As filed with the Securities and Exchange Commission on October 31, 1997
Registration No. 333-28179
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2 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. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE (1) OFFERING PRICE(1) REGISTRATION FEE
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Common Stock, par value $.01 per shares 200,000 shares $ 10.00 $ 2,000,000 $ 606(2)
Common Stock, par value $.01 per shares 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) Registration fee of $127 previously paid with Form S-1 on October 1, 1997.
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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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 11 1/2% subordinated debentures due
March 31, 2003 (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 March 31, 2003. 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. As a newly formed
entity, the Holding Company has no debt outstanding and will have no debt
outstanding prior to the issuance of the Debentures. The obligations represented
by the Debentures will be structurally subordinated to the claims of depositors
and creditors of First Federal Savings Bank, Bryan, Texas ("First Federal"), the
Company's proposed subidiary, as discussed below. At June 30, 1997 First
Federal's deposits and other borrowings were $59.7 million. 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."
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 Commissions1 Proceeds2
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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
$188,000.
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 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. The Merger and the
Offering must be consummated by March 31, 1998 or both the Merger and 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, January 31, 1998 (subject to extension
without notice by agreement between the Holding Company and the Agent until
March 20, 1998) 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)
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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]
4
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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 12, 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 requirement that elections by existing First
Federal common stockholders representing at least 20% of the consideration to be
paid by the Holding Company in the Merger must consist of elections to exchange
existing First Federal Common Stock for Holding Company Common Stock was based
on management's determination as to the amount of debt and common stock the
Holding Company should issue and the minimum amount of desired capital at the
Holding Company level to support such debt. 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
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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 11 1/2% Debentures due March 31, 2003 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 March 31, 2003. The
Debentures are to be issued under an indenture (the
"Indenture") between the Holding Company and Harris
Trust Company of New York, as trustee (the
"Trustee").
Debenture Maturity Date..... March 31, 2003
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. As a newly formed entity, the Holding
Company has no debt outstanding and will have no
debt outstanding prior to the issuance of the
Debentures. The Indenture governing the Debentures'
terms and conditions does not prohibit or limit the
occurrence of additional Senior Indebtedness or
General Obligations.
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."
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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 March 31, 2003. The Warrants are detachable
and may trade separately from the Debentures. See
"Description of Warrants."
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
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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 $4.3 million and $5.1
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.
During the nine months ended June 30, 1997 net interest income exceeded
noninterest expense by $63,000. See "Recent Financial Data." 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 of Recent Results" and "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 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.
9
<PAGE>
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. At June 30, 1997, after giving pro forma effect
to the Offering, the Holding Company would have had on a consolidated basis
$63.1 million of liabilities (consisting primarily of deposits and other
borrwings) outstanding. First Federal also has $873,000 of 10% Series A
Preferred Stock.
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. In addition,
First Federal is seeking the approval from the OTS to pay Common Stock dividends
of up to $.50 per share or approximately $120,000 in the aggregate. See
"Regulation - Limitations on Dividends and Other Capital Distributions."
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
10
<PAGE>
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 a newly formed entity, the
Holding Company has no debt outstanding and will have no debt outstanding prior
to the issuance of the debentures. The obligations represented by the Debentures
will be structurally subordinated to the claims of depositors and creditors of
First Federal. At June 30, 1997, First Federal's deposits and other borrowings
were $59.7 million. See "Description of the Debentures -Subordination." 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 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."
11
<PAGE>
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 (net of recoveries) 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
12
<PAGE>
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.
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
13
<PAGE>
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 103,000 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 34.4% the minimum and 29.5%, at the maximum, respectively, of the
shares to be outstanding upon completion of the Offering. Stock ownership by
directors and executive officers, if voted as a block or supported by sufficient
other shareholder votes, could enable the Board and management to block the
approval of transactions requiring the approval of 80% of the shareholders under
the Holding Company's Certificate of Incorporation. See "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. 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)
STATEMENT OF INCOME DATA:
<S> <C> <C> <C> <C> <C>
Total interest income...................................... $4,828 $4,698 $4,020 $3,794 $4,772
Total interest expense..................................... 2,363 2,294 1,758 1,945 3,124
------ ------- ------ ------ ------
Net interest income...................................... 2,465 2,404 2,262 1,849 1,648
Provision for loan losses.................................. (52) 27 (401)(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
ssets 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(7) 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(8)...................... 4.11 3.97 4.20 3.67 3.08
End of year(9).............................. 4.67 4.17 4.29 4.27 3.35
Net interest margin for the year(10).......... 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) The Bank's tangible, core and risk-based ratios were 7.5%, 7.5% and 10.6%,
respectively, at September 30, 1996. See "Regulation - Regulatory Capital
Requirements."
(8) 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).
(9) 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.
(10) 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)
STATEMENT OF INCOME:
<S> <C> <C> <C> <C>
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> <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(4) 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(5)....................
End of period(6)............................ 4.58 4.31 4.81 4.16
Net interest margin for the period(7)......... 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) The Bank's tangible, core and risk-based ratios were 7.2%, 7.2% and 10.3%,
respectively, at June 30, 1997. See "Management's Discussion of Recent
Results - Liquidity and Capital Resources."
(5) 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).
(6) 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.
(7) 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 (net of recoveries) 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 probable
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.
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.
22
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following Holding Company pro forma consolidated balance sheet and
statements of income presented on pages 25-28 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 and 150,000 shares of Common Stock 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.
The Holding Company pro forma consolidated balance sheet and statements
of income presented on pages 28 through 31 illustrate the pro forma effects of
the merger, without the application of leveraged buy-out accounting. In this
case the assets acquired and liabilities assumed in the acquisition of the
remainder of First Federal will be recorded at their historical values, with the
purchase price reflected as a reduction of Holding Company stockholders' equity.
23
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, 1997
--------------------------------------------------------------
First
Federal Elimination Consolidated
Historical Pro forma Adjustments 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>
24
<PAGE>
<TABLE>
<CAPTION>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the year ended
September 30, 1996
------------------------------------------
Bank Pro forma Consolidated
Historical Adjustments 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>
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 Nine Months Ended
June 30, 1997
-----------------------------------------------
Bank Pro forma Consolidated
Historical Adjustments 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>
26
<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.
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.
27
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------------------------------------------
Bank Pro forma Elimination Consolidated
Historical Adjustments Entries Pro forma
---------- --------------------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks.................. $ 766 $ 1,314 (1) $(4,326)(8) $ --- $ 731
--- 3,400 (2) --- --- ---
--- (423)(4) --- --- ---
Interest-bearing deposits with
financial institutions................. 1,605 --- --- --- 1,605
Mortgage-backed securities............... 1,186 --- --- --- 1,186
Loans.................................... 58,801 --- --- --- 58,801
Premises and equipment................... 1,046 --- --- --- 1,046
Investment in Bank....................... --- --- 5,287(8) (5,287)(5) ---
Debt issuance costs...................... --- 423(4) --- --- 423
Interest receivable and other assets..... 2,377 --- --- --- 2,377
-------- ------- ------- -------- --------
Total assets.......................... $ 65,781 $ 4,714 $ 961 $ (5,287) $ 66,169
LIABILITIES
Deposits................................. $ 57,638 $ --- $ --- $ --- $ 57,638
Other borrowings......................... 2,100 --- --- --- 2,100
Debentures............................... --- 3,400(2) --- --- 3,400
Other liabilities........................ 1,324 --- --- 1,324
-------- ------- ------- -------- --------
Total liabilities..................... 61,062 3,400 --- 64,462
Minority interest-preferred stock........ --- --- --- 873 (7) 873
STOCKHOLDERS' EQUITY
Preferred stock.......................... 1 --- --- (1)(5) ---
Common stock............................. 2 1(1) 1(8) (2)(7) 1
Additional paid-in-capital............... 2,743 --- 960(8) (872)(7) ---
--- 1,313(1) --- (3,312)(5) 832
Retained earnings........................ 1,973 --- --- (1,973)(5) ---
-------- ------- ------- -------- --------
Total stockholders' equity............ 4,719 1,314 961 (6,160) 834
-------- ------- ------- -------- --------
Total liabilities and stockholders'
equity............................. $ 65,781 $ 4,714 $ 961 $ (5,287) $ 66,169
========== ======= ======= ======== ========
PER SHARE DATA(4)
Holding Company common shares
outstanding............................. 599,030 --- --- --- 299,758
Book value per Holding Company
common share........................... $ 6.42 --- --- --- $ 2.78
Tangible book value per Holding
Company common share................... 6.42 --- --- --- 2.78
Offering price Holding Company
common stock........................... --- --- --- --- 10.00
</TABLE>
28
<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
-----------------------------------------
Bank Pro forma Consolidated
Historical Adjustments Pro forma
---------- ---------------- ------------
<S> <C> <C> <C>
INTEREST INCOME
Loans......................................................... $ 4,407 $ --- $ 4,407
Mortgage-backed securities.................................... 145 --- 145
Other......................................................... 276 --- 276
-------- -------- --------
Total interest income..................................... 4,828 4,828
INTEREST EXPENSE
Deposits...................................................... 2,358 --- 2,358
Debentures.................................................... --- 391(2) 391
Other borrowings.............................................. 5 --- 5
Total interest expense..................................... 2,363 391 2,754
-------- -------- -------
Net Interest Income........................................... 2,465 (391) 2,074
Provision for loan losses..................................... (52) --- (52)
-------- -------- -------
Net interest income after provisions for loan losses.......... 2,517 (391) 2,126
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 debt issue costs --- 85 85
Occupancy and equipment....................................... 335 --- 335
Other......................................................... 1,376 --- 1,376
------- -------- --------
Total noninterest expenses................................. 3,048 85 3,133
------- -------- ---------
Income/(loss) before federal income tax expense............... 342 (476) (134)
Income tax expense/(benefit).................................. 108 (162)(8) (54)
------- -------- --------
Net income/(loss)............................................. 234 (314) (80)
Preferred stock dividends..................................... (88) (88)
------- -------- --------
Income/(loss) available to common stockholders................ $ 146 $ (314) $ (168)
Weighted average common shares outstanding.................... 599,030 --- 299,758
Net income/(loss) per common share............................ $ .24 --- $ (.73)
</TABLE>
29
<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
------------------------------------------
Bank Pro forma Consolidated
Historical Adjustments Pro forma
------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans......................................................... $ 3,847 $ --- $ 3,847
Mortgage-backed securities.................................... 56 --- 59
Other......................................................... 104 --- 104
-------- --------- --------
Total interest income...................................... 4,007 --- 4,007
INTEREST EXPENSE
Deposits...................................................... 1,825 --- 1,825
Debentures.................................................... --- 293(2) 293
Other borrowings.............................................. 57 --- 57
-------- --------- --------
Total interest expense..................................... 1,882 (293) 2,175
-------- --------- --------
Net Interest Income........................................... 2,125 (293) 1,832
Provision for loan losses..................................... 1 --- 1
-------- --------- --------
Net interest income after provisions for loan losses.......... 2,124 (293) 1,831
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 debt issue costs.............................. --- 64(5) 64
Occupancy and equipment....................................... 239 --- 239
Other......................................................... 775 --- 775
-------- --------- --------
Total noninterest expenses................................. 2,002 64 2,066
-------- --------- --------
Income/(loss) before federal income tax expense............... 711 (357) 354
Income tax expense/(benefit).................................. 242 (121)(8) (121)
-------- --------- --------
Net income/(loss)............................................. 469 (236) 233
Preferred stock dividends..................................... (66) --- (66)
-------- --------- --------
Income/(loss) available to common stockholders................ $ 403 $ (236) $ 167
Weighted average common shares outstanding.................... 599,030 --- 299,758
Net income/(loss) per common share............................ $ .67 --- $ .56
</TABLE>
30
<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) 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. 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.
(4) 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).
(5) Elimination of intercompany accounts.
(6) Reflects tax rate of 34%.
(7) Reflects outside ownership of First Federal's preferred stock.
(8) Reflects exchange of 59,903 common shares (25% of outstanding shares)
of First Federal for 149,758 common shares (par value $.01) of Holding
Company at historical book value (59,903 shares of $16.05/share =
$961,000) plus the purchase of 75% of First Federal stock for
$4,326,000 (179,709 shares of $24.07/per share).
31
<PAGE>
DILUTION
Upon the successful completion of the 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>
Using LBO Accounting Without LBO Accounting
-------------------------------------------------------
150,000 200,000 150,000 200,000
Shares Shares Shares Shares
(Minimum (Maximum (Minimum (Maximum
Number of Number of Number of Number of
Shares) Shares) Shares) Shares)
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Offering price per share of Holding Company Common Stock.......... $10.00 $10.00 $10.00 $10.00
Net tangible book value per share of Bank Common Stock
before offering (1).............................................. 6.42 6.42 6.42 6.42
Pro forma net tangible book value per share of Holding Company
Common Stock after offering (2)................................. 3.75 4.65 2.78 3.81
Increase per share of Holding Company Common Stock attributable
to payments for shares offered hereby........................... 10.00 10.00 10.00 10.00
Dilution to investors ............................................ 6.25 5.35 7.22 6.19
</TABLE>
- -------------------
(1) Net tangible book value per share of Bank Common Stock is determined by
dividing the number of shares of Bank Common Stock outstanding into the
net tangible book value of the Bank (tangible assets less liabilities).
(2) 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). Assumes 150,000 share of
Holding Company Common Stock will be issued in the Merger. The pro
forma net tangible book value of the Holding Company excludes the pro
forma core deposit intangible, net of tax, and goodwill.
32
<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>
Using LBO Accounting Without LBO Accounting
Consolidated Capitalization Consolidated Capitalization
June 30, 1997 June 30, 1997
----------------------------- ---------------------------
(In Thousands)
Historical Pro Forma Historical Pro Forma
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Deposits.................................................. $57,638 $57,638 $57,638 $57,638
Other Borrowings.......................................... 2,100 2,100 2,100 2,100
Debentures due............................................ --- 3,400 --- 3,400
------- ------- ------- -------
Total deposits and other borrowings ................... $59,738 $63,138 $59,738 $63,138
Minority Interest......................................... $ --- $ 873 $ --- $ 873
Stockholders' equity:
Preferred Stock, $.01 par value per shares to be
outstanding as shown...................................... $ 1 $ --- $ 1 $ ---
Holding Company Common Stock, par value $.01 per share:
Authorized - shares; to be outstanding as shown........... 2 2 2 2
Additional paid-in capital................................ 2,743 2,273 2,743 832
Retained earnings......................................... 1,973 --- 1,973 ---
------- ------- ------- -------
Total stockholders' equity................................ $ 4,719 $ 2,275 $ 4,719 $ 834
======= ======= ======= =======
This capitalization table assumes the sale of only the minimum amount
of Units.
</TABLE>
33
<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 $4.3 million and $5.1 million,
at the minimum and maximum number of securities offered, respectively. This
amount is arrived at by subtracting the $614,000 and $635,000 estimated fees and
expenses of the Offering, including commissions, from $4.9 million and $5.7
million, 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
$376,000), 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.
34
<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
First Federal is seeking approval from the OTS to pay Common Stock
dividends of up to $.50 per share or approximately $120,000 in the aggregate.
However, subsequent to the Merger, it is not expected that the Holding Company
will pay cash dividends on the Holding Company Common Stock. To date, 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.
35
<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 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
36
<PAGE>
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 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
37
<PAGE>
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
Established by Board of
Change in At March 31, 1997 Directors
Interest Rate Estimated --------------------- -----------------------
(Basis Points) NPV $ 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 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.
38
<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>
39
<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.
40
<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%
For the Year Ended
September 30,
----------------------------
1996 1995 1994
---- ---- ----
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>
41
<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>
42
<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 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.
43
<PAGE>
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 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.
44
<PAGE>
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 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.
45
<PAGE>
First Federal's liquidity, represented by cash equivalents, is a
product of its operating, investing and financing activities. These activities
are summarized below for the periods indicated.
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, September 30,
1996 1995
------------- -------------
(In Thousands)
<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.
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
46
<PAGE>
not apply to financial instruments, core deposit intangibles, mortgage and other
servicing rights or deferred tax assets. Theadoption 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.
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.
47
<PAGE>
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
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
48
<PAGE>
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 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.
49
<PAGE>
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.
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>
50
<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%
======= ====== ======= ====== ======= ======
First Federal has the authority to purchase loans and loan
participations, but has elected not to do so since 1991.
</TABLE>
51
<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> <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
======= ======= =========
- -------------------
(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.
</TABLE>
52
<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
-------------------- ------------------ ------------------ -----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
-------- ------ ------- ------ ------- ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due During
Years Ended
September 30,
- -------------
1997(1)..................... $ 7,565 8.42% $ 507 9.13% $4,365 9.18 $ 1,585 8.60%
1998 and 1999............... 12,717 9.26 1,168 9.36 --- --- 3,818
2000 and 2001............... 893 9.40 925 9.55 --- --- 6,397 13.28
2002 to 2006................ 1,073 8.89 86 11.25 --- --- 71 11.80
2006 to 2016................ 1,988 8.99 643 9.81 --- --- 21 8.00
2017 and following.......... 6,660 8.98 846 8.75 --- --- --- ---
-------- ---- ------ ------ ------ ---- ------- -----
$30,896 8.97% $4,175 9.36% $4,365 9.1 $11,892 11.91%
======= ==== ====== ===== ====== ==== ======= =====
Business Total
------------------ -------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ------ -------- -----
(Dollars in Thousands)
Due During
Years Ended
September 30,
<S> <C> <C> <C> <C>
1997(1)..................... $ 280 9.72% $14,302 8.72%
1998 and 1999............... --- --- 17,703 9.64
2000 and 2001............... 79 9.96 8,294 12.41
2002 to 2006................ 86 10.81 1,316 9.33
2006 to 2016................ 150 11.00 2,802 9.28
2017 and following.......... --- --- 7,506 8.95
----- ----- ------- -----
$ 595 10.23% $51,923 9.70%
===== ===== ======= ====
</TABLE>
- -------------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
53
<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.
54
<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.
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.
55
<PAGE>
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 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
56
<PAGE>
account is used by First Federal to protect against excess interest payments to
the dealer due to loan prepayments, payoffs, orfor 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.
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.
57
<PAGE>
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 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.
58
<PAGE>
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.
59
<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%
- -------------------
(1) Including loans held for sale.
60
</TABLE>
<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.
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."
61
<PAGE>
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.
62
<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.
63
<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 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
64
<PAGE>
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>
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>
65
<PAGE>
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>
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> <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)
Maximum Balance:
- ---------------
<S> <C> <C> <C>
FHLB advances............................ $1,088 $1,088 $2,004
Average Balance:
- ---------------
FHLB advances............................ $ 89 $2,085 $ 679
</TABLE>
66
<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 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.
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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 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.
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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 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.
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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 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.
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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.
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.
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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% 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
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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,
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.
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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
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.
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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 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
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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.
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
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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 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
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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.
The statements of law or legal conclusion set forth in this summary
constitute the opinion of Crowe, Chizek and Company LLP, special tax counsel to
the Holding Company. This summary is based upon the Internal Revenue Code of
1986, as amended (the "Code"), Treasury regulations, Internal Revenue Service
rulings and pronouncements and judicial decisions now in effect, all of which
are subject to change at any time.
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 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
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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 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.
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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.
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
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"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.
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 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.
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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.
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.
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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.
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.
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.
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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
$100,000 during the fiscal year ended September 30, 1996. Mr. Stephen
voluntarily reduced his salary in 1995 and 1996.
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<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------------------------
Long Term Compensation
- ---------------------------------------------------------------------------------------------------------------------------
Awards Payout
- ---------------------------------------------------------------------------------------------------------------------------
Annual Compensation
- ---------------------------------------------------------------------------------------------------------------------------
RESTRICTED
OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
Name and Principal Salary Bonus COMPENSATION AWARD(S) SARS PAYOUT COMPENSATION
Position Year ($) ($) ($) ($) (#) ($) ($)
- ---------------------------------------------------------------------------------------------------------------------------
<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.
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
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termination of employment occurs in connection with or within 12 months after a
change in control of First Federal, he or sheshall 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.
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.
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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>
Years of Service
Average Annual ---------------------------------------------------------
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(2) Offering Offering
- ---------------- ---------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
DIRECTORS
Richard L. Peacock 3,868 1.53 5,788 1.93% 1.65%
Ernest A. Wentrcek 3,868 1.53 5,788 1.93 1.65
Jack W. Lester 13,707 5.42 10,650 3.55 3.04
Ken Hayes 1,781 .70 570 .19 .16
Phil Hobson(3) 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 (11 persons) 104,321 41.22 103,086 34.36 29.45
</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) Excludes First Federal stock options which will be canceled in the
transaction.
(3) 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. The certificate of incorporation of the Holding
Company will be amended prior to consummation of the Offering to provide that
shareholders shall have preemptive rights except with respect to any stock
options issued pursuant to a plan approved by the stockholders and warrants
issued by the Holding Company as part of the sale of the Units. 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
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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."
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
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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
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
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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.
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
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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
the closing date of the Offering, 1997 (the "Indenture"), between the Holding
Company and Harris Trust Company of New York, 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 Indenture complies with the TIA. 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 March 31, 2003. 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
July 1, October 1, January 1 or April 1 (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 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, 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
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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 a newly formed entity, the Holding Company has no debt outstanding
and will have no debt outstanding prior to the issuance of the Debentures. The
obligations represented by the Debentures will be structurally subordinated to
the claims of depositors and creditors of First Federal. At June 30, 1997, First
Federal's deposits and other borrowings were $59.7 million. 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 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
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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", 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.
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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.
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
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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
March 31, 2003. 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.
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 March 31, 2003 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.
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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, 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.
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.
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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.
102
<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.
103
<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
=========== ===========
</TABLE>
NOTE 4 - SECONDARY MORTGAGE MARKET OPERATIONS
The following summarizes the Bank's secondary mortgage market activities:
<TABLE>
<CAPTION>
In thousands
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Proceeds from sale of mortgage loans $ 13,839 $ 81,838 $ 86,336
=========== =========== ===========
Gain on sale of mortgage loans $ 125 $ 109 $ 501
Gain on sale of mortgage servicing rights 205 104 407
----------- ----------- -----------
$ 330 $ 213 $ 908
=========== =========== ===========
Loans serviced for others $ 966 $ 4,738 $ 1,986
=========== =========== ===========
</TABLE>
NOTE 5 - FORECLOSED REAL ESTATE
Properties which the Bank has acquired in settlement of mortgage loans are as
follows:
<TABLE>
<CAPTION>
In thousands
1996 1995
---- ----
<S> <C> <C>
Total cost $ 584 $ 133
Allowance for losses (7) (3)
----------- -----------
Carrying amount $ 577 $ 130
=========== ===========
- ------------------------------------------------------------------------------------------------------------------
(Continued)
F-16
</TABLE>
<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>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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>
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
=========== ===========
F-27
- ------------------------------------------------------------------------------------------------------------------
</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
========= ========= ========= =========
F-28
- ------------------------------------------------------------------------------------------------------------------
</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
=========== =========== =========== ===========
F-29
- ------------------------------------------------------------------------------------------------------------------
</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>
F-30
- --------------------------------------------------------------------------------
<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)
F-31
<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.
- --------------------------------------------------------------------------------
F-32
<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 3,700 UNITS
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........................ UNITS
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........ HOEFER & ARNETT INCORPORATED
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.
====================================== ======================================
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
150,000 SHARES MINIMUM/200,000 SHARES MAXIMUM
$10.00 PER SHARE/MINIMUM PURCHASE 30 SHARES ($300)
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 $13,000 per Unit,
each Unit consisting of $1,000 principal amount of 11 1/2% subordinated
debentures due March 31, 2003 (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 March 31, 2003. 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.
- --------------------------------------------------------------------------------
Estimated Net
Price to Public1 Proceeds2
- --------------------------------------------------------------------------------
Per Share $ 10 $ 10
- --------------------------------------------------------------------------------
Per Minimum Purchase 300 300
- --------------------------------------------------------------------------------
Total Minimum 1,500,000 1,500,000
- --------------------------------------------------------------------------------
Total Maximum 2,000,000 $2,000,000
================================================================================
(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
$188,000.
========
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. The Merger and the Offering must be consummated by
March 31, 1998 or both the Merger and 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."
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, January 31, 1998
(subject to extension without notice by agreement between the Holding Company
and the Agent until March 20, 1998) 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)
2
<PAGE>
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
<PAGE>
[INSERT MAP]
[MAP ILLUSTRATES FIRST FEDERAL'S OFFICES IN TEXAS]
4
<PAGE>
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 requirement that elections by existing First
Federal Common stockholders representing at least 20% of the consideration to be
paid by the Holding Company in the Merger must consist of elections to exchange
existing First Federal Common Stock for Holding Company Common Stock was based
on management's determination as to the amount of debt and common stock the
Holding Company should issue and the minimum amount of desired capital at the
Holding Company level to support such debt. 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
<PAGE>
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.
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 11 1/2% subordinated debentures due
March 31, 2003 (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 March 31, 2003. 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
6
<PAGE>
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 $4.3 million and $5.1
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".
7
<PAGE>
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.
During the nine months ended June 30, 1997 net interest income exceeded
noninterest expense by $63,000. See "Recent Financial Data." 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 of Recent Results" and "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 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.
8
<PAGE>
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. See "Dilution."
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. 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.
9
<PAGE>
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."
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
10
<PAGE>
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 (net of recoveries) 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 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.
11
<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 todiscourage 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 103,000 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 34.4% at the minimum and 29.5%, at the maximum, respectively, of
the shares to be outstanding upon completion of the Offering. Stock ownership by
directors and executive officers, if voted as a block or supported by sufficient
other shareholder votes, could enable the Board and management to block the
approval of transactions requiring the approval of 80% of the shareholders under
the Holding Company's Certificate of Incorporation. See "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.
12
<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. 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.
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.
13
<PAGE>
<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).............................................. 3.37 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> <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(7) 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(8)...................... 4.11 3.97 4.20 3.67 3.08
End of year(9).............................. 4.67 4.17 4.29 4.27 3.35
Net interest margin for the year(10).......... 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) The Bank's tangible, core and risk-based ratios were 7.5%, 7.5% and 10.6%,
respectively, at June 30, 1996. See "Regulation - Regulatory Capital
Requirements."
(8) 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).
(9) 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.
(10) 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.
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>
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> <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(4) 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(5)....................
End of period(6)............................ 4.58 4.31 4.81 4.16
Net interest margin for the period(7)......... 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) The Bank's tangible, core and risk-based ratios were 7.2%, 7.2% and 10.3%,
respectively, at June 30, 1997. See "Management's Discussion of Recent
Results - Liquidity and Capital Resources."
(5) 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).
(6) 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.
(7) 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 (net of recoveries) 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 probable
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.
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
19
<PAGE>
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 FINANCIAL STATEMENTS
The following Holding Company pro forma consolidated balance sheet and
statements of income presented on pages 25-28 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 and 150,000 shares of Common Stock 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.
The Holding Company pro forma consolidated balance sheet and statements
of income presented on pages 26 through 29 illustrate the pro forma effects of
the merger, without the application of leveraged buy-out accounting. In this
case the assets acquired and liabilities assumed in the acquisition of the
remainder of First Federal will be recorded at their historical values, with the
purchase price reflected as a reduction of Holding Company stockholders' equity.
21
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------------------------------
First
Federal Elimination Consolidated
Historical Pro forma Adjustments 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
-----------------------------------------
Bank Pro forma Consolidated
Historical Adjustments 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
-----------------------------------------------
Bank Pro forma Con
Historical Adjustments solidated
Pro forma
---------- ----------- ---------
INTEREST INCOME
<S> <C> <C> <C>
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.
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.
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>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, 1997
--------------------------------------------------------------
Bank Pro forma Elimination Consolidated
Historical Adjustments Entries Pro forma
---------- --------------------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks.................. $ 766 $ 1,314 (1) $(4,326)(8) $ --- $ 731
--- 3,400 (2) --- --- ---
--- (423)(4) --- --- ---
Interest-bearing deposits with
financial institutions................. 1,605 --- --- --- 1,605
Mortgage-backed securities............... 1,186 --- --- --- 1,186
Loans.................................... 58,801 --- --- --- 58,801
Premises and equipment................... 1,046 --- --- --- 1,046
Investment in Bank....................... --- --- 5,287(8) (5,287)(5) ---
Debt issuance costs...................... --- 423(4) --- --- 423
Interest receivable and other assets..... 2,377 --- --- --- 2,377
Total assets.......................... $ 65,781 $ 4,714 $ 961 $ (5,287) $66,169
LIABILITIES
Deposits................................. $ 57,638 $ --- $ --- $ --- $57,638
Other borrowings......................... 2,100 --- --- --- 2,100
Debentures............................... --- 3,400(2) --- --- 3,400
Other liabilities........................ 1,324 --- --- 1,324
Total liabilities..................... 61,062 3,400 --- 64,462
Minority interest-preferred stock........ --- --- --- 873(7) 873
STOCKHOLDERS' EQUITY
Preferred stock.......................... 1 --- --- (1)(5) ---
Common stock............................. 2 1(1) 1(8) (2)(7) 1
Additional paid-in-capital............... --- --- 960(8) (872)(7) ---
--- 1,313(1) --- (3,312)(5) 832
Retained earnings........................ 1,973 --- --- (1,973)(5) ---
Total stockholders' equity............ 4,719 1,314 961 (6,160) 834
Total liabilities and stockholders'
equity............................. $ 65,781 $ 4,714 $ 961 $(5,287) $66,169
PER SHARE DATA(4)
Holding Company common shares
outstanding............................. 599,030 --- --- --- 299,758
Book value per Holding Company
common share........................... $ 6.42 --- --- --- $ 2.78
Tangible book value per Holding
Company common share................... 6.42 --- --- --- 2.78
Offering price Holding Company
common stock........................... --- --- --- --- 10.00
</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 year ended
September 30, 1996
-------------------------------------------
Bank Pro forma Consolidated
Historical Adjustments Pro forma
---------- ------------------ ------------
<S> <C> <C> <C>
INTEREST INCOME
Loans................................................... $ 4,407 $ --- $ 4,407
Mortgage-backed securities.............................. 145 --- 145
Other................................................... 276 --- 276
Total interest income............................... 4,828 4,828
INTEREST EXPENSE
Deposits................................................ 2,358 --- 2,358
Debentures.............................................. --- 391(2) 391
Other borrowings........................................ 5 --- 5
Total interest expense............................... 2,363 391 2,754
Net Interest Income..................................... 2,465 (391) 2,074
Provision for loan losses............................... (52) --- (52)
Net interest income after provisions for loan losses.... 2,517 (391) 2,126
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 debt issue costs --- 85 85
Occupancy and equipment................................. 335 --- 335
Other................................................... 1,376 --- 1,376
Total noninterest expenses........................... 3,048 85 3,133
Income/(loss) before federal income tax expense......... 342 (476) (134)
Income tax expense/(benefit)............................ 108 (162)(8) (54)
Net income/(loss)....................................... 234 (314) (80)
Preferred stock dividends............................... (88) (88)
Income/(loss) available to common stockholders.......... $ 146 $ (314) $ (168)
Weighted average common shares outstanding.............. 599,030 --- 299,758
Net income/(loss) per common share...................... $ .24 --- $ (.73)
</TABLE>
27
<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
------------------------------------------
Bank Pro forma Consolidated
Historical Adjustments Pro forma
---------- ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME
Loans...................................................... $ 3,847 $ --- $ 3,847
Mortgage-backed securities................................. 56 --- 59
Other...................................................... 104 --- 104
Total interest income................................... 4,007 --- 4,007
INTEREST EXPENSE
Deposits................................................... 1,825 --- 1,825
Debentures................................................. --- 293(2) 293
Other borrowings........................................... 57 --- 57
Total interest expense.................................. 1,882 (293) 2,175
Net Interest Income........................................ 2,125 (293) 1,832
Provision for loan losses.................................. 1 --- 1
Net interest income after provisions for loan losses....... 2,124 (293) 1,831
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 debt issue costs........................... --- 64(5) 64
Occupancy and equipment.................................... 239 --- 239
Other...................................................... 775 --- 775
Total noninterest expenses.............................. 2,002 64 2,066
Income/(loss) before federal income tax expense............ 711 (357) 354
Income tax expense/(benefit)............................... 242 (121)(8) (121)
Net income/(loss).......................................... 469 (236) 233
Preferred stock dividends.................................. (66) --- (66)
Income/(loss) available to common stockholders............. $ 403 $ (236) $ 167
Weighted average common shares outstanding................. 599,030 --- 299,758
Net income/(loss) per common share......................... $ .67 --- $ .56
</TABLE>
28
<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) 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. 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.
(4) 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).
(5) Elimination of intercompany accounts.
(6) Reflects tax rate of 34%.
(7) Reflects outside ownership of First Federal's preferred stock.
(8) Reflects exchange of 59,903 common shares (25% of outstanding shares) of
First Federal for 149,758 common shares (par value $.01) of Holding Company
at historical book value (59,903 shares at $16.05/share = $961,000) plus
the purchase of 75% of First Federal stock for $4,326,000 (179,709 shares
at $24.07/per share).
29
<PAGE>
DILUTION
Upon the successful completion of the 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>
Using LBO Accounting Without LBO Accouting
------------------------ ------------------------
150,000 200,000 150,000 200,000
Shares Shares Shares Shares
(Minimum (Maximum (Minimum (Maximum
Number of Number of Number of Number of
Shares) Shares) Shares) Shares)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Offering price per share of Holding Company Common Stock.......... $10.00 $10.00 $10.00 $10.00
Net tangible book value per share of Bank Common Stock
before offering (1)............................................. 6.42 6.42 6.42 6.42
Pro forma net tangible book value per share of Holding Company
Common Stock after offering (2)................................. 3.75 4.65 2.78 3.81
Increase per share of Holding Company Common Stock attributable
to payments for shares offered hereby........................... 10.00 10.00 10.00 10.00
Dilution to investors ............................................ 6.25 5.35 7.22 6.19
</TABLE>
(1) Net tangible book value per share of Bank Common Stock is determined by
dividing the number of shares of Bank Common Stock outstanding into the net
tangible book value of the Bank (tangible assets less liabilities).
(2) 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). Assumes 150,000 share of Holding
Company Common Stock will be issued in the Merger. The pro forma net
tangible book value of the Holding Company excludes the pro forma core
deposit intangible, net of tax, and goodwill.
30
<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>
Using LBO Accounting Without LBO Accounting
Consolidated Capitalization Consolidated Capitalization
June 30, 1997 June 30, 1997
---------------------------- ---------------------------
(In Thousands)
Historical Pro Forma Historical Pro Forma
<S> <C> <C> <C> <C>
Deposits.................................................. $ 57,638 $ 57,638 $ 57,638 $ 57,638
Other Borrowings.......................................... 2,100 2,100 2,100 2,100
Debentures due............................................ --- 3,400 --- 3,400
---------- --------- ---------- ---------
Total deposits and other borrowings ................... $ 59,738 $ 63,138 $ 59,738 $ 63,138
========== ========= ========== =========
Minority Interest......................................... $ --- $ 873 $ --- $ 873
Stockholders' equity:
Preferred Stock, $.01 par value per shares to be
outstanding as shown...................................... $ 1 $ --- $ 1 $ ---
Holding Company Common Stock, par value $.01 per share:
Authorized - shares; to be outstanding as shown........... 2 2 2 2
Additional paid-in capital................................ 2,743 2,273 2,743 832
Retained earnings......................................... 1,973 --- 1,973 ---
---------- --------- ---------- ---------
Total stockholders' equity................................ $ 4,719 $ 2,275 $ 4,719 $ 834
========== ========= ========== =========
</TABLE>
This capitalization table assumes the sale of only the minimum amount of Units.
31
<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 $4.3 million and $5.1 million,
at the minimum and maximum number of securities offered, respectively. This
amount is arrived at by subtracting the $614,000 and $635,000 estimated fees and
expenses of the Offering, including commissions, from $4.9 million and $5.7
million, 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
$376,000), 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.
32
<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
First Federal is seeking the approval from the OTS to pay Common Stock
dividends of up to $.50 per share or approximately $120,000 in the aggregate.
However, subsequent to the Merger, it is not expected that the Holding Company
will pay cash dividends on the Holding Company Common Stock. To date, 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.
33
<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 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
34
<PAGE>
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 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
35
<PAGE>
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
(Basis Points) NPV --------------------- -----------------------
-------------- --------- $ 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 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.
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 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.
41
<PAGE>
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 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.
42
<PAGE>
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 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.
43
<PAGE>
First Federal's liquidity, represented by cash equivalents, is a
product of its operating, investing and financing activities. These activities
are summarized below for the periods indicated.
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, September 30,
1996 1995
---------------- ---------
(In Thousands)
<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.
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
44
<PAGE>
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
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
46
<PAGE>
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 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.
47
<PAGE>
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.
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>
48
<PAGE>
The following table shows the fixed- and adjustable-rate composition of
First Federal's loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
1996 1995 1994
------------------ ------------------- --------------------
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
<S> <C> <C> <C> <C> <C> <C>
Residential.................................. $22,931 44.16% $24,739 48.81% $27,128 59.76%
Residential held for sale.................... 419 .80 1,840 3.63 2,114 4.66
Commercial................................... 2,162 4.17 2,824 5.57 3,062 6.74
Construction................................. 4,365 8.41 4,261 8.41 4,838 10.66
------- ------ ------- ------- ------- -----
Total real estate loans................... 29,877 57.54 33,664 66.42 37,142 81.82
Consumer loans................................ 11,892 22.90 9,323 18.40 7,979 17.58
Commercial business loans..................... 595 1.15 643 1.27 271 0.60
------- ------ ------- ------ -------- ------
Total fixed-rate loans..................... 42,364 81.59 43,630 86.09 45,392 100.00
------- ------ ------- ------ ------- ------
Adjustable-Rate Loans:
Real estate:
Residential.................................. 7,546 14.54 6,227 12.29 --- ---
Commercial................................... 2,013 3.87 819 1.62 --- ---
------- ------ ------- ------ -------- -------
Total adjustable rate loans............... 9,559 18.41 7,046 13.91 --- ---
------- ------ ------- ------ -------- -------
Total loans............................... 51,923 100.00 50,676 100.00 45,392 100.00
Less:
Undisbursed portion of construction loans..... 1,966 3.79 1,664 3.28 1,847 4.07
Consumer loans in process..................... --- --- --- --- --- ---
Deferred fees and discounts................... 128 0.25 87 0.17 92 0.20
Deferred income............................... 3 0.01 3 0.01 13 0.03
Allowance for losses on loans................. 247 0.47 317 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.
49
<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.
50
<PAGE>
The following schedule illustrates the maturities of First Federal's
loan portfolio, excluding loans held for sale at September 30, 1996. Loans which
have adjustable or renegotiable interest rates and amortizing loans are shown as
maturing in the period during which the loan is contractually due. This schedule
does not reflect the effects of possible prepayments or enforcement of
due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
-----------------------------------------------------
Residential Commercial Construction Consumer Business Total
------------------ ----------------- ----------------- --------------- ---------------- ---------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
-------- ------ ------- ------ ------- ------ ------ ------ ------ ------ -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due During
Years Ended
September 30,
- --------------
1997(1)............. $ 7,565 8.42 $ 507 9.13% $4,365 9.18 $ 1,585 8.60% $ 280 9.72% $14,302 8.72%
1998 and 1999....... 12,717 9.26 1,168 9.36 --- --- 3,818 11.00 --- --- 17,703 9.64
2000 and 2001....... 893 9.40 925 9.55 --- --- 6,397 13.28 79 9.96 8,294 12.41
2002 to 2006........ 1,073 8.89 86 11.25 --- --- 71 11.80 86 10.81 1,316 9.33
2006 to 2016........ 1,988 8.99 643 9.81 --- --- 21 8.00 150 11.00 2,802 9.28
2017 and following.. 6,660 8.98 846 8.75 --- --- --- --- --- --- 7,506 8.95
-------- ------ ------ --- ------ ----- -------
$30,896 8.97 $4,175 9.36% $4,365 9.1 $11,892 11.91% $ 595 10.23% $51,923 9.70%
======= ==== ====== ==== ====== ==== ====== ===== ===== ===== ======= ====
</TABLE>
- -------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
51
<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)
Issuers:
<S> <C> <C> <C>
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.
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.
53
<PAGE>
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 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
54
<PAGE>
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.
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.
55
<PAGE>
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 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.
56
<PAGE>
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.
57
<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.
58
<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.
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."
59
<PAGE>
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.
60
<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 projec tions 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.
61
<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 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,
62
<PAGE>
(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%
====== ===== =====
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>
63
<PAGE>
At September 30, scheduled maturities of certificates of deposit are as
follows.
1999 and
1997 1998 thereafter Total
-----------------------------------------
(In Thousands)
3% to 4.99%................. $14,882 $ 1,322 $ 244 $16,448
5% to 6.99%................. 9,972 4,488 3,045 17,505
7% to 9.99%................. --- --- 933 933
-------- --------- ------ --------
Total.................. $24,854 $ 5,810 $4,222 $34,886
======= ======= ====== =======
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
64
<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 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.
65
<PAGE>
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.
66
<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 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.
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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 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.
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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 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.
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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.
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.
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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% 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
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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,
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.
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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
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.
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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 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
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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.
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
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<PAGE>
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 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.
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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.
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> <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 managing partner.
Those financial institutions filed counter-claims against the real estate
partnerships and their individual partners for amounts previously advanced.
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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.
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.
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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.
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.
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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.
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
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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.
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.
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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.
Years of Service
-------------------------------------------
Average Annual
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(2) Offering Offering
- ---------------- ---------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
DIRECTORS
Richard L. Peacock 3,868 1.53 5,788 1.93% 1.65%
Ernest A. Wentrcek 3,868 1.53 5,788 1.93 1.65
Jack W. Lester 13,707 5.42 10,650 3.55 3.04
Ken Hayes 1,781 .70 570 .19 .16
Phil Hobson(3) 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
(11 persons) 104,321 41.22 103,086 34.36 29.45
</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) Excludes First Federal stock options which will be canceled in the
transaction.
(3) 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 11 1/2% subordinated debentures due
March 31, 2003 (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 March 31, 2003. 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.
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. The certificate of incorporation of the Holding Company
will be amended prior to consummation of the Offering to provide that
shareholders shall have preemptive rights except with respect to any stock
options issued pursuant to a plan approved by the stockholders and warrants
issued by the Holding Company as part of the sale of the Units. The Holding
Company Common Stock will not be subject to call for
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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 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.
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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.
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
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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 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.
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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 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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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 January 31,
1997, subject to extension through March 20, 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 5:00 p.m.,
Central time on the Expiration Date. 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
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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.
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
ex perts in accounting and auditing.
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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.
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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
=========== ===========
</TABLE>
NOTE 4 - SECONDARY MORTGAGE MARKET OPERATIONS
The following summarizes the Bank's secondary mortgage market activities:
<TABLE>
<CAPTION>
In thousands
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Proceeds from sale of mortgage loans $ 13,839 $ 81,838 $ 86,336
=========== =========== ===========
Gain on sale of mortgage loans $ 125 $ 109 $ 501
Gain on sale of mortgage servicing rights 205 104 407
----------- ----------- -----------
$ 330 $ 213 $ 908
=========== =========== ===========
Loans serviced for others $ 966 $ 4,738 $ 1,986
=========== =========== ===========
</TABLE>
NOTE 5 - FORECLOSED REAL ESTATE
Properties which the Bank has acquired in settlement of mortgage loans are as
follows:
<TABLE>
<CAPTION>
In thousands
1996 1995
---- ----
<S> <C> <C>
Total cost $ 584 $ 133
Allowance for losses (7) (3)
----------- -----------
Carrying amount $ 577 $ 130
=========== ===========
- ------------------------------------------------------------------------------------------------------------------
(Continued)
F-16
</TABLE>
<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>
FIRST FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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>
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
=========== ===========
F-27
- ------------------------------------------------------------------------------------------------------------------
</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
Preferred Stock dividends (66) (66) (22) (22)
--------- --------- --------- ---------
Net Income available to Shareholders $ 403 $ 247 $ 152 $ 112
========= ========= ========= =========
NET INCOME PER SHARE OF COMMON STOCK $ 1.68 $ 1.04 $ 0.63 $ 0.47
========= ========= ========= =========
F-28
- ------------------------------------------------------------------------------------------------------------------
</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
=========== =========== =========== ===========
F-29
- ------------------------------------------------------------------------------------------------------------------
</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>
F-30
- --------------------------------------------------------------------------------
<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)
F-31
<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.
- --------------------------------------------------------------------------------
F-32
<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 _____________ 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.
====================================== ======================================
<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.
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
========
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:
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*
4.4 Form of Escrow Agreement
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*
8 Opinion of Crowe Chizek & Company, L.L.P. with respect to Federal income
tax consequences of the Units
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*
99.1 Stock Order Form and Order Form Instructions
99.2 Unit Order Form and Order Form Instructions
- ---------------
* 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.
(4) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
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 31, 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>
/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 Accounting Officer)
/s/ Richard L. Peacock /s/ Ernest A. Wentrcek
- ------------------------------------ --------------------------------------
Richard L. Peacock, Chairman of the Ernest A. Wentrcek, Vice Chairman of
the Board
/s/ Charles Neelley /s/ George Koenig
- ------------------------------------ --------------------------------------
Charles Neelley, Director and Secretary/ George Koenig, Director and Executive
Treasurer Vice-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
RESTATED AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER ("Agreement"), is made and entered into
by and among FIRST FEDERAL SAVINGS BANK, a federally-chartered capital stock
thrift institution ("First Federal"), NEW FIRST FEDERAL SAVINGS BANK, a
federally-chartered capital stock thrift institution in the process of
organization ("New Bank"), the sole stockholder of the Holding Company, J.
Stanley Stephen (the "Holding Company Stockholder") and THE BRYAN-COLLEGE
STATION FINANCIAL HOLDING COMPANY, a Delaware business corporation (the "Holding
Company"), effective as of the date executed by all of the parties.
WITNESSETH:
WHEREAS, First Federal is a capital stock thrift institution duly organized
and existing under the laws of the United States of America and having its
principal office in Bryan, Texas, with authorized capital stock consisting of
three million shares of common stock, par value $.01 per share ("First Federal
Common Stock"), of which 239,612 shares are issued and outstanding, and one
million shares of serial preferred stock (First Federal Preferred Stock), of
which 87,263 shares are issued and outstanding;
WHEREAS, New Bank is a capital stock thrift institution in the process of
organization under the laws of the United States of America, which is proposed
to be a subsidiary of the Holding Company and to have authorized capital stock
consisting of one million shares of common stock, par value $.01 per share ("New
Bank Stock");
WHEREAS, the Holding Company is a capital stock corporation duly organized
and existing under the laws of Delaware, with authorized capital stock
consisting of three million shares of common stock, par value $.01 per share
("Holding Company Common Stock") of which one share is issued and outstanding,
and one million shares serial preferred stock, of which no shares are issued and
outstanding;
WHEREAS, the Holding Company has issued one share of its common stock to
the Holding Company Stockholder in return for $10.00 cash consideration;
WHEREAS, the Holding Company proposes to purchase one share of the common
stock of New Bank for $10.00;
WHEREAS, it is the desire of the parties to this Agreement to adopt a plan
of reorganization providing for the formation of a thrift institution holding
company; and
WHEREAS, a majority of the respective Boards of Directors of First Federal,
New Bank, and the Holding Company have approved and authorized the execution of
this Agreement pursuant to which the plan of reorganization, including the
merger of New Bank into First Federal, will be implemented;
1
<PAGE>
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained, and in order to prescribe the plan of
reorganization and merger, including its terms and conditions, the mode of
carrying the same into effect, the manner and basis of stockholders of First
Federal exchanging their First Federal Common Stock for Holding Company Common
Stock or selling their First Federal Common Stock and such other details and
provisions as are deemed necessary or proper, the parties hereby agree as
follows:
ARTICLE I
MERGER AND REORGANIZATION
1.1 Subject to the conditions hereinafter set forth, New Bank shall be
merged into First Federal under the Charter of First Federal at the Effective
Date (as defined in Article XI hereof) of the merger (the "Merger"). The Merger
shall be effected pursuant to the provisions of, and with the effect provided
in, the applicable provisions of the laws of the United States of America and
the Rules and Regulations of the Office of Thrift Supervision.
1.2 On the Effective Date, the resulting thrift institution in the Merger
shall be First Federal (hereinafter referred to as the "Surviving Institution"
whenever reference is made to it as of the Effective Date of the Merger or
thereafter) which will continue to operate as a thrift institution under its
present name as "First Federal Savings Bank." The Charter and Bylaws of First
Federal in effect on the Effective Date shall be the Charter and Bylaws of the
Surviving Institution. The established offices and facilities of First Federal
immediately prior to the Merger shall become the established offices and
facilities of the Surviving Institution. The locations of the home office and
any other offices of the Surviving Institution are set forth in Schedule A
attached hereto.
1.3 On the Effective Date of the Merger, New Bank shall cease to exist
separately and shall be merged with and into First Federal in accordance with
the provisions of this Agreement and Plan of Merger and in accordance with the
provisions of applicable laws, rules and regulations, and all of the assets and
property of every kind and character, real, personal and mixed, tangible and
intangible, choses in action, rights and credits then owned by New Bank or which
would inure to it, shall immediately, by operation of law and without any
conveyance or transfer and without any further act or deed, be vested in and
become the property of the Surviving Institution, which shall have, hold and
enjoy the same in its own right as fully and to the same extent as the same were
possessed, held and enjoyed by New Bank prior to such Merger. The Surviving
Institution shall be deemed to be and shall be a continuation of the entity and
identity of New Bank and First Federal and all of the rights and obligations of
New Bank and First Federal shall remain unimpaired and the Surviving
Institution, on the Effective Date of such Merger, shall succeed to all such
rights and obligations and the duties and liabilities connected therewith on
such Effective Date.
1.4 On the Effective Date of the Merger, there will be no holders of
deposit accounts, transaction accounts, savings accounts or certificates of
deposit issued by New Bank. Holders of deposit accounts, transaction accounts,
savings accounts or certificates of deposit of First Federal as of the Effective
Date of the Merger shall continue to be holders of the same interest of the
Surviving Institution without change as to withdrawal value or other rights. No
existing deposit
2
<PAGE>
account, transaction account, savings account or certificate of deposit holder
shall have any of his rights impaired by virtue of the Merger contemplated
hereby.
1.5 The directors and officers of the Surviving Institution on the
Effective Date shall be those persons who are directors and officers,
respectively, of First Federal immediately before the Effective Date.
Information with respect to the directors of the Surviving Institution is set
forth in Schedule B attached hereto. The committees of the Board of Directors of
the Surviving Institution on the Effective Date shall be the same as, and shall
be composed of the same persons who were serving on, committees appointed by the
Board of Directors of First Federal as they exist immediately before the
Effective Date. The committees, if any, of officers of the Surviving Institution
on the Effective Date shall be the same as, and shall be composed of the same
officers who were serving on, the committees of officers of First Federal as
they exist immediately before the Effective Date.
1.6 Except as expressly prohibited by applicable laws, all corporate acts,
plans, policies, applications, agreements, orders, registrations, licenses,
approvals and authorizations of First Federal and New Bank, their respective
stockholders, Boards of Directors, committees elected or appointed by their
Boards of Directors, and their respective officers and agents, which were valid
and effective immediately before the Effective Date, shall be taken for all
purposes at and after the Effective Date as the acts, plans and policies,
applications, agreements, orders, registrations, licenses, approvals and
authorizations of the Surviving Institution and shall be as effective and
binding thereon as the same were with respect to First Federal and New Bank
immediately before the Effective Date.
ARTICLE II
CONVERSION, EXCHANGE AND CANCELLATION OF SHARES
2.1 Conversion of First Federal Common Stock. At the Effective Date, by
virtue of the Merger and without any action on the part of the holder thereof,
the Holding Company, First Federal or any other party to the Agreement, First
Federal Common Stock issued and outstanding immediately prior to the Effective
Date shall cease to be outstanding and shall, subject to the provisions of
Sections 2.2 and 2.3 hereof, be converted into and become the right to receive
either:
(a) such number of shares of Holding Company Common Stock
equal to the product of 2.5 multiplied by the number of shares of
First Federal Common Stock to be converted ("Stock Distribution");
(b) an amount in cash equal to $24.07 per share (the "Cash
Distribution"),
as the holder thereof shall elect or be deemed to have elected as provided in
Section 2.2 of this Agreement (the aggregate of the Cash Distributions and the
Stock Distributions payable or issuable pursuant to the Merger is sometimes
hereinafter referred to as the "Merger Consideration"); provided, however, that
any shares of First Federal Common Stock held by First Federal, other
3
<PAGE>
than in a fiduciary capacity or as a result of debts previously contracted,
shall be cancelled and shall not be exchanged for the Merger Consideration.
2.2 Election Procedures.
(a) An election form and other appropriate and customary transmittal
materials (which shall specify that delivery shall be effected, and risk of loss
and title to the certificates theretofore representing First Federal Common
Stock shall pass, only upon proper delivery of such certificates to the exchange
agent designated by Holding Company, or to the Holding Company in its capacity
as exchange agent, as determined by the Holding Company (the "Exchange Agent"),
in such form as First Federal and the Holding Company shall mutually agree
("Election Form") shall be mailed approximately 25 days prior to the anticipated
Effective Date or on such other date as First Federal and the Holding Company
shall mutually agree (the "Mailing Date") to each holder of record of First
Federal Common Stock as of five business days prior to the Mailing Date
("Election Form Record Date").
(b) Each Election Form shall specify the amount of Merger
Consideration receivable for each share of First Federal Common Stock in the
Cash Distribution and the Stock Distribution and shall permit a holder to elect
to receive, as provided in Section 2.2 of this Agreement, (i) the Stock
Distribution for all of his shares (in which case, such holder's shares shall be
deemed to be and shall be referred to herein as "Stock Election Shares"), (ii)
the Cash Distribution for certain designated shares (in which case, such
holder's shares so designated shall be deemed to be and shall be referred to
herein as "Cash Election Shares") with the remaining shares being converted to
the Stock Distribution as Stock Election Shares, or (iii) the Cash Distribution
for all of his shares.
(c) Any shares of First Federal Common Stock with respect to which the
holder thereof shall not, as of the Election Deadline (as defined below), have
made an election to receive either the Cash Distribution or the Stock
Distribution (such holder's shares being deemed to be and shall be referred to
herein as "No Election Shares") by submission to the Exchange Agent of an
effective, properly completed Election Form shall be deemed to be Cash Election
Shares. ^"Election Deadline" means 5:00 p.m., local time, on the 20th day
following the Mailing Date, or such other time and date as the Holding Company
and First Federal shall mutually agree.
(d) First Federal shall promptly make available one or more Election
Forms as may be reasonably requested by all persons who become holders (or
beneficial owners) of First Federal Common Stock between the Election Form
Record Date and close of business on the business day prior to the Election
Deadline, and First Federal shall provide to the Exchange Agent all information
reasonably necessary for it to perform as specified herein.
(e) Any such election shall have been properly made only if the
Exchange Agent shall have actually received a properly completed Election Form
by the Election Deadline. An Election Form shall be deemed properly completed
only if accompanied by one or more certificates (or customary affidavits and
indemnification regarding the loss or destruction of such certificates or the
guaranteed delivery of such certificates) representing all shares of First
Federal Common Stock covered by such Election Form, together with duly executed
transmittal materials included in the Election Form ^. Any Election Form may be
revoked or changed by the person submitting such
4
<PAGE>
Election Form at or prior to the Election Deadline. In the event an Election
Form is revoked prior to the Election Deadline, the shares of First Federal
Common Stock represented by such Election Form shall become No Election Shares
and First Federal shall cause the certificates representing First Federal Common
Stock to be promptly returned without charge to the person submitting the
Election Form upon written request to that effect from the person who submitted
the Election Form. Subject to the terms of this Agreement and of the Election
Form, the Exchange Agent shall have reasonable discretion to determine whether
any election, revocation or change has been properly or timely made and to
disregard immaterial defects in the Election Forms, and any good faith decisions
of the Exchange Agent regarding such matters shall be binding and conclusive.
Neither the Holding Company nor the Exchange Agent shall be under any obligation
to notify any person of any defect in an Election Form.
(f) Allocation Procedures. Within ten business days after the
Effective Date, or as soon thereafter as practicable, the Holding Company shall
cause the Exchange Agent to effect the allocation among the holders of First
Federal Common Stock of rights to receive Holding Company Common Stock or cash
in the Merger as follows:
If shares of Holding Company Common Stock that would be issued
in the Merger upon conversion of the Stock Election Shares represents
less than 20% of the shares of First Federal Common Stock outstanding
(the "Minimum Stock Value"), then the Holding Company will be permitted
to allocate cash and stock pro rata to those shareholders electing the
Cash Distribution (other than Dissenting Shares as defined in Section
2.3) in such amount as would result in at least 20% of First Federal
Common Stock to be exchanged for Holding Company Common Stock; provided,
however, that the Holding Company may pay cash for First Federal Common
Stock which, if exchanged for Holding Company Common Stock in the Merger
would result in adverse accounting treatment, as determined by
independent accountants for the Holding Company, and that any pro rata
distribution of cash and stock pursuant to this Section ^ shall be based
on the amount Stock Election Shares excluding any Stock Election Shares
exchangeable for cash due to such accounting considerations. For
purposes of determining the Minimum Stock Value under this Section ^,
all Dissenting Shares shall be deemed Cash Election Shares.
2.3 Dissenting Shares. Any record holder of First Federal's Common Stock
may require First Federal to pay the fair or appraised value of his or her First
Federal Common Stock, determined as of the Effective Date of the Merger, by
complying with Section 552.14 of the Office of Thrift Supervision ("OTS") Rules
and Regulations. The computation of fair or appraised value of such shares (the
"Dissenting Shares") will exclude any element of value arising from the
accomplishment or expectation of the Merger. Notwithstanding any other provision
of this Agreement, any Dissenting Shares shall not, after the Effective Date, be
entitled to vote for any purpose or receive any dividends or other distributions
and shall be entitled only to such rights as are afforded in respect of
Dissenting Shares pursuant to the OTS Regulations.
2.4 Exchange Procedures.
(a) In accordance with Section 2.2(a) herein, holders of record of
certificates formerly representing shares of First Federal Common Stock (the
"Certificates") shall be instructed
5
<PAGE>
to tender such Certificates to the Exchange Agent pursuant to a letter of
transmittal that the Exchange Agent shall deliver or cause to be delivered to
such holders, which letter of transmittal shall be included with the Election
Forms distributed pursuant to Section 2.2(a).
(b) The Holding Company or, at the election of the Holding Company, the
Exchange Agent, shall accept Certificates upon compliance with such reasonable
terms and conditions as the Holding Company or the Exchange Agent may impose to
effect an orderly exchange thereof in accordance with customary exchange
practices. All Certificates shall be appropriately endorsed or accompanied by
such instruments of transfer as the Holding Company or the Exchange Agent may
require.
(c) Each outstanding Certificate shall until duly surrendered to the
Holding Company or the Exchange Agent be deemed to evidence ownership of the
Merger Consideration into which the First Federal Common Stock previously
represented by such Certificate shall have been converted pursuant to this
Agreement.
(d) Subject to Section 2.3, after the Effective Date, holders of
Certificates shall cease to have rights with respect to First Federal Common
Stock previously represented by such Certificates, and their sole rights shall
be to exchange such Certificates for the Merger Consideration provided for in
this Agreement. After the Effective Date, there shall be no further transfer on
the records of First Federal of Certificates, and if such Certificates are
presented to First Federal for transfer, they shall be cancelled against
delivery of the Merger Consideration provided therefor in this Agreement.
Neither the Exchange Agent nor the Holding Company shall be obligated to deliver
the Merger Consideration to which any former holder of First Federal Common
Stock is entitled as a result of the Merger until such holder surrenders the
Certificates as provided herein. No dividends declared will be remitted to any
person entitled to receive Holding Company Common Stock under this Agreement
until such person surrenders the Certificates representing the right to receive
such Holding Company Common Stock, at which time such dividends shall be
remitted to such person, without interest and less any taxes that may have been
imposed thereon. ^ Neither the Exchange Agent nor any party to this Agreement
nor any affiliate thereof shall be liable to any holder of stock represented by
any Certificate for any consideration paid to a public official pursuant to
applicable abandoned property, escheat or similar laws. The Holding Company and
the Exchange Agent shall be entitled to rely upon the stock transfer books of
First Federal to establish the identity of those persons entitled to receive the
Merger Consideration specified in this Agreement, which books shall be
conclusive with respect thereto. In the event of a dispute with respect to
ownership of stock represented by any Certificate, the Holding Company and the
Exchange Agent shall be entitled to deposit any Merger Consideration represented
thereby in escrow with an independent third party and thereafter be relieved
with respect to any claims thereto.
2.5 No Fractional Shares. Notwithstanding any other provision of this
Agreement, neither certificates nor scrip for fractional shares of Holding
Company Common Stock shall be issued in the Merger. Each holder who otherwise
would have been entitled to a fraction of a share of Holding Company Common
Stock shall receive the number of shares rounded up to the next whole number of
shares.
2.6 First Federal Preferred Shares. First Federal preferred stock
currently issued and outstanding will remain issued and outstanding First
Federal Preferred Stock. The Merger will not
6
<PAGE>
change any of the terms or conditions of First Federal Preferred Stock, and
holders of First Federal Preferred Stock will not have any election in the
Merger.
2.7 New Bank Stock. The outstanding share of New Bank Stock issued to
the Holding Company shall be cancelled and converted into a share of First
Federal Common Stock.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HOLDING COMPANY
The Holding Company hereby represents and warrants as follows:
3.1 The Holding Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. At the
Effective Date, the Holding Company will have corporate power to carry on its
business as then to be conducted and will be qualified to do business in every
jurisdiction in which the character and location of the assets to be owned by it
or the nature of the business to be transacted by it require qualification.
3.2 The Holding Company has no subsidiaries other than New Bank at the
date of this Agreement. Between the date hereof and the Effective Date, the
Holding Company will not create or acquire any subsidiaries, other than New
Bank, without the consent of First Federal.
3.3 The authorized capital stock of the Holding Company consists on the
date hereof of three million shares of Holding Company Common Stock, par value
$.01 per share, and one million shares of serial preferred stock. Except as set
forth above or as contemplated by this Agreement or necessary for the
effectuation of the Merger, as of the date hereof, the Holding Company has one
share of its capital stock issued and outstanding and does not have any
outstanding subscriptions, options or other agreements or commitments obligating
it to issue shares of its capital stock.
3.4 Compliance with the terms and provisions of this Agreement by the
Holding Company will not conflict with or result in a breach of any of the
terms, conditions or provisions of any judgment, order, injunction, decree or
ruling of any court or governmental authority, domestic or foreign, or of any
agreement or instrument to which the Holding Company is a party, or constitute a
default thereunder.
3.5 The execution, delivery and performance of this Agreement have been
duly authorized by the Board of Directors of the Holding Company and have been
approved by the Holding Company Common Stockholders.
3.6 The Holding Company has complete and unrestricted power to enter
into and to consummate the transactions contemplated by this Agreement, subject
to approval of this Agreement and the Merger by the Holding Company Stockholder
and the provisions of Section 7.3 hereof.
3.7 On or prior to the Effective Date, the Holding Company will have
available the funds necessary to convert and exchange the outstanding First
Federal Common Stock to be converted and exchanged pursuant to the Merger as
provided herein.
7
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF FIRST FEDERAL
First Federal hereby represents and warrants as follows:
4.1 First Federal is a capital stock thrift institution duly organized,
validly existing and in good standing under the laws of the United States of
America, and is duly authorized to carry on its business as it is now being
conducted.
4.2 The authorized capital stock of First Federal consists on the date
hereof of three million shares of First Federal Common Stock, par value $.01 per
share, of which 239,612 shares are issued and outstanding, and one million
shares of serial preferred stock, of which 87,263 shares are issued and
outstanding.
4.3 Compliance with the terms and provisions of this Agreement by First
Federal will not conflict with, constitute a default under or result in a breach
of any of the terms, conditions or provisions of any judgment, order,
injunction, decree or ruling of any court or governmental authority, domestic or
foreign, or of any agreement or instrument to which First Federal is a party.
4.4 The execution, delivery and performance of this Agreement have been
duly authorized by the Board of Directors of First Federal.
4.5 First Federal has complete and unrestricted power to enter into and
to consummate the transactions contemplated by this Agreement, subject to the
provisions of Section 7.3 hereof.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF NEW BANK
New Bank hereby represents and warrants as follows:
5.1 New Bank, at the direction of the Holding Company, will apply to
the Office of Thrift Supervision to be chartered as a capital stock thrift
institution, and immediately before the Effective Date will be duly organized,
validly existing and in good standing under the laws of the United States of
America, and duly authorized to carry on the business of an interim federal
thrift institution.
5.2 The authorized capital stock of New Bank is proposed to consist of
one million shares of New Bank Stock, par value $.01 per share. Except for the
share of New Bank Stock issued to the Holding Company for the effectuation of
the Merger, prior to the Merger, New Bank will not have any shares of its stock
issued and outstanding. There are no outstanding subscriptions, options or other
arrangements or commitments obligating New Bank to issue any shares of its
capital stock.
5.3 Compliance with the terms and provisions of this Agreement by New
Bank will not conflict with, constitute a default under or result in a breach of
any of the terms, conditions or provisions of any judgment, order, injunction,
decree or ruling of any court or governmental
8
<PAGE>
authority, domestic or foreign, or of any agreement or instrument to which New
Bank is, or upon organization will be, a party.
5.4 Prior to the Merger, the execution, delivery and performance of
this Agreement will be duly authorized by the Board of Directors of New Bank and
will be approved by the Holding Company as the sole stockholder of New Bank.
5.5 New Bank has complete and unrestricted power to enter into and to
consummate the transaction contemplated by this Agreement, subject to the
approval of this Agreement and the Merger by the Holding Company as sole
stockholder of New Bank and the provisions of Section 7.3 hereof.
ARTICLE VI
OBLIGATIONS OF THE PARTIES PENDING THE EFFECTIVE DATE
6.1 Prior to the Effective Date, (i) New Bank shall complete its
organization and have directors who shall be duly elected and qualified, (ii)
the Holding Company shall complete its organization and have directors who shall
be duly elected and qualified, and (iii) this Agreement shall be duly submitted
to the stockholders of First Federal for the purpose of considering and acting
upon this Agreement in the manner required by law. Each party shall use its best
efforts to obtain the requisite approvals of this Agreement and the transactions
contemplated herein and, after obtaining such approval, the parties through
their respective officers and directors, shall execute and file with the
appropriate regulatory authorities all documents and papers, and the parties
shall take every reasonable action, necessary to comply with and to secure such
approval of this Agreement and the transactions contemplated herein as may be
required by all applicable statutes, rules and regulations.
ARTICLE VII
CONDITIONS PRECEDENT TO THE CONSUMMATION OF
THE MERGER AND REORGANIZATION
The obligations of the parties hereto to consummate the Merger and the
reorganization contemplated hereby shall be subject to the conditions that on or
before the Effective Date:
7.1 Each of the parties hereto shall have performed and complied with
all of its obligations hereunder which are to be complied with or performed on
or before the Effective Date.
7.2 This Agreement and related transactions contemplated hereby shall
have been duly and validly authorized, approved and adopted at a meeting of
stockholders duly and properly called for such purpose by First Federal by an
affirmative vote of at least 50 percent of the outstanding voting stock of First
Federal plus one affirmative vote, all in accordance with the applicable
regulations of the Office of Thrift Supervision.
9
<PAGE>
7.3 Orders, consents and approvals, in form and substance reasonably
satisfactory to all the parties hereto, shall have been entered by the Office of
Thrift Supervision, (or there shall have been received satisfactory assurance
that such orders, consents or approvals are not required), granting the
authority necessary for consummation of the transactions contemplated by this
Agreement pursuant to the provisions of the Rules and Regulations of the Office
of Thrift Supervision, all other requirements prescribed by law and the rules
and regulations of any other regulatory authority having jurisdiction over the
transactions contemplated herein shall have been satisfied.
7.4 There shall have been received from Crowe, Chizek & Company LLP,
accountants to First Federal, an opinion to the effect that:
1. No gain or loss will be recognized on the receipt of the Holding
Company Common Stock by First Federal common shareholders who
receive solely Holding Company Common Stock in exchange for
First Federal Common Stock (IRC Section 351(a)). Gain, but not
loss, will be recognized by First Federal common shareholders
who receive both Holding Company Common Stock and cash in
exchange for First Federal Common Stock, but in an amount not in
excess of the cash received (IRC Section 351(b)).
2. No gain or loss will be recognized by the Holding Company on the
receipt of cash and First Federal Common Stock solely in
exchange for shares of Holding Company Common Stock (IRC Section
1032).
3. The basis of the Holding Company Common Stock received by a
First Federal common shareholder will be the same as the
adjusted basis of the First Federal Common Stock surrendered in
exchange therefor, decreased by the amount of any cash received,
and increased by any gain recognized in the exchange (IRC
Section 358).
4. The holding period of the Holding Company Stock received by a
First Federal common shareholder in exchange for the transfer of
First Federal Common Stock will include the period during which
the First Federal Common Stock surrendered in exchange therefor
was held, provided that the First Federal Common Stock was held
as a capital asset on the date of the exchange (IRC Section
1223(1)).
5. The basis of the First Federal Common Stock received by the
Holding Company will be the same as the basis of the First
Federal Common Stock in the hands of the First Federal common
shareholders immediately prior to the exchange, increased by any
gain recognized by the First Federal common shareholders in the
exchange (IRC Section 362(a)).
6. The holding period of the First Federal Common Stock received by
Holding Company will include the period during which the First
Federal Common Stock was held by the First Federal common
shareholders (IRC Section 1223(2)).
7. Gain or loss, if any, will be recognized by a First Federal
common shareholder who receives solely cash in exchange for the
transfer of First Federal Common Sock.
10
<PAGE>
7.6 Holders of no more than 80% of First Federal Common Stock shall
elect to receive cash as Merger Consideration (approximately $4.6 million of
cash elections).
7.7 The Holding Company will have successfully completed a public
offering for at least 150,000 shares of Holding Company Common Stock, and at
least $3,400,000 of Units, each Unit consisting of debentures and warrants to
purchase Holding Company Common Stock.
7.8 No good faith action, suit or proceeding shall have been instituted
or shall have been threatened before any court or other governmental body or by
any public authority to restrain, enjoin or prohibit the Merger and
reorganization contemplated herein, or which might restrict the operation of the
business of the Surviving Institution or the ownership of the capital stock of
the Surviving Institution or the exercise of any rights with respect thereto by
the Holding Company, or subject any of the parties hereto or any of their
directors or officers to any liability, fine, forfeiture, or penalty on the
grounds that the transactions contemplated hereby, the parties hereto or their
directors or officers, have breached or will breach any applicable law or
regulation, or have otherwise acted improperly in connection with the
transactions contemplated hereby, and with respect to which the parties hereto
have been advised by counsel that, in the opinion of such counsel, such action,
suit or proceeding raises substantial questions of law or fact which could
reasonably be decided adversely to any party hereto or its directors or
officers.
ARTICLE VIII
ADDITIONAL CONDITIONS PRECEDENT
8.1 Each obligation of the Holding Company and New Bank to be performed
on or prior to the Effective Date shall be subject to the satisfaction, on or
before the Effective Date, of the following additional conditions:
(a) The representations and warranties made by First Federal ^
in this Agreement shall be true as though such representations and
warranties had been made or given on and as of the Effective Date; and
(b) This Agreement and the transactions contemplated hereby
shall have been duly and validly authorized, approved and adopted by
First Federal. ^
8.2 Each obligation of First Federal to be performed on or prior to the
Effective Date shall be subject to the satisfaction, on or before the Effective
Date, of the following additional conditions:
(a) The representations and warranties made by the Holding
Company and by New Bank contained in this Agreement shall be true as
though such representations and warranties had been made or given at
and as of the Effective Date;
(b) This Agreement and the transactions contemplated hereby
shall have been duly and validly authorized, approved and adopted by
the Holding Company and by New Bank.^
11
<PAGE>
ARTICLE IX
AMENDMENTS
First Federal, the Holding Company and New Bank, by mutual consent of
their respective Boards of Directors or incorporators, as the case may be, to
the extent permitted by law, may amend, modify, supplement and interpret this
Agreement in such manner as may be mutually agreed upon by them in writing at
any time before or after the approval and adoption thereof by the stockholders
of First Federal, provided, however, that no such amendment, modification,
supplement or interpretation shall have a materially adverse impact on First
Federal or its stockholders except with the approval of the stockholders of
First Federal.
ARTICLE X
TERMINATION AND ABANDONMENT
10.1 Anything contained in this Agreement to the contrary
notwithstanding, this Agreement may be terminated and the Merger and
reorganization abandoned at any time (whether before or after the approval and
adoption thereof by the stockholders of First Federal) prior to the Effective
Date:
(a) By mutual consent of the parties hereto;
(b) By the Holding Company or New Bank, if any condition set
forth in Sections 7.1 through 7.8 of Article VII or Section 8.1 of
Article VIII has not been met or has not been validly waived or if; or
(c) By First Federal, if any condition set forth in Sections 7.1
through 7.8 of Article VII or Section 8.2 of Article VIII has not been
met or has not been validly waived or if the holders of more than 10
percent of the outstanding voting stock of First Federal deliver
properly to First Federal a demand for appraisal and payment for
shares pursuant to 12 C.F.R. ss. 552.14.
10.2 An election by a party hereto to terminate this Agreement and
abandon the Merger as provided in Section 10.1 shall be exercised on behalf of
such thrift institution or corporation by its Board of Directors or
incorporators, as may be the case.
10.3 In the event of the termination of this Agreement pursuant to the
provisions of Section 10.1 hereof, this Agreement shall become void and have no
effect and create no liability on the part of any of the parties hereto or their
respective incorporators, directors, officers or stockholders in respect to this
Agreement.
10.4 Any of the terms or conditions of this Agreement (other than the
necessary approvals of stockholders and government authorities) may be waived at
any time by the party which is entitled to the benefit thereof, by action taken
by its Board of Directors; provided, however, that such action shall be taken
only if, in the judgment of the Board of Directors taking the action, such
waiver will
12
<PAGE>
not have a materially adverse effect on the benefits intended under this
Agreement to be afforded to the stockholders of First Federal.
ARTICLE XI
EFFECTIVE DATE
The effective date of the Merger ("Effective Date") shall be the last
day of the calendar month during which the last to occur of the following events
takes place: (i) the Merger is approved by the Office of Thrift Supervision and
the Articles of Combination are executed by the Office of Thrift Supervision,
(ii) all other required regulatory approvals have been obtained, and (iii) all
other conditions to the Merger herein set forth have been met. The Boards of
Directors of First Federal, New Bank and the Holding Company each specifically
and expressly delegate to their respective chief executive officers the
authority to change, by mutual consent of such officers, the Effective Date of
the Merger if necessary to properly and efficiently accomplish the Merger.
However, in no event shall the Merger become effective unless and until approved
by the Office of Thrift Supervision.
ARTICLE XII
TERMINATION OF REPRESENTATIONS AND
WARRANTIES AND CERTAIN AGREEMENTS
The respective representations, warranties, covenants and agreements
of the parties hereto in Articles III, IV and V hereof shall expire with, and be
terminated and extinguished by, the Merger and reorganization pursuant to this
Agreement at the time of the consummation thereof on the Effective Date. None of
the parties shall be under any liability whatsoever with respect to any such
representation, warranty, covenant or agreement which does not survive the
Merger and reorganization, it being intended that the sole remedy of the parties
for a breach of any such representation, warranty, covenant or agreement shall
be to elect not to proceed with the Merger and reorganization if such breach has
resulted in the failure to satisfy a condition precedent to such party's
obligation to consummate the transactions contemplated hereby.
ARTICLE XIII
MISCELLANEOUS
13.1 This Agreement embodies the entire agreement among the parties
and there have been and are no agreements, representations or warranties among
the parties other than those set forth or provided for herein.
13.2 Any number of counterparts hereof may be executed and each such
counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one instrument.
13
<PAGE>
13.3 Any notice or waiver to be given to any party shall be in writing
and shall be deemed to have been duly given if delivered, mailed, or sent by
prepaid telegram, addressed to such party at 2900 Texas Avenue, Bryan, Texas
77802.
13.4 The captions contained in this Agreement are solely for
convenient reference and shall not be deemed to affect the meaning or
interpretation of any paragraph hereof.
13.5 First Federal will pay all fees and expenses incurred in
connection with the transactions contemplated by this Agreement.
14
<PAGE>
IN WITNESS WHEREOF, First Federal, New Bank and the Holding Company
each under the authority of its Board of Directors, ^ have caused this Agreement
to be executed with the intent to be legally bound hereby.
FIRST FEDERAL SAVINGS BANK
ATTEST:
By:/s/ Charles Neelley By:/s/ J. Stanley Stephen
------------------------ -------------------------------------
Charles Neelley, Secretary J. Stanley Stephen,
President and Chief Executive Officer
Date: __________________________ Date: ___________________________
NEW FIRST FEDERAL SAVINGS
ATTEST: BANK
By:/s/ Charles Neelley By:/s/J. Stanley Stephen
-------------------------- -------------------------------------
Charles Neelley, Secretary J. Stanley Stephen
President and Chief Executive Officer
Date: Date:
ATTES THE BRYAN-COLLEGE STATION
FINANCIAL HOLDING COMPANY
By:/s/ Charles Neelley By:/s/ J. Stanley Stephen
-------------------------- -------------------------------------
Charles Neelley, Secretary J. Stanley Stephen
President and Chief Executive Officer
Date: Date:
Witness:
/s/ Charles Neelley /s/ J. Stanley Stephen
- ------------------------------ ----------------------------------------
Charles Neelley J. Stanley Stephen
Date: __________________________ Date: ___________________________
15
<PAGE>
SCHEDULE A
OFFICES OF SURVIVING INSTITUTION
MAIN OFFICE
- -----------
2900 Texas Avenue
Bryan, Texas 77802
BRANCH OFFICE
- -------------
2200 Longmire
College Station, Texas
LOAN PRODUCTION OFFICES
- -----------------------
510 N. Valley Mills Drive
Waco, Texas 76710
701 Normal Park, Suite 208E
Huntsville, Texas 77340
16
<PAGE>
SCHEDULE B
DIRECTORS OF SURVIVING INSTITUTION
Term
Name Address Expires
---- ------------------- -------
J. Stanley Stephen 2900 Texas Avenue 1997
Bryan, Texas 77802
Ken Hayes 2900 Texas Avenue 1997
Bryan, Texas 77802
Charles Neelley 2900 Texas Avenue 1997
Bryan, Texas 77802
George Koenig 2900 Texas Avenue 1997
Bryan, Texas 77802
Ernest A. Wentrcek 2900 Texas Avenue 1998
Bryan, Texas 77802
Robert H. Conaway 2900 Texas Avenue 1998
Bryan, Texas 77802
Richard L. Peacock 2900 Texas Avenue 1999
Bryan, Texas 77802
Jack W. Lester, Jr. 2900 Texas Avenue 1999
Bryan, Texas 77802
Phil Hobson 2900 Texas Avenue 1999
Bryan, Texas 77802
J. Roland Ruffino 2900 Texas Avenue 1999
Bryan, Texas 77802
Successor or substitute directors may be named, subject to compliance
with the requirements of applicable law and the Charter and Bylaws of the
Surviving Institution.
17
EXHIBIT 4.2
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
TO
[HARRIS TRUST COMPANY]
Trustee
--------------------
Indenture
Dated as of __________, 1997
-------------------
$3,700,000
___% Subordinated Debentures due __________, 2002
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
Reconciliation and tie between Trust Indenture Act of
1939 and Indenture, dated as of ___________, 1997
Trust Indenture Indenture
Act Section Section
ss. 310 (a) (1) ........................................................609
(a).............................................................609
(a) (3)..............................................Not Applicable
(a) (4)..............................................Not Applicable
(b)........................................................608, 610
ss. 3.11 (a).............................................................613
(b).............................................................613
(c)..................................................Not Applicable
ss. 312 (a)........................................................701, 702 (a)
(b).............................................................702 (b)
(c).............................................................702 (c)
ss.313 (a).............................................................703
(b).............................................................703
(c).............................................................703
(d).............................................................703
ss. 314 (a)(1) .........................................................704
(a)(2)..........................................................704
(a)(3)..........................................................704
(a)(4)....................................................101, 1004
(b) .................................................Not Applicable
(c) (1) ........................................................102
(c) (2) ........................................................102
(c) (3) .............................................Not Applicable
(d) .................................................Not Applicable
(e) ............................................................102
-ii-
<PAGE>
ss. 315 (a) ............................................................601
(b) ............................................................602
(c) ............................................................601
(d) ............................................................603
(d) (1) ........................................................603
(d) (2) ........................................................603
(d) (3) ........................................................603
(e) ............................................................513
ss. 316 (a) ............................................................101
(a) (1) (A) ...............................................502, 511
(a) (1) (B) ....................................................512
(a) (2) .............................................Not Applicable
(b) ............................................................515
(c).............................................................104(c)
ss. 317 (a) (1) ........................................................503
(a) (2) ........................................................504
(b) .......................................................... 1003
ss. 318 (a) ............................................................107
- -------------------
Note:This reconciliation and tie shall not, for any purpose, be deemed to be a
part of the Indenture.
-iii-
<PAGE>
TABLE OF CONTENTS
Page
RECITALS OF THE COMPANY........................................................1
ARTICLE ONE
Definitions and Other Provisions
of General Application
SECTION 101. Definitions...........................................1
Act ...........................................................2
Affiliate...........................................................2
Authenticating Agent................................................2
Board of Directors..................................................2
Board Resolution....................................................2
Business Day........................................................2
Claim ...........................................................2
Commission..........................................................2
Common Stock........................................................3
Company ...........................................................3
Company Request.....................................................3
Company Order.......................................................3
Corporate Trust Office..............................................3
Corporation.........................................................3
Defaulted Interest..................................................3
Event of Default....................................................3
Excess Proceeds.....................................................3
Exchange Act........................................................3
General Obligations.................................................3
Holder ...........................................................3
Indebtedness for Money Borrowed.....................................3
Indenture...........................................................4
Interest Payment Date...............................................4
Junior Securities...................................................4
Major Depository Institution Subsidiary.............................4
Maturity ...........................................................4
Note:This table of contents shall not, for any purpose, be deemed to be a part
of the Indenture
-iv-
<PAGE>
Officers' Certificate...............................................4
Opinion of Counsel..................................................4
OTS ...........................................................4
Outstanding.........................................................5
Paying Agent........................................................5
Person ...........................................................5
Predecessor Security................................................5
Proceeding..........................................................6
Regular Record Date.................................................6
Securities..........................................................6
Securities Payment..................................................6
Security Register...................................................6
Security Registrar..................................................6
Senior Indebtedness.................................................6
Special Record Date.................................................6
Stated Maturity.....................................................6
Subsidiary..........................................................6
Trustee ...........................................................7
Trust Indenture Act.................................................7
Vice President......................................................7
SECTION 102. Compliance Certificates and Opinions.........................7
SECTION 103. Form of Documents Delivered to Trustee.......................8
SECTION 104. Acts of Holders; Record Dates................................8
SECTION 105. Notices, Etc., to Trustee and Company........................9
SECTION 106. Notice to Holders; Waiver...................................10
SECTION 107. Conflict with Trust Indenture Act...........................10
SECTION 108. Effect of Headings and Table of Contents....................10
SECTION 109. Successors and Assigns......................................10
SECTION 110. Separability Clause.........................................10
SECTION 111. Benefits of Indenture.......................................10
SECTION 112. Governing Law...............................................11
SECTION 113. Legal Holidays..............................................11
Note:This table of contents shall not, for any purpose, be deemed to be a part
of the Indenture
-v-
<PAGE>
ARTICLE TWO
Security Forms
SECTION 201. Forms Generally.............................................11
SECTION 202. Form of Face of Security....................................12
SECTION 203. Form of Reverse of Security.................................14
SECTION 204. Form of Trustee's Certificate of Authentication.............16
ARTICLE THREE
The Securities
SECTION 301. Title and Terms.............................................16
SECTION 302. Denominations...............................................17
SECTION 303. Execution, Authentication, Delivery and Dating..............17
SECTION 304. Temporary Securities........................................18
SECTION 305. Registration; Registration of Transfer and Exchange.........18
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities............19
SECTION 307. Payment of Interest; Interest Rights Preserved..............20
SECTION 308. Persons Deemed Owners.......................................21
SECTION 309. Cancellation................................................21
SECTION 310. Computation of Interest.....................................21
SECTION 311. CUSIP Numbers...............................................21
ARTICLE FOUR
Satisfaction and Discharge
SECTION 401. Satisfaction and Discharge of Indenture.....................22
SECTION 402. Application of Trust Money..................................23
ARTICLE FIVE
Remedies
SECTION 501. Events of Default...........................................23
SECTION 502. Acceleration of Maturity; Rescission and Annulment..........25
Note:This table of contents shall not, for any purpose, be deemed to be a part
of the Indenture
-vi-
<PAGE>
SECTION 503. Collection of Indebtedness and Suits for Enforcement by
Trustee.....................................................26
SECTION 504. Trustee May File Proofs of Claim............................27
SECTION 505. Trustee May Enforce Claims Without Possession of
Securities..................................................27
SECTION 506. Application of Money Collected..............................28
SECTION 507. Limitation on Suits.........................................28
SECTION 508. Restoration of Rights and Remedies..........................29
SECTION 509. Rights and Remedies Cumulative..............................29
SECTION 510. Delay or Omission Not Waiver................................29
SECTION 511. Control by Holders..........................................29
SECTION 512. Waiver of Past Defaults.....................................30
SECTION 513. Undertaking for Costs.......................................30
SECTION 514. Waiver of Stay or Extension Laws............................31
SECTION 515. Unconditional Right of Holders to Receive Principal,
Premium and Interest........................................31
ARTICLE SIX
The Trustee
SECTION 601. Certain Duties and Responsibilities.........................31
SECTION 602. Notice of Defaults..........................................32
SECTION 603. Certain Rights of Trustee...................................32
SECTION 604. Not Responsible for Recitals or Issuance of Securities......33
SECTION 605. May Hold Securities.........................................33
SECTION 606. Money Held in Trust.........................................34
SECTION 607. Compensation and Reimbursement..............................34
SECTION 608. Disqualification; Conflicting Interests.....................34
SECTION 609. Corporate Trustee Required; Eligibility.....................35
SECTION 610. Resignation and Removal; Appointment of Successor...........35
SECTION 611. Acceptance of Appointment by Successor......................36
SECTION 612. Merger, Conversion, Consolidation or Succession to Business.36
SECTION 613. Preferential Collection of Claims Against Company...........37
SECTION 614. Appointment of Authenticating Agent.........................37
Note:This table of contents shall not, for any purpose, be deemed to be a part
of the Indenture
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ARTICLE SEVEN
Holders' Lists and Reports by Trustee and Company
SECTION 701. Company to Furnish Trustee Names and Addresses
of Holders..................................................39
SECTION 702. Preservation of Information; Communications to Holders......39
SECTION 703. Reports by Trustee..........................................39
SECTION 704. Reports by Company..........................................40
ARTICLE EIGHT
Consolidation, Merger, Conveyance, Transfer or Lease
SECTION 801. Company May Consolidate, Etc., Only on Certain Terms........40
SECTION 802. Successor Substituted.......................................41
ARTICLE NINE
Supplemental Indentures
SECTION 901. Supplemental Indentures Without Consent of Holders..........41
SECTION 902. Supplemental Indentures With Consent of Holders.............42
SECTION 903. Execution of Supplemental Indentures........................43
SECTION 904. Effect of Supplemental Indentures...........................43
SECTION 905. Conformity with Trust Indenture Act.........................43
SECTION 906. Reference in Securities to Supplemental Indentures..........43
ARTICLE TEN
Covenants
SECTION 1001. Payment of Principal, Premium and Interest..................44
SECTION 1002. Maintenance of Office or Agency.............................44
SECTION 1003. Money for Securities Payments to Be Held in Trust...........44
SECTION 1004. Statement by Officers as to Default.........................45
SECTION 1005. Existence...................................................45
SECTION 1006. Limitations on Dividends, Redemptions, Etc..................46
SECTION 1007. Payment of Taxes and Other Claims...........................46
SECTION 1008. Maintenance of Properties...................................46
Note:This table of contents shall not, for any purpose, be deemed to be a part
of the Indenture
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SECTION 1009. Waiver of Certain Covenants.................................46
SECTION 1010. Maintenance of Status of Subsidiaries as Insured Depository
Institutions................................................47
ARTICLE ELEVEN
Subordination of Securities
SECTION 1101. Securities Subordinate to Senior Indebtedness...............47
SECTION 1102. Payment Over of Proceeds Upon Dissolution, Etc..............47
SECTION 1103. Prior Payment to Senior Indebtedness Upon Acceleration
of Securities...............................................48
SECTION 1104. No Payment When Senior Indebtedness in Default..............49
SECTION 1105. Payment Permitted If No Default.............................49
SECTION 1106. Subrogation to Rights of Holders of Senior Indebtedness.....50
SECTION 1107. Provisions Solely to Define Relative Rights.................50
SECTION 1108. Trustee to Effectuate Subordination and Payment Provisions..51
SECTION 1109. No Waiver of Subordination Provisions.......................51
SECTION 1110. Notice to Trustee...........................................51
SECTION 1111. Reliance on Judicial Order or Certificate of Liquidating
Agent.......................................................52
SECTION 1112. Trustee Not Fiduciary for Holders of Senior Indebtedness
(or Creditors in Respect of General Obligations)............52
SECTION 1113. Rights of Trustee as Holder of Senior Indebtedness
(or Creditor); Preservation of Trustee's Rights.............53
SECTION 1114. Article Applicable to Paying Agents.........................53
SECTION 1115. Payment of Proceeds in Certain Cases........................53
ARTICLE TWELVE
Miscellaneous
SECTION 1201. Rules by Trustee, Paying Agent and Registrar................54
SECTION 1202. Counterparts................................................55
SECTION 1203. Further Instruments and Acts................................55
Note:This table of contents shall not, for any purpose, be deemed to be a part
of the Indenture
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INDENTURE, dated as of __________, 1997, between The Bryan-College Station
Financial Holding Company, a corporation duly organized and existing under the
laws of the State of Delaware (herein called the "Company"), having its
principal office at 2900 Texas Avenue, Bryan, Texas 77802, and [HARRIS TRUST
COMPANY], a banking corporation duly organized and existing under the laws of
the State of [________], as Trustee (herein called the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the creation of an issue of its ____%
Subordinated Debentures due _______, 2002 (herein called the "Securities") of
substantially the tenor and amount hereinafter set forth, and to provide
therefor the Company has duly authorized the execution and delivery of this
Indenture.
All things necessary to make the Securities, when executed by the Company
and authenticated and delivered hereunder and duly issued by the Company, the
valid obligations of the Company, and to make this Indenture a valid agreement
of the Company, in accordance with their and its terms, have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Securities
by the Holders thereof, it is mutually agreed, for the equal and proportionate
benefit of all Holders of the Securities, as follows:
ARTICLE ONE
Definitions and Other Provisions
of General Application
SECTION 101. Definitions. For all purposes of this Indenture, except as
otherwise expressly provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned to
them in this Article and include the plural as well as the singular;
(2) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein;
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(3) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles, and, except as otherwise herein expressly provided, the term
"generally accepted accounting principles" with respect to any computation
required or permitted hereunder shall mean such accounting principles as
are generally accepted at the date of such computation; and
(4) the words "herein," "hereof" and "hereunder" and other words of
similar import" refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision.
"Act," when used with respect to any Holder, has the meaning specified in
Section 104.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control," when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing."
"Authenticating Agent" means any Person authorized by the Trustee pursuant
to Section 614 to act on behalf of the Trustee to authenticate Securities.
"Board of Directors" means either the board of directors of the Company or
any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Company to have been duly adopted by the Board
of Directors and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in Texas or New York are
authorized or obligated by law or executive order to close.
"Claim" shall have the meaning assigned thereto in Section 101(5) of the
Bankruptcy Code of 1978, as amended to the date of this Indenture.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or, if at any time after the
execution of this instrument
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such Commission is not existing and performing the duties now assigned to it
under the Trust Indenture Act, then the body performing such duties at such
time.
"Common Stock" includes any stock of any class of the Company which has no
preference in respect of dividends or of amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or winding-up of the Company
and which is not subject to redemption by the Company.
"Company" means the Person named as the "Company" in the first paragraph of
this instrument until a successor Person shall have become such pursuant to the
applicable provisions of this Indenture, and thereafter "Company" shall mean
such successor Person.
"Company Request" or "Company Order" means, respectively, a written request
or order signed in the name of the Company by its Chairman of the Board, its
Vice Chairman of the Board, its President or a Vice President, and by its
Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and
delivered to the Trustee.
"Corporate Trust Office" means the principal office of the Trustee in
Chicago, Illinois at which at any particular time its corporate trust business
shall be administered.
"Corporation" means a corporation, association, company, joint-stock
company or business trust.
"Defaulted Interest" has the meaning specified in Section 307.
"Event of Default" has the meaning specified in Section 501.
"Excess Proceeds" has the meaning specified in Section 1115.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"FDIC" means the Federal Deposit Insurance Corporation or its successor.
"General Obligations" means all obligations of the 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 Securities and
indebtedness for money borrowed ranking pari passu with or subordinate to the
Securities.
"Holder" means a Person in whose name a Security is registered in the
Security Register.
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"Indebtedness for Money Borrowed," when used with respect to the Company,
means any obligation of, or any obligation guaranteed by, the Company for the
repayment of borrowed money, whether or not evidenced by bonds, debentures,
notes or other written instruments, and any deferred obligation for the payment
of the purchase price of property or assets.
"Indenture" means this instrument as originally executed or as it may from
time to time be supplemented or amended by one or more indentures supplemental
hereto entered into pursuant to the applicable provisions hereof, including, for
all purposes of this instrument and any such supplemental indenture, the
provisions of the Trust Indenture Act that are deemed to be a part of and govern
this instrument and any such supplemental indenture, respectively.
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Securities.
"Junior Securities" means (1) shares of Common Stock, (2) shares of any
other class or classes of capital stock of the Company, (3) any other non-debt
securities of the Company (whether or not such other securities are convertible
into Junior Securities of the Company), or (4) debt securities of the Company
(other than the Securities) 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 Securities.
"Major Depository Institution Subsidiary" means a Subsidiary that is an
insured depository institution and that is under the "control" of the Company
(as such term is defined in 12 C.F.R. ss. 574.4(a)); provided, however, that any
Subsidiary that had consolidated quarterly average total assets that were less
than 20% of the Company's consolidated quarterly average total assets for the
most recently available quarter shall not be deemed to be a Major Depository
Institution Subsidiary.
"Maturity," when used with respect to any Security, means the date on which
the principal of such Security becomes due and payable as therein or herein
provided, whether at the Stated Maturity or by declaration of acceleration, call
for redemption or otherwise.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board, a Vice Chairman of the Board, the President or a Vice President, and by
the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary,
of the Company, and delivered to the Trustee. One of the officers signing an
Officers' Certificate given pursuant to Section 1004 shall be the principal
executive, financial or accounting officer of the Company.
"Opinion of Counsel" means a written opinion of counsel delivered to the
Trustee, who may be counsel for the Company, and who shall be acceptable to the
Trustee.
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"OTS" means the Office of Thrift Supervision or its successor.
"Outstanding," when used with respect to Securities, means, as of the date
of determination, all Securities theretofore authenticated and delivered under
this Indenture, except:
(i) Securities theretofore canceled by the Trustee or delivered to the
Trustee for cancellation;
(ii) Securities for whose payment money in the necessary amount has
been theretofore deposited with the Trustee or any Paying Agent (other than
the Company) in trust or set aside and segregated in trust by the Company
(if the Company shall act as its own paying Agent) for the Holders of such
Securities; and
(iii) Securities which have been paid pursuant to Section 306 or in
exchange for or in lieu of which other Securities have been authenticated
and delivered pursuant to this Indenture, other than any such Securities in
respect of which there shall have been presented to the Trustee proof
satisfactory to it that such Securities are held by a bona fide purchaser
in whose hands such Securities are valid obligations of the Company;
provided, however, that in determining whether the Holders of the requisite
principal amount of the Outstanding Securities have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Securities owned
by the Company or any other obligor upon the Securities or any Affiliate of the
Company or of such other obligor shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in relying upon any such request, demand, authorization, direction, notice,
consent or waiver, only Securities which the Trustee knows to be so owned shall
be so disregarded. Securities so owned which have been pledged in good faith may
be regarded as Outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so to act with respect to such Securities and that
the pledgee is not the Company or any other obligor upon the Securities or any
affiliate of the Company or of such other obligor.
"Paying Agent" means any Person authorized by the Company to pay the
principal of (and premium, if any) or interest on any Securities on behalf of
the Company.
"Person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
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<PAGE>
"Predecessor Security" of any particular Security means every previous
Security evidencing all or a portion of the same debt as that evidenced by such
particular Security; and, for the purposes of this definition, any Security
authenticated and delivered under Section 306 in exchange for or in lieu of a
mutilated, destroyed, lost or stolen Security shall be deemed to evidence the
same debt as the mutilated, destroyed, lost or stolen Security.
"Proceeding" has the meaning specified in Section 1102.
"Regular Record Date" for the interest payable on any Interest Payment Date
means July 1, October 1, January 1 or April 1 (whether or not a Business Day),
as the case may be, next preceding such Interest Payment Date.
"Securities" has the meaning specified in the Recitals to this Indenture.
"Securities Payment" has the meaning specified in Section 1102.
"Security Register" and "Security Registrar" have the respective meanings
specified in Section 305.
"Senior Indebtedness" means the principal of (and premium, if any) and
interest on the following, whether outstanding at the date of execution of this
Indenture or thereafter incurred, assumed or created: (a) indebtedness of the
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 Securities or (B) ranks pari passu with the Securities; and (ii)
indebtedness evidenced by the Securities.
"Special Record Date" for the payment of any Defaulted Interest means a
date fixed by the Trustee pursuant to Section 307.
"Stated Maturity," when used with respect to any Security or any
installment of interest thereon, means the date specified in such Security as
the fixed date on which the principal of such Security or such installment of
interest is due and payable.
"Subsidiary" means a corporation more than 50% of the outstanding voting
stock of which is owned, directly or indirectly, by the Company or by one or
more other Subsidiaries, or by the
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Company and one or more other Subsidiaries. For the purposes of this definition,
"voting stock" means stock which ordinarily has voting power for the election of
directors, whether at all times or only so long as no senior class of stock has
such voting power by reason of any contingency.
"Trustee" means the Person named as the "Trustee" in the first paragraph of
this instrument until a successor Trustee shall have become such pursuant to the
applicable provisions of this Indenture, and thereafter "Trustee" shall mean
such successor Trustee.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at
the date as of which this instrument was executed; provided, however, that in
the event the Trust Indenture Act of 1939 is amended after such date, "Trust
Indenture Act" means, to the extent required by any such amendment, the Trust
Indenture Act of 1939 as so amended.
"Vice President," when used with respect to the Company or the Trustee,
means any vice president, whether or not designated by a number or a word or
words added before or after the title "vice president."
SECTION 102. Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee to take any
action under any provision of this Indenture, the Company shall furnish to the
Trustee such certificates and opinions stating that all conditions precedent, if
any, provided for in this Indenture relating to the proposed action have been
complied with, except that, in the case of any such application or request as to
which the furnishing of such documents is specifically required by any provision
of this Indenture relating to such particular application or request, no
additional certificate or opinion need be furnished. Each such certificate or
opinion shall be given in the form of an Officers' Certificate, if to be given
by an officer of the Company, or an Opinion of Counsel, if to be given by
counsel, and shall comply with the requirements of the Trust Indenture Act and
any other requirement set forth in this Indenture.
Every certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture shall include:
(1) a statement that each individual signing such certificate or
opinion has read such covenant or condition and the definitions herein
relating thereto;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
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(3) a statement that, in the opinion of each such individual, he has
made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or condition
has been complied with; and
(4) a statement as to whether or not, in the opinion of each such
individual, such condition or covenant has been complied with.
SECTION 103. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or opinion of counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with respect to such
matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 104. Acts of Holders; Record Dates.
(a) Any request, demand, authorization, direction, notice, consent, waiver
or other action provided by this Indenture to be given or taken by Holders may
be embodied in and evidenced by one or more instruments of substantially similar
tenor signed by such Holders in person or by their agent duly appointed in
writing; and, except as herein otherwise expressly provided, such action shall
become effective when such instrument or instruments are received by the Trustee
and, where it is hereby expressly required, to the Company. Such instrument or
instruments (and the action
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embodied therein and evidenced thereby) are herein sometimes referred to as the
"Act" of the Holders signing such instrument or instruments. Proof of execution
of any such instrument or of a writing appointing any such agent shall be
sufficient for any purpose of this Indenture and (subject to Section 601)
conclusive in favor of the Trustee and the Company, if made in the manner
provided in this Section.
(b) The fact and date of the execution by any Person of any such instrument
or writing may be proved by the affidavit of a witness of such execution or by a
certificate of a notary public or other officer authorized by law to take
acknowledgments of deeds, certifying that the individual signing such instrument
or writing acknowledged to him the execution thereof. Where such execution is by
a signer acting in a capacity other than his individual capacity, such
certificate or affidavit shall also constitute sufficient proof of his
authority. The fact and date of the execution of any such instrument or writing,
or the authority of the Person executing the same, may also be proved in any
other manner which the Trustee deems sufficient.
(c) The Company may, in the circumstances permitted by the Trust Indenture
Act, by Board Resolution fix any day as the record date for the purpose of
determining the Holders entitled to give or take any request, demand,
authorization, direction, notice, consent, waiver or other action, or to vote on
any action, authorized or permitted to be given or taken by Holders. If not set
by the Company prior to the first solicitation of a Holder made by any Person in
respect of any such action, or, in the case of any such vote, prior to such
vote, the record date for any such action or vote shall be the 30th day (or, if
later, the date of the most recent list of Holders required to be provided
pursuant to Section 701) prior to such first solicitation or vote, as the case
may be. With regard to any record date, only the Holders on such date (or their
duly designated proxies) shall be entitled to give or take, or vote on, the
relevant action.
(d) The ownership of Securities shall be proved by the Security Register.
(e) Any request, demand, authorization, direction, notice, consent, waiver
or other Act of the Holder of any Security shall bind every future Holder of the
same Security and the Holder of every Security issued upon the registration of
transfer thereof or in exchange therefor or in lieu thereof in respect of
anything done, omitted or suffered to be done by the Trustee or the Company in
reliance thereon, whether or not notation of such action is made upon such
Security.
SECTION 105. Notices, Etc., to Trustee and Company.
Any request, demand, authorization, direction, notice, consent, waiver or
Act of Holders or other document provided or permitted by this Indenture to be
made upon, given or furnished to, or filed with,
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(1) the Trustee by any Holder or by the Company shall be sufficient
for every purpose hereunder if made, given, furnished or filed in writing
to or with the Trustee at its Corporate Trust Office; or
(2) the Company by the Trustee or by any Holder shall be sufficient
for every purpose hereunder (unless otherwise herein expressly provided) if
in writing and mailed, first-class postage prepaid, to the Company
addressed to it at the address of its principal office specified in the
first paragraph of this instrument or at any other address previously
furnished in writing to the Trustee by the Company.
SECTION 106. Notice to Holders; Waiver.
Where this Indenture provides for notice to Holders of any event, such
notice shall be sufficiently given (unless otherwise herein expressly provided)
if in writing and mailed, first-class postage prepaid, to each Holder affected
by such event, at his address as it appears in the Security Register, not later
than the latest date (if any), and not earlier than the earliest date (if any),
prescribed for the giving of such notice. In any case where notice to Holders is
given by mail, neither the failure to mail such notice, nor any defect in any
notice so mailed, to any particular Holder shall affect the sufficiency of such
notice with respect to other Holders. Where this Indenture provides for notice
in any manner, such notice may be waived in writing by the Person entitled to
receive such notice, either before or after the event, and such waiver shall be
the equivalent of such notice. Waivers of notice by Holders shall be filed with
the Trustee, but such filing shall not be a condition precedent to the validity
of any action taken in reliance upon such waiver.
In case by reason of the suspension of regular mail service or by reason of
any other cause it shall be impracticable to give such notice by mail, then such
notification as shall be made with the approval of the Trustee shall constitute
a sufficient notification for every purpose hereunder.
SECTION 107. Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with a provision of
the Trust Indenture Act that is required under such Act to be a part of and
govern this Indenture, the latter provision shall control. If any provision of
this Indenture modifies or excludes any provision of the Trust Indenture Act
that may be so modified or excluded, the latter provision shall be deemed to
apply to this Indenture as so modified or to be excluded, as the case may be.
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SECTION 108. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are for
convenience only and shall not affect the construction hereof.
SECTION 109. Successors and Assigns.
All covenants and agreements in this Indenture by the Company shall bind
its successors and assigns, whether so expressed or not.
SECTION 110. Separability Clause.
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 111. Benefits of Indenture.
Nothing in this Indenture or in the Securities, express or implied, shall
give to any Person, other than (a) the parties hereto and their successors
hereunder, (b) the holders of Senior Indebtedness, (c) the Holders of Securities
and (d) subject to Section 901, the creditors in respect of General Obligations,
any benefit-or any legal or equitable right, remedy or claim under this
Indenture.
SECTION 112. Governing Law.
This Indenture and the Securities shall be governed by and construed in
accordance with the laws of the State of Delaware.
SECTION 113. Legal Holidays.
In any case where any Interest Payment Date, Stated Maturity or any other
payment date of any Security shall not be a Business Day, then (notwithstanding
any other provision of this Indenture or of the Securities) payment of interest
or principal (and premium, if any) need not be made on such date, but may be
made on the next succeeding Business Day with the same force and effect as if
made on the Interest Payment Date, or at the Stated Maturity, or on such other
payment date, and no interest shall accrue for the period from and after such
Interest Payment Date, Stated Maturity, or other payment date, as the case may
be.
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ARTICLE TWO
Security Forms
SECTION 201. Forms Generally.
The Securities and the Trustee's certificates of authentication shall be in
substantially the forms set forth in this Article, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture, and may have such letters, numbers or other marks
of identification and such legends or endorsements placed thereon as may be
required to comply with the rules of any securities exchange or as may,
consistently herewith, be determined by the officers executing such Securities,
as evidenced by their execution of the Securities.
The definitive Securities shall be printed, lithographed or engraved or
produced by any combination of these methods on steel engraved borders or may be
produced in any other manner permitted by the rules of any securities exchange
on which the Securities may be listed, all as determined by the officers
executing such Securities, as evidenced by their execution of such Securities.
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SECTION 202. Form of Face of Security.
THIS SECURITY IS NOT A DEPOSIT OR SAVINGS ACCOUNT AND IS NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY OR
INSTRUMENTALITY.
THE BRYAN-COLLEGE STATION HOLDING COMPANY
____% Subordinated Debenture due _______, 2002
No. $
The Bryan-College Station Holding Company, a corporation duly organized and
existing under the laws of Delaware (herein called the "Company," which term
includes any successor Person under the Indenture hereinafter referred to), for
value received, hereby promises to pay to , or registered assigns, the principal
sum of $ Dollars on __________, 2002, and to pay interest thereon from
_________, 1998 or from the most recent Interest Payment Date to which interest
has been paid or duly provided for, quarterly on July 15, October 15, January 15
and April 15 in each year, commencing ________, 1997, at the rate of ____% per
annum, until the principal hereof is paid or made available for payment. The
interest so payable, and punctually paid or duly provided for, on any Interest
Payment Date will, as provided in such Indenture, be paid to the Person in whose
name this Security (or one or more Predecessor Securities) is registered at the
close of business on the Regular Record Date for such interest, which shall be
July 1, October 1, January 1 and April 1 (whether or not a Business Day), as the
case may be, next preceding such Interest Payment Date. Any such interest not so
punctually paid or duly provided for will forthwith cease to be payable to the
Holder on such Regular Record Date and may either be paid to the Person in whose
name this Security (or one or more Predecessor Securities) is registered at the
close of business on a Special Record Date for the payment of such Defaulted
Interest to be fixed by the Trustee, notice whereof shall be given to Holders of
Securities not less than 10 days prior to such Special Record Date, or be paid
at any time in any other lawful manner not inconsistent with the requirements of
any securities exchange on which the Securities may be listed, and upon such
notice as may be required by such exchange, all as more fully provided in said
Indenture. Payment of the principal of (and premium, if any) and interest on
this Security will be made at the office or agency of the Company maintained for
that purpose in the [CITY OF _______, ________,] in such coin or currency of the
United States of America as at the time of payment is legal tender for payment
of public and private debts; provided, however, that at the option of the
Company payment of interest may be made by check mailed to the address of the
Person entitled thereto as such address shall appear in the Security Register.
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Reference is hereby made to the further provisions of this Security set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the
Trustee referred to on the reverse hereof by manual signature, this Security
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
Dated: THE BRYAN-COLLEGE STATION HOLDING COMPANY
By:
---------------------------------
Name:
Title:
[Corporate Seal]
Attest:
- ---------------------
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities referred to in the within-mentioned Indenture.
[HARRIS TRUST COMPANY]
By:
-------------------------
Authorized Officer
Date:
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SECTION 203. Form of Reverse of Security.
This Security is one of a duly authorized issue of Securities of the
Company designated as its ____% Subordinated Debentures due ________ , 2002
(herein called the "Securities"), limited in aggregate principal amount to
$__________, issued and to be issued under an Indenture, dated as of ________ _,
1997 (herein called the "Indenture"), between the Company and
[_____________________________], as Trustee (herein called the "Trustee," which
term includes any successor trustee under the Indenture), to which Indenture and
all indentures supplemental thereto reference is hereby made for a statement of
the respective rights, limitations of rights, duties and immunities thereunder
of the Company, the Trustee, the holders of Senior Indebtedness and the Holders
of the Securities, and of the terms upon which the Securities are, and are to
be, authenticated and delivered.
The indebtedness evidenced by this Security is, to the extent provided in
the Indenture, subordinate and subject in right of payment to the prior payment
in full of all Senior Indebtedness, and this Security is issued subject to the
provisions of the Indenture with respect thereto. Each Holder of this Security,
by accepting the same, (a) agrees to and shall be bound by such provisions, (b)
authorizes and directs the Trustee on his behalf to take such action as may be
necessary or appropriate to effectuate the subordination so provided and (c)
appoints the Trustee his attorney-in-fact for any and all such purposes.
If an Event of Default shall occur and be continuing, the principal of all
the Securities may be declared due and payable in the manner and with the effect
provided in the Indenture.
The indebtedness evidenced by this Security is issued subject to the
provisions of the Indenture regarding payments to creditors in respect of
General Obligations (as defined in the Indenture). In particular, the Indenture
provides that if upon the occurrence of certain events of bankruptcy or
insolvency relating to the Company, there remains, after giving effect to the
subordination provisions referred to in the preceding paragraph, any amount of
cash, property or securities available for payment or distribution in respect of
Securities (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 Securities.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities under the Indenture at
any time by the Company and the Trustee with the consent of
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the Holders of a 66-2/3% in aggregate principal amount of the Securities at the
time Outstanding. The Indenture also contains provisions permitting the Holders
of specified percentages in aggregate principal amount of the Securities at the
time Outstanding, on behalf of the Holders of all the Securities, to waive
compliance by the Company with certain provisions of the Indenture and certain
past defaults under the Indenture and their consequences. Any such consent or
waiver by the Holder of this Security shall be conclusive and binding upon such
Holder and upon all future Holders of this Security and of any Security issued
upon the registration of transfer hereof or in exchange herefor or in lieu
hereof, whether or not notation of such consent or waiver is made upon this
Security.
No reference herein to the Indenture and no provision of this Security or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of (and premium, if any) and
interest on this Security at the times, place and rate, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Security is registrable in the Security Register,
upon surrender of this Security for registration of transfer at the office or
agency of the Company in the [CITY OF _______], duly endorsed by, or accompanied
by a written instrument of transfer in form satisfactory to the Company and the
Security Registrar duly executed by, the Holder hereof or his attorney duly
authorized in writing, and thereupon one or more new Securities, of authorized
denominations and for the same aggregate principal amount, will be issued to the
designated transferee or transferees.
The Securities are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, Securities are
exchangeable for a like aggregate principal amount of Securities of a different
authorized denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such registration of transfer or
exchange, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name this Security is registered as the owner hereof for all
purposes, whether or not this Security be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
All terms used in this Security which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
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No recourse shall be had for the payment of the principal of or interest on
this Security, or for any claim based hereon, or otherwise in respect hereof, or
based on or in respect of the Indenture or any indenture supplement thereto,
against any incorporator, stockholder, officer or director, as such, past,
present or future, of the Company or any incorporator, stockholder, officer or
director of any successor at law of the Company or by the enforcement of any
assessment or penalty or otherwise against such person, all such liability
being, by the acceptance hereof and as part of the consideration for the issue
hereof, expressly waived and released.
Each Holder of a Security covenants and agrees by his or her acceptance
thereof to comply with and be bound by the foregoing provisions.
This Security is unsecured by any collateral, including the assets of the
Company or any of its Subsidiaries or other Affiliates.
SECTION 204. Form of Trustee's Certificate of Authentication.
This is one of the Securities referred to in the within-mentioned
Indenture.
----------------------------
as Trustee
By:
----------------------------
Authorized Officer
Date:
ARTICLE THREE
The Securities
SECTION 301. Title and Terms.
The aggregate principal amount of Securities which may be authenticated and
delivered under this Indenture is limited to $_______, except for Securities
authenticated and delivered upon registration of transfer of, or in exchange
for, or in lieu of, other Securities pursuant to Section 304, 305, 306 or 906.
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The Securities shall be known and designated as the "____% Subordinated
Debentures due ________ , 2002" of the Company. Their Stated Maturity shall be
________ _, 2002, and they shall bear interest at the rate of ____% per annum,
from ________ _, 1997 or from the most recent Interest Payment Date to which
interest has been paid or duly provided for, as the case may be, payable
quarterly on July 15, October 15, January 15 and April 15, commencing
__________, 1998, until the principal thereof is paid or made available for
payment.
The principal of (and premium, if any) and interest on the Securities shall
be payable at the office or agency of the Company in the [CITY OF _______]
maintained for such purpose and at any other office or agency maintained by the
Company for such purpose; provided, however, that at the option of the Company
payment of interest may be made by check mailed to the address of the Person
entitled thereto as such address shall appear in the Security Register.
The Securities shall be subordinated in right of payment to Senior
Indebtedness as provided in Article Eleven.
SECTION 302. Denominations.
The Securities shall be issuable only in registered form without coupons
and only in denominations of $1,000 and any integral multiple thereof.
SECTION 303. Execution, Authentication, Delivery and Dating.
The Securities shall be executed on behalf of the Company by its Chairman
of the Board, its Vice Chairman of the Board, its President or one of its Vice
Presidents, under its corporate seal reproduced thereon attested by its
Secretary or one of its Assistant Secretaries. The signature of any of these
officers on the Securities may be manual or facsimile.
Securities bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Securities or did not
hold such offices at the date of such Securities.
At any time and from time to time after the execution and delivery of this
Indenture, the Company may deliver Securities executed by the Company to the
Trustee for authentication, together with a Company Order for the authentication
and delivery of such Securities; and the Trustee in accordance with such Company
Order shall authenticate and deliver such Securities as in this Indenture
provided and not otherwise.
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Each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose unless there appears on such Security a
certificate of authentication substantially in the form provided for herein
executed by the Trustee by manual signature, and such certificate upon any
Security shall be conclusive evidence, and the only evidence, that such Security
has been duly authenticated and delivered hereunder.
SECTION 304. Temporary Securities.
Pending the preparation of definitive Securities, the Company may execute,
and upon Company Order the Trustee shall authenticate and deliver, temporary
Securities which are printed, lithographed, typewritten, mimeographed or
otherwise produced, in any authorized denomination, substantially of the tenor
of the definitive Securities in lieu of which they are issued and with such
appropriate insertions, omissions, substitutions and other variations as the
officers executing such Securities may determine, as evidenced by their
execution of such Securities.
If temporary Securities are issued, the Company will cause definitive
Securities to be prepared without unreasonable delay. After the preparation of
definitive Securities, the temporary Securities shall be exchangeable for
definitive Securities upon surrender of the temporary Securities at any office
or agency of the Company designated pursuant to Section 1002, without charge to
the Holder. Upon surrender for cancellation of any one or more temporary
Securities, the Company shall execute and the Trustee shall authenticate and
deliver in exchange therefor a like principal amount of definitive Securities of
authorized denominations. Until so exchanged the temporary Securities shall in
all respects be entitled to the same benefits under this Indenture as definitive
Securities.
SECTION 305. Registration; Registration of Transfer and Exchange.
The Company shall cause to be kept at the Corporate Trust Office of the
Trustee a register (the register maintained in such office and in any other
office or agency designated pursuant to Section 1002 being herein sometimes
collectively referred to as the "Security Register") in which, subject to such
reasonable regulations as it may prescribe, the Company shall provide for the
registration of Securities and of transfers of Securities. The Trustee is hereby
appointed "Security Registrar" for the purpose of registering Securities and
transfers of Securities as herein provided.
Upon surrender for registration of transfer of any Security at an office or
agency of the Company designated pursuant to Section 1002 for such purpose, the
Company shall execute, and
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the Trustee shall authenticate and deliver, in the name of the designated
transferee or transferees, one or more new Securities of any authorized
denominations and of a like aggregate principal amount.
At the option of the Holder, Securities may be exchanged for other
Securities of any authorized denominations and of a like aggregate principal
amount, upon surrender of the Securities to be exchanged at such office or
agency. Whenever any Securities are so surrendered for exchange, the Company
shall execute, and the Trustee shall authenticate and deliver, the Securities
which the Holder making the exchange is entitled to receive.
All Securities issued upon any registration of transfer or exchange of
Securities shall be the valid obligations of the Company, evidencing the same
debt, and entitled to the same benefits under this Indenture, as the Securities
surrendered upon such registration of transfer or exchange.
Every Security presented or surrendered for registration of transfer or for
exchange shall (if so required by the Company or the Trustee) be duly endorsed,
or be accompanied by a written instrument of transfer in form satisfactory to
the Company and the Security Registrar duly executed by the Holder thereof or
his attorney duly authorized in writing,
No service charge shall be made for any registration of transfer or
exchange of Securities, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer or exchange of Securities, other than
exchanges pursuant to Section 304 or 906 not involving any transfer.
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities.
If any mutilated Security is surrendered to the Trustee, the Company shall
execute and the Trustee shall authenticate and deliver in exchange therefor a
new Security of like tenor and principal amount and bearing a number not
contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (i) evidence to
their satisfaction of the destruction, loss or theft of any Security and (ii)
such security or indemnity as may be required by them to save each of them and
any agent of either of them harmless, then, in the absence of notice to the
Company or the Trustee that such Security has been acquired by a bona fide
purchaser, the Company shall execute and the Trustee shall authenticate and
deliver, in lieu of any such destroyed, lost or stolen Security, a new Security
of like tenor and principal amount and bearing a number not contemporaneously
outstanding.
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In case any such mutilated, destroyed, lost or stolen Security has become
or is about to become due and payable, the Company in its discretion may,
instead of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, the Company may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses (including
the fees and expenses of the Trustee) connected therewith.
Every new Security issued pursuant to this Section in lieu of any
destroyed, lost or stolen Security shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all the benefits of this Indenture equally and proportionately with
any and all other Securities duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities.
SECTION 307. Payment of Interest; Interest Rights Preserved.
Interest on any Security which is payable, and is punctually paid or duly
provided for, on any Interest Payment Date shall be paid to the Person in whose
name that Security (or one or more Predecessor Securities) is registered at the
close of business on the Regular Record Date for such interest.
Any interest on any Security which is payable, but is not punctually paid
or duly provided for, on any Interest Payment Date (herein called "Defaulted
Interest") shall forthwith cease to be payable to the Holder on the relevant
Regular Record Date by virtue of having been such Holder, and such Defaulted
Interest may be paid by the Company, at its election in each case, as provided
in clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted Interest to
the Persons in whose names the Securities (or their respective Predecessor
Securities) are registered at the close of business on a Special Record
Date for the payment of such Defaulted Interest, which shall be fixed in
the following manner. The Company shall notify the Trustee in writing of
the amount of Defaulted Interest proposed to be paid on each Security and
the date of the proposed payment, and at the same time the Company shall
deposit with the Trustee an amount of money equal to the aggregate amount
proposed to be
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paid in respect of such Defaulted Interest or shall make arrangements
satisfactory to the Trustee for such deposit prior to the date of the
proposed payment, such money when deposited to be held in trust for the
benefit of the Persons entitled to such Defaulted Interest as in this
clause provided. Thereupon the Trustee shall fix a Special Record Date for
the payment of such Defaulted Interest which shall be not more than 15 days
and not less than 10 days prior to the date of the proposed payment and not
less than 10 days after the receipt by the Trustee of the notice of the
proposed payment. The Trustee shall promptly notify the Company of such
Special Record Date and, in the name and at the expense of the Company,
shall cause notice of the proposed payment of such Defaulted Interest and
the Special Record Date therefor to be mailed, first-class postage prepaid,
to each Holder at his address as it appears in the Security Register, not
less than 10 days prior to such Special Record Date. Notice of the proposed
payment of such Defaulted Interest and the Special Record Date therefor
having been so mailed, such Defaulted Interest shall be paid to the Persons
in whose names the Securities (or their respective Predecessor Securities)
are registered at the close of business on such Special Record Date and
shall no longer be payable pursuant to the following clause (2).
(2) The Company may make payment of any Defaulted Interest in any
other lawful manner not inconsistent with the requirements of any
securities exchange on which the Securities may be listed, and upon such
notice as may be required by such exchange, if, after notice given by the
Company to the Trustee of the proposed payment pursuant to this clause,
such manner of payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Security
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Security shall carry the rights to interest accrued
and unpaid, and to accrue, which were carried by such other Security.
SECTION 308. Persons Deemed Owners.
Prior to due presentment of a Security for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name such Security is registered as the owner of such Security
for the purpose of receiving payment of principal of (and premium, if any) and
(subject to Section 307) interest on such Security and for all other purposes
whatsoever, whether or not such Security be overdue, and neither the Company,
the Trustee nor any agent of the Company or the Trustee shall be affected by
notice to the contrary.
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SECTION 309. Cancellation.
All Securities surrendered for payment, redemption, registration of
transfer or exchange or conversion shall, if surrendered to any Person other
than the Trustee, be delivered to the Trustee and shall be promptly canceled by
it. The Company may at any time deliver to the Trustee for cancellation any
Securities previously authenticated and delivered hereunder which the Company
may have acquired in any manner whatsoever, and all Securities so delivered
shall be promptly canceled by the Trustee. No Securities shall be authenticated
in lieu of or in exchange for any Securities canceled as provided in this
Section, except as expressly permitted by this Indenture. All canceled
Securities held by the Trustee shall be disposed of as directed by a Company
Order.
SECTION 310. Computation of Interest.
Interest on the Securities shall be computed on the basis of a 360-day year
of twelve 30-day months.
SECTION 311. CUSIP Numbers.
The Company, in issuing Securities, may use a "CUSIP" number and, if so,
the Trustee shall use the CUSIP number in any notice to Holders as a convenience
to such Holders; provided, that any such notice may state that no representation
is made as to the correctness or accuracy of the CUSIP number printed in the
notice or on the Securities and that reliance may be placed only on the other
identification numbers printed on the Securities. The Company shall promptly
notify the Trustee of any change in CUSIP number.
ARTICLE FOUR
Satisfaction and Discharge
SECTION 401. Satisfaction and Discharge of Indenture.
This Indenture shall cease to be of further effect (except as to any
surviving rights of conversion, registration of transfer or exchange of
Securities herein expressly provided for), and the Trustee, on demand of and at
the expense of the Company, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture, when
(1) either
(A) all Securities theretofore authenticated and delivered (other
than (i) Securities which have been destroyed, lost or stolen and
which have been replaced or paid
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as provided in Section 306 and (ii) Securities for whose payment money
has theretofore been deposited in trust or segregated and held in
trust by the Company and thereafter repaid to the Company or
discharged from such trust, as provided in Section 1003) have been
delivered to the Trustee for cancellation; or
(B) all such Securities not theretofore delivered to the Trustee
for cancellation
(i) have become due and payable, or
(ii) will become due and payable at their Stated Maturity
within one year,
and the Company, in the case of (i) or (ii) above, has deposited or
caused to be deposited with the Trustee as trust funds in trust for
the purpose an amount sufficient to pay and discharge the entire
indebtedness on such Securities not theretofore delivered to the
Trustee for cancellation, for principal (and premium, if any) and
interest to the date of such deposit (in the case of Securities which
have become due and payable) or to the Stated Maturity, as the case
may be;
(2) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(3) the Company has delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that all conditions precedent herein
provided for relating to the satisfaction and discharge of this Indenture have
been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 607 and, if money shall
have been deposited with the Trustee pursuant to subclause (B) of clause (1) of
this Section, the obligations of the Trustee under Section 402 and the last
paragraph of Section 1003 shall survive.
SECTION 402. Application of Trust Money.
Subject to the provisions of the last paragraph of Section 1003, all money
deposited with the Trustee pursuant to Section 401 shall be held in trust and
applied by it, in accordance with the provisions of the Securities and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the
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Persons entitled thereto, of the principal (and premium, if any) and interest
for whose payment such money has been deposited with the Trustee.
ARTICLE FIVE
Remedies
SECTION 501. Events of Default.
"Event of Default," wherever used herein, means any one of the following
events (whatever the reason for such Event of Default and whether it shall be
occasioned by the provisions of Article Eleven or be voluntary or involuntary or
be effected by operation of law or pursuant to any judgment, decree or order of
any court or any order, rule or regulation of any administrative or governmental
body):
(1) the entry by a court having jurisdiction in the premises of a
decree or order for relief in respect of the Company in an involuntary case
or proceeding under the Federal bankruptcy laws or any other applicable
federal or state law, as now or hereafter constituted, and the continuance
of any such decree or order unstayed and in effect for a period of 60
consecutive days; or a decree or order of a court having jurisdiction in
the premises for the appointment of a receiver or liquidator or trustee or
assignee in bankruptcy or insolvency of the Company or substantially all of
its property, or for the winding up or liquidation of its affairs, shall
have been entered, and such decree or order shall have continued
undischarged and unstayed for a period of 60 consecutive days; or
(2) the commencement by the Company of a voluntary case or proceeding
under the Federal bankruptcy laws or any other applicable federal or state
law, as now or hereafter constituted, or the consent by the Company to the
entry of a decree or order for relief in an involuntary case or proceeding
under any such law or shall consent to the appointment of a receiver or
liquidator or trustee or assignee in bankruptcy or insolvency of it or
substantially all of its property or shall make an assignment for the
benefit of creditors; or
(3) (A) the appointment by the OTS or the FDIC (or other competent
government agency having primary regulatory authority over any Major
Depository Institution Subsidiary) under any applicable federal or state
banking, insolvency or other similar law now or hereafter in effect of a
receiver, conservator, liquidator or other similar official for any Major
Depository Institution Subsidiary or for all or substantially all of its
assets or (B) the entry of a decree or order in any case or proceeding
under any applicable federal or state banking, insolvency or other similar
law now or hereafter in effect adjudging any Major Depository Institution
Subsidiary insolvent or bankrupt, or appointing any receiver,
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conservator or other similar official for any Major Depository Institution
Subsidiary or for all or substantially all of its assets, or ordering the
winding up or liquidation of its affairs; or
(4) (A) the filing by any Major Depository Institution Subsidiary with
the OTS or the FDIC (or other competent government agency having primary
regulatory authority over any Major Depository Institution Subsidiary) of a
notice of voluntary liquidation or other similar action under any
applicable federal or state banking, insolvency or other similar law now or
hereafter in effect or (B) the commencement by any Major Depository
Institution Subsidiary of any case or proceeding under any applicable
federal or state banking, insolvency or other similar law now or hereafter
in effect to be adjudicated insolvent or bankrupt or seeking the
appointment of a receiver, conservator, liquidator or other similar
official for any Major Depository Institution Subsidiary or for all or
substantially all of its assets, or the consent by any Major Depository
Institution Subsidiary to the entry of a decree or order in any case or
proceeding under the federal or state banking, insolvency or other similar
laws adjudging any Major Depository Institution Subsidiary insolvent or
bankrupt, or appointing any receiver, conservator, liquidator or other
similar official for any Major Depository Institution Subsidiary or for all
or substantially all of its assets, or ordering the winding up or
liquidation of its affairs, or the taking of any corporate action by any
Major Depository Institution Subsidiary in furtherance of such action; or
(5) default in the payment of any interest upon any Security or any
amount payable hereunder when the same shall become due and payable, and
continuance of such default for a period of 30 days; or
(6) default in the payment of the principal of (or premium, if any,
on) any Security when the same shall become due and payable, whether at the
Stated Maturity thereof, by acceleration or otherwise.
(7) default in the performance, or breach, of any covenant,
representation or warranty of the Company contained in this Indenture
(other than a covenant, representation or warranty a default in whose
performance or whose breath is elsewhere in this Section specifically dealt
with), and continuance of such default or breach for a period of 60 days
after there has been given, by registered or certified mail, 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 Outstanding Securities a written notice
specifying such default or breach and requiring it to be remedied and
stating that such notice is a "Notice of Default" hereunder; or
(8) a default under any bond, debenture, note or other evidence of
indebtedness for money borrowed by the Company or a Subsidiary or under any
mortgage, indenture
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or instrument under which there may be issued or by which there may be
secured or evidenced any indebtedness for money borrowed by the Company or
a Subsidiary (including this Indenture), whether such indebtedness now
exists or shall hereafter be created, which default shall have resulted (i)
in a failure to pay an aggregate principal amount exceeding $1,000,000 of
such indebtedness when due or upon the expiration of any applicable grace
period with respect thereto or (ii) in such indebtedness in an amount
exceeding $1,000,000 becoming or, with the giving of notice or lapse of
time or both, being declared due and payable prior to the date on which it
would otherwise have become due and payable, without such indebtedness
having been discharged, or such acceleration having been rescinded or
annulled, within a period of 10 days after there shall have been given, by
registered or certified mail, 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 Outstanding Securities a written notice specifying such default and
requiring the Company to cause such indebtedness to be discharged or cause
such acceleration to be rescinded or annulled and stating that such notice
is a "Notice of Default" hereunder; provided, however, that a default under
any such other bond, debenture, note, evidence of indebtedness for money
borrowed, mortgage, indenture or instrument shall not be deemed to have
occurred if and so long as the Company shall contest the validity thereof
in good faith by appropriate proceedings.
SECTION 502. Acceleration of Maturity; Rescission and Annulment.
(a) If an Event of Default occurs and is continuing, then and in every such
case the Trustee or the Holders of not less than 25% in principal amount of the
Outstanding Securities may declare the principal of all the Securities to be due
and payable immediately, by a notice in writing to the Company (and to the
Trustee if given by Holders), and upon any such declaration such principal shall
become immediately due and payable.
(b) At any time after such a declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee as hereinafter in this Article provided, the Holders of a majority
in principal amount of the Outstanding Securities, by written notice to the
Company and the Trustee, may rescind and annul such declaration and its
consequences if
(1) the Company has paid or deposited with the Trustee a sum
sufficient to pay
(A) all overdue interest on all Securities,
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(B) the principal of (and premium, if any, on) any Securities
which have become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by the Securities,
(C) to the extent that payment of such interest is lawful,
interest upon overdue interest at the rate borne by the Securities,
and
(D) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel;
and
(2) all Events of Default have been cured or waived as provided in
Section 512.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee.
The Company covenants that if any of the Events of Default specified in
paragraphs (5) or (6) of Section 501 occurs, the Company will, upon demand of
the Trustee, pay to it, for the benefit of the Holders of such Securities, the
whole amount then due and payable on such Securities for principal (and premium,
if any) and interest, and, to the extent that payment of such interest shall be
legally enforceable, interest on any overdue principal (and premium, if any) and
on any overdue interest, at the rate borne by the Securities, and, in addition
thereto, such further amount as shall be sufficient to cover the costs and
expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel.
If the Company fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, may
prosecute such proceeding to judgment or final decree and may enforce the same
against the Company or any other obligor upon such Securities and collect the
moneys adjudged or decreed to be payable in the manner provided by law out of
the property of the Company or any other obligor upon such Securities, wherever
situated.
If an Event of Default occurs and is 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 shall deem most
effectual to protect and enforce any such rights, whether for the
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specific enforcement of any covenant or agreement in this Indenture or in aid of
the exercise of any power granted herein, or to enforce any other proper remedy.
SECTION 504. Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company (or any other obligor upon the
Securities), its property or its creditors, the Trustee (irrespective of whether
the principal of the Securities shall then be due and payable as therein
expressed or by declaration or otherwise and irrespective of whether the Trustee
shall have made any demand on the Company for the payment of overdue principal
or interest) shall be entitled and empowered, by intervention in such proceeding
or otherwise, to take any and all actions authorized under the Trust Indenture
Act in order to have claims of the Holders and the Trustee allowed in any such
proceeding. In particular, the Trustee shall be authorized to collect and
receive any moneys or other property payable or deliverable on any such claims
and to distribute the same; and any custodian, receiver, assignee, trustee,
liquidator, sequestrator or other similar official in any such judicial
proceeding is hereby authorized by each Holder to make such payments to the
Trustee and, in the event that the Trustee shall consent to the making of such
payments directly to the Holders, to pay to the Trustee any amount due it for
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 607.
No provision of this Indenture shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof or to authorize the Trustee to vote in
respect of the claim of any Holder in any such proceeding; provided, however,
that the Trustee may, on behalf of the Holders, vote for the election of a
trustee in bankruptcy or similar official and may be a member of the creditors'
committee in any such proceeding.
SECTION 505. Trustee May Enforce Claims Without Possession of Securities.
All rights of action and claims under this Indenture or the Securities may
be prosecuted and enforced by the Trustee without the possession of any of the
Securities or the production thereof in any proceeding relating thereto, and any
such proceeding instituted by the Trustee shall be brought in its own name as
trustee of an express trust, and any recovery of judgment shall, after provision
for the payment of the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, be for the ratable benefit of
the Holders of the Securities in respect of which such judgment has been
recovered.
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SECTION 506. Application of Money Collected.
Subject to Article Eleven, any money collected by the Trustee pursuant to
this Article shall be applied in the following order, at the date or dates fixed
by the Trustee and, in case of the distribution of such money on account of
principal (or premium, if any) or interest, upon presentation of the Securities
and the notation thereon of the payment if only partially paid and upon
surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under Sections
503 and 607; and
SECOND: To the payment of the amounts then due and unpaid for
principal of (and premium, if any) and interest on the Securities in
respect of which or for the benefit of which such money has been collected,
ratably, without preference or priority of any kind, according to the
amounts due and payable on such Securities for principal (and premium, if
any) and interest, respectively; and
THIRD: The balance, if any, to the Company.
SECTION 507. Limitation on Suits.
No Holder of any Security shall have any right to institute any proceeding,
judicial or otherwise, with respect to this Indenture, or for the appointment of
a receiver or trustee, or for any other remedy hereunder, unless
(1) such Holder has previously given written notice to the Trustee of
a continuing Event of Default;
(2) the Holders of not less than 25% in principal amount of the
Outstanding Securities shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own name
as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice, request
and offer of indemnity has failed to institute any such proceeding; and
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(5) 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 Securities;
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Indenture to affect, disturb or prejudice the rights of any other Holders,
or to obtain or to seek to obtain priority or preference over any other Holders
or to enforce any right under this Indenture, except in the manner herein
provided and for the equal and ratable benefit of all the Holders.
SECTION 508. Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceeding to enforce any
right or remedy under this Indenture and such proceeding has been discontinued
or abandoned for any reason, or has been determined adversely to the Trustee or
to such Holder, then and in every such case, subject to any determination in
such proceeding, the Company, the Trustee and the Holders shall be restored
severally and respectively to their former positions hereunder and thereafter
all rights and remedies of the Trustee and the Holders shall continue as though
no such proceeding had been instituted.
SECTION 509. Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement or payment of
mutilated, destroyed, lost or stolen securities in the last paragraph of Section
306, no right or remedy herein conferred upon or reserved to the Trustee or to
the Holders is intended to be exclusive of any other right or remedy, and every
right and remedy shall, to the extent permitted by law, be cumulative and in
addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion or employment of any
right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
SECTION 510. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any Security to
exercise any right or remedy accruing upon any Event of Default shall impair any
such right or remedy or constitute a waiver of any such Event of Default or an
acquiescence therein. Every right and remedy given by this Article or by law to
the Trustee or to the Holders may be exercised from time to time, and as often
as may be deemed expedient, by the Trustee or by the Holders, as the case may
be.
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SECTION 511. Control by Holders.
The Holders of a majority in principal amount of the Outstanding Securities
shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee, provided that
(1) such direction shall not be in conflict with any rule of law or
with this Indenture;
(2) the Trustee may take any other action deemed proper by the Trustee
which is not inconsistent with such direction; and
(3) that (subject to the provisions of Section 601) the Trustee shall
have the right to decline to follow any such direction if the Trustee,
being advised by counsel, shall determine that the action or proceeding so
directed may not lawfully be taken, or if the Trustee in good faith shall
determine that the action or proceedings so directed might involve the
Trustee in personal liability or if the Trustee in good faith shall so
determine that the actions or forbearances specified in or pursuant to such
direction shall be unduly prejudicial to the interest of Holders not
joining in the giving of said direction, it being understood that (subject
to Section 601) the Trustee shall have no duty to ascertain whether or not
such actions or forbearances are unduly prejudicial to such Holders.
SECTION 512. Waiver of Past Defaults.
The Holders of not less than a majority in principal amount of the
Outstanding Securities may on behalf of the Holders of all the Securities waive
any past default hereunder and its consequences, except a default
(1) in the payment of the principal of (or premium, if any) or
interest on any Security, or
(2) in respect of a covenant or provision hereof which under Article
Nine cannot be modified or amended without the consent of the Holder of
each Outstanding Security affected.
Upon any such waiver, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured, for every purpose
of this Indenture; but no such waiver shall extend to any subsequent or other
default or impair any right consequent thereon.
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SECTION 513. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this
Indenture, or in any suit against the Trustee for any action taken, suffered or
omitted by it as Trustee, a court may require any party litigant in such suit to
file an undertaking to pay the costs of such suit, and may assess costs against
any such party litigant, in the manner and to the extent provided in the Trust
Indenture Act; provided that neither this Section nor the Trust Indenture Act
shall be deemed to authorize any court to require such an undertaking or to make
such an assessment in any suit instituted by the Company; and provided further
that the provisions of this Section shall not apply to any suit instituted by
such Trustee, to any suit instituted by any Holder, or group of Holders, holding
in the aggregate more than ten per centum (10%) in principal amount of the
Securities, or to any suit instituted by any Holder for the enforcement of the
payment of the principal of or interest on any Security, on or after the
respective due dates expressed in such Security.
SECTION 514. Waiver of Stay or Extension Laws.
The Company covenants (to the extent that it may lawfully do so) that it
will not at any time insist upon, or plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay or extension law wherever enacted,
now or at any time hereafter in force, which may affect the covenants or the
performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such law
and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
SECTION 515. Unconditional Right of Holders to Receive Principal, Premium and
Interest.
Notwithstanding any other provision in this Indenture, the Holder of any
Securities shall have the right, which is absolute and unconditional, to receive
payment of the principal of and any premium and any interest on such Securities
on the Stated Maturity expressed in such Securities and to institute suit for
the enforcement of any such payment, and such rights shall not be impaired
without the consent of such Holder.
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ARTICLE SIX
The Trustee
SECTION 601. Certain Duties and Responsibilities.
The duties and responsibilities of the Trustee shall be as provided by the
Trust Indenture Act. Notwithstanding the foregoing, no provision of this
Indenture shall require the Trustee to expend or risk its own funds or otherwise
incur any financial liability in the performance of any of its duties hereunder,
or in the exercise of any of its rights or powers, if it shall have reasonable
grounds for believing that repayment of such funds or adequate indemnity against
such risk or liability is not reasonably assured to it. Whether or not therein
expressly so provided, every provision of this Indenture relating to the conduct
or affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Section.
SECTION 602. Notice of Defaults.
The Trustee shall give the Holders notice of any default hereunder known to
the Trustee as and to the extent provided by the Trust Indenture Act; provided,
however, that in the case of any Event of Default of the character specified in
Section 501(5), (7) or (8), no such notice to Holders shall be given until at
least 30, 60 or 10 days, respectively, after the occurrence thereof. For the
purpose of this Section, the term "default" means any event which is, or after
notice or lapse of time or both would become, an Event of Default.
SECTION 603. Certain Rights of Trustee.
Subject to the provisions of Section 601:
(a) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document believed by it to be genuine and to have been signed or presented
by the proper party or parties;
(b) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order and any
resolution of the Board of Directors may be sufficiently evidenced by a
Board Resolution;
(c) whenever in the administration of this Indenture the Trustee shall
deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any
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action hereunder, the Trustee (unless other evidence be herein specifically
prescribed) may, in the absence of bad faith on its part, rely upon an
Officers' Certificate;
(d) before the Trustee acts or refrains from acting, the Trustee may
consult with counsel and the written advice of such counsel or any Opinion
of Counsel shall be full and complete authorization and protection in
respect of any action taken, suffered or omitted by it hereunder in good
faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction
of any of the Holders pursuant to this Indenture, unless such Holders shall
have offered to the Trustee reasonable security or indemnity against the
costs, expenses and liabilities which might be incurred by it in compliance
with such request or direction;
(f) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document, but the Trustee, in its discretion, may make such further inquiry
or investigation into such facts or matters as it may see fit, and, if the
Trustee shall determine to make such further inquiry or investigation, it
shall be entitled to examine the books, records and premises of the
Company, personally or by agent or attorney;
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by
it hereunder;
(h) the Trustee shall not be liable for any action taken or omitted by
it in good faith and with due care and believed by it to be authorized or
within the discretion, rights or powers conferred upon it by this
Indenture;
(i) the Trustee shall not be required to give any bond or surety in
respect of the performance of its powers and duties hereunder;
(j) the permissive rights of the Trustee to do things enumerated in
this Indenture shall not be construed as a duty and the Trustee shall not
be answerable for other than its negligence or willful misconduct; and
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(k) except for (i) a default under Sections 501(5) or (6) hereof, or
(ii) any other event of which the Trustee has "actual knowledge" and which
event, with the giving of notice or the passage of time or both, would
constitute an Event of Default under this Indenture, the Trustee shall not
be deemed to have notice of any default or event unless specifically
notified in writing of such event by the Company or the Holders of not less
than 25% in aggregate principal amount of the Securities Outstanding; as
used herein, the term "actual knowledge" means the actual fact or statement
of knowing, without any duty to make any investigation with regard thereto.
SECTION 604. Not Responsible for Recitals or Issuance of Securities.
The recitals contained herein and in the Securities, except the Trustee's
certificates of authentication, shall be taken as the statements of the Company,
and the Trustee assumes no responsibility for their correctness. The Trustee
makes no representations as to the validity or sufficiency of this Indenture or
of the Securities. The Trustee shall not be accountable for the use or
application by the Company of Securities or the proceeds thereof.
SECTION 605. May Hold Securities.
The Trustee, any Paying Agent, any Security Registrar or any other agent of
the Company, in its individual or any other capacity, may become the owner or
pledgee of Securities and, subject to Sections 608 and 613, may otherwise deal
with the Company with the same rights it would have if it were not Trustee,
Paying Agent, Security Registrar or such other agent.
SECTION 606. Money Held in Trust.
Money held by the Trustee in trust hereunder need not be segregated from
other funds except to the extent required by law. The Trustee shall be under no
liability for interest on any money received by it hereunder except as otherwise
agreed to in writing with the Company.
SECTION 607. Compensation and Reimbursement.
The Company agrees
(1) to pay to the Trustee from time to time, and the Trustee shall be
entitled to, reasonable compensation for all services rendered by it
hereunder (which compensation shall not be limited by any provision of law
in regard to the compensation of a trustee of an express trust);
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(2) except as otherwise expressly provided herein, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision
of this Indenture (including the reasonable compensation and the expenses
and disbursements of its agents and counsel), except any such expense,
disbursement or advance as may be attributable to its negligence or willful
misconduct;
(3) to indemnify the Trustee for, and to hold it harmless against, any
loss, liability or expense incurred without negligence or willful
misconduct on its part, arising out of or in connection with the acceptance
or administration of this trust, including the costs and expenses of
defending itself against or investigating any claim or liability in
connection with the exercise or performance of any of its powers or duties
hereunder;
(4) to treat as an administrative expense priority pursuant to 11
U.S.C. ss. 503, any expenses incurred by the Trustee or compensation for
services rendered to the Company by the Trustee after any Event of Default
as defined in Section 501; and
(5) the obligations of the Company under this Section to compensate
the Trustee, to pay or reimburse the Trustee for expenses, disbursements
and advances and to indemnify and hold harmless the Trustee shall
constitute General Obligations hereunder and shall survive the satisfaction
and discharge of this Indenture.
SECTION 608. Disqualification; Conflicting Interests.
If the Trustee has or shall acquire a conflicting interest within the
meaning of the Trust Indenture Act, the Trustee shall either eliminate such
interest or resign, to the extent and in the manner provided by, and subject to
the provisions of, the Trust Indenture Act and this Indenture.
SECTION 609. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be a Person
that is eligible pursuant to the Trust Indenture Act to act as such and has a
combined capital and surplus of at least $50,000,000. If such Person publishes
reports of condition at least annually, pursuant to law or to the requirements
of said supervising or examining authority, then for the purposes of this
Section, the combined capital and surplus of such Person shall be deemed to be
its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time the Trustee shall cease to be eligible in
accordance with the provisions of this Section, it shall resign immediately in
the manner and with the effect hereinafter specified in this Article.
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SECTION 610. Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee under Section 611.
(b) The Trustee may resign at any time by giving written notice thereof to
the Company. If an instrument of acceptance by a successor Trustee shall not
have been delivered to the Trustee within 30 days after the giving of such
notice of resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor Trustee.
(c) The Trustee may be removed at any time by Act of the Holders of a
majority in principal amount of the Outstanding Securities, delivered to the
Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with Section 608 after written
request therefor by the Company or by any Holder who has been a bona fide
Holder of a Security for at least six months, or
(2) the Trustee shall cease to be eligible under Section 609 and shall
fail to resign after written request therefor by the Company or by any such
Holder, or
(3) the Trustee shall become incapable of acting or shall be adjudged
a bankrupt or insolvent or a receiver of the Trustee or of its property
shall be appointed or any public officer shall take charge or control of
the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
then, in any such case, (i) the Company by a Board Resolution may remove the
Trustee, or (ii) subject to Section 513, any Holder who has been a bona fide
Holder of a Security for at least six months may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee.
(e) If the Trustee shall resign, be removed or become incapable of acting,
or if a vacancy shall occur in the office of Trustee for any cause, the Company,
by a Board Resolution, shall promptly appoint a successor Trustee. If, within 90
days after such resignation, removal or incapability, or the occurrence of such
vacancy, a successor Trustee shall be appointed by Act of the Holders of a
majority in principal amount of the Outstanding Securities delivered to the
Company
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and the retiring Trustee, the successor Trustee so appointed shall, forthwith
upon its acceptance of such appointment, become the successor Trustee and
supersede the successor Trustee appointed by the Company. If no successor
Trustee shall have been so appointed by the Company or the Holders and accepted
appointment in the manner hereinafter provided, any Holder who has been a bona
fide Holder of a Security for at least six months may, on behalf of himself
and-all others similarly situated, petition any court of competent jurisdiction
for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each removal of
the Trustee and each appointment of a successor Trustee to all Holders in the
manner provided in Section 106. Each notice shall include the name of the
successor Trustee and the address of its Corporate Trust Office.
SECTION 611. Acceptance of Appointment by Successor.
Every successor Trustee appointed hereunder shall execute, acknowledge and
deliver to the Company and to the retiring Trustee an instrument accepting such
appointment, and thereupon the resignation or removal of the retiring Trustee
shall become effective and such successor Trustee, without any further act, deed
or conveyance, shall become vested with all the rights, powers, trusts and
duties of the retiring Trustee; but, on request of the Company or the successor
Trustee, such retiring Trustee shall, upon payment of its charges, execute and
deliver an instrument transferring to such successor Trustee all the rights,
powers and trusts of the retiring Trustee and shall duly assign, transfer and
deliver to such successor Trustee all property and money held by such retiring
Trustee hereunder. Upon request of any such successor Trustee, the Company shall
execute any and all instruments for more fully and certainly vesting in and
confirming to such successor Trustee all such rights, powers and trusts.
No successor Trustee shall accept its appointment unless at the time of
such acceptance such successor Trustee shall be qualified and eligible under
this Article.
SECTION 612. Merger, Conversion, Consolidation or Succession to Business.
Any corporation into which the Trustee may be merged or converted or with
which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all the corporate trust business
of the Trustee, shall be the successor of the Trustee hereunder, provided such
corporation shall be otherwise qualified and eligible under this Article,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto. In case any Securities shall have been authenticated,
but not delivered, by the Trustee then in office, any successor by merger,
conversion or consolidation to such authenticating Trustee may adopt such
authentication
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and deliver the Securities so authenticated with the same effect as if such
successor Trustee had itself authenticated such Securities.
SECTION 613. Preferential Collection of Claims Against Company.
If and when the Trustee shall be or become a creditor of the Company (or
any other obligor upon the Securities), the Trustee shall be subject to the
provisions of the Trust Indenture Act regarding the collection of claims against
the Company (or any such other obligor).
SECTION 614. Appointment of Authenticating Agent.
The Trustee may appoint an Authenticating Agent or Agents which shall be
authorized to act on behalf of the Trustee to authenticate Securities issued
upon original issue and upon exchange, registration of transfer, or pursuant to
Section 306, and Securities so authenticated shall be entitled to the benefits
of this Indenture and shall be valid and obligatory for all purposes as if
authenticated by the Trustee hereunder. Whenever reference is made in this
Indenture to the authentication and delivery of Securities by the Trustee or the
Trustee's certificate of authentication, such references shall be deemed to
include authentication and delivery on behalf of the Trustee by an
Authenticating Agent and a certificate of authentication executed on behalf of
the Trustee by an Authenticating Agent. Each Authenticating Agent shall be
acceptable to the Company and shall at all times be a corporation organized and
doing business under the laws of the United States of America, any State thereof
or the District of Columbia, authorized under such laws to act as Authenticating
Agent, having a combined capital and surplus of not less than $50,000,000 and
subject to supervision or examination by Federal or State authority. If such
Authenticating Agent publishes reports of condition at least annually, pursuant
to law or to the requirements of said supervising or examining authority, then
for the purposes of this Section, the combined capital and surplus of such
Authenticating Agent shall be deemed to be its combined capital and surplus as
set forth in its most recent report of condition so published. If at any time an
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, such Authenticating Agent shall resign immediately
in the manner and with the effect specified in this Section.
Any corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such Authenticating Agent
shall be a party, or any corporation succeeding to the corporate agency or
corporate trust business of an Authenticating Agent, shall continue to be an
Authenticating Agent, provided such corporation shall be otherwise eligible
under this Section, without the execution or filing of any paper or any further
act on the part of the Trustee or the Authenticating Agent.
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An Authenticating Agent may resign at any time by giving written notice
thereof to the Trustee and to the Company. The Trustee may at any time terminate
the agency of an Authenticating Agent by giving written notice thereof to such
Authenticating Agent and to the Company. Upon receiving such a notice of
resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent which shall be acceptable to the Company and shall give notice of such
appointment to all Holders in the manner provided in Section 106. Any successor
Authenticating Agent upon acceptance of its appointment hereunder shall become
vested with all the rights, powers and duties of its predecessor hereunder, with
like effect as if originally named as an Authenticating Agent. No successor
authenticating Agent shall be appointed unless eligible under the provisions of
this Section.
The Trustee agrees to pay to each Authenticating Agent from time to time
reasonable compensation for its services under this Section, and the Trustee
shall be entitled to be reimbursed for such payments, subject to the provisions
of Section 607.
If an appointment is made pursuant to this Section, the Securities may have
endorsed thereon, in addition to the Trustee's certificate of authentication, an
alternative certificate of authentication in the following form:
"This is one of the Securities described in the within-mentioned Indenture.
By
------------------------
As Authenticating Agent
By
------------------------
Authorized Officer"
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ARTICLE SEVEN
Holders' Lists and Reports by Trustee and Company
SECTION 701. Company to Furnish Trustee Names and Addresses of Holders.
The Company will furnish or cause to be furnished to the Trustee
(a) quarterly, not more than 15 days after each Regular Record Date, a
list, in such form as the Trustee may reasonably require, of the names and
addresses of the Holders as of such Regular Record Date, and
(b) at such other times as the Trustee may request in writing, within 30
days after the receipt by the Company of any such request, a list of similar
form and content as of a date not more than 15 days prior to the time such list
is furnished;
excluding from any such list names and addresses received by the Trustee in its
capacity as Security Registrar.
SECTION 702. Preservation of Information; Communications to Holders.
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the Trustee as provided in Section 701 and the names and
addresses of Holders received by the Trustee in its capacity as Security
Registrar. The Trustee may destroy any list furnished to it as provided in
Section 701 upon receipt of a new list so furnished.
(b) The rights of Holders to communicate with other Holders with respect to
their rights under this Indenture or under the Securities, and the corresponding
rights and duties of the Trustee, shall be as provided by the Trust Indenture
Act.
(c) Every Holder of Securities, by receiving and holding the same, agrees
with the Company and the Trustee that neither the Company nor the Trustee nor
any agent of either of them shall be held accountable by reason of any
disclosure of information as to names and addresses of Holders made pursuant to
the Trust Indenture Act.
SECTION 703. Reports by Trustee.
The Trustee shall transmit to Holders such reports concerning the Trustee
and its actions under this Indenture as may be required pursuant to the Trust
Indenture Act at the times and in the manner provided pursuant thereto. At the
time of such transmission to Holders, a copy of each such report shall be filed
with each stock exchange upon which the securities are listed, and also with the
Commission.
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SECTION 704. Reports by Company.
The Company shall file with the Trustee and the Commission, and transmit to
the Holders, such information, documents and other reports, and such summaries
thereof, as may be required pursuant to the Trust Indenture Act at the times and
in the manner provided pursuant to such Act; and the Company shall file with the
Commission, and transmit to the Trustee and the Holders, such information,
documents or reports required to be filed with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act within 15 days after the same is so
required to be filed with the Commission. Notwithstanding that the Company may
not be required to remain subject to the reporting requirements of Sections 13
and 15(d) of the Exchange Act, the Company shall continue to file with the
Commission and provide the Trustee and Holders with the annual reports,
documents and other reports which are specified in Sections 13 and 15(d) of the
Exchange Act. The Company shall also comply with the other provisions of Section
314(a) of the Trust Indenture Act.
ARTICLE EIGHT
Consolidation, Merger, Conveyance, Transfer or Lease
SECTION 801. Company May Consolidate, Etc., Only on Certain Terms.
The Company shall not consolidate with or merge into any other Person or
convey, transfer or lease its properties and assets substantially as an entirety
to any Person, and the Company shall not permit any Person to consolidate with
or merge into the Company or convey, transfer or lease its properties and assets
substantially as an entirety to the Company, unless:
(1) in case the Company shall consolidate with or merge into another
Person or convey, transfer or lease its properties and assets substantially
as an entirety to any Person, the Person formed by such consolidation or
into which the Company is merged or the Person which acquires by conveyance
or transfer, or which leases, the properties and assets of the Company
substantially as an entirety shall be a corporation, partnership or trust,
shall be organized and validly existing under the laws of the United States
of America, any State thereof or the District of Columbia and shall
expressly assume, by an indenture supplemental hereto, executed and
delivered to the Trustee, in form satisfactory to the Trustee, the due and
punctual payment of the principal of (and premium, if any) and interest on
all the Securities and the performance or observance of every covenant of
this Indenture on the part of the Company to be performed or observed by
it; and
(2) immediately after giving effect to such transaction, no default or
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
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(3) the Company has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that such consolidation, merger,
conveyance, transfer or lease and, if a supplemental indenture is required
in connection with such transaction, such supplemental indenture comply
with this Article and that all conditions precedent herein provided for
relating to such transaction have been complied with.
SECTION 802. Successor Substituted.
Upon any consolidation of the Company with, or merger of the Company into,
any other Person or any conveyance, transfer or lease of the properties and
assets of the Company substantially as an entirety in accordance with Section
801, the successor Person formed by such consolidation or into which the Company
is merged or to which such conveyance, transfer or lease is made shall succeed
to, and be substituted for, and may exercise every right and power of, the
Company under this Indenture with the same effect as if such successor Person
had been named as the Company herein, and thereafter, except in the case of a
lease, the predecessor Person shall be relieved of all obligations and covenants
under this Indenture and the Securities.
ARTICLE NINE
Supplemental Indentures
SECTION 901. Supplemental Indentures Without Consent of Holders.
Without the consent of any Holders, the Company, when authorized by a Board
Resolution, and the Trustee, at any time and from time to time, may enter into
one or more indentures supplemental hereto, in form satisfactory to the Trustee,
for any of the following purposes:
(1) to evidence the succession of another Person to the Company and
the assumption by any such successor of the covenants of the Company herein
and in the Securities; or
(2) to add to the covenants of the Company for the benefit of the
Holders, or to provide collateral to secure the payment of the Securities,
or to surrender any right or power herein conferred upon the Company; or
(3) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee with respect to the Securities and to add
to or change any of the provisions of this Indenture as shall be necessary
to provide for or facilitate the administration of the trusts hereunder by
more than one Trustee; or
(4) to add any additional Events of Default; or
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(5) to cure any ambiguity, to correct or supplement any provision
herein which may be inconsistent with any other provision herein, or to
make any other provisions with respect to matters or questions arising
under this Indenture which shall not be inconsistent with the provisions of
this Indenture; provided that such action pursuant to this clause (5) shall
not adversely affect the interests of the Holders in any material respect;
or
(6) to comply with the requirements of the Commission in order to
effect or maintain the qualification of this Indenture under the Trust
Indenture Act.
Notwithstanding any provision in this Indenture or otherwise, the rights of
creditors in respect of General Obligations under this Indenture and otherwise
in respect of the Securities may, at any time and from time to time, be reduced
or eliminated by a supplemental indenture entered into by the Company and the
Trustee, which, supplemental indenture will not require the consent of the
Holders of Securities or any creditor in respect of General Obligations.
SECTION 902. Supplemental Indentures With Consent of Holders.
With the consent of the Holders of not less than 66 2/3% in principal
amount of the Outstanding Securities, by Act of said Holders delivered to the
Company and the Trustee, the Company, when authorized by a Board Resolution, and
the Trustee may enter into an indenture or indentures supplemental hereto for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of this Indenture or of modifying in any manner the rights
of the Holders under this Indenture; provided, however, that no such
supplemental indenture shall, without the consent of the Holder of each
Outstanding Security affected thereby,
(1) change the Stated Maturity of the principal of, or any installment
of interest on, any Security, or reduce the principal amount thereof or the
rate of interest thereon or any premium payable in respect thereof, or
change the place of payment where, or the coin or currency in which, any
Security or any premium or interest thereon is payable, or impair the right
to institute suit for the enforcement of any such payment on or after the
Stated Maturity thereof, or modify the provisions of this Indenture with
respect to the subordination of the Securities in a manner adverse to the
Holders, or
(2) reduce the percentage in principal amount of the Outstanding
Securities, the consent of whose Holders is required for any such
supplemental indenture, or the consent of whose Holders is required for any
waiver (of compliance with certain provisions of this Indenture or certain
defaults hereunder and their consequences) provided for in this Indenture,
or
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(3) modify any of the provisions of this Section or Section 512,
except to increase any such percentage or to provide that certain other
provisions of this Indenture cannot be modified or waived without the
consent of the Holder of each Outstanding Security affected thereby.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.
SECTION 903. Execution of Supplemental Indentures.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby of
the trusts created by this Indenture, the Trustee shall be entitled to receive,
and (subject to Section 601) shall be fully protected in relying upon, an
Opinion of Counsel stating that the execution of such supplemental indenture is
authorized or permitted by this Indenture. The Trustee may, but shall not be
obligated to, enter into any such supplemental indenture which affects the
Trustee's own rights, duties or immunities under this Indenture or otherwise.
SECTION 904. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article, this
Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Securities theretofore or thereafter authenticated and delivered hereunder
shall be bound thereby.
SECTION 905. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article shall
conform to the requirements of the Trust Indenture Act.
SECTION 906. Reference in Securities to Supplemental Indentures.
Securities authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may bear a notation in form
approved by the Trustee as to any matter provided for in such supplemental
indenture. If the Company shall so determine, new Securities so modified as to
conform, in the opinion of the Trustee and the Company, to any such supplemental
indenture may be prepared and executed by the Company and authenticated and
delivered by the Trustee in exchange for Outstanding Securities.
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ARTICLE TEN
Covenants
SECTION 1001. Payment of Principal, Premium and Interest.
The Company will duly and punctually pay the principal of (and premium, if
any) and interest on the Securities in accordance with the terms of the
Securities and this Indenture.
SECTION 1002. Maintenance of Office or Agency.
The Company will maintain in [_______, ________] an office or agency where
Securities may be presented or surrendered for payment, where Securities may be
surrendered for registration of transfer or exchange, and where notices and
demands to or upon the Company in respect of the Securities and this Indenture
may be served. The Company will give prompt written notice to the Trustee of the
location, and any change in the location, of such office or agency. If at any
time the Company shall fail to maintain any such required office or agency or
shall fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the Corporate Trust
Office of the Trustee, and the Company hereby appoints the Trustee as its agent
to receive all such presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other offices
or agencies (in or outside [_______, ________]) where the Securities may be
presented or surrendered for any or all such purposes and may from time to time
rescind such designations; provided, however, that no such designation or
rescission shall in any manner relieve the Company of its obligation to maintain
an office or agency in [_______, ________] for such purposes. The Company will
give prompt written notice to the Trustee of any such designation or rescission
and of any change in the location of any such other office or agency.
SECTION 1003. Money for Securities Payments to Be Held in Trust.
If the Company shall at any time act as its own Paying Agent, it will, on
or before each due date of the principal of (and premium, if any) or interest on
any of the Securities, segregate and hold in trust for the benefit of the
Persons entitled thereto a sum sufficient to pay the principal (and premium, if
any) or interest so becoming due until such sums shall be paid to such Persons
or otherwise disposed of as herein provided and will promptly notify the Trustee
of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents, it will, prior
to each due date of the principal of (and premium, if any) or interest on any
Securities, deposit with a paying Agent a sum sufficient to pay such amount,
such sum to be held as provided by the Trust Indenture Act, and (unless such
paying Agent is the Trustee) the Company will promptly notify the Trustee of its
action or failure so to act.
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The Company will cause each Paying Agent other than the Trustee to execute
and deliver to the Trustee an instrument in which such Paying Agent shall agree
with the Trustee, subject to the provisions of this Section, that such Paying
Agent will (i) comply with the provisions of the Trust Indenture Act applicable
to it as a Paying Agent and (ii) during the continuance of any default by the
Company (or any other obligor upon the Securities) in the making of any payment
in respect of the Securities, upon the written request of the Trustee, forthwith
pay to the Trustee all sums held in trust by such Paying Agent as such.
The Company may at any time, for the purpose of obtaining the satisfaction
and discharge of this Indenture or for any other purpose, pay, or by Company
Order direct any Paying Agent to pay, to the Trustee all sums held in trust by
the Company or such Paying Agent, such sums to be held by the Trustee upon the
same trusts as those upon which such sums were held by the Company or such
Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such
Paying Agent shall be released from all further liability with respect to such
money.
Any money deposited with the Trustee or any Paying Agent, or then held by
the Company, in trust for the payment of the principal of (and premium, if any)
or interest on any Security and remaining unclaimed for two years after such
principal (and premium, if any) or interest has become due and payable shall be
paid to the Company on Company Request, or (if then held by the Company) shall
be discharged from such trust; and the Holder of such Security shall thereafter,
as an unsecured general creditor, look only to the Company for payment thereof,
and all liability of the Trustee or such Paying Agent with respect to such trust
money, and all liability of the Company as trustee thereof, shall thereupon
cease; provided, however, that the Trustee or such Paying Agent, before being
required to make any such repayment, shall at the expense of the Company cause
to be published once, in a newspaper published in the English language,
customarily published an each Business Day and of general circulation in the
City of Bryan, Texas, notice that such money remains unclaimed and that, after a
date specified therein, which shall not be less than 30 days from the date of
such publication, any unclaimed balance of such money then remaining will be
repaid to the Company.
SECTION 1004. Statement by Officers as to Default.
The Company will deliver to the Trustee, within 120 days after the end of
each fiscal year of the Company ending after the date hereof, an Officers'
Certificate, stating whether or not to the best knowledge of the signers thereof
the Company is in default in the performance and observance of any of the terms,
provisions and conditions of this Indenture (without regard to any period of
grace or requirement of notice provided hereunder) and, if the Company shall be
in default, specifying all such defaults and the nature and status thereof of
which they may have knowledge.
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SECTION 1005. Existence.
Subject to Article Eight, the Company will do or cause to be done all
things necessary to preserve and keep in full force and effect its existence and
that of any Major Depository Institution Subsidiary, rights (charter and
statutory) and franchises of the Company and any Major Depository Institution
Subsidiary; provided, however, that the Company shall not be required to
preserve any such right or franchise if the Board of Directors shall determine
that the preservation thereof is no longer desirable in the conduct of the
business of the Company and that the loss thereof is not disadvantageous in any
material respect to the Holders.
SECTION 1006. Limitations on Dividends, Redemptions, Etc.
The Company will not (1) declare or pay any dividend or make any other
distribution on any Junior Securities of the Company, except dividends or
distributions payable in Junior Securities of the Company, or (2) purchase,
redeem or otherwise acquire or retire for value any Junior Securities of the
Company, except Junior Securities acquired upon conversion thereof into other
Junior Securities of the Company, or (3) permit a Subsidiary to purchase, redeem
or otherwise acquire or retire for value any Junior Securities of the Company,
if, upon giving effect to such dividend, distribution, purchase, redemption or
other acquisition, a default in the payment of any interest upon any Security
when it becomes due and payable or a default in the payment of the principal of
(or premium, if any, on) any Security at its Maturity shall have occurred and be
continuing.
SECTION 1007. Payment of Taxes and Other Claims.
The Company will pay or discharge or cause to be paid or discharged, before
the same shall become delinquent, (1) all taxes, assessments and governmental
charges levied or imposed upon the Company or any Subsidiary or upon the income,
profits or property of the Company or any Subsidiary, and (2) all lawful claims
for labor, materials and supplies which, if unpaid, might by law become a lien
upon the property of the Company or any Subsidiary; provided, however, that the
Company shall not be required to pay or discharge or cause to be paid or
discharged any such tax, assessment, charge or claim whose amount, applicability
or validity is being contested in good faith by appropriate proceedings.
SECTION 1008. Maintenance of Properties.
The Company will cause all properties used or useful in the conduct of its
business or the business of any Subsidiary to be maintained and kept in good
condition, repair and working order and supplied with all necessary equipment
and will cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof, all as in the judgment of the Company may
be necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times; provided, however, that
nothing in this Section shall prevent the Company from discontinuing the
operation or maintenance of any of such properties if such discontinuance is, in
the judgment of the Company, desirable in the conduct of its business or the
business of any Subsidiary and not disadvantageous in any material respect to
the Holders.
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SECTION 1009. Waiver of Certain Covenants.
The Company may, except as otherwise required by law, omit in any
particular instance to comply with any covenant or condition set forth in
Sections 1007 and 1008, if before or after the time for such compliance the
Holders of at least a majority in principal amount of the Debentures at the time
Outstanding shall, by Act of such Holders, either waive such compliance in such
instance or generally waive compliance with such covenant or condition, but no
such waiver shall extend to or affect such covenant or condition except to the
extent so expressly waived and, until such waiver shall become effective, the
obligations of the Company and the duties of the Trustee in respect of any such
covenant or condition shall remain in full force and effect.
SECTION 1010. Maintenance of Status of Subsidiaries as Insured Depository
Institutions.
The Company shall 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 depsitory institution (including First Federal Savings Bank, Bryan, Texas) 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 inerests in employee benefit
plans that are not entitled to "pass-through" insurance under 12 U.S.C. Section
1821(a)(1)(D).
ARTICLE ELEVEN
Subordination of Securities
SECTION 1101. Securities Subordinate to Senior Indebtedness.
The Company covenants and agrees, and each Holder of a Security, by his
acceptance thereof, likewise covenants and agrees, that, to the extent and in
the manner hereinafter set forth in this Article (subject to the provisions of
Article Four), the indebtedness represented by the Securities and the payment of
the principal of (and premium, if any) and interest on each and all of the
Securities are hereby expressly made subordinate and subject in right of payment
to the prior payment in full of all Senior Indebtedness.
SECTION 1102. Payment Over of Proceeds Upon Dissolution, Etc.
In the event of (a) any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, reorganization or other similar case or proceeding in
connection therewith, relative to the Company or to its creditors, as such, or
to its assets, or (b) any liquidation, dissolution or other winding up of the
Company, whether voluntary or involuntary and whether or not involving
insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or
any other marshalling of assets and liabilities of the Company, then and in any
such event specified in (a), (b) or (c) above (each such event, if any, herein
sometimes referred to as a "Proceeding") the holders of Senior Indebtedness
shall be entitled
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to receive payment in full of all amounts due or to become due on or in respect
of all Senior Indebtedness, or provision shall be made for such payment in cash
or cash equivalents or otherwise in a manner satisfactory to the holders of
Senior Indebtedness, before the Holders of the Securities are entitled to
receive any payment or distribution of any kind or character, whether in cash,
property or securities, on account of principal of (or premium, if any) or
interest on the Securities or on account of any purchase or other acquisition of
Securities by the Company or any Subsidiary of the Company (all such payments,
distributions, purchases and acquisitions herein referred to, individually and
collectively, as a "Securities Payment"), and to that end the holders of all
Senior Indebtedness shall be entitled to receive, for application to the payment
thereof, any Securities Payment which may be payable or deliverable in respect
of the Securities in any such Proceeding.
In the event that, notwithstanding the foregoing provisions of this
Section, the Trustee or the Holder of any Security shall have received any
Securities Payment before all Senior Indebtedness is paid in full or payment
thereof provided for in cash or cash equivalents or otherwise in a manner
satisfactory to the holders of Senior Indebtedness, and if such fact shall, at
or prior to the time of such Securities Payment, have been made known to the
Trustee or, as the case may be, such Holder, then and in such event such
Securities Payment shall be paid over or delivered forthwith to the trustee in
bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other
Person making payment or distribution of assets of the Company for application
to the payment of all Senior Indebtedness remaining unpaid, to the extent
necessary to pay all Senior Indebtedness in full, after giving effect to any
concurrent payment or distribution to or for the holders of Senior Indebtedness.
For purposes of this Article only, the words "any payment or distribution
of any kind or character, whether in cash, property or securities" shall not be
deemed to include a payment or distribution of capital stock or securities of
the Company provided for by a plan of reorganization or readjustment authorized
by an order or decree of a court of competent jurisdiction in a reorganization
proceeding under any applicable bankruptcy law or of any other corporation
provided for by such plan of reorganization or readjustment, which stock or
securities are subordinated in right of payment to all then outstanding Senior
Indebtedness to substantially the same extent as, or to a greater extent than,
the Securities are so subordinated as provided in this Article. The
consolidation of the Company with, or the merger of the Company into, another
Person or the liquidation or dissolution or the Company following the conveyance
or transfer of all or substantially all of its properties and assets as an
entirety to another Person upon the terms and conditions set forth in Article
Eight shall not be deemed a Proceeding for the purposes of this Section if the
Person formed by such consolidation or into which the Company is merged or the
Person which acquires by conveyance or transfer such properties and assets as an
entirety, as the case may be, shall, as a part of such consolidation, merger,
conveyance or transfer, comply with the conditions set forth in Article Eight.
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SECTION 1103. Prior Payment to Senior Indebtedness Upon Acceleration of
Securities.
In the event that any Securities are declared due and payable before their
Stated Maturity, then and in such event the holders of the Senior Indebtedness
outstanding at the time such Securities so become due and payable shall be
entitled to receive payment in full of all amounts due on or in respect of all
Senior Indebtedness, or provision shall be made for such payment in cash or cash
equivalents or otherwise in a manner satisfactory to the holders of such Senior
Indebtedness, before the Holders of the Securities are entitled to receive any
Securities Payment.
In the event that, notwithstanding the foregoing, the Company shall make
any Securities Payment to the Trustee or any Holder prohibited by the foregoing
provisions of this Section, and if such fact shall, at or prior to the time of
such Securities Payment, have been made known to the Trustee by delivering to
the Trustee the notice required by Section 1110 (unless the Trustee otherwise
has actual knowledge) or, as the case may be, such Holder, then and in such
event such Securities Payment shall be paid over and delivered forthwith to the
Company.
The provisions of this Section shall not apply to any Securities Payment
with respect to which Section 1102 would be applicable.
SECTION 1104. No Payment When Senior Indebtedness in Default.
In the event and during the continuation of any default in the payment of
principal of (or premium, if any) or interest on any Senior Indebtedness beyond
any applicable grace period with respect thereto, or in the event that any event
of default with respect to any Senior Indebtedness shall have occurred and be
continuing and shall have resulted in such Senior Indebtedness becoming or being
declared due and payable prior to the date on which it would otherwise have
become due and payable, unless and until such event of default shall have been
cured or waived or shall have ceased to exist and such acceleration shall have
been rescinded or annulled, or in the event any judicial proceeding shall be
pending with respect to any such default in payment or event of default, then no
Securities Payment shall be made.
In the event that, notwithstanding the foregoing, the Company shall make
any Securities Payment to the Trustee or any Holder prohibited by the foregoing
provisions of this Section, and if such fact shall, at or prior to the time of
such Securities Payment, have been made known to the Trustee or, as the case may
be, such Holder, then and in such event such Securities Payment shall be paid
over and delivered forthwith to the Company.
The provisions of this Section shall not apply to any Securities Payment
with respect to which Section 1102 would be applicable.
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SECTION 1105. Payment Permitted If No Default.
Nothing contained in this Article or elsewhere in this Indenture or in any
of the Securities shall prevent (a) the Company, at any time except during the
pendency of any Proceeding referred to in Section 1102 or under the conditions
described in Section 1103 or 1104, from making Securities Payments, or (b) the
application by the Trustee of any money deposited with it hereunder to
Securities Payments or the retention of such Securities Payment by the Holders,
if, at the time of such application by the Trustee, it did not have knowledge
that such Securities Payment would have been prohibited by the provisions of
this Article.
SECTION 1106. Subrogation to Rights of Holders of Senior Indebtedness.
Subject to the payment in full of all amounts due or to become due on or in
respect of Senior Indebtedness, or the provision for such payment in cash or
cash equivalents or otherwise in a manner satisfactory to the holders of Senior
Indebtedness, the Holders of the Securities shall be subrogated to the extent of
the payments or distributions made to the holders of such Senior Indebtedness
pursuant to the provisions of this Article (equally and ratably with the holders
of all indebtedness of the Company which by its express terms is subordinated to
indebtedness of the Company to substantially the same extent as the Securities
are subordinated and is entitled to like rights of subrogation) to the rights of
the holders of such Senior Indebtedness to receive payments and distributions of
cash, property and securities applicable to the Senior Indebtedness until the
principal of (and premium, if any) and interest on the Securities shall be paid
in full. For purposes of such subrogation, no payments or distributions to the
holders of the Senior Indebtedness of any cash, property or securities to which
the Holders of the Securities or the Trustee would be entitled except for the
provisions of this Article, and no payments over pursuant to the provisions of
this Article to the holders of Senior Indebtedness by Holders of the Securities
or the Trustee, shall, as among the Company, its creditors other than holders of
Senior Indebtedness and the Holders of the Securities, be deemed to be a payment
or distribution by the Company to or on account of the Senior Indebtedness.
SECTION 1107. Provisions Solely to Define Relative Rights.
The provisions of this Article are and are intended solely for the purpose
of defining the relative rights of the Holders on the one hand and the holders
of Senior Indebtedness (and, in the case of Section 1116, the creditors in
respect of General Obligations) on the other hand. Nothing contained in this
Article or elsewhere in this Indenture or in the Securities is intended to or
shall (a) impair, as among the Company, its creditors other than holders of
Senior Indebtedness and the Holders of the Securities, the obligation of the
Company, which is absolute and unconditional and which, subject to the rights
under this Article of the holders of Senior Indebtedness (and the rights under
Section 1116 of creditors in respect of General Obligations), is intended to
rank equally with all other general obligations of the Company, to pay to the
Holders of the Securities the principal of (and premium, if any) and interest on
the Securities as and when the same shall become due and payable in accordance
with their terms; or (b) affect the relative rights against the Company of the
Holders of the Securities and creditors
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of the Company other than the holders of Senior Indebtedness; or (c) prevent the
Trustee or the Holder of any Security from exercising all remedies otherwise
permitted by applicable law upon default under this Indenture, subject to the
rights, if any, under this Article of the holders of Senior Indebtedness (and
under Section 1116 of creditors in respect of General Obligations) to receive
cash, property and securities otherwise payable or deliverable to the Trustee or
such Holder.
SECTION 1108. Trustee to Effectuate Subordination and Payment Provisions.
Each Holder of a Security by his acceptance thereof authorizes and directs
the Trustee on his behalf to take such action as may be necessary or appropriate
to effectuate the subordination and payment provisions provided in this Article
and appoints the Trustee his attorney-in-fact for any and all such purposes.
SECTION 1109. No Waiver of Subordination Provisions.
No right of any present or future holder of any Senior Indebtedness to
enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act, in good faith, by any such holder, or by any
noncompliance by the Company with the terms, provisions and covenants of this
Indenture, regardless of any knowledge thereof any such holder may have or be
otherwise charged with.
Without in any way limiting the generality of the foregoing paragraph, the
holders of Senior Indebtedness may, at any time and from time to time, without
the consent of or notice to the Trustee or the Holders of the Securities,
without incurring responsibility to the Holders of the Securities and without
impairing or releasing the subordination provided in this Article or the
obligations hereunder of the Holders of the Securities to the holders of Senior
Indebtedness, do any one or more of the following: (i) change the manner, place
or terms of payment or extend the time of payment of, or renew or alter, Senior
Indebtedness, or otherwise amend or supplement in any manner Senior Indebtedness
or any instrument evidencing the same or any agreement under which Senior
Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with
any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii)
release any Person liable in any manner for the collection of Senior
Indebtedness; and (iv) exercise or refrain from exercising any rights against
the Company and any other Person.
SECTION 1110. Notice to Trustee.
The Company shall give prompt written notice to the Trustee of any fact
known to the Company which would prohibit the making of any payment to or by the
Trustee in respect of the Securities. Notwithstanding the provisions of this
Article or any other provision of this Indenture, the Trustee shall not be
charged with knowledge of the existence of any facts which would prohibit the
making of any payment to or by the Trustee in respect of the Securities, unless
and until the Trustee shall have received written notice thereof from the
Company or a holder of Senior Indebtedness or from any trustee therefor (or from
any creditor in respect of General Obligations); and, prior to the receipt of
any such written notice, the Trustee, subject to the
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<PAGE>
provisions of Section 601, shall be entitled in all respects to assume that no
such facts exist; provided, however, that if the Trustee shall not have received
the notice provided for in this Section at least two Business Days prior to the
date upon which by the terms hereof any money may become payable for any purpose
(including, without limitation, the payment of the principal of (and premium, if
any) or interest on, any Security), then, anything herein contained to the
contrary notwithstanding, the Trustee shall have full power and authority to
receive such money and to apply the same to the purpose for which such money was
received and shall not be affected by any notice to the contrary which may be
received by it within two Business Days prior to such date.
Subject to the provisions of Section 601, the Trustee shall be entitled to
rely on the delivery to it of a written notice by a Person representing himself
to be a holder of Senior Indebtedness or a trustee therefor (or a creditor in
respect of General Obligations) to establish that such notice has been given by
a holder of Senior Indebtedness or a trustee therefor (or a creditor in respect
of General Obligations). In the event that the Trustee determines in good faith
that further evidence is required with respect to the right of any Person as a
holder of Senior Indebtedness (or a creditor in respect of General Obligations)
to participate in any payment or distribution pursuant to this Article, the
Trustee may request such Person to furnish evidence to the reasonable
satisfaction of the Trustee as to the amount of Senior Indebtedness (or General
Obligations) held by such Person, the extent to which such person is entitled to
participate in such payment or distribution and any other facts pertinent to the
rights of such Person under this Article, and if such evidence is not furnished,
the Trustee may defer any payment to such Person pending judicial determination
as to the right of such Person to receive such payment.
SECTION 1111. Reliance on Judicial Order or Certificate of Liquidating Agent.
Upon any payment or distribution of assets of the Company referred to in
this Article, the Trustee, subject to the provisions of Section 601, and the
Holders of the Securities shall be entitled to rely upon any order or decree
entered by any court of competent jurisdiction in which such Proceeding is
pending, or a certificate of the trustee in bankruptcy, receiver, liquidating
trustee, custodian, assignee for the benefit of creditors, agent or other Person
making such payment or distribution, delivered to the Trustee or to the Holders
of Securities, for the purpose of ascertaining the Persons entitled to
participate in such payment or distribution, the holders of the Senior
Indebtedness and other indebtedness of the Company (and the creditors in respect
of General Obligations), the amount thereof or payable thereon, the amount or
amounts paid or distributed thereon and all other facts pertinent thereto or to
this Article.
SECTION 1112. Trustee Not Fiduciary for Holders of Senior Indebtedness (or
Creditors in Respect of General Obligations).
The Trustee shall not be deemed to owe any fiduciary duty to the holders of
Senior Indebtedness (or creditors in respect of General Obligations) and it
undertakes to perform or observe only such of its covenants and obligations as
are specifically set forth in this
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<PAGE>
Article, and no implied covenants or obligations with respect to the Senior
Indebtedness shall be read into this Indenture against the Trustee. The Trustee
shall not be liable to any such holders (or creditors in respect of General
Obligations) if it shall in good faith mistakenly pay over or distribute to
Holders of Securities or to the Company or to any other Person cash, property or
securities to which any holders of Senior Indebtedness (or creditors in respect
of General Obligations) shall be entitled by virtue of this Article or
otherwise.
SECTION 1113. Rights of Trustee as Holder of Senior Indebtedness (or Creditor);
Preservation of Trustee's Rights.
The Trustee in its individual capacity shall be entitled to all the rights
set forth in this Article with respect to any Senior Indebtedness which may at
any time be held by it (and with respect to any General Obligations owed to the
Trustee as a creditor), to the same extent as any other holder of Senior
Indebtedness (or creditors in respect of General Obligations), and nothing in
this Indenture shall deprive the Trustee of any of its rights as such holder (or
creditor in respect of General Obligations).
Nothing in this Article shall apply to claims of, or payments to, the
Trustee under or pursuant to Section 607.
SECTION 1114. Article Applicable to Paying Agents.
In case at any time any Paying Agent other than the Trustee shall have been
appointed by the Company and be then acting hereunder, the term "Trustee" as
used in this Article shall in such case (unless the context otherwise requires)
be construed as extending to and including such Paying Agent within its meaning
as fully for all intents and purposes as if such Paying Agent were named in this
Article in addition to or in place of the Trustee; provided, however, that
Section 1113 shall not apply to the Company or any Affiliate of the Company if
it or such Affiliate acts as Paying Agent.
SECTION 1115. Payment of Proceeds in Certain Cases.
(a) Upon the occurrence of any Proceeding referred to in Section 1102, the
provisions of that Section shall be given effect to determine the amount of
cash, property or securities which may be payable or deliverable as between the
holders of Senior Indebtedness, on the one hand, and the Holders of Securities,
on the other hand.
(b) If, after giving effect to the provisions of Section 1102 and Section
1107, any amount of cash, property or securities shall be available for payment
or distribution in respect of the Securities ("Excess Proceeds"), and any
creditors in respect of General Obligations shall not have 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 (ratably with any
amount of cash, property or securities available for payment or distribution in
respect of any other indebtedness of the Company that by its express terms
provides for the payment over of amounts corresponding to Excess Proceeds to
creditors in respect of General Obligations) to pay or provide for the payment
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<PAGE>
of the General Obligations remaining unpaid, to the extent necessary to pay all
General Obligations in full, after giving effect to any concurrent payment or
distribution to or for creditors in respect of General obligations. Any Excess
Proceeds remaining after the payment (or provision for payment) in full of all
General Obligations shall be available for payment or distribution in respect of
the Securities.
(c) In the event that, notwithstanding the foregoing provisions of
subsection (b) of this Section, the Trustee or Holder of any Security shall have
received any Securities Payment before all General Obligations are paid in full
or payment thereof duly provided for, and if such fact shall, at or prior to the
time of such payment or distribution have been made known to the Trustee or, as
the case may be, such Holder, then and in such event, subject to any obligation
that the Trustee or such Holder may have pursuant to Section 1102, such
Securities Payment shall be paid over or delivered forthwith to the trustee in
bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other
Person making payment or distribution of assets of the Company for payment in
accordance with subsection (b) of this section.
(d) Subject to the payment in full of all General Obligations, the Holders
of the Securities shall be subrogated (equally and ratably with the holders of
all indebtedness of the Company that by its express terms provides for the
payment over of amounts corresponding to Excess Proceeds to creditors in respect
of General Obligations and is entitled to like rights of subrogation) to the
rights of the creditors in respect of General Obligations to receive payments
and distributions of cash, property and securities applicable to the General
Obligations until the principal of and interest on the Securities shall be paid
in full. For purposes of such subrogation, no payments or distributions to
creditors in respect of General Obligations of any cash, property or securities
to which Holders of the Securities or the Trustee would be entitled except for
the provisions of this Section, and no payments over pursuant to the provisions
of this Section to creditors in respect of General Obligations by Holders of
Securities or the Trustee, shall, as among the Company, its creditors other than
creditors in respect of General Obligations and the Holders of Securities be
deemed to be a payment or distribution by the Company to or on account of the
General Obligations.
(e) The provisions of subsections (b), (c) and (d) of this Section are and
are intended solely for the purpose of defining the relative rights of the
Holders of the Securities, on the one hand, and the creditors in respect of
General Obligations, on the other hand, after giving effect to the rights of the
holders of Senior Indebtedness, as provided in this Article. Nothing contained
in subsections (b), (c) and (d) of this Section is intended to or shall affect
the relative rights against the Company of the Holders of the Securities and (1)
the holders of Senior Indebtedness or (2) other creditors of the Company other
than creditors in respect of General Obligations.
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<PAGE>
ARTICLE TWELVE
Miscellaneous
SECTION 1201. Rules by Trustee, Paying Agent and Registrar. The Trustee may
make reasonable rules for action by or a meeting of Holders, and any Registrar
or Paying Agent may make reasonable rules for their respective functions;
provided that no such rule shall conflict with the terms of this Indenture or
the Trust Indenture Act.
SECTION 1202. Counterparts. This Indenture may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
SECTION 1203. Further Instruments and Acts. Upon requrest of the Trustee,
the Company will execute and deliver such further instruments and do such
further acts as may be reasonably necessary or porper to carry out more
effectively the purposes of this Indenture.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
THE BRYAN-COLLEGE STATION COMPANY
By
------------------------------
Attest:
- ---------------------
[TRUSTEE]
By
------------------------------
Attest:
- ---------------------
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<PAGE>
STATE OF TEXAS ) ss.:
COUNTY OF _________ )
On ________________, before me, ____________, a Notary Public in and for
the State of Texas, personally appeared , the of the corporations described in
and which executed the foregoing instrument, personally known to me (or proved
to me on the basis of satisfactory evidence) to be the person whose name is
subscribed to the foregoing instrument, and acknowledged to me that he or she
executed the within instrument in his or her authorized capacity and that, by
his or her signature on the foregoing instrument, the person or entity upon
behalf of which he or she acted executed the foregoing instrument.
WITNESS my hand and official seal.
Signature
STATE OF _____________) ss.:
COUNTY OF ____________)
On , 1997, before me, , a Notary Public in and for the State of Illinois,
personally appeared , one of the corporations described in and which executed
the foregoing instrument, personally known to me (or proved to me on the basis
of satisfactory evidence) to be the person whose name is subscribed to the
foregoing instrument, and acknowledged to me that he or she executed the within
instrument in his or her authorized capacity and that, by his or her signature
on the foregoing instrument, the person or entity upon behalf of which he or she
acted executed the foregoing instrument.
WITNESS my hand and official seal.
Signature (Seal)
------------------------------
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ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement") is entered into and effective as
of the __th day of _______, 1997, by and between The Bryan-College Station
Financial Holding Company, a Delaware corporation (the "Company"), The First
National Bank of Bryan (the "Escrow Agent"), and Hoefer & Arnett, Incorporated
(the "Marketing Agent").
WITNESSETH:
WHEREAS, the Company proposes to offer and sell (the "Offering") up to
$2,000,000 in Shares of common stock par value $.01 per share (the "Shares"),
and up to $3,700,000 in Units (the "Units", and the Shares and Units
collectively, the "Securities") to investors at $10.00 per Share and $1000.00
per Unit pursuant to a public offering; and
WHEREAS, the Company has agreed that (i) the subscription price paid by
subscribers will be promptly refunded to them if less than $1,500,000 in Shares
and $3,400,000 in Units have been sold by ____ _, 1997 (the "Scheduled
Termination Date"), even though the Company may elect to extend such termination
date (the "Extended Termination Date"); and (ii) in the event at least
$1,500,000 of Shares and $3,400,000 in Units are sold prior to the Scheduled
Termination Date, then all or part of the remaining Securities may be sold
thereafter but no later than the Extended Termination Date; and
WHEREAS, the Company desires to establish an escrow for such funds, and the
Escrow Agent is willing to serve as Escrow Agent upon the terms and conditions
herein set forth.
NOW, THEREFORE, in consideration of the promises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged by the parties hereto, the parties covenant and agree as follows:
1. Deposit with Escrow Agent.
(a) The Escrow Agent agrees that it will from time to time accept
as Escrow Agent subscription funds for the Securities (the "Escrowed
Funds") received by the Company or the Marketing Agent from
subscribers or broker-dealers representing the subscribers. All checks
shall be made payable to the Escrow Agent which will be collected by
the Escrow Agent. In the event any check does not clear normal banking
channels in due course, the Escrow Agent will promptly notify the
Company. Any check which does not clear normal banking channels and is
returned by the drawer's bank to Escrow Agent will be promptly turned
over to the Company along with all other subscription documents
relating to such check. Any check received that is made payable to a
party other than the Escrow Agent shall be returned to the Company for
return to the proper party. The Company in its sole and absolute
discretion may reject any subscription for Securities for any reason
prior to the release of funds in the Escrow Account to the
<PAGE>
Company, in whole or in part, by the Escrow Agent and upon such
rejection it shall notify and instruct the Escrow Agent in writing to
return the Escrowed Funds by check made payable to the subscriber. Any
investment earnings earned on these rejected subscription Securities
will be paid to the subscriber when the funds are returned.
(b) Subscription agreements for the Securities shall be reviewed
for accuracy by the Company or the Marketing Agent and, immediately
thereafter, the Company shall deliver to the Escrow Agent the
following information: (i) the name and address of the subscriber;
(ii) the number of Securities subscribed for by such subscriber; (iii)
the subscription price paid by such subscriber; (iv) the subscriber's
tax identification number certified by such subscriber; and (v) a copy
of the stock order form.
2. Investment of Escrowed Funds. Upon receipt of each check by the Escrow
Agent, the Escrow Agent shall deposit the funds of such check in
interest bearing savings accounts, in short term certificates of
deposit issued by a bank or other short-term securities issued or
guaranteed by the United States government, as the Escrow Agent shall
in its sole and absolute discretion determine. Interest shall start
accruing on such funds as soon as such funds would be deemed to be
available for access under applicable banking laws and pursuant to the
Escrow Agent's own banking policies. The Escrow Agent shall always be
obligated to invest the funds only in instruments fully guaranteed by
the United States Government.
3. Distribution of Escrowed Funds. The Escrow Agent shall distribute the
Escrowed Funds in the amounts, at the time, and upon the conditions
hereinafter set forth in this Agreement.
(a) If at any time on or prior to the Extended Termination Date,
$1,500,000 in Shares and $3,400,000 in Units have been subscribed to
and accepted by the Company and such subscriptions shall not have been
properly rescinded, then upon the happening of such event and
subsequent written notice from the President of the Company requesting
distribution of such funds to the Company, the Escrow Agent shall
deliver the Escrowed Funds to the Company to the extent such Escrowed
Funds are collected funds. (Such date hereinafter is referred to as
the "Initial Closing Date".) In the event any portion of the Escrowed
Funds are not collected funds, then the Escrow Agent shall notify the
Company of such fact and shall distribute such funds to the Company
only after such funds become collected funds. For purposes of this
Agreement, "collected funds" shall mean all funds received by the
Escrow Agent which have cleared normal banking channels. An affidavit
or written certification from the President of the Company stating
that at least $1,500,000 in Shares and $3,400,000 in Units have been
timely sold and accepted and the receipt by the Escrow Agent of at
least $4,900,000 in collected funds together shall constitute
sufficient evidence for the purpose of this Agreement that such events
have occurred. In any event, the Escrow Agent shall
2
<PAGE>
deliver not less than $4,900,000 in collected funds to the Company,
except as expressly provided otherwise in Paragraph 3(b) hereof. All
investment earnings earned on the Escrowed Funds as calculated
pursuant to Paragraph 4 below will be delivered by the Escrow Agent to
the respective subscribers within thirty (30) days of the delivery of
the Escrowed Funds to the Company.
(b) If the Escrowed Funds do not, on or prior to the Extended
Termination Date, become deliverable pursuant to Paragraph 3(a) or the
President of the Company terminates the offering at any time prior to
the Extended Termination Date and such officer delivers written notice
to the Escrow Agent of such termination (the "Termination Notice"),
the Escrow Agent shall return the Escrowed Funds which are collected
funds to the respective subscribers in amounts equal to the
subscription amount theretofore paid by each of them, together with
their share of investment earnings. If the Escrowed Funds do not, on
or prior to the Scheduled Termination Date, become deliverable
pursuant to Paragraph 3(a), then upon the occurrence of the Scheduled
Termination Date and subsequent written notice from the President of
the Company requesting distribution of all or certain portions of the
Escrowed Funds (the "Rescission Notice"), the Escrow Agent shall
return such Escrowed Funds which are collected funds as directed in
writing by the Rescission Notice to the respective subscribers in
amounts equal to the subscription amount theretofore paid by each of
them, together with investment earnings calculated as described in
Paragraph 4. All uncleared checks representing Escrowed Funds which
are not collected funds as of the Extended Termination Date shall be
collected by the Escrow Agent, and together with all related
subscription documents thereof shall be delivered to the Company by
the Escrow Agent, unless the Escrow Agent is otherwise specifically
directed in writing by the Company.
(c) If after the Initial Closing Date, but on or before the
Extended Termination Date, the Escrow Agent receives Escrowed Funds
attributable to one or more of the remaining Securities and subsequent
written notice from the President of the Company requesting
distribution of such funds to the Company, then the Escrow Agent shall
deliver such Escrowed Funds only to the extent such Escrowed Funds are
collected funds and in accordance with the instructions set forth in
such notice. All investment earnings earned on the Escrowed Funds as
calculated pursuant to Paragraph 4 will be delivered by the Escrow
Agent to the respective subscribers within thirty (30) days of the
delivery of the Escrowed Funds to the Company.
(4) Distribution of Interest. If the Escrowed Funds become deliverable to
the Company or the respective subscribers pursuant to Paragraphs 3(a),
3(b) or 3(c) above, as may be applicable, the Escrow Agent shall
compute and distribute to the appropriate entity or persons as
required and directed in accordance with
3
<PAGE>
Paragraphs 3(a), 3(b) or 3(c) above a pro rata share of the investment
earnings of the Escrowed Funds. Each subscriber's pro rata share of
investment earnings shall be computed based on the amount of funds and
time invested relative to the total amount of funds collected.
Such pro rata share of investment earnings shall be distributed to the
appropriate entity or persons (with the return of subscription
amounts, if applicable), and all income tax consequences arising as a
result of investments made pursuant to this Agreement shall be
reported by the Escrow Agent in accordance with state and federal
income tax laws. Until distribution, any investment earnings on the
Escrowed Funds will be reinvested by the Escrow Agent.
5. Liability of Escrow Agent.
(a) In performing any of its duties under this Agreement, or upon
the claimed failure to perform its duties hereunder, the Escrow Agent
shall not be liable as a result of the Escrow Agent acting, or failing
to act, any error of judgment or for any mistake of fact or law;
provided, however, the Escrow Agent shall be liable for damages
arising out of its willful misconduct or its gross negligence under
this Agreement. Accordingly, the Escrow Agent shall not incur any such
liability with respect to (i) any action taken or omitted to be taken
in good faith or any action taken or omitted to be taken upon advice
of its counsel or counsel for the Company and the Marketing Agent
which is given with respect to any questions relating to the duties
and responsibilities of the Escrow Agent hereunder; or (ii) any action
taken or omitted to be taken in reliance upon any document, including
any written notice or instructions provided for in this Escrow
Agreement, not only as to its due execution and to the validity and
effectiveness of its provisions but also as to the truth and accuracy
of any information contained therein, if the Escrow Agent shall in
good faith believe such document to be genuine, and to conform with
the provisions of this Agreement.
(b) The Company agrees to indemnify and hold harmless Escrow
Agent, its officers, directors, agents, attorneys and representatives,
against any and all losses, claims, damages, liabilities and expenses
of any and every kind or nature whatsoever, including, without
limitation, reasonable costs of investigation and counsel fees and
disbursements which may be imposed upon Escrow Agent or incurred by it
in connection with its acceptance of this appointment as Escrow Agent
hereunder or the performance of its duties hereunder, and/or related
to any litigation whatsoever arising from this Escrow Agreement or
involving the subject matter thereof whether based upon contract, tort
negligence, comparative negligence, concurrent negligence or otherwise
and including without limitation, any actions or causes of action
instigated by subscribers and/or broker-dealers against Escrow Agent,
except that if Escrow Agent shall be found guilty of willful
4
<PAGE>
misconduct or gross negligence under this Agreement, then, in that
event, Escrow Agent shall bear only such losses, claims, damages, and
expenses attributable to Escrow Agent's willful misconduct or gross
negligence.
(c) If a dispute ensues between any of the parties hereto
including between Escrow Agent and a subscriber or subscribers which,
in the opinion of the Escrow Agent, is sufficient to justify its doing
so, the Escrow Agent shall retain legal counsel of its choice as it
reasonably may deem necessary to advise it concerning its obligations
hereunder and to represent it in any litigation to which it may be a
party by reason of this Agreement. The Escrow Agent shall be entitled
to tender into the registry or custody of any court of competent
jurisdiction, including the District Court of Brazos County, Texas,
all money or property in its hands under the terms of this Agreement,
and to file such legal proceedings as it deems appropriate, and shall
thereupon be discharged from all further duties under this Agreement.
Any such legal action may be brought in any such court as the Escrow
Agent shall determine to have jurisdiction thereof. In connection with
such dispute, the Company shall indemnify the Escrow Agent against its
court costs, reasonable expenses and reasonable attorney's fees
incurred.
(d) The Escrow Agent may resign at any time upon giving thirty
(30) days written notice to the Company. The Company within thirty
(30) days after receiving such notice of resignation must retain a
successor Escrow Agent; otherwise the Escrow Agent may petition any
court of competent jurisdiction to name a successor escrow agent and
the Escrow Agent herein shall be fully relieved of all liability under
this Agreement to any and all parties including subscribers upon the
transfer of the Escrowed Funds and all related documentation thereto,
including appropriate information to assist the successor escrow agent
with the reporting of earnings of the Escrow Funds to the appropriate
state and federal agencies in accordance with the applicable state and
federal income tax laws, to the successor escrow agent designated by
the Company or appointed by the court. In the event Escrow Agent does
petition the Court to name a successor escrow agent, then the Company
shall indemnify Escrow Agent and pay for all court costs, reasonable
expenses and attorney's fees incurred by Escrow Agent related thereto.
6. Appointment of Successor. The Company may, upon the delivery of thirty
(30) days written notice appointing a successor escrow agent to the
Escrow Agent, terminate the services of the Escrow Agent. The Escrow
Agent shall immediately deliver to the successor escrow agent selected
by the Company all documentation and Escrowed Funds including interest
earnings thereon in its possession, less any fees and expenses due to
the Escrow Agent or required to be paid by the Escrow Agent to a third
party pursuant to this Agreement.
5
<PAGE>
Upon appointment of a successor Escrow Agent whether under the
provisions of paragraph 5(d) or this paragraph 6, Escrow Agent shall
be relieved and released from any further obligations, duties and
liabilities under this Agreement. This Agreement shall then terminate
as to Escrow Agent, except for the provisions of paragraph 5(a) and
(b), liability of Escrow Agent and the indemnity of Escrow Agent by
the Company and the Marketing Agent, all of which shall survive such
termination of this Agreement.
7. Notice. All notices, requests, demands and other communications or
deliveries required or permitted to be given hereunder shall be in
writing and shall be deemed to have been duly given three days after
having been deposited for mailing if sent by registered mail, or
certified mail return receipt requested, or delivery by courier, to
the respective addresses set forth below:
If to the subscribers To their respective addresses as
for Securities: specified in their stock order form.
The Company: The Bryan-College Station Financial
Holding Company
2900 Texas Avenue
Bryan, Texas 77801
Attn: J. Stanley Stephen, President
With a copy to: Silver, Freedman & Taff
1100 New York Avenue, N. W.
Washington, D.C. 20005
Attn: Dave M. Muchnikoff, P.C.
The Escrow Agent: The First National Bank of Bryan
P.O. Box 833
Bryan, Texas 77805
Attn: Corporate Trust Department
6
<PAGE>
Marketing Agent: Hoefer & Arnett, Incorporated
101 W. Sixth Street
Suite 416
Austin, Texas 78701
Attn: Thomas R. Mecredy
With a copy to: Bracewell & Patterson, LLP
711 Louisiana Street
Suite 2900
Houston, Texas 77002
Attn: William T. Luedke, IV
8. Fees to Escrow Agent. In consideration of the services to be provided
by the Escrow Agent hereunder the Escrow Agent will receive from the
Company a onetime acceptance fee of $_________ and will receive an
annual administration base fee of $________, payable $________ for the
initial six (6) months, and $________ for a six (6) month extension.
Escrow Agent will receive $_____ per check for producing a check and
calculating interest on any check disbursements. Escrow Agent will
receive $_____ per deposit for any deposit activity. In addition,
Escrow Agent shall receive $_____ for each 1099 form it generates
pursuant hereto. Any out-of-pocket expenses will be billed at cost.
All fees or reimbursement for costs and expenses incurred by Escrow
Agent, including all reasonable legal fees incurred by Escrow Agent,
or any other monies whatsoever shall be paid out by the Company prior
to the delivery of any Escrowed Funds. The Escrow Agent shall also
receive payment for all other expenses and costs specifically provided
for in this Agreement pursuant to Paragraph 5 hereof.
9. Representations of the Company and The Marketing Agent. The Company
and the Marketing Agent hereby acknowledge that the status of the
Escrow Agent with respect to the offering of the Securities is that of
agent only for the limited purposes herein set forth, and hereby agree
they will not represent or imply that the Escrow Agent, by serving as
the Escrow Agent hereunder or otherwise, has investigated the
desirability or advisability in an investment in the Securities, or
has approved, endorsed or passed upon the merits of the Securities,
nor shall the Company or the Marketing Agent use the name of the
Escrow Agent in any manner whatsoever in connection with the offer or
sale of the Securities, other than by acknowledgment that it has
agreed to serve as Escrow Agent for the limited purposes herein set
forth.
7
<PAGE>
10. General.
(a) This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Texas. This
Agreement shall be performable and enforceable in Brazos County, Texas
and venue as to any legal proceedings shall be in Brazos County,
Texas.
(b) The section headings contained herein are for reference
purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
(c) This Agreement sets forth the entire agreement and
understanding of the parties with regard to this escrow transaction
and supersedes all prior agreements, arrangements and understandings
relating to the subject matter hereof.
(d) This Agreement may be amended, modified, superseded or
canceled, and any of the terms or conditions hereof may be waived,
only by a written instrument executed by each party hereto or, in the
case of a waiver, by the party waiving compliance. The failure of any
party at any time to require performance of any provision hereof shall
in no manner affect the right at a later time to enforce the same. No
waiver in any one or more instances by any party of any condition, or
of the breach of any term contained in this Agreement, whether by
conduct or otherwise, shall be deemed to be, or construed as, a
further or continuing waiver of any such condition or breach, or a
waiver of any other condition or of the breach of any other terms of
this Agreement.
(e) This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(f) This Agreement shall inure to the benefit of the parties
hereto and their respective administrators, successors and assigns.
Escrow Agent shall be bound only by the terms of this Escrow Agreement
and shall not be bound by or incur any liability with respect to any
other agreement or understanding between the parties except as herein
expressly provided. Escrow Agent shall not have any duties hereunder
except those specifically set forth herein.
(g) No interest of any party to this Agreement shall be
assignable in the absence of a written agreement by and between all
the parties to this Agreement, executed with the same formalities as
this original Agreement.
(h) The terms and provisions of paragraph 5(a) and (b) shall
survive any termination of this Agreement or appointment of a
successor Escrow Agent.
8
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement this __th
day of _______, 1997.
COMPANY: ESCROW AGENT:
THE BRYAN-COLLEGE STATION THE FIRST NATIONAL BANK OF
FINANCIAL HOLDING COMPANY BRYAN
By: By:
------------------------------- ------------------------------
J. Stanley Stephen, President
MARKETING AGENT:
HOEFER & ARNETT, INCORPORATED
By:
-------------------------------
9
October 30, 1997
Board of Directors
First Federal Savings Bank
2900 Texas Avenue
Bryan, Texas 77802
Re: Federal Income Tax Opinion Relating to the Unit Offering of Units
consisting of $1,000 principal amount of subordinated debentures and nine
detachable warrants offered by The Bryan-College Station Financial
Holding Company under the Internal Revenue Code of 1986, As Amended.
Gentlemen:
You have requested our opinion regarding the federal income tax consequences of
the issuance of units (the "unit offering") consisting of $1,000 principal
amount of subordinated debentures due in five years and nine detachable warrants
(the "warrants") by The Bryan-College Station Financial Holding Company (the
"Holding Company").
FACTS
The Holding Company will be formed in accordance with the facts as described in
the tax opinion we issued on April 16, 1997 in which we opined on the tax-free
formation of the Bryan-College Station Financial Holding Company.
This unit offering will be consummated in conjunction with the stock offering
and in accordance with the facts described in our opinion dated April 16, 1997.
The unit offering will consist of between 3,400 and 3,700 units at $1,000 per
unit and each unit shall include nine detachable warrants. Each warrant shall
entitle the holder thereof to purchase one share of Holding Company common
stock, par value $.01 per share, at an exercise price of $12.50, subject to
adjustment, at any time prior to the maturity date of the debentures. The
consummation of this unit offering is conditioned upon the completion of the
Common Stock offering (the "stock offering") as described in our opinion dated
April 16, 1997.
The Unit Offering Prospectus contains a detailed description of the unit
offering. The Agreement and Plan of Merger and the Joint Proxy
Statement/Prospectus contain detailed descriptions of the merger and the stock
offering. These documents, as well as the following representations and
assumptions, are incorporated in this statement of the facts.
<PAGE>
Board of Directors
First Federal Savings Bank
October 30, 1997
Page 2
ADDITIONAL ASSUMPTIONS AND REPRESENTATIONS
We have relied upon the following assumptions and representations in rendering
this opinion.
1. The holders of the units will be individuals and will not include
insurance companies, tax exempt organizations, financial institutions,
broker-dealers, foreign corporations or persons who are not citizens
or residents of the United States to whom the tax consequences may be
different than those described in this opinion.
2. The units will be considered to be capital assets within the meaning
of Internal Revenue Code Section 1221.
3. The issuer shall determine the allocation of the issue price of the
units between the debenture and the warrants based upon the relative
fair market value of each component as of the issue date.
4. The holders of the units shall be the holders who acquired the units
in the original unit offering.
5. The debentures will not be considered an applicable high yield
discount obligation as defined in Internal Revenue Code Section
163(i).
6. The exercise price of the warrants will be substantially in excess of
the fair market value of the Holding Company common stock on the issue
date.
7. The debentures provide for qualified stated interest (i.e., interest
that is payable in cash or property, other than debt instruments or
equity of the issuer, at least annually at a single fixed rate that
appropriately takes into account the length of intervals between
payments).
OPINION
Based on our understanding of the foregoing facts, representations and
assumptions, and the current applicable laws and regulations, we are of the
opinion that for federal income tax purposes:
1. The excess of the stated redemption price at maturity over the issue
price, allocated upon issuance, of the debentures will be considered
original issue discount ("OID").
2. If the OID is considered to be more than de minimus (i.e., if the OID
is equal to or greater than .0025 multiplied by the product of the
stated redemption price at maturity and the number of years to
maturity from the issue date) each holder will be required, and the
Holding Company will report to the holder, OID income, which will be
includable in the
<PAGE>
Board of Directors
First Federal Savings Bank
October 30, 1997
Page 3
holder's taxable income, as it accrues which may precede the cash
receipt of such OID income by the holder.
3. The holders of the debentures will include in their taxable income
each year both the qualified stated interest and any accrued OID that
is not deemed to be de minimus.
4. The Holding Company will be entitled to a tax deduction for any
qualified stated interest computed under its applicable method of
accounting as well as any OID.
5. A holder of a debenture will recognize gain or loss upon the sale,
retirement, or other taxable disposition of such debenture and such
gain or loss will generally be capital gain or loss.
6. The gain or loss recognized upon the sale, retirement or other taxable
disposition of such debenture will generally be equal to the
difference between 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 the holder's adjusted tax basis
in the debentures.
7. The holder's adjusted tax basis in the debenture shall be equal to the
issue price of the debenture, increased by the amount of any OID
cumulatively accrued through the sale, retirement or taxable
disposition of such debenture which was included in the holder's
taxable income.
8. The holder of each warrant will recognize gain or loss upon the sale
or other taxable disposition of such warrant in an amount equal to the
difference between the sum of cash and fair market value of property
received and the holder's adjusted tax basis in the warrant. The gain
or loss will generally be capital gain or loss.
9. The holder's adjusted tax basis of each debenture and of each warrant
shall generally be the portion of the issue price allocated to such
debenture and warrant.
10. The exercise of the warrants will not result in a taxable event to the
holder of the warrant (except with respect to the receipt of cash in
lieu of a fractional share of Holding Company stock).
11. A holder's adjusted tax basis in Holding Company stock received upon
exercise of a warrant will be equal to the holder's adjusted basis in
the warrant plus the cash paid for the shares.
Our opinion is based on the Internal Revenue Code, administrative pronouncements
and case law in existence as of the date of this opinion and based on the facts
contained herein, as well as the facts and assumptions contained in our opinion
on the stock offering dated April 16, 1997.
<PAGE>
Board of Directors
First Federal Savings Bank
October 30, 1997
Page 4
However, our opinion is not binding on the Internal Revenue Service and the
Internal Revenue Service could disagree with the conclusions included in our
opinion.
No opinion is expressed under the provisions of other sections of the Internal
Revenue Code and Regulations which may be applicable thereto or to the tax
treatment of any conditions existing at the time of, or effects resulting from,
the transaction which are not specifically covered by the opinion set forth
above.
If any fact or assumption contained in this opinion changes, it is imperative we
be notified to determine the effect, if any, on the conclusions reached herein.
Very truly yours,
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
First Federal Savings Bank
We consent to the use in this Proxy Statement filed with the Securities and
Exchange Commission and the Office of Thrift Supervision, of our report dated
November 9, 1996, on the financial statements of First Federal Savings Bank for
the year ended September 30, 1996. We also consent to the reference to us under
the heading "Federal Income Tax Consequences of the Merger" in this Proxy
Statement.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
Oak Brook, Illinois
October 31, 1997
RETURN THIS FORM ALONG WITH PAYMENT TO:
The Bryan-College Station Financial Holding
Company
(Offering of Common Stock and Units)
2900 A Texas Avenue
Bryan, Texas 77802
NUMBER OF SHARES
Fill in the number of shares you wish to purchase and the total amount due.
The Bryan-College Station Financial Holding Company (the "Holding Company") may
reject any subscription or part thereof for any reason including if the total
shares of such Holding Company Common Stock owned by any person following the
Offering and Merger (as described in the Prospectus) would constitute more than
9.9% of the issued and outstanding Holding Company Common Stock, unless such
condition has been waived in the discretion of the Holding Company's Board of
Directors in one or more instances with the approval of the OTS. Each stock
order must be for a minimum of 30 shares.
PAYMENT
Make checks payable to The First National Bank of Bryan, Escrow Agent for
the Bryan-College Station Financial Holding Company. Your money will earn
interest until the Offering is completed.
STOCK ORDER FORM
Number Total
of Offering Amount
Shares Price Due
Common Stock X $ 10.00
------- --------
Total Purchase
========
[ ] Enclosed is a check payable to The First National Bank of Bryan, Escrow
Agent for The Bryan-College Station Financial Holding Company for
$___________. (Do not send cash through the mail.)
<PAGE>
STOCK REGISTRATION
PLEASE READ THE REVERSE SIDE BEFORE COMPLETING THIS SECTION.
Check the box indicating the form of ownership for your The Bryan-College
Station Financial Holding Company stock ^. If necessary, check "Other" and write
in the ownership, such as "corporation."
Print the name(s) in which you want the stock registered and the mailing
address.
Fill in the taxpayer identification number (social security number) for one
of the registered owners.
TELEPHONE NUMBERS
Please provide us your day and evening telephone numbers in case we need to
contact you regarding your order.
DEADLINE
The Offering will terminate at 5:00 p.m. Bryan, Texas time on ^ January 31,
1998. This form must be properly completed and received with proper payment at
the above address by this
deadline.
PLEASE PRINT
[ ] Individual
[ ] Joint Tenants
[ ] Tenants in Common
[ ] Uniform Gifts to Minors
(Texas Residents Only)
[ ] Uniform Transfers to Minors
[ ] Other _______________________
[ ] Fiduciary (Legal Adoption
Date _________________)
- ------------------------------------------
Name
- ------------------------------------------
Name
- ------------------------------------------
Mailing Address
- ------------------------------------------
City State Zip Code
- ------------------------------------------
Taxpayer I.D. (Social Security) Number
( ) ( )
- ---------------------- ------------------------
Daytime Evening
- ----------
I acknowledge receipt of the Prospectus dated _______ __, 1997 describing
the stock and understand that I may not change or revoke my order once it is
received by The Bryan-College Station Financial Holding Company.
Under penalties of perjury, I certify that: 1) the social security number
or taxpayer identification number given above is correct; and 2) I am not
subject to backup withholding.
Instructions: You must cross out #2 above if you have been notified by the
Internal Revenue Service that you are subject to backup withholding because of
underreporting interest or dividends on your tax return.
<PAGE>
SIGNATURE
Sign and date the form. Add your full title to your signature if purchasing
as a fiduciary, corporate officer, etc. If paying by withdrawal from an account
requiring more than one signature to with draw funds, the same number of signers
must sign here. THIS ORDER IS NOT VALID IF NOT SIGNED.
NASD AFFILIATION
Please read the NASD Affiliation section on the reverse side of this form.
Check if applicable and initial where indicated with*.
X
- ------------------------------------------
Authorized Signature Title Date
(If Applicable)
X
- ------------------------------------------
Authorized Signature Title Date
(If Applicable)
YOUR ORDER WILL BE FILLED IN ACCORDANCE WITH THE PROVISIONS OF THE PROSPECTUS.
[ ] Check here if you are a member of the NASD or a person associated with a
NASD member or a partner with a securities brokerage firm or a member of
the immediate family of any such person to whose support such person
contributes directly or indirectly or if you have an account in which a
NASD member or person associated with a NASD member has a beneficial
interest. In accordance with the conditions for an exception from the
Interpretation, I agree (i) not to sell, transfer or hypothecate the stock
for a period of 150 days following issuance and (ii) to report this
subscription in writing to the applicable NASD member I am associated with
within one day of payment for the stock. *___________________ (Initial)
IF YOU HAVE ANY QUESTIONS, PLEASE CALL
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
AT (409) 779-2900
<PAGE>
GUIDELINES FOR REGISTERING STOCK
For reasons of clarity and standardization, the stock transfer industry has
developed uniform stockholder registration which we will use in the issuance of
your The Bryan-College Station Financial Holding Company Stock Certificate(s).
If you have any questions, please consult your legal advisor. Stock ownership
must be registered in one of the following manners:
INDIVIDUAL:
Two initials cannot be used unless they are your legal name. Include the
first given name, middle initial and last name of the stockholder. Omit words of
limitation that do not affect ownership rights such as "special account,"
"single man," "personal property," etc. If held as an individual, upon the
individual's death, ownership of the stock will be held by the individual's
estate and distributed as indicated by the individual's will or otherwise in
accordance with law.
JOINT:
Joint ownership of stock by two or more persons shall be inscribed on the
certificate with one of the following types of joint ownership. Names should be
joined by "and;" do not connect with "or." Omit titles such as "Mrs.," "Dr.,"
etc.
JOINT TENANTS - Joint Tenancy with Right of Survivorship and not as Tenants in
Common may be specified to identify two or more owners where ownership is
intended to pass automatically, upon the death of one joint tenant, to the
surviving tenant(s).
TENANTS IN COMMON - Tenants in Common may be specified to identify two or more
owners. When stock are held as tenancy in common, upon the death of one
co-tenant, ownership of the stock will be held by the surviving co-tenant(s) and
by the heirs of the deceased co-tenant. All parties must agree to the transfer
or sale of shares held in this form of ownership.
FIDUCIARIES:
Stock held in a fiduciary capacity must contain the following:
1. The name(s) of the fiduciary-
o If an individual, list the first given name, middle initial, and
last name.
o If a corporation, list the corporate title.
o If an individual and a corporation, list the corporation's title
before the individual.
2. The fiduciary capacity-
o Administrator
o Conservator
o Committee
o Executor
o Trustee
o Personal Representative
o Custodian
3. The type of document governing the fiduciary relationship. Generally,
such relationships are either under a form of living trust agreement
or pursuant to a court order. Without a document establishing a
fiduciary relationship your stock may not be registered in a fiduciary
capacity.
4. The date of the document governing the relationship. The date of the
document need not be used in the description of a trust created by a
will.
5. Either of the following: The name of the maker, donor or testator or
the name of the beneficiary
<PAGE>
UNIFORM TRANSFERS TO MINORS OR UNIFORM GIFT TO MINORS:
For Texas residents and residents of certain other states, stock may be
held in the name of a custodian for a minor under the state's Uniform Gifts to
Minors Act. For residents of most states, stock may be held in a similar type of
ownership under the Uniform Transfers to Minors Act of the individual states.
For either ownership, the minor is the actual owner of the stock with the adult
custodian being responsible for the investment until the minor reaches legal
age.
Instructions: If you are a Texas resident and wish to register stock in
this ownership, check "Uniform Gifts to Minors." For other states, see your
legal advisor if you are unsure about the correct registration of your state.
On the first "NAME" line, print the first name, middle initial, and last
name of the custodian, with "CUST" after the name.
Print the first name, middle initial, and last name of the minor on the
second "NAME" line.
Only one custodian and one minor may be designated.
EXAMPLE OF A FIDUCIARY OWNERSHIP:
John D. Smith, Trustee for Tom A. Smith Under
Agreement Dated 06/09/74.
PLEASE NOTE THAT "TOTTEN TRUST" AND "PAYABLE ON DEATH" OWNERSHIPS MAY NOT BE
USED IN REGISTERING STOCK.
For example, stock cannot be registered as "John Doe Trustee for Jane Doe" or
"John Doe Payable on Death to Jane Doe."
NASD AFFILIATION:
Please refer to the National Association of Securities Dealers, Inc.
("NASD") affiliation section and check the box if applicable. Under the
guidelines of the NASD, members of the NASD and their associates are subject to
certain restrictions on the transfer of securities purchased in accordance with
subscription rights and to certain reporting requirements upon the purchase of
such securities, as established by the NASD.
<PAGE>
ACKNOWLEDGEMENT
Please return this card together with the Stock Order Form in the enclosed
postage-paid return envelope.
I (we) acknowledge that, before purchasing the shares of either common stock I
(we) received an Prospectus dated _______ __, 1997 relating to the Common Stock.
The Prospectus received contains disclosure concerning the nature of the
securities being offered and describes the risks involved in the investment,
including those risks described in the Prospectus under the heading "Risk
Factors." I (WE) ACKNOWLEDGE THAT, I (WE) HAVE RELIED SOLELY ON THE PROSPECTUS
IN MY (OUR) DECISION TO PURCHASE THE STOCK HEREUNDER AND NO OTHER WRITTEN OR
VERBAL INFORMATION. I (we) further acknowledge that THE COMMON STOCK IS NOT A
DEPOSIT OR SAVINGS ACCOUNT AND IS NOT FEDERALLY INSURED.
_______________________________Name ____________________________Signature
__________Date
_______________________________Name ____________________________Signature
__________Date
Note: This acknowledgement must accompany the executed Stock Order Form
submitted for the purchase of The Bryan-College Station Financial Holding
Company stock.
RETURN THIS FORM ALONG WITH PAYMENT TO:
The Bryan-College Station Financial Holding Company
(Offering of Common Stock and Units)
2900 A Texas Avenue
Bryan, Texas 77802
NUMBER OF UNITS
Fill in the number of units you wish to purchase and the total amount
due. The Bryan College Station Financial Holding Company (the "Holding Company")
may reject any order or part thereof for any reason, including if the total
shares of Holding Company Common Stock owned by any person following the
Offering and Merger (as described in the Prospectus) would constitute more than
9.9% of the issued and outstanding Holding Company Common Stock, unless such
condition has been waived in the discretion of the Holding Company's Board of
Directors in one or more instances with the approval of the OTS. Each unit order
must be for a minimum of___________ units.
PAYMENT
Make checks payable to The First National Bank of Bryan, Escrow Agent
for the Bryan-College Station Financial Holding Company. Your money will earn
interest until the Offering is completed.
UNIT ORDER FORM
Number Total
of Offering Amount
Units Price Due
------ -------- -------
Units -----X $1,000.00 -------
Total Purchase =======
[ ] Enclosed is a check payable to The First National Bank of Bryan, Escrow
Agent for The Bryan-College Station Financial Holding Company for
$___________. (Do not send cash through the mail.)
<PAGE>
UNIT REGISTRATION
PLEASE READ THE REVERSE SIDE BEFORE COMPLETING THIS SECTION.
Check the box indicating the form of ownership for your The
Bryan-College Station Financial Holding Company units. If necessary, check
"Other" and write in the ownership, such as "corporation."
Print the name(s) in which you want the units registered and the
mailing address.
Fill in the taxpayer identification number (social security number) for
one of the registered owners.
TELEPHONE NUMBERS
Please provide us your day and evening telephone numbers in case we
need to contact you regarding your order.
DEADLINE
The Offering will terminate at 5:00 p.m. Bryan, Texas time on January
31, 1998. This form must be properly completed and received with proper payment
at the above address by this deadline.
PLEASE PRINT
[ ] Individual
[ ] Joint Tenants
[ ] Tenants in Common
[ ] Uniform Gifts to Minors
(Texas Residents Only)
[ ] Uniform Transfers to Minors
[ ] Other _______________________
[ ] Fiduciary (Legal Adoption
Date _________________)
- ----------------------------------
Name
- ----------------------------------
Name
- ----------------------------------
Mailing Address
- ----------------------------------
City State Zip Code
- ----------------------------------
Taxpayer I.D. (Social Security) Number
( ) ( )
- ---------------- -----------------
Daytime Evening
- -----------------------------------
I acknowledge receipt of the Prospectus dated _______ __, 1997
describing the Units and understand that I may not change or revoke my order
once it is received by The Bryan-College Station Financial Holding Company.
Under penalties of perjury, I certify that: 1) the social security
number or taxpayer identification number given above is correct; and 2) I am not
subject to backup withholding.
Instructions: You must cross out #2 above if you have been notified by
the Internal Revenue Service that you are subject to backup withholding because
of underreporting interest or dividends on your tax return.
<PAGE>
SIGNATURE
Sign and date the form. Add your full title to your signature if
purchasing as a fiduciary, corporate officer, etc. If paying by withdrawal from
an account requiring more than one signature to with draw funds, the same number
of signers must sign here. THIS ORDER IS NOT VALID IF NOT SIGNED.
NASD AFFILIATION
Please read the NASD Affiliation section on the reverse side of this
form. Check if applicable and initial where indicated with*.
X
- -----------------------------------------------
Authorized Signature Title Date
(If Applicable)
X
- -----------------------------------------------
Authorized Signature Title Date
(If Applicable)
YOUR ORDER WILL BE FILLED IN ACCORDANCE WITH THE PROVISIONS OF THE
PROSPECTUS.
[ ] Check here if you are a member of the NASD or a person associated with
a NASD member or a partner with a securities brokerage firm or a
member of the immediate family of any such person to whose support
such person contributes directly or indirectly or if you have an
account in which a NASD member or person associated with a NASD member
has a beneficial interest. In accordance with the conditions for an
exception from the Interpretation, I agree (i) not to sell, transfer
or hypothecate the units ===== for a period of 150 days following
issuance and (ii) to report this subscription in writing to the
applicable NASD member I am associated with within one day of payment
for the units.*___________________ (Initial)
IF YOU HAVE ANY QUESTIONS, PLEASE CALL
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
AT (409) 779-2900
<PAGE>
GUIDELINES FOR REGISTERING UNITS
For reasons of clarity and standardization, the stock transfer industry
has developed uniform stockholder registration which we will use in the issuance
of your The Bryan-College Station Financial Holding Company Units. If you have
any questions, please consult your legal advisor. Unit ownership must be
registered in one of the following manners:
INDIVIDUAL:
Two initials cannot be used unless they are your legal name. Include
the first given name, middle initial and last name of the stockholder. Omit
words of limitation that do not affect ownership rights such as "special
account," "single man," "personal property," etc. If held as an individual, upon
the individual's death, ownership of the unit will be held by the individual's
estate and distributed as indicated by the individual's will or otherwise in
accordance with law.
JOINT:
Joint ownership of units by two or more persons shall be inscribed on
the certificate with one of the following types of joint ownership. Names should
be joined by "and;" do not connect with "or." Omit titles such as "Mrs.," "Dr.,"
etc.
JOINT TENANTS - Joint Tenancy with Right of Survivorship and not as Tenants in
Common may be specified to identify two or more owners where ownership is
intended to pass automatically, upon the death of one joint tenant, to the
surviving tenant(s).
TENANTS IN COMMON - Tenants in Common may be specified to identify two or more
owners. When units are held as tenancy in common, upon the death of one
co-tenant, ownership of the units will be held by the surviving co-tenant(s) and
by the heirs of the deceased co-tenant. All parties must agree to the transfer
or sale of units held in this form of ownership.
FIDUCIARIES:
Units held in a fiduciary capacity mustcontain the following:
1. The name(s) of the fiduciary-
o If an individual, list the first given name, middle initial, and
last name.
o If a corporation, list the corporate title.
o If an individual and a corporation, list the corporation's
title before the individual.
2. The fiduciary capacity-
o Administrator
o Conservator
o Committee
o Executor
o Trustee
o Personal Representative
o Custodian
3. The type of document governing the fiduciary relationship. Generally,
such relationships are either under a form of living trust agreement
or pursuant to a court order. Without a document establishing a
fiduciary relationship your units may not be registered in a fiduciary
capacity. 4. The date of the document governing the relationship. The
date of the document need not be used in the description of a trust
created by a will. 5. Either of the following: The name of the maker,
donor or testator or the name of the beneficiary
<PAGE>
UNIFORM TRANSFERS TO MINORS OR UNIFORM GIFT TO MINORS:
For Texas residents and residents of certain other states, units may be
held in the name of a custodian for a minor under the state's Uniform Gifts to
Minors Act. For residents of most states, units may be held in a similar type of
ownership under the Uniform Transfers to Minors Act of the individual states.
For either ownership, the minor is the actual owner of the ^ units with the
adult custodian being responsible for the investment until the minor reaches
legal age.
Instructions: If you are a Texas resident and wish to register units in
this ownership, check "Uniform Gifts to Minors." For other states, see your
legal advisor if you are unsure about the correct registration of your state.
On the first "NAME" line, print the first name, middle initial, and last
name of the custodian, with "CUST" after the name.
Print the first name, middle initial, and last name of the minor on the
second "NAME" line. Only one custodian and one minor may be designated.
EXAMPLE OF A FIDUCIARY OWNERSHIP:
John D. Smith, Trustee for Tom A. Smith Under Agreement Dated 06/09/74.
PLEASE NOTE THAT "TOTTEN TRUST" AND "PAYABLE ON DEATH" OWNERSHIPS MAY NOT BE
USED IN REGISTERING STOCK OR UNITS.
For example, units cannot be registered as "John Doe Trustee for Jane Doe" or
"John Doe Payable on Death to Jane Doe."
NASD AFFILIATION:
Please refer to the National Association of Securities Dealers, Inc.
("NASD") affiliation section and check the box if applicable. Under the
guidelines of the NASD, members of the NASD and their associates are subject to
certain restrictions on the transfer of securities purchased in accordance with
subscription rights and to certain reporting requirements upon the purchase of
such securities, as established by the NASD.
<PAGE>
ACKNOWLEDGEMENT
Please return this card together with the Unit Order Form in the enclosed
postage-paid return envelope. I (we) acknowledge that, before purchasing the
units I (we) received a Prospectus dated _______ __, 1997 relating to the Units.
The Prospectus received contains disclosure concerning the nature of the
securities being offered and describes the risks involved in the investment,
including those risks described in the Prospectus under the heading "Risk
Factors." I (WE) ACKNOWLEDGE THAT, I (WE) HAVE RELIED SOLELY ON THE PROSPECTUS
IN MY (OUR) DECISION TO PURCHASE THE STOCK HEREUNDER AND NO OTHER WRITTEN OR
VERBAL INFORMATION. I (we) further acknowledge that ^ THE UNITS ARE NOT A
DEPOSIT OR SAVINGS ACCOUNT AND NOR ARE THE UNITS FEDERALLY INSURED.
_____________________________ Name ______________________Signature
__________Date
____________________________ Name ______________________Signature
__________Date
Note: This acknowledgement must accompany the executed Unit Order Form
submitted for the purchase of The Bryan- College Station Financial
Holding Company units.
