As filed with the Securities and Exchange Commission on October 1, 1997
Registration No. 333-28179
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO THE 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)
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)
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. [ ]
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CALCULATION OF REGISTRATION FEE
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 200,000 shares $ 10.00 $2,000,000 $ 606(2)
Common Stock, par value $.01 per share 33,300 shares $ 12.50 $ 416,250 $ 127(3)
Units 3,700 units $1,000.00 $3,700,000 $ 1,122(2)
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Registration fee of $1,728 previously paid with Form S-1 on May 30,
1997.
(3) Represents 33,300 warrants, sold as part of the Units, to purchase
Common Stock at $12.50 per share.
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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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EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in an offering of Units (consisting of Debentures and Warrants to purchase
Common Stock) offered by the Registrant on a best efforts basis through a sales
agent (the "Unit Prospectus"), and one to be used in connection with a
concurrent offering of Common Stock directly by the Registrant without the
assistance of any underwriter or sales agent (the "Common Stock Prospectus").
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SUBJECT TO COMPLETION DATED SEPTEMBER __, 1997
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
3,400 UNITS MINIMUM/3,700 UNITS MAXIMUM
$1,000 PER UNIT (CONSISTING OF A DEBENTURE AND NINE WARRANTS)
MINIMUM PURCHASE _____ UNITS ($______)
The Bryan-College Station Financial Holding Company (the "Holding
Company") is hereby offering (the "Unit Offering") for sale 3,400 Units
minimum/3,700 Units maximum (the "Units") at $1,000 per Unit, each Unit
consisting of $1,000 principal amount of __% subordinated debentures due
____________, 2002 (the "Debentures") and nine detachable warrants (the
"Warrants"). Each Warrant entitles the holder thereof to purchase one share of
common stock, par value $.01 per share, of the Holding Company (the "Holding
Company Common Stock") at an exercise price of $12.50, subject to adjustment, at
any time prior to 5:00 p.m. Central Time on ___________, 2002. Concurrently with
the Unit Offering, the Company is also offering for sale up to 200,000 shares of
Holding Company Common Stock at a price of $10.00 per share (the "Common Stock
Offering" and, together with the Unit Offering, the "Offering"). Consummation of
the Unit Offering is conditioned on the contemporaneous completion of the Common
Stock Offering. See "The Offering."
The Debentures included in the Units will be unsecured and will be
subordinate in right of payment to all present and future Senior Indebtedness
and General Obligations (each as hereinafter defined) of the Holding Company and
will be effectively subordinated to all indebtedness and other liabilities and
commitments (including deposits, trade payables, lease obligations and
obligations of holders of preferred stock) of First Federal. Generally, payment
of principal of the Debentures may be accelerated only in certain limited
circumstances, including the occurrence of certain events of default relating to
the bankruptcy or receivership of the Holding Company or First Federal or in the
event of a default in the payment of principal or interest. See "The Offering"
and "Description of the Debentures." On a pro forma basis as of June 30, 1997
there would have been $5.7 million in Senior Indebtedness and General
Obligations of the Holding Company outstanding.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR BY ANY STATE SECURITIES AUTHORITIES,
NOR HAS SUCH COMMISSION, OFFICE, CORPORATION OR AUTHORITY PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE
SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT
FEDERALLY INSURED OR GUARANTEED.
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Selling Estimated Net
Price to Public Commissions(1) Proceeds(2)
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Per Unit $ 1,000 $ 70 $ 930
Per Minimum Purchase
Total Minimum 3,400,000 238,000 3,162,000
Total Maximum 3,700,000 259,000 3,441,000
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(1) The Selling Commission will equal 7.0% of the gross proceeds of the Units
sold . Such commissions may be deemed to be underwriting fees. In addition,
the Holding Company has agreed to indemnify Hoefer & Arnett Incorporated
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended (the "Securities Act"). See "The Offering."
(2) Before deducting expenses payable by the Holding Company estimated at
$_________.
THESE SECURITIES ARE SPECULATIVE IN THAT THEY INVOLVE A HIGH DEGREE OF RISK
AND SUBSTANTIAL BOOK VALUE DILUTION. PROSPECTIVE PURCHASERS SHOULD BE PREPARED
TO SUSTAIN A LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" AT PAGE 10 AND
"DILUTION" FOR A DISCUSSION OF MATTERS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THESE SECURITIES.
THE DATE OF THIS PROSPECTUS IS ___________, 1997.
(cover page continues)
HOEFER & ARNETT INCORPORATED
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The Holding Company has been formed to acquire all of the outstanding
capital stock (the "First Federal Common Stock") of First Federal Savings Bank,
Bryan, Texas ("First Federal") pursuant to a merger agreement between First
Federal and the Holding Company dated May 21, 1997 (the "Merger"). The net
proceeds of the Offering will be used to finance the Holding Company's cash
purchase of up to 80% of the outstanding shares of First Federal which are not
exchanged for Holding Company Common Stock in the Merger. Consummation of the
Offering is contingent upon all conditions to the Merger being satisfied or
waived, except that if shareholder or regulatory approval is not obtained, the
Offering will terminate.
Pursuant to the Merger, each holder of First Federal Common Stock will
`have the option of exchanging each share of First Federal Common Stock for :
(i) 2.5 shares of Holding Company Common Stock; (ii) $24.07 in cash, or (iii)
any combination of Holding Company Common Stock and cash. The Holding Company
anticipates that a minimum of approximately 150,000 shares of Holding Company
Common Stock will be issued pursuant to the Merger. The Directors and executive
officers of First Federal have indicated that they will exchange their First
Federal Common Stock for approximately 110,000 shares of Holding Company Common
Stock. Consummation of the Merger is subject to the satisfaction of customary
conditions, the approval of both First Federal's stockholders and the Office of
Thrift Supervision (the "OTS") and the consummation of the Unit Offering and the
Common Stock Offering.
Historically, there has been no active daily market for the First
Federal Common Stock. Prior to the Offering there has been no market for the
Units, the Warrants, the Debentures or the Holding Company Common Stock . The
Holding Company has never issued capital stock. Consequently, there is no
existing market for the Holding Company Common Stock at this time. Therefore, no
assurance can be given that an established and liquid trading market for the
Holding Company Common Stock will develop . Following the Offering the Holding
Company Common Stock will be traded in the over-the-counter market. Although it
has no obligation to do so, Hoefer & Arnett intends to make a market for the
Holding Company Common Stock if the volume of trading and other market-making
considerations justify such an undertaking. If an active trading market does
develop, there can be no assurance that such a trading market will continue. See
"Risk Factors -- No Prior Market for Units and Holding Company Common Stock ;
Potential Illiquidity of Units and Holding Company Common Stock."
Prior to this offering, there have been no Units, Warrants or
Debentures outstanding. There is no public market for the Units, Warrants or
Debentures and it is unknown whether an active and liquid trading market for the
Units, Warrants or Debentures will develop. The Holding Company has no present
intention to have the Units, Warrants or Debentures authorized for quotation on
Nasdaq or any other interdealer quotation system or listed on any securities
exchange. No market maker has been obtained for the Debentures or the Warrants,
and no trading market is expected to develop. See "Risk Factors -- No Prior
Market for Units and Holding Company Common Stock; Potential Illiquidity of
Units and Holding Company Common Stock."
The Units are being offered by the Company through Hoefer & Arnett
Incorporated (the"Agent") on a "best efforts, minimum-maximum" basis. The
Holding Company Common Stock is being offered directly by the Company. The
Offering will commence on the date hereof and subscriptions for Units will be
accepted until 5:00 p.m. Central time, __________ ___, 1997 (subject to
extension without notice by agreement between the Holding Company and the Agent
until __________ __, 1997) or terminate the Offering at any time (the
"Expiration Date"). Funds tendered by subscribers will be deposited in an escrow
account (the "Escrow Account") with the First National Bank of Bryan, Bryan,
Texas as escrow agent (the "Escrow Agent"). If subscriptions for a total of at
least $1,500,000 in Holding Company Common Stock and $3,400,000 in Units have
not been received by the Expiration Date, no shares of Holding Company Common
Stock or Units will be sold and the subscribers' funds will be refunded
promptly, with each subscriber's pro rata share of any interest actually earned
thereon. Consummation of the Offering will take place as soon as possible after
the Expiration Date, subject to the satisfaction of certain conditions precedent
in the Best Efforts Selling Agreement between the Holding Company and the Agent
(the "Selling Agreement"). See "The Offering -- Subscription Procedures."
The Holding Company reserves the right in its sole discretion to
withdraw, cancel or modify the Offering without notice and to accept or reject
any subscription , in whole or in part, for any reason including if the total
amount of shares of Holding Company Common Stock to be owned by such subscriber
following the Merger and the Offering would exceed 9.9% of the shares of Holding
Company Common Stock to be issued and outstanding, unless such condition has
been waived at the discretion of the Holding Company's Board of Directors in one
or more instances with the approval of the Office of Thrift Supervision (the
"OTS"). The offering is conditioned upon all conditions to the Merger being
satisfied or waived.
THE HOLDING COMPANY AND UNITS OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS
OR SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE SAVINGS INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY.
(end of cover page)
2
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AVAILABLE INFORMATION
The Holding Company has filed with the Securities and Exchange
Commission (the "SEC") a Registration Statement on Form S-1 under the Securities
Act of 1933, as amended (Registration Statement No. 333- 28179), with respect to
the shares of Holding Company Common Stock and Units to be sold in the Offering.
As permitted by the rules and regulations of the SEC, this Prospectus omits
certain information contained in the Registration Statement. For further
information pertaining to Holding Company Common Stock and Units offered hereby,
reference is made to the Registration Statement and to the exhibits thereto,
which may be inspected and copied at the public reference facilities of the SEC,
450 Fifth Street, N.W., Washington, D.C. 20549, and copies of which can be
obtained from the SEC at prescribed rates by writing to the Public Reference
Section of the SEC at the above-stated address. The Registration Statement may
be inspected and copied at the SEC's Regional Office located at 7 World Trade
Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and may be inspected at the SEC's site on the
worldwide web (http//www.sec.gov).
The Holding Company will hereafter furnish to holders of the Holding
Company Common Stock, Debentures and Warrants annual reports containing audited
financial statements for each fiscal year and quarterly reports containing
unaudited financial information for each of the first three quarters of each
fiscal year.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS, VERBALLY OR IN WRITING, IN CONNECTION WITH THE TRANSACTIONS
DESCRIBED IN THIS PROSPECTUS OTHER THAN THOSE CONTAINED HEREIN, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS ABSOLUTELY MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY EITHER FIRST FEDERAL, THE HOLDING COMPANY, THEIR
MANAGEMENT OR THEIR RESPECTIVE BOARD OF DIRECTORS. EXCEPT AS OTHERWISE EXPRESSLY
INDICATED, ALL INFORMATION IS GIVEN AS OF THE DATE OF THIS PROSPECTUS. NEITHER
THE DELIVERY OF THIS PROSPECTUS AFTER SUCH DATE NOR ANY OFFER, SALE OR EXCHANGE
OF ANY SECURITY MADE HEREUNDER AFTER SUCH DATE SHALL UNDER ANY CIRCUMSTANCE
CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE INFORMATION SET
FORTH HEREIN SINCE SUCH DATE.
3
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[INSERT MAP]
[MAP ILLUSTRATES FIRST FEDERAL'S OFFICES IN TEXAS]
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PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified
in its entirety by the detailed information and Consolidated Financial
Statements, including the notes thereto, appearing elsewhere in this Prospectus.
THE HOLDING COMPANY
The Holding Company is a newly formed company organized under Delaware
law to become a financial institution holding company by acquiring 100% of the
stock of First Federal through the exchange of First Federal Common Stock for
Holding Company Common Stock and through the purchase of First Federal Common
Stock for cash. The Holding Company was formed to enable First Federal to remain
as a predominantly community-owned, independent financial institution. The
Holding Company has entered into a merger agreement dated May 21, 1997 (the
"Merger Agreement") to acquire 100% of First Federal's outstanding shares in
exchange for shares of Holding Company Common Stock and cash, subject to, among
other customary conditions, regulatory and shareholder approvals, the condition
that holders of no more than 80% of First Federal Common Stock elect to receive
cash as merger consideration (approximately $4.6 million of cash elections) and
consummation of this Offering. The Offering will be consummated only if every
condition required to be met pursuant to the Merger Agreement has been met or
waived, and only if at least the minimum amount of Units and Common Stock are
subscribed for in the Offering. The amount of Holding Company Common Stock and
Units offered for sale at the minimum was calculated to provide funds for the
purchase of no more than 80% of First Federal Common Stock outstanding, and the
Merger is contingent upon the subscription for the minimum amounts of Units and
Common Stock in the Offering. The Offering will close immediately prior to the
acquisition of the shares of First Federal Common Stock by the Holding Company.
See "The Offering."
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 1993, as
amended (the "HOLA") and, therefore, will be regulated and supervised by the
Office of Thrift Supervision (the "OTS").
FIRST FEDERAL SAVINGS BANK
First Federal Savings Bank ("First Federal"), is a federally chartered
community-owned, independent thrift institution, headquartered in Bryan-College
Station, Texas, which began operations in 1965. Historically, First Federal has
been predominantly a locally-based home lender, originating loans primarily in
Bryan-College Station and the surrounding trade area, and to a lesser extent
other communities in the general area between Houston, Austin and Dallas, Texas.
First Federal also originates consumer loans, construction loans, U.S. Small
Business Administration ("SBA") partially guaranteed loans, small commercial
real estate and small to medium commercial business loans. First Federal'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 December 31, 1996, First Federal had
assets of $59.7 million, deposits of $53.0 million and total stockholders'
equity of $4.4 million. New senior management was appointed in early 1991 to
recapitalize and convert First Federal from a mutual savings institution to a
federal stock institution, which was completed in April, 1993.
Beginning in fiscal 1994, senior management of First Federal began its
transition to full-service retail banking in order to compete more effectively
and to increase its overall profitability. In addition to its core single-family
lending business, since fiscal 1994 First Federal has increased its focus on the
following products:
o Commercial real estate lending
o Commercial business lending
o Small Business Administration loans (partially government
guaranteed)
o Home improvement loans
o Indirect automobile financing through dealers
o Credit-default insured "second chance" auto finance program
5
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First Federal funds these lending products using a retail deposit base
gathered in its home market of Bryan-College Station as well as in the
surrounding counties of Burleson, Grimes, Leon, Madison, Robertson and
Washington. First Federal currently operates two full service offices located in
Bryan (headquarters office) and adjacent College Station. In addition, a site
has been acquired for another full service branch in the northern portion of
Bryan. The Bryan-College Station area has a population of more than 110,000
permanent residents and is home to Texas A&M University, one of the three
largest universities in the United States. In order to expand its lending base
First Federal has opened loan production offices in Waco and Huntsville, Texas
and has redefined its general lending area to include the triangle between
Dallas, Houston and Austin.
The pursuit of this strategy entails risks different from those
present in traditional single family mortgage lending. However, First Federal's
management believes that the transition to full service retail banking has had
several positive effects including increasing the net interest margin,
increasing the portfolio of loans outstanding, diversifying the types of loans
in the loan portfolio and increasing overall profitability, including increasing
fee income and service charges.
THE UNIT OFFERING
Units Offered..................... A minimum of 3,400 and a maximum of 3,700
Units, each Unit consisting of $1,000
aggregate principal amount of __% Debentures
due __________, 2002 and nine Warrants, for a
price of $1,000 per Unit. Each Warrant
entitles the holder thereof to purchase one
share of Holding Company Common Stock at an
exercise price of $12.50 at any time prior to
5:00 p.m., Central Time, on _____, 2002. The
Debentures are to be issued under an
indenture dated ______, 1997 (the
"Indenture") between the Holding Company and
________, as trustee (the "Trustee").
Debenture Maturity Date........... __________, 2002
Interest Payment Dates............ The 15th calendar day of each of July,
October, January and April of each year, if
such calendar day is a business day, and
otherwise the next succeeding business day,
commencing on the first payment date
subsequent to the closing of the Offering.
Redemption........................ The Debentures may not be redeemed prior to
their maturity and no sinking fund is
provided for the Debentures.
Subordination..................... The Debentures will be subordinate in right
of payment to all present and future Senior
Indebtedness and General Obligations (each as
defined herein) of the Holding Company and
will be effectively subordinated to all
indebtedness and other liabilities and
commitments (including deposits, trade
payables, lease obligations and obligations
of holders of preferred stock) of First
Federal. On a pro forma basis, as of June 30,
1997, the Holding Company had $59.7 million
in Senior Indebtedness and General
Obligations outstanding. The Indenture
governing the Debentures' terms and
conditions does not prohibit or limit the
occurrence of additional Senior Indebtedness
or General Obligations.
6
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Sinking Fund...................... None. The Holding Company anticipates
retiring the Debentures upon maturity through
dividends from First Federal, the sale of
additional common stock or preferred stock,
and, if necessary, a loan to the Holding
Company from a third party financial
institution. There can be no assurance funds
will be available for repayment. See "Risk
Factors."
Covenants......................... The Indenture, among its other provisions,
restricts the ability of the Holding Company
under certain circumstances to pay dividends
on, or repurchase, its Holding Company Common
Stock, and prohibits the Holding Company from
consolidating or merging with another entity
unless: (i) such other entity assumes the
Holding Company's obligations under the
Indenture, (ii) immediately after such merger
or consolidation takes effect, the Holding
Company will not be in Default (as defined
herein) under the Indenture, and (iii) the
Holding Company has delivered to the
Indenture trustee an appropriate opinion of
counsel. See "Description of the Debentures
-Consolidation, Merger and Sales of Assets"
and "--Limitations on Dividends, Redemptions,
Etc." The Indenture will also contain
covenants with respect to the maintenance of
the status of its thrift subsidiaries as
insured depositary institutions, the payment
of taxes and the maintenance of its
properties.
Events of Default................. The (i) occurrence of certain events
involving the bankruptcy, insolvency,
reorganization, receivership or similar
proceedings of the Company or any Major
Depositary Institution Subsidiary (as defined
in the Indenture), (ii) failure to pay the
principal of (and premium, if any, on) the
Debentures when due, whether at stated
maturity, by acceleration or otherwise, (ii)
failure to pay any installment of interest
upon the Debentures when due and the
continuance of such failure for a period of
30 days, (iii) failure to comply with any
covenant contained in the Indenture and
continuance of such failure for 60 days after
notice of such failure has been given to the
Company by the Trustee, or to the Company and
the Trustee by the Holders of at least 25% in
principal amount of the Debentures then
outstanding, and (iv) failure to pay $1.0
million aggregate principal amount when due
under any indebtedness of the Company or a
Subsidiary, or in the maturity of
indebtedness of such amount being
accelerated, constitute Events of Default
under the Indenture. See "Description of
Debentures -- Events of Default."
Remedies ......................... If an Event of Default, as defined in the
Indenture, has occurred and is continuing,
the Trustee or the holders of at least 25% in
principal amount of the then outstanding
Debentures may declare the principal amount
of all the Debentures, together with unpaid
interest thereon, to be immediately due and
payable, subject in certain circumstances to
rescission or waiver by the holders of at
least a majority in principal amount of
Debentures. There can be no assurance that
the Holding Company would have or be able to
acquire sufficient funds to make payment on
the Debentures if their maturity were
accelerated due to an Event of Default. See
"Description of the Debentures - Events of
Default."
Warrants.......................... Each Warrant entitles the holder thereof to
purchase one share of Holding Company Common
Stock at an exercise price of $12.50, subject
to adjustment, at any time prior to 5:00 p.m.
Central Time on ______, 2002. The Warrants
are detachable and may trade separately from
the Debentures. See "Description of
Warrants."
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THE COMMON STOCK OFFERING
Concurrently with the Unit Offering, the Holding Company is offering
directly, and not through the Agent, up to 200,000 shares of Holding Company
Common Stock at a price of $10.00 per share. The offering price of the Holding
Company Common Stock in the Common Stock Offering has been determined by the
Company and does not necessarily bear any relation to any established investment
criteria of value, such as book value, earnings or the intrinsic value, if any,
of the Holding Company or First Federal. Although the Holding Company Common
Stock offered in the Common Stock Offering is not offered pursuant to this
Prospectus, consummation of the Common Stock Offering is conditioned on the
contemporaneous completion of the Unit Offering. See "The Offering."
NO PRIOR TRADING MARKET
The Holding Company has never issued capital stock. Consequently,
there is no existing market for the Holding Company Common Stock at this time.
Therefore, no assurance can be given that an established and liquid trading
market for the Holding Company Common Stock will develop. Following the Offering
the Holding Company Common Stock will be traded in the over-the-counter market.
Although it has no obligation to do so, Hoefer & Arnett intends to make a market
for the Holding Company Common Stock if the volume of trading and other
market-making considerations justify such an undertaking. If an active market
does develop, there can be no assurance it will continue.
Prior to this offering, there have been no Units, Warrants or
Debentures outstanding. There is no public market for the Units, Warrants or
Debentures and it is unknown whether an active and liquid trading market for the
Units, Warrants or Debentures will develop. The Holding Company has no present
intention to have the Units, Warrants or Debentures authorized for quotation on
Nasdaq or any other interdealer quotation system or listed on any securities
exchange. If an active trading market does develop, there can be no assurance
that such a trading market will continue.
The development of a public market that has depth, liquidity and
orderliness depends upon the presence in the marketplace of a sufficient number
of willing buyers and sellers at any given time, over which neither the Holding
Company nor any market maker has any control. Accordingly, there can be no
assurance that an active or liquid trading market for the Holding Company Common
Stock, Debentures or Warrants will develop, or that if a market develops, it
will continue. Furthermore, there can be no assurance that purchasers will be
able to sell their securities at or above their purchase price. See "Market
Information."
USE OF PROCEEDS
The net proceeds from the Offering (estimated at $___ million and $___
million based on the minimum and maximum number of Holding Company Common Stock
and Units offered) will be used to purchase for cash all of the shares of First
Federal Common Stock not exchanged for Holding Company Common Stock pursuant to
the Merger Agreement, reimburse First Federal for expenses paid by First Federal
in connection with the Merger and Offering, and the balance, if any, will become
part of the Holding Company's general funds for use in its business. On an
interim basis, such proceeds will be invested primarily in short-term marketable
securities. See "Use of Proceeds."
RISK FACTORS
An investment in the Holding Company Common Stock or Units involves a
high degree of risk and, in the case of the Holding Company Common Stock,
substantial dilution. Prospective investors should carefully review and consider
the factors described under "Risk Factors" and "Dilution".
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RISK FACTORS
The Securities offered by this Prospectus involve a high degree of
risk. In analyzing this Offering, the following risk factors, in addition to
those factors discussed elsewhere in this Prospectus, should be considered by
prospective investors before deciding whether to purchase any Units. 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 First Federal's results to differ
materially from those expressed in or indicated by such forward-looking
statements. See "Disclosure Regarding Forward-Looking Statements."
RISK OF RELIANCE ON NONINTEREST INCOME
In recent years, noninterest expense has exceeded net interest income
and First Federal has relied upon gains on sales of assets to record net income.
There can be no assurance that First Federal will continue to record significant
gains on sales of assets as these gains are subject to market and other risks.
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 less than in prior years. Moreover, although there can be no assurance,
management believes that First Federal is positioned to achieve significant
growth without substantial increases in noninterest expenses.
During the nine months ended June 30, 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 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 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 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. Factors considered by the Board
9
<PAGE>
of Directors of the Holding Company in determining the offering price include,
among others: the economic outlook in general and the outlook for banking in
particular; book value of the company and financial condition of the business;
dividend paying capacity; the size of the common stock offering; and market
price of stocks of financial institutions that are actively traded.
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."
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.
HOLDING COMPANY STRUCTURE; LIMITATIONS ON THE ABILITY OF THE HOLDING COMPANY TO
PAY HOLDING COMPANY COMMON STOCK DIVIDENDS AND PRINCIPAL AND INTEREST ON
DEBENTURES
As a holding company without significant assets other than its 100%
ownership of First Federal Common Stock, the Holding Company's ability to pay
cash dividends on the Holding Company Common Stock and to meet its other cash
obligations, including the payment of principal and interest on the Debentures,
is dependent upon the receipt of dividends from First Federal on the First
Federal Common Stock owned by the Holding Company.
First Federal is a legal entity separate and distinct from the Holding
Company, and has no obligation to pay any amount of the Debentures or to make
funds available therefor, whether by dividends or otherwise. The Debentures will
be direct unsecured obligations of the Holding Company only, and the Holding
Company will be solely responsible for all payment of principal and interest on
the Debentures. In a liquidation or bankruptcy, claims of Debenture holders
would be satisfied solely from the Holding Company's equity interest in First
Federal remaining after satisfaction of all creditors of First Federal,
including depositors and holders of preferred stock, and thus are effectively
subordinated to those depositors and other creditors. If the FDIC is appointed
receiver, administrative expenses of the receiver may have priority over the
interest of the Holding Company.
The declaration of dividends by First Federal is subject to the
discretion of the Board of Directors of First Federal and applicable regulatory
requirements. While it is the present intention of the Board of Directors of
First Federal to declare dividends in an amount sufficient to provide the
Holding Company with the cash flow necessary to meet its debt service
obligations with respect to the Debentures, subject to applicable regulatory
restrictions, no assurance can be given that circumstances which would limit or
preclude the declaration of such dividends will not exist in the future. At June
30, 1997, First Federal would have been permitted to pay $697,000 in dividends
on its capital stock without prior approval of the OTS. As part of its Holding
Company application, the Holding Company has requested from the OTS a dividend
of $212,000 to be distributed upon the Closing of the Offering. See "Regulation
- - Limitations on Dividends and Other Capital Distributions."
10
<PAGE>
LIMITED RIGHTS OF ACCELERATION OF DEBENTURES UPON EVENTS OF DEFAULT
Holders of the Debentures may accelerate the payment of principal and
interest on the Debentures only in the case of certain events related to the
bankruptcy or insolvency of the Holding Company, the reorganization of the
Holding Company for the benefit of its creditors or the appointment of a
receiver or conservator for any of the Holding Company's major insured
depository institution subsidiaries (which at the date hereof included only
First Federal) and upon a default in the payment of principal or interest on, or
a default in the performance of any covenant or agreement contained in, the
Debentures or Indenture. The Indenture does not contain any provisions that
would guarantee the ability of the Holding Company to make such accelerated
payments of principal and interest. If any Event of Default occurs and is
continuing, either the Trustee or the holders of not less than 25% in principal
amount of the then outstanding Debentures may declare the principal amount of
all Debentures, together with unpaid interest thereon, to be due and payable
immediately, subject in certain circumstances to rescission or waiver by the
holders of at least a majority in principal amount of Debentures. There can be
no assurance that the Holding Company would have or be able to acquire
sufficient funds to make payment on the Debentures if their maturity were
accelerated due to an Event of Default. See "Description of the Debentures -
Events of Default."
SUBORDINATION
The payment of principal and interest on the Debentures is unsecured
and is subordinated in right of payment to all present and future Senior
Indebtedness and General Obligations (both as defined in the Indenture) of the
Holding Company. Senior Indebtedness is defined generally in the Indenture to
include indebtedness of the Holding Company for money borrowed or purchased
(including indebtedness of others guaranteed by the Holding Company), other than
the Debentures or any indebtedness or obligation as to which it is expressly
provided that such obligation is not Senior Indebtedness or ranks pari passu (of
equal seniority) with the Debentures. General Obligations are defined in the
Indenture to include all obligations of the Holding Company to make payment on
account of claims of general creditors, other than Senior Indebtedness, the
Debentures and indebtedness for money borrowed ranking pari passu with or
subordinate to the Debentures. As of June 30, 1997, the Company had no
indebtedness that ranked pari passu with the Debentures. See "Description of the
Debentures - Subordination." The Holding Company has neither Senior Indebtedness
nor General Obligations outstanding. The Indenture does not prohibit or limit
the incurrence of Senior Indebtedness or General Obligations by the Holding
Company.
Under the provisions set forth in the Indenture, no principal or
interest payments on the Debentures may be made if there shall have occurred and
be continuing a default in any payment with respect to Senior Indebtedness, or
an event of default with respect to any Senior Indebtedness permitting the
holders thereof to accelerate the maturity of such Senior Indebtedness. Remedies
available to holders of Senior Indebtedness in the event of a default may be
more extensive than those provided for in the Indenture, with the effect that an
event of default under any Senior Indebtedness will probably not constitute an
Event of Default (as defined) allowing acceleration of the principal and
interest under the Debentures. In the event, however, that the maturity of the
Debentures is accelerated based upon the occurrence of certain Events of
Default, the holders of all Senior Indebtedness will first be entitled to
receive payment in full of all amounts due or to become due thereon before the
Holders of the Debentures will be entitled to any payments. See "Description of
the Debentures - Subordination."
Although the Holding Company has no present plans to issue new debt,
the Holding Company may in the future consider the issuance of additional debt
to support its business operations and pay its obligations on the Units.
LIMITED COVENANTS
The covenants in the Indenture are limited, do not protect holders of
the Debentures in the event of a material adverse change in the Holding
Company's financial condition or results of operations and do not limit the
ability of the Holding Company to incur additional Senior Indebtedness or
General Obligations; therefore, neither the covenants nor the other provisions
contained in the Indenture should be considered a significant factor in
evaluating whether the
11
<PAGE>
Holding Company will be able to comply with its obligations under the Units,
including the obligation to pay principal of interest on the Debentures. See
"Description of the Debentures."
NO PRIOR MARKET FOR UNITS AND HOLDING COMPANY COMMON STOCK; POTENTIAL
ILLIQUIDITY OF UNITS AND HOLDING COMPANY COMMON STOCK
The Holding Company has never issued capital stock. Consequently,
there is no existing market for the Holding Company Common Stock at this time.
Therefore, no assurance can be given that an established and liquid trading
market for the Holding Company Common Stock will develop. Following the Offering
the Holding Company Common Stock will be traded in the over-the-counter market.
Although it has no obligation to do so, Hoefer & Arnett intends to make a market
for the Holding Company Common Stock if the volume of trading and other
market-making considerations justify such an undertaking.
Prior to this offering, there have been no Units, Warrants or
Debentures outstanding. There is no public market for the Units, Warrants or
Debentures and it is unknown whether an active and liquid trading market for the
Units, Warrants or Debentures will develop. The Holding Company has no present
intention to have the Units, Warrants or Debentures authorized for quotation on
Nasdaq or any other interdealer quotation system or listed on any securities
exchange. If an active trading market does develop, there can be no assurance
that such a trading market will continue.
The development of a public market that has depth, liquidity and
orderliness depends upon the presence in the marketplace of a sufficient number
of willing buyers and sellers at any given time, over which neither the Holding
Company nor any market maker has any control. Accordingly, there can be no
assurance that an active or liquid trading market for the Holding Company Common
Stock, Debentures or Warrants will develop, or that if a market develops, it
will continue. Furthermore, there can no assurance that purchasers will be able
to sell their securities at or above their purchase price. See "Market
Information."
PROSPECTUS MUST BE CURRENT TO EXERCISE WARRANTS; NON-REGISTRATION IN CERTAIN
JURISDICTIONS OF SHARES OF COMMON STOCK UNDERLYING THE WARRANTS
The issuance of the Holding Company Common Stock purchasable upon
exercise of the Warrants has been registered under the Securities Act of 1933,
as amended. However, the Warrants are not convertible or exercisable unless, at
the time of exercise, the Holding Company has a current prospectus covering the
shares of Common Stock issuable upon exercise of the Warrants and such shares of
Common Stock have been registered, qualified or deemed to be exempt under the
securities laws of the state of residence of the holders of such Warrants. The
Holding Company has agreed to take all actions required under federal or state
securities laws to enable the holders of the Warrants to exercise them at any
time while they are outstanding and so that the Holding Company Common Stock
issued upon exercise thereof will be freely tradeable without restriction by
holders who are not affiliates of the Holding Company within the meaning of the
Securities Act. Should the Holding Company fail for any reason to maintain a
current prospectus or the qualification of these securities under any state
laws, holders of Warrants may be unable to exercise the Warrants.
CONCENTRATION OF LENDING ACTIVITIES; RISKS ASSOCIATED WITH NONCONFORMING LOANS
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 a substantial
portion of the loans originated for portfolio by First Federal are conventional
mortgage loans (i.e., not guaranteed or insured by agencies of the federal
government) which are secured by residential properties, 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 First Federal 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. As a result, the loans may be deemed to have higher risk
of nonpayment than secondary market conforming conventional mortgage loans.
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, (excluding a $401,000
12
<PAGE>
recovery on a lawsuit filed by First Federal and received in the year ended
September 30, 1994), on an average loan portfolio of $46.2 million, 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. If either event should occur 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
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."
EVOLUTION OF BUSINESS
First Federal's strategy is to focus on increasing its commercial real
estate and commercial business loans and consumer loans. Commercial real estate,
commercial business loans and consumer loans are expected to represent a growing
portion of the First Federal's business. Full-service retail banking activities,
while potentially more profitable, generally entail a greater degree of credit
risk than does single family lending, the historical focus of First Federal.
Specifically, the performance of commercial real estate, commercial business and
consumer loans is more sensitive to regional and local economic conditions.
Collateral valuation requires more detailed analysis and is more variable than
single family mortgage lending. Loan balances for commercial real estate and
commercial business loans are typically larger than those for single family
mortgage loans and, thus, when there are defaults and losses, they can be
greater on a per loan basis than those for single family mortgages. Similarly,
loss levels are more difficult to predict. Full-service retail banking typically
includes a greater amount of unsecured lending, or lending secured by rapidly
depreciable assets such as automobiles, which presents different risks than
secured single family mortgage lending. The sources of repayment are not related
to collateral and can be more difficult to understand and pursue. Similarly,
loan default prevention and collection for commercial real estate, commercial
business and consumer lending also can be more complex and difficult than that
for single family mortgage lending. For example, business loans are not
typically made with standardized loan documents. Thus, the opportunity for
mistakes and documentation risks are increased. Moreover, a liquid secondary
market for most types of commercial real estate and business loans does not
exist. The operational, interest rate, and competitive risks associated with
commercial real estate, commercial business and consumer lending are different
than those for single family mortgage lending and require skills and experience
of management and staff different than that for single family mortgage lending.
When evaluating such credits, more factors need to be considered. Management
must be more knowledgeable of a wider variety of business enterprises and
industries that borrow money. Intensive, ongoing customer contact is required,
as well as complex analysis of financial statements at the time of loan approval
and on an ongoing basis. Servicing these customers requires closer monitoring
and more individualized analysis than does single family mortgage lending.
Commercial real estate, commercial business and consumer lending pricing is very
competitive and more subjective than that for single family mortgage lending. As
a result, First Federal's risk of credit default is higher on these loans, which
would adversely affect net income. There can be no assurance given that First
Federal can increase the amount of these loans in its portfolio.
13
<PAGE>
RISKS ASSOCIATED WITH ANTI-TAKEOVER PROVISIONS
Holding Company and Bank Governing Instruments. Certain provisions of
the Holding Company's certificate of incorporation and bylaws may discourage or
prevent an attempted acquisition or change in control of the Holding Company.
These provisions provide for, among other things, noncumulative voting for
directors, limitations on the calling of special meetings, a fair
price/supermajority vote requirement at 80% for certain business combinations
with Interested Stockholders, as therein defined, (including mergers or
consolidations, sale, lease or other disposition of assets, issuances or
transfers of securities, adoption of any plan of liquidation proposed by the
Interested Stockholders, or any reclassification of securities which increases
the Interested Stockholders percentage ownership of the Holding Company) 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.
Regulatory and Statutory Provisions. 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 "Restrictions on Acquisitions of Stock and
Related Takeover Defensive Provisions."
Voting Control of Shares by the Board and Executive Officers. 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 (11 persons) will receive approximately 108,000 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 36.1% at the minimum and 30.9%, 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 "Description of Capital
Stock" and "Restrictions on Acquisitions of Stock and Related Takeover Defensive
Provisions."
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 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.
14
<PAGE>
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.
15
<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)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
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)(1) --- 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
Extraordinary item - Income tax benefit from utilizing net
operating loss carryforwards............................... --- --- --- --- 106
Cumulative effect of change in accounting for income
taxes.................................................... --- --- --- 137 ---
-------- ------- ------- ------- -------
Net income................................................. $ 234(2) $ 211 $ 457 $ 682 $ 501
======== ======= ======= ======= =======
Ratio of earnings to fixed charges including interest
on deposits (3)........................................... 1.10 1.10 1.33 1.35 1.16
Ratio of earnings to fixed charges excluding interest
on deposits(3)............................................ 3.73 1.99 5.19 7.23 12.52
PER SHARE DATA:
Earnings per share(5).................................... .61 .52 1.54 .47(4) N/A
</TABLE>
- ----------
(1) Reflects a negative loan loss expense from the settlement of a lawsuit
filed by First Federal which favorably impacted net income in fiscal 1994.
(2) Excluding the nonrecurring September 1996 SAIF assessment, after tax net
income would have been $454,000.
16
<PAGE>
<TABLE>
<CAPTION>
At or for the
Year Ended September 30,
-------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET RATIOS:
Nonperforming assets to total
assets at end of year(6)...................... 1.50% .62% .87% .74% .76%
Allowance for loan losses to non-performing
loans......................................... 138.76 179.10 103.30 156.22 204.70
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(7)..................... 4.11 3.97 4.20 3.67 3.08
End of year(8)............................. 4.67 4.17 4.29 4.27 3.35
Net interest margin for the year(9).......... 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..................... 7,354 6,707 5,073 4,345 4,465
Number of full-service offices................. 2 2 2 1 1
</TABLE>
- ----------
(3) The ratio of earnings to fixed charges is computed by dividing fixed
charges into earnings from continuing operations before income taxes and
extraordinary items plus fixed charges. Fixed charges include interest
expensed or capitalized, the amortization of total debt, the interest
component of rental expense and Bank preferred stock dividends.
(4) Reflects earnings from the date First Federal converted to stock form.
(5) Adjusted to reflect stock dividends paid to First Federal stockholders.
(6) Nonperforming assets include loans that are 90 days or more delinquent as
well as repossessed assets.
(7) 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).
(8) 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.
(9) Net interest income divided by average interest-earning assets.
17
<PAGE>
RECENT FINANCIAL DATA
The selected financial and other data of First Federal set forth below
at and for the three and nine months ended June 30, 1997 and June 30, 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 nine months ended June 30, 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.
At June 30, At September 30,
1997 1996
---------------------------------------
(In Thousands)
BALANCE SHEET:
Total assets................ $65,781 $57,597
Loans receivable, net....... 58,801(1) 49,579(1)
Mortgage-backed securities.. 1,186 1,292
Securities.................. --- 1,000
Deposits.................... 57,638 51,677
FHLB Advances............... 2,100 ---
Stockholders' equity........ 4,719 4,316
- ----------
(1) Including loans held for sale to the secondary market at month-end of
$475,000 and $419,000 at June 30, 1997 and September 30, 1996,
respectively.
<TABLE>
<CAPTION>
For Three Months Ended For Nine Months Ended
---------------------- ---------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
--------- -------- -------- --------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME:
Total interest income...................................... $1,391 $1,199 $4,007 $3,611
Total interest expense..................................... 663 584 1,882 1,795
--------- -------- ------- -------
Net interest income...................................... 728 615 2,125 1,816
Provision for loan losses.................................. 15 6 17 1
--------- -------- ------- -------
Net interest income after provision for loan losses...... 713 609 2,108 1,815
Service charges............................................ 135 142 449 386
Gain on sales of loans, mortgage servicing rights,
mortgage-backed securities and securities................ 40 114 99 288
Other noninterest income................................... 41 --- 41 9
Other noninterest expenses (operating expenses)............ 665 661 1,986 2,023
--------- -------- ------- -------
Income before income taxes................................. 264 204 711 475
Income tax expense ........................................ 90 70 242 162
--------- -------- ------- -------
Net income................................................. $ 174 $ 134 $ 469 $ 313
========= ======== ======= =======
Ratio of earnings to fixed charges including
interest on deposits(1).................................. 1.33 1.22 1.33 1.22
Ratio of earnings to fixed charges excluding
interest on deposits(1).................................. 6.24 6.76 6.24 6.76
PER SHARE DATA:
Earnings per share(2)...................................... .63 .47 1.68 1.04
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
For Three Months Ended For Nine Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
------ ------ ------ -----
<S> <C> <C> <C> <C>
BALANCE SHEET RATIOS:
Nonperforming assets to total
assets at end of period(3)................. 1.62% 1.24% 1.62% 1.24%
Total equity to total assets (end of period)... 7.17 7.67 7.17 7.67
Total equity to assets ratio (ratio of
average equity to average total assets)...... 7.96 7.42 7.31 7.20
EARNINGS PERFORMANCE DATA:
Interest rate spread information:
Average during period(4)...................
End of period(5)............................. 4.58 4.31 4.81 4.16
Net interest margin for the period(6)........ 4.95 4.48 4.95 4.48
Average interest-earning assets as a
percentage of average interest-bearing
liabilities.................................. 104.44 103.68 103.66 104.22
Return on assets (ratio of net income to
average total assets).......................... 1.08 .91 1.01 .70
Return on total equity (ratio of net income
to average equity)........................... 14.97 12.31 13.78 9.74
Noninterest expenses to average total assets... 4.15 4.50 4.27 4.53
OTHER DATA:
Number of deposit accounts..................... 7,394 6,768 7,394 6,768
Number of full-service offices................. 2 2 2 2
</TABLE>
- ----------
(1) The ratio of earnings to fixed charges is computed by dividing fixed
charges into earnings from continuing operations before income taxes and
extraordinary items plus fixed charges. Fixed charges include interest
expensed or capitalized, the amortization of total debt, the interest
component of rental expense and Bank preferred stock dividends.
(2) Adjusted to reflect stock dividends paid to First Federal stockholders.
(3) Nonperforming assets include loans that are 90 days or more delinquent as
well as repossessed assets.
(4) 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).
(5) 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.
(6) Net interest income divided by average interest-earning assets.
19
<PAGE>
MANAGEMENT'S DISCUSSION OF RECENT RESULTS
FINANCIAL CONDITION
First Federal's total assets increased by $8.2 million to $65.8
million at June 30, 1997 from $57.6 million at September 30, 1996 , or an
increase of 14.24%. The increase was primarily due to an increase in loans
receivable, partially offset by a decrease in cash.
Loans receivable (excluding loans held for sale) increased $9.1
million to $58.3 million at June 30, 1997, compared to $49.2 million at
September 30, 1996--or an increase of 18.50%. During the nine months ended June
30, 1997, First Federal originated $22.0 million of mortgage loans , of which
$21.2 million were secured by mortgages on one- to four-family residences, and
$9.1 million in consumer loans. Approximately $1.4 million of the new mortgage
loans represented refinancing of existing First Federal loans.
Deposits increased from $51.7 million at September 30, 1996 to $57.6
million at June 30, 1997 primarily as a result of increased marketing of
short-term certificates of deposits--along with new checking accounts. Accrued
interest payable and other liabilities increased $1.8 million from $1.6 million
at September 30, 1996 to $3.4 million at June 30, 1997 largely as a result of
increased borrowings from the Federal Home Loan Bank of Dallas to fund the
Bank's increased consumer loan demand, offset by the payment of escrowed funds
in December, 1996 for property taxes on home loans held by the Bank.
NON-PERFORMING 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. First
Federal 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 $15,000 for the three months ending June 30, 1997, as
compared to a $6,000 loan loss provision for the three months ending June 30,
1996. The Bank's loan loss reserve balance as of June 30, 1997 was $268,000
compared to the September 30, 1996 loan loss reserve of $247,000. Total
non-performing assets increased slightly during the three month period ended
June 30, 1997 to $1.1 million or 1.62% of total assets as compared to $863,000
or 1.50% of total assets at September 30, 1996. The majority of this increase in
non-performing assets were loans secured by mortgages on one- to four-family
residences. 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
(exclusive of a $400,000 recovery on a lawsuit settlement in the fiscal year
ending September 30, 1994).
The Bank will continue to monitor and adjust its allowance for losses
on loans as the Board of Director's and management's analysis of its loan
portfolio and economic conditions dictate, which may result in an increase in
the Bank's loan loss provision as the Bank implements its strategy of increasing
commercial loans. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
upon their judgment of the information available to them at the time of their
examination. Therefore, although the Bank maintains its allowance for losses on
loans at a level which it considers to be adequate to provide for potential
losses, in view of the continued uncertainties in the economy generally and the
regulatory uncertainty pertaining to reserve levels for the thrift industry
generally, there can be no assurance that losses will not exceed the estimated
amounts or the Bank will not be required to make additional substantial
additions to its allowance for losses on loans in the future.
20
<PAGE>
COMPARISON OF NINE MONTHS ENDED JUNE 30, 1997 TO JUNE 30, 1996
General. First Federal reported net income after taxes of $469,000 for
the nine months ended June 30, 1997, an increase of $156,000 (or 49.84%) as
compared to $313,000 in net income reported for the nine months ended June 30,
1996. The increase in earnings, as discussed in more detail below, resulted
primarily from a $396,000 increase in interest income and a $37,000 decrease in
noninterest expense, partially offset by a decrease of $94,000 in noninterest
income and a $87,000 increase in interest expense.
Net Interest Income. Net interest income increased $309,000 to $2.1
million for the nine month period ended June 30, 1997 from $1.8 million for the
prior period in 1996. This increase was attributable primarily to an increase in
interest earned on loans receivable, partially offset by an increase in interest
paid on the Bank's deposit liabilities and interest paid on other borrowings
from the FHLB. For the nine months ended June 30, 1997, the net interest margin
(net interest income divided by average interest earning assets) increased to
4.87%, as compared to 4.38% for 1996. The spread between the average yield on
interest earning assets and the average cost of funds was 4.81% for 1997 versus
4.16% for 1996. These increases resulted primarily from higher yields on
consumer loans and the repricing in the renewals of 3-year balloon home loans.
Noninterest Income. Noninterest income decreased $94,000 to $589,000
for the nine months ended June 30, 1997 from $683,000 for the nine months ended
June 30, 1996. This decrease can be attributed to a $13,000 decrease in net gain
on sale of securities which occurred in December, 1995, a $176,000 decrease in
net gain on sale of home loans and mortgage servicing rights to the secondary
market reflecting reduced mortgage banking activity, and also the result of sale
in June, 1996 of mortgage servicing rights previously held. This was partially
offset by a $63,000 increase in service charges, which can be attributable to an
increase in interest-bearing checking accounts and fees associated with these
types of accounts, and a $32,000 increase in other noninterest income, as a
result of recognizing excess auto dealer reserves due to the repayment of auto
loan balances.
Noninterest Expenses. Noninterest expense remained stable at $2.0
million for the nine months ended June 30, 1997 and June 30, 1996. A slight
decrease of $37,000 can primarily be attributed to a $29,000 decrease in
compensation and benefits expense, a $58,000 decrease in federal insurance
premiums due to recapitalization of SAIF in 1996, and a $11,000 decrease in
professional fees. This was offset by $16,000 increase in data processing and a
$46,000 increase in other noninterest expense due to the addition of a Mortgage
Loan Production Office and overall increased activity in the Bank.
Income Taxes. Income tax expense increased $80,000 to $242,000 for the
nine months ended June 30, 1997 compared to $162,000 for the nine months ended
June 30, 1996 as a result of increased earnings. The period reflected a tax rate
of 34.0% and 34.1% for June 30, 1997 and June 30, 1996, respectively.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1997 TO JUNE 30, 1996
General. First Federal reported net income after taxes of $174,000 for
the three months ended June 30, 1997, an increase of $40,000 as compared to
$134,000 in net income reported for the three months ended June 30, 1996. The
increase in earnings, as discussed in more detail below, resulted primarily from
a $192,000 increase in interest income, caused by an increased volume of loans
outstanding and an increase in the Bank's spread, partially offset by a $79,000
increase in interest expense and a decrease of $40,000 in noninterest income.
Net Interest Income. Net interest income increased $113,000 to
$728,000 for the three month period ended June 30, 1997 from $615,000 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 from the FHLB. For the three months ended June 30, 1997, the
net interest margin (net interest income divided by average interest earning
assets) increased to 4.79%, as compared to 4.49% for 1996. The spread between
the average yield on interest earning assets and the average cost of funds was
4.58% for 1997 versus 4.31% for 1996. These increases resulted primarily from
higher yields on consumer loans and the repricing in the renewals of 3-year
balloon loans.
21
<PAGE>
Noninterest Income. Noninterest income decreased by $40,000 to
$216,000 for the three months ended June 30, 1997 from $256,000 for the three
months ended June 30, 1996. This decrease can be attributed to a $74,000
decrease in net gain on sale of home loans and mortgage servicing rights to the
secondary market, reflecting reduced mortgage banking activity, and a slight
decrease in various other noninterest income, partially offset by a $41,000
increase in other noninterest income, as a result of recognizing excess dealer
reserves due to the repayment of auto loan balances.
Noninterest Expense. Noninterest expense increased $4,000 to $665,000
for the three months ended June 30, 1997 from $661,000 for the three months
ended June 30, 1996. This increase can primarily be attributed to a $17,000
increase in other noninterest expense and a $13,000 increase in compensation and
benefits primarily due to adding additional personnel in consumer lending.
Income Taxes. Income tax expense increased $20,000 to $90,000 for the
three months ended June 30, 1997 compared to $70,000 for the three months ended
June 30, 1996 as a result of increased earnings. The period reflected a tax rate
of 34.1% and 34.3% for June 30, 1997 and June 30, 1996, respectively.
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 (as it has in the recent past) or utilize other borrowings of
funds based primarily on the level of loan originations, 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 June 30, 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
June 30, 1997, First Federal's liquidity ratio was 5.01%. 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 June 30, 1997, First Federal had commitments to originate
loans totalling $5.7 million. First Federal also had $640,000 of outstanding
unused lines of credit. If needed for liquidity purposes, at June 30, 1997,
First Federal was eligible to borrow $23.0 million from the Federal Home Loan
Bank of Dallas, and had actually borrowed only $2.1 million. First Federal
considers its liquidity and capital resources to be adequate to meet its needs
for the foreseeable future. First Federal expects to be able to fund or
refinance, on a timely basis, its material commitments and long-term
liabilities.
At June 30, 1997, First Federal had tangible capital of $4.7 million,
or 7.15% of total assets which was $3.7 million above the minimum capital
requirement of $990,000 or 1.5% of adjusted total assets.
At June 30, 1997, First Federal had core capital of $4.7 million, or
7.15% of total assets which was $2.7 million above the minimum capital
requirement of $2.0 million or 3.0% of adjusted total assets.
22
<PAGE>
At June 30, 1997, First Federal had total risk-based capital of $5.0
million and risk-weighted assets of $48.6 million or total risk-based capital of
10.27% of risk-weighted assets. This amount was $1.1 million above the minimum
regulatory requirement of $3.9 million, or 8.0% of risk-weighted assets.
23
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
PRO FORMA CONSOLIDATED BALANCE SHEET
The following Holding Company pro forma consolidated balance sheet and
statement of income illustrate the historical consolidated balance sheet and
consolidated statements of income of First Federal giving effect to the Merger
as if it had been effective on June 30, 1997 after giving effect to the pro
forma adjustments described in the notes to the Holding Company pro forma
consolidated financial statements. The Merger will be accounted for as a
leveraged buy-out, with the First Federal Common Stock beneficially held by its
directors and executive officers and exchanged for Holding Company Common Stock
contributed to the Holding Company recorded at its carrying value. The assets
acquired and liabilities assumed in the acquisition of the remainder of First
Federal will be recorded at their estimated fair values, with the excess of the
purchase price over the net fair value recorded as goodwill. This information
should be read in conjunction with the historical consolidated financial
statements of First Federal, including the notes thereto, which appear elsewhere
in this Prospectus. The pro forma adjustments reflect assumptions regarding (i)
the aggregate amount of cash to be paid assuming that the holders of 75% of the
stock of First Federal elect to be paid in cash by the Holding Company as a
result of the Merger and (ii) the consummation of the Offering at the minimum
(3,400 Units sold). The pro forma balance sheet and income statement may differ
materially from actual results should the maximum amount of Units be sold in the
Unit Offering and should the amount of stock sold in the Common Stock Offering
be greater than the amount assumed for purposes of these tables. The pro forma
data is not indicative of the actual financial position that would have occurred
had the Merger been consummated on June 30, 1997 or that may be obtained in the
future.
24
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------------------------------------
First
Federal Pro forma Adjustments Elimination Consolidated
Historical Holding Company Entries Pro forma
---------- --------------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks ...................... $ 766 $ 1,314(1) $ (4,326)(3) $ -- $ 731
-- 3,400 -- -- --
-- (423)(5) -- -- --
Interest-bearing deposits with
financial institutions ....................... 1,605 -- -- -- 1,605
Mortgage-backed securities ................... 1,186 -- (18)(3) -- 1,168
Loans ........................................ 58,801 -- 416(3) -- 59,217
Premises and equipment ....................... 1,046 -- -- 1,046
Goodwill ..................................... -- -- 466(3) -- 466
Deposit purchase accounting
adjustments .................................. -- -- 1,079(3) -- 1,079
Investment in Bank ........................... -- 961(6) 2,885(3) (3,846)(7) --
Debt issuance costs .......................... -- 423(5) -- -- 423
Interest receivable and other assets ......... 2,377 -- -- -- 2,377
--------- --------- --------- --------- ---------
Total assets ................................. $ 65,781 $ 5,675 $ 502 $ (3,846) $ 68,112
========= ========= ========= ========= =========
LIABILITIES
Deposits ..................................... $ 57,638 $ -- $ -- $ -- $ 57,638
Other borrowings ............................. 2,100 -- -- -- 2,100
Debentures ................................... -- 3,400(2) -- -- 3,400
Other liabilities ............................ 1,324 -- 502(3) -- 1,826
--------- --------- --------- --------- ---------
Total liabilities ............................ 61,062 3,400 502 -- 64,964
Minority interest-preferred stock ............ -- -- -- 873(9) 873
STOCKHOLDERS' EQUITY
Preferred stock .............................. 1 -- (1)(9) --
Common stock ................................. 2 1(6) -- (2)(7) 2
1(1)
Additional paid-in-capital ................... 2,743 960(6) -- (1,871)(7) 2,273
-- 1,313(1) -- (872)(9) --
Retained earnings ............................ 1,973 -- -- (1,973)(7) --
--------- --------- --------- --------- ---------
Total stockholders' equity ................... 4,719 2,275 -- (4,719) 2,275
--------- --------- --------- --------- ---------
Total liabilities and stockholders'
equity ....................................... $ 65,781 $ 5,675 $ 502 $ (3,846) $ 68,112
========= ========= ========= ========= =========
PER SHARE DATA(4)
Holding Company common shares
outstanding .................................. 599,030 -- -- -- 299,758
Book value per Holding Company
common share ................................. $ 6.42 -- -- -- $ 7.59
Tangible book value per Holding
Company common share ......................... 6.42 -- -- -- 3.75
Offering price Holding Company
common stock ................................. -- -- -- -- 10.00
</TABLE>
25
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the year ended
September 30, 1996
-------------------------------------------
Pro forma
Adjustments
Bank Holding Consolidated
Historical Company Pro forma
---------- ----------- ------------
<S> <C> <C> <C>
INTEREST INCOME
Loans .............................................. $ 4,407 $ (83)(3) $ 4,324
Mortgage-backed securities ......................... 145 4 (3 149
Other .............................................. 276 -- 276
--------- --------- ---------
Total interest income .............................. 4,828 (79) 4,749
INTEREST EXPENSE
Deposits ........................................... 2,358 22(3) 2,380
Debentures ......................................... 391(2) 391
Other borrowings ................................... 5 -- 5
--------- --------- ---------
Total interest expense ............................. 2,363 413 2,776
--------- --------- ---------
Net Interest Income ................................ 2,465 (492) 1,973
Provision for loan losses .......................... (52) -- (52)
--------- --------- ---------
Net interest income after provisions for loan losses 2,517 (492) 2,025
NONINTEREST INCOME
Other .............................................. 543 -- 543
Gains on sale of loans and servicing ............... 330 -- 330
--------- --------- ---------
Total noninterest income ........................... 873 -- 873
NONINTEREST EXPENSES
Compensation and benefits .......................... 1,337 -- 1,337
Amortization of intangibles ........................ -- 135(3) 135
Amortization of debt issue costs ................... -- 85(5) 85
Occupancy and equipment ............................ 335 -- 335
Other .............................................. 1,376 -- 1,376
--------- --------- ---------
Total noninterest expenses ......................... 3,048 220 3,268
--------- --------- ---------
Income/(loss) before federal income tax expense .... 342 (712) (370)
Income tax expense/(benefit) ....................... 108 (232)(8) (124)
--------- --------- ---------
Net income/(loss) .................................. 234 (480) (246)
Preferred stock dividends .......................... (88) (88)
--------- --------- ---------
Income available to common stockholders ............ $ 146 $ (480) $ (334)
========= ========= =========
Weighted average common shares outstanding ......... 599,030 -- 299,758
Net income/(loss) per common share ................. $ .24 -- $ (1.11)
</TABLE>
26
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the Nine Months Ended
June 30, 1997
--------------------------------------------------
Pro forma
Adjustments Con-
Bank Holding solidated
Historical Company Pro forma
--------- --------- ---------
<S> <C> <C> <C>
INTEREST INCOME
Loans .................................................. $ 3,847 $ (62)(3) $ 3,785
Mortgage-backed securities ............................. 56 3(3) 59
Other .................................................. 104 -- 104
--------- --------- ---------
Total interest income .................................. 4,007 (59) 3,948
INTEREST EXPENSE
Deposits ............................................... 1,825 17(3) 1,842
Debentures ............................................. -- 293(2) 293
Other borrowings ....................................... 57 -- 57
--------- --------- ---------
Total interest expense ................................. 1,882 310 2,192
--------- --------- ---------
Net Interest Income .................................... 2,125 (369) 1,756
Provision for loan losses .............................. 1 -- 1
--------- --------- ---------
Net interest income after provisions for loan losses ... 2,124 (369) 1,755
NONINTEREST INCOME
Other .................................................. 490 -- 490
Gains on sale of loans and servicing ................... 99 -- 99
--------- --------- ---------
Total noninterest income ............................... 589 -- 589
NONINTEREST EXPENSES
Compensation and benefits .............................. 988 -- 988
Amortization of intangibles ............................ -- 101(3) 101
Amortization of debt issue costs ....................... -- 64(5) 64
Occupancy and equipment ................................ 239 -- 239
Other .................................................. 775 -- 775
--------- --------- ---------
Total noninterest expenses ............................. 2,002 165 2,167
--------- --------- ---------
Income/(loss) before federal income tax expense ........ 711 (534) 177
Income tax expense/(benefit) ........................... 242 (174)(8) 68
--------- --------- ---------
Net income/(loss) ...................................... 469 (360) 109
Preferred stock dividends .............................. (66) (66)
--------- --------- ---------
Income/(loss) available to common stockholders ......... $ 403 $ (360) $ 43
========= ========= =========
Weighted average common shares outstanding ............. 599,030 -- 299,758
Net income/(loss) per common share ..................... $ .67 -- $ .14
</TABLE>
27
<PAGE>
NOTES TO THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------
(1) Reflects the estimated proceeds from the issuance and sale of 150,000
shares of the Holding Company Common Stock (par value $.01) in the
offering.
Gross proceeds $1,500,000
Estimated offering expenses (186,000)
----------
Net proceeds $1,314,000
==========
(2) Reflects the estimated proceeds from the issuance and sale of 3,400, 11.5%,
five-year Debentures, at $1,000 per unit. Each Debenture includes a
detachable warrant to purchase 9 shares of Holding Company Common Stock at
$12.50 per share. The value of the Warrants has been estimated to be
immaterial. Interest cost of $391,000 per year.
(3) Reflects goodwill related to purchase of 75% of First Federal's Common
Stock for $4,326,000 (179,709 shares at $24.07 per share) as follows:
<TABLE>
<CAPTION>
Annual
Life Amortization Amount
---- ------------ ------
<S> <C> <C> <C>
Purchase price (179,709 shares of First Federal
Common Stock, representing 75% of outstanding
common shares at $24.07 per share) $4,326,000
First Federal book value related to common
shares purchased 2,885,000
----------
Excess purchase price over book value 1,441,000
----------
Less adjustments to reflect fair value
Securities (18,000) 5 years $ 4,000
Loans 416,000 5 years (83,000)
Certificates of deposit 43,000 2 years (22,000)
Core deposit intangible 1,036,000 10 years (104,000)
Income tax effect of above
adjustments at 34% federal rate (502,000)
Total adjustments 975,000
Goodwill $ 466,000 15 years (31,000)
==========
</TABLE>
(4) Net income and book value per common share for First Federal historical
reflects 2.5 exchange rate for Holding Company Common Stock, or 599,030
shares. Tangible book value excludes deposit intangibles and goodwill.
Warrants have not been included in shares outstanding. Consolidated pro
forma net income and book value per common share reflects 299,612 common
shares outstanding. Book value per common share excludes $873,000 of First
Federal's preferred stock. Net income per common share excludes $88,000 of
dividends on preferred stock. Tangible book value excludes goodwill and
deposit intangibles.
(5) Reflects debt issue costs of $423,000, to be amortized on a straight-line
basis over the five-year term of the Debentures ($85,000 per year).
(6) Reflects exchange of 59,903 common shares (25% of outstanding common
shares) of First Federal for 149,758 common shares (par value $0.01) of
Holding Company at historical book value (59,903 shares at $16.05/share =
$961,000).
(7) Elimination of intercompany accounts.
(8) Reflects tax rate of 34%.
(9) Reflects outside ownership of First Federal's preferred stock.
(10) The proposed transaction has been reflected in the pro forma financial
statements as a leveraged buy-out (LBO) in accordance with Issue No. 88016
of the Emerging Task Force (EITF 88-16). EITF 88-16 permits a partial or
complete change in accounting basis only if there has been a change in
control of voting interest, i.e., the establishment of a new group of
controlling stockholders. EITF 88-16 further requires the carryover of the
accounting basis for those stockholders who exchange their First Federal
stock for Company stock.
28
<PAGE>
Accordingly, these pro forma financial statements reflect a carryover of
accounting basis for the assumed 25% of First Federal stockholders who will
exchange their shares for Company shares and a new basis of accounting for
the remaining purchasers of Company Stock.
<PAGE>
DILUTION
Upon the successful completion of this Offering there will be a
minimum of approximately 300,000 and a maximum of approximately 350,000 shares
of outstanding Holding Company Common Stock.
As of June 30, 1997, the net tangible book value available to common
stockholders of First Federal amounted to $3.8 million or approximately $6.42
per share, adjusted for the Exchange Ratio. After giving effect to the issuance
and sale of 150,000 shares minimum and 200,000 shares maximum number of Shares
of Holding Company Common Stock offered hereby and the receipt of the estimated
net proceeds thereof, and assuming no exercise of options currently outstanding,
the net tangible book value of the Holding Company will amount to approximately
$1.1 million and $1.6 million or approximately $3.75 and $4.65 per share of
Holding Company Common Stock at the minimum and maximum number of shares of the
Holding Company Common Stock offered, respectively. As a result, the purchasers
of the Holding Company Common Stock offered hereby will incur an immediate
dilution ranging from approximately $6.25 to $5.35 per share of Holding Company
Common Stock, representing the difference between their purchase at $10.00 per
share and the net tangible book value per share of Holding Company Common Stock
after the Offering. This dilution results from the cash payment to First Federal
shareholders in exchange for their First Federal Common Stock in the Merger and
the expenses in connection with the Offering and the Merger. It should be noted
that the calculations above were made without giving effect to the intrinsic
value, if any, of First Federal's deposit base and over 30-year franchise.
The following table illustrates the dilution of the investment to the
investors.
<TABLE>
<CAPTION>
150,000 200,000
Shares Shares
(Minimum (Maximum
Number of Number of
Shares) Shares)
--------- ---------
<S> <C> <C>
Offering price per share of Holding Company Common Stock........................ $10.00 $10.00
Net tangible book value per share of Holding Company Common Stock
before offering (1)........................................................... 6.42 6.42
Pro forma net tangible book value per share of Holding Company Common
Stock after offering (1)...................................................... 3.75 4.65
Increase per share of Holding Company Common Stock attributable to
payments for shares offered hereby............................................ 10.00 10.00
Dilution to investors .......................................................... 6.25 5.35
</TABLE>
- ----------
(1) Net tangible book value per share of Holding Company Common Stock is
determined by dividing the number of shares of Holding Company Common Stock
outstanding into the net tangible book value of the Holding Company
(tangible assets less liabilities). Reflects the Exchange Ratio of 2.5
shares of Holding Company Common Stock for one share of First Federal
Common Stock .
(2) The pro forma net tangible book value of the Holding Company excludes the
pro forma core deposit intangible, net of tax, and goodwill.
29
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization,
including savings deposits, of First Federal at June 30, 1997 and the pro forma
capitalization of the Holding Company as of that date, after giving effect to
the completion of the Offering and based on other assumptions set forth in the
table, in "Pro Forma Data" and in "Use of Proceeds."
<TABLE>
<CAPTION>
Pro Forma Holding Company
Consolidated Capitalization
--------------------------------
June 30, 1997
(In Thousands)
--------------------------------
Historical Pro Forma
<S> <C> <C>
Deposits.................................................. $ 57,638 $ 57,638
Other Borrowings.......................................... 2,100 2,100
Debentures due............................................ -- 3,400
--------- ---------
Total Senior Indebtedness, General Obligations
and Debentures........................................ $59,738 $ 63,138
========= =========
Stockholders' equity:
Preferred Stock, $.01 par value per shares to be
outstanding as shown...................................... $ 1 $ --
Holding Company Common Stock, par value $.01 per share:
Authorized - shares; to be outstanding as shown........... 2 2
Additional paid-in capital................................ 2,743 2,273
Retained earnings......................................... 1,973 ---
--------- ---------
Total stockholders' equity................................ $ 4,719 $ 2,275
========= =========
</TABLE>
This capitalization table assumes the sale of only the minimum amount
of Units. Should the maximum amount of Units be sold in the Unit Offering,
senior indebtedness would increase to $63,438,000.
30
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in
this Prospectus, including without limitation, statements under "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" regarding the Holding Company's and First
Federal's financial position, business strategy and plans and objectives of
management of the Holding Company and First Federal for future operations, are
forward-looking statements. When used in this Prospectus, the words
"anticipate," "believe," "estimate," "expect" and "intend" and words or phrases
of similar import, as they relate to the Holding Company or First Federal or
Holding Company management, are intended to identify forward-looking statements.
Although the Holding Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no absolute assurance
that such expectations will prove to have been correct. Important factors that
could cause actual results to differ materially from the Holding Company's
expectations ("cautionary statements") are disclosed under "Risk Factors" and
elsewhere in this Prospectus, including, without limitation, in conjunction with
the forward-looking statements included in this Prospectus. Based upon changing
conditions, should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended. The Holding Company does not intend to update these
forward-looking statements. All subsequent written and oral forward-looking
statements attributable to the Holding Company, First Federal or persons acting
on their behalf are expressly qualified in their entirety by the applicable
cautionary statements.
USE OF PROCEEDS
Net proceeds from the sale of the Holding Company Common Stock and the
Units in the Offering are currently estimated at $___ million and $___ million,
at the minimum and maximum number of securities offered, respectively. This
amount is arrived at by subtracting the $_______ and $_______ estimated fees and
expenses of the Offering, including commissions, from $_________ and $_________,
which are the gross proceeds from the sale of the minimum and maximum number of
securities offered, respectively. In calculating expenses, it is assumed that a
minimum of 150,000 shares of Holding Company Common Stock will be sold at no
commission and 3,400 Units will be sold at a 7.0% commission. Actual expenses
may be more or less than those estimated.
The net proceeds will be used to purchase all of the shares of First
Federal Common Stock exchanged for cash pursuant to the Merger Agreement
(approximately $2.9 million to $4.6 million), repay First Federal for expenses
paid by First Federal in connection with the Merger and Offering (approximately
$________), and the balance, if any, will become part of the Holding Company's
general funds for use in its business. On an interim basis, the proceeds will be
invested by the Holding Company primarily in short-term marketable securities.
The Holding Company reserves the right to use the proceeds in any manner
authorized by law.
31
<PAGE>
MARKET INFORMATION
The Holding Company has never issued capital stock . Consequently,
there is no existing market for the Holding Company Common Stock at this time.
Therefore, no assurance can be given that an established and liquid trading
market for the Holding Company Common Stock will develop. Following the Offering
the Holding Company Common Stock will be traded in the over-the-counter market.
Although it has no obligation to do so, Hoefer & Arnett intends to make a market
for the Holding Company Common Stock. Depending upon the volume of trading
activity in the common stock and subject to compliance with the applicable laws
and other regulatory requirements, Hoefer & Arnett will use its bests efforts to
encourage and assist market makers to establish and maintain a market for the
Holding Company Common Stock, although there can be no assurance that it will
succeed in doing so.
Prior to this offering, there have been no Units, Warrants or
Debentures outstanding. There is no public market for the Units, Warrants or
Debentures and it is unknown whether an active and liquid trading market for the
Units, Warrants or Debentures will develop. The Holding Company has no present
intention to have the Units, Warrants or Debentures authorized for quotation on
Nasdaq or any other interdealer quotation system or listed on any securities
exchange. Although there is no obligation to do so, the Agent has informed the
Holding Company that it intends to make a market for the Holding Company Common
Stock if the volume of trading and other market-making considerations justify
such an undertaking. If an active trading market does develop, there can be no
assurance that such a trading market will continue.
DIVIDEND POLICY
In the near term, 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 no cash dividends on First Federal Common Stock
previously sold in 1992. Accordingly, any investor who anticipates the need for
current cash dividends from an investment in Holding Company Common Stock 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.
Delaware law generally limits dividends of the Holding Company to an
amount equal to the excess of its net assets (the amount by which total assets
exceed total liabilities) over its paid-in capital or, if there is no such
excess, to its net profits for the current and immediately preceding fiscal
year.
32
<PAGE>
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. See "Recent Financial Data; Management's
Discussion of Recent Results" for a discussion of First Federal's financial
condition as of June 30, 1997.
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 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 First Federal 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
33
<PAGE>
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 First Federal'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 4.61% 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.
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, First Federal has developed several strategies to manage its
interest rate risk. Primarily, First Federal is currently selling all
newly-originated one-to four-family residential mortgage loans which are
saleable in the secondary market--most of which are long-term fixed-rate loans.
In addition, First Federal currently offers three-year fixed rate balloon loans
and other adjustable rate loans, and has implemented an active, diversified
short-term consumer lending program, giving First Federal an opportunity to
reprice its loans on a more frequent basis.
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
34
<PAGE>
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 First Federal.
It has been, and continues to be, an objective of First Federal's
Board of Directors and management to manage interest rate risk. First Federal's
asset/liability policy, established by the Board of Directors, dictates
acceptable limits on the amount of change in NPV given certain changes in
interest rates. See "- Asset/Liability Management."
Presented below, as of March 31, 1997, 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.
Acceptable Limits
Change in Established by Board of
Interest Rate Estimated At March 31, 1997 Directors
------------------- ---------
NPV
(Basis Points) $ Change % Change % Change
-------------- -------- -------- --------
(Dollars in Thousands)
+400 $6,356 $ (880) (12)% (75)%
+300 6,670 (566) (8) (50)
+200 6,941 (295) (4) (30)
+100 7,144 (92) (1) (15)
--- 7,236 --- --- ---
-100 7,156 (80) (1) (15)
-200 6,987 (249) (3) (30)
-300 6,961 (275) (4) (50)
-400 7,086 (150) (2) (75)
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,
First Federal would experience a 2% decrease in NPV in a declining rate
environment and a 8.0% decrease in a rising rate environment. As of March 31,
1997, an increase in interest rates of 200 basis points would have resulted in a
4% decrease in the present value of First Federal's assets, while a change in
the interest rates of negative 200 basis points would have resulted in a 3%
decrease in the present value of First Federal's assets.
35
<PAGE>
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.
36
<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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
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>
37
<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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing liabilities:
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 .................. 54,638 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.
38
<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
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on:
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
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on:
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>
39
<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>
40
<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, First Federal 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 First Federal's loan portfolio, offset in part by an
18 basis point increase in First Federal'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.
First Federal 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 First
Federal's loan loss exposure. The provision for loan losses is based on
management's periodic review of First Federal'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 First Federal's
allowance for estimated losses on loans. Such agencies may require First Federal
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. In
41
<PAGE>
addition, First Federal 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, First
Federal 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 First Federal'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 First Federal 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
First Federal's loan portfolio, offset in part by an increase in First Federal'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, First
Federal 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 First Federal 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
42
<PAGE>
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.
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 First Federal, 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 First Federal.
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, First
Federal 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
43
<PAGE>
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.
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)
<S> <C> <C>
Operating Activities:
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 First Federal. Prior to the conversion, First
Federal 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. First Federal'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.
44
<PAGE>
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 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 First Federal.
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 First Federal.
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 First Federal 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 First Federal.
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
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 First Federal.
In March 1997, the FASB issued statement of Financial Accounting
Standard No. 128 ("SFAS No. 128") "Earnings Per Share." Under SFAS No. 128,
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 First
Federal 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.
45
<PAGE>
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130 ("SFAS No. 130") "Reporting Comprehensive Income". This
statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Income tax effects must also
be shown. This statement is effective for fiscal years beginning after December
15, 1997. The adoption of SFAS No. 130 is not expected to have a material impact
on the results of operations or financial condition of First Federal.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 ("SFAS No. 131") "Disclosures about Segments of an Enterprise
and Related Information". SFAS No. 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This statement is
effective for financial statements for periods beginning after December 15,
1997. The adoption of SFAS No. 131 is not expected to have a material impact on
the results of operations or financial condition of First Federal.
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.
First Federal, is a federally chartered community-owned, independent
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 lesser extent other communities in the general area between
Houston, Austin and Dallas, Texas. First Federal also originates consumer,
construction, SBA partially guaranteed loans, small commercial real estate and
small to medium commercial business loans. New senior management was installed
in early 1991 to recapitalize and convert First Federal from a mutual savings
institution to a federal stock institution, which was completed in April, 1993.
Beginning in fiscal 1994, senior management of First Federal began its
transition to full-service retail banking in order to compete more effectively
and to increase the overall profitabibility of First Federal. In addition to its
core single-family lending business, since fiscal 1994 First Federal has
increased its focus on the following products:
o Commercial real estate lending
o Commercial business lending
o Small Business Administration loans (partially government
guaranteed)
o Home improvement loans
o Indirect automobile financing through dealers
o Credit-default insured "second chance" auto finance program
First Federal funds these lending products using a retail
deposit base gathered in its home market of Bryan-College Station as well as in
the surrounding counties of Burleson, Grimes, Leon, Madison, Robertson and
46
<PAGE>
Washington. First Federal currently operates two full service offices located in
Bryan (headquarters office) and adjacent College Station. In addition, a site
has been acquired for another full service branch in the northern portion of
Bryan. In order to expand its lending base First Federal has opened loan
production offices in Waco and Huntsville, Texas and has redefined its general
lending area to include the triangle between Dallas, Houston and Austin.
MARKET AREA
First Federal conducts operations through its offices located in
Bryan-College Station, Texas. Bryan-College Station is located in Brazos County,
Texas and is centrally located between Waco, Houston, and Austin, Texas. It is
the home of Texas A&M University, which has an enrollment of 43,0000 students
and is the third largest University in the nation. 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. According to a 1996 article in the Wall Street Journal, Bryan-College
Station is listed as one of the top metropolitan areas, expecting the greatest
population increase in the United States. Brazos County, home of Bryan-College
Station and Texas A&M University, was ranked recently by the American
Demographics as third among "The 10 Hottest Counties," in terms of "market
potential." Data from the U.S. Census estimates that the Bryan-College
metropolitan area should have a 20 percent growth rate from 1990 to the year
2000. 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. Which a substantial
portion of the loans originated for portfolio by First Federal are conventional
mortgage loans (i.e., not guaranteed or insured by agencies of the federal
government) which are secured by residential properties , 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 First Federal 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. As a result, the loan may be deemed to have higher risk
than secondary market conforming conventional mortgage loans. Loans which do not
comply with FNMA or FHLMC underwriting requirements are held in First Federal's
loan portfolio.
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
47
<PAGE>
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.
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<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)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
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 .47 317 .63 313 .69
------- ------ ------- ------ ------- ------
Net loans ................................. $49,579 95.48% $48,605 95.91% $43,127 95.01%
======= ====== ======= ====== ======= ======
</TABLE>
49
<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:
<S> <C> <C> <C> <C> <C> <C>
Real estate:
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 0.47 317 0.63 313 0.69
------- ------ -------- ------ ------- ------
Net loans.................................. $49,579 95.48% $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.
50
<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)
<S> <C> <C> <C>
Loans Funded:
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.
51
<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
-------------------- ------------------ -------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
-------- ------- ------- ------- ------- -------
(Dollars in Thousands)
Due During
Years Ended
September 30,
<S> <C> <C> <C> <C> <C> <C>
1997(1).............. $ 7,565 8.42$ $ 507 9.13% $4,365 9.18%
1998 and 1999........ 12,717 9.26 1,168 9.36 --- --
2000 and 2001........ 893 9.40 925 9.55 --- --
2002 to 2006......... 1,073 8.89 86 11.25 --- --
2006 to 2016......... 1,988 8.99 643 9.81 --- --
2017 and following... 6,660 8.98 846 8.75 --- --
------- ------ ------ --
$30,896 8.97% $4,175 9.36% $4,365 9.18%
======= ==== ====== ===== ====== ====
</TABLE>
<TABLE>
<CAPTION>
Consumer Business Total
----------------- ------------------ -------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- -------- --------
Due During
Years Ended
September 30,
<S> <C> <C> <C> <C> <C> <C>
1997(1).............. $ 1,585 8.60% $ 280 9.72% $14,302 8.72%
1998 and 1999........ 3,818 11.00 --- -- 17,703 9.64
2000 and 2001........ 6,397 13.28 79 9.96 8,294 12.41
2002 to 2006......... 71 11.80 86 10.81 1,316 9.33
2006 to 2016......... 21 8.00 150 11.00 2,802 9.28
2017 and following... -- -- -- -- 7,506 8.95
------- ----- -------
$11,892 11.91% $ 595 10.23% $51,923 9.70%
======= ===== ===== ===== ======= =====
</TABLE>
- -------------
(1) Includes demand loans, loans having no stated maturity and overdraft
loans.
52
<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. First Federal 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, First Federal 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. First Federal 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, First Federal has experienced an average of
only $22,300 in actual annual net charge-offs (excluding a $401,000 recovery in
a lawsuit filed by First Federal and received during the year ended September
30, 1994), 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 First Federal'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 First Federal's asset/liability policy, approximately
91.9% of First Federal's mortgage-backed securities carry adjustable interest
rates.
53
<PAGE>
The following table sets forth the book value of First Federal'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 First
Federal'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
Mortgage Corporation....... $ -- $ -- $ -- $ -- $ 5 $231 $636 $ 872
Federal National
Mortgage Association....... -- -- -- -- -- 95 325 420
----- ----- ----- ----- ----- ----- ---- ------
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.
Statement of Financial Accounting Standards No. 115 (SFAS No. 115),
"Accounting for Certain Investments in Debt and Equity Securities" 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. As of September 30, 1996, First Federal held $1.3 million and $1.0
million, respectively, of principal amount of mortgage-backed securities and
other securities which First Federal has classified as held-to-maturity. As of
such date, these securities had a market value of $1.3 million and $1.0 million,
respectively.
54
<PAGE>
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 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.
First Federal 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 First Federal ("Dealer Agreement"). In fiscal 1996, First Federal
expanded this lending by initiating a 100% credit default insured indirect
automobile loan origination program for sub-prime borrowers involving dealers in
First Federal's primary market area ("Second Chance Auto Loans"). First
Federal'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
First Federal'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 First Federal'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 First Federal'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 First Federal
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
55
<PAGE>
First Federal 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. First Federal will generally use the "NADA Official
Used Car Guide" to obtain a value to assign to a used vehicle for underwriting
purposes.
All automobile dealers enter into a "Dealer Agreement" with First
Federal. First Federal 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 First Federal. The reserve account is used
by First Federal 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
First Federal 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 First Federal'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 First Federal that they intend to live in the properties upon
completion of construction.
56
<PAGE>
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 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 First Federal's
principal market area. First Federal requires that any such appraisal be
performed by independent, professionally designated and qualified appraisers.
Senior management of First Federal 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
57
<PAGE>
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 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 project 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.
58
<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)
<S> <C> <C> <C> <C>
Residential Real Estate:
Number of loans..................... 29 4 1 34
Amount.............................. $1,918 $197 $ 18 $2,133
Percent of total residential real
estate loans(1)................... 6.21% 0.64% 0.05% 6.90%
Commercial Real Estate:
Number of loans..................... 2 -- -- 2
Amount.............................. $ 55 $ -- $ -- $ 55
Percent of total commercial real
estate loans...................... 1.32% --% --% 1.32%
Consumer:
Number of loans..................... 54 9 4 67
Amount.............................. $605 $ 103 $ 130 $ 838
Percent of total consumer loans..... 5.09% 0.87% 1.09% 7.05%
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>
- ----------
(1) Including loans held for sale.
59
<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.
September 30,
-------------------------------
1996 1995 1994
----- ------ ------
(Dollars in Thousands)
Non-accruing loans:
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%
===== ===== ======
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. 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.
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<PAGE>
The following table sets forth an analysis of First Federal's allowance
for loan losses.
Year Ended September 30,
---------------------------
1996 1995 1994
----- ----- ------
(Dollars in Thousands)
Balance at beginning of period.................... $ 317 $ 313 $ 339
Charge-offs (consumer loans)...................... (23) (27) (39)
Recoveries (consumer loans)....................... 5 4 414
Provisions for losses on loans.................... (52) 27 (401)
----- ----- -----
Balance at end of period.......................... $ 247 $ 317 $ 313
===== ===== =====
Ratio of net charge-offs (recoveries) during the
period to average loans outstanding during the
period............................................ .04% .05% (.87)%
===== ===== =====
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 80.33% $ 191 81.82%
Other......... 127 24.05 94 19.67 122 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, First Federal 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.
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<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>
SOURCES OF FUNDS
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, First Federal 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. 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
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<PAGE>
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%
======== ======= =======
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<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>
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%
======= ===== ======= ===== ======= =====
At September 30, scheduled maturities of certificates of deposit are as
follows.
</TABLE>
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
======= ======= ====== =======
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<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
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<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 First Federal to
attract and retain deposits depends on its ability to provide an investment
opportunity that satisfies the
67
<PAGE>
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, First Federal had a total of 50 employees,
including 12 part-time employees. First Federal'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.
First Federal maintains a database of depositor and borrower customer
information. The net book value of the data processing and computer equipment
and software utilized by First Federal 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.
68
<PAGE>
REGULATION
GENERAL
First Federal is a federally chartered thrift institution, the deposits
of which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, First Federal is subject to broad federal
regulation and oversight extending to all its operations. First Federal is a
member of the FHLB of Dallas and is subject to certain limited regulation by the
Board of Governors of the Federal Reserve System ("Federal Reserve Board"). As
the thrift institution holding company of First Federal, the Holding Company
also will be subjected to federal regulation and oversight. The purpose of the
regulation of the Holding Company and other holding companies is to protect
subsidiary thrift institutions. First Federal is a member of the Savings
Association Insurance Fund ("SAIF") and the deposits of First Federal are
insured by the FDIC. As a result, the FDIC has certain regulatory and
examination authority over First Federal.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
PROPOSED FEDERAL LEGISLATION
The United States Congress is considering legislation that would
require all federal thrift institutions, such as the Bank, to either convert to
a national bank or a state chartered financial institution by a specified date
to be determined. In addition, under the proposed legislation, the Company would
not be regulated as a thrift holding company, but rather as a bank holding
company or a financial services holding company, a new type of holding company
created by the proposed legislation. Certain aspects of the legislation remain
to be resolved and therefore no assurance can be given as to whether or in what
form the legislation will be enacted or its effect on the Company. However,
there can be no assurance that such legislation or any similar legislation, if
enacted, would not have a material adverse effect on the Company.
FEDERAL REGULATION OF THRIFT INSTITUTIONS
The OTS has extensive authority over the operations of thrift
institutions. As part of this authority, First Federal is required to file
periodic reports with the OTS and is subject to periodic examination by the OTS
and the FDIC. The last regular OTS examination of First Federal was as of June
17, 1996. Under agency scheduling guidelines, it is likely that another
examination will be initiated within 18 months of the last exam. When these
examinations are conducted by the OTS and the FDIC, the examiners may require
First Federal to provide for higher general or specific loan loss reserves. All
thrift institutions are subject to a semi-annual assessment, based upon the
thrift institution's total assets, to fund the operations of the OTS. First
Federal's OTS assessment for the expense of examinations for the fiscal year
ended September 30, 1996, was $20,876.
The OTS also has extensive enforcement authority over all thrift
institutions and their holding companies, including First Federal and the
Holding Company. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of First
Federal is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no thrift institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by
69
<PAGE>
federal associations in loans secured by non-residential real property may not
exceed 400% of total capital, except with approval of the OTS. Federal thrift
institutions are also generally authorized to branch nationwide. First Federal
is in compliance with the noted restrictions.
First Federal's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At September 30, 1996, First Federal's legal
lending limit under this restriction was $647,000. First Federal is in
compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action. First Federal has adopted these OTS
guidelines.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
First Federal is a member of the SAIF, which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against thrift institutions, after giving the OTS an opportunity to take such
action, and may terminate the deposit insurance if it determines that the
institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 8%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
First Federal was a "well-capitalized" institution as of September 30,
1996.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF
members and SAIF members ranged from .23% to .31% of deposits. As is the case
with the SAIF, the FDIC is authorized to adjust the insurance premium rates for
banks that are insured by the BIF of the FDIC in order to maintain the reserve
ratio of the BIF at 1.25% of BIF insured deposits. As a result of the BIF
reaching its statutory reserve ratio the FDIC revised the premium schedule for
BIF insured institutions to provide a range of .04% to .31% of deposits. The
revisions
70
<PAGE>
became effective in the third quarter of 1995. In addition, the BIF rates were
further revised, effective January 1996, to provide a range of 0% to .27%. The
SAIF rates, however, were not adjusted. At the time the FDIC revised the BIF
premium schedule, it noted that, absent legislative action (as discussed below),
the SAIF would not attain its designated reserve ratio until the year 2002. As a
result, SAIF insured members would continue to be generally subject to higher
deposit insurance premiums than BIF insured institutions until, all things being
equal, the SAIF attained its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation required a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provided for the merger of the BIF and the SAIF on January 1, 1999
if no thrift institutions then exist. The special assessment rate was
established at .657% of deposits by the FDIC and the resulting assessment of
$333,000 ($220,000 net of tax effect) accrued by First Federal as of September
30, 1996 and paid by First Federal in November, 1996. This special assessment
significantly increased noninterest expense and adversely affected First
Federal's results of operations for the year ended September 30, 1996. As a
result of the special assessment, as of January 1, 1997, First Federal's deposit
insurance premiums were reduced to .065% based upon its current risk
classification and the new assessment schedule for SAIF insured institutions.
These premiums are subject to change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on thrift institutions was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment will be limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no thrift institution continues to exist, thereby imposing a greater burden
on SAIF member institutions such as First Federal. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as
SAIF-member institutions. The rates established by the FDIC to implement this
requirement for all FDIC-insured institutions is 6.5 basis points assessment on
SAIF deposits and 1.3 basis points on BIF deposits until BIF insured
institutions participate fully in the assessment. At such time the assessment is
anticipated to be about 2.4 basis points for all FDIC-insured institutions. The
rates may be revised in future periods due to changes in the BIF and SAIF
assessment base.
REGULATORY CAPITAL REQUIREMENTS
Federally insured thrift institutions, such as First Federal, are
required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such thrift institutions. These capital requirements
must be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement.
The OTS regulations establish special capitalization requirements for
thrift institutions that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities
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permissible for national banks or engaged in certain other activities solely as
agent for its customers are "includable" subsidiaries that are consolidated for
capital purposes in proportion to the association's level of ownership. For
excludable subsidiaries the debt and equity investments in such subsidiaries are
deducted from assets and capital. First Federal was not subject to any such
deduction at September 30, 1996.
At September 30, 1996, First Federal had tangible capital of $4.3
million, or 7.5% of adjusted total assets, which is approximately $3.4 million
above the minimum requirement of 1.5% of adjusted total assets in effect on that
date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a thrift institution must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At September 30, 1996,
First Federal had no intangibles which were subject to these tests.
At September 30, 1996, First Federal had core capital equal to $4.3
million, or 7.5% of adjusted total assets, which is $2.6 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires thrift institutions to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a thrift institution to maintain an additional
amount of total capital to account for concentration of credit risk and the risk
of non-traditional activities. At September 30, 1996 First Federal had no
capital instruments that qualify as supplementary capital and $247,000 of
general loss reserves, which was less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. First Federal had no such
exclusions from capital and assets at September 30, 1996.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS regulations also require that every thrift institution with more
than normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a thrift institution, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which thrift institutions may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any thrift institution with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise.
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On September 30, 1996, First Federal had total capital of $4.6 million
and risk-weighted assets of $43.7 million, or total capital of 10.6% of
risk-weighted assets. This amount was $1.2 million above the 8% requirement in
effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against thrift institutions that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any thrift institution that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
thrift institution, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized.
At September 30, 1996, First Federal fell within the regulatory
definition of "well capitalized".
Any undercapitalized association is also subject to the general
enforcement authority of the OTS and the FDIC, including the appointment of a
conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on First
Federal or the Holding Company may have a substantial adverse effect on the
Holding Company's operations and profitability and the value of the Holding
Company Common Stock. As stated above, at September 30, 1996, First Federal was
"well-capitalized".
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
OTS regulations impose various restrictions or requirements on
associations with respect to their ability to make distributions of capital,
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account. OTS regulations also prohibit
an association from declaring or paying any dividends or from repurchasing any
of its stock if, as a result, the regulatory capital of the association would be
reduced below the amount required to be maintained for the liquidation account
established in connection with its mutual to stock conversion.
Generally thrift institutions, such as First Federal, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100%
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of net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. First Federal has
not been so notified and therefore may pay dividends in accordance with this
general authority.
Thrift institutions proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution. Thrift
institutions that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain OTS
approval prior to making such distribution. The OTS may object to the
distribution during that 30-day notice period based on safety and soundness
concerns. See " -- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a thrift institution may make a
capital distribution restrictions. Under the proposal a thrift institution may
make a capital distribution without notice to the OTS provided that it has a
CAMEL 1 or 2 rating, is not of supervisory concern, and would remain adequately
capitalized (as defined in the OTS prompt corrective action regulations)
following the proposed distribution. Thrift institutions that would remain
adequately capitalized following the proposed distribution but do not meet the
other noted requirements must notify the OTS 30 days prior to declaring a
capital distribution. The OTS stated it will generally regard as permissible
that amount of capital distributions that do not exceed 50% of the institution's
excess regulatory capital plus net income to date during the calendar year. A
thrift institution may not make a capital distribution without prior approval of
the OTS and the FDIC if it is under capitalized before, or as a result of, such
a distribution. As under the current rule, the OTS may object to a capital
distribution if it would constitute an unsafe or unsound practice. No absolute
assurance may be given as to whether or in what form the regulations may be
adopted.
First Federal is not aware at this time of any restriction on dividends
that could be imposed upon it by the OTS or the FDIC.
LIQUIDITY
All thrift institutions, including First Federal, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what First Federal
includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
thrift institutions. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At September 30, 1996, First Federal was in compliance with
both requirements, with an overall liquid asset ratio of 8.27% and a short-term
liquid assets ratio of 8.27%.
ACCOUNTING
An OTS policy statement applicable to all thrift institutions clarifies
and re-emphasizes that the investment activities of a thrift institution must be
in compliance with approved and documented investment policies and strategies,
and must be accounted for in accordance with GAAP. Under the policy statement,
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management must support its classification of and accounting for loans (i.e.,
whether held for investment, sale or trading) and securities (held-to-maturity
available-for-sale or trading) with appropriate documentation. First Federal is
in compliance with these amended rules.
The OTS accounting regulations, which may be made more stringent than
GAAP by the OTS, require that transactions be reported in a manner that best
reflects their underlying economic substance and inherent risk and that
financial reports must incorporate any other accounting regulations or orders
prescribed by the OTS.
QUALIFIED THRIFT LENDER TEST
All thrift institutions, including First Federal are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a thrift institution to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the thrift institution may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under
either test, such assets primarily consist of residential housing related loans
and investments. At September 30, 1996, First Federal met the test and has
always met the test since its effectiveness.
Any thrift institution that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a thrift institution and a national bank, and it is limited
to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of First
Federal, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by First
Federal. An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, First Federal may be required to devote additional funds
for investment and lending in its local community.
First Federal was examined for CRA compliance in 1996 and received a
rating of satisfactory.
TRANSACTIONS WITH AFFILIATES
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Generally, transactions between a thrift institution or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the association's capital. Affiliates of First Federal include the Holding
Company and any company which is under common control with First Federal. In
addition, a thrift institution may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. First Federal's subsidiaries are not deemed affiliates;
however, the OTS has the discretion to treat subsidiaries of thrift institutions
as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
HOLDING COMPANY REGULATION
The Holding Company will be an independent, unitary thrift institution
holding company subject to regulatory oversight by the OTS. As such, the Holding
Company is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Holding Company and its non-thrift institution subsidiaries
which permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary thrift institution.
As a unitary thrift institution holding company, the Holding Company
generally is not subject to activity restrictions. If the Holding Company
acquires control of another thrift institution as a separate subsidiary, it
would become a multiple thrift institution holding company, and the activities
of the Holding Company and any of its subsidiaries (other than First Federal or
any thrift institution) would become subject to activity restrictions comparable
to those applicable to bank holding companies unless such other associations
each qualify as a QTL and were acquired in a supervisory acquisition.
If First Federal fails the QTL test, the Holding Company must obtain
the approval of the OTS prior to continuing after such failure, directly or
through its other subsidiaries, any business activity other than those approved
for multiple thrift institution holding companies or their subsidiaries. In
addition, within one year of such failure the Holding Company must register as,
and will become subject to, the restrictions applicable to bank holding
companies.
The activities authorized for a bank holding company are more limited
than are the activities authorized for a unitary or multiple thrift institution
holding company. See "--Qualified Thrift Lender Test."
The Holding Company must obtain approval from the OTS before acquiring
control of any SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple thrift institution holding company
controlling thrift institutions in more than one state. However, such interstate
acquisitions are permitted based on specific state authorization or in a
supervisory acquisition of a failing thrift institution.
FEDERAL SECURITIES LAW
The stock of the Holding Company will be registered with the Securities
and Exchange Commission (the "SEC") under the Exchange Act. The Holding Company
will be subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Holding Company stock held by persons who are affiliates (generally
officers, directors and principal shareholders) of the Holding Company may not
be resold without registration or unless sold in accordance with
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certain resale restrictions set forth under Rule 144 of the Securities Act. If
the Holding Company meets specified current public information requirements,
each affiliate of the Holding Company is able to sell in the public market,
without registration, a limited number of shares in any three-month period.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to
maintain noninterest bearing reserves at specified levels against their
transaction accounts (primarily checking and NOW checking accounts). At
September 30, 1996, First Federal was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "-- Liquidity."
Thrift institutions are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM
First Federal is a member of the FHLB of Dallas, which is one of 12
regional FHLBs, that administers the home financing credit function of thrift
institutions. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, First Federal is required to purchase and maintain stock
in the FHLB of Dallas. At September 30, 1996, First Federal had $845,000 in FHLB
stock, which was in compliance with this requirement. In past years, First
Federal has received substantial dividends on its FHLB stock. Over the past five
fiscal years such dividends have averaged 4.80% and were 5.96% for fiscal year
1996.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled thrift institutions and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of First Federal's FHLB stock may result in a corresponding
reduction in First Federal's capital.
For the year ended September 30, 1996, dividends paid by the FHLB of
Dallas to First Federal totaled $49,279, which constitute a $969 increase over
the amount of dividends received in fiscal year 1995. The $12,359 dividend
received for the quarter ended September 30, 1996 reflects an annualized rate of
5.85%, or 0.37% below the rate for fiscal 1995.
FEDERAL AND STATE TAXATION
Thrift institutions such as First Federal that meet certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), are
permitted to establish reserves for bad debts and to make annual additions
thereto which may, within specified formula limits, be taken as a deduction in
computing taxable income for federal income tax purposes. The amount of the bad
debt reserve deduction is computed under the experience method.
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Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the thrift institution over a period of years.
For the years beginning before December 1, 1996, a percentage of
specially computed taxable income could be used to compute a thrift
institution's bad debt reserve deduction under the percentage of taxable income
method (the "percentage bad debt deduction").
To the extent earnings appropriated to a thrift institution's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceeded the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of September 30, 1996, First Federal's Excess accumulated through
September 30, 1988 for tax purposes totaled approximately $643,000.
With the passage of the Small Business Job Protection Act of 1996 on
August 20, 1996, the availability of the percentage bad debt deduction was
repealed for tax years beginning after December 1, 1995. For the first tax year
beginning after December 31, 1995 and thereafter, thrift institutions, such as
First Federal will be required to utilize the experience method referred to
above in computing the tax bad debt deduction for qualifying and nonqualifying
loans.
In addition, thrift institutions such as First Federal are required to
recapture the excess of the tax bad debt reserves for qualifying and
nonqualifying loans as of the end of the last tax year beginning before January
1, 1996 over the balance of those reserves as of the end of the "base year" into
taxable income evenly over a six year period beginning with the first tax year
that begins after December 31, 1995. The base year is the last tax year
beginning before January 1, 1988. As of September 30, 1996, the balance of the
tax bad debt reserves to be recaptured under the new law totaled approximately
$350,000.
If the institution meets the "Residential Loan Requirement" explained
below, the reserve recapture can be deferred for the first or second tax year
beginning after December 31, 1995, or both. However, in any case, the six year
reserve recapture period must begin no later than the third tax year beginning
after December 31, 1995.
The Residential Loan Requirement is met for a particular year if the
principal amount of home purchase and improvement loans originated in that year
exceeds the "base amount." The base amount is the average of such lending
activity for the six most recent tax years beginning before January 1, 1996. For
purposes of determining this average, the institution can elect to eliminate the
years with the highest and lowest lending activity from the calculation.
In addition to the regular income tax, corporations, including thrift
institutions such as First Federal, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including thrift institutions such as
First Federal, are also subject to an environmental tax equal to 0.12% of the
excess of alternative minimum taxable income for the taxable year (determined
without regard to net operating losses and the deduction for the environmental
tax) over $2 million.
First Federal and its consolidated subsidiary have been audited by the
IRS with respect to consolidated federal income tax returns through September
30, 1987. With respect to years examined by the IRS, either all deficiencies
have been satisfied or sufficient reserves have been established to satisfy
asserted deficiencies. In the
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opinion of management, any examination of still open returns (including returns
of subsidiaries and predecessors of, or entities merged into, First Federal)
would not result in a deficiency which could have a material adverse effect on
the financial condition of First Federal and its consolidated subsidiaries.
State Taxation. The State of Texas does not have a corporate income
tax, but it does have a corporate franchise tax to which First Federal is
subject.
The tax for the year 1992 (which was paid by First Federal for the
first time prior to May 15, 1992), is the higher of 0.25% of taxable capital
(usually the amount of paid in capital plus retained earnings) or 4.5% of "net
taxable earned surplus." "Net taxable earned surplus" is net income for federal
income tax purposes increased by the compensation of directors and executive
officers. Net income cannot be reduced by net operating loss carryforwards from
years prior to 1991, and operating loss carry over are limited to five years.
Delaware Taxation. As a Delaware holding company, the Holding Company
is exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Holding Company
is also subject to an annual franchise tax imposed by the State of Delaware.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain material federal
income tax considerations relevant to the acquisition, ownership and disposition
of the Units, Debentures and Warrants by initial holders acquiring Units,
Debentures and Warrants at original issue for cash as part of the initial
offering. This does not purport to be a complete analysis or listing of all
potential tax considerations that may be relevant to initial holders, and does
not purport to discuss tax considerations that may be relevant to subsequent
holders (which considerations may differ from those described herein) of the
Units, Debentures, or Warrants. The discussion does not include the special
rules that may apply to certain holders (including insurance companies,
tax-exempt organizations, financial institutions or broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States), and does not address the tax consequences of the laws of any state,
locality or foreign jurisdiction. The discussion is based upon currently
existing provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), existing and proposed Treasury regulations promulgated thereunder, and
current practice, administrative rulings, and court decisions, all of which are
subject to change and any such change could affect the continuing validity of
this discussion. The Holding Company has not sought and will not seek any
rulings from the Internal Revenue Service ("IRS") with respect to the positions
of the Holding Company discussed below. There can be no assurance that the IRS
will not take a different position concerning the tax consequences of the
acquisition, ownership or disposition of the Units, Debentures or Warrants or
that any such IRS position would not be sustained. This discussion applies only
to a holder that will hold Units, Debentures and Warrants as "capital assets"
within the meaning of Section 1221 of the Code.
EACH PURCHASER IS URGED TO CONSULT HIS OWN TAX ADVISER AS TO THE
PARTICULAR TAX CONSEQUENCES OF ACQUIRING, OWNING AND DISPOSING OF THE UNITS,
DEBENTURES AND WARRANTS, INCLUDING THE APPLICABILITY AND EFFECT OF ANY FEDERAL,
STATE OR FOREIGN INCOME AND OTHER TAX LAWS.
UNITED STATES FEDERAL INCOME TAXATION OF U.S. HOLDERS
This section discusses certain rules applicable to a holder of
Debentures, Warrants and shares of stock received upon exercise of the Warrants
("Warrant Shares") that is a U.S. Holder. For purposes of this discussion, a
"U.S. Holder" means a holder of Debentures, Warrants or Warrant Shares who or
which is (i) an individual who is a citizen or resident of the United States for
U.S. federal income tax purposes, (ii) a corporation or other entity taxable as
a corporation created or organized in the United States or under the laws of the
United States or any political subdivision thereof (including the States and the
District of Columbia), (iii) any trust if a court within the
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United States is able to exercise primary supervision over the administration of
such trust and one or more U.S. fiduciaries have the authority to control all
substantial decisions of such trust, or (iv) a person whose income or gain with
respect to a Debenture, Warrant or Warrant Share is otherwise subject to U.S.
federal income taxation on a net income basis.
ALLOCATION OF ISSUE PRICE
For federal income tax purposes, each Unit will be treated as an
investment unit, consisting of a Debenture and Warrant. The issue price of a
Unit will be the first price at which a substantial amount of the Units are sold
to purchasers for money (excluding sales to bond houses, brokers, or similar
persons acting in the capacity of an underwriter, placement agent or
wholesaler).
The issue price of a Unit has been allocated between the Debenture and
the Warrant, $___.__ to each Debenture and $.__ to the Warrants associated with
each Debenture, based on the Holding Company's best judgement of the relative
fair market values of each such component of the Units on the issue date. This
allocation will be used to determine the holders' income tax basis in the
Warrants and the issue price of the Debentures, as discussed below. The Holding
Company's allocation is not binding on the IRS, which may challenge such
allocation. A holder of a Unit is bound by the Holding Company's allocation
unless the holder discloses a different allocation on a statement attached to
the holder's timely filed federal income tax return for the holder's taxable
year that includes the acquisition date of the Unit.
TAX TREATMENT OF THE DEBENTURES
Original Issue Discount. The amount of original issue discount ("OID")
on a Debenture is the excess of the stated redemption price at maturity over its
issue price. The "issue price" of each Debenture will be that portion of the
issue price of the investment unit allocated to the Debenture, as described
above. The "stated redemption price at maturity" of each Debenture will include
all payments to be made in respect thereof, including payments of principal, but
not including (i) "qualified stated interest" (defined generally as stated
interest that is unconditionally payable in cash or property (other than debt
instruments of the issuer) at least annually at a single fixed rate that
appropriately takes into account the length of intervals between payments) and
(ii) payments subject to remote or incidental contingencies (which include
certain redemption premiums).
If the OID is de minimis, then it is deemed to be zero, and a holder of
the Debenture will recognize income on the Debenture in accordance with such
holder's method of accounting (cash or accrual). If the OID is more than de
minimis, each holder (whether a cash or accrual method taxpayer) will be
required to include in income such OID as it accrues, in advance of the receipt
of some or all of the related cash payments. The OID will be de minimis if the
amount by which the stated redemption price at maturity exceeds the issue price
of the Debenture is less than 0.0025 multiplied by the product of the stated
redemption price at maturity and the number of complete years to maturity from
the issue date.
Based on the Holding Company's best judgement as to the portion of the
issue price of a Unit that is allocable to each Warrant, the Holding Company
believes that OID associated with each Debenture will be de minimis and
therefore will be deemed to be zero. As such, holders of Debentures will be
required to include qualified stated interest on the Debentures in gross income
as ordinary income in accordance with their respective methods of accounting for
federal income tax purposes. In addition, each holder of a Debenture must
include such de minimis OID in gross income as stated principal payments are
made.
As stated above, the IRS may not agree with the Holding Company's
allocation of the issue price of a Unit. If the IRS successfully challenges the
Holding Company's allocation of the issue price of a Unit and if the OID is
determined to be more than de minimis, the amount of OID includable in income by
the initial holder of a Debenture is the sum of the "daily portions" of OID with
respect to the Debenture for each day during the taxable
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year or portion of the taxable year on which such holder held such Debenture
("accrued OID"). The daily portion is determined by allocating to each day in
any accrual period a ratable portion of the OID allocable to that accrual
period. The amount of OID allocable to any accrual period other than the initial
short accrual period and the final accrual period is an amount equal to the
excess of (i) the product of a Debenture's adjusted issue price at the beginning
of such accrual period and its yield to maturity (determined on the basis of
compounding at the close of each accrual period and properly adjusted for the
length of the accrual period) over (ii) the amount of any qualified stated
interest payments allocable to such accrual period. The "yield to maturity" is
the discount rate that, when applied to all payments under a Debenture, results
in a present value equal to the issue price. The amount of OID allocable to the
final accrual period is the difference between the amount payable at maturity
(other than qualified stated interest) and the adjusted issue price of the
Debenture at the beginning of the final accrual period. The amount of OID
allocable to the initial short accrual period may be computed under any
reasonable method. The adjusted issue price of the Debenture at the start of any
accrual period is equal to its issue price increased by the accrued OID for each
prior accrual period.
Sale, Retirement or Other Taxable Disposition. A holder of a Debenture
will recognize gain or loss upon the sale, retirement or other taxable
disposition of such Debenture. Such gain or loss will generally be equal to the
difference between (i) the amount of cash and the fair market value of property
received for such Debenture (other than amounts representing accrued but unpaid
stated interest) and (ii) the holder's adjusted tax basis in the Debenture. The
adjusted tax basis of a Debenture in the hands of an original holder generally
will be equal to the Debenture's issue price, increased by the amount of OID, if
any, on the Debenture that is previously includable in the holder's income
pursuant to these rules. Such gain or loss generally will be capital gain or
loss.
TAX TREATMENT OF THE WARRANTS
A holder of a Warrant will recognize gain or loss upon the sale or
other taxable disposition of a Warrant in an amount equal of the difference
between the amount of cash and fair market value of property received and the
holder's adjusted tax basis in the Warrant. An initial holder's tax basis in a
Warrant will be the portion of the initial offering price of a Unit allocable to
a Warrant, as described above, adjusted as described below. Such gain or loss
generally will be capital gain or loss if the gain or loss from a taxable
disposition of Holding Company Common Stock received upon exercise of a Warrant
would be capital gain or loss.
In general, upon redemption or repurchase by the Holding Company of the
Warrants, a holder will recognize capital gain or loss in an amount equal to the
difference between the amount realized in the redemption or repurchase and the
holder's adjusted tax basis in such Warrants.
The exercise of a Warrant will not result in a taxable event to the
holder of a Warrant (except with respect to the receipt of cash in lieu of a
fractional share of Holding Company Common Stock). The receipt of cash in lieu
of a fractional share of Holding Company Common Stock will be taxable as if the
fractional share has been issued and then redeemed for cash. As a result, a
holder would recognize gain or loss in an amount equal to the difference between
the amount of cash received for the fractional share and the holder's tax basis
(described below) in the fractional share.
A holder's federal income tax basis in the Holding Company Common Stock
received upon exercise of a Warrant pursuant to the payment of the exercise
price (including any fractional share interest) will be equal to the sum of the
holder's federal income tax basis in the Warrant immediately prior to exercise
plus the amount of any cash paid upon exercise. The holder's holding period for
the Holding Company Common Stock (including any fractional share interest) would
begin on the day after the date of exercise.
Upon the expiration of an unexercised Warrant, a holder will generally
recognize a capital loss equal to the adjusted tax basis of such Warrant.
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An adjustment in the exercise price or conversion ratio with respect to
the Warrants may, in certain circumstances, result in constructive distributions
to the holders of the Warrants which could be taxable as dividends to the
holders under section 305 of the Code. A holder's federal income tax basis in a
Warrant would generally be increased by the amount of any such dividend.
BACKUP WITHHOLDING
Under certain circumstances, the failure of a holder of a Debenture to
provide sufficient information to establish that such holder is exempt form the
backup withholding provisions of the Code will subject such holder to backup
withholding at a rate of 31 percent. In general, backup withholding applies if a
holder fails to furnish a correct taxpayer identification number, fails to
report dividend and interest income in full, or fails to certify that such
holder has provided a correct taxpayer identification number and that the holder
is not subject to withholding. An individual's taxpayer identification number is
such person's Social Security number.
Any amount withheld from a payment to a holder under the backup
withholding rules is allowable as a credit against such holder's U.S. federal
income tax liability, provided that the required information is furnished to the
IRS. Certain holders (including, among others, corporations and foreign
individuals who comply with certain certification requirements) are not subject
to backup withholding. Holders should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption.
MANAGEMENT OF THE HOLDING COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Holding Company is currently identical to
the Board of Directors of First Federal. See "Management of First Federal -
Directors." Directors of the Holding Company will serve one-year terms. The
Holding Company currently intends to compensate its directors for their services
on the Holding Company Board.
The executive officers of the Holding Company are elected annually and
hold office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The executive
officers of the Holding Company are the identical to the executive officers of
First Federal. See "Management of First Federal -Executive Officers." It is not
currently anticipated that the executive officers of the Holding Company will
receive any remuneration in their capacity as Holding Company executive
officers. For information regarding compensation of directors and executive
officers of First Federal, see "Management of First Federal - Meetings and
Committees of the Board of Directors of First Federal" and "- Executive
Compensation."
INDEMNIFICATION
The certificate of incorporation of the Holding Company provides that a
director or officer of the Holding Company shall be indemnified by the Holding
Company to the fullest extent authorized by the General Corporation Law of the
State of Delaware against all expenses, liability and loss reasonably incurred
or suffered by such person in connection with his activities as a director of
officer or as a director or officer of another company, if the director or
officer held such position at the request of the Holding Company. Delaware law
requires that such director, officer employee or agent, in order to be
indemnified, must have acted in good faith and in a manner reasonably believed
to be not opposed to the best interests of the Holding Company and, with respect
to any criminal action or proceeding, did not have reasonable cause to believe
his conduct was unlawful.
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The certificate of incorporation of the Holding Company and Delaware
law also provide that the indemnification provisions of such certificate and the
statute are not exclusive of any other right which a person seeking
indemnification may have or later acquire under any statute, provision of the
certificate of incorporation or bylaws of the Holding Company, agreement, vote
of shareholders or disinterested directors, or otherwise.
These provisions may have the effect of deterring shareholder
derivative actions, since the Holding Company may ultimately be responsible for
expenses for both parties to the action.
In addition, the certificate of incorporation of the Holding Company
and Delaware law also provide that the Holding Company may maintain insurance,
at its expense, to protect itself and any director, officer, employee or agent
of the Holding Company or another corporation, partnership, joint venture, trust
or other enterprise against any expense, liability or loss, whether or not the
Holding Company has the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law. The Holding
Company intends to obtain such insurance.
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MANAGEMENT OF FIRST FEDERAL
DIRECTORS
The direction and control of First Federal is vested in its Board of
Directors. The Board of Directors of First Federal currently consists of ten
members. The directors are divided into three classes, with approximately
one-third of the directors elected at each annual meeting of First Federal.
Because the Holding Company will, after the Merger, own all of the issued and
outstanding shares of capital stock of First Federal, the Holding Company
through its directors will elect the directors of First Federal in the future.
The following table sets forth certain information as of December 31,
1996 regarding the directors of First Federal.
<TABLE>
<CAPTION>
Position(s) Held Director Term
Name With First Federal Age Since(1) Expires
--------------------- ------------------------ --- --------- ----------
<S> <C> <C> <C> <C>
J. Stanley Stephen Director, President/ 64 1991 1997
Chief Executive Officer
Ken Hayes Director 57 1993 1997
Charles Neeley Director, Secretary/ 67 1993 1997
Treasurer
George Koenig Director, Executive 52 1996 1997
Vice-President
Ernest A. Wentrcek Vice Chairman of the Board 68 1965 1998
Robert H. Conaway Director 43 1995 1998
Richard L. Peacock Chairman of the Board 78 1965 1999
Jack W. Lester, Jr. Director, Assistant Secretary/ 56 1992 1999
Treasurer
Phil Hobson(2) Director 64 1993 1999
J. Roland Ruffino Director 46 1995 1999
</TABLE>
- ----------
(1) Includes service on First Federal's Board of Directors prior
to its conversion to a stock institution in 1993.
(2) Director Hobson intends to resign from the Board of Directors
prior to the closing of the Merger.
The principal occupation of each Director of First Federal 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.
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
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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 First Federal to profitability. In addition,
under Mr. Stephen's direction, First Federal has now expanded its home,
consumer, commercial, 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. In
addition, First Federal has recently acquired a site for a new full-service
banking facility to be located at a key intersection in the northern portion of
Bryan, which is currently not served by any nearby banking facility. 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 growth of First Federal.
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.
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.
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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 retail meat market 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 First Federal. Mr. Koenig was previously employed as an operating
officer with a local financial institution located in Bryan, Texas.
EXECUTIVE OFFICERS
Each of the executive officers of First Federal will retain his or her
office in First Federal after the Merger. Officers are elected annually by the
Board of Directors of First Federal. There are no arrangements or understandings
between the officers and any other person pursuant to which such officer was
selected.
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.
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The Personnel Committee is currently composed of Directors Stephen,
Neelley, Peacock (Chairman), Wentrcek and Hayes and Officer Hegar. The Committee
meets as needed to review staffing, compensation 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 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, Koenig and Stephen, along with Advisory
Director, Arthur Davila. 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 $225.00 for each board meeting attended and
$75.00 for each Loan Committee meeting attended.
EXECUTIVE OFFICERS OF FIRST FEDERAL WHO ARE NOT DIRECTORS
The following information as to the business experience during the past
five years is supplied with respect to each executive officer of the Bank. There
are no arrangements or understandings between the persons named and any other
person pursuant to which such officers were selected.
Mary L. Hegar. Ms. Hegar joined First Federal in 1977 and became
Assistant Secretary/Treasurer in 1987 and was promoted to Senior Vice
President/Financial and Regulatory in January 1993. Ms. Hegar primarily
coordinates the accounting functions of the Bank, monitors First Federal's
investments and is responsible for regulatory reporting. Ms. Hegar is a member
of the Asset/Liability and Personnel Committee.
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
$100,000 during the fiscal year ended September 30, 1996. Mr. Stephen
voluntarily reduced his salary in 1995 and 1996.
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<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------------------------
Long Term Compensation
----------------------
Annual Compensation Awards Payout
-----------------------------------------------------------------------------
RESTRICTED
OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
Name and Principal Salary Bonus COMPENSATION AWARD(S) SARS PAYOUT COMPENSATION
Position Year ($) ($) ($) ($) (#) ($) ($)
- --------------------------------------------------------------------------------------------------------------------------
<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>
The following table sets forth information regarding the number and value
of stock options at December 31, 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 First
Federal's Chief Executive Officer based upon the last available sale
price of $11.00 per share at March 31, 1996 and an exercise price of
$10.00 per share.
EMPLOYMENT AGREEMENTS
First Federal has entered into employment agreements with J. Stanley
Stephen, George Koenig, Mary L. Hegar and Kay Watson. The employment agreements
are designed to assist First Federal in maintaining a stable and competent
management team after the Merger. The continued success of First Federal 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.
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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 First Federal, 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 First Federal
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.
First Federal 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 First
Federal 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 First Federal at a fee of $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 First Federal 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.
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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.
Average Annual Years of Service
------------------
Compensation 10 20 30 40
------------ -- -- -- --
$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
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.
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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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(1) the Merger Offering Offering
---------------- ---------- ---------- ------------ ---------- ---------
DIRECTORS
<S> <C> <C> <C> <C> <C>
Richard L. Peacock 3,868 1.53 8,288 2.76% 2.37%
Ernest A. Wentrcek 3,868 1.53 8,288 2.76 2.37
Jack W. Lester 13,707 5.42 10,650 3.55 3.04
Ken Hayes 1,781 .70 570 .19 .16
Phil Hobson 24,705 9.76 -- -- --
Charles Neelley 22,915 9.05 53,405 17.82 15.27
J. Roland Ruffino 6,765 2.67 5,800 1.93 1.66
Robert H. Conaway 18,135 7.17 10,000 3.34 2.86
George Koenig 56 .02 140 .05 .04
J. Stanley Stephen 7,771 3.07 9,070 3.03 2.59
EXECUTIVE OFFICERS
Mary L. Hegar 750 .30 1,875 .63 .54
Directors and executive
officers
of First Federal as a group 104,321 41.22 108,086 36.06 30.90
</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.
(2) Director Hobson intends to resign from the Board of Directors prior to
the closing of the Merger.
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DESCRIPTION OF CAPITAL STOCK
HOLDING COMPANY CAPITAL STOCK
The 4,000,000 shares of capital stock authorized by the Holding Company
certificate of incorporation are divided into two classes, consisting of
3,000,000 shares of Holding Company Common Stock (par value $.01 per share) and
1,000,000 shares of serial preferred stock (par value $.01 per share). The
Holding Company currently expects to issue between 150,000 shares and 200,000
shares of Holding Company Common Stock in the Offering and an additional 150,000
shares in exchange for First Federal Common Stock as part of the Merger and no
shares of serial preferred stock. The aggregate par value of the issued shares
will constitute the capital account of the Holding Company on a consolidated
basis. Upon issuance, the shares will not be subject to further sale or
assessment. The balance of the purchase price of Holding Company Common Stock,
less expenses of the Offering, will be reflected as paid-in capital on a
consolidated basis. See "Capitalization."
Each share of the Holding Company Common Stock will have the same
relative rights and will be identical in all respects with each other share of
the Holding Company Common Stock. THE HOLDING COMPANY COMMON STOCK WILL
REPRESENT NON-WITHDRAWABLE CAPITAL, WILL NOT BE OF AN INSURABLE TYPE AND WILL
NOT BE INSURED OR GUARANTEED BY THE FDIC.
Under Delaware law, the holders of the Holding Company Common Stock
will possess exclusive voting power in the Holding Company. Each shareholder
will be entitled to one vote for each share held on all matters voted upon by
shareholders, subject to the limitation discussed under "Restrictions on
Acquisitions of Stock and Related Takeover Defensive Provisions - Provisions of
the Holding Company's Certificate of Incorporation and Bylaws - Limitation on
Voting Rights." If the Holding Company issues preferred stock subsequent to the
Conversion, holders of the preferred stock may also possess voting rights.
Liquidation or Dissolution. In the unlikely event of the liquidation or
dissolution of the Holding Company and First Federal, the holders of the Holding
Company Common Stock will be entitled to receive --after payment or provision
for payment of all debts and liabilities of the Holding Company (including all
deposits in First Federal and accrued interest thereon) and after distribution
of the Liquidation Account previously established upon the conversion of First
Federal from the mutual to stock form in 1993 -- all assets of the Holding
Company available for distribution, in cash or in kind. If preferred stock is
issued subsequent to the Offering, the holders thereof may have a priority over
the holders of Holding Company Common Stock in the event of liquidation or
dissolution.
Preemptive Rights. Holders of Holding Company Common Stock will be
entitled to preemptive rights with respect to any shares which may be issued.
The Holding Company Common Stock will not be subject to call for redemption,
and, upon receipt by the Holding Company of the Purchase Price therefor, each
share of the Holding Company Common Stock will be fully paid and nonassessable.
Preferred Stock. After the Merger, the Board of Directors of the
Holding Company will be authorized to issue preferred stock in series and to fix
and state the voting powers, designations, preferences and relative,
participating, optional or other special rights of the shares of each such
series and the qualifications, limitations and restrictions thereof. Preferred
stock may rank prior to the Holding Company Common Stock as to dividend rights,
liquidation preferences, or both, and may have full or limited voting rights.
The holders of preferred stock will be entitled to vote as a separate class or
series under certain circumstances, regardless of any other voting rights which
such holders may have.
Except as discussed above, the Holding Company has no present plans for
the issuance of the additional authorized shares of Holding Company Common Stock
or for the issuance of any shares of preferred stock. In the future, the
authorized but unissued and unreserved shares of Holding Company Common Stock
will be
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available for general corporate purposes including but not limited to possible
issuance as stock dividends or stock splits, in future mergers or acquisitions,
under a cash dividend reinvestment and stock purchase plan, in a future
underwritten or other public offering, or under an employee stock ownership
plan. The authorized but unissued shares of preferred stock will similarly be
available for issuance in future mergers or acquisitions, in a future
underwritten public offering or private placement or for other general corporate
purposes. Except as described above or as otherwise required to approve the
transaction in which the additional authorized shares of Holding Company Common
Stock or authorized shares of preferred stock would be issued, no shareholder
approval will be required for the issuance of these shares. Accordingly, the
Board of Directors of the Holding Company, without shareholder approval, can
issue preferred stock with voting and conversion rights which could adversely
affect the voting power of the holders of Holding Company Common Stock.
Restrictions on Acquisitions. See "Restrictions on Acquisitions of
Stock and Related Takeover Defensive Provisions" for a description of certain
provisions of the Holding Company's certificate of incorporation and bylaws
which may affect the ability of the Holding Company's shareholders to
participate in certain transactions relating to acquisitions of control of the
Holding Company.
Dividends. Upon consummation of the purchase of all of First Federal's
outstanding First Federal Common Stock, the Holding Company's only assets will
be First Federal common stock, and a portion of the proceeds from the Offering.
Dividends from First Federal will initially be the only source of income for the
Holding Company. Should First Federal elect or be required by its regulators to
retain its income, the ability of the Holding Company to pay dividends to its
own shareholders may be adversely affected. Furthermore, if at any time in the
future the Holding Company owns less than 80% of the outstanding stock of First
Federal, certain tax benefits under the Code as to inter-company distributions
will not be fully available to the Holding Company and it will be required to
pay federal income tax on a portion of the dividends received from First
Federal, thereby reducing the amount of income available for distribution to the
shareholders of the Holding Company. For further information concerning the
ability of First Federal to pay dividends to the Holding Company, see "Dividend
Policy," "Regulation - Regulatory Capital Requirements" and " -- Limitation on
Dividends and Other Capital Distributions."
RESTRICTIONS ON ACQUISITIONS OF STOCK AND
RELATED TAKEOVER DEFENSIVE PROVISIONS
Although the Board of Directors of the Holding Company is not aware of
any effort that might be made to obtain control of the Holding Company after the
Merger, the Board believes, as discussed below, that it is appropriate to
include certain provisions as part of the Holding Company's certificate of
incorporation to protect the interests of the Holding Company and its
shareholders from takeovers which the Board of Directors of the Holding Company
might conclude are not in the best interests of First Federal, the Holding
Company or the Holding Company's shareholders. The Holding Company intends to
operate First Federal as an independent, predominantly community-owned financial
institution.
The following discussion is a summary of all material provisions of the
Holding Company's certificate of incorporation and bylaws and certain other
regulatory provisions, which may be deemed to have an"anti-takeover" effect and
could potentially discourage or even prevent a bid for the Holding Company which
might otherwise result in shareholders receiving a premium for their stock.
Further, ownership restrictions imposed by federal law could potentially serve
as a basis to invalidate or otherwise restrict the use or exercise by management
or others of revocable proxies. The following description of certain of these
provisions is necessarily general and, with respect to provisions contained in
the Holding Company's certificate of incorporation and bylaws and First
Federal's charter and bylaws, reference should be made in each case to the
document in question, each of which is part of First Federal's application to
the OTS and the Holding Company's Registration Statement filed with the SEC. See
"Available Information."
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PROVISIONS OF THE HOLDING COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
Directors. Certain provisions of the Holding Company's certificate of
incorporation and bylaws will impede changes in majority control of the Board of
Directors. The Holding Company's certificate of incorporation provides that the
Board of Directors of the Holding Company will be elected annually. The Holding
Company's certificate of incorporation provides that the size of the Board of
Directors may be increased or decreased only by a majority vote of the Board.
The certificate of incorporation also provides that any vacancy occurring in the
Board of Directors, including a vacancy created by an increase in the number of
directors, shall be filled for the remainder of the unexpired term by a majority
vote of the directors then in office. The certificate of incorporation further
provides that, to be eligible to serve as a director, persons must meet certain
eligibility criteria. Finally, the bylaws impose certain notice and information
requirements in connection with the nomination by shareholders of candidates for
election to the Board of Directors or the proposal by shareholders of business
to be acted upon at an annual meeting of shareholders.
The certificate of incorporation provides that a director may only be
removed for cause by the affirmative vote of 80% of the shares eligible to vote.
Restrictions on Call of Special Meetings. The certificate of
incorporation of the Holding Company provides that a special meeting of
shareholders may be called only pursuant to a resolution adopted by a majority
of the Board of Directors. Shareholders are not authorized to call a special
meeting.
Absence of Cumulative Voting. The Holding Company's certificate of
incorporation provides that there shall be no cumulative voting rights in the
election of directors.
Authorization of Preferred Stock. The certificate of incorporation of
the Holding Company authorized 1,000,000 shares of serial preferred stock, $.01
par value. The Holding Company is authorized to issue preferred stock from time
to time in one or more series subject to applicable provisions of law, and the
Board of Directors is authorized to fix the designations, powers, preferences
and relative participating, optional and other special rights of such shares,
including voting rights (which could be multiple or as a separate class) and
conversion rights. In the event of a proposed merger, tender offer or other
attempt to gain control of the Holding Company that the Board of Directors does
not approve, it might be possible for the Board of Directors to authorize the
issuance of a series of preferred stock with rights and preferences that would
impede the completion of such a transaction. An effect of the possible issuance
of preferred stock, therefore, may be to deter a future takeover attempt. The
Board of Directors has no present plans or understandings for the issuance of
any preferred stock and does not intend to issue any preferred stock except on
terms which the Board deems to be in the best interests of the Holding Company
and its shareholders.
Procedures for Certain Business Combinations. The Holding Company's
certificate of incorporation requires that certain business combinations,
(including mergers or consolidations, sale, lease or other disposition of
assets, issuances or transfers of securities, adoption of any plan of
liquidation proposed by the Interested Stockholder, or any reclassification of
securities which increases the Interested Stockholders share of the holding
Company), between the Holding Company (or any majority-owned subsidiary thereof)
and a 25% or more shareholder either (i) be approved by at least 80% of the
total number of outstanding voting shares, voting as a single class, of the
Holding Company, (ii) be approved by a majority of the continuing Board of
Directors (i.e., persons serving prior to the 25% shareholder becoming such and
who are not affiliated with the 25% shareholder) or (iii) involve consideration
per share generally equal to the highest per share price paid by such 25%
shareholder to acquire its stock.
Amendment to Certificate of Incorporation and Bylaws. Amendments to the
Holding Company's Certificate of Incorporation must be approved by a majority
vote of 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 to amend certain provisions (i.e., provisions relating to number,
classification, election and removal of directors; amendment of bylaws; call of
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special shareholder meetings; offers to acquire and acquisitions of control;
director liability; certain business combinations; 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 shareholders.
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. These provisions will also assist the Holding Company in the orderly
deployment of the Offering proceeds into productive assets during the initial
period after the Offering. The Board of Directors believes these provisions are
in the best interests of First Federal and of the Holding Company and its
shareholders. 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 shareholders. Accordingly, the Board of Directors believes that it is in
the best interests of the Holding Company and its shareholders to encourage
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 shareholders.
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 shareholders
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
shareholders, 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.
Effect of Takeover Defenses on Shareholder Interests. 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, shareholders 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
different management and whose objectives may not be similar to those of the
remaining shareholders. The concentration of control, which could result from a
tender offer or other takeover attempt, could also deprive the Holding Company's
remaining shareholders of the benefits of certain protective provisions of the
Exchange Act, if the number of beneficial owners becomes less than the 300 at
which Exchange Act registration is required.
Potential Negative Impact of Takeover Defenses on Shareholder
Interests. Despite the belief of First Federal and the Holding Company as to the
benefits to shareholders 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 shareholders may receive a
substantial premium for their shares over then current market prices. As a
result, shareholders who might desire to participate in such a transaction may
not have any opportunity to do so. Such provisions will also render the removal
of the Holding Company's Board of Directors and management more difficult. The
Board of Directors, however, has concluded that the potential benefits outweigh
the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
shareholders, 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.
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OTHER RESTRICTIONS ON ACQUISITIONS OF STOCK
Delaware Anti-Takeover Statute. The State of Delaware has enacted
legislation which provides that subject to certain exceptions a publicly held
Delaware corporation may not engage in any business combination with an
"interested shareholder" for three years after such shareholder became an
interested shareholder, unless, among other things, the interested shareholder
acquired at least 85% of the corporation's voting stock in the transaction that
resulted in the shareholder becoming an interested shareholder. This legislation
generally defines "interested shareholder" as any person or entity that owns 15%
or more of the corporation's voting stock. The term "business combination" is
defined broadly to cover a wide range of corporate transactions, including
mergers, sales of assets, issuances of stock, transactions with subsidiaries and
the receipt of disproportionate financial benefits. Under certain circumstances,
either the board of directors or both the board and two-thirds of the
shareholders other than the acquiror may approve a given business combination
and thereby exempt the corporation from the operation of the statute.
However, these statutory provisions do not apply, among other
situations, to Delaware corporations with fewer than 2,000 shareholders or which
do not have voting stock listed on a national exchange or listed for quotation
with a registered national securities association. While the Holding Company has
applied to have its shares quoted on the Nasdaq System, no prediction can be
made as to whether the Holding Company will have 2,000 shareholders.
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 without 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 institutions
whose accounts are insured by the FDIC's BIF, and holding companies thereof.
Control, as defined under federal law, means ownership of, 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 shareholders. 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 form 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.
Therefore, a warrant holder who, upon exchange of warrants would acquire
ownership of more than 10% of the issued and outstanding of the Holding
Company's Common Stock, must obtain OTS's approval prior to exercise.
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DESCRIPTION OF THE DEBENTURES
The Debentures are to be issued pursuant to an Indenture, dated as of
________, 1997 (the "Indenture"), between the Holding Company and
_____________________________, as Trustee (the "Trustee").
The following is a summary of the material terms of the Debentures and
the Indenture. This summary is qualified in its entirety by reference to all of
the provisions of the Indenture, including the definitions therein of certain
terms. The terms of the Debentures include those provisions contained in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended, ("TIA"). The Debentures are subject to all
such terms, and holders are referred to the Indenture and the TIA for a
statement of such terms. The following summary does not purport to be complete
and should be read in conjunction with the Indenture. Wherever particular
sections or defined terms of the Indenture are referred to, such sections or
defined terms are incorporated herein by reference, and the statements made
herein are qualified in their entirety by such reference. Capitalized terms not
otherwise defined in this section of the Prospectus shall have the meanings
ascribed to them in the Indenture. In this regard, the term "Holding Company" in
this section of the Prospectus refers to The Bryan - College Station Financial
Holding Company on an unconsolidated basis. The form of Indenture and the
Debentures have been filed with the Commission as an exhibit to the Registration
Statement of which this Prospectus is a part. Copies of the Indenture may be
obtained from the Agent.
GENERAL
The Debentures will be unsecured subordinated obligations of the
Holding Company, will be limited to an aggregate principal amount of $3,700,000
and will mature on __________, 2002. The Debentures will bear interest at the
rate per annum shown on the front cover of this Prospectus from the date of
issuance or from the most recent Interest Payment Date to which interest has
been paid or provided for, payable quarterly on the 15th calendar day 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.
Principal of and premium, if any, and interest on the Debentures will
be payable at the office or agency of the Holding Company in Bryan, Texas, and
the transfer of Debentures will be registrable at the offices of the Trustee in
_______, ________. In addition, payment of interest may, at the option of the
Holding Company, be made by check mailed to the address of the Person entitled
thereto as it appears in the Security Register.
The Debentures will be issued only in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple thereof. No
service charge will be made for any registration of transfer or exchange of
Debentures, but the Holding Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
Because the Holding Company is a holding company, its rights and the
rights of its creditors, including the Holders of the Debentures, to participate
in the assets or earnings of any Subsidiary through the payment of dividends or
otherwise will be subject to the prior claims of the Subsidiary's creditors,
except to the extent that the Holding Company may itself be a creditor with
recognized claims against the Subsidiary.
SUBORDINATION
The payment of the principal and premium, if any, and interest on, the
Debentures will, to the extent set forth in the Indenture, be subordinate in
right of payment to the prior payment in full of all Senior Indebtedness (as
defined). In certain events of insolvency, the payment of the principal of and
interest on the Debentures will,
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to the extent set forth in the Indenture, also be effectively subordinated in
right of payment to the prior payment in full of all General Obligations (as
defined). Upon any payment or distribution of assets to creditors upon any
liquidation, dissolution, winding up, reorganization, assignment for the benefit
of creditors, marshalling of assets or any bankruptcy, insolvency or similar
proceedings of the Holding Company, the holders of all Senior Indebtedness will
first be entitled to receive payment in full of all amounts due thereon before
the Holders of the Debentures will be entitled to receive any payment in respect
of the principal of or premium, if any, or interest on, the Debentures. If, upon
any such payment or distribution of assets to creditors, there remains, after
giving effect to such subordination provisions in favor of the holders of Senior
Indebtedness, any amount of cash, property or securities available for payment
or distribution in respect of Debentures (as defined in the Indenture, "Excess
Proceeds") and if, at such time, any creditors in respect of General Obligations
have not received payment in full of all amounts due or to become due on or in
respect of such General Obligations, then such Excess Proceeds shall first be
applied to pay or provide for the payment in full of such General Obligations
before any payment or distribution may be made in respect of the Debentures. In
the event of the acceleration of the maturity of any Debentures, the holders of
all Senior Indebtedness will first be entitled to receive payment in full of all
amounts due or to become due thereon before the Holders of Debentures will be
entitled to receive any payment upon the principal of or premium, if any, or
interest on, the Debentures. No payments on account of principal, premium, if
any, or interest, in respect of the Debentures may be made if there shall have
occurred and be continuing a default in any payment with respect to Senior
Indebtedness or an event of default with respect to any Senior Indebtedness
permitting the holders thereof to accelerate the maturity thereof.
By reason of such subordination, in the event of insolvency, creditors
of the Holding Company who are not holders of Senior Indebtedness or of the
Debentures may recover less, ratably, than holders of Senior Indebtedness and
may recover more, ratably, than the Holders of Debentures.
"Senior Indebtedness" is defined to mean the principal of (and premium,
if any) and interest on the following, whether outstanding at the date of
execution of the Indenture or thereafter incurred, assumed or created: (a)
indebtedness of the Holding Company for money borrowed or purchased, similar
obligations arising from off-balance- sheet guarantees and direct credit
substitutes, and obligations associated with derivative products such as
interest and foreign exchange rate contracts, commodity contracts, and similar
arrangements, and (b) any deferrals, renewals, extensions and refundings of any
such Senior Indebtedness; other than (i) any indebtedness or obligation as to
which, in the instrument creating or evidencing the same or pursuant to which
the same is outstanding, it is expressly provided that such obligation (A) is
not Senior Indebtedness with respect to the Debentures or (B) ranks pari passu
with the Debentures and (ii) indebtedness evidenced by the Debentures.
"General Obligations" means all obligations of the Holding Company to
make payment on account of claims of general creditors, other than (A)
obligations on account of Senior Indebtedness and (B) obligations on account of
the Debentures and indebtedness for money borrowed ranking pari passu with or
subordinate to the Debentures. "Claim" shall have the meaning assigned thereto
in Section 101(5) of the Bankruptcy Code of 1978, as amended to the date of the
Indenture. The term "indebtedness for money borrowed" when used with respect to
the Holding Company is defined to mean any obligation of, or any obligation
guaranteed by, the Holding Company for the repayment of borrowed money, whether
or not evidenced by bonds, debentures, notes or other written instruments.
As of June 30, 1997, the Holding Company had no Senior Indebtedness and
no General Obligations outstanding. On a pro forma basis, however as of this
date there would have been $59.7 million in Senior Indebtedness and General
Obligations outstanding. The Holding Company may from time to time incur
additional indebtedness constituting Senior Indebtedness. The Indenture does not
prohibit or limit the incurrence of additional Senior Indebtedness and General
Obligations.
The subordination provisions of the Indenture described herein are
intended for the benefit of holders of Senior Indebtedness and are not intended
for the benefit of creditors in respect of General Obligations. The
98
<PAGE>
Holding Company and the Trustee may amend the Indenture to reduce or eliminate
the rights of creditors in respect of General Obligations without the consent of
such creditors or the Holders of Debentures.
LIMITATIONS ON DIVIDENDS ; AND REPURCHASES OR JUNIOR SECURITIES
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 Holding Company Common
Stock, (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.
EVENTS OF DEFAULT
The Indenture defines an Event of Default with respect to the
Debentures as any one of the following events: (i) certain events of bankruptcy
of the Holding Company or receivership of any Major Depository Institution
Subsidiary (as defined in the Indenture); (ii) default for 30 days in payment of
interest on any Debenture; (iii) default in payment of principal of (or premium,
if any, on) any Debenture when the same shall become due and payable, whether at
Stated Maturity, by acceleration or otherwise; (iv) failure by the Holding
Company for 60 days after due notice to remedy a default in performance or the
breach of any representation, covenant or warranty in the Indenture; or (v)(A)
failure by the Holding Company or any Subsidiary to pay indebtedness for money
borrowed in an aggregate principal amount exceeding $1.0 million when due or
upon the expiration of any applicable period of grace with respect to such
principal amount; or (B) acceleration of the maturity of any indebtedness of the
Holding Company or any Subsidiary for borrowed money in excess of $1.0 million
if such failure to pay or acceleration results from a default under the
instrument giving rise to, or securing, such indebtedness and is not annulled
within 10 days after due notice has been given, unless the validity of such
default is contested by the Holding Company in good faith by appropriate
proceedings. First Federal Savings Bank will currently be upon consummation of
the Merger the only Major Depository Institution Subsidiary of the Holding
Company. If any Event of Default occurs and is continuing, either the Trustee or
the Holders of not less than 25% in principal amount of the outstanding
Debentures may declare the principal amount of all Debentures to be due and
payable immediately, but upon certain conditions such declaration may be
rescinded and annulled and past defaults may be waived by the Holders of a
majority in principal amount of the Outstanding Debentures on behalf of the
Holders of all Debentures. In case an Event of Default shall occur and be
continuing, the Trustee may in its discretion proceed to protect and enforce its
rights and the rights of the Holders by such appropriate judicial proceedings as
the Trustee deems most effectual. The Indenture does not contain any provisions
that would provide protection to Holders of the Debentures against a sudden and
significant decline in credit quality of the Holding Company, resulting from any
takeover, recapitalization or similar restructuring of the Holding Company.
There can be no assurance that the Holding Company would have or be able to
acquire sufficient funds to make payment on the Debentures if their maturity
were accelerated due to an Event of Default.
The Indenture provides that the Trustee will give to the Holders of the
Outstanding Debentures notice of any default known to it if uncured or not
waived; provided, however, that such notice shall not be given until at least 30
days after the occurrence of a default with respect to the Outstanding
Debentures. The term "default",
99
<PAGE>
with respect to the Outstanding Debentures for the purpose only of this
provision, means the happening of any event which is, or after notice or lapse
of time or both would become, an Event of Default.
The Indenture provides that, subject to the duty of the Trustee during
default to act with the required standard of care, the Trustee will not be under
an obligation to exercise any of its rights or powers under the Indenture at the
request or direction of any of the Holders, unless such Holders shall have
offered to the Trustee reasonable security or indemnity. The Indenture provides
that the Holders of a majority in principal amount of the Outstanding Debentures
may direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or other power
conferred on the Trustee, provided that the Trustee may decline to act if such
direction is contrary to law or the Indenture and may take other action deemed
proper that is not inconsistent with such direction.
The Indenture includes a covenant that the Holding Company will file
annually with the Trustee a certificate of no default, or specifying any default
that exists.
MAINTENANCE OF STATUS OF SUBSIDIARIES AS INSURED DEPOSITORY INSTITUTIONS
The Holding Company has agreed that it will do or cause to be done all
things necessary to preserve and keep in full force and effect the status of
each of its subsidiaries that is a depository institution (including First
Federal) as an insured depository institution and do or cause to be done all
things necessary to ensure that savings accounts of each such subsidiary are
insured by the FDIC or any successor organization up to the maximum amount
permitted by 12 U.S.C. Section 1811 et seq. and the regulations thereunder or
any succeeding federal law, except as to individual accounts or interests in
employee benefit plans that are not entitled to pass-through insurance under 12
U. S.C. Section 1821(a)(1)(D).
CONSOLIDATION, MERGER AND SALES OF ASSETS
The Holding Company, without the consent of the Holders of any of the
Debentures under the Indenture, may consolidate with or merge into any other
Person or convey, transfer or lease its properties and assets substantially as
an entirety to any Person, provided that: (i) the successor is a Person
organized and validly existing under the laws of any domestic jurisdiction; (ii)
the successor Person, if other than the Holding Company, assumes the Holding
Company's obligations with respect to the Debentures and under the Indenture,
(iii) after giving effect to the transaction, no Event of Default, and no event
which, after notice or lapse of time or both would become an Event of Default,
shall have occurred and be continuing; and (iv) certain other conditions are
met.
LIMITATION ON SUITS
No Holder of any Debenture shall have the right to institute any
proceeding, judicial or otherwise, with respect to the Indenture, or for the
appointment of a receiver or trustee, or for any other remedy under the
Indenture, unless: (i) such Holder has previously given written notice to the
Trustee of a continuing default; (ii) the Holders of not less than 25% in
principal amount of the Outstanding Debentures shall have made written request
to the Trustee to institute proceedings in respect of such Default; (iii) such
Holder(s) shall have offered to the Trustee reasonable indemnity against the
costs, expenses and liabilities to be incurred in compliance with such request;
(iv) the Trustee for 60 days after its receipt of such notice, request and offer
of indemnity has failed to institute any such proceeding; and (v) no direction
inconsistent with such written request has been given to the Trustee during such
60-day period by the Holders of a majority in principal amount of the
Outstanding Debentures.
100
<PAGE>
REPORTS TO HOLDERS OF DEBENTURES
The Holding Company shall file with the Trustee and provide holders of
Debentures, within 15 days after it files them with the SEC, copies of its
annual report and the information, documents and other reports which the Holding
Company is required to file with the SEC pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended ("Exchange Act"). Notwithstanding
that the Holding Company may not be required to remain subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Holding company
shall continue to file the SEC and proved the Trustee and the holders of
Debentures with the annual reports and the information, documents and other
reports which are specified in Section 13 and 15(d) of the Exchange Act. The
Holding Company also shall comply with the other provisions of TIA Section
314(a).
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the
Holding Company and the Trustee with the consent of the Holders of not less than
66-2/3% in principal amount of the Outstanding Debentures; provided, however,
that no such modification or amendment may, without the consent of the Holding
Company and the Holder of each Outstanding Debenture affected thereby, (i)
change the Stated Maturity of the principal of, or any installment of interest
on, any Debenture, (ii) reduce the principal amount of, or the premium or
interest on, any Debenture, (iii) change the place or currency of payment of
principal of, or premium or rate of interest on, any Debenture, (iv) impair the
right to institute suit for the enforcement of any payment on or with respect to
any Debenture, (v) modify the subordination provisions in a manner adverse to
the Holders of the Debentures, (vi) reduce the above-stated percentage of
Outstanding Debentures necessary to modify or amend the Indenture or (vii)
reduce the percentage of aggregate principal amount of Outstanding Debentures
necessary for waiver of compliance with certain provisions of the Indenture or
for waiver of certain defaults.
The Holders of not less than a majority in principal amount of the
Outstanding Debentures may on behalf of the Holders of all of the Debentures
waive any past default under the Indenture, except a default in the payment of
principal of (or premium, if any) or interest on any Debenture.
DESCRIPTION OF THE UNITS
Each Unit offered in the Unit Offering consists of a $1,000 principal
amount Debenture and nine Warrants, each such Warrant entitling the holder
thereof to purchase one share of Holding Company Common Stock at a price of
$12.50 per share, subject to adjustment. The Debentures and the Warrants
comprising the Units will be separately transferable immediately. It is not
contemplated that there will be any public trading market for the Units.
Accordingly, investors may experience substantial difficulty in transferring the
Debentures and Warrants as a Unit. If a market should develop for the Units, the
market price may be greater or less than the public offering price of the Units.
DESCRIPTION OF WARRANTS
Each Warrant contained in the Units will entitle the holder thereof to
purchase one share of Holding Company Common Stock at an exercise price of
$12.50, subject to adjustments, at any time prior to 5:00 p.m., Central Time on
_______, 2002. The number of shares purchasable upon exercise of the Warrants
and the exercise price shall be subject to adjustment to reflect among other
things, stock dividends on or stock splits of the Holding Company Common Stock
or reclassification of its shares of Holding Company 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.
101
<PAGE>
The Warrants have no value other than as the right to acquire Holding
Company Common Stock 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 Holding Company 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.
The Warrants may be exercised during the exercise period stated above
by delivery of the Warrant Certificate, with the subscription form on the
reverse side of the Warrant Certificate fully executed, to the Holding Company
with a check payable to the Holding Company in an amount equal to the Warrant
exercise price multiplied by the number of shares of Holding Company Common
Stock being purchased. The Holding Company or its transfer agent will issue a
new Warrant Certificate representing the unexercised but not expired Warrants.
The Warrants will be detachable and may trade separately from the Debentures.
A complete statement of the terms and conditions pertaining to the
Warrants is contained in the Warrant Certificate, copies of which can be
obtained from the Holding Company. The description contained in this Prospectus
is qualified in its entirety by the text of the Warrant Certificate.
THE OFFERING
This Offering is being made to finance the purchase of all of the
outstanding shares of First Federal Common Stock not exchanged for Holding
Company Common Stock pursuant to the Merger Agreement. Shares of Holding Company
Common Stock and Units are being offered to members of the general public. See
"Offering and Sale of Holding Company Common Stock and Units." Subscription for
shares of Holding Company Common Stock and Units will be subject to the minimum
and maximum purchase limitations. See " --Subscription Procedures."
GENERAL
The Holding Company reserves the right to reject any subscriptions
prior to release of the funds in the Escrow Account to the Holding Company, in
whole or in part, for any reason whatsoever and may, in its sole discretion,
elect to accept those subscriptions for a lesser number of shares than is
subscribed for by any person. The Holding Company reserves the right to allocate
shares of Holding Company Common Stock and Units in any manner as it, in its
sole discretion, deems appropriate. If the Holding Company terminates the
Offering in its entirety, all subscription funds will be refunded in full with
interest actually earned thereon, without deduction.
SUBSCRIPTION PROCEDURES
The Holding Company is offering through the Agent 3,400 Units
minimum/3,700 Units maximum at a price of $1,000 per Unit. See "Description of
Units," Description of Warrants" and Description of Debentures" for a discussion
of the terms of the securities comprising the Units. The Unit Offering is being
conducted by the Holding Company though the Agent on a "best efforts,
minimum-maximum" basis and, as to the minimum, on an "all or none" basis. The
Holding Company has agreed to pay the Agent a commission of 7% of the aggregate
amount of Units sold by the Agent, and to reimburse the Agent for its reasonable
and accountable expenses up to $60,000, including legal fees of counsel to the
Agent. The Company has also agreed to pay to the Agent a fee of $5,000 in
connection with its fairness opinion with regard to the purchase of shares of
First Federal Common Stock.
Persons may subscribe for Units by signing, completing and delivering
or mailing a subscription form, together with payment in full for the number of
Units for which such person is subscribing by cashiers' check,
102
<PAGE>
draft or wire transfer payable in next day funds to the Agent. These
subscriptions must be received by the Escrow Agent by 5:00 p.m., Central time on
the Expiration Date. Checks should be made payable to the order of "The First
National Bank of Bryan, Texas -- Escrow Agent for The Bryan-College Station
Financial Holding Company." All subscription checks received will be transmitted
to the Escrow Agent by noon the next business day following receipt by the
Agent. Consummation of the Offering through release of the funds held in the
Escrow Account to the Holding Company and delivery of instruments representing
the Debentures and the Warrants will occur as soon as practicable after the
Expiration Date, subject to the satisfaction of certain conditions precedent to
the Selling Agreement entered into between the Holding Company and the Agent.
The Agent has informed the Company that neither it nor any such
selected dealers expect sales of Units to accounts over which they exercise
discretionary authority to exceed 5% of the total number of Units offered by it.
The Company has agreed to indemnify the Agent against certain
liabilities, including liabilities under the Securities Act.
OFFERING PRICE OF HOLDING COMPANY COMMON STOCK ARBITRARILY DETERMINED
The purchase price of the Holding Company Common Stock has been
determined arbitrarily by the Board of Directors based on, among other things,
the amount of capital necessary to enable the Holding Company to accomplish the
Merger and does not necessarily bear any relation to any established investment
criteria of value such as book value, earnings or assets or the intrinsic value,
if any, of the Holding Company or First Federal. As a result, there can be no
assurance that the price of the Holding Company Common Stock will not fall below
its purchase price after the completion of the Offering.
TRANSFER AGENT
The Holding Company will act as its own transfer agent, registrar,
dividend disbursing agent and redemption agent for the shares of Holding Company
Common Stock and the Units.
LEGAL MATTERS
The legality of the Holding Company Common Stock and Debentures will be
passed upon for the Holding Company by Silver, Freedman & Taff, LLP (a
partnership including professional corporations), 1100 New York Avenue, N.W.,
Washington, D.C., special counsel to First Federal. Silver, Freedman & Taff, LLP
has consented to the reference herein to its opinion. Certain legal matters will
be passed upon for Hoefer & Arnett by Bracewell & Patterson, LLP, Houston,
Texas.
EXPERTS
The Consolidated Financial Statements of First Federal Savings Bank of
Bryan and its subsidiary as of September 30, 1994, 1995 and 1996 and for each of
the years in the three year period ended September 30, 1996 included in this
Prospectus/Proxy Statement have been audited by Crowe, Chizek and Company LLP,
independent certified public accountants. Such Consolidated Financial Statements
have been included herein in reliance upon the report of Crowe, Chizek and
Company LLP, appearing elsewhere herein, and upon the authority of such firm as
experts in accounting and auditing.
103
<PAGE>
FIRST FEDERAL SAVINGS BANK
Index to Consolidated Financial Statements
Page
Report of Independent Auditors............................................. F-2
Consolidated Statements of Financial Condition
September 30, 1996 and 1995.............................................. F-4
Consolidated Statements of Income
Years ended September 30, 1996, 1995 and 1994.......................... F-5
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1996, 1995 and 1994.......................... F-5
Consolidated Statements of Cash Flows
Years ended September 30, 1996, 1995 and 1994.......................... F-6
Notes to Consolidated Financial Statements
Years Ended September 30, 1996, 1995 and 1994............................ F-8
Consolidated Statements of Financial Condition
June 30, 1997 and September 30, 1996...........................................
Consolidated Statements of Income
Three Months and Nine Months Ended June 30, 1997 and 1996.......................
Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended June 30, 1997 and 1996........................................
Consolidated Statements of Cash Flows
Three Months and Nine Months Ended June 30, 1997 and 1996.......................
Notes to Consolidated Financial Statements
June 30, 1997 and 1996..........................................................
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.
F-1
<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.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
November 9, 1996
F-2
<PAGE>
FIRST FEDERAL SAVINGS BANK
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 1,000,000 shares,
issued 87,263 shares 1 1
Common stock - par value $.01 per share; authorized
3,000,000 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
=========== ===========
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
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
----------- ----------- -----------
- ------------------------------------------------------------------------------------------------------------------
(Continued)
F-4
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
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
Preferred stock dividends (88) (88) (87)
----------- ----------- -----------
Income available to common stockholders $ 146 $ 123 $ 370
=========== =========== ===========
Earnings per common share (Note 1) $ .61 $ .52 $ 1.54
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
F-5
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
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
=========== =========== =========== =========== ===========
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
F-6
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
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 e
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)
- ------------------------------------------------------------------------------------------------------------------
(Continued)
F-7
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
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 - -
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-8
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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. Realized gains and losses on
disposition of available-for-sale securities are based on the net proceeds and
the adjusted carrying amounts of the securities sold, using the specific
identification method.
Loans Receivable: Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses, and deferred loan origination fees and discounts.
Allowance for Loan Losses: Because some loans may not be repaid in full, the
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 level considered
adequate to cover losses that are currently anticipated based on
- --------------------------------------------------------------------------------
(Continued)
F-9
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
past loss experience, general economic conditions, information about specific
borrower situations including their financial position and collateral values,
and other factors and estimates which are subject to change over time. While
management may periodically allocate portions of the allowance for specific
problem loan situations, the whole allowance is available for any loan
charge-offs that occur. A loan is charged-off against the allowance by
management as a loss when deemed uncollectible, although collection efforts
continue and future recoveries may occur.
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.
- --------------------------------------------------------------------------------
(Continued)
F-10
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
(Continued)
F-11
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
(Continued)
F-12
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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
=========== =========== =========== ===========
---------------------------1 9 9 5-----------------------
-------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ----------- ----------- ------------
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
=========== =========== =========== ===========
- ------------------------------------------------------------------------------------------------------------------
(Continued)
F-13
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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
<TABLE>
<CAPTION>
Loans receivable at September 30 are summarized as follows:
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
=========== ===========
- ------------------------------------------------------------------------------------------------------------------
(Continued)
F-14
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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 related to 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
=========== =========== ===========
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.
- ------------------------------------------------------------------------------------------------------------------
(Continued)
F-15
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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
=========== ===========
NOTE 4 - SECONDARY MORTGAGE MARKET OPERATIONS
The following summarizes the Bank's secondary mortgage market activities:
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
=========== ===========
- ------------------------------------------------------------------------------------------------------------------
(Continued)
</TABLE>
F-16
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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
=========== =========== ===========
NOTE 6 - PREMISES AND EQUIPMENT
A summary of premises and equipment at September 30 is as follows:
In thousands
1996 1995
---- ----
<S> <C> <C>
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.
Non-interest-bearing deposit accounts totaled $3,344,000 and $3,336,000 at
September 30, 1996 and 1995, respectively.
- ------------------------------------------------------------------------------------------------------------------
(Continued)
F-17
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
(Continued)
F-18
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 9 - BENEFIT PLANS (Continued)
<TABLE>
<CAPTION>
The funded status of the plan is as follows:
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
Additional minimum liability (48) (44)
----------- -----------
Accrued pension (cost) benefit recorded on statement
of financial condition $ (52) $ (43)
=========== ===========
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.
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%
- ------------------------------------------------------------------------------------------------------------------
(Continued)
F-19
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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. 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.
- --------------------------------------------------------------------------------
(Continued)
F-20
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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. At September 30, 1996, the
Bank's housing-related and other specified assets totaled approximately 78.8% of
total assets.
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.
Regulations of the Office of Thrift Supervision limit the amount of dividends
and other capital distributions that may be paid by a savings institution
without prior approval of the Office of Thrift Supervision. This regulatory
restriction is based on a three-tiered system with the greatest flexibility
afforded to well-capitalized (Tier 1) institutions. The Bank currently meets the
requirements of a Tier 1 institution and has not been informed by the OTS of the
need for more than normal supervision. Accordingly, the Bank can make, without
prior regulatory approval, distributions during a fiscal year up to 100% of its
net income to date during a fiscal
- --------------------------------------------------------------------------------
(Continued)
F-21
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 10 - REGULATORY MATTERS (Continued)
year plus an amount that would reduce by one-half its "surplus capital ratio"
(the excess over its Fully Phased-In Capital Requirements) at the beginning of
the last calendar year. At September 30, 1996, the Bank could pay up to $724,000
in dividends.
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.
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.
- --------------------------------------------------------------------------------
F-22
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 11 - COMMITMENTS, CONTINGENT LIABILITIES AND CONCENTRATIONS
(Continued)
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.
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>
F-23
<PAGE>
NOTE 12 - INCOME TAX EXPENSE (Continued)
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> <C>
Tax expense at statutory rate (34%) $ 116 $ 109 $ 235
Other tax effects (8) 1 (1)
----------- ----------- -----------
$ 108 $ 110 $ 234
=========== =========== ===========
</TABLE>
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>
- --------------------------------------------------------------------------------
(Continued)
F-24
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
(Continued)
F-25
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
F-26
<PAGE>
Form 10-QSB
Office of Thrift Supervision
Department of the Treasury
1700 G Street, N.W.,
Washington, D.C. 20552
Quarterly Report pursuant to Section 13 or 15 (d)
Of The Securities Exchange Act of 1934
For the Three and Nine Months Ended: June 30, 1997
Office of Thrift Supervision Docket Number 7035
FIRST FEDERAL SAVINGS BANK
(Exact name of the registrant as specified in its charter)
Texas 74-1505941
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2900 Texas Avenue, Bryan, Texas 77802
(Address of principal executive offices)
(409) 779-2900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
Outstanding
Class: at August 5, 1997
Common Stock (433,000 authorized) 239,612
Preferred Stock (200,000 authorized) 87,263
<PAGE>
FIRST FEDERAL SAVINGS BANK
BRYAN/COLLEGE STATION, TEXAS
FORM 10-QSB
THREE AND NINE MONTHS ENDED JUNE 30, 1997
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Page
Consolidated Statements of Financial Condition ................... 3
Consolidated Statements of Income ................................. 4
Consolidated Statements of Changes in Stockholders' Equity......... 5
Consolidated Statements of Cash Flows ............................. 6
Notes to Consolidated Financial Statements......................... 7,8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................................... 9-17
PART II - OTHER INFORMATION
Other Information .................................................... 18
Signatures ........................................................... 19
2
<PAGE>
FIRST FEDERAL SAVINGS BANK
BRYAN/COLLEGE STATION, TEXAS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1997 and September 30, 1996
(Unaudited)
In thousands, except per share data
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
June 30, September 30,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 766 $ 1,661
Interest-bearing deposits in other financial institutions 1,605 1,145
----------- -----------
Total cash and cash equivalents 2,371 2,806
Securities held-to-maturity (estimated market value:
September 1996 - $1,000) - 1,000
Mortgage-backed securities held-to-maturity (estimated
market value: June 1997 - $1,162; September 1996 - $1,261) 1,186 1,292
Loans held for sale 475 419
Loans receivable 58,326 49,160
Federal Home Loan Bank stock 882 845
Real estate owned and in judgment 398 577
Premises and equipment 1,046 924
Accrued interest receivable 497 329
Other assets 600 245
----------- -----------
$ 65,781 $ 57,597
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 57,638 $ 51,677
Advance payments by borrowers for insurance and taxes 606 783
Advance from Federal Home Loan Bank 2,100 -
Accrued interest payable and other liabilities 718 821
----------- -----------
61,062 53,281
Stockholders' equity
Preferred stock - par value $.01 per share;
authorized 200,000 shares, issued 87,263 shares 1 1
Common stock - par value $.01 per share;
authorized 433,000 shares, issued 239,612 2 2
Additional paid-in capital 2,743 2,743
Retained earnings, substantially restricted 1,973 1,570
----------- -----------
4,719 4,316
----------- -----------
$ 65,781 $ 57,597
=========== ===========
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
BRYAN/COLLEGE STATION, TEXAS
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
In thousands, except per share data
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Nine months ended Three months ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income
Loans $ 3,847 $ 3,262 $ 1,334 $ 1,106
Mortgage-backed securities 56 79 18 21
Investment securities - 35 - 11
Other 104 235 39 61
--------- --------- --------- ---------
Total interest income 4,007 3,611 1,391 1,199
Interest expense
Deposits 1,825 1,790 639 584
Other borrowings 57 5 24 -
--------- --------- --------- ---------
Total interest expense 1,882 1,795 663 584
---------- --------- --------- ---------
NET INTEREST INCOME 2,125 1,816 728 615
Provision for loan losses 17 1 15 6
--------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN 2,108 1,815 713 609
Noninterest income
Service charges 449 386 135 142
Net gain on sale of securities - 13 - -
Net gain on sale of loans and mortgage
servicing rights 99 275 40 114
Other 41 9 41 -
--------- --------- --------- ---------
Total noninterest income 589 683 216 256
Noninterest expenses
Compensation and benefits 988 1,017 347 334
Occupancy and equipment expense 239 242 76 81
Federal insurance premiums 36 94 8 31
Net (gain)/loss on real estate owned 2 - 4 (1)
Professional fees 95 106 25 31
Data processing 125 109 40 37
Other 501 455 165 148
--------- --------- --------- ----------
Total noninterest expenses 1,986 2,023 665 661
--------- --------- --------- ----------
INCOME BEFORE INCOME TAX EXPENSE 711 475 264 204
Income tax expense 242 162 90 70
--------- --------- --------- ----------
NET INCOME $ 469 $ 313 $ 174 $ 134
========= ========= ========= =========
NET INCOME PER SHARE OF COMMON STOCK $ 1.68 $ 1.04 $ 0.63 $ 0.47
========= ========= ========= =========
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
BRYAN/COLLEGE STATION, TEXAS
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
June 30, 1997 and 1996
(Unaudited)
In thousands, except per share data
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Nine months ended Three months ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $ 4,316 $ 4,170 $ 4,567 $ 4,305
Net income 469 313 174 134
Cash dividends paid (66) (66) (22) (22)
----------- ----------- ----------- -----------
Balance at June 30, $ 4,719 $ 4,417 $ 4,719 $ 4,417
=========== =========== =========== ===========
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
BRYAN/COLLEGE STATION, TEXAS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
In thousands
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Nine months ended Three months ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 469 $ 313 $ 174 $ 134
Adjustments to reconcile net income to net
cash from operating activities
Depreciation 123 124 40 42
Amortization of premiums and discounts on
mortgage-backed securities, net 3 (2) 2 1
Proceeds from sale of mortgage loans 5,003 11,547 2,387 2,853
Origination of loans held for sale (5,016) (9,890) (1,483) (2,646)
Amortization of deferred loan origination fees 32 32 30 13
Net (gains) losses on sales of
Real estate owned (12) 1 (10) 1
Securities available-for-sale - (13) - -
Mortgage loans (43) (175) (14) (97)
Mortgage servicing rights (56) (100) (26) (17)
Provision for losses on loans and real estate owned 17 1 15 6
Federal Home Loan Bank stock dividend (37) (37) (13) (12)
Change in
Accrued interest receivable (168) 45 (19) 28
Other assets (355) (420) (206) (61)
Accrued interest payable and other liabilities (103) 253 189 175
----------- ---------- ---------- ----------
Net cash from operating activities (143) 1,679 1,066 420
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans receivable (9,116) (470) (5,557) 279
Proceeds from sale of securities available-for-sale - 576 - -
Proceeds from maturity of securities 1,000 - - -
Principal payments on mortgage-backed securities
and collateralized mortgage obligations 103 389 31 45
Proceeds from sale of mortgage servicing rights 56 100 26 17
Investment in office properties and equipment, net (245) (54) (58) (28)
Capital expenditures on foreclosed real estate (57) (15) - (3)
Proceeds from sale of real estate owned 149 71 - 71
---------- ---------- ---------- ----------
Net cash from investing activities (8,110) 597 (5,558) 381
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 5,961 (2,915) 2,567 (2,023)
Net increase (decrease) in advance payments by
borrowers for insurance and taxes (177) (323) 292 265
Net change on advances from Federal
Home Loan Bank 2,100 (1,088) (100) -
Dividends paid (66) (66) (22) (22)
----------- ----------- ----------- -----------
Net cash from financing activities 7,818 (4,392) 2,737 (1,780)
---------- ----------- ---------- -----------
Decrease in cash and cash equivalents (435) (2,116) (1,755) (979)
Cash and cash equivalents at beginning of period 2,806 6,941 4,126 5,804
---------- ---------- ---------- ----------
Cash and cash equivalents at end of period $ 2,371 $ 4,825 $ 2,371 $ 4,825
========== ========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
FIRST FEDERAL SAVINGS BANK
BRYAN/COLLEGE STATION, TEXAS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended June 30, 1997 and 1996
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, the unaudited consolidated financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial condition of First Federal Savings
Bank, Bryan/College Station, Texas (the Bank) and its wholly-owned subsidiary,
First Service Corporation of Bryan, as of June 30, 1997 and 1996, and the
results of its operations and cash flows for the nine-month and three-month
periods then ended.
The Bank adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115),
with an effective date of October 1, 1994. SFAS 115 addresses the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. Securities are to be
classified in three categories; held-to-maturity securities, trading securities
and available-for-sale securities. Upon adoption of SFAS 115, all securities
held by the Bank were classified as held-to-maturity. As a result, securities
are carried on the balance sheet at amortized cost.
NOTE 2 - ALLOWANCE FOR LOAN LOSSES
The summary of changes in the allowance for loan losses is as follows:
Nine months ended
June 30,
(In thousands)
1997 1996
---- ----
Balances, beginning of period $ 247 $ 317
Provision charged to operations 17 1
Charge-offs (4) (20)
Recoveries 8 1
-------- --------
Balances, end of period $ 268 $ 299
======== ========
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
FIRST FEDERAL SAVINGS BANK
BRYAN/COLLEGE STATION, TEXAS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended June 30, 1997 and 1996
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - CAPITAL REQUIREMENTS
Pursuant to federal regulations, savings institutions must meet three separate
capital requirements. The following is a reconciliation of the Bank's capital
under generally accepted accounting principles (GAAP) to regulatory capital at
June 30, 1997.
<TABLE>
<CAPTION>
Tangible Core Risk based
Capital Capital Capital
------- ------- -------
(In thousands)
<S> <C> <C> <C>
GAAP capital $ 4,719 $ 4,719 $ 4,719
General valuation allowances - - 268
---------- ---------- ----------
Regulatory capital 4,719 4,719 4,987
Minimum capital requirement 990 1,979 3,887
---------- ---------- ----------
Excess regulatory capital over
minimum requirement $ 3,729 $ 2,740 $ 1,100
========== ========== ==========
</TABLE>
NOTE 4 - 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.
- --------------------------------------------------------------------------------
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
First Federal Savings Bank's ("First Federal" or the "Bank") 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. The Bank intends to continue to focus
primarily on one to four-family residential lending, direct and indirect
consumer lending, including home improvement loans and constructions loans, and
small to medium-sized 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 primarily
earned on loans, and to a much lesser extent, mortgage-backed securities and
other securities, versus the average rate paid on savings and other deposits and
other borrowings, as well as the relative amounts of such assets and
liabilities. The interest rate spread is impacted by several factors including
economic and competitive conditions that influence interest rates, loan demand,
deposit flows, and balance sheet composition.
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 home loans and loan servicing rights
to the secondary market, and other investments, provisions expensed for loan and
other repossessed real estate losses, service charge fees, fees for other
financial services rendered, operating expenses and income taxes. First Federal
believes that building its earnings from net interest income and non-interest
income, such as profitable sale of long-term, fixed rate loans to the secondary
market utilizing a fully-staffed residential loan department, an active and
diversified consumer lending division, and a SBA/Conventional 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.
Non-interest income can provide an excellent source of secondary income through
fees charges 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 in past quarters.
- --------------------------------------------------------------------------------
<PAGE>
However, as reflected in the first nine months of fiscal 1997 (beginning october
1, 1996), net interest income now exceeds noninterest expense. Prior to Fiscal
1997, First Federal has relied primarily on its noninterest income for net
income, but due to increased volume in consumer loans, small commercial loans,
3-year balloon home loans and adjustable rate home loans, along with an
increased spread, the Bank has become less dependent on noninterest
income--particularly income derived from the sale of home loans to the secondary
market--as a vital source of income for the Bank.
ASSET/LIABILITY MANAGEMENT
First Federal, like all banks, 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 the portion of its interest-earning assets which are
primarily short-term, balloon home loans, adjustable rate home loans, consumer
loans, and mortgage backed securities. As a continuing part of its financial
strategy, First Federal considers methods of managing this asset/liability
mismatch, consistent with maintaining acceptable levels of net interest income.
The Office of Thrift Supervision ("OTS") mandates a Net Portfolio Value
("NPV") approach to the quantification of interest rate risk. NPV is the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off balance sheet contracts. Management measures the Bank's
interest rate risk as the change occurring to its NPV resulting from a 200 basis
point increase or decrease in market interest rates. Any decline in NPV of up to
two percent of the Bank's assets is considered by the OTS a normal "level". As
of March 31, 1997, the date of the latest OTS report, a change in interest rates
of positive 200 basis points will result in a 4% decline (or $295,000) in the
Bank's NPV, while a change in interest rates of a negative 200 basis points will
result in an 3% decline (or $249,000) in the Bank's NPV. As a percentage of the
Bank's assets, a change of negative 200 basis points results in a .45% decrease
in assets while a change of positive 200 basis points results in a .30% decrease
in assets.
First Federal's asset/liability management strategy has two goals.
First, First Federal seeks to build its net interest 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 interest rates. First Federal places its
primary emphasis on maximizing net interest margin while striving to better
matching the interest rate sensitivity of its assets and liabilities. There can
be no absolute assurance that this strategy will achieve the desired results and
no absolute assurance that this strategy 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 to its
customers and prospective customers. In order to minimize the
- --------------------------------------------------------------------------------
<PAGE>
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 home 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.
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/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.
FINANCIAL CONDITION
First Federal's total assets increased by $8.2 million to $65.8 million
at June 30, 1997 from $57.6 million at September 30, 1996, or an increase of
14.24%. The increase was primarily due to an increase in loans receivable,
partially offset by a decrease in cash.
Loans receivable (excluding loans held for sale) increased $9.1 million
to $58.3 million at June 30, 1997, compared to $49.2 million at September 30,
1996--or an increase of 18.50%. During the nine months ended June 30, 1997,
First Federal originated $22.0 million of mortgage loans including $21.2 million
secured by one- to four-family residences, and $9.1 million in consumer loans.
Approximately $1.4 million of these mortgage loans represented refinancing of
existing First Federal loans.
Deposits increased from $51.7 million at September 30, 1996 to $57.6
million at June 30, 1997 primarily as a result of increased marketing of
short-term certificates of deposits--along with new checking accounts. Accrued
interest payable and other liabilities increased $1.8 million from $1.6 million
at September 30, 1996 to $3.4 million at June 30, 1997 largely as a result of
increased borrowings from the Federal Home Loan Bank of Dallas to fund the
Bank's increased consumer loan demand, offset by the payment of escrowed funds
in December, 1996 for property taxes on home loans held by the Bank.
NON-PERFORMING 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
- --------------------------------------------------------------------------------
<PAGE>
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 $15,000 for the three months ending June 30, 1997, as
compared to a $6,000 loan loss provision for the three months ending June 30,
1996. The Bank's loan loss reserve balance as of June 30, 1997 was $268,000
compared to the September 30, 1996 loan loss reserve of $247,000. Total
non-performing assets increased slightly during the three month period ended
June 30, 1997 to $1.1 million or 1.62% of total assets as compared to $863,000
or 1.50% of total assets at September 30, 1996. The majority of this increase in
non-performing assets were 1-4 family residences. 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 (exclusive of a $400,000 recovery on a
lawsuit settlement in the fiscal year ending September 30, 1994).
The Bank will continue to monitor and adjust its allowance for losses
on loans as the Board of Director's and management's analysis of its loan
portfolio and economic conditions dictate. In addition, regulatory agencies, as
an integral part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to recognize
additions to the allowance based upon their judgment of the information
available to them at the time of their examination. Therefore, although the Bank
maintains its allowance for losses on loans at a level which it considers to be
adequate to provide for potential losses, in view of the continued uncertainties
in the economy generally and the regulatory uncertainty pertaining to reserve
levels for the thrift industry generally, there can be no absolute assurance
that losses will not exceed the estimated amounts or the Bank will not be
required to make additional substantial additions to its allowance for losses on
loans in the future.
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 fees and
charges and gains on sales of home loans and servicing rights to the secondary
market-- along with service charges and related fees on checking accounts. 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.
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<PAGE>
COMPARISON OF NINE MONTHS ENDED JUNE 30, 1997 TO JUNE 30, 1996
First Federal reported net income after taxes of $469,000 for the nine
months ended June 30, 1997, an increase of $156,000 (or 49.84%) as compared to
$313,000 in net income reported for the nine months ended June 30, 1996. The
increase in earnings, as discussed in more detail below, resulted primarily from
a $396,000 increase in interest income and a $37,000 decrease in noninterest
expense, partially offset by a decrease of $94,000 in noninterest income and a
$87,000 increase in interest expense.
Net interest income increased $309,000 to $2.1 million for the nine
month period ended June 30, 1997 from $1.8 million for the prior period in 1996.
This increase was attributable primarily to an increase in interest earned on
loans receivable, partially offset by an increase in interest paid on the Bank's
deposit liabilities and interest paid on other borrowings from the FHLB. For the
nine months ended June 30, 1997, the net interest margin (net interest income
divided by average interest earning assets) increased to 4.87%, as compared to
4.38% for 1996. The spread between the average yield on interest earning assets
and the average cost of funds was 4.81% for 1997 versus 4.16% for 1996. These
increases resulted primarily from higher yields on consumer loans and the
repricing in the renewals of 3-year balloon home loans.
Noninterest income decreased $94,000 to $589,000 for the nine months
ended June 30, 1997 from $683,000 for the nine months ended June 30, 1996. This
decrease can be attributed to a $13,000 decrease in net gain on sale of
securities which occurred in December, 1995, a $176,000 decrease in net gain on
sale of home loans and mortgage servicing rights to the secondary market
reflecting reduced mortgage banking activity, and also the result of sale in
June, 1996 of mortgage servicing rights previously held. This was partially
offset by a $63,000 increase in service charges, which can be attributable to an
increase in interest-bearing checking accounts and fees associated with these
types of accounts, and a $32,000 increase in other noninterest income, as a
result of recognizing excess auto dealer reserves due to the repayment of auto
loan balances.
Noninterest expense remained stable at $2.0 million for the nine months
ended June 30, 1997 and June 30, 1996. A slight decrease of $37,000 can
primarily be attributed to a $29,000 decrease in compensation and benefits
expense, a $58,000 decrease in federal insurance premiums due to
recapitalization of SAIF in 1996, and a $11,000 decrease in professional fees.
This was offset by $16,000 increase in data processing and a $46,000 increase in
other noninterest expense due to the addition of a Mortgage Loan Production
Office and overall increased activity in the Bank.
Income tax expense increased $80,000 to $242,000 for the nine months
ended June 30, 1997 compared to $162,000 for the nine months ended June 30, 1996
as a result of increased earnings. The period reflected a tax rate of 34.0% and
34.1% for June 30, 1997 and June 30, 1996, respectively.
- --------------------------------------------------------------------------------
<PAGE>
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1997 TO JUNE 30, 1996
First Federal reported net income after taxes of $174,000 for the three
months ended June 30, 1997, an increase of $40,000 as compared to $134,000 in
net income reported for the three months ended June 30, 1996. The increase in
earnings, as discussed in more detail below, resulted primarily from a $192,000
increase in interest income, resulting from an increased volume of loans
outstanding and an increase in the Bank's spread, partially offset by a $79,000
increase in interest expense and a decrease of $40,000 in noninterest income.
Net interest income increased $113,000 to $728,000 for the three month
period ended June 30, 1997 from $615,000 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 from the
FHLB. For the three months ended June 30, 1997, the net interest margin (net
interest income divided by average interest earning assets) increased to 4.79%,
as compared to 4.49% for 1996. The spread between the average yield on interest
earning assets and the average cost of funds was 4.58% for 1997 versus 4.31% for
1996. These increases resulted primarily from higher yields on consumer loans
and the repricing in the renewals of 3-year balloon loans.
Noninterest income decreased by $40,000 to $216,000 for the three
months ended June 30, 1997 from $256,000 for the three months ended June 30,
1996. This decrease can be attributed to a $74,000 decrease in net gain on sale
of home loans and mortgage servicing rights to the secondary market, reflecting
reduced mortgage banking activity, and a slight decrease in various other
noninterest income, partially offset by a $41,000 increase in other noninterest
income, as a result of recognizing excess dealer reserves due to the repayment
of auto loan balances.
Noninterest expense increased $4,000 to $665,000 for the three months
ended June 30, 1997 from $661,000 for the three months ended June 30, 1996. This
increase can primarily be attributed to a $17,000 increase in other noninterest
expense and a $13,000 increase in compensation and benefits primarily due to
adding additional personnel in consumer lending.
Income tax expense increased $20,000 to $90,000 for the three months
ended June 30, 1997 compared to $70,000 for the three months ended June 30, 1996
as a result of increased earnings. The period reflected a tax rate of 34.1% and
34.3% for June 30, 1997 and June 30, 1996, respectively.
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
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<PAGE>
the FHLB of Dallas (as it has in the recent past) or utilize other borrowings of
funds based primarily on need to fund loan growth over and above deposit growth,
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 June 30, 1997, the minimum regulatory liquidity
requirement was 5% of the sum of First Federal's average daily balance of net
withdrawable deposit accounts and borrowing payable in one year or less. At June
30, 1997, First Federal's liquidity ratio was 5.01%. 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 June 30, 1997, First Federal had commitments to originate
loans totalling $5.7 million. First Federal also had $640,000 of outstanding
unused lines of credit. If needed for liquidity purposes, at June 30, 1997,
First Federal was eligible to borrow $23.0 million from the Federal Home Loan
Bank of Dallas, and had actually borrowed only $2.1 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 June 30, 1997, the Bank had tangible capital of $4.7 million, or
7.15% of total assets which was $3.7 million above the minimum capital
requirement of $990,000 or 1.5% of adjusted total assets.
At June 30, 1997, the Bank had core capital of $4.7 million, or 7.15%
of total assets which was $2.7 million above the minimum capital requirement of
$2.0 million or 3.0% of adjusted total assets.
At June 30, 1997, the Bank had total risk-based capital of $5.0 million
and risk-weighted assets of $48.6 million or total risk-based capital of 10.27%
of risk-weighted assets. This amount was $1.1 million above the minimum
regulatory requirement of $3.9 million, or 8.0% of risk- weighted assets.
- --------------------------------------------------------------------------------
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In May 1995, The FASB released Statement of Financial Accounting Standards No.
122 ("SFAS 122"), "Accounting for Mortgage Servicing Rights." SFAS No. 122
required mortgage banking enterprises to recognize the rights to service
mortgage loans for others as a separate asset, regardless of the manner in which
such rights are acquired. SFAS No. 122 applies to fiscal years beginning after
December 15, 1995. The adoption of this statement did not have a material impact
on the results of operations or capital of the Bank. SFAS No. 122 will be
superseded by Statement of Financial Accounting Standards No. 125 after December
31, 1996.
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 standard for stock-based employee
compensation plans. SFAS No. 123 permits the Bank to choose either a new fair
value based method or the compensation arrangements. SFAS No. 123 requires pro
forma disclosures of net earnings and 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. The adoption of SFAS No. 123 did not have a
material impact on the financial condition or operations 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 is 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 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
transfer 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
provision have been delayed by SFAS No. 127. The adoption of SFAS No. 125 did
not have a material impact on the results of operations or financial condition
of the Bank.
On March 3, 1997, the Financial Accounting Standards Board (FASB) issued
Statement 128, "Earnings Per Share", which is effective for financial statements
beginning with year end 1997. Statement 128 simplifies the calculation of
earnings per share (EPS) by replacing primary EPS
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<PAGE>
with basic EPS. It also requires dual presentation of basic EPS and diluted EPS
for entities with complex capital structures. Basic EPS include no dilution and
is computed by dividing income available to common shareholders by the
weighted-average common shares outstanding for the period. Diluted EPS reflects
the potential dilution of securities that could share in earnings, such as stock
options, warrants or other common stock equivalents. The bank expects Statement
128 to have little impact on its earnings per share calculations in future
years, other than changing terminology from primary EPS to basic EPS. All prior
period EPS data will be restated to conform with the new presentation.
- --------------------------------------------------------------------------------
<PAGE>
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
- --------------------------------------------------------------------------------
<PAGE>
FIRST FEDERAL SAVINGS BANK
BRYAN/COLLEGE STATION, TEXAS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended June 30, 1997 and 1996
(Unaudited)
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST FEDERAL SAVINGS BANK, BRYAN/COLLEGE STATION
Date: By:
------------------- -------------------------------
J. Stan Stephen
President and Chief
Executive Officer
Date: By:
------------------- --------------------------------
Mary L. Hegar
Chief Financial Officer
- --------------------------------------------------------------------------------
<PAGE>
====================================== ======================================
NO PERSON HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED
IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFERING MADE HEREBY, AND, IF UP TO 3,700 UNITS
GIVEN, OR MADE, SUCH OTHER INFORMATION
OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE
HOLDING COMPANY OR THE BANK. THIS
PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY TO ANY PERSON IN AN THE BRYAN-COLLEGE STATION
JURISDICTION IN WHICH SUCH OFFER OR FINANCIAL HOLDING COMPANY
SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREASE
ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE HOLDING
COMPANY OR THE BANK SINCE ANY OF THE
DATES AS OF WHICH INFORMATION IS
FURNISHED HEREIN OR SINCE THE DATE
HEREOF.
UNITS
-----------------
TABLE OF CONTENTS
Page
Prospectus Summary...................
The Unit Offering.................... --------------------------------------
Risk Factors.........................
Selected Consolidated Financial Data.
Recent Financial Data................ PROSPECTUS
Management's Discussion of Recent
Results.............................
The Bryan-College Station Financial
Holding Company Pro Forma --------------------------------------
Consolidated Balance Sheet..........
Notes to the Bryan-College Station
Financial Holding Company Pro Forma
Consolidated Financial Statements
Dilution.............................
Capitalization.......................
Disclosure Regarding Forward-Looking
Statements..........................
Use of Proceeds......................
Market Information................... HOEFER & ARNETT INCORPORATED
Dividend Policy......................
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................
Business.............................
Regulation...........................
Federal Income Tax Considerations....
Management of the Holding Company....
Management of First Federal..........
Description of Capital Stock.........
Restrictions on Acquisitions of Stock ________ __, 1997
and Related Takeover Defensive
Provisions..........................
Description of the Debentures........
Description of Units.................
Description of Warrants..............
The Offering.........................
Legal Matters........................
Experts..............................
-------------------
UNTIL _______, 1997 ALL
DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION,
MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
====================================== ======================================
<PAGE>
SUBJECT TO COMPLETION DATED SEPTEMBER __, 1997
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
150,000 SHARES MINIMUM/200,000 SHARES MAXIMUM
$10.00 PER SHARE/MINIMUM PURCHASE _____ SHARES ($______)
The Bryan-College Station Financial Holding Company (the "Holding Company")
is hereby offering (the "Common Stock Offering") for sale 150,000 shares
minimum/200,000 shares maximum of its common stock, par value $.01 per share
(the "Holding Company Common Stock") , at $10.00 per share. Concurrently with
the Common Stock Offering, the Company is also offering for sale 3,400 Units
minimum/3,700 Units maximum (the "Units") (the "Unit Offering" and, together
with the Common Stock Offering, the "Offering") at $1,000 per Unit, each Unit
consisting of $1,000 principal amount of __% subordinated debentures due
____________, 2002 (the "Debentures") and nine detachable warrants (the
"Warrants"). Each Warrant entitles the holder thereof to purchase one share of
common stock, par value $.01 per share, of Holding Company Common Stock at an
exercise price of $12.50, subject to adjustment, at any time prior to 5:00 p.m.
Central Time on ___________, 2002. Consummation of the Common Stock Offering is
conditioned on the contemporaneous completion of the Unit Offering. See "The
Offering."
The Holding Company has never issued capital stock. Consequently, there is
no existing market for the Holding Company Common Stock at this time. Therefore,
no assurance can be given that an established and liquid trading market for the
Holding Company Common Stock will develop. Following the Offering the Holding
Company Common Stock will be traded in the over-the-counter market. Although it
has no obligation to do so, Hoefer & Arnett intends to make a market for the
Holding Company Common Stock. Depending upon the volume of trading activity in
the common stock and subject to compliance with the applicable laws and other
regulatory requirements, Hoefer & Arnett will use its bests efforts to encourage
and assist market makers to establish and maintain a market for the Holding
Company Common Stock, although there can be no assurance that it will succeed in
doing so.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR BY ANY STATE SECURITIES AUTHORITIES,
NOR HAS SUCH COMMISSION, OFFICE, CORPORATION OR AUTHORITY PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE
SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT
FEDERALLY INSURED OR GUARANTEED.
<TABLE>
<CAPTION>
Estimated Net
Price to Public 1 Proceeds 2
----------------- -------------
<S> <C> <C>
Per Share $ 10 $ 10
Per Minimum Purchase
Total Minimum 1,500,000 1,500,000
Total Maximum 2,000,000 $ 2,000,000
</TABLE>
(1) The Holding Company Common Stock is being offered directly by the Company
and no commission is payable with respect to the sale thereof. See "The
Offering" for compensation payable in connection with the sale of the
Units.
(2) Before deducting expenses payable by the Holding Company estimated at
$_________.
THESE SECURITIES ARE SPECULATIVE IN THAT THEY INVOLVE A HIGH DEGREE OF RISK
AND SUBSTANTIAL BOOK VALUE DILUTION. PROSPECTIVE PURCHASERS SHOULD BE PREPARED
TO SUSTAIN A LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" AT PAGE __ AND
"DILUTION" FOR A DISCUSSION OF MATTERS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THESE SECURITIES.
THE DATE OF THIS PROSPECTUS IS ___________, 1997.
(cover page continues)
<PAGE>
The Holding Company has been formed to acquire all of the outstanding
capital stock (the "First Federal Common Stock") of First Federal Savings Bank,
Bryan, Texas ("First Federal") pursuant to a merger agreement between First
Federal and the Holding Company dated May 21, 1997 (the "Merger"). The net
proceeds of the Offering will be used to finance the Holding Company's cash
purchase of up to 80% of the outstanding shares of First Federal which are not
exchanged for Holding Company Common Stock in the Merger. Consummation of the
Offering is contingent upon all conditions to the Merger being satisfied or
waived, except that if shareholder or regulatory approval is not obtained, the
Offering will terminate.
Pursuant to the Merger, each holder of First Federal Common Stock will have
the option of exchanging each share of First Federal Common Stock for : (i) 2.5
shares of Holding Company Common Stock; (ii) $24.07 in cash, or (iii) any
combination of Holding Company Common Stock and cash. The Holding Company
anticipates that a minimum of approximately 150,000 shares of Holding Company
Common Stock will be issued pursuant to the Merger. The Directors and executive
officers of First Federal have indicated that they will exchange their First
Federal Common Stock for approximately 108,000 shares of Holding Company Common
Stock. Consummation of the Merger is subject to the satisfaction of customary
conditions, the approval of both First Federal's stockholders and the Office of
Thrift Supervision (the "OTS") and the consummation of the Unit Offering and the
Common Stock Offering.
The Units are not being offered pursuant to this Prospectus. The Debentures
included in the Units will be unsecured and will be subordinate in right of
payment to all present and future Senior Indebtedness and General Obligations
(each as hereinafter defined) of the Holding Company and will be effectively
subordinated to all indebtedness and other liabilities and commitments
(including deposits, trade payables, lease obligations and obligations of
holders of preferred stock) of First Federal. Generally, payment of principal of
the Debentures may be accelerated only in the case of certain events of default
relating to the bankruptcy or receivership of the Holding Company or First
Federal or in the event of a default in the payment of principal or interest.
See "The Offering" and "Description of the Debentures." On a pro forma basis as
of June 30, 1997 there would have been $5.7 million in Senior Indebtednes and
General Obligations of the Holding Company outstanding.
The Holding Company Common Stock is being offered directly by the Company
on a "best efforts, minimum-maximum " basis. The Units are being offered by
Hoefer & Arnett Incorporated (the "Agent") on a "best efforts, minimum-maximum"
basis. The Offering will commence on the date hereof and subscriptions will be
accepted until 5:00 p.m. Central time, __________ ___, 1997 (subject to
extension without notice by agreement between the Holding Company and the Agent
until __________ __, 1997) or terminate the Offering at any time (the
"Expiration Date"). Funds tendered by subscribers will be deposited in an escrow
account (the "Escrow Account") with the First National Bank of Bryan, Bryan,
Texas as escrow agent (the "Escrow Agent"). If subscriptions for a total of at
least $1,500,000 in Holding Company Common Stock and $3,700,000 in Units have
not been received by the Expiration Date, no shares of Holding Company Common
Stock or Units will be sold and the subscribers' funds will be refunded
promptly, with each subscriber's pro rata share of any interest actually earned
thereon. Consummation of the Offering will take place as soon as possible after
the Expiration Date, subject to the satisfaction of certain conditions precedent
in the Best Efforts Selling Agreement between the Holding Company and the Agent
(the "Selling Agreement"). See "The Offering -- Subscription Procedures."
The Holding Company reserves the right in its sole discretion to withdraw,
cancel or modify the Offering without notice and to accept or reject any
subscription , in whole or in part, for any reason including if the total amount
of shares of Holding Company Common Stock to be owned by such subscriber
following the Merger and the Offering would exceed 9.9% of the shares of Holding
Company Common Stock to be issued and outstanding, unless such condition has
been waived at the discretion of the Holding Company's Board of Directors in one
or more instances with the approval of the Office of Thrift Supervision (the
"OTS"). The offering is conditioned upon all conditions to the Merger being
satisfied or waived.
THE HOLDING COMPANY COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE SAVINGS INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY.
(end of cover page)
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AVAILABLE INFORMATION
The Holding Company has filed with the Securities and Exchange Commission
(the "SEC") a Registration Statement on Form S-1 under the Securities Act of
1933, as amended (Registration Statement No. 333- 28179), with respect to the
shares of Holding Company Common Stock and Units to be sold in the Offering. As
permitted by the rules and regulations of the SEC, this Prospectus omits certain
information contained in the Registration Statement. For further information
pertaining to Holding Company Common Stock and Units offered hereby, reference
is made to the Registration Statement and to the exhibits thereto, which may be
inspected and copied at the public reference facilities of the SEC, 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies of which can be obtained from
the SEC at prescribed rates by writing to the Public Reference Section of the
SEC at the above-stated address. The Registration Statement may be inspected and
copied at the SEC's Regional Office located at 7 World Trade Center, Suite 1300,
New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and may be inspected at the SEC's site on the worldwide web
(http//www.sec.gov).
The Holding Company will hereafter furnish to holders of the Holding
Company Common Stock, Debentures and Warrants annual reports containing audited
financial statements for each fiscal year and quarterly reports containing
unaudited financial information for each of the first three quarters of each
fiscal year.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS, VERBALLY OR IN WRITING, IN CONNECTION WITH THE TRANSACTIONS
DESCRIBED IN THIS PROSPECTUS OTHER THAN THOSE CONTAINED HEREIN, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS ABSOLUTELY MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY EITHER FIRST FEDERAL, THE HOLDING COMPANY, THEIR
MANAGEMENT OR THEIR RESPECTIVE BOARD OF DIRECTORS. EXCEPT AS OTHERWISE EXPRESSLY
INDICATED, ALL INFORMATION IS GIVEN AS OF THE DATE OF THIS PROSPECTUS. NEITHER
THE DELIVERY OF THIS PROSPECTUS AFTER SUCH DATE NOR ANY OFFER, SALE OR EXCHANGE
OF ANY SECURITY MADE HEREUNDER AFTER SUCH DATE SHALL UNDER ANY CIRCUMSTANCE
CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE INFORMATION SET
FORTH HEREIN SINCE SUCH DATE.
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[INSERT MAP]
[MAP ILLUSTRATES FIRST FEDERAL'S OFFICES IN TEXAS]
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PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified in
its entirety by the detailed information and Consolidated Financial Statements,
including the notes thereto, appearing elsewhere in this Prospectus.
THE HOLDING COMPANY
The Holding Company is a newly formed company organized under Delaware law
to become a financial institution holding company by acquiring 100% of the stock
of First Federal through the exchange of First Federal Common Stock for Holding
Company Common Stock and through the purchase of First Federal Common Stock for
cash. The Holding Company was formed to enable First Federal to remain as a
predominantly community-owned, independent financial institution. The Holding
Company has entered into a merger agreement dated May 21, 1997 (the "Merger
Agreement") to acquire 100% of First Federal's outstanding shares in exchange
for shares of Holding Company Common Stock and cash, subject to, among other
customary conditions, regulatory and shareholder approvals, the condition that
holders of no more than 80% of First Federal Common Stock elect to receive cash
as merger consideration (approximately $4.6 million of cash elections) and
consummation of this Offering. The Offering will be consummated only if every
condition required to be met pursuant to the Merger Agreement has been met or
waived, and only if at least the minimum amount of Units and Common Stock are
subscribed for in the Offering. The amount of Holding Company Common Stock and
Units offered for sale at the minimum was calculated to provide funds for the
purchase of no more than 80% of First Federal Common Stock outstanding, and the
Merger is contingent upon the subscription for the minimum amounts of Units and
Common Stock in the Offering. The Offering will close immediately prior to the
acquisition of the shares of First Federal Common Stock by the Holding Company.
See "The Offering."
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 1993, as
amended (the "HOLA") and, therefore, will be regulated and supervised by the
Office of Thrift Supervision (the "OTS").
FIRST FEDERAL SAVINGS BANK
First Federal Savings Bank ("First Federal"), is a federally chartered
community-owned, independent thrift institution, headquartered in Bryan-College
Station, Texas, which began operations in 1965. Historically, First Federal has
been predominantly a locally-based home lender, originating loans primarily in
Bryan-College Station and the surrounding trade area, and to a lesser extent
other communities in the general area between Houston, Austin and Dallas, Texas.
First Federal also originates consumer loans, construction loans, U.S. Small
Business Administration ("SBA") partially guaranteed loans, small commercial
real estate and small to medium commercial business loans. First Federal'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 December 31, 1996, First Federal had
assets of $59.7 million, deposits of $53.0 million and total stockholders'
equity of $4.4 million. New senior management was appointed in early 1991 to
recapitalize and convert First Federal from a mutual savings institution to a
federal stock institution, which was completed in April, 1993.
Beginning in fiscal 1994, senior management of First Federal began its
transition to full-service retail banking in order to compete more effectively
and to increase its overall profitability. In addition to its core single-family
lending business, since fiscal 1994 First Federal has increased its focus on the
following products:
o Commercial real estate lending
o Commercial business lending
o Small Business Administration loans (partially government guaranteed)
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o Home improvement loans
o Indirect automobile financing through dealers
o Credit-default insured "second chance" auto finance program
First Federal funds these lending products using a retail deposit base
gathered in its home market of Bryan-College Station as well as in the
surrounding counties of Burleson, Grimes, Leon, Madison, Robertson and
Washington. First Federal currently operates two full service offices located in
Bryan (headquarters office) and adjacent College Station. In addition, a site
has been acquired for another full service branch in the northern portion of
Bryan. The Bryan-College Station area has a population of more than 110,000
permanent residents and is home to Texas A&M University, one of the three
largest universities in the United States. In order to expand its lending base
First Federal has opened loan production offices in Waco and Huntsville, Texas
and has redefined its general lending area to include the triangle between
Dallas, Houston and Austin.
The pursuit of this strategy entails risks different from those present in
traditional single family mortgage lending. However, First Federal's management
believes that the transition to full service retail banking has had several
positive effects including increasing the net interest margin, increasing the
portfolio of loans outstanding, diversifying the types of loans in the loan
portfolio and increasing overall profitability, including increasing fee income
and service charges.
THE HOLDING COMPANY COMMON STOCK OFFERING
Common Stock Offered..................... The Holding Company is hereby
offering up to a maximum of 200,000
shares of Holding Company Common
Stock, $.01 par value per share,
with a purchase price to the public
of $10.00 per share of Holding
Company Common Stock. Subscriptions
will be filled first on a when
received basis subject to the
minimum and maximum purchase and
other limitations, described below.
Par value per share has no relation
to the inherent value of the stock.
Determination of Offering Price.......... The offering price of the Holding
Company Common Stock and the
exchange ratio of Holding Company
Common Stock for First Federal
Common Stock have been determined
by the Holding Company and do not
necessarily bear any relation to
any established investment criteria
of value such as book value,
earnings or assets or the intrinsic
value, if any, of the Holding
Company or First Federal. The
future value of the Holding Company
Common Stock will be dependent in
part on the Holding Company's and
First Federal's future operating
results which are subject in part
to economic and other factors
beyond the Holding Company's and
First Federal's control. See "The
Offering."
Maximum Purchase Limitation.............. The Holding Company may reject any
subscription or part thereof for
shares of Holding Company Common
Stock or Units for any reason
including if the total amount of
shares of Holding Company Common
Stock owned by any person following
the Merger would constitute more
than 9.9% of the issued and
outstanding Holding Company Common
Stock, unless such condition has
been waived at the discretion of
the Holding Company's Board of
Directors in one or more instances
with the approval of the OTS.
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THE UNIT OFFERING
Concurrently with the Common Stock Offering, the Holding Company is
offering through the Agent up to 3,700 Units at a price of $1,000 per Unit. Each
Unit consists of $1,000 principal amount of __% subordinated debentures due
______, 2002 (the "Debentures") and nine detachable warrants (the "Warrants").
Each Warrant entitles the holder thereof to purchase one share of Holding
Company Common Stock at an exercise price of $12.50, subject to adjustment, at
any time prior to 5:00 p.m. Central Time on ______, 2002. The Debentures
included in the Units will be unsecured and subordinate in right of payment to
all present and future Senior Indebtedness and General Obligations (as such
terms are hereinafter defined) and will be effectively subordinated to all
indebtedness and other liabilities and commitments (including deposits, trade
payables, lease obligations and obligations of holders of preferred stock) of
First Federal. Although the Units are not offered pursuant to this Prospectus,
consummation of the Unit Offering is conditioned on the contemporaneous
completion of the Common Stock Offering. See "Description of Unit Offering."
NO PRIOR TRADING MARKET
The Holding Company has never issued capital stock. Consequently, there is
no existing market for the Holding Company Common Stock at this time. Therefore,
no assurance can be given that an established and liquid trading market for the
Holding Company Common Stock will develop. Following the Offering the Holding
Company Common Stock will be traded in the over-the-counter market. Although it
has no obligation to do so, Hoefer & Arnett intends to make a market for the
Holding Company Common Stock if the volume of trading and other market-making
considerations justify such an undertaking. See "Risk Factors -- No Prior Market
for Holding Company Common Stock; Potential Illiquidity of Holding Company
Common Stock."
The development of a public market that has depth, liquidity and
orderliness depends upon the presence in the marketplace of a sufficient number
of willing buyers and sellers at any given time, over which neither the Holding
Company nor any market maker has any control. Accordingly, there can be no
assurance that an active or liquid trading market for the Holding Company Common
Stock will develop, or that if a market develops, it will continue. Furthermore,
there can no assurance that purchasers will be able to sell their shares at or
above their purchase price. See "Market Information."
USE OF PROCEEDS
The net proceeds from the Offering (estimated at $___ million and $___
million based on the minimum and maximum number of Holding Company Common Stock
and Units offered) will be used to purchase for cash all of the shares of First
Federal Common Stock not exchanged for Holding Company Common Stock pursuant to
the Merger Agreement, and to reimburse First Federal for expenses paid by First
Federal in connection with the Merger and Offering, and the balance, if any,
will become part of the Holding Company's general funds for use in its business.
On an interim basis, such proceeds will be invested primarily in short-term
marketable securities. See "Use of Proceeds."
RISK FACTORS
An investment in the Holding Company Common Stock involves a high degree of
risk and, in the case of the Holding Company Common Stock, substantial dilution.
Prospective investors should carefully review and consider the factors described
under "Risk Factors" and "Dilution".
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RISK FACTORS
The Securities offered by this Prospectus involve a high degree of risk. In
analyzing this Offering, the following risk factors, in addition to those
factors discussed elsewhere in this Prospectus, should be considered by
prospective investors before deciding whether to purchase any Holding Company
Common Stock. 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 First Federal's
results to differ materially from those expressed in or indicated by such
forward-looking statements. See "Disclosure Regarding Forward-Looking
Statements."
RISK OF RELIANCE ON NONINTEREST INCOME
In recent years, noninterest expense has exceeded net interest income and
First Federal has relied upon gains on sales of assets to record net income.
There can be no assurance that First Federal will continue to record significant
gains on sales of assets as these gains are subject to market and other risks.
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 less than in prior years. Moreover, although there can be no assurance,
management believes that First Federal is positioned to achieve significant
growth without substantial increases in noninterest expenses.
During the nine months ended June 30, 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 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 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 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. Factors considered by the Board
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<PAGE>
of Directors of the Holding Company in determining the offering price include,
among others: the economic outlook in general and the outlook for banking in
particular; book value of the company and financial condition of the business;
dividend paying capacity; the size of the common stock offering; and market
price of stocks of financial institutions that are actively traded.
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 OF BOOK VALUE
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 June 30, 1997 the net tangible book value per common
share of First Federal was approximately $6.42 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
$3.75 per share of Holding Company Common Stock as of June 30, 1997. As a result
of the assumptions stated above, investors would suffer a dilution of $6.25 per
share of Holding Company Common Stock from the offering price of $10.00 as of
June 30, 1997 based on the minimum amount of Holding Company Common Stock sold
pursuant to the Offering.
LACK OF CASH DIVIDENDS ON COMMON STOCK
It is not expected that the Holding Company will pay cash dividends on the
Holding Company Common Stock in the near term. 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
"Dividend Policy," "Regulation - Regulatory Capital Requirements" and "--
Limitation on Dividends and Other Capital Distributions."
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.
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<PAGE>
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.
HOLDING COMPANY STRUCTURE; LIMITATIONS ON THE ABILITY OF THE HOLDING COMPANY TO
PAY HOLDING COMPANY COMMON STOCK DIVIDENDS AND PRINCIPAL AND INTEREST ON
DEBENTURES
As a holding company without significant assets other than its 100%
ownership of First Federal Common Stock, the Holding Company's ability to pay
cash dividends on the Holding Company Common Stock and to meet its other cash
obligations, including the payment of principal and interest on the Debentures,
is dependent upon the receipt of dividends from First Federal on the First
Federal Common Stock owned by the Holding Company.
First Federal is a legal entity separate and distinct from the Holding
Company, and has no obligation to pay any amount of the Debentures or to make
funds available therefor, whether by dividends or otherwise. The Debentures will
be direct unsecured obligations of the Holding Company only, and the Holding
Company will be solely responsible for all payment of principal and interest on
the Debentures. In a liquidation or bankruptcy, claims of Debenture holders
would be satisfied solely from the Holding Company's equity interest in First
Federal remaining after satisfaction of all creditors of First Federal,
including depositors and holders of preferred stock, and thus are effectively
subordinated to those depositors and other creditors. If the FDIC is appointed
receiver, administrative expenses of the receiver may have priority over the
interest of the Holding Company.
The declaration of dividends by First Federal is subject to the discretion
of the Board of Directors of First Federal and applicable regulatory
requirements. While it is the present intention of the Board of Directors of
First Federal to declare dividends in an amount sufficient to provide the
Holding Company with the cash flow necessary to meet its debt service
obligations with respect to the Debentures, subject to applicable regulatory
restrictions, no assurance can be given that circumstances which would limit or
preclude the declaration of such dividends will not exist in the future. At June
30, 1997, First Federal would have been permitted to pay $697,000 in dividends
on its capital stock without prior approval of the OTS. As part of its Holding
Company application, the Holding Company has requested from the OTS a dividend
of $212,000 to be distributed upon the Closing of the Offering. See "Regulation
- - Limitations on Dividends and Other Capital Distributions."
NO PRIOR MARKET FOR HOLDING COMPANY COMMON STOCK; POTENTIAL ILLIQUIDITY OF
HOLDING COMPANY COMMON STOCK
The Holding Company has never issued capital stock. Consequently, there is
no existing market for the Holding Company Common Stock at this time. Therefore,
no assurance can be given that an established and liquid trading market for the
Holding Company Common Stock will develop. Following the Offering the Holding
Company Common Stock will be traded in the over-the-counter market. Although it
has no obligation to do so, Hoefer & Arnett intends to make a market for the
Holding Company Common Stock if the volume of trading and other market-making
considerations justify such an undertaking. See "Risk Factors -- No Prior Market
for Holding Company Common Stock; Potential Illiquidity of Holding Company
Common Stock."
The development of a public market that has depth, liquidity and
orderliness depends upon the presence in the marketplace of a sufficient number
of willing buyers and sellers at any given time, over which neither the Holding
Company nor any market maker has any control. Accordingly, there can be no
assurance that an active or liquid trading market for the Holding Company Common
Stock will develop, or that if a market develops, it will continue. Furthermore,
there can no assurance that purchasers will be able to sell their shares at or
above their purchase price. See "Market Information."
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CONCENTRATION OF LENDING ACTIVITIES; RISKS ASSOCIATED WITH NONCONFORMING LOANS
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 a substantial portion of
the loans originated for portfolio by First Federal are conventional mortgage
loans (i.e., not guaranteed or insured by agencies of the federal government)
which are secured by residential properties, 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 First Federal 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. As a result, the loans may be deemed to have higher risk of
nonpayment than secondary market conforming conventional mortgage loans. 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, (excluding a $401,000 recovery on a lawsuit filed by First Federal and
received in the year ended September 30, 1994), on an average loan portfolio of
$46.2 million, 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. If either event should
occur 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
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."
EVOLUTION OF BUSINESS
First Federal's strategy is to focus on increasing its commercial real
estate and commercial business loans and consumer loans. Commercial real estate,
commercial business loans and consumer loans are expected to represent a growing
portion of the First Federal's business. Full-service retail banking activities,
while potentially more profitable, generally entail a greater degree of credit
risk than does single family lending, the historical focus of First Federal.
Specifically, the performance of commercial real estate, commercial business and
consumer loans is more sensitive to regional and local economic conditions.
Collateral valuation requires more detailed analysis and is more variable than
single family mortgage lending. Loan balances for commercial real estate and
commercial business loans are typically larger than those for single family
mortgage loans and, thus, when there are defaults and losses, they can be
greater on a per loan basis than those for single family mortgages. Similarly,
loss levels are more difficult to predict. Full-service retail banking typically
includes a greater amount of unsecured lending, or lending secured by rapidly
depreciable assets such as automobiles, which presents different risks than
secured single family mortgage lending. The sources of repayment are not related
to collateral and can be more difficult to understand and pursue. Similarly,
loan default prevention and collection for commercial real estate, commercial
business and consumer
11
<PAGE>
lending also can be more complex and difficult than that for single family
mortgage lending. For example, business loans are not typically made with
standardized loan documents. Thus, the opportunity for mistakes and
documentation risks are increased. Moreover, a liquid secondary market for most
types of commercial real estate and business loans does not exist. The
operational, interest rate, and competitive risks associated with commercial
real estate, commercial business and consumer lending are different than those
for single family mortgage lending and require skills and experience of
management and staff different than that for single family mortgage lending.
When evaluating such credits, more factors need to be considered. Management
must be more knowledgeable of a wider variety of business enterprises and
industries that borrow money. Intensive, ongoing customer contact is required,
as well as complex analysis of financial statements at the time of loan approval
and on an ongoing basis. Servicing these customers requires closer monitoring
and more individualized analysis than does single family mortgage lending.
Commercial real estate, commercial business and consumer lending pricing is very
competitive and more subjective than that for single family mortgage lending. As
a result, First Federal's risk of credit default is higher on these loans, which
would adversely affect net income. There can be no assurance given that First
Federal can increase the amount of these loans in its portfolio.
RISKS ASSOCIATED WITH ANTI-TAKEOVER PROVISIONS
Holding Company and Bank Governing Instruments. Certain provisions of the
Holding Company's certificate of incorporation and bylaws may discourage or
prevent an attempted acquisition or change in control of the Holding Company.
These provisions provide for, among other things, noncumulative voting for
directors, limitations on the calling of special meetings, a fair
price/supermajority vote requirement at 80% for certain business combinations
with Interested Stockholders, as therein defined, (including mergers or
consolidations, sale, lease or other disposition of assets, issuances or
transfers of securities, adoption of any plan of liquidation proposed by the
Interested Stockholders, or any reclassification of securities which increases
the Interested Stockholders percentage ownership of the Holding Company) 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.
Regulatory and Statutory Provisions. 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 "Restrictions on Acquisitions of Stock and
Related Takeover Defensive Provisions."
Voting Control of Shares by the Board and Executive Officers. 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 (11 persons) will receive approximately 108,000 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 36.1% at the minimum and 30.9%, 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 "Description of Capital
Stock" and "Restrictions on Acquisitions of Stock and Related Takeover Defensive
Provisions."
12
<PAGE>
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 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.
13
<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)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
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)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
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)(1) --- 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
Extraordinary item - Income tax benefit from utilizing net
operating loss carryforwards............................... --- --- --- --- 106
Cumulative effect of change in accounting for income
taxes.................................................... --- --- --- 137 ---
------ ------- ------ ------ ------
Net income............................................... $ 234(2) $ 211 $ 457 $ 682 $ 501
====== ======= ====== ====== ======
Ratio of earnings to fixed charges including interest
on deposits (3)........................................... 1.10 1.10 1.33 1.35 1.16
Ratio of earnings to fixed charges excluding interest
on deposits(3)............................................ 3.73 1.99 5.19 7.23 12.52
PER SHARE DATA:
Earnings per share(5)..................................... .61 .52 1.54 .47(4) N/A
</TABLE>
- ----------
(1) Reflects a negative loan loss expense from the settlement of a lawsuit
filed by First Federal which favorably impacted net income in fiscal 1994.
(2) Excluding the nonrecurring September 1996 SAIF assessment, after tax net
income would have been $454,000.
14
<PAGE>
<TABLE>
<CAPTION>
At or for the
Year Ended September 30,
--------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET RATIOS:
Nonperforming assets to total
assets at end of year(6)...................... 1.50% .62% .87% .74% .76%
Allowance for loan losses to non-performing
loans......................................... 138.76 179.10 103.30 156.22 204.70
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(7)...................... 4.11 3.97 4.20 3.67 3.08
End of year(8).............................. 4.67 4.17 4.29 4.27 3.35
Net interest margin for the year(9)........... 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..................... 7,354 6,707 5,073 4,345 4,465
Number of full-service offices................. 2 2 2 1 1
</TABLE>
- ----------
(3) The ratio of earnings to fixed charges is computed by dividing fixed
charges into earnings from continuing operations before income taxes and
extraordinary items plus fixed charges. Fixed charges include interest
expensed or capitalized, the amortization of total debt, the interest
component of rental expense and Bank preferred stock dividends.
(4) Reflects earnings from the date First Federal converted to stock form.
(5) Adjusted to reflect stock dividends paid to First Federal stockholders.
(6) Nonperforming assets include loans that are 90 days or more delinquent as
well as repossessed assets.
(7) 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).
(8) 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.
(9) Net interest income divided by average interest-earning assets.
15
<PAGE>
RECENT FINANCIAL DATA
The selected financial and other data of First Federal set forth below at
and for the three and nine months ended June 30, 1997 and June 30, 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 nine months ended June 30, 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 June 30, At September 30,
1997 1996
------------------ -------------------
(In Thousands)
<S> <C> <C>
BALANCE SHEET:
Total assets................................... $65,781 $57,597
Loans receivable, net.......................... 58,801(1) 49,579(1)
Mortgage-backed securities..................... 1,186 1,292
Securities..................................... --- 1,000
Deposits....................................... 57,638 51,677
FHLB Advances.................................. 2,100 ---
Stockholders' equity........................... 4,719 4,316
</TABLE>
- ----------
(1) Including loans held for sale to the secondary market at month-end of
$475,000 and $419,000 at June 30, 1997 and September 30, 1996,
respectively.
<TABLE>
<CAPTION>
For Three Months Ended For Nine Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------- ------- ------ ------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME:
Total interest income...................................... $1,391 $1,199 $4,007 $3,611
Total interest expense..................................... 663 584 1,882 1,795
-------- ------- ------ ------
Net interest income...................................... 728 615 2,125 1,816
Provision for loan losses.................................. 15 6 17 1
-------- ------- ------ ------
Net interest income after provision for loan losses...... 713 609 2,108 1,815
Service charges............................................ 135 142 449 386
Gain on sales of loans, mortgage servicing rights,
mortgage-backed securities and securities................ 40 114 99 288
Other noninterest income................................... 41 --- 41 9
Other noninterest expenses (operating expenses)............ 665 661 1,986 2,023
-------- ------- ------ ------
Income before income taxes................................. 264 204 711 475
Income tax expense ........................................ 90 70 242 162
-------- ------- ------ ------
Net income................................................. $ 174 $ 134 $ 469 $ 313
======== ======= ====== ======
Ratio of earnings to fixed charges including
interest on deposits(1).................................. 1.33 1.22 1.33 1.22
Ratio of earnings to fixed charges excluding
interest on deposits(1).................................. 6.24 6.76 6.24 6.76
PER SHARE DATA:
Earnings per share(2)..................................... .63 .47 1.68 1.04
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
For Three Months Ended For Nine Months Ended
-------------------------- -------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
------ ------ ------ -----
<S> <C> <C> <C> <C>
BALANCE SHEET RATIOS:
Nonperforming assets to total
assets at end of period(3).................. 1.62% 1.24% 1.62% 1.24%
Total equity to total assets (end of period)... 7.17 7.67 7.17 7.67
Total equity to assets ratio (ratio of
average equity to average total assets)...... 7.96 7.42 7.31 7.20
EARNINGS PERFORMANCE DATA:
Interest rate spread information:
Average during period(4)....................
End of period(5)............................ 4.58 4.31 4.81 4.16
Net interest margin for the period(6)......... 4.95 4.48 4.95 4.48
Average interest-earning assets as a
percentage of average interest-bearing
liabilities.................................. 104.44 103.68 103.66 104.22
Return on assets (ratio of net income to
average total assets).......................... 1.08 .91 1.01 .70
Return on total equity (ratio of net income
to average equity)........................... 14.97 12.31 13.78 9.74
Noninterest expenses to average total assets... 4.15 4.50 4.27 4.53
OTHER DATA:
Number of deposit accounts..................... 7,394 6,768 7,394 6,768
Number of full-service offices................. 2 2 2 2
</TABLE>
- ----------
(1) The ratio of earnings to fixed charges is computed by dividing fixed
charges into earnings from continuing operations before income taxes and
extraordinary items plus fixed charges. Fixed charges include interest
expensed or capitalized, the amortization of total debt, the interest
component of rental expense and Bank preferred stock dividends.
(2) Adjusted to reflect stock dividends paid to First Federal stockholders.
(3) Nonperforming assets include loans that are 90 days or more delinquent as
well as repossessed assets.
(4) 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).
(5) 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.
(6) Net interest income divided by average interest-earning assets.
17
<PAGE>
MANAGEMENT'S DISCUSSION OF RECENT RESULTS
FINANCIAL CONDITION
First Federal's total assets increased by $8.2 million to $65.8 million at
June 30, 1997 from $57.6 million at September 30, 1996, or an increase of
14.24%. The increase was primarily due to an increase in loans receivable,
partially offset by a decrease in cash.
Loans receivable (excluding loans held for sale) increased $9.1 million to
$58.3 million at June 30, 1997, compared to $49.2 million at September 30,
1996--or an increase of 18.50%. During the nine months ended June 30, 1997,
First Federal originated $22.0 million of mortgage loans , of which $21.2
million were secured by mortgages on one- to four-family residences, and $9.1
million in consumer loans. Approximately $1.4 million of the new mortgage loans
represented refinancing of existing First Federal loans.
Deposits increased from $51.7 million at September 30, 1996 to $57.6
million at June 30, 1997 primarily as a result of increased marketing of
short-term certificates of deposits--along with new checking accounts. Accrued
interest payable and other liabilities increased $1.8 million from $1.6 million
at September 30, 1996 to $3.4 million at June 30, 1997 largely as a result of
increased borrowings from the Federal Home Loan Bank of Dallas to fund the
Bank's increased consumer loan demand, offset by the payment of escrowed funds
in December, 1996 for property taxes on home loans held by the Bank.
NON-PERFORMING 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. First Federal
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 $15,000 for the three months ending June 30, 1997, as
compared to a $6,000 loan loss provision for the three months ending June 30,
1996. The Bank's loan loss reserve balance as of June 30, 1997 was $268,000
compared to the September 30, 1996 loan loss reserve of $247,000. Total
non-performing assets increased slightly during the three month period ended
June 30, 1997 to $1.1 million or 1.62% of total assets as compared to $863,000
or 1.50% of total assets at September 30, 1996. The majority of this increase in
non-performing assets were loans secured by mortgages on one- to four-family
residences. 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
(exclusive of a $400,000 recovery on a lawsuit settlement in the fiscal year
ending September 30, 1994).
The Bank will continue to monitor and adjust its allowance for losses on
loans as the Board of Director's and management's analysis of its loan portfolio
and economic conditions dictate, which may result in an increase in the Bank's
loan loss provision as the Bank implements its strategy of increasing commercial
loans. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
upon their judgment of the information available to them at the time of their
examination. Therefore, although the Bank maintains its allowance for losses on
loans at a level which it considers to be adequate to provide for potential
losses, in view of the continued uncertainties in the economy generally and the
regulatory uncertainty pertaining to reserve levels for the thrift industry
generally, there can be no assurance that losses will not exceed the estimated
amounts or the Bank will not be required to make additional substantial
additions to its allowance for losses on loans in the future.
18
<PAGE>
COMPARISON OF NINE MONTHS ENDED JUNE 30, 1997 TO JUNE 30, 1996
General. First Federal reported net income after taxes of $469,000 for the
nine months ended June 30, 1997, an increase of $156,000 (or 49.84%) as compared
to $313,000 in net income reported for the nine months ended June 30, 1996. The
increase in earnings, as discussed in more detail below, resulted primarily from
a $396,000 increase in interest income and a $37,000 decrease in noninterest
expense, partially offset by a decrease of $94,000 in noninterest income and a
$87,000 increase in interest expense.
Net Interest Income. Net interest income increased $309,000 to $2.1 million
for the nine month period ended June 30, 1997 from $1.8 million for the prior
period in 1996. This increase was attributable primarily to an increase in
interest earned on loans receivable, partially offset by an increase in interest
paid on the Bank's deposit liabilities and interest paid on other borrowings
from the FHLB. For the nine months ended June 30, 1997, the net interest margin
(net interest income divided by average interest earning assets) increased to
4.87%, as compared to 4.38% for 1996. The spread between the average yield on
interest earning assets and the average cost of funds was 4.81% for 1997 versus
4.16% for 1996. These increases resulted primarily from higher yields on
consumer loans and the repricing in the renewals of 3-year balloon home loans.
Noninterest Income. Noninterest income decreased $94,000 to $589,000 for
the nine months ended June 30, 1997 from $683,000 for the nine months ended June
30, 1996. This decrease can be attributed to a $13,000 decrease in net gain on
sale of securities which occurred in December, 1995, a $176,000 decrease in net
gain on sale of home loans and mortgage servicing rights to the secondary market
reflecting reduced mortgage banking activity, and also the result of sale in
June, 1996 of mortgage servicing rights previously held. This was partially
offset by a $63,000 increase in service charges, which can be attributable to an
increase in interest-bearing checking accounts and fees associated with these
types of accounts, and a $32,000 increase in other noninterest income, as a
result of recognizing excess auto dealer reserves due to the repayment of auto
loan balances.
Noninterest Expenses. Noninterest expense remained stable at $2.0 million
for the nine months ended June 30, 1997 and June 30, 1996. A slight decrease of
$37,000 can primarily be attributed to a $29,000 decrease in compensation and
benefits expense, a $58,000 decrease in federal insurance premiums due to
recapitalization of SAIF in 1996, and a $11,000 decrease in professional fees.
This was offset by $16,000 increase in data processing and a $46,000 increase in
other noninterest expense due to the addition of a Mortgage Loan Production
Office and overall increased activity in the Bank.
Income Taxes. Income tax expense increased $80,000 to $242,000 for the nine
months ended June 30, 1997 compared to $162,000 for the nine months ended June
30, 1996 as a result of increased earnings. The period reflected a tax rate of
34.0% and 34.1% for June 30, 1997 and June 30, 1996, respectively.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1997 TO JUNE 30, 1996
General. First Federal reported net income after taxes of $174,000 for the
three months ended June 30, 1997, an increase of $40,000 as compared to $134,000
in net income reported for the three months ended June 30, 1996. The increase in
earnings, as discussed in more detail below, resulted primarily from a $192,000
increase in interest income, caused by an increased volume of loans outstanding
and an increase in the Bank's spread, partially offset by a $79,000 increase in
interest expense and a decrease of $40,000 in noninterest income.
Net Interest Income. Net interest income increased $113,000 to $728,000 for
the three month period ended June 30, 1997 from $615,000 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
from the FHLB. For the three months ended June 30, 1997, the net interest margin
(net interest income divided by average interest earning assets) increased to
4.79%, as compared to 4.49% for 1996. The spread between the average yield on
interest earning assets and the average cost of funds was 4.58% for 1997 versus
4.31% for 1996. These increases resulted primarily from higher yields on
consumer loans and the repricing in the renewals of 3-year balloon loans.
19
<PAGE>
Noninterest Income. Noninterest income decreased by $40,000 to $216,000 for
the three months ended June 30, 1997 from $256,000 for the three months ended
June 30, 1996. This decrease can be attributed to a $74,000 decrease in net gain
on sale of home loans and mortgage servicing rights to the secondary market,
reflecting reduced mortgage banking activity, and a slight decrease in various
other noninterest income, partially offset by a $41,000 increase in other
noninterest income, as a result of recognizing excess dealer reserves due to the
repayment of auto loan balances.
Noninterest Expense. Noninterest expense increased $4,000 to $665,000 for
the three months ended June 30, 1997 from $661,000 for the three months ended
June 30, 1996. This increase can primarily be attributed to a $17,000 increase
in other noninterest expense and a $13,000 increase in compensation and benefits
primarily due to adding additional personnel in consumer lending.
Income Taxes. Income tax expense increased $20,000 to $90,000 for the three
months ended June 30, 1997 compared to $70,000 for the three months ended June
30, 1996 as a result of increased earnings. The period reflected a tax rate of
34.1% and 34.3% for June 30, 1997 and June 30, 1996 , respectively.
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 (as it has in the recent past) or utilize other borrowings of
funds based primarily on the level of loan originations, 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 June 30, 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
June 30, 1997, First Federal's liquidity ratio was 5.01%. 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 June 30, 1997, First Federal had commitments to originate
loans totalling $5.7 million. First Federal also had $640,000 of outstanding
unused lines of credit. If needed for liquidity purposes, at June 30, 1997,
First Federal was eligible to borrow $23.0 million from the Federal Home Loan
Bank of Dallas, and had actually borrowed only $2.1 million. First Federal
considers its liquidity and capital resources to be adequate to meet its needs
for the foreseeable future. First Federal expects to be able to fund or
refinance, on a timely basis, its material commitments and long-term
liabilities.
At June 30, 1997, First Federal had tangible capital of $4.7 million, or
7.15% of total assets which was $3.7 million above the minimum capital
requirement of $990,000 or 1.5% of adjusted total assets.
At June 30, 1997, First Federal had core capital of $4.7 million, or 7.15%
of total assets which was $2.7 million above the minimum capital requirement of
$2.0 million or 3.0% of adjusted total assets.
At June 30, 1997, First Federal had total risk-based capital of $5.0
million and risk-weighted assets of $48.6 million or total risk-based capital of
10.27% of risk-weighted assets. This amount was $1.1 million above the minimum
regulatory requirement of $3.9 million, or 8.0% of risk-weighted assets.
20
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
PRO FORMA CONSOLIDATED BALANCE SHEET
The following Holding Company pro forma consolidated balance sheet and
statement of income illustrate the historical consolidated balance sheet and
consolidated statements of income of First Federal giving effect to the Merger
as if it had been effective on June 30, 1997 after giving effect to the pro
forma adjustments described in the notes to the Holding Company pro forma
consolidated financial statements. The Merger will be accounted for as a
leveraged buy-out, with the First Federal Common Stock beneficially held by its
directors and executive officers and exchanged for Holding Company Common Stock
contributed to the Holding Company recorded at its carrying value. The assets
acquired and liabilities assumed in the acquisition of the remainder of First
Federal will be recorded at their estimated fair values, with the excess of the
purchase price over the net fair value recorded as goodwill. This information
should be read in conjunction with the historical consolidated financial
statements of First Federal, including the notes thereto, which appear elsewhere
in this Prospectus. The pro forma adjustments reflect assumptions regarding (i)
the aggregate amount of cash to be paid assuming that the holders of 75% of the
stock of First Federal elect to be paid in cash by the Holding Company as a
result of the Merger and (ii) the consummation of the Offering at the minimum
(3,400 Units sold). The pro forma balance sheet and income statement may differ
materially from actual results should the maximum amount of Units be sold in the
Unit Offering and should the amount of stock sold in the Common Stock Offering
be greater than the amount assumed for purposes of these tables. The pro forma
data is not indicative of the actual financial position that would have occurred
had the Merger been consummated on June 30, 1997 or that may be obtained in the
future.
21
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
June 30, 1997
---------------------------------------------------------------
First
Federal Pro forma Adjustments Elimination Consolidated
Historical Holding Company Entries Pro forma
---------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks.................. $ 766 $ 1,314 (1) $(4,326)(3) $ --- $ 731
--- 3,400 (2) --- --- ---
--- (423)(5) --- --- ---
Interest-bearing deposits with
financial institutions................. 1,605 --- --- --- 1,605
Mortgage-backed securities............... 1,186 --- (18)(3) --- 1,168
Loans.................................... 58,801 --- 416(3) --- 59,217
Premises and equipment................... 1,046 --- --- 1,046
Goodwill................................. --- --- 466(3) --- 466
Deposit purchase accounting
adjustments.............................. --- --- 1,079(3) --- 1,079
Investment in Bank....................... --- 961(6) 2,885(3) (3,846)(7) ---
Debt issuance costs...................... --- 423(5) --- --- 423
Interest receivable and other assets..... 2,377 --- --- --- 2,377
-------- -------- ---------- -------- ----------
Total assets.......................... $65,781 $ 5,675 $ 502 $(3,846) $68,112
======== ======== ========= ======= =======
LIABILITIES
Deposits................................. $57,638 $ --- $ --- $ --- $57,638
Other borrowings......................... 2,100 --- --- --- 2,100
Debentures............................... --- 3,400(2) --- --- 3,400
Other liabilities........................ 1,324 --- 502(3) --- 1,826
-------- -------- ---------- -------- ----------
Total liabilities..................... 61,062 3,400 502 --- 64,964
Minority interest-preferred stock........ --- --- --- 873(9) 873
STOCKHOLDERS' EQUITY
Preferred stock.......................... 1 --- (1)(9) ---
Common stock............................. 2 1(6) --- (2)(7) 2
1(1)
Additional paid-in-capital............... 2,743 960(6) --- (1,871)(7) 2,273
--- 1,313(1) --- (872)(9) ---
Retained earnings........................ 1,973 --- --- (1,973)(7) ---
-------- -------- ---------- -------- ----------
Total stockholders' equity............ 4,719 2,275 --- (4,719) 2,275
-------- -------- ---------- -------- ----------
Total liabilities and stockholders'
equity............................. $65,781 $ 5,675 $ 502 $(3,846) $68,112
======== ======== ========== ======== ==========
PER SHARE DATA(4)
Holding Company common shares
outstanding............................. 599,030 --- --- --- 299,758
Book value per Holding Company
common share........................... $ 6.42 --- --- --- $ 7.59
Tangible book value per Holding
Company common share................... 6.42 --- --- --- 3.75
Offering price Holding Company
common stock........................... --- --- --- --- 10.00
</TABLE>
22
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the year ended
September 30, 1996
------------------------------------------
Pro forma
Adjustments
Bank Holding Consolidated
Historical Company Pro forma
---------- ----------- ------------
<S> <C> <C> <C>
INTEREST INCOME
Loans....................................................... $ 4,407 $ (83)(3) $ 4,324
Mortgage-backed securities.................................. 145 4 (3) 149
Other....................................................... 276 --- 276
-------- -------- ---------
Total interest income................................... 4,828 (79) 4,749
INTEREST EXPENSE
Deposits.................................................... 2,358 22(3) 2,380
Debentures.................................................. 391(2) 391
Other borrowings............................................ 5 --- 5
-------- -------- ---------
Total interest expense................................... 2,363 413 2,776
-------- -------- ---------
Net Interest Income......................................... 2,465 (492) 1,973
Provision for loan losses................................... (52) --- (52)
-------- -------- ---------
Net interest income after provisions for loan losses........ 2,517 (492) 2,025
NONINTEREST INCOME
Other....................................................... 543 --- 543
Gains on sale of loans and servicing........................ 330 --- 330
-------- -------- ---------
Total noninterest income................................ 873 --- 873
NONINTEREST EXPENSES
Compensation and benefits................................... 1,337 --- 1,337
Amortization of intangibles................................. --- 135(3) 135
Amortization of debt issue costs --- 85(5) 85
Occupancy and equipment..................................... 335 --- 335
Other....................................................... 1,376 --- 1,376
-------- -------- ---------
Total noninterest expenses............................... 3,048 220 3,268
-------- -------- ---------
Income/(loss) before federal income tax expense............ 342 (712) (370)
Income tax expense/(benefit)................................ 108 (232)(8) (124)
-------- -------- ---------
Net income/(loss)........................................... 234 (480) (246)
Preferred stock dividends................................... (88) (88)
-------- -------- ---------
Income available to common stockholders..................... $ 146 $ (480) $ (334)
======== ======== =========
Weighted average common shares outstanding.................. 599,030 --- 299,758
Net income/(loss) per common share.......................... $ .24 --- $ (1.11)
</TABLE>
23
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the Nine Months Ended
June 30, 1997
---------------------------------------
Pro forma
Adjustments Con-
Bank Holding solidated
Historical Company Pro forma
---------- ----------- ---------
<S> <C> <C> <C>
INTEREST INCOME
Loans...................................................... $ 3,847 $ (62)(3) $ 3,785
Mortgage-backed securities................................. 56 3(3) 59
Other...................................................... 104 --- 104
---------- ----------- ---------
Total interest income................................... 4,007 (59) 3,948
INTEREST EXPENSE
Deposits................................................... 1,825 17(3) 1,842
Debentures................................................. --- 293(2) 293
Other borrowings........................................... 57 --- 57
---------- ----------- ---------
Total interest expense.................................. 1,882 310 2,192
---------- ----------- ---------
Net Interest Income........................................ 2,125 (369) 1,756
Provision for loan losses.................................. 1 --- 1
---------- ----------- ---------
Net interest income after provisions for loan losses....... 2,124 (369) 1,755
NONINTEREST INCOME
Other...................................................... 490 --- 490
Gains on sale of loans and servicing....................... 99 --- 99
---------- ----------- ---------
Total noninterest income................................ 589 --- 589
NONINTEREST EXPENSES
Compensation and benefits.................................. 988 --- 988
Amortization of intangibles................................ --- 101(3) 101
Amortization of debt issue costs........................... --- 64(5) 64
Occupancy and equipment.................................... 239 --- 239
Other...................................................... 775 --- 775
---------- ----------- ---------
Total noninterest expenses.............................. 2,002 165 2,167
---------- ----------- ---------
Income/(loss) before federal income tax expense............ 711 (534) 177
Income tax expense/(benefit)............................... 242 (174)(8) 68
---------- ----------- ---------
Net income/(loss).......................................... 469 (360) 109
Preferred stock dividends.................................. (66) (66)
---------- ----------- ---------
Income/(loss) available to common stockholders............. $ 403 $ (360) $ 43
========== =========== =========
Weighted average common shares outstanding................. 599,030 --- 299,758
Net income/(loss) per common share......................... $.67 --- $.14
</TABLE>
24
<PAGE>
NOTES TO THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) Reflects the estimated proceeds from the issuance and sale of 150,000
shares of the Holding Company Common Stock (par value $.01) in the
offering.
<TABLE>
<CAPTION>
<S> <C>
Gross proceeds $1,500,000
Estimated offering expenses (186,000)
----------
Net proceeds $1,314,000
==========
</TABLE>
(2) Reflects the estimated proceeds from the issuance and sale of 3,400, 11.5%,
five-year Debentures, at $1,000 per unit. Each Debenture includes a
detachable warrant to purchase 9 shares of Holding Company Common Stock at
$12.50 per share. The value of the Warrants has been estimated to be
immaterial. Interest cost of $391,000 per year.
(3) Reflects goodwill related to purchase of 75% of First Federal's Common
Stock for $4,326,000 (179,709 shares at $24.07 per share) as follows:
<TABLE>
<CAPTION>
Annual
Life Amortization Amount
------------ ------------- ------------
<S> <C> <C> <C>
Purchase price (179,709 shares of First Federal
Common Stock, representing 75% of outstanding
common shares at $24.07 per share) $4,326,000
First Federal book value related to common
shares purchased 2,885,000
-----------
Excess purchase price over book value 1,441,000
-----------
Less adjustments to reflect fair value
Securities (18,000) 5 years $ 4,000
Loans 416,000 5 years (83,000)
Certificates of deposit 43,000 2 years (22,000)
Core deposit intangible 1,036,000 10 years (104,000)
Income tax effect of above
adjustments at 34% federal rate (502,000)
Total adjustments 975,000
Goodwill $ 466,000 15 years (31,000)
===========
</TABLE>
(4) Net income and book value per common share for First Federal historical
reflects 2.5 exchange rate for Holding Company Common Stock, or 599,030
shares. Tangible book value excludes deposit intangibles and goodwill.
Warrants have not been included in shares outstanding. Consolidated pro
forma net income and book value per common share reflects 299,612 common
shares outstanding. Book value per common share excludes $873,000 of First
Federal's preferred stock. Net income per common share excludes $88,000 of
dividends on preferred stock. Tangible book value excludes goodwill and
deposit intangibles.
(5) Reflects debt issue costs of $423,000, to be amortized on a straight-line
basis over the five-year term of the Debentures ($85,000 per year).
(6) Reflects exchange of 59,903 common shares (25% of outstanding common
shares) of First Federal for 149,758 common shares (par value $0.01) of
Holding Company at historical book value (59,903 shares at $16.05/share =
$961,000).
(7) Elimination of intercompany accounts.
(8) Reflects tax rate of 34%.
(9) Reflects outside ownership of First Federal's preferred stock.
(10) The proposed transaction has been reflected in the pro forma financial
statements as a leveraged buy-out (LBO) in accordance with Issue No. 88016
of the Emerging Task Force (EITF 88-16). EITF 88-16 permits a partial or
complete change in accounting basis only if there has been a change in
control of voting interest, i.e., the establishment of a new group of
controlling stockholders. EITF 88-16 further requires the carryover of the
accounting basis for those stockholders who exchange their First Federal
stock for Company stock.
Accordingly, these pro forma financial statements reflect a carryover of
accounting basis for the assumed 25% of First Federal stockholders who will
exchange their shares for Company shares and a new basis of accounting for
the remaining purchasers of Company Stock.
25
<PAGE>
DILUTION
Upon the successful completion of this Offering there will be a minimum of
approximately 300,000 and a maximum of approximately 350,000 shares of
outstanding Holding Company Common Stock.
As of June 30, 1997, the net tangible book value available to common
stockholders of First Federal amounted to $3.8 million or approximately $6.42
per share, adjusted for the Exchange Ratio. After giving effect to the issuance
and sale of 150,000 shares minimum and 200,000 shares maximum number of Shares
of Holding Company Common Stock offered hereby and the receipt of the estimated
net proceeds thereof, and assuming no exercise of options currently outstanding,
the net tangible book value of the Holding Company will amount to approximately
$1.1 million and $1.6 million or approximately $3.75 and $4.65 per share of
Holding Company Common Stock at the minimum and maximum number of shares of the
Holding Company Common Stock offered, respectively. As a result, the purchasers
of the Holding Company Common Stock offered hereby will incur an immediate
dilution ranging from approximately $6.25 to $5.35 per share of Holding Company
Common Stock, representing the difference between their purchase at $10.00 per
share and the net tangible book value per share of Holding Company Common Stock
after the Offering. This dilution results from the cash payment to First Federal
shareholders in exchange for their First Federal Common Stock in the Merger and
the expenses in connection with the Offering and the Merger. It should be noted
that the calculations above were made without giving effect to the intrinsic
value, if any, of First Federal's deposit base and over 30-year franchise.
The following table illustrates the dilution of the investment to the
investors.
<TABLE>
<CAPTION>
150,000 200,000
Shares Shares
(Minimum (Maximum
Number of Number of
Shares) Shares)
<S> <C> <C>
Offering price per share of Holding Company Common Stock...................... $10.00 $10.00
Net tangible book value per share of Holding Company Common Stock
before offering (1)......................................................... 6.42 6.42
Pro forma net tangible book value per share of Holding Company Common
Stock after offering (1).................................................... 3.75 4.65
Increase per share of Holding Company Common Stock attributable to
payments for shares offered hereby.......................................... 10.00 10.00
Dilution to investors ........................................................ 6.25 5.35
</TABLE>
- ----------
(1) Net tangible book value per share of Holding Company Common Stock is
determined by dividing the number of shares of Holding Company Common Stock
outstanding into the net tangible book value of the Holding Company
(tangible assets less liabilities). Reflects the Exchange Ratio of 2.5
shares of Holding Company Common Stock for one share of First Federal
Common Stock .
(2) The pro forma net tangible book value of the Holding Company excludes the
pro forma core deposit intangible, net of tax, and goodwill.
26
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization, including
savings deposits, of First Federal at June 30, 1997 and the pro forma
capitalization of the Holding Company as of that date, after giving effect to
the completion of the Offering and based on other assumptions set forth in the
table, in "Pro Forma Data" and in "Use of Proceeds."
<TABLE>
<CAPTION>
Pro Forma Holding Company
Consolidated Capitalization
June 30, 1997
(In Thousands)
Historical Pro Forma
---------- --------
<S> <C> <C>
Deposits.................................................. $57,638 $57,638
Other Borrowings.......................................... 2,100 2,100
Debentures due............................................ --- 3,400
---------- --------
Total Senior Indebtedness, General Obligations
and Debentures........................................ $59,738 $63,138
========== ========
Stockholders' equity:
Preferred Stock, $.01 par value per shares to be
outstanding as shown...................................... $ 1 $ ---
Holding Company Common Stock, par value $.01 per share:
Authorized - shares; to be outstanding as shown........... 2 2
Additional paid-in capital................................ 2,743 2,273
Retained earnings......................................... 1,973 ---
---------- --------
Total stockholders' equity................................ $ 4,719 $2,275
========== ========
</TABLE>
This capitalization table assumes the sale of only the minimum amount of
Units. Should the maximum amount of Units be sold in the Unit Offering, senior
indebtedness would increase to $63,438,000.
27
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in this
Prospectus, including without limitation, statements under "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" regarding the Holding Company's and First Federal's
financial position, business strategy and plans and objectives of management of
the Holding Company and First Federal for future operations, are forward-looking
statements. When used in this Prospectus, the words "anticipate," "believe,"
"estimate," "expect" and "intend" and words or phrases of similar import, as
they relate to the Holding Company or First Federal or Holding Company
management, are intended to identify forward-looking statements. Although the
Holding Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no absolute assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from the Holding Company's expectations
("cautionary statements") are disclosed under "Risk Factors" and elsewhere in
this Prospectus, including, without limitation, in conjunction with the
forward-looking statements included in this Prospectus. Based upon changing
conditions, should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended. The Holding Company does not intend to update these
forward-looking statements. All subsequent written and oral forward-looking
statements attributable to the Holding Company, First Federal or persons acting
on their behalf are expressly qualified in their entirety by the applicable
cautionary statements.
USE OF PROCEEDS
Net proceeds from the sale of the Holding Company Common Stock and the
Units in the Offering are currently estimated at $___ million and $___ million,
at the minimum and maximum number of securities offered, respectively. This
amount is arrived at by subtracting the $_______ and $_______ estimated fees and
expenses of the Offering, including commissions, from $_________ and $_________,
which are the gross proceeds from the sale of the minimum and maximum number of
securities offered, respectively. In calculating expenses, it is assumed that a
minimum of 150,000 shares of Holding Company Common Stock will be sold at no
commission and 3,400 Units will be sold at a 7.0% commission. Actual expenses
may be more or less than those estimated.
The net proceeds will be used to purchase all of the shares of First
Federal Common Stock exchanged for cash pursuant to the Merger Agreement
(approximately $2.9 million to $4.6 million), repay First Federal for expenses
paid by First Federal in connection with the Merger and Offering (approximately
$________), and the balance, if any, will become part of the Holding Company's
general funds for use in its business. On an interim basis, the proceeds will be
invested by the Holding Company primarily in short-term marketable securities.
The Holding Company reserves the right to use the proceeds in any manner
authorized by law.
28
<PAGE>
MARKET INFORMATION
The Holding Company has never issued capital stock . Consequently, there is
no existing market for the Holding Company Common Stock at this time. Therefore,
no assurance can be given that an established and liquid trading market for the
Holding Company Common Stock will develop. Following the Offering the Holding
Company Common Stock will be traded in the over-the-counter market. Although it
has no obligation to do so, Hoefer & Arnett intends to make a market for the
Holding Company Common Stock. Depending upon the volume of trading activity in
the common stock and subject to compliance with the applicable laws and other
regulatory requirements, Hoefer & Arnett will use its bests efforts to encourage
and assist market makers to establish and maintain a market for the Holding
Company Common Stock, although there can be no assurance that it will succeed in
doing so.
The development of a public market that has depth, liquidity and
orderliness depends upon the presence in the marketplace of a sufficient number
of willing buyers and sellers at any given time, over which neither the Holding
Company nor any market maker has any control. Accordingly, there can be no
assurance that an active or liquid trading market for the Holding Company Common
Stock will develop, or that if a market develops, it will continue. Furthermore,
there can no assurance that purchasers will be able to sell their shares at or
above the purchase price.
DIVIDEND POLICY
In the near term, 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 no cash dividends on First Federal Common Stock
previously sold in 1992. Accordingly, any investor who anticipates the need for
current cash dividends from an investment in Holding Company Common Stock 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.
Delaware law generally limits dividends of the Holding Company to an amount
equal to the excess of its net assets (the amount by which total assets exceed
total liabilities) over its paid-in capital or, if there is no such excess, to
its net profits for the current and immediately preceding fiscal year.
29
<PAGE>
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. See "Recent Financial Data; Management's
Discussion of Recent Results" for a discussion of First Federal's financial
condition as of June 30, 1997.
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 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 First Federal 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
30
<PAGE>
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 First Federal'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 4.61% 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.
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, First Federal has developed several strategies to manage its
interest rate risk. Primarily, First Federal is currently selling all
newly-originated one-to four-family residential mortgage loans which are
saleable in the secondary market--most of which are long-term fixed-rate loans.
In addition, First Federal currently offers three-year fixed rate balloon loans
and other adjustable rate loans, and has implemented an active, diversified
short-term consumer lending program, giving First Federal an opportunity to
reprice its loans on a more frequent basis.
31
<PAGE>
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 First
Federal.
It has been, and continues to be, an objective of First Federal's Board of
Directors and management to manage interest rate risk. First Federal's
asset/liability policy, established by the Board of Directors, dictates
acceptable limits on the amount of change in NPV given certain changes in
interest rates. See "- Asset/Liability Management."
Presented below, as of March 31, 1997, 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.
<TABLE>
<CAPTION>
Acceptable Limits
Change in Established by Board of
Interest Rate Estimated At March 31, 1997 Directors
NPV ------------------------ ----------
---------
(Basis Points) $ Change % Change % Change
- -------------- -------- -------- -----------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+400 $6,356 $ (880) (12)% (75)%
+300 6,670 (566) (8) (50)
+200 6,941 (295) (4) (30)
+100 7,144 (92) (1) (15)
--- 7,236 --- --- ---
-100 7,156 (80) (1) (15)
-200 6,987 (249) (3) (30)
-300 6,961 (275) (4) (50)
-400 7,086 (150) (2) (75)
</TABLE>
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, First Federal would
experience a 2% decrease in NPV in a declining rate environment and a 8.0%
decrease in a rising rate environment. As of March 31, 1997, an increase in
interest rates of 200 basis points would have resulted in a 4% decrease in the
present value of First Federal's assets, while
32
<PAGE>
a change in the interest rates of negative 200 basis points would have resulted
in a 3% decrease in the present value of First Federal'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.
33
<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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
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>
34
<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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing liabilities:
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 .................. 54,638 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.
35
<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
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on:
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
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on:
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>
36
<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>
37
<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, First Federal 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 First Federal's loan portfolio, offset in part by an 18 basis
point increase in First Federal'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.
First Federal 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 First Federal's loan
loss exposure. The provision for loan losses is based on management's periodic
review of First Federal'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 First Federal's allowance for
estimated losses on loans. Such agencies may require First Federal 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. In
38
<PAGE>
addition, First Federal 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, First
Federal 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 First Federal'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 First Federal 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 First
Federal's loan portfolio, offset in part by an increase in First Federal'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, First
Federal 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 First Federal 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
39
<PAGE>
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.
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 First Federal, 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 First Federal.
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, First Federal 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
40
<PAGE>
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.
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)
<S> <C> <C>
Operating Activities:
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 First Federal. Prior to the conversion, First
Federal 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. First Federal'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.
41
<PAGE>
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 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 First Federal.
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 First Federal.
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 First Federal 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 First Federal.
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 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 First Federal.
In March 1997, the FASB issued statement of Financial Accounting Standard
No. 128 ("SFAS No. 128") "Earnings Per Share." Under SFAS No. 128, 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 First
Federal 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.
42
<PAGE>
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS No. 130") "Reporting Comprehensive Income". This statement
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. This Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Income tax effects must also
be shown. This statement is effective for fiscal years beginning after December
15, 1997. The adoption of SFAS No. 130 is not expected to have a material impact
on the results of operations or financial condition of First Federal.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS No. 131") "Disclosures about Segments of an Enterprise and
Related Information". SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This statement is
effective for financial statements for periods beginning after December 15,
1997. The adoption of SFAS No. 131 is not expected to have a material impact on
the results of operations or financial condition of First Federal.
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.
First Federal, is a federally chartered community-owned, independent 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 lesser extent other communities in the general area between
Houston, Austin and Dallas, Texas. First Federal also originates consumer,
construction, SBA partially guaranteed loans, small commercial real estate and
small to medium commercial business loans. New senior management was installed
in early 1991 to recapitalize and convert First Federal from a mutual savings
institution to a federal stock institution, which was completed in April, 1993.
Beginning in fiscal 1994, senior management of First Federal began its
transition to full-service retail banking in order to compete more effectively
and to increase the overall profitabibility of First Federal. In addition to its
core single-family lending business, since fiscal 1994 First Federal has
increased its focus on the following products:
o Commercial real estate lending
o Commercial business lending
o Small Business Administration loans (partially government guaranteed)
o Home improvement loans
o Indirect automobile financing through dealers o Credit-default insured
"second chance" auto finance program
First Federal funds these lending products using a retail deposit base
gathered in its home market of Bryan-College Station as well as in the
surrounding counties of Burleson, Grimes, Leon, Madison, Robertson and
43
<PAGE>
Washington. First Federal currently operates two full service offices located in
Bryan (headquarters office) and adjacent College Station. In addition, a site
has been acquired for another full service branch in the northern portion of
Bryan. In order to expand its lending base First Federal has opened loan
production offices in Waco and Huntsville, Texas and has redefined its general
lending area to include the triangle between Dallas, Houston and Austin.
MARKET AREA
First Federal conducts operations through its offices located in
Bryan-College Station, Texas. Bryan-College Station is located in Brazos County,
Texas and is centrally located between Waco, Houston, and Austin, Texas. It is
the home of Texas A&M University, which has an enrollment of 43,0000 students
and is the third largest University in the nation. 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. According to a 1996 article in the Wall Street Journal, Bryan-College
Station is listed as one of the top metropolitan areas, expecting the greatest
population increase in the United States. Brazos County, home of Bryan-College
Station and Texas A&M University, was ranked recently by the American
Demographics as third among "The 10 Hottest Counties," in terms of "market
potential." Data from the U.S. Census estimates that the Bryan-College
metropolitan area should have a 20 percent growth rate from 1990 to the year
2000. 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. Which a substantial portion
of the loans originated for portfolio by First Federal are conventional mortgage
loans (i.e., not guaranteed or insured by agencies of the federal government)
which are secured by residential properties, 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 First Federal 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. As a result, the loan may be deemed to have higher risk than
secondary market conforming conventional mortgage loans. Loans which do not
comply with FNMA or FHLMC underwriting requirements are held in First Federal's
loan portfolio.
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
44
<PAGE>
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.
45
<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)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
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 .47 317 .63 313 .69
-------- ------- -------- ------- -------- -------
Net loans .............................. $49,579 95.48% $48,605 95.91% $43,127 95.01%
======= ======= ======= ====== ======= ======
</TABLE>
46
<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)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
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 0.47 317 0.63 313 0.69
-------- ------- -------- ------ -------- ------
Net loans.................................. $49,579 95.48% $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.
47
<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)
<S> <C> <C> <C>
Loans Funded:
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.
48
<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
-------------------- ------------------- ------------------- ----------------- ------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
-------- ------ ------- ------ ------- ------ ------ ------ ------ ------
(Dollars in Thousands)
Due During
Years Ended
September 30,
<S> <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%
1998 and 1999............. 12,717 9.26 1,168 9.36 --- --- 3,818 11.00 --- ---
2000 and 2001............. 893 9.40 925 9.55 --- --- 6,397 13.28 79 9.96
2002 to 2006.............. 1,073 8.89 86 11.25 --- --- 71 11.80 86 10.81
2006 to 2016.............. 1,988 8.99 643 9.81 --- --- 21 8.00 150 11.00
2017 and following........ 6,660 8.98 846 8.75 --- --- --- --- --- ---
-------- ------ ------ --- ------ -- ----- -
$30,896 8.97 $4,175 9.36% $4,365 9.18 $11,892 11.91% $ 595 10.23%
======= ==== ====== ==== ====== ==== ====== ===== ===== =====
<CAPTION>
Total
---------------------
Weighted
Average
Amount Rate
-------- -----
(Dollars in Thousands)
Due During
Years Ended
September 30,
<C> <C> <C>
1997(1)................... $14,302 8.72%
1998 and 1999............. 17,703 9.64
2000 and 2001............. 8,294 12.41
2002 to 2006.............. 1,316 9.33
2006 to 2016.............. 2,802 9.28
2017 and following........ 7,506 8.95
-------
$51,923 9.70%
======= ====
</TABLE>
- -------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
49
<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. First Federal 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, First Federal 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. First Federal 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, First Federal has experienced an average of
only $22,300 in actual annual net charge-offs (excluding a $401,000 recovery in
a lawsuit filed by First Federal and received during the year ended September
30, 1994), 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 First Federal'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 First Federal's asset/liability policy, approximately 91.9%
of First Federal's mortgage-backed securities carry adjustable interest rates.
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<PAGE>
The following table sets forth the book value of First Federal's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------
1996 1995 1994
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
The following table sets forth the contractual maturities of First
Federal'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
Mortgage Corporation....... $ --- $ --- $ --- $ --- $ 5 $231 $636 $ 872
Federal National
Mortgage Association....... --- --- --- --- --- 95 325 420
----- ----- ----- ----- ----- ----- ---- ------
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.
Statement of Financial Accounting Standards No. 115 (SFAS No. 115),
"Accounting for Certain Investments in Debt and Equity Securities" 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. As of September 30, 1996, First Federal held $1.3 million and $1.0
million, respectively, of principal amount of mortgage-backed securities and
other securities which First Federal has classified as held-to-maturity. As of
such date, these securities had a market value of $1.3 million and $1.0 million,
respectively.
51
<PAGE>
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
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. First Federal 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
First Federal ("Dealer Agreement"). In fiscal 1996, First Federal expanded this
lending by initiating a 100% credit default insured indirect automobile loan
origination program for sub-prime borrowers involving dealers in First Federal's
primary market area ("Second Chance Auto Loans"). First Federal'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
First Federal'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 First Federal'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 First Federal'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 First Federal
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
52
<PAGE>
addition to the sales price, collectively the "Additional Vehicle Costs").
Accordingly, the amount financed by First Federal 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. First Federal
will generally use the "NADA Official Used Car Guide" to obtain a value to
assign to a used vehicle for underwriting purposes.
All automobile dealers enter into a "Dealer Agreement" with First Federal.
First Federal 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 First Federal. The reserve account is used by First Federal
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
First Federal 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 First Federal'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 First Federal that they intend to live in the properties upon
completion of construction.
53
<PAGE>
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 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.
<TABLE>
<CAPTION>
Number
of Principal
Loans Balance
-------- -----------
(Dollars in Thousands)
<S> <C> <C>
Bryan area:
Churches................................. 6 $ 389
Land..................................... 19 365
Multi-family residential................. 3 941
Office buildings......................... 26 2,480
-- -----
Total.................................... 54 $4,175
== ======
</TABLE>
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 First Federal's principal market
area. First Federal requires that any such appraisal be performed by
independent, professionally designated and qualified appraisers. Senior
management of First Federal 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
54
<PAGE>
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 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 project 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.
55
<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)
<S> <C> <C> <C> <C>
Residential Real Estate:
Number of loans..................... 29 4 1 34
Amount.............................. $1,918 $197 $ 18 $2,133
Percent of total residential real
estate loans(1)................... 6.21% 0.64% 0.05% 6.90%
Commercial Real Estate:
Number of loans..................... 2 --- --- 2
Amount.............................. $ 55 $ --- $ --- $ 55
Percent of total commercial real
estate loans...................... 1.32% ---% ---% 1.32%
Consumer:
Number of loans..................... 54 9 4 67
Amount.............................. $605 $103 $130 $ 838
Percent of total consumer loans..... 5.09% 0.87% 1.09% 7.05%
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>
- ----------
(1) Including loans held for sale.
56
<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)
<S> <C> <C> <C>
Non-accruing loans:
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.
57
<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:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
Substandard.......................................... $1,086
Doubtful............................................. ---
Loss................................................. ---
--------
$1,086
</TABLE>
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. 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.
58
<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 (consumer loans)...................... (23) (27) (39)
Recoveries (consumer loans)....................... 5 4 414
Provisions for losses on loans.................... (52) 27 (401)
------ ------ -----
Balance at end of period.......................... $ 247 $ 317 $ 313
====== ====== =====
Ratio of net charge-offs (recoveries) 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 80.33% $ 191 81.82%
Other................... 127 24.05 94 19.67 122 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, First Federal 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.
59
<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>
SOURCES OF FUNDS
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, First Federal 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. 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
60
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended September 30,
1996 1995 1994
-------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
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%
===== ===== =====
</TABLE>
61
<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)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
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.
<TABLE>
<CAPTION>
1999 and
1997 1998 thereafter Total
-------- --------- ---------- --------
(In Thousands)
<S> <C> <C> <C> <C>
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
======= ======= ====== =======
</TABLE>
62
<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.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------
1996 1995 1994
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances............................ $1,088 $1,088 $2,004
Average Balance:
FHLB advances............................ $ 89 $2,085 $ 679
</TABLE>
63
<PAGE>
The following table sets forth certain information as to First
Federal's FHLB advances and other borrowings at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------
1996 1995 1994
------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C>
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
</TABLE>
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 First Federal to
attract and retain deposits depends on its ability to provide an investment
opportunity that satisfies the
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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, First Federal had a total of 50 employees, including
12 part-time employees. First Federal'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.
First Federal maintains a database of depositor and borrower customer
information. The net book value of the data processing and computer equipment
and software utilized by First Federal 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.
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REGULATION
GENERAL
First Federal is a federally chartered thrift institution, the deposits of
which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, First Federal is subject to broad federal
regulation and oversight extending to all its operations. First Federal is a
member of the FHLB of Dallas and is subject to certain limited regulation by the
Board of Governors of the Federal Reserve System ("Federal Reserve Board"). As
the thrift institution holding company of First Federal, the Holding Company
also will be subjected to federal regulation and oversight. The purpose of the
regulation of the Holding Company and other holding companies is to protect
subsidiary thrift institutions. First Federal is a member of the Savings
Association Insurance Fund ("SAIF") and the deposits of First Federal are
insured by the FDIC. As a result, the FDIC has certain regulatory and
examination authority over First Federal.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
PROPOSED FEDERAL LEGISLATION
The United States Congress is considering legislation that would require
all federal thrift institutions, such as the Bank, to either convert to a
national bank or a state chartered financial institution by a specified date to
be determined. In addition, under the proposed legislation, the Company would
not be regulated as a thrift holding company, but rather as a bank holding
company or a financial services holding company, a new type of holding company
created by the proposed legislation. Certain aspects of the legislation remain
to be resolved and therefore no assurance can be given as to whether or in what
form the legislation will be enacted or its effect on the Company. However,
there can be no assurance that such legislation or any similar legislation, if
enacted, would not have a material adverse effect on the Company.
FEDERAL REGULATION OF THRIFT INSTITUTIONS
The OTS has extensive authority over the operations of thrift institutions.
As part of this authority, First Federal is required to file periodic reports
with the OTS and is subject to periodic examination by the OTS and the FDIC. The
last regular OTS examination of First Federal was as of June 17, 1996. Under
agency scheduling guidelines, it is likely that another examination will be
initiated within 18 months of the last exam. When these examinations are
conducted by the OTS and the FDIC, the examiners may require First Federal to
provide for higher general or specific loan loss reserves. All thrift
institutions are subject to a semi-annual assessment, based upon the thrift
institution's total assets, to fund the operations of the OTS. First Federal's
OTS assessment for the expense of examinations for the fiscal year ended
September 30, 1996, was $20,876.
The OTS also has extensive enforcement authority over all thrift
institutions and their holding companies, including First Federal and the
Holding Company. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of First
Federal is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no thrift institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by
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federal associations in loans secured by non-residential real property may not
exceed 400% of total capital, except with approval of the OTS. Federal thrift
institutions are also generally authorized to branch nationwide. First Federal
is in compliance with the noted restrictions.
First Federal's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
September 30, 1996, First Federal's legal lending limit under this restriction
was $647,000. First Federal is in compliance with the loans-to-one-borrower
limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action. First Federal has adopted these OTS
guidelines.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
First Federal is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the United States Government. As insurer,
the FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the FDIC. The FDIC
also has the authority to initiate enforcement actions against thrift
institutions, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 8%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
First Federal was a "well-capitalized" institution as of September 30,
1996.
The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF members
and SAIF members ranged from .23% to .31% of deposits. As is the case with the
SAIF, the FDIC is authorized to adjust the insurance premium rates for banks
that are insured by the BIF of the FDIC in order to maintain the reserve ratio
of the BIF at 1.25% of BIF insured deposits. As a result of the BIF reaching its
statutory reserve ratio the FDIC revised the premium schedule for BIF insured
institutions to provide a range of .04% to .31% of deposits. The revisions
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became effective in the third quarter of 1995. In addition, the BIF rates were
further revised, effective January 1996, to provide a range of 0% to .27%. The
SAIF rates, however, were not adjusted. At the time the FDIC revised the BIF
premium schedule, it noted that, absent legislative action (as discussed below),
the SAIF would not attain its designated reserve ratio until the year 2002. As a
result, SAIF insured members would continue to be generally subject to higher
deposit insurance premiums than BIF insured institutions until, all things being
equal, the SAIF attained its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation required a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provided for the merger of the BIF and the SAIF on January 1, 1999
if no thrift institutions then exist. The special assessment rate was
established at .657% of deposits by the FDIC and the resulting assessment of
$333,000 ($220,000 net of tax effect) accrued by First Federal as of September
30, 1996 and paid by First Federal in November, 1996. This special assessment
significantly increased noninterest expense and adversely affected First
Federal's results of operations for the year ended September 30, 1996. As a
result of the special assessment, as of January 1, 1997, First Federal's deposit
insurance premiums were reduced to .065% based upon its current risk
classification and the new assessment schedule for SAIF insured institutions.
These premiums are subject to change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF assessment
imposed on thrift institutions was used to repay obligations issued by a
federally chartered corporation to provide financing ("FICO") for resolving the
thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment will be limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no thrift institution continues to exist, thereby imposing a greater burden
on SAIF member institutions such as First Federal. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as
SAIF-member institutions. The rates established by the FDIC to implement this
requirement for all FDIC-insured institutions is 6.5 basis points assessment on
SAIF deposits and 1.3 basis points on BIF deposits until BIF insured
institutions participate fully in the assessment. At such time the assessment is
anticipated to be about 2.4 basis points for all FDIC-insured institutions. The
rates may be revised in future periods due to changes in the BIF and SAIF
assessment base.
REGULATORY CAPITAL REQUIREMENTS
Federally insured thrift institutions, such as First Federal, are required
to maintain a minimum level of regulatory capital. The OTS has established
capital standards, including a tangible capital requirement, a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable to
such thrift institutions. These capital requirements must be generally as
stringent as the comparable capital requirements for national banks. The OTS is
also authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement.
The OTS regulations establish special capitalization requirements for
thrift institutions that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities
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permissible for national banks or engaged in certain other activities solely as
agent for its customers are "includable" subsidiaries that are consolidated for
capital purposes in proportion to the association's level of ownership. For
excludable subsidiaries the debt and equity investments in such subsidiaries are
deducted from assets and capital. First Federal was not subject to any such
deduction at September 30, 1996.
At September 30, 1996, First Federal had tangible capital of $4.3 million,
or 7.5% of adjusted total assets, which is approximately $3.4 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a thrift institution must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At September 30, 1996,
First Federal had no intangibles which were subject to these tests.
At September 30, 1996, First Federal had core capital equal to $4.3
million, or 7.5% of adjusted total assets, which is $2.6 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires thrift institutions to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a thrift institution to maintain an additional
amount of total capital to account for concentration of credit risk and the risk
of non-traditional activities. At September 30, 1996 First Federal had no
capital instruments that qualify as supplementary capital and $247,000 of
general loss reserves, which was less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. First Federal had no such
exclusions from capital and assets at September 30, 1996.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan to value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS regulations also require that every thrift institution with more than
normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a thrift institution, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which thrift institutions may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any thrift institution with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise.
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On September 30, 1996, First Federal had total capital of $4.6 million and
risk-weighted assets of $43.7 million, or total capital of 10.6% of
risk-weighted assets. This amount was $1.2 million above the 8% requirement in
effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against thrift institutions that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any thrift institution that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
thrift institution, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized.
At September 30, 1996, First Federal fell within the regulatory definition
of "well capitalized".
Any undercapitalized association is also subject to the general enforcement
authority of the OTS and the FDIC, including the appointment of a conservator or
a receiver.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on First
Federal or the Holding Company may have a substantial adverse effect on the
Holding Company's operations and profitability and the value of the Holding
Company Common Stock. As stated above, at September 30, 1996, First Federal was
"well-capitalized".
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
OTS regulations impose various restrictions or requirements on associations
with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit an
association from declaring or paying any dividends or from repurchasing any of
its stock if, as a result, the regulatory capital of the association would be
reduced below the amount required to be maintained for the liquidation account
established in connection with its mutual to stock conversion.
Generally thrift institutions, such as First Federal, that before and after
the proposed distribution meet their capital requirements, may make capital
distributions during any calendar year equal to the greater of 100%
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of net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. First Federal has
not been so notified and therefore may pay dividends in accordance with this
general authority.
Thrift institutions proposing to make any capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. Thrift
institutions that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain OTS
approval prior to making such distribution. The OTS may object to the
distribution during that 30-day notice period based on safety and soundness
concerns. See " -- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a thrift institution may make a
capital distribution restrictions. Under the proposal a thrift institution may
make a capital distribution without notice to the OTS provided that it has a
CAMEL 1 or 2 rating, is not of supervisory concern, and would remain adequately
capitalized (as defined in the OTS prompt corrective action regulations)
following the proposed distribution. Thrift institutions that would remain
adequately capitalized following the proposed distribution but do not meet the
other noted requirements must notify the OTS 30 days prior to declaring a
capital distribution. The OTS stated it will generally regard as permissible
that amount of capital distributions that do not exceed 50% of the institution's
excess regulatory capital plus net income to date during the calendar year. A
thrift institution may not make a capital distribution without prior approval of
the OTS and the FDIC if it is under capitalized before, or as a result of, such
a distribution. As under the current rule, the OTS may object to a capital
distribution if it would constitute an unsafe or unsound practice. No absolute
assurance may be given as to whether or in what form the regulations may be
adopted.
First Federal is not aware at this time of any restriction on dividends
that could be imposed upon it by the OTS or the FDIC.
LIQUIDITY
All thrift institutions, including First Federal, are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what First Federal
includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
thrift institutions. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term United States Treasury obligations)
currently must constitute at least 1% of the association's average daily balance
of net withdrawable deposit accounts and current borrowings. Penalties may be
imposed upon associations for violations of either liquid asset ratio
requirement. At September 30, 1996, First Federal was in compliance with both
requirements, with an overall liquid asset ratio of 8.27% and a short-term
liquid assets ratio of 8.27%.
ACCOUNTING
An OTS policy statement applicable to all thrift institutions clarifies and
re-emphasizes that the investment activities of a thrift institution must be in
compliance with approved and documented investment policies and strategies, and
must be accounted for in accordance with GAAP. Under the policy statement,
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management must support its classification of and accounting for loans (i.e.,
whether held for investment, sale or trading) and securities (held-to-maturity
available-for-sale or trading) with appropriate documentation. First Federal is
in compliance with these amended rules.
The OTS accounting regulations, which may be made more stringent than GAAP
by the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must incorporate any other accounting regulations or orders prescribed by the
OTS.
QUALIFIED THRIFT LENDER TEST
All thrift institutions, including First Federal are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a thrift institution to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the thrift institution may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under
either test, such assets primarily consist of residential housing related loans
and investments. At September 30, 1996, First Federal met the test and has
always met the test since its effectiveness.
Any thrift institution that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a thrift institution and a national bank, and it is limited
to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of First
Federal, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by First
Federal. An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.
The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the past
few years, First Federal may be required to devote additional funds for
investment and lending in its local community.
First Federal was examined for CRA compliance in 1996 and received a rating
of satisfactory.
TRANSACTIONS WITH AFFILIATES
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Generally, transactions between a thrift institution or its subsidiaries
and its affiliates are required to be on terms as favorable to the association
as transactions with non-affiliates. In addition, certain of these transactions,
such as loans to an affiliate, are restricted to a percentage of the
association's capital. Affiliates of First Federal include the Holding Company
and any company which is under common control with First Federal. In addition, a
thrift institution may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates. First Federal's subsidiaries are not deemed affiliates; however, the
OTS has the discretion to treat subsidiaries of thrift institutions as
affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
HOLDING COMPANY REGULATION
The Holding Company will be an independent, unitary thrift institution
holding company subject to regulatory oversight by the OTS. As such, the Holding
Company is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Holding Company and its non-thrift institution subsidiaries
which permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary thrift institution.
As a unitary thrift institution holding company, the Holding Company
generally is not subject to activity restrictions. If the Holding Company
acquires control of another thrift institution as a separate subsidiary, it
would become a multiple thrift institution holding company, and the activities
of the Holding Company and any of its subsidiaries (other than First Federal or
any thrift institution) would become subject to activity restrictions comparable
to those applicable to bank holding companies unless such other associations
each qualify as a QTL and were acquired in a supervisory acquisition.
If First Federal fails the QTL test, the Holding Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple thrift institution holding companies or their subsidiaries. In
addition, within one year of such failure the Holding Company must register as,
and will become subject to, the restrictions applicable to bank holding
companies.
The activities authorized for a bank holding company are more limited than
are the activities authorized for a unitary or multiple thrift institution
holding company. See "--Qualified Thrift Lender Test."
The Holding Company must obtain approval from the OTS before acquiring
control of any SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple thrift institution holding company
controlling thrift institutions in more than one state. However, such interstate
acquisitions are permitted based on specific state authorization or in a
supervisory acquisition of a failing thrift institution.
FEDERAL SECURITIES LAW
The stock of the Holding Company will be registered with the Securities and
Exchange Commission (the "SEC") under the Exchange Act. The Holding Company will
be subject to the information, proxy solicitation, insider trading restrictions
and other requirements of the SEC under the Exchange Act.
Holding Company stock held by persons who are affiliates (generally
officers, directors and principal shareholders) of the Holding Company may not
be resold without registration or unless sold in accordance with
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certain resale restrictions set forth under Rule 144 of the Securities Act. If
the Holding Company meets specified current public information requirements,
each affiliate of the Holding Company is able to sell in the public market,
without registration, a limited number of shares in any three-month period.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to maintain
noninterest bearing reserves at specified levels against their transaction
accounts (primarily checking and NOW checking accounts). At September 30, 1996,
First Federal was in compliance with these reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements that may be imposed by the OTS.
See "-- Liquidity."
Thrift institutions are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM
First Federal is a member of the FHLB of Dallas, which is one of 12
regional FHLBs, that administers the home financing credit function of thrift
institutions. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, First Federal is required to purchase and maintain stock in
the FHLB of Dallas. At September 30, 1996, First Federal had $845,000 in FHLB
stock, which was in compliance with this requirement. In past years, First
Federal has received substantial dividends on its FHLB stock. Over the past five
fiscal years such dividends have averaged 4.80% and were 5.96% for fiscal year
1996.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled thrift institutions and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of First Federal's FHLB stock may result in a corresponding
reduction in First Federal's capital.
For the year ended September 30, 1996, dividends paid by the FHLB of Dallas
to First Federal totaled $49,279, which constitute a $969 increase over the
amount of dividends received in fiscal year 1995. The $12,359 dividend received
for the quarter ended September 30, 1996 reflects an annualized rate of 5.85%,
or 0.37% below the rate for fiscal 1995.
FEDERAL AND STATE TAXATION
Thrift institutions such as First Federal that meet certain definitional
tests relating to the composition of assets and other conditions prescribed by
the Internal Revenue Code of 1986, as amended (the "Code"), are permitted to
establish reserves for bad debts and to make annual additions thereto which may,
within specified formula limits, be taken as a deduction in computing taxable
income for federal income tax purposes. The amount of the bad debt reserve
deduction is computed under the experience method.
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Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually sustained
by the thrift institution over a period of years.
For the years beginning before December 1, 1996, a percentage of specially
computed taxable income could be used to compute a thrift institution's bad debt
reserve deduction under the percentage of taxable income method (the "percentage
bad debt deduction").
To the extent earnings appropriated to a thrift institution's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceeded the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of September 30, 1996, First Federal's Excess accumulated through
September 30, 1988 for tax purposes totaled approximately $643,000.
With the passage of the Small Business Job Protection Act of 1996 on August
20, 1996, the availability of the percentage bad debt deduction was repealed for
tax years beginning after December 1, 1995. For the first tax year beginning
after December 31, 1995 and thereafter, thrift institutions, such as First
Federal will be required to utilize the experience method referred to above in
computing the tax bad debt deduction for qualifying and nonqualifying loans.
In addition, thrift institutions such as First Federal are required to
recapture the excess of the tax bad debt reserves for qualifying and
nonqualifying loans as of the end of the last tax year beginning before January
1, 1996 over the balance of those reserves as of the end of the "base year" into
taxable income evenly over a six year period beginning with the first tax year
that begins after December 31, 1995. The base year is the last tax year
beginning before January 1, 1988. As of September 30, 1996, the balance of the
tax bad debt reserves to be recaptured under the new law totaled approximately
$350,000.
If the institution meets the "Residential Loan Requirement" explained
below, the reserve recapture can be deferred for the first or second tax year
beginning after December 31, 1995, or both. However, in any case, the six year
reserve recapture period must begin no later than the third tax year beginning
after December 31, 1995.
The Residential Loan Requirement is met for a particular year if the
principal amount of home purchase and improvement loans originated in that year
exceeds the "base amount." The base amount is the average of such lending
activity for the six most recent tax years beginning before January 1, 1996. For
purposes of determining this average, the institution can elect to eliminate the
years with the highest and lowest lending activity from the calculation.
In addition to the regular income tax, corporations, including thrift
institutions such as First Federal, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including thrift institutions such as
First Federal, are also subject to an environmental tax equal to 0.12% of the
excess of alternative minimum taxable income for the taxable year (determined
without regard to net operating losses and the deduction for the environmental
tax) over $2 million.
First Federal and its consolidated subsidiary have been audited by the IRS
with respect to consolidated federal income tax returns through September 30,
1987. With respect to years examined by the IRS, either all deficiencies have
been satisfied or sufficient reserves have been established to satisfy asserted
deficiencies. In the
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opinion of management, any examination of still open returns (including returns
of subsidiaries and predecessors of, or entities merged into, First Federal)
would not result in a deficiency which could have a material adverse effect on
the financial condition of First Federal and its consolidated subsidiaries.
State Taxation. The State of Texas does not have a corporate income tax,
but it does have a corporate franchise tax to which First Federal is subject.
The tax for the year 1992 (which was paid by First Federal for the first
time prior to May 15, 1992), is the higher of 0.25% of taxable capital (usually
the amount of paid in capital plus retained earnings) or 4.5% of "net taxable
earned surplus." "Net taxable earned surplus" is net income for federal income
tax purposes increased by the compensation of directors and executive officers.
Net income cannot be reduced by net operating loss carryforwards from years
prior to 1991, and operating loss carry over are limited to five years.
Delaware Taxation. As a Delaware holding company, the Holding Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Holding Company
is also subject to an annual franchise tax imposed by the State of Delaware.
FEDERAL INCOME TAX CONSIDERATIONS
SALE OR EXCHANGE
The sale or exchange of Holding Company Common Stock to or with a person
other than the Holding Company will result in the recognition of gain or loss
equal to the difference between the consideration received (i.e., cash plus the
fair market value of other property) and the holder's tax basis in such Holding
Company Common Stock. Such gain or loss will be capital gain or loss and will be
long-term if the holding period for such Holding Company Common Stock exceeds
one year.
MANAGEMENT OF THE HOLDING COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Holding Company is currently identical to the
Board of Directors of First Federal. See "Management of First Federal -
Directors." Directors of the Holding Company will serve one-year terms. The
Holding Company currently intends to compensate its directors for their services
on the Holding Company Board.
The executive officers of the Holding Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The executive
officers of the Holding Company are the identical to the executive officers of
First Federal. See "Management of First Federal -Executive Officers." It is not
currently anticipated that the executive officers of the Holding Company will
receive any remuneration in their capacity as Holding Company executive
officers. For information regarding compensation of directors and executive
officers of First Federal, see "Management of First Federal - Meetings and
Committees of the Board of Directors of First Federal" and "- Executive
Compensation."
INDEMNIFICATION
The certificate of incorporation of the Holding Company provides that a
director or officer of the Holding Company shall be indemnified by the Holding
Company to the fullest extent authorized by the General
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Corporation Law of the State of Delaware against all expenses, liability and
loss reasonably incurred or suffered by such person in connection with his
activities as a director of officer or as a director or officer of another
company, if the director or officer held such position at the request of the
Holding Company. Delaware law requires that such director, officer employee or
agent, in order to be indemnified, must have acted in good faith and in a manner
reasonably believed to be not opposed to the best interests of the Holding
Company and, with respect to any criminal action or proceeding, did not have
reasonable cause to believe his conduct was unlawful.
The certificate of incorporation of the Holding Company and Delaware law
also provide that the indemnification provisions of such certificate and the
statute are not exclusive of any other right which a person seeking
indemnification may have or later acquire under any statute, provision of the
certificate of incorporation or bylaws of the Holding Company, agreement, vote
of shareholders or disinterested directors, or otherwise.
These provisions may have the effect of deterring shareholder derivative
actions, since the Holding Company may ultimately be responsible for expenses
for both parties to the action.
In addition, the certificate of incorporation of the Holding Company and
Delaware law also provide that the Holding Company may maintain insurance, at
its expense, to protect itself and any director, officer, employee or agent of
the Holding Company or another corporation, partnership, joint venture, trust or
other enterprise against any expense, liability or loss, whether or not the
Holding Company has the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law. The Holding
Company intends to obtain such insurance.
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MANAGEMENT OF FIRST FEDERAL
DIRECTORS
The direction and control of First Federal is vested in its Board of
Directors. The Board of Directors of First Federal currently consists of ten
members. The directors are divided into three classes, with approximately
one-third of the directors elected at each annual meeting of First Federal.
Because the Holding Company will, after the Merger, own all of the issued and
outstanding shares of capital stock of First Federal, the Holding Company
through its directors will elect the directors of First Federal in the future.
The following table sets forth certain information as of December 31, 1996
regarding the directors of First Federal.
<TABLE>
<CAPTION>
Position(s) Held Director Term
Name With First Federal Age Since(1) Expires
--------------------- ------------------------ --- --------- -------
<S> <C> <C> <C> <C>
J. Stanley Stephen Director, President/ 64 1991 1997
Chief Executive Officer
Ken Hayes Director 57 1993 1997
Charles Neelley Director, Secretary/ 67 1993 1997
Treasurer
George Koenig Director, Executive 52 1996 1997
Vice-President
Ernest A. Wentrcek Vice Chairman of the Board 68 1965 1998
Robert H. Conaway Director 43 1995 1998
Richard L. Peacock Chairman of the Board 78 1965 1999
Jack W. Lester, Jr. Director, Assistant Secretary/ 56 1992 1999
Treasurer
Phil Hobson(2) Director 64 1993 1999
J. Roland Ruffino Director 46 1995 1999
</TABLE>
----------
(1) Includes service on First Federal's Board of Directors prior to its
conversion to a stock institution in 1993.
(2) Director Hobson intends to resign from the Board of Directors prior to
the closing of the Merger.
The principal occupation of each Director of First Federal 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.
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
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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 First Federal to profitability. In addition,
under Mr. Stephen's direction, First Federal has now expanded its home,
consumer, commercial, 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. In
addition, First Federal has recently acquired a site for a new full-service
banking facility to be located at a key intersection in the northern portion of
Bryan, which is currently not served by any nearby banking facility. 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 growth of First Federal.
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.
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.
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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 retail meat market 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 First Federal. Mr. Koenig was previously employed as an operating officer
with a local financial institution located in Bryan, Texas.
EXECUTIVE OFFICERS
Each of the executive officers of First Federal will retain his or her
office in First Federal after the Merger. Officers are elected annually by the
Board of Directors of First Federal. There are no arrangements or understandings
between the officers and any other person pursuant to which such officer was
selected.
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.
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The Personnel Committee is currently composed of Directors Stephen,
Neelley, Peacock (Chairman), Wentrcek and Hayes and Officer Hegar. The Committee
meets as needed to review staffing, compensation 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 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, Koenig and Stephen, along with Advisory
Director, Arthur Davila. 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 $225.00 for each board meeting attended and
$75.00 for each Loan Committee meeting attended.
EXECUTIVE OFFICERS OF FIRST FEDERAL WHO ARE NOT DIRECTORS
The following information as to the business experience during the past
five years is supplied with respect to each executive officer of the Bank. There
are no arrangements or understandings between the persons named and any other
person pursuant to which such officers were selected.
Mary L. Hegar. Ms. Hegar joined First Federal in 1977 and became Assistant
Secretary/Treasurer in 1987 and was promoted to Senior Vice President/Financial
and Regulatory in January 1993. Ms. Hegar primarily coordinates the accounting
functions of the Bank, monitors First Federal's investments and is responsible
for regulatory reporting. Ms. Hegar is a member of the Asset/Liability and
Personnel Committee.
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
$100,000 during the fiscal year ended September 30, 1996. Mr. Stephen
voluntarily reduced his salary in 1995 and 1996.
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<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
------------------------------
Annual Compensation Awards Payout
- --------------------------------------------------------------------- -------------------------------
RESTRICTED
OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
Name and Principal Salary Bonus COMPENSATION AWARD(S) SARS PAYOUT COMPENSATION
Position Year ($) ($) ($) ($) (#) ($) ($)
- ------------------------- ------ ----------- -------- ---------------- ------------------------------- ------------------
<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>
The following table sets forth information regarding the number and value
of stock options at December 31, 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 First Federal's
Chief Executive Officer based upon the last available sale price of $11.00
per share at March 31, 1996 and an exercise price of $10.00 per share.
EMPLOYMENT AGREEMENTS
First Federal has entered into employment agreements with J. Stanley
Stephen, George Koenig, Mary L. Hegar and Kay Watson. The employment agreements
are designed to assist First Federal in maintaining a stable and competent
management team after the Merger. The continued success of First Federal 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.
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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 First Federal, 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 First Federal
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.
First Federal 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 First
Federal 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 First Federal at a fee of $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 First Federal 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.
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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 Years of Service
---------------------------------------------------
Compensation 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>
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.
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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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(1) the Merger Offering Offering
---------------- ---------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
DIRECTORS
Richard L. Peacock 3,868 1.53 8,288 2.76% 2.37%
Ernest A. Wentrcek 3,868 1.53 8,288 2.76 2.37
Jack W. Lester 13,707 5.42 10,650 3.55 3.04
Ken Hayes 1,781 .70 570 .19 .16
Phil Hobson 24,705 9.76 --- --- ---
Charles Neelley 22,915 9.05 53,405 17.82 15.27
J. Roland Ruffino 6,765 2.67 5,800 1.93 1.66
Robert H. Conaway 18,135 7.17 10,000 3.34 2.86
George Koenig 56 .02 140 .05 .04
J. Stanley Stephen 7,771 3.07 9,070 3.03 2.59
EXECUTIVE OFFICERS
Mary L. Hegar 750 .30 1,875 .63 .54
Directors and executive officers
of First Federal as a group 104,321 41.22 108,086 36.06 30.90
</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.
(2) Director Hobson intends to resign from the Board of Directors prior to the
closing of the Merger.
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DESCRIPTION OF UNIT OFFERING
Concurrently with the Common Stock Offering, the Holding Company is
offering through the Agent up to 3,700 Units at a price of $1,000 per Unit. Each
Unit consists of $1,000 principal amount of __% subordinated debentures due
______, 2002 (the "Debentures") and nine detachable warrants (the "Warrants").
Each Warrant entitles the holder thereof to purchase one share of Holding
Company Common Stock at an exercise price of $12.50, subject to adjustment, at
any time prior to 5:00 p.m. Central Time on ______, 2002. The Debentures
included in the Units will be unsecured and subordinate in right of payment to
all present and future Senior Indebtedness and General Obligations of the
Holding Company (as such terms are defined) and will be effectively subordinated
to all indebtedness and other liabilities and commitments (including deposits,
trade payables, lease obligations and obligations of holders of preferred stock)
of First Federal. Although the Units are not offered pursuant to this
Prospectus, consummation of the Unit Offering is conditioned on the
contemporaneous completion of the Common Stock Offering.
Senior Indebtedness is defined generally in the Indenture to include
indebtedness of the Holding Company for money borrowed or purchased (including
indebtedness of others guaranteed by the Holding Company), other than the
Debentures or any indebtedness or obligation as to which it is expressly
provided that such obligation is not Senior Indebtedness or ranks pari passu (of
equal seniority) with the Debentures. General Obligations are defined in the
Indenture to include all obligations of the Holding Company to make payment on
account of claims of general creditors, other than Senior Indebtedness, the
Debentures and indebtedness for money borrowed ranking pari passu with or
subordinate to the Debentures.
DESCRIPTION OF CAPITAL STOCK
HOLDING COMPANY CAPITAL STOCK
The 4,000,000 shares of capital stock authorized by the Holding Company
certificate of incorporation are divided into two classes, consisting of
3,000,000 shares of Holding Company Common Stock (par value $.01 per share) and
1,000,000 shares of serial preferred stock (par value $.01 per share). The
Holding Company currently expects to issue between 150,000 shares and 200,000
shares of Holding Company Common Stock in the Offering and an additional 150,000
shares in exchange for First Federal Common Stock as part of the Merger and no
shares of serial preferred stock. The aggregate par value of the issued shares
will constitute the capital account of the Holding Company on a consolidated
basis. Upon issuance, the shares will not be subject to further sale or
assessment. The balance of the purchase price of Holding Company Common Stock,
less expenses of the Offering, will be reflected as paid-in capital on a
consolidated basis. See "Capitalization."
Each share of the Holding Company Common Stock will have the same relative
rights and will be identical in all respects with each other share of the
Holding Company Common Stock. THE HOLDING COMPANY COMMON STOCK WILL REPRESENT
NON-WITHDRAWABLE CAPITAL, WILL NOT BE OF AN INSURABLE TYPE AND WILL NOT BE
INSURED OR GUARANTEED BY THE FDIC.
Under Delaware law, the holders of the Holding Company Common Stock will
possess exclusive voting power in the Holding Company. Each shareholder will be
entitled to one vote for each share held on all matters voted upon by
shareholders, subject to the limitation discussed under "Restrictions on
Acquisitions of Stock and Related Takeover Defensive Provisions - Provisions of
the Holding Company's Certificate of Incorporation and Bylaws Limitation on
Voting Rights." If the Holding Company issues preferred stock subsequent to the
Conversion, holders of the preferred stock may also possess voting rights.
Liquidation or Dissolution. In the unlikely event of the liquidation or
dissolution of the Holding Company and First Federal, the holders of the Holding
Company Common Stock will be entitled to receive -- after payment or provision
for payment of all debts and liabilities of the Holding Company (including all
deposits in First Federal and accrued interest thereon) and after distribution
of the Liquidation Account previously established upon the conversion of First
Federal from the mutual to stock form in 1993 -- all assets of the Holding
Company available for distribution, in cash or in kind. If preferred stock is
issued subsequent to the Offering, the holders thereof may have a priority over
the holders of Holding Company Common Stock in the event of liquidation or
dissolution.
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Preemptive Rights. Holders of Holding Company Common Stock will be entitled
to preemptive rights with respect to any shares which may be issued. The Holding
Company Common Stock will not be subject to call for redemption, and, upon
receipt by the Holding Company of the Purchase Price therefor, each share of the
Holding Company Common Stock will be fully paid and nonassessable.
Preferred Stock. After the Merger, the Board of Directors of the Holding
Company will be authorized to issue preferred stock in series and to fix and
state the voting powers, designations, preferences and relative, participating,
optional or other special rights of the shares of each such series and the
qualifications, limitations and restrictions thereof. Preferred stock may rank
prior to the Holding Company Common Stock as to dividend rights, liquidation
preferences, or both, and may have full or limited voting rights. The holders of
preferred stock will be entitled to vote as a separate class or series under
certain circumstances, regardless of any other voting rights which such holders
may have.
Except as discussed above, the Holding Company has no present plans for the
issuance of the additional authorized shares of Holding Company Common Stock or
for the issuance of any shares of preferred stock. In the future, the authorized
but unissued and unreserved shares of Holding Company Common Stock will be
available for general corporate purposes including but not limited to possible
issuance as stock dividends or stock splits, in future mergers or acquisitions,
under a cash dividend reinvestment and stock purchase plan, in a future
underwritten or other public offering, or under an employee stock ownership
plan. The authorized but unissued shares of preferred stock will similarly be
available for issuance in future mergers or acquisitions, in a future
underwritten public offering or private placement or for other general corporate
purposes. Except as described above or as otherwise required to approve the
transaction in which the additional authorized shares of Holding Company Common
Stock or authorized shares of preferred stock would be issued, no shareholder
approval will be required for the issuance of these shares. Accordingly, the
Board of Directors of the Holding Company, without shareholder approval, can
issue preferred stock with voting and conversion rights which could adversely
affect the voting power of the holders of Holding Company Common Stock.
Restrictions on Acquisitions. See "Restrictions on Acquisitions of Stock
and Related Takeover Defensive Provisions" for a description of certain
provisions of the Holding Company's certificate of incorporation and bylaws
which may affect the ability of the Holding Company's shareholders to
participate in certain transactions relating to acquisitions of control of the
Holding Company.
Dividends. Upon consummation of the purchase of all of First Federal's
outstanding First Federal Common Stock, the Holding Company's only assets will
be First Federal common stock, and a portion of the proceeds from the Offering.
Dividends from First Federal initially will be the only source of income for the
Holding Company. Should First Federal elect or be required by its regulators to
retain its income, the ability of the Holding Company to pay dividends to its
own shareholders may be adversely affected. Furthermore, if at any time in the
future the Holding Company owns less than 80% of the outstanding stock of First
Federal, certain tax benefits under the Code as to inter-company distributions
will not be fully available to the Holding Company and it will be required to
pay federal income tax on a portion of the dividends received from First
Federal, thereby reducing the amount of income available for distribution to the
shareholders of the Holding Company. For further information concerning the
ability of First Federal to pay dividends to the Holding Company, see "Dividend
Policy," "Regulation Regulatory Capital Requirements" and " -- Limitation on
Dividends and Other Capital Distributions."
RESTRICTIONS ON ACQUISITIONS OF STOCK AND
RELATED TAKEOVER DEFENSIVE PROVISIONS
Although the Board of Directors of the Holding Company is not aware of any
effort that might be made to obtain control of the Holding Company after the
Merger, the Board believes, as discussed below, that it is appropriate to
include certain provisions as part of the Holding Company's certificate of
incorporation to protect
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the interests of the Holding Company and its shareholders from takeovers which
the Board of Directors of the Holding Company might conclude are not in the best
interests of First Federal, the Holding Company or the Holding Company's
shareholders. The Holding Company intends to operate First Federal as an
independent, predominantly community-owned financial institution.
The following discussion is a summary of all material provisions of the
Holding Company's certificate of incorporation and bylaws and certain other
regulatory provisions, which may be deemed to have an"anti-takeover" effect and
could potentially discourage or even prevent a bid for the Holding Company which
might otherwise result in shareholders receiving a premium for their stock.
Further, ownership restrictions imposed by federal law could potentially serve
as a basis to invalidate or otherwise restrict the use or exercise by management
or others of revocable proxies. The following description of certain of these
provisions is necessarily general and, with respect to provisions contained in
the Holding Company's certificate of incorporation and bylaws and First
Federal's charter and bylaws, reference should be made in each case to the
document in question, each of which is part of First Federal's application to
the OTS and the Holding Company's Registration Statement filed with the SEC. See
"Available Information."
PROVISIONS OF THE HOLDING COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
Directors. Certain provisions of the Holding Company's certificate of
incorporation and bylaws will impede changes in majority control of the Board of
Directors. The Holding Company's certificate of incorporation provides that the
Board of Directors of the Holding Company will be elected annually. The Holding
Company's certificate of incorporation provides that the size of the Board of
Directors may be increased or decreased only by a majority vote of the Board.
The certificate of incorporation also provides that any vacancy occurring in the
Board of Directors, including a vacancy created by an increase in the number of
directors, shall be filled for the remainder of the unexpired term by a majority
vote of the directors then in office. The certificate of incorporation further
provides that, to be eligible to serve as a director, persons must meet certain
eligibility criteria. Finally, the bylaws impose certain notice and information
requirements in connection with the nomination by shareholders of candidates for
election to the Board of Directors or the proposal by shareholders of business
to be acted upon at an annual meeting of shareholders.
The certificate of incorporation provides that a director may only be
removed for cause by the affirmative vote of 80% of the shares eligible to vote.
Restrictions on Call of Special Meetings. The certificate of incorporation
of the Holding Company provides that a special meeting of shareholders may be
called only pursuant to a resolution adopted by a majority of the Board of
Directors. Shareholders are not authorized to call a special meeting.
Absence of Cumulative Voting. The Holding Company's certificate of
incorporation provides that there shall be no cumulative voting rights in the
election of directors.
Authorization of Preferred Stock. The certificate of incorporation of the
Holding Company authorized 1,000,000 shares of serial preferred stock, $.01 par
value. The Holding Company is authorized to issue preferred stock from time to
time in one or more series subject to applicable provisions of law, and the
Board of Directors is authorized to fix the designations, powers, preferences
and relative participating, optional and other special rights of such shares,
including voting rights (which could be multiple or as a separate class) and
conversion rights. In the event of a proposed merger, tender offer or other
attempt to gain control of the Holding Company that the Board of Directors does
not approve, it might be possible for the Board of Directors to authorize the
issuance of a series of preferred stock with rights and preferences that would
impede the completion of such a transaction. An effect of the possible issuance
of preferred stock, therefore, may be to deter a future takeover attempt. The
Board of Directors has no present plans or understandings for the issuance of
any preferred stock and does not intend to issue any preferred stock except on
terms which the Board deems to be in the best interests of the Holding Company
and its shareholders.
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Procedures for Certain Business Combinations. The Holding Company's
certificate of incorporation requires that certain business combinations,
(including mergers or consolidations, sale, lease or other disposition of
assets, issuances or transfers of securities, adoption of any plan of
liquidation proposed by the Interested Stockholder, or any reclassification of
securities which increases the Interested Stockholders share of the holding
Company), between the Holding Company (or any majority-owned subsidiary thereof)
and a 25% or more shareholder either (i) be approved by at least 80% of the
total number of outstanding voting shares, voting as a single class, of the
Holding Company, (ii) be approved by a majority of the continuing Board of
Directors (i.e., persons serving prior to the 25% shareholder becoming such and
who are not affiliated with the 25% shareholder) or (iii) involve consideration
per share generally equal to the highest per share price paid by such 25%
shareholder to acquire its stock.
Amendment to Certificate of Incorporation and Bylaws. Amendments to the
Holding Company's Certificate of Incorporation must be approved by a majority
vote of 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 to amend certain provisions (i.e., provisions relating to number,
classification, election and removal of directors; amendment of bylaws; call of
special shareholder meetings; offers to acquire and acquisitions of control;
director liability; certain business combinations; 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 shareholders.
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.
These provisions will also assist the Holding Company in the orderly deployment
of the Offering proceeds into productive assets during the initial period after
the Offering. The Board of Directors believes these provisions are in the best
interests of First Federal and of the Holding Company and its shareholders. 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
shareholders. Accordingly, the Board of Directors believes that it is in the
best interests of the Holding Company and its shareholders to encourage
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 shareholders.
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 shareholders
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
shareholders, 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.
Effect of Takeover Defenses on Shareholder Interests. 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, shareholders 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
different management and whose objectives may not be similar to those of the
remaining shareholders. The concentration of control, which could result from a
tender offer or other takeover attempt, could also deprive the Holding Company's
remaining shareholders of the benefits
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of certain protective provisions of the Exchange Act, if the number of
beneficial owners becomes less than the 300 at which Exchange Act registration
is required.
Potential Negative Impact of Takeover Defenses on Shareholder Interests.
Despite the belief of First Federal and the Holding Company as to the benefits
to shareholders 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 shareholders may receive a
substantial premium for their shares over then current market prices. As a
result, shareholders who might desire to participate in such a transaction may
not have any opportunity to do so. Such provisions will also render the removal
of the Holding Company's Board of Directors and management more difficult. The
Board of Directors, however, has concluded that the potential benefits outweigh
the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
shareholders, 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 State of Delaware has enacted
legislation which provides that subject to certain exceptions a publicly held
Delaware corporation may not engage in any business combination with an
"interested shareholder" for three years after such shareholder became an
interested shareholder, unless, among other things, the interested shareholder
acquired at least 85% of the corporation's voting stock in the transaction that
resulted in the shareholder becoming an interested shareholder. This legislation
generally defines "interested shareholder" as any person or entity that owns 15%
or more of the corporation's voting stock. The term "business combination" is
defined broadly to cover a wide range of corporate transactions, including
mergers, sales of assets, issuances of stock, transactions with subsidiaries and
the receipt of disproportionate financial benefits. Under certain circumstances,
either the board of directors or both the board and two-thirds of the
shareholders other than the acquiror may approve a given business combination
and thereby exempt the corporation from the operation of the statute.
However, these statutory provisions do not apply, among other situations,
to Delaware corporations with fewer than 2,000 shareholders or which do not have
voting stock listed on a national exchange or listed for quotation with a
registered national securities association. While the Holding Company has
applied to have its shares quoted on the Nasdaq System, no prediction can be
made as to whether the Holding Company will have 2,000 shareholders.
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 without 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 institutions
whose accounts are insured by the FDIC's BIF, and holding companies thereof.
Control, as defined under federal law, means ownership of, 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
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control factors include the acquiror being one of the two largest shareholders.
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 form
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. Therefore, a warrant holder who, upon
exchange of warrants would acquire ownership of more than 10% of the issued and
outstanding of the Holding Company's Common Stock, must obtain OTS's approval
prior to exercise.
THE OFFERING
This Offering is being made to finance the purchase of all of the
outstanding shares of First Federal Common Stock not exchanged for Holding
Company Common Stock pursuant to the Merger Agreement. Shares of Holding Company
Common Stock and Units are being offered to members of the general public. See
"Offering and Sale of Holding Company Common Stock and Units." Subscription for
shares of Holding Company Common Stock and Units will be subject to the minimum
and maximum purchase limitations. See " --Subscription Procedures."
GENERAL
The Holding Company reserves the right to reject any subscriptions prior to
release of the funds in the Escrow Account to the Holding Company, in whole or
in part, for any reason whatsoever and may, in its sole discretion, elect to
accept those subscriptions for a lesser number of shares than is subscribed for
by any person. The Holding Company reserves the right to allocate shares of
Holding Company Common Stock and Units in any manner as it, in its sole
discretion, deems appropriate. If the Holding Company terminates the Offering in
its entirety, all subscription funds will be refunded in full with interest
actually earned thereon, without deduction.
SUBSCRIPTION PROCEDURES
The Holding Company is offering a minimum of 150,000 shares and a maximum
of 200,000 shares of Holding Company Common Stock at a cash price of $24.07 per
share. The shares of Holding Company Common Stock will be offered solely by
officers and directors of the Holding Company. It is anticipated that the
Holding Company's directors and officers may hold informational meetings to
review the prospectus with potential purchasers and to discuss the terms and
provisions of the Holding Company Common Stock. The Holding Company will rely on
Rule 3a4-1 of the 1934 Act, and sales of Holding Company Common Stock will be
conducted within the requirements of Rule 3a4-1, so as to permit officers and
directors to participate in the sale of Holding Company Common Stock. No officer
or director of the Holding Company will be compensated in connection with his or
her participation by the payment of commissions or other remuneration based
either directly or indirectly on the transactions in the Holding Company Common
Stock. Subscriptions to purchase Holding Company Common Stock must be received
by the Company by not later than 5:00 p.m., Bryan, Texas time, on ___________,
1997, subject to extension through ______, 1997 or terminate the Offering at any
time (the "Expiration Date").
Concurrently with the Holding Company Common Stock Offering, the Company is
also offering for sale Units. Although the Units are not offered pursuant to
this Prospectus, consummation of the Common Stock Offering is conditioned upon
the sale of the minimum number of Units.
Persons may subscribe for the shares of Holding Company Common Stock by
completing, signing and delivering or mailing a subscription form, together with
payment in full for the number of shares for which such person is subscribing by
cashiers' check, draft, or wire transfer payable in next day funds to the
Company. These subscriptions must be received by the Escrow Agent by __:__ _.m.,
Central time on the Expiration Date.
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Consummation of the Offering through release of the funds in the Escrow Account
to the Holding Company and delivery of certificates representing shares of
Holding Company Common Stock or Units will occur as soon as practicable after
the Expiration Date, subject to the satisfaction of certain conditions precedent
in the Best Efforts Selling Agreement entered into between the Holding Company
and the Agent (the "Selling Agreement").
Pending receipt of subscriptions for the minimum shares, all subscription
funds will be deposited into a separate, interest-bearing Escrow Account for the
benefit of subscribers of the Holding Company Common Stock and Units.
Subscription funds may, at the direction of the Company, be invested in short
term federal funds sold, government obligations and certificates of deposit.
Subject to the satisfaction of certain conditions precedent in the Selling
Agreement, the subscription funds will be released to the Holding Company if,
prior to the Expiration Date, at least $1,500,000 in Holding Company Common
Stock and $3,400,000 in Units are subscribed for and accepted by the Holding
Company. Certificates evidencing shares of Holding Company Common Stock and the
Debentures and Warrants included in the Units will be issued to subscribers as
soon as practicable after closing of the Offering and the Merger and release of
the funds from the Escrow Account. If the minimum amount of securities are not
subscribed for and accepted by the Holding Company by the Expiration Date, or
the conditions precedent to consummation of the Offering are not satisfied or
waived, all subscription funds will be refunded to subscribers as soon as
possible, with interest, if any, actually earned and received on a subscriber's
funds deposited in the Escrow Account, without deduction for any charges or
expenses. Notwithstanding the foregoing, 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 agreement or condition of the Merger Agreement. The Holding
Company will pay the expenses of the Escrow Agent as an expense of the Offering.
After any and all refunds have been made of funds received for subscriptions,
the Holding Company and its directors and officers will have no further
liability to any prospective investor with respect to rejected or canceled
subscriptions.
OFFERING PRICE OF HOLDING COMPANY COMMON STOCK ARBITRARILY DETERMINED
The purchase price of the Holding Company Common Stock has been determined
arbitrarily by the Board of Directors based on, among other things, the amount
of capital necessary to enable the Holding Company to accomplish the Merger and
does not necessarily bear any relation to any established investment criteria of
value such as book value, earnings or assets or the intrinsic value, if any, of
the Holding Company or First Federal. As a result, there can be no assurance
that the price of the Holding Company Common Stock will not fall below its
purchase price after the completion of the Offering.
TRANSFER AGENT
The Holding Company will act as its own transfer agent, registrar, dividend
disbursing agent and redemption agent for the shares of Holding Company Common
Stock and the Units.
LEGAL MATTERS
The legality of the Holding Company Common Stock and Debentures will be
passed upon for the Holding Company by Silver, Freedman & Taff, LLP (a
partnership including professional corporations), 1100 New York Avenue, N.W.,
Washington, D.C., special counsel to First Federal. Silver, Freedman & Taff, LLP
has consented to the reference herein to its opinion.
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EXPERTS
The Consolidated Financial Statements of First Federal Savings Bank of
Bryan and its subsidiary as of September 30, 1994, 1995 and 1996 and for each of
the years in the three year period ended September 30, 1996 included in this
Prospectus/Proxy Statement have been audited by Crowe, Chizek and Company LLP,
independent certified public accountants. Such Consolidated Financial Statements
have been included herein in reliance upon the report of Crowe, Chizek and
Company LLP, appearing elsewhere herein, and upon the authority of such firm as
experts in accounting and auditing.
93
<PAGE>
FIRST FEDERAL SAVINGS BANK
Index to Consolidated Financial Statements
Page
Report of Independent Auditors.............................................. F-2
Consolidated Statements of Financial Condition
September 30, 1996 and 1995................................................ F-4
Consolidated Statements of Income
Years ended September 30, 1996, 1995 and 1994............................. F-5
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1996, 1995 and 1994............................. F-5
Consolidated Statements of Cash Flows
Years ended September 30, 1996, 1995 and 1994............................. F-6
Notes to Consolidated Financial Statements
Years Ended September 30, 1996, 1995 and 1994.............................. F-8
Consolidated Statements of Financial Condition
June 30, 1997 and September 30, 1996...........................................
Consolidated Statements of Income
Three Months and Nine Months Ended June 30, 1997 and 1996.......................
Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended June 30, 1997 and 1996........................................
Consolidated Statements of Cash Flows
Three Months and Nine Months Ended June 30, 1997 and 1996.......................
Notes to Consolidated Financial Statements
June 30, 1997 and 1996..........................................................
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>
Bryan, Texas
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995, and 1994
CONTENTS
REPORT OF INDEPENDENT AUDITORS ............................................ 1
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ....................... 2
CONSOLIDATED STATEMENTS OF INCOME .................................... 3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ...................... 5
CONSOLIDATED STATEMENTS OF CASH FLOWS ................................ 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ........................... 8
F-1
<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.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
November 9, 1996
F-2
<PAGE>
FIRST FEDERAL SAVINGS BANK
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 1,000,000 shares,
issued 87,263 shares 1 1
Common stock - par value $.01 per share; authorized
3,000,000 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
=========== ===========
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
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
----------- ----------- -----------
- ------------------------------------------------------------------------------------------------------------------
(Continued)
F-4
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
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
Preferred stock dividends (88) (88) (87)
----------- ----------- -----------
Income available to common stockholders $ 146 $ 123 $ 370
=========== =========== ===========
Earnings per common share (Note 1) $ .61 $ .52 $ 1.54
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
F-5
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
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
=========== =========== =========== =========== ===========
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
F-6
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
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 e
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)
- ------------------------------------------------------------------------------------------------------------------
(Continued)
F-7
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
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 - -
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-8
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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. Realized gains and losses on
disposition of available-for-sale securities are based on the net proceeds and
the adjusted carrying amounts of the securities sold, using the specific
identification method.
Loans Receivable: Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses, and deferred loan origination fees and discounts.
Allowance for Loan Losses: Because some loans may not be repaid in full, the
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 level considered
adequate to cover losses that are currently anticipated based on
- --------------------------------------------------------------------------------
(Continued)
F-9
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
past loss experience, general economic conditions, information about specific
borrower situations including their financial position and collateral values,
and other factors and estimates which are subject to change over time. While
management may periodically allocate portions of the allowance for specific
problem loan situations, the whole allowance is available for any loan
charge-offs that occur. A loan is charged-off against the allowance by
management as a loss when deemed uncollectible, although collection efforts
continue and future recoveries may occur.
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.
- --------------------------------------------------------------------------------
(Continued)
F-10
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
(Continued)
F-11
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
(Continued)
F-12
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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
=========== =========== =========== ===========
---------------------------1 9 9 5-----------------------
-------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ----------- ----------- ------------
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
=========== =========== =========== ===========
- ------------------------------------------------------------------------------------------------------------------
(Continued)
F-13
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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
<TABLE>
<CAPTION>
Loans receivable at September 30 are summarized as follows:
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
=========== ===========
- ------------------------------------------------------------------------------------------------------------------
(Continued)
F-14
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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 related to 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
=========== =========== ===========
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.
- ------------------------------------------------------------------------------------------------------------------
(Continued)
F-15
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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
=========== ===========
NOTE 4 - SECONDARY MORTGAGE MARKET OPERATIONS
The following summarizes the Bank's secondary mortgage market activities:
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
=========== ===========
- ------------------------------------------------------------------------------------------------------------------
(Continued)
</TABLE>
F-16
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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
=========== =========== ===========
NOTE 6 - PREMISES AND EQUIPMENT
A summary of premises and equipment at September 30 is as follows:
In thousands
1996 1995
---- ----
<S> <C> <C>
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.
Non-interest-bearing deposit accounts totaled $3,344,000 and $3,336,000 at
September 30, 1996 and 1995, respectively.
- ------------------------------------------------------------------------------------------------------------------
(Continued)
F-17
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
(Continued)
F-18
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 9 - BENEFIT PLANS (Continued)
<TABLE>
<CAPTION>
The funded status of the plan is as follows:
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
Additional minimum liability (48) (44)
----------- -----------
Accrued pension (cost) benefit recorded on statement
of financial condition $ (52) $ (43)
=========== ===========
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.
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%
- ------------------------------------------------------------------------------------------------------------------
(Continued)
F-19
</TABLE>
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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. 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.
- --------------------------------------------------------------------------------
(Continued)
F-20
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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. At September 30, 1996, the
Bank's housing-related and other specified assets totaled approximately 78.8% of
total assets.
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.
Regulations of the Office of Thrift Supervision limit the amount of dividends
and other capital distributions that may be paid by a savings institution
without prior approval of the Office of Thrift Supervision. This regulatory
restriction is based on a three-tiered system with the greatest flexibility
afforded to well-capitalized (Tier 1) institutions. The Bank currently meets the
requirements of a Tier 1 institution and has not been informed by the OTS of the
need for more than normal supervision. Accordingly, the Bank can make, without
prior regulatory approval, distributions during a fiscal year up to 100% of its
net income to date during a fiscal
- --------------------------------------------------------------------------------
(Continued)
F-21
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 10 - REGULATORY MATTERS (Continued)
year plus an amount that would reduce by one-half its "surplus capital ratio"
(the excess over its Fully Phased-In Capital Requirements) at the beginning of
the last calendar year. At September 30, 1996, the Bank could pay up to $724,000
in dividends.
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.
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.
- --------------------------------------------------------------------------------
F-22
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 11 - COMMITMENTS, CONTINGENT LIABILITIES AND CONCENTRATIONS
(Continued)
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.
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>
F-23
<PAGE>
NOTE 12 - INCOME TAX EXPENSE (Continued)
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> <C>
Tax expense at statutory rate (34%) $ 116 $ 109 $ 235
Other tax effects (8) 1 (1)
----------- ----------- -----------
$ 108 $ 110 $ 234
=========== =========== ===========
</TABLE>
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>
- --------------------------------------------------------------------------------
(Continued)
F-24
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
(Continued)
F-25
<PAGE>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
F-26
<PAGE>
====================================== ======================================
NO PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED
IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFERING MADE HEREBY, AND, IF
GIVEN, OR MADE, SUCH OTHER INFORMATION
OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE
HOLDING COMPANY OR THE BANK. THIS
PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY TO ANY PERSON IN AN Up to 200,000 SHARES
JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREASE
ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE HOLDING THE BRYAN-COLLEGE STATION
COMPANY OR THE BANK SINCE ANY OF THE FINANCIAL HOLDING COMPANY
DATES AS OF WHICH INFORMATION IS
FURNISHED HEREIN OR SINCE THE DATE
HEREOF.
-----------------
TABLE OF CONTENTS
Page
Prospectus Summary..................
The Holding Company Common Stock
Offering...........................
Risk Factors........................ COMMON STOCK
Selected Consolidated Financial
Data...............................
Recent Financial Data...............
Management's Discussion of Recent
Results............................
The Bryan-College Station Financial
Holding Company Pro Forma
Consolidated Balance Sheet.........
Notes to the Bryan-College Station
Financial Holding Company Pro Forma
Consolidated Financial Statements
Dilution............................ --------------------------------------
Capitalization......................
Disclosure Regarding Forward-Looking
Statements......................... PROSPECTUS
Use of Proceeds.....................
Market Information..................
Dividend Policy..................... --------------------------------------
Management's Discussion and Analysis
of Financial Condition and Results
of Operations......................
Business............................
Regulation..........................
Federal Income Tax Considerations...
Management of the Holding Company...
Management of First Federal.........
Description of Unit Offering........
Description of Capital Stock........
Restrictions on Acquisitions of
Stock and Related Takeover Defensive
Provisions.........................
The Offering........................
Legal Matters.......................
Experts.............................
-------------------
________ __, 1997
UNTIL _______, 1997 ALL DEALERS
EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION,
MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
====================================== ======================================
NUMBER 002
COMMON STOCK
CUSIP No. 116902 10 7
THE BRYAN - COLLEGE STATION FINANCIAL HOLDING COMPANY
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE OF
THE BRYAN - COLLEGE STATION FINANCIAL HOLDING COMPANY (the "Company"), a
Delaware corporation. The shares represented by this certificate are
transferable only on the stock transfer books of the Company by the holder of
record hereof, or by his duly authorized attorney or legal representative, upon
the surrender of this certificate properly endorsed. This certificate is not
valid until countersigned and registered by the Company's transfer agent and
registrar. THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY
INSURED OR GUARANTEED.
IN WITNESS WHEREOF, the Company has caused this certificate to be executed
by the facsimile signatures of its duly authorized officers and has caused a
facsimile of its corporate seal to be hereunto affixed.
DATED
--------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
------------------------------------------- ---------------------------------------------
Charles Neeley, Corporate Secretary J. Stanley Stephen, President and Chief
[Seal] Executive Officer
</TABLE>
Countersigned and Registered
- ----------------------
Transfer Agent and Registrar
<PAGE>
THE BRYAN - COLLEGE STATION FINANCIAL HOLDING COMPANY
The shares represented by this certificate are issued subject to all
the provisions of the certificate of incorporation and bylaws of the Company as
from time to time amended (copies of which are on file at the principal
executive offices of the Company).
The Company's certificate of incorporation provides that shareholders
have a preemptive right to purchase or subscribe for any unissued stock of any
class of voting stock or any additional shares of any class to be issued by
reason of any increase of the authorized capital stock of the Company of any
securities of the Company. The provision shall not apply to shares issued by the
Company upon the exercise of certain warrants issued in 1997 and which expire in
2002.
The Company's certificate of incorporation also includes a provision
the general effect of which is to require the affirmative vote of the holders of
80% of the outstanding voting shares of the Corporation to approve certain
"business combinations" (as defined in the certificate of incorporation) between
the Company and a stockholder owning in excess of 10% of the outstanding shares
of the Company. However, only the affirmative vote of a majority of the
outstanding shares or such vote as is otherwise required by law (rather than the
80% voting requirement) is applicable to the particular transaction if it is
approved by a majority of the "disinterested directors" (as defined in the
certificate of incorporation) or, alternatively, the transaction satisfies
certain minimum price and procedural requirements. The Company's certificate of
incorporation also contains a provision which requires the affirmative vote of
holders of at least 80% of the outstanding voting shares of the Company which
are not beneficially owned by the "interested person" (as defined in the
certificate of incorporation) to approve the direct or indirect purchase or
other acquisition by the Company of any "equity security" (as defined in the
certificate of incorporation) from such interested person.
The Company will furnish to any stockholder upon request and without
charge a full statement of the powers, designations, preferences and relative
participating, optional or other special rights of each authorized class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights, to the extent that the same have been fixed, and
of the authority of the board of directors to designate the same with respect to
other series. Such request may be made to the Company or to its transfer agent
and registrar.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT Custodian
------- ------
TEN ENT - as tenants by the entirety (Cust) (Minor)
JT TEN - as joint tenants with right of Under Uniform Gift to Minors Act - ___________
survivorship and not as tenants (State)
in common. UNIF TRANS MIN ACT Custodian
------- ------
(Cust) (Minor)
Under Uniform Transfers to Minors Act-
-------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, hereby sell, assign and transfer unto
------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------
| |
- ------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
Shares of Common Stock represented by the within
- -------------------------------
<TABLE>
<CAPTION>
<S> <C>
certificate, and do hereby irrevocably constitute and appoint Attorney to transfer
-------------------
the said shares on the books of the within named Association with full power of
substitution in the premises.
Dated
--------------- -------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
</TABLE>
<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 to
be incurred in connection with the issuance of the shares and units.
<TABLE>
<CAPTION>
<S>
<C>
Counsel fees and expenses............................................... $100,000
Accounting fees and expenses............................................ 35,000
Marketing Agent fees (including counsel fees and expenses) 259,000
Printing, postage and mailing........................................... 20,000
Registration and Filing Fees............................................ 1,855
Blue Sky fees and expenses.............................................. 31,085
Trustee fee........................................................... 2,500
Other expenses........................................................ 7,500
--------
TOTAL............................................................ $456,940
========
</TABLE>
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
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
<PAGE>
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:
<TABLE>
<CAPTION>
<S> <C>
1 Form of Agency Agreement*
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**
4.1 Form of Stock Certificate of the Holding Company ^
4.2 Indenture, including Form of Debenture**
4.3 Form of Warrant ^
5.1 Opinion of Silver, Freedman & Taff, L.L.P. with Respect to Legality
of Stock**
5.2 Opinion of Silver, Freedman & Taff, L.L.P. with respect to Legality of Debentures**
5.3 Opinion of Silver, Freedman & Taff, L.L.P. with respect to Legality of Warrants**
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 ^ and Company, L.L.P.
24 Power of Attorney (set forth on signature page)
25 Statement of eligibility of trustee**
99 Stock Order Form and Order Form Instructions**
</TABLE>
* To be filed supplementally or by amendment.
**Previously filed
<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 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 October 1, 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)
/s/ Richard L. Peacock /s/ Ernest A. Wentrcek
- ------------------------------------------ ---------------------------------------------
Richard L. Peacock, Chairman of the Board Ernest A. Wentrcek, Vice Chairman of the Board
/s/ Charles Neelley /s/ George Koenig
- ------------------------------------------ ---------------------------------------------
<PAGE>
Charles Neelley, Director and Secretary/ George Koenig, Director and Executive Vice-
Treasurer President
/s/ Jack W. Lester /s/ Robert H. Conaway
- ------------------------------------------ ---------------------------------------------
Jack W. Lester, Director and Assistant Robert H. Conaway, Director
Secretary/Treasurer Director
/s/ Ken Hayes /s/ Phil Hobson
- ------------------------------------------ ---------------------------------------------
Ken Hayes, Director Phil Hobson, Director
/s/ J. Roland Ruffino
- ------------------------------------------
J. Rolan Ruffino, Director
</TABLE>
THE BRYAN-COLLEGE STATION
FINANCIAL HOLDING COMPANY
FORM OF WARRANT CERTIFICATE FOR PURCHASE
OF SHARES OF COMMON STOCK
THIS WARRANT CERTIFICATE IS VOID AFTER
5:00 P.M., CENTRAL TIME, ON _______________, 2002
Number of Warrants:____________ Warrant No.
This Warrant Certificate certifies that, for value received,
is the registered holder of the number of Warrants (the "Warrants") set forth
above. Each Warrant entitles the holder thereof to purchase from The
Bryan-College Station Holding Company, a Delaware corporation ("Company"), at
any time or from time to time after _____________, 1997 and on or before 5:00
p.m., Central Time, on _____________, 2002 ("Expiration Date"), one (1) share of
fully paid and nonassessable Common Stock, $.01 par value ("Common Stock"), of
the Company at an exercise price of $12.50 per share, subject to adjustment as
provided herein ("Exercise Price"), on the terms set forth herein. As used
herein, the term "Warrant Issuance Date" shall mean ________________, 1997.
1. EXERCISE OF WARRANTS. (a) At any time after the Warrant Issuance Date
and prior to the Expiration Date, the Warrants evidenced by this Warrant
Certificate may be exercised in whole or in part by presentation and surrender
of this Warrant Certificate at the office of the Company with the within
contained Subscription Form duly completed and executed and accompanied by
payment of the Exercise Price as then in effect by bank draft or cashier's check
payable in lawful money of the United States of America for the number of
Warrants being exercised. No adjustment shall be made for any cash dividends,
whether paid or declared, on any securities issuable upon the exercise of a
Warrant.
(b) Upon receipt of this Warrant Certificate, with the within
contained Subscription Form duly completed and executed, accompanied by payment
of the Exercise Price of the Warrants being exercised, the Company shall deliver
to or upon the order of the registered holder of this Warrant Certificate, in
such name or names as such registered holder may designate, a certificate or
certificates for the number of full shares of the securities to be purchased,
together with any cash due in respect of any fraction of a share of such
securities otherwise issuable upon such
<PAGE>
exercise in accordance with Section 2 hereof. If the Warrant is exercisable to
purchase property other than securities, the Company shall take appropriate
steps to cause such property to be delivered to or upon the order of the
registered holder of this Warrant Certificate.
(c) Each person in whose name any certificate for securities is issued
upon the exercise of Warrants shall for all purposes be deemed to have become
the holder of record of the securities represented thereby as of, and such
certificate shall be dated, the date upon the Warrant Certificate was duly
surrendered in proper form and payment of the Exercise Price was made whether or
not the stock transfer books shall be closed on such date.
(d) If the holder of this Warrant Certificate at any time exercises
less than all the Warrants evidenced by this Warrant Certificate, the Company
shall issue to such holder a warrant certificate identical in form to this
Warrant Certificate, but evidencing a number of Warrants equal to the number of
Warrants originally represented by this Warrant Certificate less the number of
Warrants previously exercised. Likewise, upon the presentation and surrender of
this Warrant Certificate at the office of the Company and at the request of the
holder, the Company will, at the option of the holder, issue to the holder in
substitution for this Warrant Certificate one or more warrant certificates in
identical form and for an aggregate number of Warrants equal to the number of
Warrants evidenced by this Warrant Certificate.
(e) To the extent that the Warrants evidenced by this Warrant
Certificate have not been exercised on or before 5:00 p.m., Central Time, on
____________, 2002, such Warrants shall expire and the rights of the holder
shall become void and of no effect.
2. FRACTIONAL INTERESTS. The Company shall not be required to issue any
Warrant Certificate evidencing a fraction of a Warrant or to issue fractions of
shares of securities on the exercise of the Warrants. If any fraction of a
Warrant or a share of securities would, except for the provisions of this
Section, be issuable on the exercise of any Warrant, the Company shall purchase
such frraction for an amount in cash equal to the current value of such fraction
computed on the basis of the greater of (i) the closing market price (as quoted
on National Association of Securities Dealers' Inc. SmallCap Market or National
Market System, if applicable), on the trading day immediately preceding the day
upon which such Warrant Certificate was surrendered for exercise in accordance
with Section 1 hereof, or (ii) the Exercise Price. By accepting a Warrant
Certificate, the holder thereof expressly waives any right to receive a Warrant
Certificate evidencing any fraction of a Warrant or to receive any fractional
share of securities upon exercise of a Warrant.
3. REGISTRATION. The Company covenants and agrees to take all actions
necessary to maintain in effect continuously, from the Warrant Issuance Date
through the Expiration Date, the Company's registration statement on Form S-1
(or any other applicable form then in effect) under
-2-
<PAGE>
the Securities Act of 1933, as amended (the "Act"), relating to the shares of
Common Stock issuable upon exercise of the Warrants represented by this Warrant
Certificate, including, without limitation, the timely filing of the necessary
amendments and supplements to such registration statement and the taking of any
other action under the law of the United States of America or any political
subdivision thereof, so that such securities may be validly issued; and the
Company covenants and agrees that it will furnish the holder of this Warrant
Certificate, upon each exercise of the Warrants represented hereby, a current
prospectus meeting the requirements of Section 10 of the Act and the rules and
regulations of the Securities and Exchange Commission thereunder.
4. ANTIDILUTIVE ADJUSTMENT. The shares of Common Stock purchasable on
exercise of the Warrants evidenced by this Warrant Certificate are shares of
Common Stock of the Company as constituted as of the Warrant Issuance Date. The
number and kind of securities purchasable on the exercise of the Warrants
evidenced by this Warrant Certificate, and the Exercise Price, shall be subject
to adjustment from time to time upon the happening of certain events, as
follows:
(a) MERGERS, CONSOLIDATIONS AND RECLASSIFICATIONS. In case of any
reclassification or change of outstanding securities issuable upon exercise of
the Warrants evidenced by this Warrant Certificate at any time after the Warrant
Issuance Date (other than a change in par value, or from par value to no par
value, or from no par value to par value or as a result of a subdivision or
combination to which subsection 4(b) applies), or in case of any consolidation
or merger of the Company with or into another corporation (other than a merger
with another corporation in which the Company is the surviving corporation and
which does not result in any reclassification or change [other than a change in
par value, or from par value to no par value, or from no par value to par value,
or as a result of a subdivision or combination to which subsection 4(b) applies]
of outstanding securities issuable upon exercise of this Warrant), the holder of
the Warrants evidenced by this Warrant Certificate shall have, and the Company,
or such successor corporation or other entity, shall covenant in the constituent
documents effecting any of the foregoing transactions that such holder does
have, the right to obtain upon the exercise of the Warrants evidenced by this
Warrant Certificate, in lieu of each share of Common Stock, other securities,
money or other property theretofore issuable upon exercise of a Warrant, the
kind and amount of shares of stock, other securities, money or other property
receivable upon such reclassification, change, consolidation or merger by a
holder of Common Stock, other securities, money or other property issuable upon
exercise of a Warrant as if the Warrants evidenced by this Warrant Certificate
had been exercised immediately prior to such reclassification, change,
consolidation or merger. The constituent documents effecting any such
reclassification, change, consolidation or merger shall provide for any
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided in this subsection 4(a). The provisions of this subsection
4(a) shall similarly apply to successive reclassifications, changes,
consolidations or mergers.
-3-
<PAGE>
(b) SUBDIVISIONS AND COMBINATIONS. If the Company, at any time after
the Warrant Issuance Date, shall subdivide its shares of Common Stock into a
greater number of shares, the Exercise Price in effect immediately prior to such
subdivision shall be proportionately reduced, and the number of shares of Common
Stock purchasable upon exercise of the Warrants evidenced by this Warrant
Certificate shall be proportionately increased, as at the effective date of such
subdivision, or if the Company shall take a record of holders of its Common
Stock for the purpose of so subdividing, as at such record date, whichever is
earlier. If the Company, at any time after the Warrant Issuance Date, shall
combine its shares of Common Stock into a smaller number of shares, the Exercise
Price in effect immediately prior to such combination shall be proportionately
increased, and the number of shares of Common Stock purchasable upon exercise of
the Warrants evidenced by this Warrant Certificate shall be proportionately
reduced, as at the effective date of such combination, or if the Company shall
take a record of holders of its Common Stock for purposes of such combination,
as at such record date, whichever is earlier.
(c) DIVIDENDS AND DISTRIBUTIONS. If the Company at any time after the
Warrant Issuance Date shall declare a dividend on its Common Stock payable in
stock or other securities of the Company or of any other corporation or other
entity, or in property or otherwise than in cash, to the holders of its Common
Stock, the holder of a Warrant evidenced by this Warrant Certificate shall,
without additional cost, be entitled to received upon any exercise of a Warrant
evidenced by this Warrant Certificate, in addition to the Common Stock to which
such holder would otherwise be entitled upon such exercise, the number of shares
of stock or other securities or property which such holder would have been
entitled to receive if he had been a holder immediately prior to the record date
for such dividend (or, if no record date shall have been established, the
payment date for such dividend) of the number of shares of Common Stock
purchasable on exercise of such Warrant immediately prior to such record date or
payment date, as the case may be.
(d) CERTAIN ISSUANCES OF SECURITIES. If the Company at any time after
the Warrant Issuance Date shall issue any additional shares of Common Stock
(otherwise than as provided in subsections 4(a) through 4(c) of this Warrant
Certificate) at a price per share less than the Warrant Exercise Price then in
effect, then the Warrant Exercise Price upon each such issuance shall be
adjusted to that price determined by multiplying the Warrant Exercise Price by a
fraction:
i. the numerator of which shall be the sum of (1) the number
of shares of Common Stock outstanding immediately prior to the
issuance of such additional shares of Common Stock multiplied by the
Warrant Exercise Price, and (2) the consideration, if any, received
and deemed received by the Company upon the issuance of such
additional shares of Common Stock, and
-4-
<PAGE>
ii. the denominator of which shall be the Warrant Exercise
Price multiplied by the total number of shares of Common Stock
outstanding immediately after the issuance of such additional shares
of Common Stock.
No adjustments of the Warrant Exercise Price shall be made under this
subsection 4(d) upon the issuance of any additional shares of Common Stock that
(y) are issued pursuant to thrift plans, stock purchase plans, stock bonus
plans, stock option plans, employee stock ownership plans and other incentive or
profit sharing arrangements for the benefit of employees ("Employee Benefit
Plans") that otherwise would cause an adjustment under this subsection 4(d);
provided, that the aggregate number of shares of Common Stock so issued
(including the shares issued pursuant to any options, rights or warrants or
convertible or exchangeable securities issued under such Employee Benefit Plans
containing the right to purchase shares of Common Stock) after the Warrant
Issuance Date pursuant to Employee Benefit Plans shall not exceed 10% of the
Company's outstanding Common Stock (on a fully diluted basis using the treasury
stock method) at the time of such issuance; or (z) are issued pursuant to any
Common Stock Equivalent (i) which was outstanding on the Warrant Issuance Date
or (ii) if upon the issuance of any such Common Stock Equivalent, any such
adjustments shall previously have been made pursuant to subsection 4(e) or (iii)
if no adjustment was required pursuant to subsection 4(e).
(e) COMMON STOCK EQUIVALENTS. If the Company shall, after the
Warrant Issuance Date, issue any security or evidence of indebtedness which is
convertible into or exchangeable for Common Stock ("Convertible Security"), or
any warrant, option or other right to subscribe for or purchase Common Stock or
any Convertible Security, other than pursuant to Employee Benefit Plans
(together with Convertible Securities, "Common Stock Equivalent"), or if, after
any such issuance, the price per share for which additional shares of Common
Stock may be issuable thereunder is amended, then upon each such issuance or
amendment the Warrant Exercise Price shall be adjusted as provided in
subsection4(d) on the basis that (i) the maximum number of additional shares of
Common Stock issuable pursuant to all such Common Stock Equivalents shall be
deemed to have been issued as of the earlier of (a) the date on which the
Company shall enter into a firm contract for the issuance of such Common Stock
Equivalent, or (b) the date of actual issuance of such Common Stock Equivalent;
and (ii) the aggregate consideration for such maximum number of additional
shares of Common Stock shall be deemed to be the minimum consideration received
and receivable by the Company for the issuance of such additional shares of
Common Stock pursuant to such Common Stock Equivalent; provided, however, that
no adjustment shall be made pursuant to this subsection 4(e) unless the
consideration received and receivable by the Company per share of Common Stock
for the issuance of such additional shares of Common Stock pursuant to such
Common Stock Equivalent is less than the Warrant Exercise Price. No adjustment
of the Warrant Exercise Price shall be made under this subsection 4(e) upon the
issuance of any Convertible Security which is issued pursuant to the exercise of
any warrants or other subscription
-5-
<PAGE>
or purchase rights therefor, if any adjustment shall previously have been made
in the Warrant Exercise Price then in effect upon the issuance of such warrants
or other rights pursuant to this subsection 4(e).
(f) MISCELLANEOUS. The following provisions shall be applicable
to the making of adjustments in the Warrant Exercise Price hereinbefore provided
in this section 4:
i. The consideration received by the Company shall be deemed
to be the following: (a) to the extent that any additional shares of
Common Stock or any Common Stock Equivalent shall be issued for cash
consideration, the consideration received by the Company therefor, or,
if such additional shares of Common Stock or Common Stock Equivalent
are offered by the Company for subscription, the subscription price,
or, if such additional shares of Common Stock or Common Stock
Equivalent are sold to underwriters or dealers for public offering
without a subscription offering, the public offering price, in any
such case excluding any amounts paid or receivable for accrued
interest or accrued dividends and without deduction of any
compensation, discounts, commissions or expenses paid or incurred by
the Company for and in the underwriting of, or otherwise in connection
with, the issue thereof; (b) to the extent that such issuance shall be
for a consideration other than cash, then, except as herein otherwise
expressly provided, the fair value of such consideration at the time
of such issuance as determined in good faith by the Board of
Directors, as evidenced by a certified resolution of the Board of
Directors delivered to the holder of this Warrant Certificate setting
forth such determination. The consideration for any additional shares
of Common Stock issuable pursuant to any Common Stock Equivalent shall
be the consideration received by the Company for issuing such Common
Stock Equivalent, plus the additional consideration payable to the
Company upon the exercise, conversion or exchange of such Common Stock
Equivalent. In case of the issuance at any time of any additional
shares of Common Stock or Common Stock Equivalent in payment or
satisfaction of any dividend upon any class of stock other than Common
Stock, the Company shall be deemed to have received for such
additional shares of Common Stock or Common Stock Equivalent (which
shall not be deemed to be a dividend payable in, or other distribution
of, Common Stock under subsection 4(b) above) consideration equal to
the amount of such dividend so paid or satisfied.
ii. Upon the expiration of the right to convert, exchange or
exercise any Common Stock Equivalent the issuance of which effected an
adjustment in the Warrant Exercise Price, if any such Common Stock
Equivalent shall not have been converted, exercised or exchanged, the
number of shares of Common Stock deemed to be issued and outstanding
because they were issuable upon conversion, exchange or exercise of
any such Common Stock Equivalent shall no longer be computed as set
forth above, and the Warrant
-6-
<PAGE>
Exercise Price shall forthwith be readjusted and thereafter be the
price which it would have been (but reflecting any other adjustments in
the Warrant Exercise Price made pursuant to the provisions of
subsection 4(d) above after the issuance of such Common Stock
Equivalent) had the adjustment of the Exercise Price made upon the
issuance or sale of such Common Stock Equivalent been made on the basis
of the issuance only of the number of additional shares of Common Stock
actually issued upon exercise, conversion or exchange of such Common
Stock Equivalent and thereupon only the number of additional shares of
Common Stock actually so issued shall be deemed to have been issued and
only the consideration actually received by the Company (computed as in
subsection 4(f)(i)) shall be deemed to have been received by the
Company.
iii. The number of shares of Common Stock at any time
outstanding shall not include any shares thereof then directly or
indirectly owned or held by or for the account of the Company or its
subsidiaries.
iv. For the purposes of this Section 4, the term "shares of
Common Stock" shall mean shares of (i) the class of stock designated
as the Common Stock of the Company at the date hereof or (ii) any
other class of stock resulting from successive changes or
reclassifications of such shares consisting solely of changes in par
value, or from par value to no par value, or from no par value to par
value. If at any time, because of an adjustment pursuant to subsection
4(a), the Warrants shall entitle the holders to purchase any
securities other than shares of Common Stock, thereafter the number of
such other securities so purchasable upon exercise of each Warrant and
the Warrant Exercise Price of such securities shall be subject to
adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Common
Stock contained in this Section 4.
(g) CALCULATION OF WARRANT EXERCISE PRICE. The Warrant Exercise
Price in effect from time to time shall be calculated to four decimal places and
rounded to the nearest thousandth.
5. NOTICE OF ADJUSTMENT TO EXERCISE PRICE. Whenever the Warrant Exercise
Price is required to be adjusted as provided in Section 4, the Company shall
forthwith compute the adjusted Warrant Exercise Price and shall prepare and mail
to the holder hereof a certificate setting forth such adjusted Warrant Exercise
Price and showing in reasonable detail the facts upon which such adjustment is
based.
-7-
<PAGE>
6. NOTICES TO WARRANT HOLDER. In the event:
(a) of any consolidation or merger to which the Company is a party and
for which approval of any stockholders of the Company is required, or of the
conveyance or sale of all or substantially all of the assets of the Company, or
of any reclassification or change of the Common Stock or other securities
issuable upon exercise of the Warrants (other than a change in par value, or
from par value to no par value, or from no par value to par value or as a result
of a subdivision or combination), or a tender offer or exchange offer for shares
of Common Stock (or other securities issuable upon the exercise of the
Warrants); or
(b) the Company shall declare any dividend (or any other distribution)
on the Common Stock, other than regular cash dividends; or
(c) the Company shall authorize the granting to the holders of Common
Stock of rights or warrants to subscribe for or purchase any shares of any class
or series of capital stock; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company;
then the Company shall cause to be sent to the holder of this Warrant
Certificate, at least 30 days prior to the applicable record date hereinafter
specified, or promptly in the case of events for which there is no record date,
a written notice stating (x) the date for the determination of the holders of
record of shares of Common Stock (or other securities issuable upon the exercise
of the Warrants) entitled to receive any such dividends or other distribution,
(y) the initial expiration date set forth in any tender offer or exchange offer
for shares of Common Stock (or other securities issuable upon the exercise of
the Warrants), or (z) the date on which any such consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding up is expected to
become effective or consummated, and the date as of which it is expected that
holders of record of shares of Common Stock (or other securities issuable upon
the exercise of the Warrants) shall be entitled to exchange such shares for
securities or other property, if any, deliverable upon such reclassification,
consolidation, merger, conveyance, transfer, dissolution, liquidation or winding
up.
7. REPORTS TO HOLDERS. The Company will cause to be delivered, by
first-class mail, postage prepaid, to the holder at such holder's address
appearing hereon, or such other address as the holder shall specify, a copy of
any reports delivered by the Company to the holders of Common Stock.
-8-
<PAGE>
8. COVENANTS OF THE COMPANY. The Company covenants and agrees that:
(a) During the period within which the Warrants evidenced by this
Warrant Certificate may be exercised, the Company shall at all times reserve and
keep available, free from preemptive rights, out of the aggregate of its
authorized but unissued Common Stock, for the purpose of enabling it to satisfy
any obligation to issue shares of Common Stock upon the exercise of the Warrants
evidenced by this Warrant Certificate, the number of shares of Common Stock
issuable upon the exercise of such Warrants.
(b) The Company shall pay all expenses, taxes (other than stock
transfer taxes or charges) and other charges payable in connection with the
preparation, issuance and delivery of new warrant certificates on transfer of
the Warrants evidenced by this Warrant Certificate.
(c) All Common Stock which may be issued upon exercise of the Warrants
evidenced by this Warrant Certificate shall upon issuance be validly issued,
fully paid, non-assessable and free from all taxes, liens and charges with
respect to the issuance thereof.
(d) All original issue taxes payable in respect of the issuance of
shares of Common Stock to the registered holder hereof upon the exercise of the
Warrants evidenced by this Warrant Certificate shall be borne by the Company;
provided, that the Company shall not be required to pay any tax or charge
imposed in connection with any transfer involved in the issuance of any
certificate representing shares of Common Stock in any name other than that of
the registered holder hereof, and in such case the Company shall not be required
to issue or deliver any certificate representing shares of Common Stock until
such tax or other charge has been paid or it has been established to the
Company's satisfaction that no such tax or charge is due.
9. NO RIGHTS AS STOCKHOLDER. The holder of the Warrants evidenced by this
Warrant Certficate shall not, by virtue of holding such Warrants, be entitled to
any rights of a stockholder of the Company either at law or in equity, and the
rights of the holder of the Warrants evidenced by this Warrant Certificate are
limited to those expressed herein.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
executed this _____ day of ___________________, 1997 by its President and
Secretary, thereunto duly authorized.
THE BRYAN-COLLEGE STATION
FINANCIAL HOLDING COMPANY
-9-
<PAGE>
By:
-------------------------------------
J. Stanley Stephen
President
ATTEST:
- -------------------------
Charles Neeley
Secretary
-10-
<PAGE>
SUBSCRIPTION FORM
[To be executed on exercise of the Warrants evidenced by this Warrant
Certificate]
TO: The Bryan-College Station Financial Holding Company
The undersigned, the holder of the Warrants evidenced by the attached
Warrant Certificate, hereby irrevocably elects to exercise the purchase right
evidenced by such Warrant Certificate for, and to purchase thereunder, shares of
Common Stock of The Bryan-College Station Financial Holding Company and herewith
makes payment of ____________ ($ ) for those shares, and requests that the
certificate representing those shares be issued in the name of
_____________________ and delivered to ____________, whose address is
__________________________________ Dated: ____________________________________
------------------------------------
Signature(s) of Registered Holder(s)
Note: The above signature(s) must
correspond with the name as written
on the face of this Warrant
Certificate in every particular,
without alteration or enlargement or
any change whatsoever.
- --------------------------------------------------------------------------------
TRANSFER FORM
[To be executed only upon transfer of the Warrants evidenced by this Warrant
Certificate]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto _________________________________________________ the Warrants represented
by the within Warrant Certificate, together with all right, title and interest
therein, and does hereby irrevocably constitute and appoint
_____________________________________ Attorney-in-Fact, to transfer same on the
books of the Company with full power of substitution in the premises.
Dated:
----------- ------------------------------------
------------------------------------
Signature(s) of Registered Holder(s)
Note: The above signature(s) must
correspond with the name as written
on the face of this Warrant
Certificate in every particular,
without alteration or enlargement or
any change whatsoever.
WITNESS:
- --------------------------------
-11-
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
First Federal Savings Bank
We consent to the use in this Prospectus on Form S-1 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 "Experts" in this Prospectus on Form S-1.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
Oak Brook, Illinois
October 1, 1997
