumed by the
Holding Company, which will transmit proxy materials and annual reports
containing financial statements to its stockholders and will file with the SEC
periodic reports, which will be available for public inspection, to provide
current financial and other information about the Holding Company.
Liability and Indemnification of Directors, Officers and Employees.
Federal regulations require the indemnification of certain costs and expenses
and judgment liability for any action brought or threatened by reason of the
fact that a person is or was a director, officer or employee of First Federal.
Such indemnification is authorized, subject to certain conditions and
limitations, including the requirement that such action results in either a
final judgment on the merits in favor of the indemnitee or a judgment not on the
merits or settlement as to which the majority of the Board of Directors
determines that such indemnitee was acting in good faith within what he or she
was reasonably entitled to believe, under the circumstances, was within the
scope of his or her employment or authority and was acting for a purpose that he
or she was reasonably entitled to believe, under the circumstances,
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was in the best interests of First Federal or its stockholders and after notice
to, and without objection by, the OTS. First Federal has insurance to protect
its officers, directors, employees and the Bank itself from potential liability
expenses and other costs arising from such claims. No such insurance, however,
may be provided for losses incurred as a consequence of willful or criminal
conduct.
Delaware law provides corporations with broad indemnification powers.
Such powers include the ability to provide forms of indemnification in addition
to the type of indemnification set forth in the Delaware statute. The
Certificate of Incorporation of the Holding Company authorizes rights of
indemnification that are broader than those applicable to First Federal and do
not require any notice or right of objection to be afforded the OTS. The Holding
Company's Certificate of Incorporation provides that a director, officer,
employee or agent of the Holding Company or of any Subsidiary, or any person
serving in such capacity at the request of the Holding Company shall be
indemnified by the Holding Company from and against expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred in connection
with a threatened, pending or completed suit or proceeding, including a
proceeding by or on behalf of the Holding Company, in which such person is
involved due to such person's position with the Holding Company, provided that a
determination has been made that such person acted in good faith and in a manner
that such person reasonably believed to be in, or not opposed to, the best
interests of the Holding Company and in the case of a criminal proceeding, such
person had no reason to believe his or her conduct was unlawful. The
determination that indemnification is proper shall be made by a majority vote of
a quorum of directors who were not parties to such proceedings, or if a quorum
cannot be obtained or such a quorum so directs, by a written opinion of
independent legal counsel or by stockholders. Expenses incurred in defending or
investigating a threatened or pending suit or proceeding may be paid by the
Holding Company in advance of the final disposition of such suit or proceeding
upon receipt of an undertaking by or on behalf of such person to repay such
amount if it shall ultimately be determined that he or she is not entitled to
indemnification by the Holding Company.
The Holding Company intends to purchase insurance (if available) to
protect its officers, directors and employees. If the Holding Company does not,
or is not able to, purchase such insurance, or to the extent that such insurance
is inadequate, the Holding Company will be required to fund any amount that may
ultimately be paid under the indemnification provision. The Board of Directors
of the Holding Company has not considered whether the Holding Company will enter
into indemnification agreements with its directors. Notwithstanding the
foregoing, indemnification for liability under the federal securities laws may
be considered void as against public policy. The provisions in the Certificate
of Incorporation regarding indemnification and limitation of liability may only
be amended or repealed by the affirmative vote of the holders of 80 percent of
the votes eligible to be cast at a legal meeting of stockholders.
Under Delaware law, each director owes certain fiduciary duties to the
corporation and to its stockholders. These duties include a duty of loyalty and
a duty of care. Applicable decisional law requires not only that a director
refrain from fraud, bad faith, self-dealing and transactions involving material
conflicts of interest (the duty of loyalty), but also that the director exercise
his or her business judgment on an informed basis (the duty of care). Delaware
law permits the inclusion in the certificate of incorporation of a Delaware
corporation of a provision limiting or eliminating the potential monetary
liability of directors to the corporation or its stockholders by reason of any
failure to perform their fiduciary duty as directors, subject to certain
important exceptions which are reflected in Article Twelfth of the Holding
Company's Certificate of Incorporation and discussed below. Subject to these
exceptions, this section would relieve directors (but not officers) from such
personal liability, including liability for any breach of the duty of care which
involves gross negligence in the performance of such duty in the various
contexts in which directors are called upon to act, including consideration of
proposed mergers or other business combinations.
As provided in the Delaware statute, the Holding Company's Certificate
of Incorporation eliminates a director's personal liability to the Holding
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director, except for liability (i) for any breach of the director's duty of
loyalty to the Holding Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct
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or a knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived an
improper personal benefit. This provision does not affect the availability of
equitable remedies, such as an injunction or rescission, for a breach of
fiduciary duty.
First Federal has not received notice of any suit or proceeding as to
which this provision could have the effect of reducing the likelihood of
derivative litigation against directors in the future. This proposition also may
discourage or deter stockholders from bringing a lawsuit against directors for
breach of their fiduciary duty or gross negligence even though such an action,
if successful, might result in a judgment in favor of the Holding Company and
its stockholders.
Since these provisions limit the potential liability of directors and
provide for indemnification of directors, and the Certificate of Incorporation
requires a 80 percent vote of the total votes eligible to be cast by
stockholders to amend, alter or repeal these provisions, it should be noted that
the Board of Directors has an interest in and may benefit from these provisions.
The Board is nevertheless of the view that the advantages of these provisions in
encouraging qualified persons to serve and to exercise their best judgment
without concern for personal monetary liability significantly outweigh the
potential disadvantages.
Preemptive Rights. The certificate of incorporation of the Holding
Company provides that shareholders shall have preemptive rights.
Voting Rights. All voting rights are vested in the holders of First
Federal Common Stock, each share being entitled to one vote. Upon the Merger,
holders of Holding Company Common Stock will have the same voting rights.
Neither First Federal's Charter nor the Holding Company's Certificate of
Incorporation permits cumulative voting for the election of directors.
First Federal may, in general, effect a merger or consolidation or sale
of all or substantially all of its assets, if approved by the holders of
two-thirds (or a majority in the case of certain transactions with an interim
institution) of the outstanding First Federal Common Stock. Under Delaware law,
the Holding Company will be able to merge or consolidate with other
corporations, or sell all or substantially all of its assets, with the approval
of the holders of a majority of its outstanding Holding Company Common Stock.
The Holding Company Common Stock, like that of First Federal, has no
redemption, sinking fund or conversion privileges, and will be fully paid and
non-assessable.
Legal Investments. Under the laws of some jurisdictions, shares of
Holding Company Common Stock may not be legal investments for certain
institutions and fiduciaries, whereas shares of First Federal Common Stock are
more likely to be. For example, under the laws of some jurisdictions, certain
pension funds may not be permitted to invest in common stock or other securities
of thrift institution holding companies. Stockholders of First Federal should
consult their personal advisors or plan administrators regarding the
permissibility under state law of investment in the Holding Company Common
Stock.
Continuation of Certain Provisions. The Holding Company's Certificate
of Incorporation will continue certain provisions already contained in First
Federal's Charter or Bylaws. Certain of these provisions, including those
restricting removal of directors, could be deemed to have an anti-takeover
effect and to render more difficult the removal of management. As described
elsewhere in this Joint Proxy Statement/Prospectus, First Federal's 1993 Stock
Option and Incentive Plan would also provide or accelerate benefits in certain
events involving a change of control or takeover attempt.
Certain regulatory provisions may also have a takeover defensive
effect. OTS regulations generally require persons who intend to acquire control
of a federally-insured capital stock savings institution to give 60-days' prior
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written notice to the OTS. OTS regulations also require prior OTS approval
before any company may acquire control of savings institution.
Limitations on Action by Stockholders. Under First Federal's Charter
and Bylaws, special meetings may be called upon the written request of the
holders of not less than one-tenth of all the outstanding capital stock of the
Bank entitled to vote at the meeting. Under Delaware law, special meetings of
stockholders may be called only by the board of directors or by any other person
authorized to do so in the certificate of incorporation or bylaws. The
Certificate of Incorporation of the Holding Company provides that a special
meeting of stockholders may be called only by a majority of the Board of
Directors.
The stockholders of First Federal may presently take action without a
meeting with the written consent of all the holders of the common stock entitled
to vote on such matters approving such action. The Certificate of Incorporation
of the Holding Company provides that its stockholders may act only at an annual
or special meeting.
Amendment to Certificate of Incorporation and Bylaws. Amendments to the
Holding Company's Certificate of Incorporation must be approved by the Holding
Company's Board of Directors and also by a majority of the outstanding shares of
the Holding Company's voting stock, provided, however, that approval by at least
80% of the outstanding voting stock is generally required for certain provisions
(i.e., provisions relating to number, classification, election and removal of
directors; amendment of bylaws; call of special stockholder meetings; director
liability; power of indemnification; and amendments to provisions relating to
the foregoing in the certificate of incorporation).
The bylaws may be amended by a majority vote of the Board of Directors
or the affirmative vote of at least 80% of the total votes eligible to be voted
at a duly constituted meeting of stockholders.
Purpose and Takeover Defensive Effects of the Holding Company's
Certificate of Incorporation and Bylaws. The Board of Directors of First Federal
believes that the provisions described above are prudent and will reduce the
Holding Company's vulnerability to takeover attempts and certain other
transactions which have not been negotiated with and approved by its Board of
Directors. The Board of Directors believes these provisions are in the best
interest of First Federal and of the Holding Company and its stockholders. In
the judgment of the Board of Directors, the Holding Company's Board will be in
the best position to determine the true value of the Holding Company and to
negotiate more effectively for what may be in the best interests of its
stockholders. Accordingly, the Board of Directors believes that it is in the
best interests of the Holding Company and its stockholders to encour age
potential acquirors to negotiate directly with the Board of Directors of the
Holding Company and that these provisions will encourage such negotiations and
discourage hostile takeover attempts. It is also the view of the Board of
Directors that these provisions should not discourage persons from proposing a
merger or other transaction at prices reflective of the true value of the
Holding Company and which is in the best interests of all stockholders.
Attempts to take over financial institutions and their holding
companies have become increasingly common. Takeover attempts which have not been
negotiated with and approved by the Board of Directors present to stockholders
the risk of a takeover on terms which may be less favorable than might otherwise
be available. A transaction which is negotiated and approved by the Board of
Directors, on the other hand, can be carefully planned and undertaken at an
opportune time in order to obtain maximum value for the Holding Company and its
stockholders, with due consideration given to matters such as the management and
business of the acquiring corporation and maximum strategic development of the
Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above then
current market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
which is under
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different management and whose objectives may not be similar to those of the
remaining stockholders. The concentration of control, which could result from a
tender offer or other takeover attempt, could also deprive the Holding Company's
remaining stockholders of the benefits of certain protective provisions of the
Exchange Act, if the number of beneficial owners becomes less than the 300
required for Exchange Act registration.
Despite the belief of First Federal and the Holding Company as to the
benefits to stockholders of these provisions of the Holding Company's
Certificate of Incorporation and bylaws, these provisions may also have the
effect of discouraging a future takeover attempt which would not be approved by
the Holding Company's Board, but pursuant to which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, these provisions may prevent stockholders who might desire to
participate in such a transaction from doing so even if such transaction is
favored by a majority of the Holding Company's stockholders. Such provisions
will also render the removal of the Holding Company's Board of Directors and of
management more difficult. The Board will enforce the voting limitation
provisions of the Certificate of Incorporation in proxy solicitations and
accordingly could utilize these provisions to defeat proposals that are favored
by a majority of the stockholders. The Boards of Directors of First Federal and
the Holding Company, however, have concluded that the potential benefits
outweigh the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders, the Holding Company may adopt additional charter provisions
regarding the acquisition of its equity securities that would be permitted to a
Delaware corporation. The Holding Company and First Federal do not presently
intend to propose the adoption of further restrictions on the acquisition of the
Holding Company's equity securities.
OTHER RESTRICTIONS ON ACQUISITIONS OF STOCK
Delaware Anti-Takeover Statute. The Delaware General Corporation Law
(the "DGCL") provides that buyers who acquire more than 15% of the outstanding
stock of a Delaware corporation, such as the Holding Company, are prohibited
from completing a hostile takeover of such corporation for three years. However,
the takeover can be completed if (i) the buyer, while acquiring the 15%
interest, acquires at least 85% of the corporation's outstanding stock (the 85%
requirement excludes shares held by directors who are also officers and certain
shares held under employee stock plans), or (ii) the takeover is approved by the
target corporation's board of directors and two-thirds of the shares of
outstanding stock of the corporation (excluding shares held by the bidder).
However, these provisions of the DGCL do not apply to Delaware
corporations with less than 2,000 stockholders or which do not have voting stock
listed on a national exchange or listed for quotation with a registered national
securities association. If this statute were applicable to the Holding Company,
the Holding Company could exempt itself from the requirements of the statute by
adopting an amendment to its Certificate of Incorporation or Bylaws electing not
to be governed by this provision. At the present time, the Board of Directors
does not intend to propose any such amendment.
Federal Regulation. Federal law provides that no company, "directly or
indirectly or acting in concert with one or more persons, or through one or more
subsidiaries, or through one or more transactions," may acquire "control" of a
savings association at any time except upon application and the prior approval
of the OTS. In addition, Federal regulations require that, prior to obtaining
control of a savings association, a person, other than a company, must give 60
days' prior notice to the OTS and have received no OTS objection to such
acquisition of control. Any company that acquires such control becomes a
"savings and loan holding company" subject to registration, examination and
regulation as a savings and loan holding company. Under federal law (as well as
the regulations referred to below) the term "savings association" includes state
and federally chartered SAIF-insured institutions and federally chartered
savings banks whose accounts are insured by the FDIC's Bank Insurance Fund and
holding companies thereof.
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Control, as defined under federal law, in general means ownership,
control of or holding irrevocable proxies representing more than 25% of any
class of voting stock, control in any manner of the election of a majority of
the savings association's directors, or a determination by the OTS that the
acquiror has the power to direct, or directly or indirectly to exercise a
controlling influence over, the management or policies of the institution.
Acquisition of more than 10% of any class of a savings association's voting
stock, if the acquiror also is subject to any one of eight "control factors,"
constitutes a rebuttable determination of control under the regulations. Such
control factors include the acquiror being one of the two largest stockholders.
The determination of control may be rebutted by submission to the OTS, prior to
the acquisition of stock or the occurrence of any other circumstances giving
rise to such determination, of a statement setting forth facts and circumstances
which would support a finding that no control relationship will exist and
containing certain undertakings. The regulations provide that persons or
companies which acquire beneficial ownership exceeding 10% or more of any class
of a savings association's stock must file with the OTS a certification that the
holder is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable. These federal regulations can make a change
in control more difficult, even if desired by the holders of the majority of the
shares of the stock. See "General Information -- Voting Securities and Principal
Holders Thereof."
RISK FACTORS ASSOCIATED WITH THE HOLDING COMPANY
Ownership of the Holding Company Common Stock involves a high degree of
risk. In analyzing your election, the following risk factors, in addition to
those factors discussed elsewhere in this Joint Proxy Statement/Prospectus,
should be considered. The cautionary statements set forth below and elsewhere in
this Prospectus should be read as accompanying forward looking statements
included under "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere herein. The risks described in
the statements set forth below could cause the Holding Company's and the Bank's
results to differ materially from those expressed in or indicated by such
forward-looking statements.
Noninterest Expense. In accordance with its restructuring strategy,
First Federal has in recent years incurred above average noninterest expense
levels, due primarily to expenses related to its recent transition into current
full service retail banking. First Federal's Board of Directors believes that
expenses have been incurred for data processing, equipment, drive-in facilities
and personnel required for full-service retail banking, and that future
additions to its noninterest expenses (as a percentage of average assets) will
be modest. Moreover, management believes that First Federal is positioned to
achieve significant growth without substantial increases in noninterest
expenses.
In this regard, during the six months ended March 31, 1997 net interest
income exceeded noninterest expense. See "Management's Discussion of Recent
Results." However, there can be no assurance that future operating income levels
will improve or that First Federal will be able to record net income in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Adequacy of Loan Loss Allowance. Management and the Board of Directors
of First Federal regularly review First Federal's loan portfolio and determine
whether the allowance established for loan losses is adequate. In making this
evaluation, management and the Board of Directors consider, among other matters,
the fair value of the underlying collateral, economic conditions, historical
loan loss experience and other factors that warrant recognition in providing for
an adequate loan loss allowance. Because future events affecting borrowers and
loan collateral cannot be predicted with any degree of certainty, there can be
no absolute assurance that existing allowances are adequate or that substantial
increases to allowances will not be necessary should the quality of any loan
deteriorate as a result of the factors discussed above. There is also no
assurance that First Federal's loss allowances will be adequate to cover costs
and losses in connection with any foreclosures or repossessions. Increases in
allowances, if necessary, are most probable in connection with the nonperforming
assets and other loans of concern discussed in this Prospectus. When future
examinations are conducted by the OTS or the FDIC, the
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examiners may require First Federal to provide for higher loan loss allowances.
See "Business -Loan Delinquencies; Nonperforming Assets and Classified Assets"
and "Regulation - Federal Regulation of Thrift Institutions."
Offering Price of Holding Company Common Stock Arbitrarily Determined.
In order to finance the purchase for cash of the First Federal Common Stock not
exchanged for Holding Company Common Stock pursuant to the Merger, the Holding
Company is offering for sale the Holding Company Common Stock and the Units. The
price of the Holding Company Common Stock has been arbitrarily established by
the Board of Directors of the Holding Company in consultation with Hoefer &
Arnett and does not necessarily bear any relationship to any established
investment criteria of value such as book value, earnings or assets, including
the intrinsic value, if any, of the Holding Company or First Federal's deposit
base and its more than 30-year old franchise.
Reliance on Chief Executive Officer. The successful operation of First
Federal depends heavily upon the active involvement of First Federal's current
President and Chief Executive Officer, J. Stanley Stephen, age 64, whose loss
could have an adverse effect on the Company. Mr. Stephen has been President and
Chief Executive Officer of First Federal since 1991. First Federal currently has
no plans to purchase "key-man" life insurance with respect to Mr. Stephen;
however, it has recently entered into an employment and supplemental retirement
agreement with Mr. Stephen wherein he agrees to work full-time with First
Federal for at least the next five years and will contribute over the next five
years one-half of the monthly cost to First Federal for his supplemental
retirement. See "Management of First Federal - Employment Agreements."
Dilution. Upon completion of the Offering, there will be an immediate
and substantial dilution of the net tangible book value of the Holding Company
Common Stock from the public offering price. This dilution results from the
payment of a premium paid as part of the merger consideration and expenses
incurred in connection with the Offering. As of March 31, 1997 the net tangible
book value per common share of First Federal was approximately $6.17 per share
(adjusted for the Exchange Ratio of First Federal Common Stock for Holding
Company Common Stock). After giving effect to the receipt of the minimum net
proceeds of the Offering, and assuming the payment of $4,326,000 to First
Federal shareholders who may elect to receive cash in the Merger (equating to
75% of the First Federal Holding Company Common Stock outstanding), the net
tangible book value would be $3.36 per share of Holding Company Common Stock as
of March 31, 1997. As a result of the assumptions stated above, investors would
suffer a dilution of $6.64 per share of Holding Company Common Stock from the
offering price of $10.00 as of March 31, 1997 based on the minimum amount of
Holding Company Common Stock sold pursuant to the Offering.
Dividends. Initially, it is not expected that the Holding Company will
pay cash dividends on the Holding Company Common Stock. Indeed, First Federal
has paid only stock dividends and not cash dividends on the First Federal Common
Stock previously sold in 1992. Accordingly, any investor who anticipates the
need for current cash dividends from this investment should not purchase any
shares of Holding Company Common Stock offered. The declaration and payment of
future cash dividends will be subject to, among other things, the level of First
Federal's regulatory capital relative to its capital requirements, the Holding
Company's and First Federal's then current and projected consolidated operating
results, financial condition, regulatory restrictions, future growth plans and
other factors the Board deems relevant. First Federal is required to pay cash
dividends of $88,000 per year on its outstanding preferred stock prior to any
dividends being paid to the Holding Company. The Holding Company will be
prohibited from paying dividends on junior securities such as the Holding
Company Common Stock unless all interest payments with respect to the Debentures
have been made. There can be no assurance that the Holding Company will be able
to pay dividends or, if dividends are permitted, that the Board of Directors
will determine to pay dividends on the Holding Company Common Stock. See "Market
and Dividend Information."
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Interest Rate Risk. First Federal's profitability, like that of many
financial institutions, is dependent to a large extent upon its net interest
income, which is the difference or "spread" between the interest it earns on
interest-earning assets, such as loans and, to a much lesser extent, securities
and the interest it pays on interest-bearing liabilities, such as deposits and
borrowings. As a result, First Federal's profitability may be adversely affected
by rapid changes in interest rates. First Federal generally attempts to maximize
net interest income by achieving a positive interest rate spread that can be
sustained during fluctuations in prevailing interest rates. First Federal
believes its 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. First Federal has implemented these policies
generally by selling its long-term fixed-rate mortgage loan originations,
retaining its adjustable-rate and balloon mortgage loans, and originating and
retaining its short-term consumer loans.
No Prior Market for Holding Company Common Stock; Potential Illiquidity
of Holding Company Common Stock. The Holding Company has never issued capital
stock to the public and, consequently, there is no existing market for the
Holding Company Common Stock. Although the Holding Company has received
preliminary approval to list the Holding Company Common Stock among the
"Small-Cap Issues" on Nasdaq under the symbol "____", there can be no assurance
that the Holding Company will meet Nasdaq listing requirements, which include a
minimum market capitalization, a minimum of 300 stockholders immediately upon
the closing of the Offering and a minimum of two market makers in the Holding
Company Common Stock. In the event that the Holding Company does not satisfy the
criteria for listing on the Nasdaq, it will seek to list its shares on the OTC
Bulletin Board administered by the NASD. Moreover, there can be no assurance
that an active or liquid trading market will develop, or that if a market
develops, it will continue. A public market having the desirable characteristics
of depth, liquidity and orderliness depends upon the presence in the marketplace
of both willing buyers and sellers of the Holding Company Common Stock at any
given time, which is not within the control of the Holding Company or any market
maker. Accordingly, there can be no assurance that purchasers will be able to
sell their shares at or above the price paid for the shares in the Offering.
Investors should consider, therefore, the potentially illiquid and long-term
nature of an investment in the Holding Company Common Stock. See "Market and
Dividend Information."
Concentration of Lending Activities. Substantially all of the aggregate
principal amount of First Federal's real estate mortgage loans are secured by
one- to four-family residential properties located in First Federal's primary
market area. While First Federal currently believes that its loans are
adequately secured or reserved for and has experienced average annual net
charge-offs of approximately $22,300 on an average loan portfolio of $46.2
million over the last three fiscal years, in the event that real estate prices
in its primary market area weaken or economic conditions in its primary market
area deteriorate, thereby reducing the value of properties securing First
Federal's loans, it is possible both that some borrowers may default and that
the value of the real estate collateral may be insufficient to fully secure the
loan. In either event, which is unforeseen at this time, First Federal may
experience increased levels of delinquencies and related losses having an
adverse impact on income and stockholders' equity.
Risks Associated with Automobile Loans. At September 30, 1996 First
Federal had $9.4 million of automobile loans, of which $2.3 million were issued
pursuant to First Federal's "second chance" auto program to sub-prime borrowers
with less than perfect credit. First Federal has had a policy of not purchasing
any "second chance" auto loans. Although First Federal has attempted to mitigate
the credit risk by insuring these loans, in the event of a default by the
insurer, First Federal would assume the entire credit risk. Further, automobiles
rapidly depreciate. As a consequence, in the absence of such credit-default
insurance, the borrower's continuing financial stability rather than the value
of the vehicle is generally relied upon for the repayment of the related
receivable. This is especially true with respect to loans originated by First
Federal, because First Federal's underwriting procedures, which include personal
interviews with the borrower prior to funding, are primarily based on the
ability of the borrower to repay. As a result, First Federal may permit the
origination of a loan in excess of the
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manufacturer's suggested retail price, in the case of new vehicles, or the value
established by used car reference publications. Therefore, a repossessed
automobile may not provide an adequate source of repayment of the outstanding
loan balance. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans. See "Business - Consumer Lending."
Risks Associated with Anti-Takeover Provisions. Certain provisions of
the Holding Company's certificate of incorporation and bylaws assist the Holding
Company in maintaining its status as an independent publicly owned corporation.
These provisions provide for, among other things, noncumulative voting for
directors, limitations on the calling of special meetings, a fair
price/supermajority vote requirement for certain business combinations and
certain notice requirements. Any or all of these provisions may serve to
entrench current management and to discourage potential proxy contests and other
takeover attempts, particularly those which have not been negotiated with the
Board of Directors.
Federal law requires OTS approval prior to the acquisition of "control"
(as defined in OTS regulations) of an insured institution, including a holding
company thereof. In the event that holders of revocable proxies for more than
25% of the shares of Holding Company Common Stock acting as a group or in
concert with other proxy holders seek, among other things, to elect one-third or
more of the Holding Company's Board of Directors, to cause the Holding Company's
shareholders to approve the acquisition or corporate reorganization of the
Holding Company or to exert a continuing influence on a material aspect of the
business operations of the Holding Company, such actions could be deemed to be a
change of control, subject to OTS approval. A Delaware statute also limits the
circumstances under which a Delaware corporation may engage in any business
combinations (as defined by the statute) with an interested shareholder (i.e.,
any person or entity that owns 15% or more of the voting stock). See " -- Other
Restrictions on Acquisitions of Stock."
The ownership of Holding Company Common Stock by First Federal's Board
of Directors and executive officers could render it more difficult to obtain
majority support for shareholder proposals opposed by the Board and management.
Assuming the sale of Holding Company Common Stock at the 150,000 shares minimum
and 200,000 shares maximum of the Offering, and assuming that First Federal's
Board and executive officers (13 persons) will receive approximately 110,000 of
the approximately 150,000 shares of Holding Company Common Stock anticipated to
be exchanged as part of the Merger, then under such assumptions, such
individuals would own approximately 36.8% at the minimum and 31.5%, at the
maximum, respectively, of the shares to be outstanding upon completion of the
Offering. Stock ownership by directors and executive officers, if voted as a
block or supported by sufficient other shareholder votes, could enable the Board
and management to block the approval of transactions requiring the approval of
80% of the shareholders under the Holding Company's Certificate of
Incorporation. See ""-- Other Restrictions on Acquisitions of Stock."
Regulatory Oversight. First Federal is subject to extensive regulation,
supervision and examination by the OTS, as its chartering authority and primary
federal regulator, and by the FDIC, which insures its deposits up to applicable
limits. First Federal is a member of the Federal Home Loan Bank System ("FHLB")
and is subject to certain limited regulation by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). As the holding company for
First Federal, the Holding Company will also be subject to regulation and
oversight by the OTS. See "Regulation." Such regulation and supervision governs
the activities in which an institution can engage and is intended primarily for
the protection of the insurance fund and depositors. Regulatory authorities have
been granted extensive discretion in connection with their supervisory and
enforcement activities which are intended to strengthen the financial condition
of the banking industry, including the imposition of restrictions on the
operation of an institution, the classification of assets by the institution and
the adequacy of an institution's allowance for loan losses. See "Regulation -
Federal Regulation of Thrift institutions." Any change in regulators or in
applicable regulation, whether by the OTS, the FDIC, the Comptroller of the
Currency, the Federal Reserve Board or Congress could have a material adverse
impact on the Holding Company, First Federal and their respective operations. In
this regard, legislation has been introduced into Congress that would require
all federal thrift
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<PAGE>
institutions to either convert to a national or a state depository institution
(either a bank or a thrift institution) by June 30, 1998. No assurance can be
given as to whether or in what form such legislation may be enacted.
Competition. First Federal experiences significant competition in its
local market area in both originating real estate and other loans and attracting
deposits. This competition arises from other thrift institutions as well as
commercial companies, mortgage companies, credit unions and national and local
securities firms. On September 30, 1996 First Federal's loan to deposit ratio
was 95.9%, reflecting the high use of its deposits and ability to generate
loans. Such competition may limit First Federal's growth in the future. See
"Business - Competition."
Limitations on Stock Ownership. With certain limited exceptions,
federal regulations prohibit a person or company or a group of persons deemed to
be acting in concert from, directly or indirectly, acquiring more than 10% of
any class of voting stock or obtaining the ability to control in any manner the
election of a majority of the directors or otherwise direct the management or
policies of the Holding Company, without prior notice or application to and
approval of the OTS.
-50-
<PAGE>
THE OFFERING
The Holding Company is offering for sale a minimum of 150,000 shares
and a maximum of 200,000 shares of Common Stock at $10.00 per shares and a
minimum of 3,400 units and a maximum of 3,700 Units ("Units") at $1,000 per
Unit, each Unit consisting of $1,000 of ___% debentures due ____, 2002 (the
"Debentures") and nine warrants ("Warrant"). The Holding Company Common Stock
and Units are to be issued to finance the purchase of the outstanding shares of
First Federal Common Stock pursuant to the merger agreement between First
Federal and the Holding Company dated May 21, 1997. The net proceeds of this
Offering will be used to effectuate the purchase of some of the outstanding
First Federal Common Stock pursuant to the Merger, resulting in a thrift holding
company structure with First Federal as the wholly-owned, sole subsidiary of the
Holding Company. Consummation of the Offering is contingent upon all conditions
to the Merger being satisfied or waived.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the pro forma
beneficial ownership of Holding Company Common Stock upon the completion of the
Offering of each of the directors of First Federal and all directors and
executive officers as a group. The table assumes that (i) the directors and
executive officers acquire the amount of Holding Company Common Stock set forth
in the preceding table, (ii) 150,000 shares are issued as part of the Merger and
(iii) 150,000 minimum shares and 200,000 maximum shares of Holding Company
Common Stock are issued.
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<PAGE>
There are no arrangements known to the registrant, including any pledge
by any person of securities of the registrant, the operation of which may at a
subsequent date result in a change in control of the registrant.
<TABLE>
<CAPTION>
Indicated
Holding Percent of Percent of
Bank Shares Company share Class at Class at
Beneficially Percent of ownership after Minimum of Maximum of
Beneficial Owner Owned(1) Class the Merger Offering Offering
---------------- -------- ----- ---------- -------- --------
DIRECTORS
<S> <C> <C> <C> <C> <C>
Richard L. Peacock 3,868 1.62 8,288 2.76% 2.37%
Ernest A. Wentrcek 3,868 1.62 8,288 2.76 2.37
Jack W. Lester 13,707 5.72 10,650 3.55 3.04
Ken Hayes 1,781 .74 570 .19 .16
Phil Hobson 24,705 10.31 1,250 .42 .36
Charles Neelley 22,915 9.56 53,405 17.81 15.26
J. Roland Ruffino 6,765 2.82 5,800 1.93 1.66
Robert H. Conaway 18,135 7.57 10,000 3.36 2.86
George Koenig 56 .02 140 .05 .04
J. Stanley Stephen 7,771 3.24 9,070 3.02 2.59
EXECUTIVE OFFICERS
Mary L. Hegar 750 .31 1,875 .62 .54
Kay Watson 115 .05 288 .10 .08
Lily Watson 231 .10 578 .19 .17
Directors and executive officers
of First Federal as a group
(13 persons) 104,667 43.68 110,202 36.76 31.50
</TABLE>
- ----------
(1) Amounts include shares held directly and jointly with family members, as
well as shares which are held in retirement accounts, or held by certain
members of the named individuals' families, or held by trusts of which the
named individual is a trustee or substantial beneficiary, with respect to
which shares the respective Directors may be deemed to have sole or shared
voting and/or investment power. Amounts also include stock option awards of
4,143 and 1,553 to President Stephen and some non-employee Directors at the
time of First Federal's conversion to stock form, respectively.
DEBENTURES
The Debentures will be unsecured subordinated obligations of the
Holding Company, will be limited to an aggregate principal amount of $4,200,000
and will mature on __________, 2002. The Debentures will bear interest at the
rate per annum shown on the front cover of this Prospectus from __________, 1997
or from the most recent Interest Payment Date to which interest has been paid or
provided for, payable quarterly on the 15th calendar day
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<PAGE>
of July, October, January and April of each year (or the next succeeding
business day if the 15th calendar day is not a business day), commencing July
15, 1997, to the Person in whose name the Debenture (or any predecessor
Debenture) is registered at the close of business on the Regular Record Date for
such interest, which shall be ______ or ___________ (whether or not a Business
Day), as the case may be, next preceding such Interest Payment Date.
The Indenture provides that the Holding Company will not (i) declare or
pay any dividend or make any other distribution on any Junior Securities, except
dividends or distributions payable in Junior Securities, or (ii) purchase,
redeem or otherwise acquire or retire for value any Junior Securities, except
Junior Securities acquired upon conversion thereof into other Junior Securities,
or (iii) permit a Subsidiary to purchase, redeem or otherwise acquire or retire
for value any Junior Securities if, at the time such dividend, distribution,
purchase, redemption or other acquisition is effected, a default in the payment
of any interest upon any Debenture when it becomes due and payable or a default
in the payment of the principal of (or premium, if any, on) any Debenture at its
Maturity shall have occurred and be continuing.
The term "Junior Securities" means (i) shares of Common Stock of the
Holding Company, (ii) shares of any other class or classes of capital stock of
the Holding Company, (iii) any other non-debt securities of the Holding Company
(whether or not such other securities are convertible into Junior Securities),
or (iv) debt securities of the Holding Company (other than the Debentures) as to
which, in the instrument creating or evidencing the same or pursuant to which
the same is outstanding, it is provided that such debt securities are not Senior
Indebtedness with respect to, or do not rank pari passu with, the Debentures.
WARRANTS
Each Unit issued in the Offering will contain nine Warrants, each of
which will entitle the holder thereof to purchase one share of the Holding
Company's Common Stock at an exercise price of $12.50 at any time prior to 5:00
p.m., Eastern Time on _______, 2002. The number of shares purchasable upon
exercise of the Units and the exercise price shall be subject to adjustment to
reflect among other things, stock dividends on or stock splits of the Common
Stock or reclassification of its shares of Common Stock. In such situation, the
number of shares purchasable upon exercise will be adjusted so that the Warrant
holder shall be entitled to receive the kind and number of shares which the
holder thereof would have owned or been entitled to receive after the occurrence
of any of such events if the Units had been exercised prior thereto. The
exercise price will be adjusted accordingly. It is not anticipated that the
Units will be traded publicly, and therefore investors may experience
substantial difficulty liquidating their investment in the Units. If a market
should develop for the Units, the market price may be greater or less than the
portion of each Unit's price which is attributable to the Warrants offered
hereby. The Warrants have no value other than as the right to acquire Common
Stock of the Holding Company at the exercise price. The Warrants do not confer
upon the holders thereof any of the rights or privileges of a stockholder.
Accordingly, the Warrants do not entitle holders thereof to receive any
dividends, to vote, to call meetings or to receive any distribution upon a
liquidation of the Company. The Holding Company has authorized and reserved for
issuance a number of shares of Common Stock sufficient to provide for the
exercise of the rights represented by the Warrants. Shares issued upon exercise
of the Warrants will be fully paid and nonassessable. Warrants not exercised
prior to 5:00 p.m., Central Time, on ___________, 2002 shall become null and
void.
PROPOSAL III - RATIFICATION OF THE APPOINTMENT OF AUDITORS
The Board of Directors has renewed First Federal's arrangement for
Crowe, Chizek and Company LLP ("Crowe Chizek") to be its auditors for the 1997
fiscal year, subject to the ratification of the appointment by First Federal's
stockholders. A representative of Crowe Chizek is expected to attend the Meeting
to respond to appropriate questions and will have an opportunity to make a
statement if he so desires.
-53-
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
RATIFICATION OF THE APPOINTMENT OF CROWE, CHIZEK AND COMPANY LLP AS FIRST
FEDERAL'S AUDITORS FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 1997.
PROPOSAL IV - ADJOURNMENT OF MEETING
The Merger, as described above, must be approved by a majority of the
outstanding shares of Common Stock. The form of Revocable Proxy sent to
stockholders with this proxy statement sets forth a proposal to permit the proxy
holder to vote the proxy in favor of adjournment of the Meeting in order to
solicit additional proxies if, by the date of the Meeting, a majority of the
shares of Common Stock are not voted in favor of the Merger. The proposal to
authorize such adjournment must be approved by a majority of the votes present
in person or by proxy at the Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THIS
PROPOSAL AND REQUESTS THAT STOCKHOLDERS CHECK THE BOX PERMITTING ADJOURNMENT OF
THE MEETING IN THE EVENT SUFFICIENT VOTES ARE NOT CAST IN FAVOR OF THE MERGER.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Holding Company has only recently been formed and, accordingly, has
no results of operations. The following discussion is intended to provide
information to facilitate the understanding and assessment of significant
changes and trends related to the financial condition of First Federal and the
results of its operations. This discussion and analysis should be read in
conjunction with First Federal's audited financial statements and notes thereto
included elsewhere in this Prospectus.
GENERAL
First Federal's major goals are to provide high quality full service
retail banking on a profitable basis to its customers through its offices
located in Bryan/College Station and its loan production offices located in its
expanded trade area between Dallas, Houston and Austin, Texas. First Federal
intends to continue to focus primarily on one- to four-family residential loans,
direct and indirect consumer lending, including home improvement loans and
construction loans, and commercial business loans, some of which are partially
guaranteed by the U.S. Small Business Administration. In addition, First Federal
also seeks to continue to improve its asset quality and continue to minimize, to
the extent possible, its vulnerability to changes in interest rates in order to
maintain a reasonable 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 lesser extent mortgage-backed securities and other
securities ("interest-earning assets") and the average 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
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<PAGE>
competitive conditions that influence interest rates, loan demand, deposit
flows, regulatory developments and the types of assets and liabilities on its
balance sheet.
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 repossessed real estate
losses, 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
utilizing a fully-staffed residential loan department and SBA business loan
staff, along with income from service charges and fees on checking accounts from
its recent transition to full service retail banking, while continuing to reduce
operating expenses, 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, without requiring additional
capital.
First Federal's recent restructuring to provide full service banking
and more convenience to its customers has caused an 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, 1996. 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 the Bank to originate loans
and realize profits on the sale of these loans and related servicing rights to
the secondary market and to increase its service charge and fee income from
additional checking accounts resulting from its recent transition to
full-service banking. Over the past year, the volume of origination and sale of
these residential mortgage loans by First Federal declined; however, First
Federal experienced an increase of $117,000 in profits from the sale of loans
and mortgage servicing rights in part due to the sale in 1996 of servicing
rights originated in previous years. First Federal believes this decline in the
volume of origination and sale of residential mortgage loans was caused by an
increase in the general market interest rates during the first part of fiscal
1996, and also by an ever-increasing number of residential mortgage lenders in
its primary trade area competing for the same overall volume. Total noninterest
income increased $281,000 from 1995 to 1996, while noninterest expense increased
$67,000 (excluding the one-time special SAIF assessment of $333,000 in 1996).
In order to offset this decline in the Bank's origination and sale of
residential mortgage loans to the secondary market, First Federal's senior
management is continuing to restructure its residential mortgage lending
department to improve further its efficiency and effectiveness while expanding
consumer and small business lending. In addition, senior management has
continued its effort to control operating expenses. Noninterest expense
(operating expenses which do not include interest paid on deposit accounts and
other borrowings) increased slightly from 4.47% of average assets for the year
ended September 30, 1995, to 4.60% for the year ended September 30, 1996
(excluding the SAIF assessment). Management believes that continuing this
strategy will help it meet the full-service banking needs of its customers in
its competitive market, contributing to increased checking accounts and service
charges and fee income therefrom.
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 $40.3 million or 77.6% of total loans, while loans maturing over
five years total $11.6 million or 22.4% of total loans. At September 30, 1996,
only $2.2 million of its total residential loan portfolio of $30.5 million
consisted of long-term, fixed-rate loans which were predominantly originated
prior to 1980. 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.
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<PAGE>
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, Senior Vice President/Financial, Executive Vice
President of Operations and one outside Director. 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 so
as 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 absolute 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 recently emphasized growth in
noninterest-bearing deposits such as checking accounts or lower interest-bearing
savings deposits 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, the Bank has developed several strategies to manage its
interest rate risk. Primarily, the Bank is currently selling all newly-
originated one-to four-family residential mortgage loans which are saleable in
the secondary market--most of which are long-term fixed-rate loans. In addition,
the Bank currently offers three-year fixed rate balloon loans and other
adjustable rate loans, and has implemented an active, diversified short-term
consumer lending program, giving First Federal an opportunity to reprice its
loans on a more frequent basis.
NET PORTFOLIO VALUE
The OTS, First Federal's primary regulator has issued a proposed rule
for the calculation of an interest rate risk component for institutions with a
greater than "normal" (i.e., greater than 2%) level of interest rate risk
exposure ("NPV"). The OTS has not yet implemented the capital deduction for
interest rate risk. NPV is the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet contracts.
This approach calculates the difference between the present value of expected
cash flows from assets and the present value of expected cash flows from
liabilities, as well as cash flows from off-balance sheet contracts. Under OTS
regulations, an institution's "normal" level of interest rate risk in the event
of an assumed change in interest rates is a decrease in the institution's NPV in
an amount not exceeding 2% of the present value of its assets.
The amount of that deduction is one-half of the difference between (a) the
institution's actual calculated exposure to a 200 basis point interest rate
increase or decrease (whichever results in the greater pro forma decrease in
NPV) and (b) its "normal" level of exposure which is 2% of the present value of
its assets. If a capital deduction was required for the September, 1996
reporting period, the deduction for risk-based capital purposes would not be
material to the Bank.
It has been, and continues to be, an objective of First Federal's Board
of Directors and management to manage interest rate risk. The Bank'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."
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<PAGE>
Presented below, as of September 30, 1996, 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 400 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.
Change in
Interest Rate Estimated At September 30, 1996
------------------------
(Basis Points) NPV $ Change % Change
-------------- --- -------- --------
(Dollars in Thousands)
+400 $6,150 $ (521) (8)%
+300 6,375 (296) (4)
+200 6,545 (126) (2)
+100 6,658 (13) ---
--- 6,671 --- ---
-100 6,549 (122) (2)
-200 6,401 (270) (4)
-300 6,405 (266) (4)
-400 6,536 (135) (2)
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 400 basis point change in interest rates,
the Bank would experience a 2% decrease in NPV in a declining rate environment
and a 8.0% decrease in a rising rate environment. As of September 30, 1996, an
increase in interest rates of 200 basis points would have resulted in a 2%
decrease in the present value of the Bank's assets, while a change in the
interest rates of negative 200 basis points would have resulted in a 4% decrease
in the present value of the Bank's assets.
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.
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<PAGE>
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 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.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- --------------------------- --------------------------------
Average Average Average
Outstanding Interest Outstanding Interest Outstanding Interest
Balance Earned Yield Balance Earned Yield Balance Earned Yield
----------- ------- ----- ----------- ------- ----- ----------- -------- -----
(Dollars in Thousands)
Interest-earning
assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable, net.............. $48,185 $4,407 9.15% $47,464 $4,187 8.82% $ 43,009 $ 3,619 8.41%
Mortgage-backed securities........ 1,573 99 6.29 2,440 162 6.64 3,259 205 6.29
Securities......................... 1,000 46 4.60 1,000 42 4.20 1,000 33 3.30
Interest bearing deposits
with Federal Home Loan Bank....... 3,870 227 5.87 4,329 259 5.98 3,379 133 3.94
Other interest-earning assets...... 817 49 6.00 767 48 6.26 725 30 4.14
--- -- --- -- --- --
Total interest-earning assets... 55,445 4,828 8.71 56,000 4,698 8.39 51,372 4,020 7.83
Noninterest-earning assets.......... 3,478 3,255 2,804
----- ----- -----
Total assets....................... $58,923 $59,255 $ 54,176
======= ======= ========
</TABLE>
-58-
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------- ---------------------------- --------------------------------
Average Average Average
Outstanding Interest Outstanding Interest Outstanding Interest
Balance Paid Cost Balance Paid Cost Balance Paid Cost
--------------------------- ----------------------------- --------------------------------
(Dollars in Thousands)
Interest-bearing liabilities:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Deposits............................ $51,243 $2,358 4.60% $49,793 $2,146 4.30% $47,786 $ 1,701 3.56%
FHLB advances....................... 89 5 5.62 2,085 148 7.10 679 57 8.39
-- - ---- ----- --- ---- --- -- ----
Total interest-bearing liabilities 51,332 2,363 4.60 51,878 2,294 4.42 48,465 1,758 3.63
Other liabilities(2)................ 3,306 3,282 1,860
----- ----- -----
Total liabilities .................. 55,160 50,325
Stockholders' equity................ 4,285 4,095 3,851
----- ----- -----
Total liabilities and
stockholders' equity............... $58,923 $59,255 $ 54,176
======= ======= ========
Net interest income;
interest rate spread................ $2,465 4.11% $2,404 3.97% $ 2,262 4.20%
====== ==== ====== ==== ======= ====
Net interest margin(1)............... 4.45% 4.29% 4.40%
== ==== ==== ====
Average interest-earning assets
to average interest-bearing
liabilities......................... 108.01% 107.95% 106.00%
====== ====== ======
</TABLE>
- ----------
(1) Net interest margin is net interest income divided by average
interest-earning assets.
(2) Including noninterest-bearing deposits.
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<PAGE>
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.
<TABLE>
<CAPTION>
At September 30,
-------------------------------
1996 1995 1994
---- ---- ----
Weighted average yield on:
<S> <C> <C> <C>
Loans receivable.......................................................... 9.35% 9.06% 8.44%
Mortgage-backed securities................................................ 6.59 6.94 6.05
Securities................................................................ 4.51 4.44 3.21
Other interest-earning assets............................................. 5.79 6.06 5.82
Combined weighted average yield on interest-earning assets................ 9.00 8.60 7.91
Weighted average rate paid on:
Deposits................................................................... 4.33 4.38 3.62
Borrowings................................................................. --- 7.10 ---
Combined weighted average rate paid on interest-bearing liabilities........ 4.33 4.43 3.62
Spread..................................................................... 4.67% 4.17% 4.29%
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended
September 30,
--------------------------------
1996 1995 1994
---- ---- ----
Weighted average yield on:
<S> <C> <C> <C>
Loans receivable............................................................. 9.15% 8.82% 8.41%
Mortgage-backed securities................................................... 6.29 6.64 6.29
Securities................................................................... 4.60 4.20 3.30
Other interest-earning assets................................................ 5.89 6.02 3.97
Combined weighted average yield on interest-earning assets.................. 8.71 8.39 7.83
Weighted average rate paid on:
Deposits..................................................................... 4.60 4.30 3.56
Borrowings................................................................... 5.62 7.10 8.39
Combined weighted average rate paid on interest-bearing liabilities......... 4.60 4.42 3.63
Spread........................................................................ 4.11 3.97 4.20
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 and paid)...................... 4.45% 4.29% 4.40%
</TABLE>
-60-
<PAGE>
The following schedule presents the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities for the periods shown. It distinguishes
between the increase in interest income and interest expense related to higher
outstanding balances and that due 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 the change due to rate.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------------------
1995 vs. 1996 1994 vs. 1995
--------------------------------- ------------------------------------
Increase Total Increase Total
(Decrease) Increase (Decrease) Increase
Due To (Decrease) Due To (Decrease)
-------------------- --------- -------------------- ----------
Volume Rate Volume Rate
------- ------ -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans................................................ $ 64 $156 $220 $387 $181 $568
Mortgage-backed securities.......................... (55) (8) (63) (54) 11 (43)
Securities........................................... --- 4 4 --- 9 9
Interest bearing deposits with Federal
Home Loan Bank..................................... (22) (10) (32) 44 82 126
Other interest-earning assets........................ 3 (2) 1 2 16 18
-- --- - - -- --
Total interest-earning assets....................... (10) 140 130 379 299 678
---- --- --- --- --- ---
Interest-bearing liabilities:
Deposits............................................. 64 148 212 74 371 445
FHLB advances ....................................... (117) (26) (143) 108 (17) 91
----- ---- ----- --- ---- --
Total interest-bearing liabilities................. (53) 122 69 182 354 536
---- --- -- --- --- ---
Net interest income................................... $ 43 $ 18 $197 $(55)
===== ==== ==== ====
Net increase in net interest income................... $ 61 $ 142
===== ======
</TABLE>
-61-
<PAGE>
RESULTS OF OPERATIONS
First Federal's results of operations are primarily dependent on its
net interest income--which is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Interest income is a function of the average balances of interest-earning assets
outstanding during the period and the average yields earned on such assets.
Interest expense is a function of the average amount of interest-bearing
liabilities outstanding during the period and the average rates paid on such
liabilities. First Federal also generates noninterest income, such as income
from service charges and fees on checking accounts, loan servicing and other
fees and charges and gains on sales of loans and servicing rights. First
Federal'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.
COMPARISON OF FISCAL YEAR ENDED SEPTEMBER 30, 1996 TO SEPTEMBER 30, 1995
First Federal reported net income of $234,000 for the year ended
September 30, 1996 compared to $211,000 for the year ended September 30, 1995,
an increase of $23,000, or 10.9%. Excluding the nonrecurring September 1996 SAIF
assessment, after tax net income would have been $454,000. This represents a
115% increase over net income from the previous year. The increase in net income
resulted primarily from an increase in service charge income of $172,000 coupled
with an increase in gain on sale of loans and mortgage servicing rights of
$117,000. In addition, the Bank recorded a negative provision for loan losses of
($52,000) for the year ended September 30, 1996 compared to $27,000 for the year
ended September 30, 1995. These items were largely offset by a $333,000 special
SAIF assessment for SAIF insured deposits as a result of a federal law enacted
on September 30, 1996. These items are more fully discussed below.
Net interest income increased $61,000 to $2.5 million for the year
ended September 30, 1996 from $2.4 million for the year ended September 30,
1995. This increase resulted primarily from increases in both the yield earned
and the average balance of the Bank's loan portfolio, offset in part by an 18
basis point increase in the Bank's cost of funds. The increase in the yield on
loans of 33 basis points was primarily the result of an increase in consumer
automobile loans which yield a higher rate of interest than traditional mortgage
loans and the origination of three year balloon loans at higher initial rates.
As a result, First Federal's net interest margin increased to 4.45% for the year
ended September 30, 1996 from 4.29% for the year ended September 30, 1995. The
spread between the average yield on interest-earning assets and the average cost
of interest-bearing liabilities also increased from 3.97% for the year ended
September 30, 1995 to 4.11% for the year ended September 30, 1996.
The Bank recorded a $52,000 negative provision for loan losses for the
year ended September 30, 1996 compared to a $27,000 provision for loan losses
for the year ended September 30, 1995. The decrease in the provision for loan
losses was a result of management reevaluation of estimates used in calculating
the allowance for loan losses due to a decrease in delinquencies and nonaccrual
loans, continued low levels of actual charge-offs over the last three fiscal
years relative to the allowance for loan losses and the use of credit-default
loss insurance coverage for new automobile loans to limit the Bank's loan loss
exposure. The provision for loan losses is based on management's periodic review
of the Bank's loan portfolio which considers, among other factors, past actual
loan loss experience, the general prevailing economic conditions, changes in the
size, composition and risks inherent in the loan portfolio, independent
third-party loan reviews, and specific borrower considerations such as the
ability to repay the loan and the estimated value of the underlying collateral.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for estimated
losses on loans. Such agencies may require the Bank to provide additions to the
allowance based upon judgments which differ from those of management.
Noninterest income increased to $873,000 for the year ended September
30, 1996 from $592,000 for the year ended September 30, 1995. The increase was
primarily due to increased service charge income of $172,000 resulting from
service charges assessed on a new checking account coupled with an increase in
return check charges.
-62-
<PAGE>
In addition, the Bank realized a $117,000 increase in the gain on sale of loans
and mortgage servicing rights due to a large extent to the sale of all Federal
Home Loan Mortgage Corporation ("FHLMC") servicing rights.
Noninterest expense increased $400,000 to $3.0 million for the year
ended September 30, 1996 from $2.6 million for the year ended September 30, 1995
primarily as a result of a $333,000 special FDIC assessment on SAIF-insured
deposits which was enacted into law on September 30, 1996. As a result, the Bank
will experience a reduction in its SAIF insurance expense in future periods. In
addition, occupancy and equipment expense increased $37,000 due to an increase
in depreciation and the remodeling of the main office, and data processing
expense increased $37,000 as a result of the Bank's full year's operations on
the new data processing system, which was implemented to provide full service
retail banking to First Federal customers.
Income tax expense decreased $2,000 from $110,000 for the year ended
September 30, 1995 to $108,000 for the year ended September 30, 1996, reflecting
a tax rate of 31.6% for the year ended September 30, 1996 versus 34.3% for the
year ended September 30, 1995.
COMPARISON OF FISCAL YEAR ENDED SEPTEMBER 30, 1995 TO SEPTEMBER 30, 1994
First Federal reported net income of $211,000 for the year ended
September 30, 1995 compared to $193,000 net income in fiscal 1994, excluding
$264,000 (after-tax) additional net income due to the settlement of a lawsuit
filed by First Federal. Total net income for fiscal 1994 was $457,000, including
proceeds from the settlement of the lawsuit. Thus, the net income of $211,000
for the year ending September 30, 1995, was $246,000 less than the total net
income for the year ending September 30, 1994 (including income from settlement
of the law suit). In addition, for the years ending September 30, 1994, and
September 30, 1995, significant one-time expenses were incurred in connection
with the transition of the Bank into full-service retail banking. Therefore,
this decrease resulted primarily from an increase in the provision for loan
losses from a $401,000 (before-tax) negative provision (resulting from the
lawsuit recovery) to a $27,000 provision in 1995.
Net interest income increased $142,000 to $2.4 million for the year
ended September 30, 1995 from $2.3 million for 1994. This increase resulted
primarily from increases in both the yield earned and the average balance of the
Bank's loan portfolio, offset in part by an increase in the Bank's cost of
deposits reflecting an increase in general market interest rates and, to a
lesser extent, an increase in the average deposit balance. As a result, for the
year ended September 30, 1995, First Federal's net interest margin decreased to
4.29% and the spread between the average yield on interest earning assets and
the average cost of funds decreased from 4.20% for 1994 to 3.97% for 1995.
During the year ended September 30, 1995, First Federal recorded a
provision for loan losses of $27,000 based on management's analysis of the loan
portfolio, as described above. During the year ended September 30, 1994, the
Bank recorded a negative loan loss provision of $401,000 primarily as a result
of $400,000 of proceeds received ($264,000 net of income tax) from the
settlement of a lawsuit filed by First Federal and related to a previously
charged-off pool of automobile loans.
Management will continue to monitor the appropriate factors when
considering future levels of provisions and the allowance for loan losses. While
management believes that it uses the best information available to determine the
allowance for estimated loan losses, unforeseen market conditions could result
in adjustments to the allowance for estimated loan losses and net earnings could
be significantly affected if circumstances differ substantially from the
assumptions used in determining the allowance. In addition, the OTS as part of
its review process may require the Bank to establish additional general or
specific allowances.
Noninterest income declined to $592,000 for the year ended September
30, 1995 from $1.1 million for the previous year, primarily due to a $695,000
decline in profits from the sale of loans and servicing rights. This drop in
profits reflects both a rising interest rate environment for the first half of
1995, and significant increased competition from additional residential mortgage
lenders in First Federal's primary trade area.
-63-
<PAGE>
Noninterest expense declined by $448,000 to $2.6 million for the year
ended September 30, 1995 from $3.1 million for the year ended September 30,
1994. This decrease reflects management's continuing efforts to reduce expenses
in all areas of operations of the Bank, while at the same time absorbing some
one-time expenses in connection with the transition into full-service retail
banking.
Income tax expense decreased $124,000 to $110,000 for the year ended
September 30, 1995 as compared to $234,000 for the previous year, reflecting the
lower 1995 pretax earnings of the Bank.
FINANCIAL CONDITION
First Federal's total assets were $57.6 million as of September 30,
1996 compared to $61.4 million at September 30, 1995, a decrease of $3.8
million, or 6.2%. The decrease was a direct result of a planned reduction of
high-cost deposits of $3.3 million resulting from management's decision to lower
excess cash on hand by decreasing higher cost deposits. In addition, the Bank no
longer had FHLB advances outstanding at September 30, 1996 compared to $1.1
million at September 30, 1995.
Loans receivable (excluding loans held for sale at month end to the
secondary market) increased $2.4 million to $49.2 million at September 30, 1996
from $46.8 million at September 30, 1995. The increase resulted primarily from
the origination of credit-default insured auto loans. This increase was offset
by a decrease in cash and cash equivalents of $4.1 million due to the planned
reduction in high-cost deposits and the utilization of any remaining excess cash
balances to fund loan originations.
LIQUIDITY AND CAPITAL RESOURCES
First Federal's primary sources of funds are deposits, checking
accounts, principal and interest payments on loans and mortgage related
securities, proceeds from sales of long term, fixed-rate residential mortgage
loans and other funds provided from operations. Additionally, First Federal may
borrow funds from the Federal Home Loan Bank of Dallas or utilize 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, general economic
conditions and most recently, the restructuring occurring in the thrift
institutions industry.
First Federal 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, 1996, First Federal's regulatory
liquidity ratio was 8.27% or 3.27% above the 5% 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. At September 30, 1996, First Federal had
commitments to originate loans, including loans in process, totaling $7.6
million. First Federal also had $112,000 of outstanding unused lines of credit
and $175,000 of letters of credit. First Federal considers its liquidity and
capital resources to be adequate to meet its foreseeable short and long-term
needs. First Federal expects to be able to fund or refinance, on a timely basis,
its material commitments and long-term liabilities. First Federal also has the
ability, if needed, to borrow up to $20.3 million from the FHLB of Dallas for
liquidity purposes. At September 30, 1996, First Federal had no advances
outstanding from the Federal Home Loan Bank.
-64-
<PAGE>
First Federal'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.
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, September 30,
1996 1995
------------ ------------
(In Thousands)
Operating Activities:
<S> <C> <C>
Net income............................................................. $ 234 $ 211
Adjustment to reconcile net income or loss to net
cash provided by operating activities................................. 1,811 583
----- ---
Net cash provided by operating activities.............................. 2,045 794
Net cash used in investing activities.................................. (1,615) (5,433)
Net cash provided by (used in) financing activities.................... (4,565) 5,120
------ -----
Net increase (decrease) in cash and cash equivalents................... (4,135) 481
Cash and cash equivalents at beginning of period....................... 6,941 6,460
----- -----
Cash and cash equivalents at end of period............................. $2,806 $ 6,941
====== =======
</TABLE>
The primary investing activity of First Federal is lending. Loans
originated net of repayments and sales used $1.1 million and $5.3 million in
cash for the year ended September 30, 1996 and September 30, 1995, respectively.
During the years ended September 30, 1996 and 1995, deposits decreased $3.3
million (through a planned reduction of higher costing deposits) and increased
$4.1 million, respectively.
On April 22, 1993, First Federal issued 207,159 shares of common and
87,263 shares of preferred stock at $10 per share and received proceeds of $2.4
million, net of costs to convert from a mutual savings institution to a federal
stock institution and recapitalize the Bank. Prior to the conversion, the Bank
did not meet its minimum capital requirements. As a result, First Federal was
subject to conditions specified in a Consent Agreement dated September 20, 1990
and an Operating Agreement dated August 28, 1992. With the completion of the
conversion, on July 1, 1993, the OTS terminated these agreements. The Bank's
tangible, core and risk-based capital was $4.3 million, $4.3 million and $4.6
million at September 30, 1996, which exceeded the minimum required capital
levels of $868,000, $1.7 million and $3.3 million, respectively. See Note 10 of
Notes to Consolidated Financial Statements.
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 First Federal'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 First Federal's assets and liabilities are critical to the maintenance of
acceptable performance levels.
EFFECT OF NEW ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement of Financial Accounting
Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long Lived
Assets and for Long Lived Assets to be Disposed Of." SFAS
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<PAGE>
No. 121 requires that long lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. However, SFAS No. 121 does
not apply to financial instruments, core deposit intangibles, mortgage and other
servicing rights or deferred tax assets. The adoption of SFAS No. 121 for the
year ending September 30, 1997 is not expected to have a material impact on the
results of operations or financial condition of the Bank.
In May 1995, the FASB issued Statement of Financial Accounting
Standards No. 122 ("SFAS No. 122"), "Accounting for Mortgage Servicing Rights."
SFAS No. 122 requires an institution that purchases or originates mortgage loans
and sells or securitizes those loans with servicing rights retained to allocate
the cost of the mortgage loans to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values. In
addition, institutions are required to assess impairment of the capitalized
mortgage servicing portfolio based on the fair value of those rights. SFAS No.
122 is effective for fiscal years beginning after December 15, 1995. SFAS No.
122 will be superseded by Statement of Financial Accounting Standards No. 125
after December 31, 1996. The adoption of SFAS No. 122 for the year ending
September 30, 1997 is not expected to have a material impact on the results of
operations or financial condition of the Bank.
In November 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123"), "Accounting for Stock Based Compensation,"
("SFAS No. 123"). This statement establishes financial accounting standard for
stock-based employee compensation plans. SFAS No. 123 permits the Bank to choose
either a new fair value based method or the current APB Opinion 25 intrinsic
value based method of accounting for its stock-based compensation arrangements.
SFAS No. 123 requires pro forma disclosures of net earnings and earnings per
share computed as if the fair value based method had been applied in financial
statements of companies that continue to follow current practice in accounting
for such arrangements under Opinion 25. The disclosure provisions of SFAS No.
123 are effective for fiscal years beginning after December 15, 1995 and are not
expected to have a material impact on the results of operations or financial
condition of the Bank.
In June 1996, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 125 ("SFAS No. 125"),
"Accounting for Transfers and Extinguishments of Liabilities." SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. SFAS No. 125 requires a
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, and derecognizes liabilities when extinguished. SFAS No. 125 also
supersedes SFAS No. 122 and requires that servicing assets and liabilities be
subsequently measured by amortization in proportion to and over the period of
estimated net servicing income or loss and requires assessment for asset
impairment or increases obligation based on their fair values. SFAS No. 125
applies to transfers and extinguishments occurring after December 31, 1996 and
early or retroactive application is not permitted. Because the volume and
variety of certain transactions will make it difficult for some entities to
comply, some provisions have been delayed by SFAS No. 127. Management
anticipates that the adoption of SFAS No. 125 will not have a material impact on
the financial condition or operations of the Bank.
In March 1997, the accounting requirements for calculating earnings per
share were revised. Basic earnings per share for 1998 and later will be
calculated solely on average common shares outstanding. Diluted earnings per
share will reflect the potential dilution of stock options and other common
stock equivalents. All prior calculations will be restated to be comparable to
the new methods. As the Bank has not had significant dilution from stock
options, the new calculation methods will not significantly affect future basic
earnings per share and diluted earnings per share.
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<PAGE>
BUSINESS
The Holding Company is a newly organized financial institution holding
company that was formed to acquire First Federal. Upon consummation of the
Offering and the Merger, the Holding Company will hold all of the outstanding
shares of First Federal, and First Federal will be the Holding Company's sole
subsidiary. At present, the Holding Company does not have any assets, and does
not conduct any significant business. The Holding Company and First Federal are
headquartered in Bryan, Texas. The executive offices of the Holding Company and
First Federal are located at 2900 Texas Avenue, Bryan, Texas 77802 and its
telephone number at that address is (409) 779-2900.
As a community-oriented, independent financial institution, First
Federal offers a range of retail banking services through its offices located in
Bryan-College Station, Texas. First Federal is principally engaged in the
business of attracting deposits from the general public and using such deposits,
together with other funds, to originate mortgage loans secured by owner occupied
one- to four-family residential properties in its primary market area. To a
lesser extent, First Federal also originates construction, direct and indirect
consumer loans, SBA partially guaranteed business loans, small commercial real
estate and small to medium commercial business loans.
MARKET AREA
First Federal conducts operations through its offices located in
Bryan-College Station, Texas. Management considers the Bryan-College Station
area, Brazos, Burleson, Grimes, Leon, Madison, Robertson and Washington
counties, Texas, to be its primary market area for deposits and lending
activities. The Bryan-College Station area is characterized as a college
community, centered around Texas A&M University. The University's annual budget
of over $622 million is responsible for the vast majority of the government jobs
in the area. Government service provides 39.4% of the jobs in the community and
is primarily responsible for the comparative stability the area has enjoyed
throughout most of the 1980's. Population growth trends within First Federal's
market area have shown increases at rates exceeding those of the State and
unemployment rates have been consistently lower than those of the rest of the
State. During the past five years, a number of independent depository
institutions have been acquired in the Brazos County area, some by out-of-state
multi-bank holding companies. Currently, there are only one other thrift
institution and two state savings banks operating in the area. Consequently,
management believes that the opportunity exists for the expansion of First
Federal's lending and deposit gathering activities as one of the few remaining
independent, community-owned financial institutions now offering full service
retail banking.
LENDING ACTIVITIES
GENERAL
The principal lending activity of First Federal is originating first
mortgage real estate loans secured by owner occupied one- to four-family
residential property, along with an expanding consumer loan program. All long
term, fixed rate conventional mortgage loans are sold immediately to the
secondary market.
SINGLE-FAMILY RESIDENTIAL REAL ESTATE LENDING. A substantial portion of
the loans originated for portfolio by the Bank are conventional mortgage loans
(i.e., not guaranteed or insured by agencies of the federal government) which
are secured by residential properties; however, most do not conform with the
requirements for sale to Federal National Mortgage Association (the "FNMA") or
FHLMC (i.e., conforming loans), because they exceed the maximum loan to value
ratio to qualify for sale to FNMA or FHLMC, have credit deficiencies (which in
certain cases will result in the Bank securing the loan by additional
collateral), the borrower has an insufficient employment history or the property
does not qualify due to its rural location or lack of comparability for
appraisal purposes. Loans which do not comply with FNMA or FHLMC underwriting
requirements are held in the Bank's loan portfolio.
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<PAGE>
First Federal also originates construction loans, small commercial real
estate and small to medium commercial business loans. In addition, First Federal
has begun to originate SBA loans and Farmers Home Administration rural home
loans for moderate income home buyers. In order to diversify its assets and
increase the proportion of interest rate sensitive assets in its portfolio,
First Federal also has in the past purchased mortgage-backed securities.
Currently, however, First Federal is able to attract sufficient loans to
maintain a high loan-to-deposit ratio and thereby maximize the utilization of
its deposits. Thus, it has not acquired any securities for several years.
Most of First Federal's mortgage-backed securities, and a significant
number of its residential loans were made before the 1980's on a long term,
fixed rate basis. Accordingly, in the event of a change in interest rates, the
yield in those First Federal loans remaining in that category will change much
less quickly than its deposits, which are, for the most part, of the short term
variety. Accordingly, First Federal is vulnerable to an increase in interest
rates on those loans, which at September 30, 1996, represented only $2.2 million
of its $30.5 million in residential loans. First Federal's current policy is not
to invest in long term, fixed rate mortgage-backed securities or retain long
term, fixed rate loans. In order to reduce First Federal's vulnerability to
changes in interest rates, First Federal has increased its originations of
three-year balloon and adjustable rate one- to four-family residential mortgage
loans, consumer (especially automobile) and construction loans. At September 30,
1996, First Federal had $19.7 million of three year balloon loans and $9.6
million of adjustable rate loans out of a total of $51.9 million in gross loans.
Loan originations come primarily from walk-in customers, real estate
brokers, homebuilders and other contractors. All loans in which the aggregate
lending relationship is under $50,000 are approved by First Federal's senior
management and all loan applications for over $50,000 aggregate debt to one
borrower are approved by the Board of Directors.
First Federal requires, in connection with the origination and purchase
of residential real estate loans, title insurance and fire and casualty
insurance coverage, as well as flood insurance where appropriate, to protect
First Federal's interest. The cost of this insurance coverage is paid by the
borrower.
-68-
<PAGE>
Loan Portfolio Composition. The following table sets forth information
concerning the composition of First Federal's loan portfolio, including
mortgage-backed securities, in dollar amounts and in percentages (before
deductions for loans in process, deferred fees and discounts and allowances for
losses) as of the dates indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------------
1996 1995 1994
----------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans
- -----------------
<S> <C> <C> <C> <C> <C> <C>
Residential................................ $30,477 58.70% $30,966 61.10% $27,128 59.76%
Residential held for sale.................. 419 .80 1,840 3.63 2,114 4.66
Commercial................................. 4,175 8.04 3,643 7.19 3,062 6.74
Construction............................... 4,365 8.41 4,261 8.41 4,838 10.66
----- ---- ----- ---- ----- -----
Total real estate loans................. 39,436 75.95 40,710 80.33 37,142 81.82
Other Loans:
- ------------
Consumer loans:
Deposit accounts......................... 967 1.86 705 1.39 789 1.74
Purchased automobile receivables......... --- --- 4 .01 10 .02
Automobile............................... 9,435 18.17 7,634 15.06 6,600 14.54
Other.................................... 1,490 2.87 980 1.94 580 1.28
----- ---- --- ---- --- ----
Total consumer loans.................... 11,892 22.90 9,323 18.40 7,979 17.58
Commercial business loans................. 595 1.15 643 1.27 271 .60
--- ---- --- ---- --- ---
Total other loans....................... 12,487 24.05 9,966 19.67 8,250 18.18
------ ----- ----- ----- ----- -----
Total loans ............................ 51,923 100.00 50,676 100.00 45,392 100.00
Less:
- -----
Undisbursed portion of construction loans.. 1,966 3.79 1,664 3.28 1,847 4.07
Consumer loans in process.................. --- --- --- --- --- ---
Deferred fees and discounts................ 128 .25 87 .17 92 .20
Deferred income............................ 3 .01 3 .01 13 .03
Allowance for losses on loans.............. 247 .48 317 .63 313 .69
--- --- --- --- --- ---
Net loans .............................. $49,579 95.47% $48,605 95.91% $43,127 95.01%
======= ===== ======= ===== ======= =====
</TABLE>
-69-
<PAGE>
The following table shows the fixed- and adjustable-rate composition of
First Federal's loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Fixed-Rate Loans:
- -----------------
Real estate:
<S> <C> <C> <C> <C> <C> <C>
Residential.................................. $22,931 44.16% $24,739 48.81% $27,128 59.76%
Residential held for sale.................... 419 .80 1,840 3.63 2,114 4.66
Commercial................................... 2,162 4.17 2,824 5.57 3,062 6.74
Construction................................. 4,365 8.41 4,261 8.41 4,838 10.66
----- ---- ----- ---- ----- -----
Total real estate loans................... 29,877 57.54 33,664 66.42 37,142 81.82
Consumer loans................................ 11,892 22.90 9,323 18.40 7,979 17.58
Commercial business loans..................... 595 1.15 643 1.27 271 0.60
----- ---- ----- ---- ----- -----
Total fixed-rate loans..................... 42,364 81.59 43,630 86.09 45,392 100.00
----- ---- ----- ---- ----- -----
Adjustable-Rate Loans:
- ----------------------
Real estate:
Residential.................................. 7,546 14.54 6,227 12.29 --- ---
Commercial................................... 2,013 3.87 819 1.62 --- ---
----- ---- ----- ---- ----- -----
Total adjustable rate loans............... 9,559 18.41 7,046 13.91 --- ---
----- ---- ----- ---- ----- -----
Total loans............................... 51,923 100.00 50,676 100.00 45,392 100.00
Less:
- -----
Undisbursed portion of construction loans..... 1,966 3.79 1,664 3.28 1,847 4.07
Consumer loans in process..................... --- --- --- --- --- ---
Deferred fees and discounts................... 128 0.25 87 0.17 92 0.20
Deferred income............................... 3 0.01 3 0.01 13 0.03
Allowance for losses on loans................. 247 0.48 317 0.63 313 0.69
----- ---- ----- ---- ----- -----
Net loans.................................. $49,579 95.47% $48,605 95.91% $43,127 95.01%
======= ===== ======= ===== ======= =====
</TABLE>
First Federal has the authority to purchase loans and loan
participations, but has elected not to do so since 1991.
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<PAGE>
The following table shows the origination, purchase and repayment
activities for loans of First Federal for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
Loans Funded:
- -------------
<S> <C> <C> <C>
Real estate - residential(2)...................... $19,104 $87,908(1) $92,316(1)
- commercial...................... 1,026 1,281 393
- construction or development..... 5,697 6,223 7,159
Non-real estate - consumer........................ 8,534 7,065 7,261
- commercial business............. 1,980 1,065 579
----- ----- -----
Total loans originated......................... 36,341 103,542 107,708
Loans Sold:
- -----------
Loans sold........................................... 13,839 81,838(1) 86,336(1)
Principal repayments and refinancings................ 21,255 16,420 20,316
------ ------ ------
Total reductions..................................... 35,094 98,258 106,652
Decrease in other items, net......................... (273) 194 990
---- --- ---
Net increase......................................... $ 974 $ 5,478 $ 2,046
======= ======= =======
</TABLE>
- ---------------
(1) Includes activity attributable to a mortgage warehouse facility
previously extended to an independent mortgage company.
(2) Includes refinancings of loans from First Federal's portfolio.
At September 30, 1996, First Federal serviced $966,000 in loans for
others.
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<PAGE>
The following schedule illustrates the maturities of First Federal's
loan portfolio, excluding loans held for sale at September 30, 1996. Loans which
have adjustable or renegotiable interest rates and amortizing loans are shown as
maturing in the period during which the loan is contractually due. This schedule
does not reflect the effects of possible prepayments or enforcement of
due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
-------------------------------------------------------
Residential Commercial Construction Consumer Business Total
------------------- ---------------- --------------- ---------------- ---------------- -----------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During
Years Ended
September 30,
- -------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997(1)............. $ 7,565 8.42% $ 507 9.13% $4,365 9.18 $1,585 8.60% $ 280 9.72% $14,302 8.72%
1998 and 1999....... 12,717 9.26 1,168 9.36 --- --- 3,818 11.00 --- --- 17,703 9.64
2000 and 2001....... 893 9.40 925 9.55 --- --- 6,397 13.28 79 9.96 8,294 12.41
2002 to 2006........ 1,073 8.89 86 11.25 --- --- 71 11.80 86 10.81 1,316 9.33
2006 to 2016........ 1,988 8.99 643 9.81 --- --- 21 8.00 150 11.00 2,802 9.28
2017 and following.. 6,660 8.98 846 8.75 --- --- --- --- --- --- 7,506 8.95
- ---- ----- --- ------ ------- ----- -----
$30,896 8.97 $4,175 9.36% $4,365 9.18% $11,892 11.91% $ 595 10.23% $51,923 9.70%
======= ==== ====== ==== ====== ==== ======= ===== ===== ===== ======= ====
</TABLE>
- -------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
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<PAGE>
The total amount of loans due after September 30, 1997 which have fixed
rates of interest (including 3- year balloon home loans and other types of loans
with balloon maturities) is $28.0 million while the total amount of loans due
after such date which have floating or adjustable rates of interest is $9.6
million.
ONE-TO-FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING
One of First Federal's primary lending programs is the origination of
loans secured by mortgages on owner-occupied one- to four-family residences.
Historically (before the 1980's), most of First Federal's residential loans were
made on a fixed rate basis and had contractual maturity (and amortization
schedules) of 30, or to a lesser extent, 15 years. Since 1979, however, in order
to increase the interest rate sensitivity of its residential loan portfolio,
First Federal has emphasized the origination of non-conforming three year
balloon loans (generally with 30 year amortization schedules). At September 30,
1996, $19.7 million or 37.9%, of First Federal's gross loan portfolio consisted
of three-year fixed-rate balloon loans on one- to four-family residences. On the
same date, First Federal had $3.7 million of other fixed-rate residential loans
or 7.1% of the gross loan portfolio. All of these loans were secured by
residential (primarily owner-occupied) properties located in the State of Texas,
with a majority located in First Federal's primary market area.
First Federal's residential loans are generally underwritten and
documented to permit their sale in the secondary market. In the event they are
non-conforming to secondary market standards, First Federal will underwrite such
loans to the extent feasible in accordance with such standards. First Federal
evaluates both the borrower's ability to make principal and interest payments
and the value of the property (and any other collateral) that will secure the
loan. One- to four-family loan originations are generally made in amounts up to
90% of the appraised value of the security property. The determination as to
whether to lend in excess of 80% of the appraised value is made on a
case-by-case basis and is based on a variety of factors, including the
borrower's payment history, length of employment and debt to income ratio, as
well as the quality of the security property. The Bank neither requires nor
obtains private mortgage insurance on its loans. As a result of its higher
loan-to-value ratios and the absence of private mortgage insurance, in the event
of a foreclosure, the Bank is subject to a greater risk of loss on the
disposition of such property in the event of a decrease in value of the
property. The Bank has, however, had a very limited loss experience on such
loans. See " -- Loan Delinquencies; Nonperforming Assets and Classified Assets."
Over the past three fiscal years, the Bank has experienced an average of only
$22,300 in actual annual net charge-offs, resulting from an average total loan
portfolio of $46.2 million.
First Federal's residential mortgage loans customarily include
"due-on-sale" clauses, which are provisions giving First Federal the right to
declare a loan immediately due and payable in the event the borrower sells or
otherwise disposes of the real property subject to the mortgage where the loan
is not repaid in full. First Federal generally enforces these due-on-sale
clauses primarily on fixed rate residential mortgage loans to the extent
permitted by law.
Mortgage-Backed Securities
First Federal has a limited portfolio of mortgage-backed securities
which are held-to-maturity. Such mortgage-backed securities can serve as
collateral for borrowings and, through repayments, as a source of liquidity. For
information regarding the carrying and market values of First Federal's
mortgage-backed securities portfolio, see Note 2 of the Notes to Financial
Statements. Under the Bank's risk-based capital requirement, mortgage-backed
securities have a risk weight of 20% (or 0% in the case of GNMA securities) in
contrast to the 50% risk weight carried by residential loans with a loan to
value ratio of 80% or less. See "Regulation."
Consistent with the Bank's asset/liability policy, approximately 91.9%
of the Bank's mortgage-backed securities carry adjustable interest rates.
-73-
<PAGE>
The following table sets forth the book value of the Bank's
mortgage-backed securities at the dates indicated.
September 30,
-----------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
Issuers:
- --------
Federal Home Loan Mortgage Corporation...... $ 872 $1,672 $2,037
Federal National Mortgage Association....... 420 551 594
Government National Mortgage Association.... --- 55 62
------ ----- -----
Total................................... $1,292 $2,278 $2,693
====== ====== ======
The following table sets forth the contractual maturities of the Bank's
mortgage-backed securities at September 30, 1996. Not considered in the
preparation of the table below is the effect of prepayments, periodic principal
repayments and the adjustable rate nature of these instruments.
<TABLE>
<CAPTION>
Due in
--------------------------------------------------------------------------
6 Months 6 Months 1 to 3 to 5 5 to 10 10 to 20 Over 20 Balance
or Less to 1 Year 3 Years Years Years Years Years Outstanding
------- --------- ------- ----- ----- ----- ----- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Home Loan $ --- $ --- $ --- $ --- $ 5 $231 $636 $ 872
Mortgage Corporation.......
Federal National --- --- --- --- --- 95 325 420
----- ----- ----- ----- ----- ---- ---- ------
Mortgage Association.......
Total................. $ --- $ --- $ --- $ --- $ 5 $326 $961 $1,292
====== ===== ===== ===== ===== ==== ==== ======
</TABLE>
First Federal's mortgage-backed and other securities portfolios are
managed in accordance with a written investment policy adopted by the Board of
Directors. Investments may be made in accordance with the policy and approval by
its Investment Committee. At the present time, First Federal does not have any
investments that are available-for-sale or for trading purposes.
The OTS has issued guidelines regarding management oversight and
accounting treatment for securities, loans, mortgage-backed securities and
derivative securities. The guidelines require thrift institutions to carry
securities at market value unless it can be demonstrated that a class of
securities is intended to be held-to- maturity. As of September 30, 1996, the
Bank held $1.3 million and $1.0 million, respectively, of principal amount of
mortgage-backed securities and other securities which the Bank has the intent
and ability to hold until maturity. As of such date, these securities had a
market value of $1.3 million and $1.0 million, respectively.
CONSUMER LENDING
Federal laws and regulations permit federally chartered thrift
institutions to make secured and unsecured consumer loans up to a maximum of 35%
of their total assets less permissible investments in commercial paper and
corporate debt. In addition, federal thrift institutions have lending authority
above the
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<PAGE>
35% limit for certain consumer loans such as home improvement loans, mobile home
loans, credit card loans and educational loans.
As part of management's strategy to shorten the average effective
maturity and increase the average yield of its interest-earning assets, First
Federal offers various consumer loans, including but not limited to automobile
and home improvement loans. First Federal also offers loans to its depositors on
the security of their deposit accounts. The Bank discourages unsecured loans.
First Federal currently originates substantially all of its consumer
loans in its primary market area. Direct loans are made when First Federal
extends credit directly to the borrower. First Federal has more recently
increased the origination of consumer loans. In September 1991, First Federal
began purchasing motor vehicle installment sales contracts on an indirect basis
from selected automobile dealers pursuant to an agreement established between
the dealer and the Bank ("Dealer Agreement"). In fiscal 1996, the Bank expanded
this lending by initiating a 100% credit default insured indirect automobile
loan origination program for sub-prime borrowers involving dealers in the Bank's
primary market area ("Second Chance Auto Loans"). The Bank's Second Chance Auto
Loan program may be expanded to automobile dealers in the triangle between
Dallas, Houston and Austin. Second Chance Auto Loans have been insured up to
$25,000 per loan through Midland Risk Insurance Company which reinsures its
exposure through Constitution Reinsurance Corporation of New York. Midland Risk
and Constitution Reinsurance carry ratings of B and A+ respectively, by A.M.
Best's, an insurance rating company. At September 30, 1996, Second Chance Auto
Loans totalled $2.3 million.
First Federal may elect in the future to make certain automobile loans
to sub-prime borrowers without credit-default insurance, but with special loan
loss reserves which First Federal believes to be adequate to protect against any
future loan losses.
Second Chance Auto Loans are underwritten according to credit-default
insurance guidelines while other sales contracts are underwritten pursuant to
the Bank's guidelines. Each sales contract is fully amortizing and provides for
level payments over the term of the contract. The contracts are non-recourse to
the originating dealer and are purchased, in First Federal's sole discretion,
from the dealers on a case-by-case basis, after First Federal reviews the
credit-worthiness of the borrower. On Second Chance Auto Loans, First Federal
conducts an interview with the borrower prior to approving the loan for the
purchase of the automobile.
Second Chance Auto Loan contracts are reviewed by First Federal's
automobile loan specialist and monthly reviews are conducted by an independent
outside audit firm, representing the agent for the credit default insurance
company. All monthly audits to date have reflected First Federal's substantial
compliance with credit underwriting guidelines of the credit-default insurance
company. Factors considered under both the Bank's and credit-default insurance
guidelines include, among others, the durability and useful life of the vehicle
being financed in conjunction with the term of the loan and the stability and
creditworthiness of the buyer. Used vehicles are generally not financed longer
than 60 months, to credit-worthy borrowers.
Under both the Bank's and credit-default insurance guidelines the
maximum amount financed may not exceed 120% of current wholesale value of the
vehicle or dealer's cost (traditionally 100% of current retail value), although
the primary focus is on the ability of the borrower to repay the loan rather
than the value of underlying collateral. The amount financed by the Bank will
generally be up to 120% of the current wholesale value or dealer cost, plus the
cost of service and warranty contracts and premiums for physical damage, credit
life and disability insurance obtained in connection with the vehicle or the
financing (such amounts in addition to the sales price, collectively the
"Additional Vehicle Costs"). Accordingly, the amount financed by the Bank under
an installment contract generally does not, in the case of new vehicles, exceed
the manufacturer's suggested retail price of the financed vehicle plus the
Additional Vehicle Costs. In the case of used vehicles, the amount financed may
be 120% of the current wholesale value, as assigned by one of the three standard
reference sources for dealers of used cars and the Additional Vehicle Costs. The
Bank will generally use the "NADA Official Used Car Guide" to obtain a value to
assign to a used vehicle for underwriting purposes.
-75-
<PAGE>
All automobile dealers enter into a "Dealer Agreement" with the Bank.
The Bank has two forms of Dealer Agreements which are substantially similar
except that dealers selling loans pursuant to the "Second Chance" Program are
not required to establish dealer reserves. Otherwise, the Dealer Agreement
provides for a reserve account to be established consisting of a minimum balance
to be maintained at the Bank. The reserve account is used by the Bank to protect
against excess interest payments to the dealer due to loan prepayments, payoffs,
or for repossession expenses plus any losses due to repossessions. Minimum
reserve balances and the method of disbursement are outlined in each Dealer
Agreement. If the reserve account falls below agreed upon levels, the dealer is
required to increase the balance up to the agreed upon minimum amount. Dealers
are also required to make an immediate deposit to cover any shortages under this
type of Dealer Agreement. At September 30, 1996 the Bank had $2.9 million of
automobile loans requiring dealer reserves.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or secured
by rapidly depreciable assets such as automobiles. First Federal makes a very
limited amount of unsecured loans. In such cases, any repossessed collateral for
a defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of the greater likelihood of damage, loss
or depreciation. The remaining deficiency may not warrant further substantial
collection efforts against the borrower. In addition, consumer loan collections
are dependent on the borrower's continuing financial stability, and thus are
more likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans. Such loans may also give rise to claims
and defenses by a consumer loan borrower against an assignee of such loan such
as First Federal, and a borrower may be able to assert against such assignee
claims and defenses which it has against the seller of the underlying
collateral. Consumer loan delinquencies may often increase over time as the
loans age. First Federal has attempted to mitigate this risk by implementing
new, stricter credit underwriting standards. At September 30, 1996,
approximately 1% of the Bank's consumer loans were nonperforming. Included in
these new credit standards is emphasis on the proven cash flow of the borrower
to pay such loan back. However, there can be no assurance that First Federal's
consumer loan delinquencies and repossessions will not increase in the future.
CONSTRUCTION LENDING
First Federal makes construction loans to individuals for the
construction of their residences and to builders primarily for the construction
of contracted-for (custom) residences and to a much lesser extent for residences
that have not been pre-sold.
Construction loans to individuals for their residences generally have
terms of 9 months and are made on a non-amortizing (interest only, payable
monthly), balloon basis, to be repaid from the permanent mortgage loan. First
Federal's construction loans are generally made either as the initial stage of a
combination loan (i.e., with a commitment from First Federal to provide
permanent financing upon completion of the project) or with a takeout obligation
(commitment to provide permanent financing) by a third party. Residential
construction loans are generally underwritten pursuant to the same guidelines
used for originating permanent residential loans. At September 30, 1996, First
Federal had $4.0 million of residential construction loans to borrowers who have
indicated to the Bank that they intend to live in the properties upon completion
of construction.
Construction loans are generally made up to a maximum loan-to-value
ratio of 80% based on an independent appraisal and estimate of costs.
Construction loans involve additional risk attributable to the fact that loan
funds are advanced upon the security of the project under construction, which is
more difficult to value prior to the completion of construction. Because of the
uncertainties inherent in estimating construction costs and the market for the
home upon completion, it is relatively difficult to evaluate the total loan
funds required to complete a project, the related loan-to-value ratios, and the
likelihood of ultimate success of the project. In evaluating a construction
loan, First Federal considers the reputation of the borrower and the contractor,
the
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<PAGE>
amount of the borrower's equity (down payment) in the project, independent
appraisal valuations and review of cost estimates, and, if applicable,
pre-construction sale and market information. Progress payments during
construction of homes are generally made only after inspection by an
independent, licensed real estate inspector. Construction loans to borrowers
other than owner occupants also involve many of the same risks discussed below
regarding commercial real estate loans and tend to be more sensitive to general
economic conditions than many other types of loans. First Federal generally
discourages loans intended for the construction of speculative homes.
COMMERCIAL REAL ESTATE LENDING
In order to enhance the yield of its assets, First Federal originated a
limited amount of construction and permanent loans secured by commercial real
estate. First Federal's permanent commercial real estate loan portfolio includes
loans secured by churches, small office buildings, and other business
properties. First Federal generally makes only commercial real estate loans
secured by income producing property. At September 30, 1996, First Federal had
one commercial real estate loan in excess of $250,000 which is secured by a
first lien on a home that was converted to a shopping area. This loan had a
balance of $300,000 at September 30, 1996 and is performing in accordance with
its loan terms.
The following table presents information as to the locations and types
of properties securing First Federal's commercial real estate loans at September
30, 1996.
Number
of Principal
Loans Balance
----- -------
(Dollars in Thousands)
Bryan area:
Churches................................. 6 $ 389
Land..................................... 19 365
Multi-family residential................. 3 941
Office buildings......................... 26 2,480
-- -----
Total.................................... 54 $4,175
== ======
Commercial real estate loans included in First Federal's portfolio have
terms generally ranging from 3 to 5 year balloon and 20-25 year amortization
schedules.
First Federal generally will not originate or purchase a commercial
real estate loan with a balance of greater than 80% of the appraised value of
the underlying collateral. Land and developed building lot loans are
individually negotiated and secured by properties located in the Bank's
principal market area. First Federal requires that any such appraisal be
performed by independent, professionally designated and qualified appraisers.
Senior management of the Bank reviews all independent appraisals prior to
funding any loan. In originating or purchasing any loan, First Federal considers
the creditworthiness of the borrower and value of the underlying collateral, in
addition to the level of experience of the contractor. Creditworthiness is
determined by considering the character, experience, management ability and
financial strength of the borrower, and the ability of the property securing the
loan to generate adequate funds to cover both operating expenses and debt
service.
Commercial real estate lending affords First Federal an opportunity to
receive interest at rates generally higher than those obtainable from
residential lending. Commercial real estate lending, however, entails a higher
level of risk than loans secured by one- to four-family residences. This greater
risk is due to several factors, including the concentration of principal in a
limited number of loans and borrowers, the effects of general
-77-
<PAGE>
economic conditions on income producing properties and the increased difficulty
of evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by commercial real estate is typically dependent upon the
successful operation of the related real estate project and thus may be subject
to a greater extent to adverse conditions in the real estate market or the
economy generally. If the cash flow from the pro ject is reduced (for example,
if leases are not obtained or renewed), the borrower's ability to repay the loan
may be impaired. For these reasons, First Federal limits the amount of
commercial real estate loans held in its loan portfolio.
COMMERCIAL BUSINESS LENDING
First Federal has historically engaged in a very limited level of
commercial business lending. At September 30, 1996, First Federal had $595,000
in commercial business loans outstanding. As of the same date, First Federal's
largest commercial business loan, $103,000 to an established homebuilder, was
secured by a first lien on six developed residential real estate lots in a
residential subdivision, and is current with interest monthly and principal
reductions made based on lot sales in accordance with the loan terms.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from employment and other
income and which are secured by real property, the value of which tends to be
relatively easily ascertainable, business loans can be of higher risk and
typically are made on the basis of the borrower's ability to make repayment from
the cash flow of his business and to a lesser extent, the borrowers net worth
and liquid assets. First Federal's commercial business loans are generally
secured by business assets such as commercial real estate, and to a much lesser
extent, accounts receivable, inventory and equipment. As a result, the
availability of funds for the repayment of business loans may be substantially
dependent on the success of the business itself. Further, the collateral
securing the loans may depreciate over time, may be difficult to appraise and
may fluctuate in value based on the success of the business and the economy
generally. Partial guarantees (75% or more) by the Small Business Administration
are generally required for commercial business loans primarily secured by
accounts receivable, inventory and equipment.
LOAN DELINQUENCIES; NONPERFORMING ASSETS AND CLASSIFIED ASSETS
When a borrower fails to make a required payment on a loan, First
Federal attempts to cause the deficiency to be cured by contacting the borrower
as soon as possible. In most cases, deficiencies are cured promptly. After a
payment is 5 days past due, First Federal's collections department will contact
the borrower by telephone and letter and continue that contact on a regular
basis. After a payment is 60 days past due, First Federal may send the borrower
a demand letter. When deemed appropriate by senior management, First Federal
institutes action to foreclose on the property. If foreclosed on, real property
is sold at a public sale and may be purchased by First Federal. A decision as to
whether and when to initiate foreclosure proceedings is based on such factors as
the amount of the outstanding loan in relation to the original indebtedness, the
extent of delinquency and the borrower's ability and willingness to cooperate in
curing delinquencies. First Federal has experienced minimum foreclosure and
losses thereon, over the past three years.
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<PAGE>
The following table sets forth information concerning delinquent
mortgage and other loans at September 30, 1996 in dollar amounts and as a
percentage of First Federal's total loan portfolio. The amounts presented
represent the total remaining principal balances of the related loans, rather
than the actual payment amounts which are overdue.
<TABLE>
<CAPTION>
Loans Delinquent at September 30, 1996
--------------------------------------
Total
90 Days Delinquent
30-59 Days 60-89 Days and Over Loans
---------- ---------- -------- -----
(Dollars in Thousands)
Residential Real Estate:
<S> <C> <C> <C> <C>
Number of loans..................... 29 4 1 34
Amount.............................. $1,918 $197 $ 18 $2,133
Percent of total loans.............. 6.29% 0.65% 0.06% 7.0%
Commercial Real Estate:
Number of loans..................... 2 --- --- 2
Amount.............................. $ 55 $ --- $ --- $ 55
Percent of total loans.............. 1.32% ---% ---% 1.32%
Consumer:
Number of loans..................... 54 9 4 67
Amount.............................. $605 $103 $130 $ 838
Percent of total loans.............. 4.85% 0.82% 1.04% 6.71%
Total:
Number of loans..................... 85 13 5 103
Amount.............................. $2,578 $300 $148 $3,026
Percent of total loans.............. 4.97% 0.58% 0.28% 5.83%
</TABLE>
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<PAGE>
The table below sets forth the amounts and categories of nonperforming
assets in First Federal's loan portfolio. Loans are placed on non-accrual status
when the collection of principal and/or interest become doubtful and in any
event when payments thereon are more than 90 days past due. For all years
presented, First Federal has had no troubled debt restructurings which involve
forgiving a portion of interest or principal on any loans. Foreclosed assets may
include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
September 30,
-------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
<S> <C> <C> <C>
Residential............................... $ 18 $143 $ 201
Consumer.................................. 38 32 46
-- -- --
Total................................... 56 175 247
-- --- ---
Accruing loans delinquent more than 90 days:
Residential............................... --- --- 46
Commercial Real Estate.................... --- --- 10
Consumer.................................. 122 2 ---
--- - ---
Total................................... 122 2 56
--- - --
Foreclosed assets:
Residential............................... 577 130 130
Commercial real estate.................... --- --- ---
Other Repossessed Assets (Vehicles)....... 108 76 57
--- -- --
Total................................... 685 206 187
--- --- ---
Total nonperforming assets.................. $ 863 $ 383 $ 490
===== ===== ======
Total as a percentage of
total assets at end of period............. 1.50% 0.62% 0.87%
==== ==== ====
</TABLE>
For the most part, nonperforming assets at September 30, 1996 consisted
of residential homes located in First Federal's principal market area.
As of September 30, 1996, there were no concentrations of loans in any
types of industry which exceed 10% of First Federal's total loans, that are not
included as a loan category in the table above.
At September 30, 1996 non-accruing loans totaled $56,000. Interest
income recognized and foregone relative to these loans approximated $4,000 and
$1,000, respectively, for the year ended September 30, 1996.
Other Loans of Concern. As of September 30, 1996 there was an aggregate
of $400,000 of loans including non-accruing loans with respect to which known
information about the possible credit problems of the borrowers or the cash
flows of the security properties have caused management to have some doubts as
to the ability of the borrowers to comply with present loan repayment terms and
which may result in the future inclusion of such items in the nonperforming
assets categories.
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<PAGE>
Loans being monitored include three one- to four-family loans totaling
$128,000, and 29 consumer loans totaling $272,000 at September 30, 1996. See "
- -- Consumer Lending."
Classified Assets. Federal regulations require that each insured
institution classify its own assets on a regular basis. In addition, in
connection with examinations of insured institutions, the Principal Regulatory
Agency has authority to identify problem assets and, if appropriate, require
them to be classified. There are three classifications for problem assets:
substandard, doubtful and loss. "Substandard" assets have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
"Doubtful" assets have the weaknesses of substandard assets, with the additional
characteristics that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable, and
there is a high possibility of loss. An asset classified "Loss" is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. Assets classified as substandard or doubtful
require the institution to establish general allowances (reserves) for loan
losses. If an asset or portion thereof is classified as Loss, the institution
must either establish specific allowances, (reserves) for loan losses in the
amount of 100% of the portion of the asset classified loss, or charge off such
amount. General loss allowances established to cover possible losses related to
assets classified substandard or doubtful may be included in determining the
institution's regulatory capital under the risk-based capital standard, while
specific loss allowances do not qualify as regulatory capital. If an institution
does not agree with an examiner's classification of an asset, it may appeal this
determination to the District Director. Generally, all assets of First Federal
which have been classified are included in the discussion below of nonperforming
assets and assets for which repayment by the borrower may be in doubt.
In connection with the filing of its periodic reports with the
Principal Regulatory Agency and in accordance with its classification of assets
policy, First Federal regularly reviews the problem loans in its portfolio to
determine whether any loans require classification in accordance with applicable
regulations. Classified assets, as described above, of First Federal at
September 30, 1996 were as follows:
(In Thousands)
Substandard.......................................... $1,086
Doubtful............................................. ---
Loss................................................. ---
------
$1,086
======
ALLOWANCE FOR LOSSES ON LOANS
Management's policy is to establish allowances for loan losses based on
historical data, economic trends and projections, an assessment of the
borrower's overall financial condition, the type and value of any collateral
securing such loans and other relevant factors so as to attempt to cover any
potential losses known to management. Management's policy is to establish
allowances for losses on real estate owned sufficient to value such real estate
at the lower of cost or estimated net realizable value based on current,
independent appraisals when it determines that losses are expected to be
incurred on the underlying properties. While management believes that it uses
the best information available to make such determinations, future adjustments
could be necessary and net income could be affected if circumstances differ
substantially from the assumptions used in making the initial determination.
-81-
<PAGE>
The following table sets forth an analysis of First Federal's allowance
for loan losses.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period.................... $ 317 $ 313 $ 339
Charge-offs....................................... (23) (27) (39)
Recoveries........................................ 5 4 414
Provisions for losses on loans.................... (52) 27 (401)
--- -- ----
Balance at end of period.......................... $ 247 $ 317 $ 313
===== ===== =====
Ratio of net charge-offs during the
period to average loans outstanding
during the period.............................. .04% .05% (.87)%
=== === ====
</TABLE>
The allocation of the allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------------------------
1996 1995 1994
------------------------- -------------------------- --------------------------
Percent of Loans Percent of Loans Percent of Loans
in Each Category in Each Category in Each Category
Amount to Total Loans Amount to Total Loans Amount to Total Loans
------ -------------- ------ -------------- ------ --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate............. $120 75.95% $223 80.72% $ 191 81.82%
Other................... 127 24.05 94 19.28 122 18.18
--- ----- -- ----- --- -----
Total................ $247 100.00% $317 100.00% $ 313 100.00%
==== ====== ==== ====== ===== ======
</TABLE>
For information on First Federal's allowance for losses on real estate
owned, See Note 5 of the Notes to Financial Statements in the Annual Report to
Stockholders filed as Exhibit 13 hereto.
INVESTMENT ACTIVITIES
First Federal's assets, other than loans and some mortgage-backed
securities receivable, are invested primarily in interest-bearing deposits with
banks, other thrift institutions and the FHLB of Dallas, United States
government and agency securities and FHLB stock. First Federal is required by
federal regulations to maintain a minimum amount of liquid assets that may be
invested in specified securities and is also permitted to make certain other
security investments. First Federal maintains liquidity in excess of regulatory
requirements. Cash flow projections are regularly reviewed and updated to assure
that adequate liquidity is provided. As of September 30, 1996, First Federal's
liquidity ratio (liquid assets as a percentage of net withdrawable savings and
current borrowings) was 8.27% as compared to the regulatory requirement of 5%.
At September 30, 1996, the Bank had no borrowings from the FHLB; however, First
Federal had the ability, if needed, to borrow up to $20.3 million from the FHLB
of Dallas for liquidity purposes.
-82-
<PAGE>
The following table sets forth the composition of First Federal's
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------
1996 1995 1994
------------------- ----------------- ------------------
Book Market Book Market Book Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits with FHLB.................. $1,145 $1,145 $5,666 $5,666 $4,940 $4,940
Federal agency obligations........................... 1,000 1,000 1,000 988 1,000 949
FHLB stock........................................... 845 845 796 796 748 748
--- --- --- --- --- ---
Total liquid assets, securities and FHLB stock. $2,990 $2,990 $7,462 $7,450 $6,688 $6,637
====== ====== ====== ====== ====== ======
Average remaining life or term to repricing.......... --- 0.13 years 0.30 years
</TABLE>
General. Deposit accounts have traditionally been the principal source
of First Federal's funds for use in lending and for other general business
purposes. In addition to deposits, First Federal derives funds from loan
repayments and cash flows generated from operations. Scheduled loan payments are
a relatively stable source of funds, while deposit inflows and outflows and the
related cost of such funds have varied. Borrowings may be used on a short-term
basis to compensate for seasonal reductions in deposits or deposit inflows at
less than projected levels and may be used on a longer term basis to support
expanded lending activities in order to minimize excess cash in hand over and
above liquidity requirements.
Deposits. First Federal attracts both short-term and long-term deposits
from its primary market area and has not actively sought deposits outside of
this area. First Federal offers regular passbook accounts, NOW accounts,
commercial and personal checking accounts (including its new "Golden Eagle"
checking designed for persons of age 50 or more, and its new "30 Something"
checking designed for persons between 30 and 49 years of age), money market
deposit accounts, fixed interest rate certificates of deposits with varying
maturities, and negotiated rate $95,000 or above jumbo certificates of deposit
("Jumbo CDs"). At September 30, 1996, the Bank had $2.6 million in "Golden
Eagle" accounts and $50,000 in its brand new "30 Something" accounts.
Deposit account terms vary, according to the minimum balance required,
the time period the funds must remain on deposit and the interest rate, among
other factors. First Federal regularly evaluates the internal cost of funds,
surveys rates offered by competing institutions, reviews its cash flow
requirements for lending and liquidity and makes rate changes when deemed
appropriate. In order to decrease the volatility of its deposits, First Federal
imposes penalties up to 30 days of interest for certificates maturing one year
or less and 90 days for certificates over one year on early withdrawal on its
certificates of deposit. First Federal has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. In addition, First Federal has not been willing to pay higher rates
to retain deposits that may not be profitably deployed. First Federal does not
have any brokered deposits and has no present intention to accept or solicit
such deposits.
In 1994 First Federal attempted to increase its passbook accounts
through a marketing campaign emphasizing the community involvement of First
Federal with all segments of the population in its trade area.
-83-
<PAGE>
Among the measures which have been undertaken in connection with this marketing
campaign are an increase in the proportion of First Federal's employees that
speak Spanish, advertising in Spanish language publications, direct contact with
local Hispanic community organizations and the opening of a new office at a
later date in an area with a significant Hispanic influence. After its
conversion to bank-type data processing in the spring of 1995, First Federal has
increased its checking or transaction accounts through an aggressive marketing
campaign aimed at, among others, local college students and faculty, with the
new branch in College Station, Texas, (immediately south of Bryan) opened in the
first half of 1994. Recently, it acquired a site for a new full-service branch
located at a key intersection in northern Bryan. This immediate area presently
has no nearby banking facility servicing its financial needs.
The following table sets forth the deposit flows at First Federal
during the periods indicated. Net increase (decrease) refers to the amount of
deposits during a period less the amount of withdrawals during the period. In
order to reduce excess cash on hand, First Federal implemented a planned
reduction in higher cost deposits from 1995 to 1996.
Year Ended September 30,
------------------------------------
1996 1995 1994
-------- ------- -------
(Dollars in Thousands)
Opening balance...................... $54,939 $50,846 $47,312
Net deposits (withdrawals)........... (4,916) 2,592 1,833
Interest credited.................... 1,654 1,501 1,701
----- ----- -----
Ending balance....................... $51,677 $54,939 $50,846
======= ======= =======
Net increase (decrease).............. $(3,262) $ 4,093 $ 3,534
======= ======= =======
Percent increase (decrease).......... (5.94)% 8.05% 7.47%
===== ==== ====
-84-
<PAGE>
The following table sets forth the dollar amount of savings deposits,
by interest rate range, in the various types of deposit programs offered by
First Federal at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------
1996 1995 1994
---------------------- -------------------- -------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Certificate accounts:
<S> <C> <C> <C> <C> <C> <C> <C>
0.00 - 2.99............................. $ --- ---% $ --- ---% $ 59 0.1%
3.00 - 4.99............................. 16,448 31.8 12,854 23.4 28,689 56.4
5.00 - 6.99............................. 17,505 33.9 23,371 42.5 5,943 11.7
7.00 - 8.99............................. 933 1.8 921 1.7 --- ---
9.00 - 9.99............................. --- --- --- --- --- ---
------ ---- ------ ---- ------ ----
Total Certificate Accounts............... 34,886 67.5 37,146 67.6 34,691 68.2
Other Accounts:
- ---------------
Passbook accounts........................ 4,177 8.1 5,014 9.1 5,039 9.9
NOW and Other Demand Deposit 5,387 10.4 4,117 7.5 3,510 6.9
Accounts.................................
Money market accounts.................... 4,653 9.0 5,650 10.3 5,486 10.8
Commercial checking accounts............. 1,185 2.3 1,295 2.4 1,660 3.3
Other noninterest-bearing accounts....... 1,389 2.7 1,717 3.1 460 0.9
------ ---- ------ ---- ------ ----
Total other accounts..................... 16,791 32.5 17,793 32.4 16,155 31.8
------ ---- ------ ---- ------ ----
Total deposits........................... $51,677 100.0% $54,939 100.0% $50,846 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
At September 30, scheduled maturities of certificates of deposit are as
follows.
1999 and
1997 1998 thereafter Total
---- ---- ---------- -----
(In Thousands)
3% to 4.99%................. $14,882 $ 1,322 $ 244 $16,448
5% to 6.99%................. 9,972 4,488 3,045 17,505
7% to 9.99%................. --- --- 933 933
------- ------- ------ -------
Total.................. $24,854 $ 5,810 $4,222 $34,886
======= ======= ====== =======
-85-
<PAGE>
The following table indicates the amount of First Federal's
certificates of deposit by time remaining until maturity as of September 30,
1996.
<TABLE>
<CAPTION>
Maturity
-------------------------------------------------
3 Months 3 to 6 6 to 12 Over 12
or Less Months Months Months Total
------- ------ ------ ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000.......... $6,355 $7,028 $8,564 $ 8,679 $30,626
Certificates of deposit of $100,000 or more......... 1,003 1,104 800 1,353 4,260
-------- ----- ----- --- ----- -----
Total............................................... $7,358 $8,132 $9,364 $10,032 $34,886
====== ====== ====== ======= =======
</TABLE>
BORROWINGS
First Federal's borrowings primarily have been advances from the FHLB
of Dallas. As a member of the FHLB of Dallas, First Federal is required to own
capital stock in the FHLB of Dallas and is authorized to apply for advances from
the FHLB of Dallas. Each FHLB credit program has its own interest rate, which
may be fixed or variable, and range of maturities. The FHLB of Dallas may
prescribe the acceptable uses to which these advances may be put, as well as
limitations on the size of the advances and repayment provisions. Federal law
requires that all long-term FHLB advances be for the purpose of financing
residential housing and members must meet community lending standards in order
to have continued access to long-term FHLB advances. First Federal does not
expect that these limitations will have a significant impact on its access to
FHLB advances.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances and other borrowings during the periods
indicated.
Year Ended September 30,
---------------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
Maximum Balance:
- ----------------
FHLB advances............................ $1,088 $1,088 $2,004
Average Balance:
- ----------------
FHLB advances............................ $ 89 $2,085 $ 679
-86-
<PAGE>
The following table sets forth certain information as to First
Federal's FHLB advances and other borrowings at the dates indicated.
September 30,
--------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
FHLB advances............................ $ --- $1,088 $ ---
Other borrowings......................... --- --- ---
------- ------ -----
Total borrowings......................... $ --- $1,008 $ ---
======= ====== ======
Weighted average interest rate of
FHLB advances............................ ---% 7.10% ---%
Weighted average interest rate of
other borrowings......................... --- N/A N/A
SERVICE CORPORATION
Federally chartered institutions are permitted to invest in the capital
stock, obligations, or other specified types of securities of subsidiaries
(referred to as "service corporations") and to make loans to such subsidiaries,
and joint ventures in which such subsidiaries are participants, in an aggregate
amount not exceeding 2% of an institution's assets, plus an additional 1% of
assets if the amount over 2% is used for specified community or inner city
development purposes. In addition, federal regulations permit institutions to
make specified loans to such subsidiaries under its general lending authority.
In addition, such institutions are authorized to invest unlimited amounts in
subsidiaries that are engaged solely in activities in which the parent
institution may engage.
First Federal's service corporation, First Service Corporation of
Bryan, is currently inactive. At September 30, 1996, First Federal had a total
investment of $13,000 in its service corporation. See "Regulation - Federal
Regulation of Thrift Institutions."
COMPETITION
First Federal faces strong competition both in originating loans and in
attracting deposits. Competition in originating loans comes primarily from other
thrift institutions, commercial banks and mortgage companies who also make loans
located in First Federal's primary market area. First Federal competes for loans
principally on the basis of the interest rates and loan fees it charges, the
types of loans it originates and the quality of service it provides to
borrowers.
First Federal faces substantial competition in attracting deposits from
other thrift institutions, commercial banks, money market and mutual funds,
credit unions and other investment vehicles. The ability of
-87-
<PAGE>
First Federal to attract and retain deposits depends on its ability to provide
an investment opportunity that satisfies the requirements of investors as to
rate of return, liquidity, risk and other factors. First Federal competes for
these deposits by offering a variety of deposit accounts at competitive rates
and convenient business hours.
New, innovative checking accounts have been recently introduced by
First Federal. These accounts are targeted to those individuals age 50 or over
("Golden Eagle Account") and age 30 to 49 ("30 Something Account"), both of
which include special benefits and planned trips.
First Federal considers its primary market for deposits and lending
activities to be the Bryan-College Station area (Brazos County), and the
surrounding counties of Burleson, Grimes, Leon, Madison, Robertson and
Washington county, Texas. This area may be characterized principally as a
college community centered around Texas A&M University; however, during 1995 and
1996 additional private businesses have located in the area. A significant
portion of the region's deposit base is comprised of depositors associated with
Texas A&M University. At September 30, 1996 there was one thrift institution,
one state savings bank and seven commercial banks with offices in Bryan-College
Station, Texas, where First Federal's principal offices and full-service branch
are located.
EMPLOYEES
At September 30, 1996, the Bank had a total of 50 employees, including
12 part-time employees. The Bank's employees are not represented by any
collective bargaining group. Management considers its employee relations to be
good.
DESCRIPTION OF PROPERTY OWNED
First Federal owns the building and land for its main office at 2900
Texas Avenue, Bryan, Texas, which was built in 1956 and acquired by First
Federal in 1978. This office now has 8,700 square feet and is situated on almost
an acre of land with over 200 feet of frontage situated on the principal
thoroughfare in Bryan- College Station. The net depreciated net book value of
this office and land (with recent parking lot improvements) was $325,000 at
September 30, 1996. An expansion of 800 square feet was added in 1995, and
additional drive-in facilities were added in 1994.
First Federal also opened and owns a branch office at 2202 Longmire in
College Station in March of 1994. This office has approximately 2320 square feet
and is situated on almost two acres of land. The book value of this office and
land was $316,000 at September 30, 1996.
Management's present intentions are to develop a branch in northern
Bryan to better serve the Hispanic and minority community, low income population
and other residents in this part of the community not presently served with a
nearby banking facility, and has recently acquired a site at a key intersection
in northern Bryan. Management believes its current check clearing capability can
service these additional accounts.
The Bank maintains a database of depositor and borrower customer
information. The net book value of the data processing and computer equipment
and software utilized by the Bank at September 30, 1996 was $71,000.
LEGAL PROCEEDINGS
First Federal is, from time to time, a party to certain lawsuits
arising in the ordinary course of its business. First Federal believes that none
of these lawsuits would, if adversely determined, have a material adverse effect
on its financial condition.
-88-
<PAGE>
OTHER MATTERS
The Board of Directors is not aware of any business to come before the
Meeting other than the matter described above in this Joint Proxy
Statement/Prospectus. However, if any other matters should properly come before
the Meeting, it is intended that holders of the proxies will act in accordance
with their best judgment.
The cost of solicitation of proxies will be borne by the Bank. The Bank
will reimburse brokerage firms and other custodians, nominees and fiduciaries
for reasonable expenses incurred by them in sending proxy materials to the
beneficial owners of Bank Common Stock. In addition to solicitation by mail,
directors, officers and regular employees of the Bank may solicit proxies
personally or by telegraph or telephone, without additional compensation.
BY ORDER OF THE BOARD OF DIRECTORS
----------------------------------
Bryan, Texas
____________, 1997
-89-
<PAGE>
FIRST FEDERAL SAVINGS BANK
Index to Consolidated Financial Statements
Page
----
Report of Independent Auditors........................................... F-2
Consolidated Statements of Financial Condition
September 30, 1994 and 1995.............................................. F-4
Consolidated Statements of Income
Years ended September 30, 1994, 1995 and 1996............................ F-5
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1994, 1995 and 1996............................ F-5
Consolidated Statements of Cash Flows
Years ended September 30, 1994, 1995 and 1996............................ F-6
Notes to Consolidated Financial Statements
Years Ended September 30, 1994, 1995 and 1996............................ F-8
All schedules are omitted because the required information is not
applicable or is included in the Consolidated Financial Statements and related
Notes.
Financial statements of the Holding Company have not been provided
because The Bryan-College Station Financial Holding Company has not conducted
any operations to date and has not been capitalized.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
First Federal Savings Bank
Bryan, Texas
We have audited the accompanying consolidated statements of financial condition
of First Federal Savings Bank and its wholly-owned subsidiary, First Service
Corporation of Bryan, as of September 30, 1996 and 1995 and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended September 30, 1996. These financial
statements are the responsibility of the Bank'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 First Federal
Savings Bank and its wholly-owned subsidiary, First Service Corporation of
Bryan, as of September 30, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended September 30,
1996 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Bank
changed its method of accounting for securities for the year ended September 30,
1995.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
Oak Brook, Illinois
November 9, 1996
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1996 and 1995
In thousands, except share data
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,661 $ 1,275
Interest-bearing deposits in other financial institutions 1,145 5,666
----------- -----------
Total cash and cash equivalents 2,806 6,941
Securities held-to-maturity (fair value:
1996 - $1,000; 1995 - $988) (Note 2) 1,000 1,000
Mortgage-backed securities held-to-maturity (fair value:
1996 - $1,261; 1995 - $2,247) (Note 2) 1,292 2,278
Loans held for sale, net of unrealized loss of $14 in 1996
and 1995 419 1,840
Loans receivable, net (Note 3) 49,160 46,765
Federal Home Loan Bank stock 845 796
Foreclosed real estate (Note 5) 577 130
Premises and equipment (Note 6) 924 1,034
Accrued interest receivable 329 377
Other assets 245 271
----------- -----------
$ 57,597 $ 61,432
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (Note 7) $ 51,677 $ 54,939
Advance payments by borrowers for insurance and taxes 783 910
Advance from Federal Home Loan Bank (Note 8) - 1,088
Deferred income taxes (Note 12) 86 146
Accrued interest payable and other liabilities 735 179
----------- -----------
53,281 57,262
Commitments and contingent liabilities (Note 11)
Stockholders' equity (Note 10)
Preferred stock - par value $.01 per share (liquidation preference of
$873,000); authorized 200,000 shares,
issued 87,263 shares 1 1
Common stock - par value $.01 per share; authorized
433,000 shares, issued 239,612 and 228,282 shares at
September 30, 1996 and 1995, respectively 2 2
Additional paid-in capital 2,743 2,630
Retained earnings, substantially restricted 1,570 1,537
----------- -----------
4,316 4,170
----------- -----------
$ 57,597 $ 61,432
=========== ===========
</TABLE>
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1996, 1995, and 1994
In thousands, except per share data
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans $ 4,407 $ 4,187 $ 3,619
Securities 46 42 33
Mortgage-backed securities 99 162 205
Other 276 307 163
----------- ----------- -----------
Total interest income 4,828 4,698 4,020
Interest expense
Deposits 2,358 2,146 1,701
Other borrowings 5 148 57
----------- ----------- -----------
Total interest expense 2,363 2,294 1,758
----------- ----------- -----------
NET INTEREST INCOME 2,465 2,404 2,262
Provision for loan losses (Note 3) (52) 27 (401)
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,517 2,377 2,663
Noninterest income
Service charges 527 355 202
Gain on sale of loans (Note 4) 125 109 501
Gain on sale of mortgage servicing rights (Note 4) 205 104 407
Gain on sale of mortgage-backed securities (Note 2) 13 - -
Operation of foreclosed real estate (9) (2) -
Other 12 26 14
----------- ----------- -----------
Total noninterest income 873 592 1,124
Noninterest expense
Compensation and benefits 1,337 1,284 1,569
Occupancy and equipment expense 335 298 282
SAIF special assessment 333 - -
Federal insurance premiums 125 116 134
Net loss on real estate owned, including
provision for losses 8 12 19
Loan expense 33 61 120
Office supplies 73 85 100
Professional fees 179 167 196
Advertising 57 55 73
Data processing 148 111 132
Telephone 57 57 45
Other 363 402 426
----------- ----------- -----------
Total noninterest expense 3,048 2,648 3,096
----------- ----------- -----------
</TABLE>
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1996, 1995, and 1994
In thousands, except per share data
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INCOME BEFORE INCOME TAX EXPENSE $ 342 $ 321 $ 691
Income tax expense (Note 12) 108 110 234
----------- ----------- -----------
NET INCOME $ 234 $ 211 $ 457
=========== =========== ===========
Earnings per common share (Note 1) $ .61 $ .52 $ 1.54
</TABLE>
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 1996, 1995, and 1994
In thousands, except per share data
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Additional
Preferred Common Paid-In Retained
Stock Stock Capital Earnings Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at
September 30, 1993 $ 1 $ 2 $ 2,419 $ 1,255 $ 3,677
Issuance of 10,321
common shares as
5% stock dividend - - 103 (103) -
Net income - - - 457 457
Dividends
($1.00 per
preferred share) - - - (87) (87)
----------- ----------- ----------- ----------- -----------
Balance at
September 30, 1994 1 2 2,522 1,522 4,047
Issuance of 10,802
common shares as
5% stock dividend - - 108 (108) -
Net income - - - 211 211
Dividends ($1.00 per
preferred share) - - - (88) (88)
----------- ----------- ----------- ----------- -----------
Balance at
September 30, 1995 1 2 2,630 1,537 4,170
Issuance of 11,330
common shares as
5% stock dividend - - 113 (113) -
Net income - - - 234 234
Dividends ($1.00 per
preferred share) - - - (88) (88)
----------- ----------- ----------- ----------- -----------
Balance at
September 30, 1996 $ 1 $ 2 $ 2,743 $ 1,570 $ 4,316
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1996, 1995, and 1994
In thousands
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 234 $ 211 $ 457
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 167 154 118
Amortization of premiums and discounts
on mortgage-backed securities, net 5 2 -
Proceeds from sale of mortgage loans 13,839 81,838 86,336
Origination of loans held for sale (12,293) (81,423) (81,441)
Market value adjustment of loans held-for-sale - (32) 46
Change in deferred loan origination fees (41) (62) (32)
Change in deferred income taxes (60) 38 155
Change in deferred gain on real estate owned - (10) -
Net (gains) losses on sales of
Real estate owned 1 9 7
Mortgage-backed securities (13) - -
Mortgage loans (125) (109) (501)
Mortgage servicing rights (205) (104) (407)
Provision for losses on loans and real
estate owned (45) 30 (389)
Federal Home Loan Bank stock dividend (49) (48) (31)
Change in
Accrued interest receivable 48 (71) (23)
Other assets 26 397 (434)
Accrued interest payable and other
liabilities 556 (26) (121)
------------ ------------ ------------
Net cash provided by operating
activities 2,045 794 3,740
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans receivable (2,677) (5,690) (6,134)
Principal payments on mortgage-backed
securities 418 413 1,748
Proceeds from sale of mortgage-backed securities 576 - -
Proceeds from sale of mortgage servicing rights 205 104 407
Capital expenditures on premises and
equipment, net (57) (231) (589)
Capital expenditures on foreclosed real estate (83) (32) -
Proceeds from sale of real estate owned 3 3 90
------------ ------------ ------------
Net cash used in investing activities (1,615) (5,433) (4,478)
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1996, 1995, and 1994
In thousands
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ (3,262) $ 4,093 $ 3,534
Net increase (decrease) in advance payments
by borrowers for insurance (127) 49 127
Proceeds from other borrowings - 1,088 -
Repayment of other borrowings (1,088) - (500)
Dividends paid on preferred stock (88) (110) (65)
------------ ------------ ------------
Net cash provided by (used in) financing
activities (4,565) 5,120 3,096
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (4,135) 481 2,358
Cash and cash equivalents at beginning of year 6,941 6,460 4,102
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,806 $ 6,941 $ 6,460
============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 2,369 $ 2,288 $ 1,755
Income taxes paid (received) 139 (98) 232
Supplemental disclosure of noncash investing
activities
Net transfer between loans and real estate
acquired through foreclosure (375) (17) (8)
Cash dividends declared, not paid - - 22
Transfer of investment and mortgage-backed
securities to held-to-maturity upon adoption
of SFAS No. 115 - 3,693 -
Transfer of securities to available-for-sale at
fair value 563 - -
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying consolidated financial statements
include the accounts of First Federal Savings Bank and its wholly-owned
subsidiary, First Service Corporation of Bryan. All significant intercompany
balances and transactions have been eliminated.
Business: First Federal Savings Bank (the Bank) is a federally chartered savings
bank and 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.
Operations: The Bank makes residential, commercial real estate and consumer
loans primarily in Brazos County of Texas. Substantially all loans are secured
by specific items of collateral, including real estate, residences, and consumer
assets.
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.
Securities: Effective October 1, 1994, the Bank adopted the provisions of
Statement of Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting
for Certain Investments in Debt and Equity Securities". SFAS No. 115 requires
corporations to classify debt securities as held-to-maturity, trading, or
available-for-sale. Securities are classified as held-to-maturity when
management has the intent and the Bank has the ability to hold those securities
to maturity. Premiums and discounts are recognized in interest income using
methods that approximate the level-yield method. Management classified all of
the Bank's investments and mortgage-backed securities as held-to-maturity,
therefore, the adoption of this statement did not have an effect on the
financial position or operations of the Bank.
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
Bank 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
F-8
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 114 (SFAS No. 114), "Accounting by Creditors
for Impairment of a Loan". SFAS No. 114 (as modified by No. 118), effective for
the Bank beginning October 1, 1995, requires the measurement of 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. Under this standard, 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. The effect of adopting
SFAS No. 114 was not material to the Bank's consolidated financial position or
results of operations during 1995.
Smaller balance homogeneous loans are defined as residential first mortgage
loans secured by one-to-four family residences, residential construction loans,
and share 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 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 under SFAS Nos. 114 and 118 are not
expected to 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.
F-9
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan Fees and Costs: The Bank 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 Bank sells a portion of its mortgage loan production in the
secondary market. The Bank obtains sales commitments on these loans immediately
prior to making the origination commitment. Loans classified as held for sale
are carried at the lower of cost or market value. Net unrealized losses are
recognized by charges to income.
Premises and Equipment: The Bank's premises and equipment are stated at cost
less accumulated depreciation. The Bank'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.
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
Bank'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 Bank 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, in accordance with Statement
of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income
Taxes".
Earnings Per Common Share: Earnings per share is calculated by dividing the net
earnings (less preferred stock dividend) by the weighted average number of
common shares outstanding and common stock equivalents attributable to
outstanding stock options, when dilutive. The weighted average number of the
Bank's shares of common stock used to calculate the 1996, 1995, and 1994
earnings per share was 239,612, after giving retroactive effect to the stock
dividends.
F-10
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impact of New Accounting Standards: In March 1995, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". SFAS No. 121 requires that the long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or circumstances indicate that the carrying amount of an asset may not be
recoverable. However, SFAS No. 121 does not apply to financial instruments, core
deposit intangibles, mortgage and other servicing rights, or deferred tax
assets. The adoption of SFAS No. 121 had no material effect on the Bank's income
or financial condition.
In May 1995, the FASB issued Statement of Financial Accounting Standards No. 122
(SFAS No. 122), "Accounting for Mortgage Servicing Rights". SFAS No. 122
requires an institution that purchases or originates mortgage loans and sells or
securitizes those loans with servicing rights retained to allocate the total
cost of the mortgage loans to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values. In
addition, institutions are required to assess impairment of the capitalized
mortgage servicing portfolio based on the fair value of those rights. SFAS No.
122 is effective for fiscal years beginning after December 31, 1995. The
adoption of this statement is not expected to have a material impact on the
Bank's earnings or financial condition. As discussed below, SFAS No. 122 will be
superseded by SFAS No. 125 after December 31, 1996.
In June 1996, the FASB released Statement of Financial Accounting Standards No.
125 (SFAS No. 125), "Accounting for Transfers and Extinguishments of
Liabilities". SFAS No. 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
SFAS No. 125 requires a consistent application of a FINANCIAL-COMPONENTS
APPROACH that focuses on control. Under that approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, and derecognizes liabilities when
extinguished. SFAS No. 125 also supersedes SFAS No. 122 and requires that
servicing assets and liabilities be subsequently measured by amortization in
proportion to and over the period of estimated net servicing income or loss and
requires assessment for asset impairment or increased obligation based on their
fair values. SFAS No. 125 applies to transfers and extinguishments occurring
after December 31, 1996 and early or retroactive application is not permitted.
Management anticipates that the adoption of SFAS No. 125 will not have a
material impact on the financial condition or operations of the Bank.
In November 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, (SFAS No. 123), "Accounting for Stock-Based Compensation". This
statement establishes financial accounting standards for stock-based employee
compensation plans. SFAS No. 123 permits the Bank to choose either a new fair
value-based method or the current APB Opinion 25 intrinsic value-based method of
accounting for its stock-based compensation arrangements.
F-11
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SFAS No. 123 requires pro forma disclosures of net earnings and earnings per
share computed as if the fair value-based method has been applied in financial
statements of companies that continue to follow current practice in accounting
for such arrangements under APB Opinion 25. SFAS No. 123 applies to all
stock-based employee compensation plans adopted in years beginning after
December 15, 1995 in which an employer grants shares of its stock or other
equity instruments to employees except for employee stock ownership plans. The
adoption of SFAS No. 123 is not expected to have a material impact on the Bank's
earnings or financial condition.
Reclassifications: Certain reclassifications were made to the 1995 financial
statements to make them comparable to the 1996 presentation.
NOTE 2 - SECURITIES
The amortized cost and fair values of securities held-to-maturity at September
30, are as follows (in thousands):
<TABLE>
<CAPTION>
1 9 9 6
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. government agency security $ 1,000 $ - $ - $ 1,000
=========== =========== =========== ===========
FHLMC certificates $ 872 $ 2 $ (31) $ 843
FNMA certificates 420 3 (5) 418
----------- ----------- ----------- -----------
$ 1,292 $ 5 $ (36) $ 1,261
=========== =========== =========== ===========
<CAPTION>
1 9 9 5
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. government agency security $ 1,000 $ - $ (12) $ 988
=========== =========== =========== ===========
GNMA certificates $ 55 $ 1 $ - $ 56
FHLMC certificates 1,672 13 (41) 1,644
FNMA certificates 551 4 (8) 547
----------- ----------- ----------- -----------
$ 2,278 $ 18 $ (49) $ 2,247
=========== =========== =========== ===========
</TABLE>
F-12
<PAGE>
NOTE 2 - SECURITIES (Continued)
On December 1, 1995, the Bank reclassified certain held-to-maturity securities
as available-for-sale in accordance with "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities." The
amortized cost and unrealized gain on the securities transferred were $563,000
and $13,000, respectively.
The $1,000,000 U.S. government agency security matures on October 1, 1996.
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. Mortgage-backed securities have varying maturities.
Gross sales of securities during 1996 totaled $576,000 with gross gains of
$13,000. There were no sales of investment or mortgage-backed securities during
1995.
NOTE 3 - LOANS
Loans receivable at September 30 are summarized as follows:
<TABLE>
<CAPTION>
In thousands
1996 1995
----------- -----------
<S> <C> <C>
First mortgage loans
Principal balances:
Secured by one-to-four-family residences $ 30,477 $ 30,966
Secured by other properties 4,175 3,643
Construction loans 4,365 4,261
----------- -----------
39,017 38,870
Less:
Undisbursed portion of loans (1,966) (1,664)
Net deferred loan origination fees (128) (87)
Deferred gain (3) (3)
----------- -----------
Total first mortgage loans 36,920 37,116
Consumer and other loans
Principal balances:
Automobile loans 9,435 7,634
Home equity and second mortgage 151 193
Loans secured by deposit accounts 967 705
Commercial loans 595 643
Purchased automobile and lease pools - 4
Other consumer loans 1,339 787
----------- -----------
Total consumer and other loans 12,487 9,966
Less allowance for loan losses: (247) (317)
----------- -----------
$ 49,160 $ 46,765
=========== ===========
</TABLE>
F-13
<PAGE>
NOTE 3 - LOANS (Continued)
A summary of the activity in the allowance for loan losses follows:
<TABLE>
<CAPTION>
In thousands
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $ 317 $ 313 $ 339
Provision charged to operations (52) 27 (401)
Charge-offs (23) (27) (39)
Recoveries 5 4 414
----------- ----------- -----------
Balance at end of year $ 247 $ 317 $ 313
=========== =========== ===========
</TABLE>
The Bank recorded a recovery of $401,000 during 1994 primarily as a result of
proceeds received from a lawsuit involving a previously charged-off pool of
loans.
There were no impaired loans at September 30, 1996. Nonaccrual loans totaled
approximately $56,000, $175,000, and $247,000 at September 30, 1996, 1995, and
1994, 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 summarized below:
<TABLE>
<CAPTION>
In thousands
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Interest that would have been recorded $ 5 $ 17 $ 21
Interest income recognized (4) (9) (6)
----------- ----------- -----------
Interest income foregone $ 1 $ 8 $ 15
=========== =========== ===========
</TABLE>
The largest portion of the Bank'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, 1996, approximately 62% of the Bank's
loans were secured by owner-occupied, one-to-four-family residential property.
The Bank requires collateral on all loans and generally maintains loan-to-value
ratios of 80% or less.
The Bank has granted loans to certain officers and directors of the Bank.
Related-party loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than normal risk of
collectibility. All loans are current in their contractual payments for both
principal and interest.
F-14
<PAGE>
NOTE 3 - LOANS (Continued)
Activity in the loan accounts of executive officers, directors, and principal
shareholders is as follows:
<TABLE>
<CAPTION>
In thousands
1996 1995
---- ----
<S> <C> <C>
Balance at beginning of year $ 734 $ 574
Loans disbursed 566 223
Principal repayments (471) (63)
Change in persons classified as related parties (130) -
----------- -----------
Balance at end of year $ 699 $ 734
=========== ===========
</TABLE>
NOTE 4 - SECONDARY MORTGAGE MARKET OPERATIONS
The following summarizes the Bank's secondary mortgage market activities:
<TABLE>
<CAPTION>
In thousands
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Proceeds from sale of mortgage loans $ 13,839 $ 81,838 $ 86,336
=========== =========== ===========
Gain on sale of mortgage loans $ 125 $ 109 $ 501
Gain on sale of mortgage servicing rights 205 104 407
----------- ----------- -----------
$ 330 $ 213 $ 908
=========== =========== ===========
Loans serviced for others $ 966 $ 4,738 $ 1,986
=========== =========== ===========
</TABLE>
NOTE 5 - FORECLOSED REAL ESTATE
Properties which the Bank has acquired in settlement of mortgage loans are as
follows:
<TABLE>
<CAPTION>
In thousands
1996 1995
----------- -----------
<S> <C> <C>
Total cost $ 584 $ 133
Allowance for losses (7) (3)
----------- -----------
Carrying amount $ 577 $ 130
=========== ===========
</TABLE>
F-15
<PAGE>
NOTE 5 - FORECLOSED REAL ESTATE (Continued)
Activity in the allowance for losses for foreclosed real estate is summarized
below:
<TABLE>
<CAPTION>
In thousands
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $ 3 $ 19 $ 18
Provision charged to income 7 3 12
Charge-offs, net of recoveries (3) (19) (11)
----------- ----------- -----------
Balance at end of year $ 7 $ 3 $ 19
=========== =========== ===========
</TABLE>
NOTE 6 - PREMISES AND EQUIPMENT
A summary of premises and equipment at September 30 is as follows:
In thousands
1996 1995
----------- -----------
Land $ 235 $ 235
Buildings and improvements 741 732
Furniture and equipment 1,007 954
----------- -----------
Total cost 1,983 1,921
Accumulated depreciation (1,059) (887)
----------- -----------
$ 924 $ 1,034
=========== ===========
NOTE 7 - DEPOSITS
Certificate of deposit accounts with a minimum denomination of $100,000 or more
totaled $4,260,000 and $4,481,000 at September 30, 1996 and 1995, respectively.
F-16
<PAGE>
NOTE 7 - DEPOSITS (Continued)
At September 30, 1996, scheduled maturities of certificates of deposit are as
follows:
Year Ending In Thousands
----------- ------------
September 30, 1997 $ 24,854
September 30, 1998 5,810
September 30, 1999 2,026
September 30, 2000 2,121
September 30, 2001 and thereafter 75
-----------
$ 34,886
===========
NOTE 8 - OTHER BORROWINGS
Other borrowings at September 30, 1995 consist of a revolving line of credit
with the Federal Home Loan Bank of Dallas (FHLB) to fund loans originated for
sale by the Bank. The line is secured by the underlying loans and bears a
variable interest rate which reprices daily. The interest rate at September 30,
1995 was 7.10%. This line was closed during 1996.
NOTE 9 - BENEFIT PLANS
During 1993, the Bank's Board of Directors adopted a stock option and incentive
plan (the Plan) that was subsequently ratified by the stockholders. Under the
Plan, options for 18,479 shares of common stock at $10.00 per share were granted
to the directors and officers of the Bank. During the fiscal year 1996, 5,018
stock options expired due to the resignation of an officer and a director who
did not exercise their options. At September 30, 1996, 13,461 options were
outstanding.
The Bank has a defined benefit pension plan covering 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.
F-17
<PAGE>
NOTE 9 - BENEFIT PLANS (Continued)
The funded status of the plan is as follows:
<TABLE>
<CAPTION>
In thousands
September 30,
1996 1995
---- ----
<S> <C> <C>
Accumulated benefit obligation, including vested
benefits of $353 and $303, respectively $ (385) $ (339)
=========== ===========
Projected benefit obligation for service rendered to date $ (498) $ (471)
Plan assets at fair value (Lincoln National Group
Variable Annuity Contract) 333 296
----------- -----------
Projected benefit obligation in excess of plan assets (165) (175)
Unrecognized transition obligation which is being
recognized over 25 years 118 125
Unrecognized net loss 43 51
----------- -----------
Accrued pension (cost) benefit recorded on statement
of financial condition $ (4) $ 1
=========== ===========
</TABLE>
In accordance with Statement of Financial Accounting Standards No. 87, the Bank
has recorded an additional minimum liability to recognize a pension obligation
equal to the unfunded accumulated benefit obligation (shown as accrued interest
payable and other liabilities) with an equal amount reflected as an intangible
asset.
<TABLE>
<CAPTION>
In thousands
Year ended September 30,
-----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net pension cost includes the following components:
Service cost earned during the period $ 73 $ 40 $ 34
Interest cost 25 28 25
Actual return on plan assets (16) (13) (14)
Net amortization and deferral 7 7 6
----------- ----------- -----------
Net periodic pension cost $ 89 $ 62 $ 51
=========== =========== ===========
The assumptions used to develop the net periodic pension cost were:
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%
</TABLE>
F-18
<PAGE>
NOTE 10 - REGULATORY 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.
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, 1996, the most
recent notification from the Office of Thrift Supervision categorized the Bank
as well 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, Tier I leverage ratios. There are no conditions
or events since that notification that management believes have changed the
institution's category.
As of September 30, 1996, the Bank's total risk-based, Tier I risk-based, and
Tier I leverage ratios exceeded the regulatory minimums for being considered
well capitalized. The total risk-based capital ratio exceeded the well
capitalized standard of 10.0% by 2.9% or approximately $123,000. Tier I
risk-based capital was greater than the well capitalized minimum of 6.0% by 7.6%
or approximately $328,000. The Tier I leverage ratio was 7.3%, approximately
$97,000, greater than the well capitalized minimum of 5.0%.
Current regulations also require savings institutions to have minimum regulatory
tangible capital equal to 1.5% of total assets, a core capital ratio of 3%, and
a risk-based capital ratio equal to 8% of risk-adjusted assets as defined by
regulation. The following is a reconciliation of the Bank's capital under
generally accepted accounting principles (GAAP) to regulatory capital at
September 30, 1996.
F-19
<PAGE>
NOTE 10 - REGULATORY MATTERS (Continued)
<TABLE>
<CAPTION>
% of
% of Adjusted % of Risk
Tangible Tangible Core Tangible Risk-based Adjusted
Capital Assets Capital Assets Capital Assets
--------- ------- ---------- -------- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
GAAP capital $ 4,316 7.46% $ 4,316 7.46% $ 4,316 10.05%
Regulatory general
valuation allowances - - - - 247 .57
--------- ---- ---------- ----- ---------- ----
Regulatory capital -
computed 4,316 7.46 4,316 7.46 4,563 10.62
Capital adequacy
requirement 868 1.50 1,736 3.00 3,347 8.00
--------- ---- ---------- ----- ---------- ----
Excess regulatory
capital over minimum $ 3,448 5.96% $ 2,580 4.46% $ 1,216 2.62%
========= ==== ========== ==== ========== ====
</TABLE>
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 shareholders;
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.
In 1991, the Board of Directors of the Bank adopted a Plan of Conversion to
convert from a federal mutual savings and loan association to a stock savings
and loan association. On April 22, 1993, the Bank sold 207,159 shares of common
stock at $10 per share and received proceeds of $1,549,000, net of conversion
expenses, and sold 87,263 shares of Series A redeemable preferred stock at $10
per share and received proceeds of $873,000. 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.
NOTE 11 - COMMITMENTS, CONTINGENT LIABILITIES AND CONCENTRATIONS
The Bank 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 Bank'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 Bank follows the same credit
policy to make such commitments as it uses for on-balance-sheet items.
F-20
<PAGE>
NOTE 11 - COMMITMENTS, CONTINGENT LIABILITIES AND CONCENTRATIONS (Continued)
At September 30, these financial instruments are summarized as follows:
In thousands
Contract
Amount
------
1996 1995
---- ----
Financial instruments whose contract amounts
represent credit risk:
Commitments to make loans $ 5,651 $ 1,565
Loans-in-process 1,966 1,664
Lines of credit 112 4,733
Commitments to sell loans 278 1,229
Letters of credit 175 70
The Bank had $5,422,000 of fixed rate commitments to originate loans, ranging
from 7.0% to 10.25% at September 30, 1996. 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 Bank to concentrations of
credit risk include interest-bearing deposit accounts in other financial
institutions and loans. At September 30, 1996, the Bank had deposit accounts
with balances totaling approximately $1,145,000 at the Federal Home Loan Bank of
Dallas.
Concentrations of loans are described in Note 3.
The Bank 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 Bank entered into a noncancelable operating lease for
office space relating to mortgage operations. The lease expires August 31, 1998
but has options for renewal through the year 2006. Projected minimum payments
under the terms of the lease, not including insurance and maintenance, are
$20,632 and $18,913 for years ended September 30, 1997 and 1998, respectively.
F-21
<PAGE>
NOTE 11 - COMMITMENTS, CONTINGENT LIABILITIES AND CONCENTRATIONS
(Continued)
The deposits of savings institutions such as the Bank are presently insured by
the Savings Association Insurance Fund (SAIF), which, along with the Bank
Insurance Fund (BIF), is one of the two insurance funds administered by the
Federal Deposit Insurance Corporation (FDIC). However, it is not anticipated
that SAIF will be adequately recapitalized until 2002, absent a substantial
increase in premium rates or the imposition of special assessments or other
significant developments, such as a merger of the SAIF and the BIF. Accordingly,
a recapitalization plan was signed into law on September 30, 1996 which provides
for a special assessment of an estimated .65% of all SAIF-insured deposit
balances as of March 31, 1995. The Bank's liability for the special assessment,
totaling approximately $217,000 net of taxes, was recorded in September 1996.
NOTE 12 - INCOME TAX EXPENSE
The provision for income tax expense consists of the following:
<TABLE>
<CAPTION>
In thousands
Year Ended
September 30,
------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Current income tax expense $ 168 $ 72 $ 79
Deferred income tax expense (benefit) (60) 38 155
----------- ----------- -----------
$ 108 $ 110 $ 234
=========== =========== ===========
</TABLE>
The provision for income tax differs from that computed at the statutory
corporate tax rate as follows:
<TABLE>
<CAPTION>
In thousands
Year Ended
September 30,
------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Tax expense at statutory rate (34%) $ 116 $ 109 $ 235
Other tax effects (8) 1 (1)
----------- ----------- -----------
$ 108 $ 110 $ 234
=========== =========== ===========
</TABLE>
F-22
<PAGE>
NOTE 12 - INCOME TAX EXPENSE (Continued)
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, 1996 include approximately $643,000, representing tax
bad debt provisions through 1986, for which no deferred federal income tax
liability has been recorded.
Tax legislation passed in August 1996 now requires all thrift institutions to
deduct a provision for bad debts for tax purposes based on actual loss
experience and recapture the excess bad debt reserve accumulated in the tax
years after 1986. The related amount of deferred tax liability which must be
recaptured is $124,000 and is payable over a six-year period, beginning in
fiscal year 1997.
Deferred tax assets (liabilities) are comprised of the following at September
30:
<TABLE>
<CAPTION>
In thousands
1996 1995
---- ----
<S> <C> <C>
Deferred loan fees $ 10 $ 30
SAIF assessment 112 -
Other 1 -
---------- -----------
Total deferred tax assets 123 30
Depreciation (23) (36)
Federal Home Loan Bank stock dividends (111) (94)
Loans, principally due to allowance for losses (75) (46)
---------- -----------
Total deferred tax liabilities (209) (176)
----------- -----------
Net deferred tax liabilities $ (86) $ (146)
=========== ===========
</TABLE>
Management has not recorded a valuation allowance based on previous taxes paid
and its estimate of future taxable income.
F-23
<PAGE>
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The approximate carrying amount and estimated fair value of financial
instruments is as follows:
<TABLE>
<CAPTION>
September 30, 1996
-------------------------------
Approximate
Carrying Estimated
Amount Fair Value
------ ----------
<S> <C> <C>
Financial assets
Cash and cash equivalents $ 2,806 $ 2,806
Securities 2,292 2,261
Loans, net of allowance for loan losses 49,160 49,537
Loans held for sale 419 419
Federal Home Loan Bank stock 845 845
Accrued interest receivable 329 329
Financial liabilities
Demand deposits (12,614) (12,614)
Savings deposits (4,177) (4,177)
Time deposits (34,886) (35,075)
Advance payments by borrowers for taxes and insurance (783) (783)
Accrued interest payable (25) (25)
</TABLE>
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 Bank would
charge for similar loans with similar maturities, applied for an estimated time
period until the loan is assumed to be repriced or repaid.
Federal Home Loan Bank Stock: The fair value of Federal Home Loan Bank stock is
assumed to approximate its carrying value.
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
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 Bank 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.
Advance Payments by Borrowers for Taxes and Insurance: The fair value of advance
payments by borrowers for taxes and insurance approximates the carrying value.
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 Bank 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 Bank disposed of these
items on September 30, 1996, the fair value would have been achieved, because
the market value may differ depending on the circumstances. The estimated fair
values at September 30, 1996 should not necessarily be considered to apply at
subsequent dates.
See accompanying notes to consolidated financial statements.
F-25
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER ("Agreement"), is made and entered
into by and among FIRST FEDERAL SAVINGS BANK, a federally-chartered capital
stock thrift institution ("First Federal"), NEW FIRST FEDERAL SAVINGS BANK, a
federally-chartered capital stock thrift institution in the process of
organization ("New Bank"), the sole stockholder of the Holding Company, J.
Stanley Stephen (the "Holding Company Stockholder") and THE BRYAN-COLLEGE
STATION FINANCIAL HOLDING COMPANY, a Delaware business corporation (the "Holding
Company"), effective as of the date executed by all of the parties.
WITNESSETH:
WHEREAS, First Federal is a capital stock thrift institution duly
organized and existing under the laws of the United States of America and having
its principal office in Bryan, Texas, with authorized capital stock consisting
of three million shares of common stock, par value $.01 per share ("First
Federal Common Stock"), of which 239,612 shares are issued and outstanding, and
one million shares of serial preferred stock (First Federal Preferred Stock), of
which 87,263 shares are issued and outstanding;
WHEREAS, New Bank is a capital stock thrift institution in the process
of organization under the laws of the United States of America, which is
proposed to be a subsidiary of the Holding Company and to have authorized
capital stock consisting of one million shares of common stock, par value $.01
per share ("New Bank Stock");
WHEREAS, the Holding Company is a capital stock corporation duly
organized and existing under the laws of Delaware, with authorized capital stock
consisting of three million shares of common stock, par value $.01 per share
("Holding Company Common Stock") of which one share is issued and outstanding,
and one million shares serial preferred stock, of which no shares are issued and
outstanding;
WHEREAS, the Holding Company has issued one share of its common stock
to the Holding Company Stockholder in return for $10.00 cash consideration;
WHEREAS, the Holding Company proposes to purchase one share of the
common stock of New Bank for $10.00;
WHEREAS, it is the desire of the parties to this Agreement to adopt a
plan of reorganization providing for the formation of a thrift institution
holding company; and
WHEREAS, a majority of the respective Boards of Directors of First
Federal, New Bank, and the Holding Company have approved and authorized the
execution of this Agreement pursuant to which the plan of reorganization,
including the merger of New Bank into First Federal, will be implemented;
<PAGE>
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, and in order to prescribe the plan of
reorganization and merger, including its terms and conditions, the mode of
carrying the same into effect, the manner and basis of stockholders of First
Federal exchanging their First Federal Common Stock for Holding Company Common
Stock or selling their First Federal Common Stock and such other details and
provisions as are deemed necessary or proper, the parties hereby agree as
follows:
ARTICLE I
MERGER AND REORGANIZATION
1.1 Subject to the conditions hereinafter set forth, New Bank shall be
merged into First Federal under the Charter of First Federal at the Effective
Date (as defined in Article XI hereof) of the merger (the "Merger"). The Merger
shall be effected pursuant to the provisions of, and with the effect provided
in, the applicable provisions of the laws of the United States of America and
the Rules and Regulations of the Office of Thrift Supervision.
1.2 On the Effective Date, the resulting thrift institution in the
Merger shall be First Federal (hereinafter referred to as the "Surviving
Institution" whenever reference is made to it as of the Effective Date of the
Merger or thereafter) which will continue to operate as a thrift institution
under its present name as "First Federal Savings Bank." The Charter and Bylaws
of First Federal in effect on the Effective Date shall be the Charter and Bylaws
of the Surviving Institution. The established offices and facilities of First
Federal immediately prior to the Merger shall become the established offices and
facilities of the Surviving Institution. The locations of the home office and
any other offices of the Surviving Institution are set forth in Schedule A
attached hereto.
1.3 On the Effective Date of the Merger, New Bank shall cease to exist
separately and shall be merged with and into First Federal in accordance with
the provisions of this Agreement and Plan of Merger and in accordance with the
provisions of applicable laws, rules and regulations, and all of the assets and
property of every kind and character, real, personal and mixed, tangible and
intangible, choses in action, rights and credits then owned by New Bank or which
would inure to it, shall immediately, by operation of law and without any
conveyance or transfer and without any further act or deed, be vested in and
become the property of the Surviving Institution, which shall have, hold and
enjoy the same in its own right as fully and to the same extent as the same were
possessed, held and enjoyed by New Bank prior to such Merger. The Surviving
Institution shall be deemed to be and shall be a continuation of the entity and
identity of New Bank and First Federal and all of the rights and obligations of
New Bank and First Federal shall remain unimpaired and the Surviving
Institution, on the Effective Date of such Merger, shall succeed to all such
rights and obligations and the duties and liabilities connected therewith on
such Effective Date.
1.4 On the Effective Date of the Merger, there will be no holders of
deposit accounts, transaction accounts, savings accounts or certificates of
deposit issued by New Bank. Holders of deposit accounts, transaction accounts,
savings accounts or certificates of deposit of First Federal as of the Effective
Date of the Merger shall continue to be holders of the same interest of the
Surviving Institution without change as to withdrawal value or other rights. No
existing
2
<PAGE>
deposit account, transaction account, savings account or certificate of deposit
holder shall have any of his rights impaired by virtue of the Merger
contemplated hereby.
1.5 The directors and officers of the Surviving Institution on the
Effective Date shall be those persons who are directors and officers,
respectively, of First Federal immediately before the Effective Date.
Information with respect to the directors of the Surviving Institution is set
forth in Schedule B attached hereto. The committees of the Board of Directors of
the Surviving Institution on the Effective Date shall be the same as, and shall
be composed of the same persons who were serving on, committees appointed by the
Board of Directors of First Federal as they exist immediately before the
Effective Date. The committees, if any, of officers of the Surviving Institution
on the Effective Date shall be the same as, and shall be composed of the same
officers who were serving on, the committees of officers of First Federal as
they exist immediately before the Effective Date.
1.6 Except as expressly prohibited by applicable laws, all corporate
acts, plans, policies, applications, agreements, orders, registrations,
licenses, approvals and authorizations of First Federal and New Bank, their
respective stockholders, Boards of Directors, committees elected or appointed by
their Boards of Directors, and their respective officers and agents, which were
valid and effective immediately before the Effective Date, shall be taken for
all purposes at and after the Effective Date as the acts, plans and policies,
applications, agreements, orders, registrations, licenses, approvals and
authorizations of the Surviving Institution and shall be as effective and
binding thereon as the same were with respect to First Federal and New Bank
immediately before the Effective Date.
ARTICLE II
CONVERSION, EXCHANGE AND CANCELLATION OF SHARES
2.1 CONVERSION OF FIRST FEDERAL COMMON STOCK. At the Effective Date, by
virtue of the Merger and without any action on the part of the holder thereof,
the Holding Company, First Federal or any other party to the Agreement, First
Federal Common Stock issued and outstanding immediately prior to the Effective
Date shall cease to be outstanding and shall, subject to the provisions of
Sections 2.2 and 2.3 hereof, be converted into and become the right to receive
either:
(a) such number of shares of Holding Company Common
Stock equal to the product of 2.5 multiplied by the number of
shares of First Federal Common Stock to be converted ("Stock
Distribution");
(b) an amount in cash equal to $24.07 per share (the
"Cash Distribution"),
as the holder thereof shall elect or be deemed to have elected as provided in
Section 2.2 of this Agreement (the aggregate of the Cash Distributions and the
Stock Distributions payable or issuable pursuant to the Merger is sometimes
hereinafter referred to as the "Merger Consideration"); provided, however, that
any shares of First Federal Common Stock held by First Federal, other than in a
fiduciary capacity or as a result of debts previously contracted, shall be
cancelled and shall not be exchanged for the Merger Consideration.
3
<PAGE>
2.2 Election Procedures.
-------------------
(a) An election form and other appropriate and customary
transmittal materials (which shall specify that delivery shall be effected, and
risk of loss and title to the certificates theretofore representing First
Federal Common Stock shall pass, only upon proper delivery of such certificates
to the exchange agent designated by Holding Company, or to the Holding Company
in its capacity as exchange agent, as determined by the Holding Company (the
"Exchange Agent"), in such form as First Federal and the Holding Company shall
mutually agree ("Election Form") shall be mailed approximately 25 days prior to
the anticipated Effective Date or on such other date as First Federal and the
Holding Company shall mutually agree (the "Mailing Date") to each holder of
record of First Federal Common Stock as of five business days prior to the
Mailing Date ("Election Form Record Date").
(b) Each Election Form shall specify the amount of Merger
Consideration receivable for each share of First Federal Common Stock in the
Cash Distribution and the Stock Distribution and shall permit a holder to elect
to receive, as provided in Section 2.2 of this Agreement, (i) the Stock
Distribution for all of his shares (in which case, such holder's shares shall be
deemed to be and shall be referred to herein as "Stock Election Shares"), (ii)
the Cash Distribution for certain designated shares (in which case, such
holder's shares so designated shall be deemed to be and shall be referred to
herein as "Cash Election Shares") with the remaining shares being converted to
the Stock Distribution as Stock Election Shares, or (iii) the Cash Distribution
for all of his shares.
(c) Any shares of First Federal Common Stock with respect to
which the holder thereof shall not, as of the Election Deadline (as defined
below), have made an election to receive either the Cash Distribution or the
Stock Distribution (such holder's shares being deemed to be and shall be
referred to herein as "No Election Shares") by submission to the Exchange Agent
of an effective, properly completed Election Form shall be deemed to be Cash
Election Shares. Any holder of 1% or more of First Federal Common Stock
(determined as of the Effective Date) that shall not, on or before the Election
Deadline, have delivered to the Exchange Agent a tax certification confirming
his present intention not to sell, exchange, or otherwise dispose of any Holding
Company Common Stock (a "Tax Certification") received in the Merger shall be
deemed to have made a timely election to receive the Cash Distribution for all
of his shares, and all shares of First Federal Common Stock held by such holder
shall be deemed to be Cash Election Shares for all purposes of this Agreement,
including Section 2.1. (The parties acknowledge that the foregoing sentence will
preclude a holder that acquires additional shares of First Federal Common Stock
and becomes a holder of 1% or more of such shares after the Election Deadline
from receiving the Stock Distribution.) "Election Deadline" means 5:00 p.m.,
local time, on the 20th day following the Mailing Date, or such other time and
date as the Holding Company and First Federal shall mutually agree.
(d) First Federal shall promptly make available one or more Election
Forms as may be reasonably requested by all persons who become holders (or
beneficial owners) of First Federal Common Stock between the Election Form
Record Date and close of business on the business day prior to the Election
Deadline, and First Federal shall provide to the Exchange Agent all information
reasonably necessary for it to perform as specified herein.
4
<PAGE>
(e) Any such election shall have been properly made only if the
Exchange Agent shall have actually received a properly completed Election Form
by the Election Deadline. An Election Form shall be deemed properly completed
only if accompanied by one or more certificates (or customary affidavits and
indemnification regarding the loss or destruction of such certificates or the
guaranteed delivery of such certificates) representing all shares of First
Federal Common Stock covered by such Election Form, together with duly executed
transmittal materials included in the Election Form and in the case of holders
of 1% or more of the outstanding First Federal Common Stock, a Tax Certification
if any such holder elects the Stock Distribution, in whole or in part. Any
Election Form may be revoked or changed by the person submitting such Election
Form at or prior to the Election Deadline. In the event an Election Form is
revoked prior to the Election Deadline, the shares of First Federal Common Stock
represented by such Election Form shall become No Election Shares and First
Federal shall cause the certificates representing First Federal Common Stock to
be promptly returned without charge to the person submitting the Election Form
upon written request to that effect from the person who submitted the Election
Form. Subject to the terms of this Agreement and of the Election Form, the
Exchange Agent shall have reasonable discretion to determine whether any
election, revocation or change has been properly or timely made and to disregard
immaterial defects in the Election Forms, and any good faith decisions of the
Exchange Agent regarding such matters shall be binding and conclusive. Neither
the Holding Company nor the Exchange Agent shall be under any obligation to
notify any person of any defect in an Election Form.
(f) ALLOCATION PROCEDURES. Within ten business days after the Effective
Date, or as soon thereafter as practicable, the Holding Company shall cause the
Exchange Agent to effect the allocation among the holders of First Federal
Common Stock of rights to receive Holding Company Common Stock or cash in the
Merger as follows:
(i) STOCK ELECTIONS LESS THAN THE MINIMUM STOCK VALUE, If
shares of Holding Company Common Stock that would be issued in the
Merger upon conversion of the Stock Election Shares represents less
than 20% of the shares of First Federal Common Stock outstanding (the
"Minimum Stock Value"), then the Holding Company will be permitted to
allocate cash and stock pro rata to those shareholders electing the
Cash Distribution (other than Dissenting Shares as defined in Section
2.3) in such amount as would result in at least 20% of First Federal
Common Stock to be exchanged for Holding Company Common Stock;
provided, however, that the Holding Company may pay cash for First
Federal Common Stock which, if exchanged for Holding Company Common
Stock in the Merger would result in adverse accounting treatment, as
determined by independent accountants for the Holding Company, and that
any pro rata distribution of cash and stock pursuant to this Section
2.2(f)(i) shall be based on the amount Stock Election Shares excluding
any Stock Election Shares exchangeable for cash due to such accounting
considerations. For purposes of determining the Minimum Stock Value
under this Section 2.2(f)(i) and Section 2.2(f)(ii) below, all
Dissenting Shares shall be deemed Cash Election Shares.
(ii) STOCK ELECTIONS GREATER THAN THE MAXIMUM STOCK VALUE. If
the shares of Holding Company Common Stock that would be issued in the
Merger upon the conversion of the Stock Election Shares is greater than
49% of the shares of First Federal Common Stock outstanding (the
"Maximum Stock Value"), then the Holding Company will be permitted to
allocate cash and stock pro rata to those shareholders electing the
5
<PAGE>
Stock Distribution in such amount as would result in less than 49% of
First Federal Common Stock being exchanged for Holding Company Common
Stock in the Merger; provided, however, that the Holding Company may
pay cash for First Federal Common Stock which, if exchanged for Holding
Company Common Stock in the Merger would result in adverse accounting
treatment, as determined by independent accountants for the Holding
Company, and that any pro rata distribution of cash and stock pursuant
to this Section 2.2(f)(i) shall be based on the amount of Stock
Election Shares excluding any Stock Election Shares exchangeable for
cash due to such accounting considerations. Merger Consideration shall
be paid in accordance with the Election Forms subject to the provisions
of Section 2.2(c). No Election Shares shall be converted into the right
to receive cash.
2.3 DISSENTING SHARES. Any record holder of First Federal's Common
Stock may require First Federal to pay the fair or appraised value of his or her
First Federal Common Stock, determined as of the Effective Date of the Merger,
by complying with Section 552.14 of the Office of Thrift Supervision ("OTS")
Rules and Regulations. The computation of fair or appraised value of such shares
(the "Dissenting Shares") will exclude any element of value arising from the
accomplishment or expectation of the Merger. Notwithstanding any other provision
of this Agreement, any Dissenting Shares shall not, after the Effective Date, be
entitled to vote for any purpose or receive any dividends or other distributions
and shall be entitled only to such rights as are afforded in respect of
Dissenting Shares pursuant to the OTS Regulations.
2.4 Exchange Procedures.
-------------------
(a) In accordance with Section 2.2(a) herein, holders
of record of certificates formerly representing shares of First Federal Common
Stock (the "Certificates") shall be instructed to tender such Certificates to
the Exchange Agent pursuant to a letter of transmittal that the Exchange Agent
shall deliver or cause to be delivered to such holders, which letter of
transmittal shall be included with the Election Forms distributed pursuant to
Section 2.2(a).
(b) The Holding Company or, at the election of the
Holding Company, the Exchange Agent, shall accept Certificates upon compliance
with such reasonable terms and conditions as the Holding Company or the Exchange
Agent may impose to effect an orderly exchange thereof in accordance with
customary exchange practices. All Certificates shall be appropriately endorsed
or accompanied by such instruments of transfer as the Holding Company or the
Exchange Agent may require.
(c) Each outstanding Certificate shall until duly
surrendered to the Holding Company or the Exchange Agent be deemed to evidence
ownership of the Merger Consideration into which the First Federal Common Stock
previously represented by such Certificate shall have been converted pursuant to
this Agreement.
(d) Subject to Section 2.3, after the Effective Date,
holders of Certificates shall cease to have rights with respect to First Federal
Common Stock previously represented by such Certificates, and their sole rights
shall be to exchange such Certificates for the Merger Consideration provided for
in this Agreement. After the Effective Date, there shall be no further transfer
on the records of First Federal of Certificates, and if such Certificates are
presented to First Federal for transfer, they shall be cancelled against
delivery of the Merger Consideration
6
<PAGE>
provided therefor in this Agreement. Neither the Exchange Agent nor the Holding
Company shall be obligated to deliver the Merger Consideration to which any
former holder of First Federal Common Stock is entitled as a result of the
Merger until such holder surrenders the Certificates as provided herein. No
dividends declared will be remitted to any person entitled to receive Holding
Company Common Stock under this Agreement until such person surrenders the
Certificates representing the right to receive such Holding Company Common
Stock, at which time such dividends shall be remitted to such person, without
interest and less any taxes that may have been imposed thereon. [CERTIFICATES
SURRENDERED FOR EXCHANGE BY ANY PERSON CONSTITUTING AN "AFFILIATE" OF FIRST
FEDERAL FOR PURPOSES OF RULE 145 OF THE SECURITIES ACT OF 1933, AS AMENDED
(TOGETHER WITH THE RULES AND REGULATIONS THEREUNDER, THE "SECURITIES ACT"),
SHALL NOT BE EXCHANGED FOR HOLDING COMPANY COMMON STOCK UNTIL THE HOLDING
COMPANY HAS RECEIVED A WRITTEN AGREEMENT FROM SUCH PERSON IN THE FORM ATTACHED
AS EXHIBIT C.] Neither the Exchange Agent nor any party to this Agreement nor
any affiliate thereof shall be liable to any holder of stock represented by any
Certificate for any consideration paid to a public official pursuant to
applicable abandoned property, escheat or similar laws. The Holding Company and
the Exchange Agent shall be entitled to rely upon the stock transfer books of
First Federal to establish the identity of those persons entitled to receive the
Merger Consideration specified in this Agreement, which books shall be
conclusive with respect thereto. In the event of a dispute with respect to
ownership of stock represented by any Certificate, the Holding Company and the
Exchange Agent shall be entitled to deposit any Merger Consideration represented
thereby in escrow with an independent third party and thereafter be relieved
with respect to any claims thereto.
2.5 NO FRACTIONAL SHARES. Notwithstanding any other provision of this
Agreement, neither certificates nor scrip for fractional shares of Holding
Company Common Stock shall be issued in the Merger. Each holder who otherwise
would have been entitled to a fraction of a share of Holding Company Common
Stock shall receive the number of shares rounded up to the next whole number of
shares.
2.6 FIRST FEDERAL PREFERRED SHARES. First Federal preferred stock
currently issued and outstanding will remain issued and outstanding First
Federal Preferred Stock. The Merger will not change any of the terms or
conditions of First Federal Preferred Stock, and holders of First Federal
Preferred Stock will not have any election in the Merger.
2.7 NEW BANK STOCK. The outstanding share of New Bank Stock issued to
the Holding Company shall be cancelled and converted into a share of First
Federal Common Stock.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HOLDING COMPANY
The Holding Company hereby represents and warrants as follows:
3.1 The Holding Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. At the
Effective Date, the Holding Company will have corporate power to carry on its
business as then to be conducted and will be
7
<PAGE>
qualified to do business in every jurisdiction in which the character and
location of the assets to be owned by it or the nature of the business to be
transacted by it require qualification.
3.2 The Holding Company has no subsidiaries other than New Bank at the
date of this Agreement. Between the date hereof and the Effective Date, the
Holding Company will not create or acquire any subsidiaries, other than New
Bank, without the consent of First Federal.
3.3 The authorized capital stock of the Holding Company consists on
the date hereof of three million shares of Holding Company Common Stock, par
value $.01 per share, and one million shares of serial preferred stock. Except
as set forth above or as contemplated by this Agreement or necessary for the
effectuation of the Merger, as of the date hereof, the Holding Company has one
share of its capital stock issued and outstanding and does not have any
outstanding subscriptions, options or other agreements or commitments obligating
it to issue shares of its capital stock.
3.4 Compliance with the terms and provisions of this Agreement by the
Holding Company will not conflict with or result in a breach of any of the
terms, conditions or provisions of any judgment, order, injunction, decree or
ruling of any court or governmental authority, domestic or foreign, or of any
agreement or instrument to which the Holding Company is a party, or constitute a
default thereunder.
3.5 The execution, delivery and performance of this Agreement have
been duly authorized by the Board of Directors of the Holding Company and have
been approved by the Holding Company Common Stockholders.
3.6 The Holding Company has complete and unrestricted power to enter
into and to consummate the transactions contemplated by this Agreement, subject
to approval of this Agreement and the Merger by the Holding Company Stockholder
and the provisions of Section 7.3 hereof.
3.7 On or prior to the Effective Date, the Holding Company will have
available the funds necessary to convert and exchange the outstanding First
Federal Common Stock to be converted and exchanged pursuant to the Merger as
provided herein.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF FIRST FEDERAL
First Federal hereby represents and warrants as follows:
4.1 First Federal is a capital stock thrift institution duly
organized, validly existing and in good standing under the laws of the United
States of America, and is duly authorized to carry on its business as it is now
being conducted.
4.2 The authorized capital stock of First Federal consists on the date
hereof of three million shares of First Federal Common Stock, par value $.01 per
share, of which 239,612 shares
8
<PAGE>
are issued and outstanding, and one million shares of serial preferred stock, of
which 87,263 shares are issued and outstanding.
4.3 Compliance with the terms and provisions of this Agreement by
First Federal will not conflict with, constitute a default under or result in a
breach of any of the terms, conditions or provisions of any judgment, order,
injunction, decree or ruling of any court or governmental authority, domestic or
foreign, or of any agreement or instrument to which First Federal is a party.
4.4 The execution, delivery and performance of this Agreement have
been duly authorized by the Board of Directors of First Federal.
4.5 First Federal has complete and unrestricted power to enter into
and to consummate the transactions contemplated by this Agreement, subject to
the provisions of Section 7.3 hereof.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF NEW BANK
New Bank hereby represents and warrants as follows:
5.1 New Bank, at the direction of the Holding Company, will apply to
the Office of Thrift Supervision to be chartered as a capital stock thrift
institution, and immediately before the Effective Date will be duly organized,
validly existing and in good standing under the laws of the United States of
America, and duly authorized to carry on the business of an interim federal
thrift institution.
5.2 The authorized capital stock of New Bank is proposed to consist of
one million shares of New Bank Stock, par value $.01 per share. Except for the
share of New Bank Stock issued to the Holding Company for the effectuation of
the Merger, prior to the Merger, New Bank will not have any shares of its stock
issued and outstanding. There are no outstanding subscriptions, options or other
arrangements or commitments obligating New Bank to issue any shares of its
capital stock.
5.3 Compliance with the terms and provisions of this Agreement by New
Bank will not conflict with, constitute a default under or result in a breach of
any of the terms, conditions or provisions of any judgment, order, injunction,
decree or ruling of any court or governmental authority, domestic or foreign, or
of any agreement or instrument to which New Bank is, or upon organization will
be, a party.
5.4 Prior to the Merger, the execution, delivery and performance of
this Agreement will be duly authorized by the Board of Directors of New Bank and
will be approved by the Holding Company as the sole stockholder of New Bank.
5.5 New Bank has complete and unrestricted power to enter into and to
consummate the transaction contemplated by this Agreement, subject to the
approval of this Agreement and
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<PAGE>
the Merger by the Holding Company as sole stockholder of New Bank and the
provisions of Section 7.3 hereof.
ARTICLE VI
OBLIGATIONS OF THE PARTIES PENDING THE EFFECTIVE DATE
6.1 Prior to the Effective Date, (i) New Bank shall complete its
organization and have directors who shall be duly elected and qualified, (ii)
the Holding Company shall complete its organization and have directors who shall
be duly elected and qualified, and (iii) this Agreement shall be duly submitted
to the stockholders of First Federal for the purpose of considering and acting
upon this Agreement in the manner required by law. Each party shall use its best
efforts to obtain the requisite approvals of this Agreement and the transactions
contemplated herein and, after obtaining such approval, the parties through
their respective officers and directors, shall execute and file with the
appropriate regulatory authorities all documents and papers, and the parties
shall take every reasonable action, necessary to comply with and to secure such
approval of this Agreement and the transactions contemplated herein as may be
required by all applicable statutes, rules and regulations.
ARTICLE VII
CONDITIONS PRECEDENT TO THE CONSUMMATION OF
THE MERGER AND REORGANIZATION
The obligations of the parties hereto to consummate the Merger and the
reorganization contemplated hereby shall be subject to the conditions that on or
before the Effective Date:
7.1 Each of the parties hereto shall have performed and complied with
all of its obligations hereunder which are to be complied with or performed on
or before the Effective Date.
7.2 This Agreement and related transactions contemplated hereby shall
have been duly and validly authorized, approved and adopted at a meeting of
stockholders duly and properly called for such purpose by First Federal by an
affirmative vote of at least 50 percent of the outstanding voting stock of First
Federal plus one affirmative vote, all in accordance with the applicable
regulations of the Office of Thrift Supervision.
7.3 Orders, consents and approvals, in form and substance reasonably
satisfactory to all the parties hereto, shall have been entered by the Office of
Thrift Supervision, (or there shall have been received satisfactory assurance
that such orders, consents or approvals are not required), granting the
authority necessary for consummation of the transactions contemplated by this
Agreement pursuant to the provisions of the Rules and Regulations of the Office
of Thrift Supervision, all other requirements prescribed by law and the rules
and regulations of any other regulatory authority having jurisdiction over the
transactions contemplated herein shall have been satisfied.
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7.4 There shall have been received from Crowe, Chizek & Company LLP,
accountants to First Federal, an opinion to the effect that:
1. No gain or loss will be recognized on the receipt of the
Holding Company Common Stock by First Federal common
shareholders who receive solely Holding Company Common Stock
in exchange for First Federal Common Stock (IRC Section
351(a)). Gain, but not loss, will be recognized by First
Federal common shareholders who receive both Holding Company
Common Stock and cash in exchange for First Federal Common
Stock, but in an amount not in excess of the cash received
(IRC Section 351(b)).
2. No gain or loss will be recognized by the Holding Company on
the receipt of cash and First Federal Common Stock solely in
exchange for shares of Holding Company Common Stock (IRC
Section 1032).
3. The basis of the Holding Company Common Stock received by a
First Federal common shareholder will be the same as the
adjusted basis of the First Federal Common Stock surrendered
in exchange therefor, decreased by the amount of any cash
received, and increased by any gain recognized in the exchange
(IRC Section 358).
4. The holding period of the Holding Company Stock received by a
First Federal common shareholder in exchange for the transfer
of First Federal Common Stock will include the period during
which the First Federal Common Stock surrendered in exchange
therefor was held, provided that the First Federal Common
Stock was held as a capital asset on the date of the exchange
(IRC Section 1223(1)).
5. The basis of the First Federal Common Stock received by the
Holding Company will be the same as the basis of the First
Federal Common Stock in the hands of the First Federal common
shareholders immediately prior to the exchange, increased by
any gain recognized by the First Federal common shareholders
in the exchange (IRC Section 362(a)).
6. The holding period of the First Federal Common Stock received
by Holding Company will include the period during which the
First Federal Common Stock was held by the First Federal
common shareholders (IRC Section 1223(2)).
7. Gain or loss, if any, will be recognized by a First Federal
common shareholder who receives solely cash in exchange for
the transfer of First Federal Common Sock.
7.6 Holders of no more than 80% of First Federal Common Stock shall
elect to receive cash as Merger Consideration (approximately $4.6 million of
cash elections).
7.7 The Holding Company will have successfully completed a public
offering for at least 100,000 shares of Holding Company Common Stock, and at
least $3,900,000 of Units, each Unit consisting of debentures and warrants to
purchase Holding Company Common Stock.
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<PAGE>
7.8 No good faith action, suit or proceeding shall have been
instituted or shall have been threatened before any court or other governmental
body or by any public authority to restrain, enjoin or prohibit the Merger and
reorganization contemplated herein, or which might restrict the operation of the
business of the Surviving Institution or the ownership of the capital stock of
the Surviving Institution or the exercise of any rights with respect thereto by
the Holding Company, or subject any of the parties hereto or any of their
directors or officers to any liability, fine, forfeiture, or penalty on the
grounds that the transactions contemplated hereby, the parties hereto or their
directors or officers, have breached or will breach any applicable law or
regulation, or have otherwise acted improperly in connection with the
transactions contemplated hereby, and with respect to which the parties hereto
have been advised by counsel that, in the opinion of such counsel, such action,
suit or proceeding raises substantial questions of law or fact which could
reasonably be decided adversely to any party hereto or its directors or
officers.
ARTICLE VIII
ADDITIONAL CONDITIONS PRECEDENT
8.1 Each obligation of the Holding Company and New Bank to be
performed on or prior to the Effective Date shall be subject to the
satisfaction, on or before the Effective Date, of the following additional
conditions:
(a) The representations and warranties made by First Federal
and by New Bank in this Agreement shall be true as though such
representations and warranties had been made or given on and as of
the Effective Date; and
(b) The Holding Company shall have received an opinion of
Silver, Freedman & Taff, L.L.P. which shall be to the effect that:
(i) First Federal is duly organized, validly existing
and in good standing under the laws of the United States of
America and the Rules and Regulations of the Office of Thrift
Supervision;
(ii) the execution and delivery of this Agreement did
not, and the consummation of the Merger and reorganization
contemplated hereby will not, violate any provisions of the
Charter or Bylaws of First Federal;
(iii) New Bank is a capital stock thrift institution,
duly organized, validly existing and in good standing under
the laws of the United States of America and Rules and
Regulations of the Office of Thrift Supervision;
(iv) the execution and delivery of this Agreement did
not, and the consummation of the Merger and reorganization
contemplated hereby will not, violate any provisions of the
Charter or Bylaws of New Bank; and
(v) the Boards of Directors and stockholders of First
Federal and New Bank have taken all corporate action required
by their respective Charters and Bylaws and by the Rules and
Regulations of the Office of Thrift Supervision to
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<PAGE>
authorize the execution and delivery of this Agreement and to
approve the Merger and reorganization in accordance with the
terms of this Agreement; First Federal and New Bank have
obtained the requisite approvals from the Office of Thrift
Supervision to consummate the Merger and reorganization
contemplated by this Agreement; and this Agreement is a legal,
valid and binding agreement of First Federal and New Bank in
accordance with its terms, except to the extent that
enforceability may be limited by bankruptcy laws, insolvency
laws, or other laws affecting the rights of creditors
generally or the rights of creditors of thrift institutions
the accounts of which are insured by the Federal Deposit
Insurance Corporation or which are subject to regulation by
the Office of Thrift Supervision, including but not limited to
laws relating to the availability of equitable remedies.
8.2 Each obligation of First Federal to be performed on or prior to
the Effective Date shall be subject to the satisfaction, on or before the
Effective Date, of the following additional conditions:
(a) The representations and warranties made by the Holding
Company and by New Bank contained in this Agreement shall be true as
though such representations and warranties had been made or given at
and as of the Effective Date;
(b) This Agreement and the transactions contemplated hereby
shall have been duly and validly authorized, approved and adopted by
the Holding Company and by New Bank; and
(c) First Federal shall have received an opinion of Silver,
Freedman & Taff, L.L.P. which shall be to the effect that:
(i) The Holding Company is a corporation duly
organized, validly existing and in good standing under the
laws of the State of Delaware;
(ii) The Holding Company has corporate power to
execute and deliver this Agreement; the Board of Directors and
the Holding Company Stockholder have taken all action required
by its Certificate of Incorporation and Bylaws to authorize
such execution and delivery, to approve the Merger and
reorganization contemplated hereby and to authorize the
issuance of the shares of Holding Company Common Stock
necessary to consummate the Merger and reorganization; and
this Agreement is the legal, valid and binding agreement of
the Holding Company in accordance with its terms, except to
the extent that enforceability may be limited by bankruptcy
laws, insolvency laws, or other laws affecting the rights of
the creditors generally, including but not limited to laws
relating to the availability of equitable remedies;
(iii) New Bank is a capital stock thrift institution
duly organized, validly existing and in good standing under
the laws of the United States of America and the Rules and
Regulations of the Office of Thrift Supervision;
(iv) New Bank has corporate power to execute, deliver
and perform this Agreement; the Board of Directors and the
stockholder of New Bank have taken
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<PAGE>
all action required by its Charter and Bylaws and by the Rules
and Regulations of the Office of Thrift Supervision to
authorize such execution, delivery and performance and to
approve the Merger; and this Agreement is the legal, valid and
binding agreement of New Bank in accordance with its terms,
except to the extent that enforceability may be limited by
bankruptcy laws, insolvency laws, or other laws affecting the
rights of creditors generally or the rights of creditors of
thrift institutions the accounts of which are insured by the
Federal Deposit Insurance Corporation or which are subject to
regulation by the Office of Thrift Supervision, including but
not limited to laws relating to the availability of equitable
remedies; and
(v) The Holding Company and New Bank have obtained or
will obtain the requisite approvals from the Office of Thrift
Supervision to consummate the Merger and reorganization
contemplated by this Agreement.
In rendering opinions provided for in this Agreement, counsel may rely
upon opinions of other counsel and, as to matters of fact, upon certificates of
public officials and of any officer or officers of First Federal, New Bank and
the Holding Company.
ARTICLE IX
AMENDMENTS
First Federal, the Holding Company and New Bank, by mutual consent of
their respective Boards of Directors or incorporators, as the case may be, to
the extent permitted by law, may amend, modify, supplement and interpret this
Agreement in such manner as may be mutually agreed upon by them in writing at
any time before or after the approval and adoption thereof by the stockholders
of First Federal, provided, however, that no such amendment, modification,
supplement or interpretation shall have a materially adverse impact on First
Federal or its stockholders except with the approval of the stockholders of
First Federal.
ARTICLE X
TERMINATION AND ABANDONMENT
10.1 Anything contained in this Agreement to the contrary
notwithstanding, this Agreement may be terminated and the Merger and
reorganization abandoned at any time (whether before or after the approval and
adoption thereof by the stockholders of First Federal) prior to the Effective
Date:
(a) By mutual consent of the parties hereto;
(b) By the Holding Company or New Bank, if any condition set
forth in Sections 7.1 through 7.8 of Article VII or Section 8.1 of
Article VIII has not been met or has not been validly waived or if; or
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<PAGE>
(c) By First Federal, if any condition set forth in Sections
7.1 through 7.8 of Article VII or Section 8.2 of Article VIII has not
been met or has not been validly waived or if the holders of more than
10 percent of the outstanding voting stock of First Federal deliver
properly to First Federal a demand for appraisal and payment for
shares pursuant to 12 C.F.R. ss. 552.14.
10.2 An election by a party hereto to terminate this Agreement and
abandon the Merger as provided in Section 10.1 shall be exercised on behalf of
such thrift institution or corporation by its Board of Directors or
incorporators, as may be the case.
10.3 In the event of the termination of this Agreement pursuant to the
provisions of Section 10.1 hereof, this Agreement shall become void and have no
effect and create no liability on the part of any of the parties hereto or their
respective incorporators, directors, officers or stockholders in respect to this
Agreement.
10.4 Any of the terms or conditions of this Agreement (other than the
necessary approvals of stockholders and government authorities) may be waived at
any time by the party which is entitled to the benefit thereof, by action taken
by its Board of Directors; provided, however, that such action shall be taken
only if, in the judgment of the Board of Directors taking the action, such
waiver will not have a materially adverse effect on the benefits intended under
this Agreement to be afforded to the stockholders of First Federal.
ARTICLE XI
EFFECTIVE DATE
The effective date of the Merger ("Effective Date") shall be the last
day of the calendar month during which the last to occur of the following events
takes place: (i) the Merger is approved by the Office of Thrift Supervision and
the Articles of Combination are executed by the Office of Thrift Supervision,
(ii) all other required regulatory approvals have been obtained, and (iii) all
other conditions to the Merger herein set forth have been met. The Boards of
Directors of First Federal, New Bank and the Holding Company each specifically
and expressly delegate to their respective chief executive officers the
authority to change, by mutual consent of such officers, the Effective Date of
the Merger if necessary to properly and efficiently accomplish the Merger.
However, in no event shall the Merger become effective unless and until approved
by the Office of Thrift Supervision.
ARTICLE XII
TERMINATION OF REPRESENTATIONS AND
WARRANTIES AND CERTAIN AGREEMENTS
The respective representations, warranties, covenants and agreements
of the parties hereto in Articles III, IV and V hereof shall expire with, and be
terminated and extinguished by, the Merger and reorganization pursuant to this
Agreement at the time of the consummation thereof on the Effective Date. None of
the parties shall be under any liability whatsoever with respect
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<PAGE>
to any such representation, warranty, covenant or agreement which does not
survive the Merger and reorganization, it being intended that the sole remedy of
the parties for a breach of any such representation, warranty, covenant or
agreement shall be to elect not to proceed with the Merger and reorganization if
such breach has resulted in the failure to satisfy a condition precedent to such
party's obligation to consummate the transactions contemplated hereby.
ARTICLE XIII
MISCELLANEOUS
13.1 This Agreement embodies the entire agreement among the parties
and there have been and are no agreements, representations or warranties among
the parties other than those set forth or provided for herein.
13.2 Any number of counterparts hereof may be executed and each such
counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one instrument.
13.3 Any notice or waiver to be given to any party shall be in writing
and shall be deemed to have been duly given if delivered, mailed, or sent by
prepaid telegram, addressed to such party at 2900 Texas Avenue, Bryan, Texas
77802.
13.4 The captions contained in this Agreement are solely for
convenient reference and shall not be deemed to affect the meaning or
interpretation of any paragraph hereof.
13.5 First Federal will pay all fees and expenses incurred in
connection with the transactions contemplated by this Agreement.
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<PAGE>
IN WITNESS WHEREOF, First Federal, New Bank and the Holding Company
each under the authority of its Board of Directors, and Richard E. Belcher have
caused this Agreement to be executed with the intent to be legally bound hereby.
<TABLE>
<CAPTION>
FIRST FEDERAL SAVINGS BANK
ATTEST:
<S> <C> <C>
By: /s/ Charles Neelley By: /s/ J. Stanley Stephen
-------------------------------- -------------------------------------
Charles Neelley, Secretary J. Stanley Stephen,
President and Chief Executive Officer
Date: Date:
--------------------------------- -------------------------------------
NEW FIRST FEDERAL SAVINGS
ATTEST: BANK
By: /s/ Charles Neelley By: /s/J. Stanley Stephen
-------------------------------- -------------------------------------
Charles Neelley, Secretary J. Stanley Stephen
President and Chief Executive Officer
Date: Date:
--------------------------------- -------------------------------------
ATTEST: THE BRYAN-COLLEGE STATION
FINANCIAL HOLDING COMPANY
By: /s/ Charles Neelley By: /s/ J. Stanley Stephen
---------------------------------- -------------------------------------
Charles Neelley, Secretary J. Stanley Stephen
President and Chief Executive Officer
Date: Date:
--------------------------------- -------------------------------------
Witness:
/s/ Charles Neelley /s/ J. Stanley Stephen
- ------------------------------------------ -------------------------------------
Charles Neelley J. Stanley Stephen
Date: Date:
--------------------------------- -------------------------------------
</TABLE>
17
<PAGE>
SCHEDULE A
OFFICES OF SURVIVING INSTITUTION
MAIN OFFICE
- -----------
2900 Texas Avenue
Bryan, Texas 77802
BRANCH OFFICE
- -------------
2200 Longmire
College Station, Texas
LOAN PRODUCTION OFFICES
- -----------------------
510 N. Valley Mills Drive
Waco, Texas 76710
701 Normal Park, Suite 208E
Huntsville, Texas 77340
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SCHEDULE B
DIRECTORS OF SURVIVING INSTITUTION
Term
Name Address Expires
---- ------- -------
J. Stanley Stephen 2900 Texas Avenue 1997
Bryan, Texas 77802
Ken Hayes 2900 Texas Avenue 1997
Bryan, Texas 77802
Charles Neelley 2900 Texas Avenue 1997
Bryan, Texas 77802
George Koenig 2900 Texas Avenue 1997
Bryan, Texas 77802
Ernest A. Wentrcek 2900 Texas Avenue 1998
Bryan, Texas 77802
Robert H. Conaway 2900 Texas Avenue 1998
Bryan, Texas 77802
Richard L. Peacock 2900 Texas Avenue 1999
Bryan, Texas 77802
Jack W. Lester, Jr. 2900 Texas Avenue 1999
Bryan, Texas 77802
Phil Hobson 2900 Texas Avenue 1999
Bryan, Texas 77802
J. Roland Ruffino 2900 Texas Avenue 1999
Bryan, Texas 77802
Successor or substitute directors may be named, subject to compliance
with the requirements of applicable law and the Charter and Bylaws of the
Surviving Institution.
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APPENDIX B
RIGHTS OF DISSENTING STOCKHOLDERS
SECTION 552.14 OF THE OFFICE OF THRIFT SUPERVISION
RULES AND REGULATIONS
ss. 552.14 DISSENTER AND APPRAISAL RIGHTS.
(a) RIGHT TO DEMAND PAYMENT OF FAIR OR APPRAISED VALUE. Except as
provided in paragraph (b) of this section, any stockholder of a Federal stock
association combining in accordance with ss.552.13 of this part shall have the
right to demand payment of the fair or appraised value of his stock: Provided,
That such stockholder has not voted in favor of the combination and complies
with the provisions of paragraph (c) of this section.
(b) EXCEPTIONS. No stockholder required to accept only qualified
consideration for his or her stock shall have the right under this section to
demand payment of the stock's fair or appraised value, if such stock was listed
on a national securities exchange or quoted on the National Association of
Securities Dealers' Automated Quotation System ("NASDAQ") on the date of the
meeting at which the combination was acted upon or stockholder action is not
required for a combination made pursuant to ss. 552.13(h)(2) of this part.
"Qualified consideration" means cash, shares of stock of any association or
corporation which at the effective date of the combination will be listed on a
national securities exchange or quoted on NASDAQ or any combination of such
shares of stock and cash.
(c) PROCEDURE.
(1) NOTICE. Each constituent Federal stock association shall notify all
stockholders entitled to rights under this section, not less than twenty days
prior to the meeting at which the combination agreement is to be submitted for
stockholder approval, of the right to demand payment of appraised value of
shares, and shall include in such notice a copy of this section. Such written
notice shall be mailed to stockholders of record and may be part of the
management's proxy solicitation for such meeting.
(2) DEMAND FOR APPRAISAL AND PAYMENT. Each stockholder electing to make
a demand under this section shall deliver to the Federal Stock association,
before voting on the combination, a writing identifying himself or herself and
stating his or her intention thereby to demand appraisal of and payment for his
or her shares. Such demand must be in addition to and separate from any proxy or
vote against the combination by the stockholder.
(3) NOTIFICATION OF EFFECTIVE TIME AND WRITTEN OFFER. Within ten days
after the effective date of the combination, the resulting association shall;
(i) Give written notice by mail to stockholders of constituent Federal
Stock associations who have complied with the provisions of paragraph (c)(2) of
this section and have not voted in favor of the combination, of the effective
date of the combination;
B-1
<PAGE>
(ii) Make a written offer to each stockholder to pay for dissenting
shares at a specified price deemed by the resulting association to be the fair
value thereof; and
(iii) Inform them that, within sixty days of such date, the respective
requirements of paragraphs (c)(5) and (6) of this section (set out in the
notice) must be satisfied.
The notice and offer shall be accompanied by a balance sheet and statement of
income of the association the shares of which the dissenting stockholder holds,
for a fiscal year ending not more than sixteen months before the date of notice
and offer, together with the latest available interim financial statements.
(4) ACCEPTANCE OF OFFER. If within sixty days of the effective date of
the combination the fair value is agreed upon between the resulting association
and any stockholder who has complied with the provisions of paragraph (c)(2) of
this section, payment therefor shall be made within ninety days of the effective
date of the combination.
(5) PETITION TO BE FILED IF OFFER NOT ACCEPTED. If within sixty days of
the effective date of the combination the resulting association and any
stockholder who has complied with the provisions of paragraph (c)(2) of this
section do not agree as to the fair value, then any such stockholder may file a
petition with the Office, with a copy by registered or certified mail to the
resulting association, demanding a determination of the fair market value of the
stock of all such stockholders. A stockholder entitled to file a petition under
this section who fails to file such petition within sixty days of the effective
date of the combination shall be deemed to have accepted the terms offered under
the combination.
(6) STOCK CERTIFICATES TO BE NOTED. Within sixty days of the effective
date of the combination, each stockholder demanding appraisal and payment under
this section shall submit to the transfer agent his certificates of stock for
notation thereon that an appraisal and payment have been demanded with respect
to such stock and that appraisal proceedings are pending. Any stockholder who
fails to submit his stock certificates for such notation shall no longer be
entitled to appraisal rights under this section and shall be deemed to have
accepted the terms offered under the combination.
(7) WITHDRAWAL OF DEMAND. Notwithstanding the foregoing, at any time
within sixty days after the effective date of the combination, any stockholder
shall have the right to withdraw his or her demand for appraisal and to accept
the terms offered upon the combination.
(8) VALUATION AND PAYMENT. The Director shall, as he or she may elect,
either appoint one or more independent persons or direct appropriate Staff of
the Office to appraise the shares to determine their fair market value, as of
the effective date of the combination, exclusive of any element of value arising
from the accomplishment or expectation of the combination. Appropriate staff of
the Office shall review and provide an opinion on appraisals prepared by
independent persons as to the suitability of the appraisal methodology and the
adequacy of the analysis and supportive data. The Director after consideration
of the appraisal report and the advice of the appropriate staff shall, if he or
she concurs in the valuation of the shares, direct payment by the resulting
association of the appraised fair market value of the shares, upon
B-2
<PAGE>
surrender of the certificates representing such stock. Payment shall be made,
together with interest from the effective date of the combination, at a rate
deemed equitable by the Director.
(9) COSTS AND EXPENSES. The costs and expenses of any proceeding under
this section may be apportioned and assessed by the Director as he or she may
deem equitable against all or some of the parties. In making this determination
the Director shall consider whether any party has acted arbitrarily,
vexatiously, or not in good faith in respect to the rights provided by this
section.
(10) VOTING AND DISTRIBUTION. Any stockholder who has demanded
appraisal rights as provided in subparagraph (c)(2) of this section shall
thereafter neither be entitled to vote such stock for any purpose nor be
entitled to the payment of dividends or other distributions on the stock (except
dividends or other distribution payable to, or a vote to be taken by
stockholders of record at a date which is on or prior to, the effective date of
the combination): Provided, That if any stockholder becomes unentitled to
appraisal and payment of appraised value with respect to such stock and accepts
or is deemed to have accepted the terms offered upon the combination, such
stockholder shall thereupon be entitled to vote and receive the distributions
described above.
(11) STATUS. Shares of the resulting association into which shares of
the stockholders demanding appraisal rights would have been converted or
exchanged, had they assented to the combination, shall have the status of
authorized and unissued shares of the resulting association.
B-3
<PAGE>
April 16, 1997
Members of the Board of Directors
First Federal Savings Bank
2900 Texas Avenue
Bryan, Texas 77802
Members of the Board:
You have requested our opinion as investment bankers as to the
fairness, from a financial point of view, to the holders of shares of First
Federal Savings Bank ("First Federal") of the terms of the proposed acquisition
of shares of common stock of First Federal by The Bryan- College Station
Financial Holding Company as defined in the Prospectus. Subject to the terms and
conditions therein, holders of up to 80% of First Federal Stock shall be
entitled to receive from First Federal, as of the Effective Date, $24.07 in cash
for each share of First Federal Stock owned by such holder at the Effective
Date.
As part of its investment banking business, Hoefer & Arnett,
Incorporated is continually engaged in the valuation of bank, bank holding
company and thrift securities in connection with mergers and acquisitions
nationwide. Prior to being retained for this assignment, we have not provided
investment banking or financial advisory services to First Federal. Concurrent
with this assignment, Hoefer & Arnett, Incorporated is prepared to serve as
manager on a best efforts basis for the proposed public offering of shares of
common stock and units of Senior Subordinated Debentures and warrants to
purchase common stock by the new holding company to be formed by First Federal,
which shall be named The Bryan-College Station Financial Holding Company.
In arriving at our opinion, we have reviewed and analyzed, among other
things, the following: (i) the Prospectus (ii) Annual Reports to Shareholders of
First Federal for the years ended September 30, 1995 and September 30, 1996;
(iii) Quarterly OTS Call reports for the quarters ended December 31, 1996, and
March 31, 1997 for First Federal; (iv) certain other publicly available
financial and other information concerning First Federal; and (v) publicly
available information concerning other thrifts, banks and holding companies, the
trading markets for their securities and the nature and terms of certain other
merger/acquisition transactions we believe relevant to our inquiry. We have held
discussions with senior management of First Federal concerning their past and
current operations, financial condition and prospects, as well as the results of
regulatory examinations.
We have reviewed with senior management of First Federal earnings
projections for 1997 through 2001 for First Federal as a stand-alone entity,
assuming the merger does not occur, prepared by First Federal.
In conducting our review and in arriving at our opinion, we have relied
upon and assumed the accuracy and completeness of the financial and other
information provided to us or publicly available, and we have not assumed any
responsibility for independent verification of the same. We have relied upon the
management of First Federal as to the reasonableness of the
<PAGE>
financial and operating forecasts, projections (and the assumptions and bases
therefor) provided to us, and we have assumed that such forecasts and
projections reflect the best currently available estimates and judgments of the
management of First Federal. We have also assumed without assuming any
responsibility for the independent verification of same, that the allowance for
loan losses for First Federal is adequate to cover such losses. We have not made
or obtained any evaluations or appraisals of the property of First Federal, nor
have we examined any individual loan credit files. For purposes of this opinion,
we have assumed that the transaction will have the tax, accounting and legal
effects described in the Prospectus and assumed the accuracy of the disclosures
set forth in the Prospectus. Our opinion as expressed herein is limited to the
fairness, from a financial point of view, to the holders of First Federal Stock
of the terms of the proposed acquisition of up to 80% of the common stock of
First Federal by Holding Company and does not address Holding Company's
underlying business decision to proceed with the acquisition.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others the following: (i)
the historical and current financial position and results of operations of First
Federal, including interest income, interest expense, net interest income, net
interest margin, provision for loan losses, non-interest income, non-interest
expense, earnings, dividends, internal capital generation, book value,
intangible assets, return on assets, return on shareholders' equity,
capitalization, the amount and type of non-performing assets, loan losses and
the reserve for loan losses, all as set forth in the financial statements for
First Federal; (ii) the assets and liabilities of First Federal, including the
loan, investment and mortgage portfolios, deposits, other liabilities,
historical and current liability sources and costs and liquidity; and (iii) the
nature and terms of certain other merger/acquisition transactions involving
thrifts, banks and bank holding companies. We have also taken into account our
assessment of general economic, market and financial conditions and our
experience in other transactions, as well as our experience in securities
valuation and our knowledge of the banking industry generally. Our opinion is
necessarily based upon conditions as they exist and can be evaluated on the date
hereof and the information made available to us through the date hereof.
Based upon and subject to the foregoing, we are of the opinion as
investment bankers that, as of the date hereof, the terms of proposed
acquisition of up to 80% of the outstanding common stock of First Federal by
Holding Company are fair, from a financial point of view, to the holders of
First Federal Stock.
It is understood that this letter is for the information of the Board
of Directors of First Federal and does not constitute a recommendation to the
Board of Directors or to any shareholder of First Federal with respect to any
approval of the acquisition. We hereby consent to the reference to our firm in
the proxy statement or prospectus related to the merger transaction and to the
inclusion of our opinion as an exhibit to the proxy statement or prospectus
related to the transaction.
Very truly yours,
/s/ Hoefer & Arnett, Incorporated
----------------------------------
Hoefer & Arnett, Incorporated
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
- -----------------------------------------------------
Set forth below is an estimate of the amount of fees and expenses
(other than underwriting discounts and commissions) to be incurred in connection
with the issuance of the shares.
Counsel fees and expenses...................................... $67,500
Accounting fees and expenses................................... *
Marketing Agent fees........................................... *
Marketing Agent's counsel fees and expenses.................... *
OTS Filing Fee................................................. *
Printing, postage and mailing.................................. 15,000
Registration and Filing Fees................................... *
Blue Sky fees and expenses..................................... *
Other expenses................................................. *
TOTAL..................................................... $ *
=======
- ------------------
(*) To be completed by amendment.
Item 14. Indemnification of Directors and Officers
- ---------------------------------------------------
Article Eleventh of the Holding Company's Certificate of Incorporation
provides for indemnification of directors and officers of the Holding Company
against all expense, liability and loss (including attorneys' fees, court costs,
judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement) incurred in any actual, threatened or potential proceeding, except
to the extent that such indemnification is limited by Delaware law and such law
cannot be varied by contract or bylaw. Article Eleventh also provides for the
authority to purchase insurance with respect thereto.
Section 145 of the General Corporation Law of the State of Delaware
authorizes a corporation's Board of Directors to grant indemnity under certain
circumstances to directors and officers, when made, or threatened to be made,
parties to certain proceedings by reason of such status with the corporation,
against judgments, fines, settlements and expenses, including attorneys' fees.
In addition, under certain circumstances such persons may be indemnified against
expenses actually and reasonably incurred in defense of a proceeding by or on
behalf of the corporation. Similarly, the corporation, under certain
circumstances, is authorized to indemnify directors and officers of other
corporations or enterprises who are serving as such at the request of the
corporation, when such persons are made, or threatened to be made, parties to
certain proceedings by reason of such status, against judgments, fines,
settlements and expenses, including attorneys' fees; and under certain
circumstances, such persons may be indemnified against expenses actually and
reasonably incurred in connection with the defense or settlement of a proceeding
by or in the right of such other corporation or enterprise. Indemnification is
<PAGE>
permitted where such person (I) was acting in good faith; (ii) was acting in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation or other corporation or enterprise, as appropriate; (iii) with
respect to a criminal proceeding, has no reasonable cause to believe his conduct
was unlawful; and (iv) was not adjudged to be liable to the corporation or other
corporation or enterprise (unless the court where the proceeding was brought
determines that such person is fairly and reasonably entitled to indemnity).
Unless ordered by a court, indemnification may be made only following a
determination that such indemnification is permissible because the person being
indemnified has met the requisite standard of conduct. Such determination may be
made (I) by the Board of Directors of the Holding Company by a majority vote of
a quorum consisting of directors not at the time parties to such proceeding; or
(ii) if such a quorum cannot be obtained or the quorum so directs, then by
independent legal counsel in a written opinion; or (iii) by the stockholders.
Section 145 also permits expenses incurred by directors and officers in
defending a proceeding to be paid by the corporation in advance of the final
disposition of such proceedings upon the receipt of an undertaking by the
director or officer to repay such amount if it is ultimately determined that he
is not entitled to be indemnified by the corporation against such expenses.
Item 15. Recent Sales of Unregistered Securities
- -------------------------------------------------
The Registrant is newly incorporated, solely for the purpose of acting
as the holding company of First Federal Savings Bank pursuant to the Merger
Agreement (filed as Exhibit 2 herein), and no sales of its securities have
occurred to date, other than the sale of one share of the Registrant's stock to
its incorporator for the purpose of qualifying the Registrant to do business in
the State of Delaware.
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
- -----------------------------------------------------
(a) Exhibits:
2 Agreement and Plan of Merger*
3.1 Certificate of Incorporation of the Holding Company*
3.2 Bylaws of the Holding Company*
3.3 Charter of First Federal*
3.4 Bylaws of First Federal*
4 Form of Stock Certificate of the Holding Company*
5 Opinion of Silver, Freedman & Taff, L.L.P. with respect to legality
of stock
8.1 Opinion of Crowe Chizek & Company, L.L.P. with respect to Federal
income tax consequences of the Merger
10.1 1993 Stock Option and Incentive Plan*
10.2 Form of Employment Agreement of J. Stanley Stephen*
10.3 Form of Employment Agreement of George Koenig*
10.4 Form of Employment Agreement of Mary Lynn Hegar*
10.5 Form of Employment Agreement of Kay Watson*
23.1 Consent of Silver, Freedman & Taff, L.L.P.
23.2 Consent of Crowe, Chizek & Company, L.L.P.
23.3 Consent of Hoefer & Arnett, Inc. (set forth in Fairness Opinion,
Exhibit 99.1)
24 Power of Attorney (set forth on signature page)
99.1 Fairness Opinion
99.2 Form of Proxy to be furnished to First Federal Stockholders
99.3 Form of Election of First Federal Stockholders
* Filed as an exhibit to the Company's S-1 registration statement filed on
May 30, 1997 (File No. 333- ) pursuant to Section 5 of the Securities Act of
1933. Such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
<PAGE>
Item 17. Undertakings
- ----------------------
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(I) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Proxy Statement/Prospectus any facts or events
arising after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in
the information set forth in the Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and it will be governed by the final adjudication
of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Bryan, State
of Texas on May 29, 1997.
THE BRYAN-COLLEGE STATION FINANCIAL
HOLDING COMPANY
By: /s/ J. Stanley Stephen
---------------------------------
J. Stanley Stephen, President and
Chief Executive Officer
(Duly Authorized Representative)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints J. Stanley Stephen and Mary Lynn Hegar
his true and lawful attorneys-in-fact and agents, with full power of
substitution and re-substitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and all other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents or their substitutes or substitute may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
/s/ J. Stanley Stephen /s/ Mary Lynn Hegar
- --------------------------------------------- -------------------------------------------
J. Stanley Stephen, Director, Mary Lynn Hegar, Vice President,
President and Chief Executive Officer Secretary and Chief Financial Officer
(Chief Operating Officer) (Principal Financial Officer)
Date: May 29, 1997 Date: May 29, 1997
- --------------------------------------------- ---------------------------------------------
/s/ Richard L. Peacock /s/ Ernest A. Wentrcek
- --------------------------------------------- -------------------------------------------
Richard L. Peacock, Chairman of the Board Ernest A. Wentrcek, Vice Chairman of the
Date: May 29, 1997 Board
- --------------------------------------------- Date: May 29, 1997
---------------------------------------------
/s/ Charles Neelley /s/ George Koenig
- --------------------------------------------- -------------------------------------------
Charles Neelley, Director and Secretary/ George Koenig, Director and Executive Vice-
Treasurer President
Date: May 29, 1997 Date: May 29, 1997
- --------------------------------------------- ---------------------------------------------
/s/ Jack W. Lester /s/ Robert H. Conaway
- --------------------------------------------- -------------------------------------------
Jack W. Lester, Director and Assistant Robert H. Conaway, Director
Secretary/Treasurer Director Date: May 29, 1997
Date: May 29, 1997 ---------------------------------------------
- ---------------------------------------------
/s/ Ken Hayes /s/ Phil Hobson
- --------------------------------------------- -------------------------------------------
Ken Hayes, Director Phil Hobson, Director
Date: May 29, 1997 Date: May 29, 1997
- --------------------------------------------- ---------------------------------------------
/s/ J. Roland Ruffino
- ---------------------------------------------
Rolan Ruffino, Director
Date: May 29, 1997
- ---------------------------------------------
</TABLE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM S-1
UNDER
THE SECURITIES ACT OF 1933
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
2900 TEXAS AVENUE
BRYAN, TEXAS 77802
================================================================================
<PAGE>
EXHIBIT INDEX
EXHIBITS:
2 Agreement And Plan of Merger*
3.1 Certificate of Incorporation of the Holding Company*
3.2 Bylaws of the Holding Company*
3.3 Charter of First Federal*
3.4 Bylaws of First Federal*
4 Form of Stock Certificate of the Holding Company*
5 Opinion of Silver, Freedman & Taff, L.L.P. With Respect To Legality
of Stock
8.1 Opinion of Crowe Chizek & Company, L.L.P. With Respect To Federal
Income Tax Consequences of the Merger
10.1 1993 Stock Option And Incentive Plan*
10.2 Form of Employment Agreement of J. Stanley Stephen*
10.3 Form of Employment Agreement of George Koenig*
10.4 Form of Employment Agreement of Mary Lynn Hegar*
10.5 Form of Employment Agreement of Kay Watson*
23.1 Consent of Silver, Freedman & Taff, L.L.P.
23.2 Consent of Crowe, Chizek & Company, L.L.P.
23.3 Consent of Hoefer & Arnett, Inc. (set forth in Fairness Opinion,
Exhibit 99.1)
24 Power of Attorney (set forth on signature page)
99.1 Fairness Opinion
99.2 Form of Proxy to be furnished to First Federal Stockholders
99.3 Form of Election of First Federal Stockholders
- ----------
* Filed as an exhibit to the Company's S-1 registration statement filed on
May 30, 1997 (File No. 333- ) pursuant to Section 5 of the Securities Act
of 1933. Such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
May 29, 1997
The Bryan - College Station
Financial Holding Company
2900 Texas Avenue
Bryan, Texas 77802
Re: Registration Statement on Form S-1
Members of the Board of Directors:
We have examined (i) the Agreement and Plan of Merger by and among The
Bryan - College Station Financial Holding Company (the "Company"), and First
Federal Savings Bank (the "Merger Agreement"), (ii) the Registration Statement
on Form S-1 (the "Registration Statement") filed by the Company with the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended (the "Securities Act"), and the joint proxy statement/public
offering prospectus (the "Joint Proxy Statement/Prospectus"), relating to the
issuance by the Company of up to 294,500 shares of common stock, par value $.01
per share (the "Common Stock"), in the manner set forth in the Registration
Statement and the Joint Proxy Statement/Prospectus, (iii) the Company's
Certificate of Incorporation and Bylaws and (iv) records of the Company's
corporate proceedings relative to its organization and to the issuance of the
Common Stock.
We have examined originals, or copies identified to our satisfaction,
of such corporate records of the Company and have made such examinations of law
as we have deemed relevant. In our examination, we have assumed and have not
verified (i) the genuineness of all signatures, (ii) the authenticity of all
documents submitted to us as originals, (iii) the conformity with the originals
of all documents supplied to us as copies, and (iv) the accuracy and
completeness of all corporate records and documents and all certificates and
statements of fact, in each case given or made available to us by the Company.
We have relied upon certificates and other written documents from public
officials and government agencies and departments and we have assumed the
accuracy and authenticity of such certificates and documents.
Based upon the foregoing, and having a regard for such legal
considerations as we deem relevant, we are of the opinion that the Common Stock
will be, upon issuance, against payment therefor as contemplated in the Merger
Agreement, legally issued, fully paid and non-assessable.
Very truly yours,
/s/ SILVER, FREEDMAN & TAFF, L.L.P.
-----------------------------------
SILVER, FREEDMAN & TAFF, L.L.P.
April 16, 1997
Board of Directors
First Federal Savings Bank
2900 Texas Avenue
Bryan, TX 77802
RE: Federal Income and Texas Franchise Tax Opinion Relating to the
Tax-Free Formation of the Bryan-College Station Financial Holdings
Company and the Acquisiton of First Federal Savings Bank by the
Newly-Formed Holding Company Under the Internal Revenue Code of 1986,
As Amended, and the Texas Franchise Tax as Codified in Title 2,
Subtitle F (Chapter 171) of the Tax Code Effective January 1, 1982
Gentlemen:
You have requested our opinion regarding the federal income and Texas franchise
tax consequences of the formation of the Bryan-College Station Financial Holding
Company ("Holding Company") and the acquisiton by Holding Company of 100 percent
of all of the outstanding common shares of First Federal Savings Bank ("Bank").
FACTS
The Holding Company will be formed by members of the management of First Federal
Savings Bank (the "Bank") and certain shareholders of the Bank (collectively the
"control group") for a nominal amount of cash in order to facilitate the
transaction. The Holding Company, in turn, will form a wholly-owned subsidiary
("New Bank") to facilitate the merger of New Bank into the Bank.
Upon receiving shareholder approval from the shareholders of the Bank, the New
Bank will be merged with and into the Bank with the Bank surviving the
transaction (the "Merger"). As part of the Merger, each shareholder of the Bank
will receive the right to exchange each share of Bank Common Stock for two and
one-half shares of Holding Company Common Stock or $24.07 in cash or,
alternatively, of any combination of Holding Company Common Stock and cash.
Fractional shares will be rounded to the next whole share. As a result of these
exchanges, Holding Company will own all of the outstanding Bank Common Stock.
To finance the acquisition of Bank Common Stock in the Merger, contemporaneous
with the merger, in an initial public offering, Holding Company will offer for
sale up to 200,000 shares of Holding Company Common Stock and a certain number
of debentures and warrants. Each warrant issued will entitle the holder thereof
to purchase one share of Holding Company Common Stock.
The Agreement and Plan of Merger and the Joint Proxy
Statement/Prospectus contain detailed descriptions of the Merger and the
initial public offering. These documents as well as the following
representations and assumptions are incorporated in this statement of the
facts.
<PAGE>
ADDITIONAL ASSUMPTIONS AND REPRESENTATIONS
We have relied upon the following assumptions and representations
in rendering this opinion.
1. The Bank shareholders who elect to receive shares of Holding Company Common
Stock in the merger will not contribute any property or liabilities to the
Holding Company other than Bank Common Stock and nominal cash contributed
to facilitate the Holding Company formation.
2. The Holding Company will only have one class of stock outstanding after the
merger and the initial public offering.
3. The Bank shareholders who elect to receive shares of Holding Company Common
Stock in the merger, and the Holding Company common shareholders who
acquire their stock for cash in the initial public offering, will own 100
percent of the Holding Company Common Stock after the merger and the
initial public offering.
4. The Holding Company does not intend to issue additional shares other than
the issuance of the shares of its common stock described herein.
5. The Holding Company has no intention of disposing of the Bank stock
acquired in the merger or of liquidating the Bank following the merger.
6. There is no plan for the Holding Company to be merged into another
corporation subsequent to the merger.
7. The Bank will not have any net operating losses, capital loss carryovers,
or built-in losses at the time of the merger.
8. The Bank will be solvent at the time of the merger.
9. There will be no indebtedness between the Bank and the Holding Company
created as a result of the merger or the initial public offering.
10. After the merger, the Holding Company will own stock of the Bank which
possesses at least 80 percent of the total voting power of all the stock
(common and preferred) of the Bank and at least 80 percent of the value of
all the stock (common and preferred) of the Bank.
11. No stock or securities of the Holding Company will be issued for services
rendered to or for the benefit of the Holding Company in connection with
the merger or the initial public offering.
12. All the exchanges and transfers related to the merger and the initial
public offering will occur on or approximately on the same date.
<PAGE>
13. The Holding Company will not be an investment company within the meaning of
Section 351(e)(1) of the Internal Revenue Code and Section
1.351-1(c)(1)(ii) of the Income Tax Regulations.
14. Following both the merger and the initial public offering, the person or
persons in control of Holding Company, within the meaning of IRC Section
304(c), will not be the person or persons in control of Bank, within the
meaning of IRC Section 304(c), immediately prior to the merger.
OPINION
Based on our understanding of the foregoing facts, representations and
assumptions, and the applicable laws and regulations, we are of the opinion that
for federal income and Texas franchise purposes:
1. The formation of Holding Company, the merger of New Bank with and into
Bank, and the initial public offering, as described above, will be treated
as involving, in substance, the transfer of Bank Common Stock and/or cash,
as the case may be, for Holding Company Common Stock and/or cash, as the
case may be. The transitory existence of New Bank and its merger with and
into Bank will be disregarded.
2. No gain or loss will be recognized on the receipt of Holding Company Common
Stock by the Bank common shareholders who receive solely Holding Company
Common Stock in exchange for Bank Common Stock (IRC Code Section 351(a)).
Gain, but not loss, will be recognized by the Bank common shareholders who
receive both Holding Company Common Stock and cash in exchange for Bank
Common Stock, but in an amount not in excess of the cash received (IRC Code
Section 351(b)).
3. No gain or loss will be recognized by Holding Company on the receipt of
cash and Bank Common Stock solely in exchange for shares of Holding Company
Common Stock (IRC Section 1032).
4. The basis of the Holding Company Common Stock received by a Bank common
shareholder will be the same as the adjusted basis of the Bank Common Stock
surrendered in exchange therefore, decreased by the amount of any cash
received, and increased by any gain recognized in the exchange (IRC Section
358).
5. The holding period of the Holding Company Common Stock received by a Bank
common shareholder in exchange for the transfer of Bank Common Stock will
include the period during which the Bank Common Stock surrendered in
exchange therefor was held, provided that the Bank Common Stock was held as
a capital asset on the date of the exchange (IRC Section 1223(1)).
6. The basis of the Bank Common Stock received by Holding Company will be the
same as the basis of the Bank Common Stock in the hands of the Bank common
shareholders immediately prior to the exchange, increased by any gain
recognized by the Bank common shareholders in the exchange (IRC Section
362(a)).
<PAGE>
7. The holding period of the Bank Common Stock received by Holding Company
will include the period during which the Bank Common Stock was held by the
Bank common shareholders (IRC Section 1223(2)).
8. Gain or loss, if any, will be recognized by a Bank common shareholder who
receives solely cash in exchange for the transfer of Bank Common Stock.
Our opinion is based on the Internal Revenue Code, Texas Code, Regulations,
administrative pronouncements and case law in existence as of the date of this
opinion and based on the facts contained herein. However, our opinion is not
binding on the Internal Revenue Service or the state of Texas, and the Internal
Revenue Service or the state of Texas could disagree with the conclusions
reached in our opinion.
No opinion is expressed under the provisions of other sections of the Internal
Revenue Code and Regulations which may be applicable thereto, or to the tax
treatment of any conditions existing at the time of, or effects resulting from,
the transaction which are not specifically covered by the opinion set forth
above.
If any fact or assumption contained in this opinion changes, it is imperative we
be notified to determine the effect, if any, on the conclusions reached herein.
Very truly yours,
/s/ Crowe, Chizek and Company LLP
- ---------------------------------
Crowe, Chizek and Company LLP
May 29, 1997
Board of Directors
The Bryan - College Station
Financial Holding Company
2900 Texas Avenue
Bryan, Texas 77802
Gentlemen:
We hereby consent to the inclusion of our opinion as Exhibit 5 of this
Registration Statement on Form S-1. In giving this consent, we do not admit that
we are within the category of persons whose consent is required under Section 7
of the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
/s/ SILVER, FREEDMAN & TAFF, L.L.P.
-----------------------------------
SILVER, FREEDMAN & TAFF, L.L.P.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
First Federal Savings Bank
We consent to the use in this Proxy Statement filed with the Securities
and Exchange Commission and the Office of Thrift Supervision, of our report
dated November 9, 1996, on the financial statements of First Federal Savings
Bank for the year ended September 30, 1996. We also consent to the reference to
us under the heading "Federal Income Tax Consequences of the Merger" in this
Proxy Statement.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
Oak Brook, Illinois
May 27, 1997
April 16, 1997
Members of the Board of Directors
First Federal Savings Bank
2900 Texas Avenue
Bryan, Texas 77802
Members of the Board:
You have requested our opinion as investment bankers as to the
fairness, from a financial point of view, to the holders of shares of First
Federal Savings Bank ("First Federal") of the terms of the proposed acquisition
of shares of common stock of First Federal by The Bryan- College Station
Financial Holding Company as defined in the Prospectus. Subject to the terms and
conditions therein, holders of up to 80% of First Federal Stock shall be
entitled to receive from First Federal, as of the Effective Date, $24.07 in cash
for each share of First Federal Stock owned by such holder at the Effective
Date.
As part of its investment banking business, Hoefer & Arnett,
Incorporated is continually engaged in the valuation of bank, bank holding
company and thrift securities in connection with mergers and acquisitions
nationwide. Prior to being retained for this assignment, we have not provided
investment banking or financial advisory services to First Federal. Concurrent
with this assignment, Hoefer & Arnett, Incorporated is prepared to serve as
manager on a best efforts basis for the proposed public offering of shares of
common stock and units of Senior Subordinated Debentures and warrants to
purchase common stock by the new holding company to be formed by First Federal,
which shall be named The Bryan-College Station Financial Holding Company.
In arriving at our opinion, we have reviewed and analyzed, among other
things, the following: (i) the Prospectus (ii) Annual Reports to Shareholders of
First Federal for the years ended September 30, 1995 and September 30, 1996;
(iii) Quarterly OTS Call reports for the quarters ended December 31, 1996, and
March 31, 1997 for First Federal; (iv) certain other publicly available
financial and other information concerning First Federal; and (v) publicly
available information concerning other thrifts, banks and holding companies, the
trading markets for their securities and the nature and terms of certain other
merger/acquisition transactions we believe relevant to our inquiry. We have held
discussions with senior management of First Federal concerning their past and
current operations, financial condition and prospects, as well as the results of
regulatory examinations.
We have reviewed with senior management of First Federal earnings
projections for 1997 through 2001 for First Federal as a stand-alone entity,
assuming the merger does not occur, prepared by First Federal.
In conducting our review and in arriving at our opinion, we have relied
upon and assumed the accuracy and completeness of the financial and other
information provided to us or publicly available, and we have not assumed any
responsibility for independent verification of the same. We have relied upon the
management of First Federal as to the reasonableness of the
<PAGE>
financial and operating forecasts, projections (and the assumptions and bases
therefor) provided to us, and we have assumed that such forecasts and
projections reflect the best currently available estimates and judgments of the
management of First Federal. We have also assumed without assuming any
responsibility for the independent verification of same, that the allowance for
loan losses for First Federal is adequate to cover such losses. We have not made
or obtained any evaluations or appraisals of the property of First Federal, nor
have we examined any individual loan credit files. For purposes of this opinion,
we have assumed that the transaction will have the tax, accounting and legal
effects described in the Prospectus and assumed the accuracy of the disclosures
set forth in the Prospectus. Our opinion as expressed herein is limited to the
fairness, from a financial point of view, to the holders of First Federal Stock
of the terms of the proposed acquisition of up to 80% of the common stock of
First Federal by Holding Company and does not address Holding Company's
underlying business decision to proceed with the acquisition.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others the following: (i)
the historical and current financial position and results of operations of First
Federal, including interest income, interest expense, net interest income, net
interest margin, provision for loan losses, non-interest income, non-interest
expense, earnings, dividends, internal capital generation, book value,
intangible assets, return on assets, return on shareholders' equity,
capitalization, the amount and type of non-performing assets, loan losses and
the reserve for loan losses, all as set forth in the financial statements for
First Federal; (ii) the assets and liabilities of First Federal, including the
loan, investment and mortgage portfolios, deposits, other liabilities,
historical and current liability sources and costs and liquidity; and (iii) the
nature and terms of certain other merger/acquisition transactions involving
thrifts, banks and bank holding companies. We have also taken into account our
assessment of general economic, market and financial conditions and our
experience in other transactions, as well as our experience in securities
valuation and our knowledge of the banking industry generally. Our opinion is
necessarily based upon conditions as they exist and can be evaluated on the date
hereof and the information made available to us through the date hereof.
Based upon and subject to the foregoing, we are of the opinion as
investment bankers that, as of the date hereof, the terms of proposed
acquisition of up to 80% of the outstanding common stock of First Federal by
Holding Company are fair, from a financial point of view, to the holders of
First Federal Stock.
It is understood that this letter is for the information of the Board
of Directors of First Federal and does not constitute a recommendation to the
Board of Directors or to any shareholder of First Federal with respect to any
approval of the acquisition. We hereby consent to the reference to our firm in
the proxy statement or prospectus related to the merger transaction and to the
inclusion of our opinion as an exhibit to the proxy statement or prospectus
related to the transaction.
Very truly yours,
/s/ Hoefer & Arnett, Incorporated
---------------------------------
Hoefer & Arnett, Incorporated
REVOCABLE PROXY
FIRST FEDERAL SAVINGS BANK
BRYAN, TEXAS
ANNUAL MEETING OF STOCKHOLDERS
, 1997
The undersigned hereby appoints the Board of Directors of First Federal
Savings Bank ("First Federal"), with full powers of substitution, to act as
proxy for the undersigned, to vote all shares of common stock of First Federal
which the undersigned is entitled to vote at the Annual Meeting of Stockholders,
scheduled to be held at the office of First Federal, 2900 Texas Avenue, Bryan
Texas on __________, 1997 at ____, and at any and all adjournments thereof, as
follows:
1) The election as directors of all nominees listed below:
-- --
|__| FOR |__| VOTE WITHHELD
INSTRUCTION: TO WITHHOLD YOUR VOTE FOR ANY INDIVIDUAL NOMINEE,
STRIKE A LINE IN THAT NOMINEE'S NAME IN THE LIST
BELOW.
J. STANLEY STEPHEN KEN HAYES CHARLES NEELLEY GEORGE KOENIG
2) The adoption and approval of the Agreement and Plan of Merger dated
____________, 1997 by and between First Federal and The Bryan - College
Station Financial Holding Company (including the exhibits and schedules
thereto) (the "Merger Agreement"), and the transactions contemplated
thereby;
-- -- --
|__| FOR |__| AGAINST |__| ABSTAIN
3) The ratification of the appointment of Crowe, Chizek and Company LLP as
auditors for the Bank for the fiscal year ending September 30, 1997;
and
-- -- --
|__| FOR |__| AGAINST |__| ABSTAIN
4) The adjournment of the meeting;
-- -- --
|__| FOR |__| AGAINST |__| ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSITIONS SET
FORTH ABOVE
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE
SPECIFIED, THIS PROXY WILL BE VOTED FOR THE PROPOSITIONS STATED. IF ANY OTHER
BUSINESS IS PRESENTED AT THE ANNUAL MEETING, THIS PROXY WILL BE VOTED BY THOSE
NAMED IN THIS PROXY AS DETERMINED BY A MAJORITY OF THE BOARD OF DIRECTORS. AT
THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE
PRESENTED AT THE ANNUAL MEETING. THIS PROXY CONFERS DISCRETIONARY AUTHORITY ON
THE HOLDERS THEREOF TO VOTE WITH RESPECT TO MATTERS INCIDENT TO THE CONDUCT OF
THE ANNUAL MEETING. HOWEVER, PROXIES INSTRUCTED TO VOTE AGAINST THE PROPOSAL TO
APPROVE THE AGREEMENT AND PLAN OF MERGER WILL NOT BE VOTED FOR A PROPOSAL TO
APPROVE ADJOURNMENT OF THE ANNUAL MEETING IN THE EVENT THAT THERE ARE NOT
SUFFICIENT SHARES PRESENT IN PERSON OR BY PROXY AT THE ANNUAL MEETING TO APPROVE
THE MERGER.
<PAGE>
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
Should the undersigned be present and elect to vote at the Annual
Meeting or at any adjournment thereof and after notification to the Secretary of
First Federal at the Annual Meeting of the stockholder's decision to terminate
this proxy, then the power of said attorney and proxy shall be deemed terminated
and of no further force and effect.
The undersigned acknowledges receipt from First Federal prior to the
execution of this proxy of the Notice of the Annual Meeting and the Joint Proxy
Statement/Prospectus dated _____, 1997.
Dated: _________________________, 1997
---------------------------
SIGNATURE OF STOCKHOLDER
---------------------------
SIGNATURE OF STOCKHOLDER
Please sign exactly as your
name appears herein. When
signing as attorney,
executor, administrator,
trustee or guardian, please
give your full title. If
shares are held jointly,
each holder should sign.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY
IN THE ACCOMPANYING POSTAGE-PREPAID ENVELOPE
FIRST FEDERAL SAVINGS BANK OF BRYAN
STOCK ELECTION FORM
IMPORTANT - IMMEDIATE ACTION REQUIRED
ALL FIRST FEDERAL STOCKHOLDERS WHO WISH TO EXCHANGE SHARES IN THE
MERGER OF FIRST FEDERAL SAVINGS BANK ("FIRST FEDERAL") AND THE BRYAN - COLLEGE
STATION FINANCIAL HOLDING COMPANY (THE "HOLDING COMPANY") MUST RETURN THIS FORM
BY THE DATE SPECIFIED BELOW. PLEASE COMPLETE, SIGN AND RETURN THIS FORM TO FIRST
FEDERAL IN THE ENVELOPE PROVIDED OR DROP IT OFF AT FIRST FEDERAL SAVINGS BANK,
2900 TEXAS AVENUE, BRYAN, TEXAS, NO LATER THAN 5:00 P.M., ___________, 1997. IF
YOU DO NOT RETURN THIS FORM, YOUR SHARES WILL AUTOMATICALLY BE CONVERTED TO THE
RIGHT TO RECEIVE THE CASH DISTRIBUTION, SUBJECT TO THE PROVISIONS OF THE MERGER
AGREEMENT.
Please complete the section that describes your choice.
1. EXCHANGE ALL MY FIRST FEDERAL SHARES FOR
HOLDING COMPANY SHARES
Number of First Federal shares owned ________
2. EXCHANGE SOME OF MY FIRST FEDERAL SHARES
FOR HOLDING COMPANY SHARES, AND THE
REMAINING SHARES FOR CASH
Number of First Federal shares to be exchanged for stock ________
Number of First Federal shares to be exchanged for cash ________
3. EXCHANGE ALL OF MY FIRST FEDERAL SHARES
FOR CASH
Number of First Federal shares owned
of Common Stock.
Number of Shares of Common Stock ________
<PAGE>
I (we) hereby authorize the exchange of my (our) First Federal Common
Stock as described above.
I (we) acknowledge receipt of the Joint Proxy Statement/Prospectus
dated _________, 1997.
________________________________ _________________
Signature Date
________________________________ _________________
Signature (if required) Date
________________________________
Title (if applicable)
All signatures should appear exactly as on the original First Federal stock
certificate. This Stock Election Form should be signed by all persons whose name
appears on the First Federal stock certificate. If less than all signatories
appear on this form, First Federal Savings Bank reserves the right to treat the
election as valid, but it is not obligated to do so.
For assistance in completing this form, please call the First Federal
Savings Bank at (409) ___-____.
<PAGE>
ACKNOWLEDGEMENT
Please return this card together with the Stock Election Form in the
enclosed postage-paid return envelope.
I (we) acknowledge that, before filling out this form for the exchange
of my shares of First Federal Savings Bank of Bryan, I (we) received a Joint
Proxy Statement/Prospectus dated _________, 1997.
The Joint Proxy Statement/Prospectus received contains disclosure
concerning the nature of the securities being offered and describes the risks
involved in the investment, including but not limited to those risks associated
with the new Holding Company, First Federal's loan loss allowance, recent
operating income levels, the effect of changes in interest rates, the existence
of anti-takeover provisions in the Holding Company's charter and bylaws, the
arbitrary determination of the offering price, dilution, dividends and the
absence of a prior market for the securities offered, all as described in the
Joint Proxy Statement/Prospectus under the heading "Risk Factors Associated with
the Holding Company."
I (WE) ACKNOWLEDGE THAT, I (WE) HAVE RELIED SOLELY ON THE JOINT PROXY
STATEMENT/PROSPECTUS IN MY DECISION TO EXCHANGE MY FIRST FEDERAL SHARES FOR
HOLDING COMPANY SHARES AND NO OTHER WRITTEN OR VERBAL INFORMATION, PROJECTIONS,
REPRESENTATIONS, PROMISES OR AGREEMENTS BY FIRST FEDERAL OF FIRST FEDERAL
MANAGEMENT.
I (WE) FURTHER ACKNOWLEDGE THAT THE HOLDING COMPANY COMMON STOCK IS NOT
A DEPOSIT OR SAVINGS ACCOUNT AND IS NOT GUARANTEED OR INSURED BY THE BRYAN -
COLLEGE STATION FINANCIAL HOLDING COMPANY OR BY THE FEDERAL GOVERNMENT.
________________________________ _________________
Signature Date
________________________________ _________________
Signature Date
NOTE: THIS ACKNOWLEDGEMENT MUST ACCOMPANY THE EXECUTED STOCK ELECTION FORM
SUBMITTED FOR THE EXCHANGE OF FIRST FEDERAL COMMON STOCK FOR COMMON STOCK OF THE
BRYAN - COLLEGE STATION FINANCIAL HOLDING COMPANY.
