As filed with the Securities and Exchange Commission on October 31, 1997
Registration No. 333-28205
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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
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
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2900 TEXAS AVENUE, BRYAN, TEXAS 77802
(409) 779-2900
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
-------------------------------
J. STANLEY STEPHEN, PRESIDENT
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
2900 TEXAS AVENUE
BRYAN, TEXAS 77802
(409) 779-2900
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
--------------------------------
PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:
Dave M. Muchnikoff, P.C.
SILVER, FREEDMAN & TAFF, L.L.P.
(a limited liability partnership including professional corporations)
1100 New York Avenue, NW
Washington, DC 20005-3934
(202) 414-6100
-------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE (1) OFFERING PRICE(1) REGISTRATION FEE
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Common Stock, par value $.01 per share 294,500 shares $10.00 $2,945,000 $893(2)
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Registration fee of $893 previously paid with Form S-1 on May 30, 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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FIRST FEDERAL LETTERHEAD
__________, 1997
Dear Stockholder of First Federal:
On behalf of the Board of Directors and the management of First Federal
Savings Bank (sometimes referred to in this letter as "First Federal or the
"Institution"), I am very pleased to invite you to attend the ANNUAL MEETING OF
STOCKHOLDERS of First Federal, to be held at ______:00 a.m. local time, on
___________, 1997, at First Federal's principal office at 2900 Texas Avenue,
Bryan, Texas. As indicated in this Joint Proxy Statement/Prospectus, our results
for the fiscal year ending September 30, 1996 reflect net earnings more than
double that of fiscal year 1995, if you exclude the one-time SAIF charge in
September, 1996, and mandated by Congress for deposit insurance. We look forward
to reporting to you at the Annual Meeting the progress of the institution in its
transition to full-service retail banking, and our exciting plans for the future
of First Federal!
The primary purpose of the Annual Meeting will be to ask our stockholders to
consider and vote on a proposal to organize a new holding company. This new
holding company will raise capital through the issuance of up to $2,000,000 of
common stock of the holding company and up to $3,700,000 in units ("Units"),
each Unit consisting of $1,000 of 11 1/2% debentures due March 31, 2003 and nine
detachable warrants exercisable through March 31, 2003 at an exercise price of
$12.50 per share (collectively, the "Offering"), for the purpose of repurchasing
shares (subject to certain conditions) from some current stockholders who wish
to sell all or part of their shares. The reorganization is being undertaken in
order to provide an opportunity for First Federal's common stockholders who wish
to continue their ownership in First Federal through its new Holding Company by
exchanging one share of existing First Federal Common Stock for two and one-half
shares of new holding company common stock, and also to provide an exit strategy
for those common stockholders of First Federal who had the confidence to invest
in the Institution's future in 1992 (when First Federal converted from a mutual
savings association to a Federal stock institution in order to recapitalize
First Federal), and who now need or wish to sell some of their First Federal
Common Stock for cash on the basis described below and exchange the balance of
their First Federal Common Stock for new common stock of the holding company, on
the basis described above, or sell all of their First Federal Common Stock for
cash at this time at an appropriate premium over book value and the current
trading price and who previously indicated to management their desire to sell
the shares in First Federal. The reorganization will further assist First
Federal to remain a predominantly community owned independent financial
institution. As a result of the issuances of new holding company common stock
and Units, First Federal stockholders who elect to receive holding company
common stock will experience significant dilution of the net tangible book value
of their stock.
Your Board of Directors believes the reorganization to be in the best
interests of First Federal's stockholders and of the institution. Stockholder
and regulatory approval of this proposal for the new holding company will also
enable First Federal to consider additional expansion of the institution through
possible future acquisitions of other financial institutions, and/or additional
full-service branches for the Bank in the Bryan-College Station area - - and in
the triangle between Houston, Dallas and Austin -- and to consider further
diversification of First Federal in other financially-related businesses. First
Federal currently has no specific plans, understandings or agreements relating
to such acquisitions or diversifications.
Our plans are to implement this proposal by the adoption of an
Agreement and Plan of Merger, dated May 21, 1997, as amended between First
Federal, the new holding company (which will be named "The Bryan-College Station
Financial Holding Company") and an interim, temporary bank referred to as "New
Bank" - to facilitate the formation of the new holding company and the Merger of
First Federal into the new holding company. Under the "Merger Agreement"
described in the enclosed information, First Federal would then become a
wholly-owned subsidiary of The Bryan-College Station Financial Holding Company.
After the Merger (as described more in detail in the enclosed Joint
Proxy Statement/Prospectus, which preempts any language in this letter), you
will be given the option, subject to certain conditions and limitations, of
either (1.) exchanging each share of the existing common stock of First Federal
which you now own, for two and one-half shares of new common stock in The Bryan
- - College Station Financial Holding Company and thus continuing in your
ownership of First Federal through its new holding company by owning all of your
stock through First
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Federal's new holding company, OR (2.) exchanging some of your existing First
Federal common stock for two and one-half shares of new common stock in the
holding company, and selling some of your existing First Federal common stock
for $24.07 cash per share and thus partially continue in your ownership of First
Federal through its new holding company, OR (3.) selling all your existing First
Federal common stock for $24.07 cash per share. In the opinion of Hoefer &
Arnett, Incorporated, an experienced, recognized and independent investment
banking firm, the proposed cash acquisition of up to 80 percent of the
outstanding common stock of First Federal by the holding company is fair from a
financial point of view to the holders of First Federal Common Stock. Certain
limitations on the maximum amounts of shareholder elections to exchange their
stock or to sell their stock for cash, as described in this Joint Proxy
Statement/Prospectus, may result in a shareholder receiving different amounts of
common stock in the holding company and cash than elected by the shareholder in
the event of an oversubscription of stock or cash election.
While we know that you will select the option described above which is
best suited for you, we hope you will seriously consider remaining as an owner
of this organization - - which is one of the very few remaining independent
banking institutions in Bryan-College Station and the Brazos Valley. We are
excited about what's going on at First Federal, and believe that we have a
wonderful opportunity in the years ahead!!
The Board of Directors of First Federal are very proud of the history
of this institution, which is owned by over 250 stockholders in this area, - -
and particularly our history over the past 5 years as First Federal gained more
momentum and visibility in this community through its transition into
full-service retail banking. Our customer base has been better served through
our two-year old full-service branch bank on Longmire in College Station. We
have just recently acquired an excellent site for a full-service branch bank in
northern Bryan, at the key intersection of Highway 21 and Texas Avenue - - which
we are anxious to open!!
WE SINCERELY BELIEVE THAT THIS BANK (WHICH YOU OWN) HAS A WONDERFUL
FUTURE, AS A PREDOMINANTLY COMMUNITY-OWNED, INDEPENDENT BANKING INSTITUTION IN
THIS AREA. THEREFORE, YOUR BOARD OF DIRECTORS HAS APPROVED THE AGREEMENT AND
PLAN OF MERGER, BELIEVES IT IS IN THE BEST INTERESTS OF FIRST FEDERAL AND ITS
STOCKHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR ITS APPROVAL.
In addition to the vote on the adoption of the Merger Agreement, First
Federal shareholders are asked to: (i) authorize the Board of Directors to
adjourn the meeting in order to solicit additional proxies in favor of the
Merger, if necessary; (ii) elect four directors; and (iii) ratify the
appointment of our current auditors, Crowe, Chizek and Company LLP, as First
Federal's independent auditors for the fiscal year ended September 30, 1997.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THESE
PROPOSALS.
We encourage you to attend the Annual Meeting in person. Whether or not
you plan to attend, however, please SIGN and DATE the enclosed PROXY and RETURN
IT TO US, PROMPTLY.
Thank you for your continuing support and interest in FIRST FEDERAL. We
look forward to working with you in the years ahead.
Sincerely,
Stan Stephen
President and Chief Executive Officer
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FIRST FEDERAL SAVINGS BANK
2900 TEXAS AVENUE
BRYAN, TEXAS 77802
(409) 779-2900
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be Held on ________, 1997
Notice is hereby given that the Annual Meeting of common stockholders
(the "Meeting") of First Federal Savings Bank ("First Federal" or the "Bank")
will be held at the principal office of the Bank located at 2900 Texas Avenue,
Bryan, Texas, at __:00 a.m. local time, on _______, 1997.
A Proxy Card and a Proxy Statement for the Meeting are enclosed.
The Meeting is for the purpose of considering and acting upon:
1. The election of four Directors of the Bank;
2. The adoption and approval of the Agreement and Plan of Merger
by and between First Federal and The Bryan - College Station
Financial Holding Company (the "Holding Company") attached as
Appendix A to this Proxy Statement, whereby the common stock
shareholders of First Federal would either receive in exchange
for each First Federal share two and one-half shares of common
stock of the Holding Company ("Holding Company Common Stock"),
cash consideration of $24.07 per share (up to a maximum of 80%
of existing First Federal common stock), or a combination of
cash and stock;
3. The ratification of the appointment of Crowe, Chizek and
Company LLP as auditors for the Bank for the fiscal year
ending September 30, 1997;
4. The adjournment of the Meeting in order to solicit additional
proxies in the event that sufficient votes are not cast in
favor of the Merger; and
such other matters as may properly come before the Meeting, or any adjournments
thereof. The Board of Directors is not aware at this time of any other business
to come before the Meeting.
Any action may be taken on the foregoing proposals at the Meeting on
the date specified above, or on any date or dates to which the Meeting may be
adjourned. Common stockholders of record at the close of business on ________,
1997, are the stockholders entitled to vote at the Meeting, and any adjournments
thereof.
You are requested to COMPLETE and SIGN the enclosed form of PROXY which
is solicited on behalf of the Board of Directors, and to MAIL IT PROMPTLY in the
enclosed envelope. The Proxy will not be used if you attend and vote at the
Meeting in person.
By Order of the Board of Directors
Richard L. Peacock
Chairman of the Board
J. Stanley Stephen
President/Chief Executive Officer
Bryan, Texas
___________, 1997
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TABLE OF CONTENTS
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INTRODUCTION AND SUMMARY ............................ Opinion of Financial Advisor.......................
Introduction ............................... Effective Date.....................................
Parties to the Merger ...................... First Federal's Stock Option and Incentive
Summary of Certain Aspects of the Plan...............................................
Merger...................................... Rights of Dissenting Stockholders..................
Fractional Shares..................................
GENERAL MEETING INFORMATION.......................... Exchange of Certificates...........................
Time and Date; Record Date.................. Representations and Warranties.....................
Matters to be Considered.................... Conditions to the Merger...........................
Vote Required and Proxy Information......... Regulatory Approval................................
Proxy Solicitation.......................... Waiver and Amendment; Termination..................
Voting Rights............................... Conduct of Business of First Federal
Summary of Certain Aspects of Merger........ Pending
the Merger.........................................
RISK FACTORS Material Agreements Relating to the Merger
HOLDING COMPANY OFFERING............................. and Interests of Certain Persons...................
MARKET AND DIVIDEND INFORMATION...................... Federal Income Tax Consequences....................
Accounting Treatment...............................
SELECTED CONSOLIDATED FINANCIAL Comparison of Stockholder Rights...................
DATA................................................. Other Restrictions on Acquisitions of Stock........
Risk Factors Associated with the Holding
RECENT FINANCIAL DATA................................ Company............................................
Regulatory Oversight...............................
MANAGEMENT'S DISCUSSION OF RECENT Competition........................................
RESULTS.............................................. Limitations on Stock Ownership.....................
Financial Condition.........................
Nonperforming Assets and Loan Loss THE OFFERING................................................
Provision................................... Security Ownership of Certain Beneficial
Comparison of Three months ended Owners and Management..............................
December 31, 1996 to December 31, 1995...... Debentures.........................................
Liquidity and Capital Resources............. Warrants...........................................
Proposals for Annual Meeting................
PROPOSAL III - RATIFICATION OF THE
PROPOSAL I - ELECTION OF DIRECTORS APPOINTMENT OF AUDITORS.....................................
General.....................................
Voting Securities and Principal Holders PROPOSAL IV - ADJOURNMENT OF MEETING
Thereof.....................................
Meetings and Committees of the Board of MANAGEMENT'S DISCUSSION AND
Directors................................... ANALYSIS OF FINANCIAL CONDITION AND
Director Compensation....................... RESULTS OF OPERATIONS.......................................
Executive Compensation...................... General............................................
Certain Transactions........................ Asset/Liability Management.........................
Net Portfolio Value................................
PROPOSAL II - THE MERGER Average Balances, Interest Rates and
General..................................... Yields.............................................
Reasons for and Recommendation of the Results of Operations..............................
Merger...................................... Comparison of Fiscal Year Ended September
Consideration to be Received................ 30, 1996 to September 30, 1995.....................
First Federal Stockholder Election
Procedures..................................
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Comparison of Fiscal Year Ended September
30, 1995 to September 30, 1994...................
Financial Condition..............................
Liquidity and Capital Resources..................
Impact of Inflation and Changing Prices..........
Effect of New Accounting Standards...............
BUSINESS..................................................
Market Area......................................
Lending Activities...............................
General..........................................
One-to-Four Residential Real Estate
Lending..........................................
Mortgage-Back Securities.........................
Consumer Lending.................................
Construction Lending.............................
Commercial Real Estate Lending...................
Commercial Business Lending......................
Loan Delinquencies; Nonperforming Assets
and Classified Assets............................
Allowance for Losses on Loans....................
Investment Activities............................
Source of Funds..................................
Borrowings.......................................
Service Corporation..............................
Competition......................................
Employees........................................
Description of Property-Owned....................
Legal Proceedings................................
OTHER MATTERS.............................................
FIRST FEDERAL SAVINGS BANKS INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS.........................
APPENDICES
Agreement and Plan of Merger.....................
Section 552.14 of Home Owners Loan Act
of 1993, as amended..............................
Opinion of Hoefer & Arnett, investment
bankers .........................................
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PROXY STATEMENT
FIRST FEDERAL SAVINGS BANK
2900 TEXAS AVENUE
BRYAN, TEXAS 77802
(409) 779-2900
ANNUAL MEETING OF STOCKHOLDERS
____________, 1997
- --------------------------------------------------------------------------------
PROSPECTUS OF THE BRYAN - COLLEGE STATION
FINANCIAL HOLDING COMPANY
FOR UP TO 294,500 SHARES OF HOLDING COMPANY COMMON STOCK
SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Joint Proxy Statement/Prospectus. Certain capitalized terms
used in this summary are defined elsewhere in this Joint Proxy
Statement/Prospectus. This summary is not intended to be a complete description
of all material facts regarding First Federal, the Holding Company and the
matters to be considered at the stockholders' meetings and is qualified in its
entirety by, and reference is made to, the more detailed information contained
elsewhere in this Joint Proxy Statement/Prospectus, the accompanying Appendices
and the documents referred to and incorporated herein by reference.
INTRODUCTION
This Joint Proxy Statement/Prospectus, which is first being sent on or
about ________, 1997, is furnished to the holders of record on ________, 1997
(the "Record Date"), of shares of common stock of First Federal Savings Bank
("First Federal" or the "Bank"), $0.01 par value ("First Federal Common Stock"),
in connection with a solicitation on behalf of the Board of Directors of First
Federal of proxies to be voted at the annual meeting of stockholders of First
Federal to be held on ________ ___, 1997 (the "Annual Meeting"). The purpose of
the Annual Meeting is to consider and vote upon adoption of an Agreement and
Plan of Merger, dated May 21, 1997 (the "Merger Agreement"), between First
Federal, The Bryan-College Station Financial Holding Company (the "Holding
Company"), a Delaware corporation, and New Bank, an interim banking subsidiary
formed temporarily to facilitate the Merger ("New Bank"), in substantially the
form set forth in Appendix A to this Joint Proxy Statement/Prospectus. The
Holding Company has received indications from its directors, executive officers
and members of their immediate families holding 44,080 shares, or approximately
18.4% of First Federal's Common Stock, that such holders will exchange their
First Federal Common Stock for approximately 110,000 shares of Holding Company
Common Stock. This amount does not include the remaining stockholders of First
Federal's Common Stock who are not directors, executive officers and members of
their immediate families, who are being asked by this Joint Proxy
Statement/Prospectus to make an election regarding their stock.
As a result of the merger contemplated by the Merger Agreement (the
"Merger"), First Federal will become a wholly owned subsidiary of the Holding
Company. The stockholders of First Federal at the Effective Date (as defined
below) of the Merger (other than stockholders who have properly exercised
appraisal rights under the rules and regulations of the Office of Thrift
Supervision (the "OTS")) may elect to receive for each share of First Federal
Common Stock held either (i) two and one-half shares of Holding Company Common
Stock (fractional shares will be rounded up to the next whole number), or (ii) a
combination of Holding Company Common Stock at two and one-half shares of
Holding Company Common Stock for each share of First Federal Common Stock held
by the stockholder and cash at $24.07 per share for each other share of First
Federal Common Stock held by the stockholder, or (iii) all cash at $24.07 per
share of First Federal Common Stock; provided, however, that no more than 80% of
1
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existing First Federal common stock can be sold for cash. If shareholders
approve the Merger, but less than 20% of the shareholders elect to receive
Holding Company Common Stock, the Holding Company will be permitted to allocate
cash and stock pro rata to those shareholders who elect the oversubscribed cash
consideration. (See "PROPOSAL II - THE MERGER -- Consideration to be Received").
After the Merger, First Federal stockholders who sell all of their shares will
have no continuing stockholder relationship with First Federal, the Holding
Company, or the temporary New Bank.
In addition, stockholders are asked to: (i) elect four members of the
Bank's Board of Directors; (ii) ratify the appointment of First Federal's
current auditors, Crowe, Chizek and Company LLP, as auditors for the Bank for
the fiscal year ended September 30, 1997; and (iii) authorize the Board of
Directors to adjourn the Meeting to solicit additional proxies, if necessary.
YOUR BOARD OF DIRECTORS RECOMMENDS THAT FIRST FEDERAL STOCKHOLDERS
VOTE FOR ADOPTION OF THE AGREEMENT AND PLAN OF MERGER AND ALL OTHER PROPOSALS.
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PARTIES TO THE MERGER
First Federal Savings Bank. First Federal is a federally chartered
thrift institution, headquartered in Bryan-College Station, Texas, which began
operations in 1965. First Federal is predominantly a locally-based home lender,
originating loans primarily in Bryan-College Station and the surrounding trade
area, and to a much lesser extent other communities in the general area between
Houston, Austin and Dallas, Texas. First Federal also originates direct and
indirect consumer, construction, Small Business Administration ("SBA") partially
guaranteed loans, small commercial real estate and small to medium commercial
business loans. The institution's deposits are insured up to applicable limits
by the Savings Association Insurance Fund (the "SAIF") which is administered by
the Federal Deposit Insurance Corporation (the "FDIC"). At September 30, 1996,
First Federal had assets of $57.6 million, deposits of $51.7 million and total
stockholders' equity of $4.3 million. New senior management was installed in
early 1991 to recapitalize and convert First Federal from a mutual savings
institution to a federal stock institution. The conversion was completed through
a successful stock offering which became effective in April, 1993.
The Bryan-College Station Holding Company and New Bank. The Holding
Company is a newly formed company that was formed under the laws of Delaware to
acquire 100% of the stock of First Federal upon consummation of the Merger. The
principal executive offices of the Holding Company are located at 2900 Texas
Avenue, Bryan, Texas 77802, and its telephone number at that address is (409)
779-2900. The Holding Company upon consummation of the Merger will be a thrift
institution holding company under the Home Owners Loan Act of 1933, as amended
(the "HOLA") and, therefore, will be regulated and supervised by the Office of
Thrift Supervision (the "OTS").
New Bank is a federally chartered interim (temporary) subsidiary that
is wholly owned by the Holding Company. New Bank was only formed specifically
for the purpose of the acquisition of First Federal by the Holding Company and
has the same address as the Holding Company. New Bank will cease to exist after
the Merger.
GENERAL MEETING INFORMATION
TIME AND DATE; RECORD DATE
The Annual Meeting will be held on __________, 1997, at ___ _.m., local
time, at First Federal's main office at 2900 Texas Avenue, Bryan, Texas. The
Board of Directors of First Federal has fixed ________, 1997, as the Record
Date. Only stockholders of record of First Federal Common Stock at the close of
business on the Record Date are entitled to notice of and to vote at the Annual
Meeting. As of the Record Date, there were 239,612 shares of First Federal
Common Stock outstanding and entitled to be voted at the Annual Meeting.
MATTERS TO BE CONSIDERED
At the Annual Meeting, the holders of First Federal Common Stock will
be asked to vote upon a proposal to approve the adoption of the Merger Agreement
and the transactions contemplated thereby, including the acquisition of First
Federal by the Holding Company by exchange of stock and the balance by purchase
for cash of all of the outstanding shares of First Federal by the Holding
Company. In addition, First Federal stockholders will be asked to: (i) elect
directors for First Federal; (ii) ratify the appointment of Crowe, Chizek and
Company LLP as the Bank's auditors for the year ended September 30, 1997; and
(iii) authorize the Board of Directors to adjourn the Meeting in order to
solicit additional proxies, if necessary.
VOTE REQUIRED AND PROXY INFORMATION
All shares of First Federal Common Stock represented at the Meeting by
properly executed proxies received prior to or at the Meeting, and not revoked,
will be voted at the Meeting in accordance with the instructions thereon. If no
instructions are indicated, properly executed proxies will be voted for the
nominees and the adoption of the proposal set forth in this Joint Proxy
Statement/Prospectus. First Federal does not know of any matters, other than as
described in the Notice of Meeting, that are to come before the Meeting. If any
other matters are properly
3
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presented at the Meeting for action, the persons named in the enclosed form of
proxy and acting thereunder will have the discretion to vote on such matters in
accordance with their best judgment.
An affirmative vote by a majority of the shares outstanding will be
required to approve the adoption of the Merger Agreement. Directors shall be
elected by a plurality of votes present in person or represented by proxy at the
Meeting and entitled to vote on the election of Directors. In all matters other
than the election of Directors, the affirmative vote of the majority of shares
present in person or represented by proxy at the Meeting and entitled to vote on
the matter shall be the act of the shareholders. Proxies marked to abstain with
respect to a proposal have the same effect as votes against the proposal. Broker
non-votes have no effect on the vote. A majority of the shares of the Bank's
Common Stock, present in person or represented by proxy, shall constitute a
quorum for purposes of the Meeting. Abstentions and broker non-votes are counted
for purposes of determining a quorum.
A proxy given pursuant to the solicitation may be revoked at any time
before it is voted. Proxies may be revoked by: (i) filing with the Secretary of
First Federal's Board of Directors at or before the Meeting a written notice of
revocation bearing a later date than the proxy; (ii) duly executing a subsequent
proxy relating to the same shares and delivering it to the Secretary of First
Federal's Board of Directors at or before the Meeting; or (iii) attending the
Meeting and voting in person (although attendance at the Meeting will not in and
of itself constitute revocation of a proxy). Any written notice revoking a proxy
should be delivered to Charles Neelley, Secretary of the Board of Directors,
2900 Texas Avenue, Bryan, Texas 77802.
PROXY SOLICITATION
The board of directors, officers, and employees of First Federal will
initially solicit proxies by mail. If they deem it advisable, directors,
officers, and employees of First Federal may also solicit proxies in person by
telephone or by other forms of communication without additional compensation,
except for reimbursement of reasonable out-of-pocket expenses incurred in
connection with such solicitation. In addition, nominees and other fiduciaries
may also solicit proxies. Such persons may, at the request of First Federal's
management, mail material to or otherwise communicate with the beneficial owners
of shares held by them. All expenses of solicitation of proxies will be paid by
First Federal.
VOTING RIGHTS
Each holder of record of First Federal Common Stock on the Record Date
will be entitled to one vote for each share registered in his, her, or its name
on each matter presented for a vote of the stockholders at the Annual Meeting.
The Merger must be approved by the affirmative vote of the holders of a majority
of the shares of First Federal Common Stock outstanding as of the Record Date.
For the purpose of counting votes on this proposal, failures to vote,
abstentions and broker non-votes will have the same effect as votes against
approval of the Merger Agreement.
SUMMARY OF CERTAIN ASPECTS OF THE MERGER
Directors' Approval and Recommendation of the Merger. At a Board of
Directors meeting held on May 21, 1997, the First Federal Board of Directors
approved the Merger Agreement after considering the terms and conditions of the
Merger Agreement and obtaining the advice of its financial advisor and
investment banker, Hoefer & Arnett, Incorporated ("Hoefer & Arnett"), Austin,
Texas and San Francisco, California. THE FIRST FEDERAL BOARD OF DIRECTORS
BELIEVES THAT THE CONSIDERATION OFFERED PURSUANT TO THE TRANSACTION IS FAIR TO
THE STOCKHOLDERS OF FIRST FEDERAL AND, ACCORDINGLY, RECOMMENDS THAT STOCKHOLDERS
OF FIRST FEDERAL VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT. (For a discussion
of the circumstances surrounding the Merger and the factors considered by the
First Federal Board of Directors in making its recommendation, see "PROPOSAL II
- - THE MERGER -- Reasons for and the Recommendation of the Merger"). See "Opinion
of Hoefer & Arnett" attached as Appendix C hereto.
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Certain members of First Federal's management and First Federal's Board
of Directors have interests in the Merger that are in addition to their
interests as stockholders of First Federal generally. (See "PROPOSAL II -THE
MERGER -- Material Agreements Relating to the Merger and Interests of Certain
Persons").
Consideration to be Received in the Merger. Subject to the terms,
conditions and procedures set forth in the Merger Agreement the stockholders of
First Federal on the effective date of the Merger (other than the shares owned
by the Holding Company and stockholders who have properly exercised appraisal
rights under the OTS Rules and Regulations) may elect to receive for each share
of First Federal Common Stock held either (i) two and one-half shares of Holding
Company Common Stock (fractional shares will be rounded up to the next whole
number), or (ii) a combination of Holding Company Common Stock at two and
one-half shares of Holding Company Common Stock for each share of First Federal
Common Stock held by the stockholder and cash at $24.07 per share for each other
share of First Federal Common Stock held by the stockholder, or (iii) all cash
at $24.07 per share of First Federal Common Stock; provided, however, that no
more than 80% of existing First Federal Common Stock can be sold for cash. 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 total consideration to be received by First
Federal shareholders electing cash in the Merger will range from $2,941,000 at
the minimum to $4,614,000 at the maximum. (See "PROPOSAL II - THE MERGER --
Consideration to be Received; -- Rights of Dissenting Stockholders; and APPENDIX
B - Section 552.14 of Home Owners Loan Act of 1993, as amended"). After the
Merger, First Federal stockholders who sell all of their shares will have no
continuing stockholder relationship with First Federal, the Holding Company, or
New Bank. If shareholders approve the Merger, but less than 20% of the
shareholders elect to receive Holding Company Common Stock, the Holding Company
will be permitted to allocate cash and stock pro rata to those shareholders who
elect the oversubscribed cash consideration. All stockholders will be treated
the same for purposes of proration. For examples as to how reallocation would
operate, see "PROPOSAL II - THE MERGER -- Consideration to be Received."
Management intends that the transaction qualify for treatment as a
leveraged buy-out ("LBO") in accordance with Issue No. 88-16 of the Emerging
Issues Task Force ("EITF 88-16"). EITF 88-16 permits a partial or complete
change in accounting basis only if a new controlling stockholder or group of
stockholder has been established. Under the proposed transaction, a group of
First Federal stockholders (including members of First Federal management) and
others who do not have unilateral (over 50%) control of First Federal have
present intentions to acquire control of the Company through the exchange of
First Federal stock for Holding Company stock and the purchase of newly issued
Company stock. Accordingly, the accounting basis of exchanged shares will be
carried over while the new Company shares issued will reflect a new basis of
accounting.
In the event that the proposed transaction does not qualify for LBO
treatment, the Company would not record a partial new basis of accounting, but
would instead reflect a recapitalization, with the purchase of shares recorded
as a reduction of Holding Company equity and the issuance of new shares at their
price less costs of issuance. Accordingly, pro forma June 30, 1997 stockholders'
equity of Company would be reduced by $1.4 million to $873,000. Thus, management
prefers that the proposed transaction qualify for LBO treatment.
For tax purposes it is necessary that currently existing stockholders
of First Federal owning in the aggregate 50% or more of the First Federal Common
Stock own less than 50% of the common stock in the new holding company. The
transaction is intended to qualify under Internal Revenue Code Section 351.
Under Section 351, any gain related to the distribution of cash to the
stockholders will be taxed as a capital gain. However, if 50% or more of the new
holding company stock is acquired by currently existing stockholders in First
Federal owning in the aggregate 50% or more of the First Federal Common Stock,
the transaction will not qualify under Section 351 and any cash distribution to
the stockholders electing both cash and stock may be treated as dividend income
and taxed as ordinary income.
Opinion of Financial Adviser. Hoefer & Arnett has rendered an opinion
to First Federal's board of directors, dated as of April 16, 1997, to the effect
that (as of such date) the proposed acquisition of the First Federal Common
Stock by the Holding Company at a cash price of $24.07 per share
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is fair from a financial point of view to First Federal stockholders. This
opinion is attached in full as Appendix C to this Joint Proxy
Statement/Prospectus. First Federal stockholders are urged to read that opinion
in its entirety for a description of the procedures followed, assumptions made,
matters considered, and qualifications on the review undertaken by Hoefer &
Arnett (See "PROPOSAL II - THE MERGER -- Opinion of Financial Advisor").
Vote Required. The affirmative vote of the holders of a majority of the
outstanding shares of First Federal Common Stock entitled to vote as of the
Record Date is required to adopt the Merger Agreement. As of the Record Date,
First Federal's directors and executive officers and their affiliates
beneficially owned 41.2 percent of the outstanding First Federal Common Stock.
As of the Record Date, the Holding Company has received indications from
directors, executive officers and their immediate families holding 44,080 or
approximately 18.4 percent of the outstanding First Federal Common Stock that
they will vote for the Merger and exchange their shares for Holding Company
Common Stock. No vote of the shareholders of the Holding Company is required to
adopt the Merger Agreement (See "GENERAL MEETING INFORMATION").
Effective Date. The Merger shall become effective at the time and on
the date specified in the certificate and articles of merger to be filed with
the Secretary of State of Delaware and with the OTS (the "Effective Date"). Such
filing will occur only after the receipt of all requisite regulatory approvals,
approval of the Merger Agreement by the requisite vote of First Federal
stockholders and the satisfaction or waiver of all other conditions to the
Merger. The closing of the Merger will occur on a date mutually agreed upon by
First Federal and the Holding Company. In the absence of such agreement, the
closing shall occur on the tenth business day after the last to occur of : (i)
the receipt of all requisite regulatory approvals and the expiration of all
applicable statutory waiting periods; and (ii) the requisite approval of the
Merger by stockholders of First Federal.
Appraisal Rights. Holders of First Federal Common Stock are entitled to
regulatory rights of appraisal pursuant to Section 552 of the OTS Rules and
Regulations (See "PROPOSAL II - THE MERGER -- Rights of Dissenting
Stockholders"). Stockholders who exercise appraisal rights are herein called
dissenting stockholders.
Conditions to the Merger. The respective obligations of the parties to
consummate the Merger are subject to the fulfillment or waiver of certain
conditions specified in the Merger Agreement, including, among other things, the
receipt of the requisite regulatory and stockholder approvals, the Holding
Company completing the sale of at least 150,000 shares of Common Stock
($1,500,000) and $3,400,000 of Units consisting of debentures and warrants by
March 31, 1998, the accuracy of the representations and warranties contained
therein, the legal opinions and certain other conditions customary in
transactions of this nature. The Merger is contingent upon the Offering, because
the funds raised in the Offering are necessary to purchase those shares for
which First Federal Stockholders have elected cash. Likewise, should First
Federal Stockholders reject the Merger proposal, the Offering will terminate.
See "PROPOSAL II - THE MERGER -- Conditions to the Merger" and "The Offering."
Regulatory Approval. The Merger is subject to the approval of OTS.
First Federal filed an application for approval of the Merger with the OTS, and
anticipates obtaining the approval of the OTS in the fourth quarter of 1997.
There can be no assurance as to the timing of such approval or that the OTS will
approve the Merger.
It is a condition to the consummation of the Merger that First Federal
and the Holding Company shall have received all applicable regulatory approvals
and consents to consummate the Merger Agreement. There can be no assurance that
such approvals or consents will not contain terms, conditions or requirements
which cause such approval to fail to satisfy such conditions to the consummation
of the Merger.
In addition, under federal law, a period of 30 days (subject to
reduction to 15 days) must expire following approval by the OTS within which
period the United States Department of Justice (the "Department of Justice") may
file objections to the Merger under the federal antitrust laws. The Department
of Justice could take such action under the antitrust laws as it deems necessary
or desirable in the public interest, including seeking to enjoin the Merger
unless divestiture of an acceptable number of branches to a competitively
suitable purchaser could be made. While First Federal believes that the
likelihood of such action by the Department of Justice is remote in this case,
there can
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be no assurance that the Department of Justice will not initiate such a
proceeding. (See "PROPOSAL II - THE MERGER -- Regulatory Approval").
Waiver and Amendment; Termination. Prior to the Effective Date, First
Federal and the Holding Company Boards may extend the time for performance of
any obligations under the Merger Agreement, waive any inaccuracies in the
representations and warranties contained in the Merger Agreement and waive
compliance with any agreements or conditions of the Merger Agreement.
Subject to applicable law, the Merger Agreement may be amended by
action of First Federal and the Holding Company Boards at any time before or
after approval of the Merger Agreement by the stockholders of First Federal and
the Holding Company. However, the Merger Agreement may not be amended after
stockholder approval which changes the form of consideration or the value of the
consideration to be received by the stockholders of First Federal without the
approval of the stockholders of First Federal. See "PROPOSAL II - THE MERGER --
Waiver and Amendment; Termination."
The Merger Agreement may be terminated at any time prior to the
Effective Date: (i) by the mutual written consent of the Board of Directors of
First Federal and the Holding Company; (ii) by First Federal or the Holding
Company if there is a final judicial or regulatory determination that any
material provision of the Merger Agreement is illegal, invalid or unenforceable
or denying any regulatory application the approval of which is a concern
precedent to First Federal or the Holding Company's obligations under the Merger
Agreement (iii) if the conditions precedent to the obligations of the other
party are rendered impossible to be satisfied or fulfilled; (iv) if the
stockholders of First Federal and the Holding Company fail to approve the
Merger; (v) the other party (either First Federal or the Holding Company) has
materially breached any representation, warranty, covenant or agreement set
forth in the Merger Agreement and has failed to or cannot in a timely manner
rectify such breach after receiving written notice of such breach; or (vi) if
the Merger is not consummated by the 270th day (360 days if there is a CRA
protest).
Conduct of Business Pending the Merger. Each of First Federal and the
Holding Company has agreed to conduct its business prior to the Effective Date
in accordance with certain guidelines set forth in the Merger Agreement. See
"PROPOSAL II - THE MERGER - Conduct of Business of First Federal Pending the
Merger."
Accounting Treatment. Management prefers that the Merger qualify as a
"leveraged buy-out" for accounting and financial reporting purposes. In the
event that the proposed transaction does not qualify for LBO treatment, the
Company would not record a partial new basis of accounting, but would instead
reflect a recapitalization, with the purchase of shares recorded as treasury
stock and the issuance of new shares at their price less costs of issuance.
Accordingly, pro forma June 30, 1997 stockholders' equity of Company would be
reduced by $1.4 million to $873,000. See "PROPOSAL II - THE MERGER -- Accounting
Treatment."
Federal Income Tax Consequences of the Merger. Crowe, Chizek and
Company LLP, accountants to the Holding Company, has delivered to the Holding
Company its opinion to the effect that, assuming the Merger occurs in accordance
with the Merger Agreement and conditioned on the accuracy of certain
representations made or to be made by the Holding Company and certain holders of
First Federal Common Stock, the exchange of First Federal Common Stock solely
for shares of Holding Company Common Stock in the Merger will be a nontaxable
exchange for federal income tax purposes and that, accordingly, no gain or loss
will be recognized by the Holding Company, First Federal, or First Federal
stockholders who exchange their shares of First Federal Common Stock solely for
shares of Holding Company Common Stock in the Merger. However, First Federal
stockholders who receive both shares and cash of Holding Company Common Stock in
exchange for First Federal Common Stock will recognize taxable income in an
amount not in excess of the amount of cash received. Gain or loss, if any, will
be recognized by First Federal stockholders who receive solely cash. Each First
Federal stockholder is urged to consult his or her own tax advisor to determine
the specific tax consequences of the Merger to such stockholder. First Federal
will resolicit its shareholders prior to proceeding with the transaction if the
condition of receiving a tax opinion is waived
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and the material federal income tax consequences are materially different than
as described herein. See "PROPOSAL II - THE MERGER -- Federal Income Tax
Consequences of the Merger and -- Conditions to the Merger."
First Federal Stockholder Election Procedures. Each First Federal
stockholder will have the opportunity to elect whether to receive either two and
one-half shares of Holding Company Common Stock (the "Stock Distribution") per
share of First Federal Stock Common Stock (in which case, such holder's shares
shall be deemed to be "Stock Election Shares"), or a Stock Distribution for
those shares of First Federal Common Stock designated by the holder as Stock
Election Shares and cash (the "Cash Distribution") for the remaining shares
equal to $24.07 per share for his or her First Federal Common Stock (in which
case, such holder's shares shall be deemed to be "Cash Election Shares") or a
Cash Distribution for all of the holder's shares. Enclosed with this Joint Proxy
Statement/Prospectus is an election form for use by stockholders of First
Federal (the "Election Form") whereby stockholders may indicate a Stock
Election, a combination of Stock Distribution and Cash Distribution, or a Cash
Election. In order for an Election Form to be deemed to be effective, such
Election Form must be properly completed and duly executed by the First Federal
stockholder and returned to the Holding Company (in its capacity as exchange
agent) no later than the date of the First Federal Annual Meeting (the "Election
Deadline").
Any First Federal stockholder who fails to deliver a properly completed
and duly executed Election Form by the Election Deadline shall be deemed to have
made no election (a "No Election, " in which case, such holder's shares shall be
deemed to be "No Election Shares"). Unless the aggregate Cash Distribution
elected by the holders of Cash Election Shares is required to be reduced as
described below, No Election Shares will be treated as Cash Election Shares for
purposes of determining the type and amount of the Merger Consideration payable
pursuant to the Merger.
As discussed above, at least 20% of the consideration to be received in
the Merger must consist of Holding Company Common Stock. Therefore, the actual
Merger Consideration that will be paid to each First Federal common stockholder
upon consummation of the Merger may differ from the form of Merger Consideration
elected by such stockholder pursuant to his or her Election Form in the event
that the number of shares of Holding Company Common Stock exchanged for First
Federal Common Stock and to be issued pursuant to the Merger would be less than
20% of the total value of the Merger Consideration (the "Minimum Stock
Consideration Shares").
In the event that the number of shares of First Federal Common Stock
that would be issuable to Stock Election Shares on the basis of the
stockholders' elections is less than the Minimum Stock Consideration Shares,
then the Cash Distribution payable will be reduced. First, all No Election
Shares will be converted to additional Stock Election Shares in a manner to
equal to the extent possible the Minimum Stock Consideration Shares (when added
to the original Stock Election Shares). Then if necessary, the Cash Election
Shares (other than Dissenting Shares) will be reduced pro rata and be
substituted with the Stock Distribution such that the Minimum Stock
Consideration Shares will be issued in the Merger. See "PROPOSAL II -- The
Merger - Consideration to be Received" for examples as to how reallocation would
operate.
Within five business days after the Effective Date, the Holding Company
will allocate among the holders of First Federal Common Stock the right to
receive the Cash Distribution or the Stock Distribution pursuant to the Merger
Agreement and distribute such distributions promptly thereafter.
Comparison of Stockholder Rights. As a result of the Merger, holders of
First Federal Common Stock who elect to receive shares of the Holding Company
Common Stock will become stockholders of the Holding Company. Holders of First
Federal Common Stock, whose rights are presently governed by the Home Owners
Loan Act of 1933, as amended ("HOLA") and the Federal Stock Charter (the
"Charter") and Bylaws (the "First Federal Bylaws") of First Federal, will become
stockholders of the Holding Company, a Delaware corporation. Accordingly, their
rights will be governed by Delaware law ("DGCL"), the Holding Company
Certificate and the Holding Company Bylaws. Certain differences in the rights of
stockholders arise from distinctions between the First Federal Charter and First
Federal Bylaws, and the Holding Company Certificate of Incorporation and the
Holding Company Bylaws as well as Delaware law and the HOLA. Principally,
Delaware law provides certain anti-takeover protections that are not present
under the HOLA. For a more detailed comparison of the charter and bylaw
provisions of the Holding Company and First Federal governing the rights of the
Holding Company and First Federal stockholders, see
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PROPOSAL II - THE MERGER - Comparison of Stockholder Rights; and "Risk Factors
Associated with the Holding Company--Risks Associated with Anti-Takeover
Provisions."
RISK FACTORS
RISK FACTORS ASSOCIATED WITH THE HOLDING COMPANY
Ownership of the Holding Company Common Stock involves a high degree of
risk. In analyzing your election, the following risk factors, in addition to
those factors discussed elsewhere in this Joint Proxy Statement/Prospectus,
should be considered. The cautionary statements set forth below and elsewhere in
this Joint Proxy Statement/Prospectus should be read as accompanying forward
looking statements included under "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and elsewhere herein.
The risks described in the statements set forth below could cause the Holding
Company's and the Bank's results to differ materially from those expressed in or
indicated by such forward-looking statements.
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; the value of First Federal's
thrift charter; 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.
Dilution of Book Value. Upon completion of the Merger and Offering,
there will be an immediate and substantial dilution of the net tangible book
value of the Holding Company Common Stock from First Federal stock. 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 that as much
as 75% of the First Federal common shareholders may elect to receive cash for
sale of their stock and thus receive 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
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Board of Directors will determine to pay dividends on the Holding Company Common
Stock. See "Market and Dividend Information."
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.
Depending on the number of shares sold, it is expected that following the
Offering and Merger, 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.
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. See "Market and Dividend Information."
Risks Associated with Anti-Takeover Provisions. Certain provisions of
the Holding Company's certificate of incorporation and bylaws may discourage or
prevent an attempted acquisition or change in control of the Holding Company.
These provisions provide for, among other things, noncumulative voting for
directors, limitations on the calling of special meetings, a fair
price/supermajority vote requirement at 80% for certain business combinations
with Interested Stockholders, as therein defined, (including mergers or
consolidations, sale, lease or other disposition of assets, issuances or
transfers of securities, adoption of any plan of liquidation proposed by the
Interested Stockholders, or any reclassification of securities which increases
the Interested Stockholders percentage ownership of the Holding Company) and
certain notice requirements. Any or all of these provisions may serve to
entrench current management and to discourage potential proxy contests and other
takeover attempts, particularly those which have not been negotiated with the
Board of Directors.
Federal law requires OTS approval prior to the acquisition of "control"
(as defined in OTS regulations) of an insured institution, including a holding
company thereof. In the event that holders of revocable proxies for more than
25% of the shares of Holding Company Common Stock acting as a group or in
concert with other proxy holders seek, among other things, to elect one-third or
more of the Holding Company's Board of Directors, to cause the Holding Company's
shareholders to approve the acquisition or corporate reorganization of the
Holding Company or to exert a continuing influence on a material aspect of the
business operations of the Holding Company, such actions could be deemed to be a
change of control, subject to OTS approval. A Delaware statute also limits the
circumstances under which a Delaware corporation may engage in any business
combinations (as defined by the statute) with an interested shareholder (i.e.,
any person or entity that owns 15% or more of the voting stock). See " -- Other
Restrictions on Acquisitions of Stock."
The ownership of Holding Company Common Stock by First Federal's Board
of Directors and executive officers could render it more difficult to obtain
majority support for shareholder proposals opposed by the Board and management.
Assuming the sale of Holding Company Common Stock at the 150,000 shares minimum
and 200,000 shares maximum of the Offering, and assuming that First Federal's
Board and executive officers (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 shares of the Offering
and 29.5%, at the maximum shares of the Offering, respectively, of the shares to
be outstanding upon completion of the Offering. Stock ownership by directors and
executive officers, if voted as a block or supported by sufficient other
shareholder votes, could enable the Board and management to block the approval
of transactions requiring the approval of 80% of the shareholders under the
Holding Company's Certificate of Incorporation. See ""-- Other Restrictions on
Acquisitions of Stock."
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Regulatory Oversight. First Federal is subject to extensive regulation,
supervision and examination by the OTS, as its chartering authority and primary
federal regulator, and by the FDIC, which insures its deposits up to applicable
limits. First Federal is a member of the Federal Home Loan Bank System ("FHLB")
and is subject to certain limited regulation by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). As the holding company for
First Federal, the Holding Company will also be subject to regulation and
oversight by the OTS. See "Regulation." Such regulation and supervision governs
the activities in which an institution can engage and is intended primarily for
the protection of the insurance fund and depositors. Regulatory authorities have
been granted extensive discretion in connection with their supervisory and
enforcement activities which are intended to strengthen the financial condition
of the banking industry, including the imposition of restrictions on the
operation of an institution, the classification of assets by the institution and
the adequacy of an institution's allowance for loan losses. See "Regulation -
Federal Regulation of Thrift institutions." Any change in regulators or in
applicable regulation, whether by the OTS, the FDIC, the Comptroller of the
Currency, the Federal Reserve Board or Congress could have a material adverse
impact on the Holding Company, First Federal and their respective operations. In
this regard, legislation has been introduced into Congress that would require
all federal thrift institutions to either convert to a national or a state
depository institution (either a bank or a thrift institution) by June 30, 1998.
No assurance can be given as to whether or in what form such legislation may be
enacted.
Competition. First Federal experiences significant competition in its
local market area in both originating real estate and other loans and attracting
deposits. This competition arises from other thrift institutions as well as
banks, 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.
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. The Holding Company
will own 100% of the common stock of First Federal, after completion of the
Merger.
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 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. 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."
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RISK FACTORS ASSOCIATED WITH THE BANK
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 (primarily sales of home loans to the national secondary
market) 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. In accordance with its restructuring
strategy, First Federal has in recent years incurred above average noninterest
expense levels, due primarily to expenses related to its recent transition into
current full service retail banking. First Federal's Board of Directors believes
that expenses have been incurred for data processing, equipment, drive-in
facilities and personnel required for full-service retail banking, and that
future additions to its noninterest expenses (as a percentage of average assets)
will be modest.
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 Joint Proxy Statement/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."
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.
12
<PAGE>
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 either exceed the
maximum loan to value ratio to qualify for sale to FNMA and FHLMC, and/or have
credit deficiencies (which in certain cases will result in First Federal
securing the loan by additional collateral), and/or the borrower has an
insufficient employment history and/or the property does not qualify due to its
rural location or lack of comparability for appraisal purposes. As a result, the
loans may be deemed to have higher risk of nonpayment than secondary market
conforming conventional mortgage loans. While First Federal currently believes
that its loans are adequately secured or reserved for and has experienced
average annual net charge-offs (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 over the last three fiscal years, in the event that real estate prices
in its primary market area weaken or economic conditions in its primary market
area deteriorate, thereby reducing the value of properties securing First
Federal's loans, it is possible both that some borrowers may default and that
the value of the real estate collateral may be insufficient to fully secure the
loan. 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 those loans originated through its "second chance"
auto loan program, against credit default by the borrower, in the event of a
default by the insurance company which insures those loans, 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 entire
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."
HOLDING COMPANY OFFERING
The Merger is contingent upon the Holding Company successfully
completing an offering (the "Offering") of a minimum of 150,000 shares and a
maximum of 200,000 shares of Holding Company Common Stock at $10.00 per share
and a minimum of 3,400 units and a maximum of 3,700 units (the "Unit"), each
Unit consisting of one $1,000 11 1/2% Debenture due 2003 and nine Warrants to
purchase Holding Company Common Stock at $12.50 per share. Through the Offering,
the Holding Company anticipates raising $1,500,000 to $2,000,000 from the sale
of Holding Company Common Stock and $3,400,000 to $3,700,000 from the sale of
Units. The Merger is contingent upon a successful Offering because the funds
raised in the Offering are necessary to fund the cash consideration necessary to
complete the Merger . Should First Federal stockholders reject the Merger
proposal, the Offering will terminate. See "The Offering."
MARKET AND DIVIDEND INFORMATION
First Federal Common Stock is not listed on a national exchange and is
only traded infrequently. First Federal Common Stock was issued at $10.00 per
share in connection with the conversion of First Federal from mutual to stock
form on April 22, 1993. At June 30, 1997 there were 269 holders of First Federal
Common Stock and
13
<PAGE>
239,612 shares of common stock issued and outstanding. At June 30, 1997, the
last known sales price of First Federal's common stock was $11.00 per share.
First Federal pays dividends upon the determination of the Board of
Directors in its discretion that such payment is consistent with the long-term
interests of the Bank. The factors affecting this determination include First
Federal's consolidated financial condition and results of operations, tax
considerations, industry standards, economic conditions, regulatory
restrictions, general business practices and other relevant factors. First
Federal has never declared cash dividends on its common stock; however, it has
declared 5% Common Stock dividends in 1993, 1994 and 1995. Since the issuance of
the preferred stock in 1993, First Federal has paid an aggregate of $88,000 per
year in quarterly cash dividends on its preferred stock. 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. The issuance of the
Debentures by the Holding Company will result in the Holding Company being
dependent on the Bank for dividends to service the interest payments on the
Debentures, thus reducing the amount of capital that may be utilized for Common
Stock dividends or to supplement future growth.
For informational purposes only, the rights and conditions of First
Federal's 87,263 shares of existing Preferred Stock will remain unchanged by the
adoption of the proposed Agreement and Plan of Merger and the Preferred Stock
will remain outstanding upon completion of the Merger.
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 this
reorganization 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 price they would otherwise receive by electing the cash consideration.
14
<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 shares(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.
15
<PAGE>
<TABLE>
<CAPTION>
At or for the
Year Ended September 30,
1996 1995 1994 1993 1992
BALANCE SHEET RATIOS:
<S> <C> <C> <C> <C> <C>
Nonperforming assets to total
assets at end of year(6)...................... 1.50% .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.
16
<PAGE>
RECENT FINANCIAL DATA
The selected financial and other data of First Federal set forth below
at and for the three and nine months ended June 30, 1997 and June 30, 1996 were
derived from unaudited financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the financial condition and results of operations for the
unaudited periods presented have been included. The results of operations and
other data presented for the nine months ended June 30, 1997 are not necessarily
indicative of the results of operations which may be expected for the fiscal
year ending September 30, 1997. The information presented below is qualified in
its entirety by the detailed information and financial statements included
elsewhere in this Prospectus and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and the audited Financial Statements of First Federal
and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At June 30, At September 30,
1997 1996
-------------------------------------
(In Thousands)
<S> <C> <C>
BALANCE SHEET:
Total assets....................... $65,781 $57,597
Loans receivable, net.............. 58,801(1) 49,579(1)
Mortgage-backed securities......... 1,186 1,292
Securities......................... -- 1,000
Deposits........................... 57,638 51,677
FHLB Advances...................... 2,100 --
Stockholders' equity............... 4,719 4,316
</TABLE>
- -------------------
(1) Including loans held for sale to the secondary market at month-end of
$475,000 and $419,000 at June 30, 1997 and September 30, 1996,
respectively.
<TABLE>
<CAPTION>
For Three Months Ended For Nine Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME:
Total interest income...................................... $1,391 $1,199 $4,007 $3,611
Total interest expense..................................... 663 584 1,882 1,795
------- ------- ------- -------
Net interest income...................................... 728 615 2,125 1,816
Provision for loan losses.................................. 15 6 17 1
------- ------- ------- -------
Net interest income after provision for loan losses...... 713 609 2,108 1,815
Service charges............................................ 135 142 449 386
Gain on sales of loans, mortgage servicing rights,
mortgage-backed securities and securities................ 40 114 99 288
Other noninterest income................................... 41 -- 41 9
Other noninterest expenses (operating expenses)............ 665 661 1,986 2,023
------- ------- ------- -------
Income before income taxes................................. 264 204 711 475
Income tax expense ........................................ 90 70 242 162
------- ------- ------- -------
Net income................................................. $ 174 $ 134 $ 469 $ 313
======= ======= ======= =======
Ratio of earnings to fixed charges including interest on
deposits(1)................................................ 1.33 1.22 1.33 1.22
Ratio of earnings to fixed charges excluding interest on
deposits(1)................................................ 6.24 6.76 6.24 6.76
PER SHARE DATA:
Earnings per share(2)...................................... .63 .47 1.68 1.04
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
For Three Months Ended For Nine Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
------ ------ ------ -----
<S> <C> <C> <C> <C>
BALANCE SHEET RATIOS:
Nonperforming assets to total
assets at end of period(3)................... 1.62% 1.24% 1.62% 1.24%
Total equity to total assets (end of period)... 7.17(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.
18
<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.
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
19
<PAGE>
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 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
20
<PAGE>
$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 totaling $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.
21
<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 Joint Proxy Statement/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 or should the amount of stock sold in the Common Stock Offering be
greater than the amount assumed for purposes of these tables or should less than
75% of the holders of the stock of First Federal elect to be paid in cash by the
Holding Company. 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 27 through 30 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.
22
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, 1997
----------------------------------------------------------
Bank Elimination Consolidated
Historical Pro forma Adjustments Entries Pro forma
---------- -------------------------- ----------- -------------
ASSETS
<S> <C> <C> <C> <C> <C>
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>
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 year ended
September 30, 1996
------------------------------------------
Bank Pro forma Consolidated
Historical Adjustments Pro Forma
---------- ----------- ------------
INTEREST INCOME
<S> <C> <C> <C>
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>
24
<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
---------- ----------- ------------
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>
25
<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 75% of First Federal's Common
Stock for $4,326,000 (179,709 shares at $24.07 per share) as follows:
<TABLE>
<CAPTION>
Amortization
Annual
Life Amount
---- ------
<S> <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 1,036,00 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.
26
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
June 30, 1997
<TABLE>
<CAPTION>
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>
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 year ended
September 30, 1996
Bank Pro forma
Historical Adjustments Consolidated
---------- ----------- ------------
INTEREST INCOME
<S> <C> <C> <C>
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>
28
<PAGE>
<TABLE>
<CAPTION>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Nine Months Ended
June 30, 1997
Pro forma
Bank 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>
29
<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 vlue $.01) of Holding
Company at historical book value (59,903 shares at $16.05/share =
$961,000) plus the purhcase of 75% of First Federal stock for
$4,326,000 (179,709 shares at $24,07/per share).
30
<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 and the receipt of the estimated net proceeds
thereof, assuming the use of LBO accounting 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.
31
<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.
32
<PAGE>
PROPOSAL I - ELECTION OF DIRECTORS
GENERAL
First Federal's Board of Directors currently consists of ten members.
The Board is divided into three classes, each of which contains approximately
one-third of the Board. Approximately one-third of the Directors is elected
annually, as is required by regulation. Directors of the Bank are generally
elected to serve for a three-year period or until their respective successors
are elected and qualified.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Common stockholders of record as of the close of business on ________,
1997, will be entitled to one vote for each share then held. As of that date,
First Federal had 239,612 shares of Common Stock issued and outstanding. The
following table sets forth information regarding share ownership of: (i) those
persons or entities known by management to beneficially own more than five
percent of First Federal's Common Stock and (ii) all Directors and officers as a
group.
Percent of
Beneficial Owner Shares Beneficially Owned Class
---------------- ------------------------- ----------
Charles Neelley
Director, First Federal 22,915 9.05%
Phil Hobson 24,705 9.76
Director, First Federal
Davis T. McGill 38,828 16.20
John Winsauer 24,705 9.76
Directors and executive officers 104,321 41.22%
of the Bank as a group
(11 persons)(1)
- -----------------------
(1) Includes shares held directly, as well as, jointly with family members,
and shares held in retirement accounts in a fiduciary capacity or by
certain family members, with respect to which shares the listed
individuals or group members may be deemed to have sole voting and
investment power. This table also includes 4,143 and 1,553 shares
subject to options granted under the Bank's Stock Option Plan to
President Stephen and certain non-employee Directors, which are
exercisable within 60 days of December 1, 1996.
33
<PAGE>
The table below sets forth certain information, regarding the composition of
First Federal's Board of Directors, including each Director's term of office.
The Board of Directors, acting as the nominating committee, has recommended and
approved the nominees identified in the following table. It is intended that the
proxies solicited on behalf of the Board of Directors (other than proxies in
which the vote is withheld as to a nominee) will be voted at the Meeting FOR the
election of the nominees identified below. If a nominee is unable to serve, the
shares represented by all valid proxies will be voted for the election of such
substitute nominee as the Board of Directors may recommend. At this time, the
Board of Directors knows of no reason why any nominee may be unable to serve, if
elected. Except as disclosed herein, there are no arrangements or understandings
between the nominee and any other person pursuant to which the nominee was
selected.
<TABLE>
<CAPTION>
Shares of
Stock
Position(s) Held Director Term to Beneficially Percent
Name Age(1) in the Bank Since Expire Owned(2) of Class
- ------------------------ ------ ------------- ------- -------- ---------- --------
NOMINEES
<S> <C> <C> <C> <C> <C>
J. Stanley Stephen 63 Director, President/Chief 1991 2000 7,771 3.07%
Executive Officer
Ken Hayes 57 Director 1993 2000 1,781 (3)
Charles Neelley 67 Director, Secretary/Treasurer 1993 2000 22,915 9.05
George Koenig 52 Director/Executive Vice 1996 2000 56 (3)
President
DIRECTORS CONTINUING IN OFFICE
Ernest A. Wentrcek 68 Vice Chairman of the Board 1965 1998 3,868 1.53
Robert H. Conaway 43 Director 1995 1998 18,135 7.17
Richard L. Peacock 78 Chairman of the Board 1965 1999 3,868 1.53
Jack W. Lester, Jr. 56 Director, Assistant 1992 1999 13,707 5.42
Secretary/Treasurer
Phil Hobson(4) 64 Director 1993 1999 24,705 9.76
J. Roland Ruffino 46 Director 1995 1999 6,765 2.67
</TABLE>
(1) At December 31, 1996.
(2) Amounts include shares held directly and jointly with family members,
as well as shares which are held in retirement accounts, or held by
certain members of the named individuals' families, or held by trusts
of which the named individual is a trustee or substantial beneficiary,
with respect to which shares the respective Directors may be deemed to
have sole or shared voting and/or investment power. Amounts also
include stock option awards of 4,143 and 1,553 to President Stephen and
each non-employee Director at the time of the Bank's conversion from a
mutual savings association to a federal stock institution,
respectively.
(3) Less than one percent.
(4) Director Hobson intends to resign from the Board of Directors prior to
the closing of the Merger.
The principal occupation of each Director of the Bank is set forth
below. All Directors have held their present position for at least five years
unless otherwise indicated. Director Hobson intends to resign from the Board of
Directors prior to the closing of the Merger.
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
34
<PAGE>
partnerships of which Mr. Stephen was a partner but not a managing partner.
Those financial institutions filed counter-claims against the real estate
partnerships and their individual partners for amounts previously advanced.
Subsequent to the commencement of litigation by Mr. Stephen, certain of
those financial institutions were taken over by their respective Federal
regulatory agencies, including the FDIC.
In addition, the FDIC filed suit against the officers and directors of
certain failed institutions, including those with which Mr. Stephen was
previously associated with, alleging various civil causes of action arising from
their activities as directors and/or officers -- which Mr. Stephen and his
fellow directors and officers disputed. Mr. Stephen has never been accused of
any criminal wrongdoing by any regulatory agency. Currently all lawsuits in
which Mr. Stephen was a party have either been successfully dismissed or
settled. In addition, in June of 1994, Mr. Stephen successfully completed a
personal plan of reorganization under the federal bankruptcy laws. The OTS has
never objected to Mr. Stephen serving as President of First Federal since 1991.
Mr. Stephen has provided new senior management at First Federal, since
his arrival in early 1991, to successfully convert it from a mutual savings
association to a new, Federal stock institution through a community public stock
offering, as well as returning the institution to profitability. In addition,
under Mr. Stephen's direction, First Federal has now expanded its home,
consumer, and SBA lending in the Bryan-College Station market area, and now
meets the regulatory definition of a "well capitalized" financial institution.
Also, under his direction, First Federal opened a Loan Production Office in
Waco, Texas in 1993, a full-service banking facility in College Station, Texas
in early 1994, a loan production office in Huntsville, Texas in July 1995, and a
Mortgage Loan Production Office in College Station in 1996. Recently, a new site
located at a key intersection was acquired by First Federal for a future
full-service branch bank to serve the northern portion of Bryan-College Station.
During his tenure as President/CEO, he has re-structured First Federal to begin
providing full-service retail banking --through the addition of experienced
personnel, re-training existing staff, converting data processing and adding
facilities to provide for the future, long-term profitable growth of the
institution.
Ken Hayes. Mr. Hayes is the owner of Aggieland Travel, located in
College Station, a full-service travel agency.
Charles Neelley. Mr. Neelley is retired from Texas A&M University and
the travel agency business. In November 1995, Mr. Neelley was elected
Secretary/Treasurer of the Board.
Richard L. Peacock. Mr. Peacock has been retired since 1983 from a
privately owned retail office supply and furniture business located in Bryan,
Texas. In November 1995, Mr. Peacock was elected Chairman of the Board.
Ernest A. Wentrcek. Mr. Wentrcek was the Secretary and/or Treasurer of
First Federal's Board of Directors until 1995 when he was elected Vice Chairman
of the Board of Directors. Mr. Wentrcek is the President and owner of W&W
Builders/Realtors, a real estate sales, rentals and property management company
located in Bryan, Texas. In September 1988, he retired as the Associate Director
for Business Affairs of the Texas Engineering Extension Service, Texas A&M
University System, a vocational education organization. He is the Vice Chairman
of the Finance Committee of the Supreme Lodge of the Slavonic Benevolent Order
of the State of Texas (SPJST). Mr. Wentrcek is a licensed Real Estate Broker and
a member of the Bryan-College Station Board of Realtors and the Multiple Listing
Service. He is also a member of the American Legion Post 159-Bryan.
Jack W. Lester, Jr. Mr. Lester is currently retired. Prior to his
retirement, he was the owner and operator of a leading women's apparel store
located in Bryan, Texas. In November 1995, Mr. Lester was elected Assistant
Secretary/Treasurer of the Board.
Phil Hobson. Dr. Hobson is a professor of veterinary medicine at Texas
A&M University, a position he has held since 1965.
J. Roland Ruffino. Mr. Ruffino is a partner of Readfield Meats, Inc., a
long-time leading wholesale and retail meat distributor located in Bryan, Texas.
Robert H. Conaway. Mr. Conaway is the founder and President of Progress
Supply located in Bryan, Texas, a distributor of wholesale supply plumbing
fixtures.
35
<PAGE>
George Koenig. Mr. Koenig is currently serving as executive vice
president of the Bank. Mr. Koenig was previously employed as an operating
officer with a local financial institution located in Bryan, Texas.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
Meetings of First Federal's Board of Directors are generally held on a
monthly basis, with Special Meetings held on an as needed basis. The Board of
Directors met 14 times during the fiscal year ended September 30, 1996. No
incumbent Director of First Federal attended fewer than 75% of the total number
of board meetings held by the Board of Directors and the total number of
meetings held by the committees of the Board of Directors on which he served,
during fiscal year 1996.
The Board of Directors has standing Executive, Audit, Asset/Liability,
Investments, Insurance and Finance, Loan, Personnel, Policy, Compliance, Stock
Option and Business Development committees.
The Executive Committee is currently composed of Directors Stephen
(Chairman), Wentrcek, Peacock, Neelley and Hobson. This Committee meets as
needed and handles major policy questions between regularly scheduled board
meetings. The Committee met two times during fiscal 1996.
The Audit Committee is currently composed of Directors Wentrcek
(Chairman), Peacock, Neelley, Lester and Hayes. The Committee currently meets as
necessary on matters concerning annual audits and internal audit findings. This
Committee met two times during fiscal 1996.
The Asset/Liability Committee is currently composed of Directors
Stephen (Chairman), Koenig and Hobson and Officer Hegar. The Committee meets
quarterly to deal with matters concerning asset/liability composition,
interest-rate risk exposure and liquidity investment. This Committee met five
times during fiscal 1996.
The Investment, Insurance and Finance Committee is currently composed
of Directors Stephen, Wentrcek and Ruffino and officer Hegar (Chairman). The
Committee usually meets quarterly to handle matters concerning investment
policies and decisions and insurance of First Federal's personnel and property.
This Committee met 12 times during fiscal 1996.
The Loan Committee consists of all members of the Board of Directors on
a rotating basis with three outside Directors constituting a quorum. The Loan
Committee approves all loans originated by First Federal in excess of $50,000
and ratifies all loans at the monthly meeting of the Board of Directors. The
Loan Committee met 18 times during fiscal 1996.
The Personnel Committee is currently composed of Directors Peacock
(Chairman), Stephen, Neelley, Peacock, Wentrcek and Hayes and Officer Hegar. The
Committee meets as needed to review staffing, compensation 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,
Conaway and Wentrcek and meets as needed to review First Federal's operating
policies. The Policy Committee met three times during fiscal 1996.
The Compliance Committee is responsible for reviewing compliance
policies with First Federal's regulatory activities. It currently consists of
Directors Lester (Chairman), Hobson, Peacock and Officer Koenig. This Committee
met two times during fiscal 1996.
The Stock Option Committee is composed of Directors Wentrcek and
Peacock. This Committee is responsible for the administration of the stock
option and incentive plan. The Committee did not meet during fiscal 1996.
The Business Development Committee consists of Directors Neelley
(Chairman), Peacock, Conaway, Ruffino and Stephen. This Committee did not meet
during fiscal 1996.
The entire Board of Directors acts as a nominating committee for
selecting nominees for election as Directors. While the Board of Directors of
First Federal will consider nominees recommended by stockholders, the Board has
not actively solicited such nominations.
36
<PAGE>
DIRECTOR COMPENSATION
Outside Directors received $150.00 for each board meeting attended and
$50.00 for each Loan Committee meeting attended in the fiscal year ending
September 30, 1996.
EXECUTIVE 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 operations and 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
$100,000 during the fiscal year ended September 30, 1996. Mr. Stephen
voluntarily reduced his salary in 1995 and 1996.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------
Long Term Compensation
Annual Compensation Awards Payouts
RESTRICTED
OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
Name and Salary Bonus COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
- ------------------------ -------- ----------- --------- -------------- ----------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J. Stanley Stephen 1996 $ 89,875 $--- $--- $--- --- --- $---
President and Chief 1995 91,233 --- --- --- --- --- ---
Executive Officer 1994 102,000 --- --- --- --- --- ---
</TABLE>
37
<PAGE>
The following table sets forth information regarding the number and
value of stock options at September 30, 1996 held by First Federal's Chief
Executive Officer. No stock options were exercised during fiscal 1996.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISED IN LAST FISCAL YEAR
- ------------------------------------------------------------------------------------------------------------------
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FY-END (#) FY-END ($)(1)
--------------- -----------------
SHARES VALUE
NAME ACQUIRED REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------- ON EXERCISE (#) ($) ----------- ------------- ----------- -------------
--------------- --------
<S> <C> <C> <C> <C> <C> <C>
J. Stanley Stephen --- --- 4,143 --- $4,143 ---
</TABLE>
- -------------------
(1) Represents an option to purchase Common Stock awarded to the Bank's
Chief Executive Officer based upon the last available sale price of
$11.00 per share at March 31, 1996.
EMPLOYMENT AGREEMENTS
The Bank has entered into employment agreements with J. Stanley
Stephen, George Koenig, Mary L. Hegar and Kay Watson. The employment agreements
are designed to assist the Bank in maintaining a stable and competent management
team after the Merger. The continued success of the Bank depends to a
significant degree on the skills and competence of its officers. These
agreements have been filed with the OTS as part of the application of the
Holding Company for approval to become a thrift holding company. The employment
agreements provide for annual base salary in an amount not less than the
officer's salary as of that date. These agreements provide for an initial term
of two years in the case of Mr. Stephen and one year in the case of Mr. Koenig,
Ms. Hegar and Ms. Watson. The agreements provide for termination upon death,
termination of employment for cause or certain events specified by OTS
regulations.
The agreements provide that in the event the employee is involuntarily
terminated without cause, he or she shall receive one's year's base salary and
continued health benefits for one year. In the event that such termination of
employment occurs in connection with or within 12 months after a change in
control of the Bank, he or she shall receive instead a lump sum equal to 200% of
his or her "base amount" and continued health benefits for the remainder of the
term of the agreement, provided that such benefits are subject to reduction to
prevent any amount from becoming non-deductible by the Bank pursuant to Section
280G of the Internal Revenue Code of 1986, as amended. For purposes of the
employment agreements, a "change in control" is defined as an event that would
require the filing of an application or notice under 12 C.F.R. Part 574 or
certain other events which generally occur upon the acquisition of control of
10% or more of the Company's voting stock.
The Bank has also entered in a new employment agreement with Mr.
Stephen, which will supersede and replace the agreement described above,
effective July 1, 1997. The new agreement provides for an initial term of three
years, commencing July 1, 1997, and a base salary not less than his current
based salary, provided that the amount actually paid as salary shall be reduced
during the first five years of the agreement by one-half of the cost to the bank
of his supplemental retirement benefit. The agreement gives Mr. Stephen the
right to elect to cease serving as President and Chief Executive Officer and to
commence serving as a consultant to the bank at a fee of $58,200 per year. In
addition, the agreement provides a supplemental retirement benefit for Mr.
Stephen, in an amount such that, when added to his benefit under the qualified
retirement plan, he will receive up to 70% of the average of his annual salary
and bonus during the three years out of the prior ten years in which he received
the highest salary and bonus. Mr. Stephen's right to the supplemental retirement
benefit vests at 20% per year commencing July 1, 1997, and will vest completely
if he discontinues his employment due to disability. The agreement further
provides that if the Bank
38
<PAGE>
terminates Mr. Stephen's employment other than for cause, without his consent,
it shall pay him his salary for the then-remaining term of the agreement and
consulting fees until June 30, 2002.
Based on their current salaries, if Mr. Stephen, Mr. Koenig, Ms. Hegar
or Ms. Watson were terminated as of December 31, 1997, under circumstances
entitling him or her to severance pay as described above, he or she would have
been entitled to receive a lump sum cash payment of approximately $179,750,
$105,000, $93,000 and $70,000, respectively.
BENEFIT PLANS
First Federal currently provides health care benefits to its employees,
including hospitalization and comprehensive medical insurance, life and
disability insurance, subject to certain deductibles and other limitations.
DEFINED BENEFIT PENSION PLAN
First Federal also sponsors a defined benefit pension plan (the
"Pension Plan"). Employees are eligible to participate in the Pension Plan on
January 1, or July 1 following the completion of twelve months of service,
provided they have attained at least age 20 1/2.
Effective January 1, 1994 a participant's normal retirement benefit is
a monthly benefit equal to 2.1% of Average Monthly Compensation times Years of
Service not to exceed 15. The benefit is accrued fractionally over the
participant's Years of Service. The participant's accrued benefit is equal to
the greater of (a) the Frozen Accrued Benefit as of December 31, 1993, and (b)
the participants accrued benefit calculated using the formula as stated above.
In the event of total and permanent disability, a participant becomes
fully vested with respect to his accrued normal retirement benefit. The
participant may receive an actuarially reduced benefit at the time of his
disability retirement provided the participant is age 50 or older and has 15
years of service.
Participants make no contributions to the Pension Plan. The employer
pays the entire cost of the Pension Plan.
The following table illustrates annual pension benefits payable upon
retirement to employees based on various levels of compensation and years of
service and assuming payment in the form of a straight-life annuity.
<TABLE>
<CAPTION>
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.
39
<PAGE>
PROPOSAL II - THE MERGER
The following discussion summarizes certain provisions of the Merger
Agreement and aspects of the Merger. This summary discussion is not intended to
be a complete description of the Merger and is qualified in its entirety by
reference to the Merger Agreement. The Merger Agreement is attached as Appendix
A and incorporated by reference in this Joint Proxy Statement/Prospectus.
GENERAL
First Federal shareholders will elect to receive Holding Company Common
Stock or cash, or a combination of both, in exchange for their First Federal
shares. Pursuant to the Merger Agreement, the Holding Company's subsidiary, New
Bank, will be merged with and into First Federal, with First Federal being the
surviving entity. "New Bank" is to be organized solely for the purpose of
facilitating the Merger, and will no longer be in existence after the Merger is
completed. As soon as possible after the conditions to consummation of the
Merger described below have been satisfied, those shareholders of First Federal
choosing to exchange those shares of First Federal Common Stock will receive
Holding Company Common Stock, those shareholders electing to exchange some of
their shares for new Holding Company Common Stock and to receive cash for some
of their shares will be notified how to so elect such a combination, and those
shareholders electing to receive cash in the Merger will be notified as to how
to exchange their shares for cash. The time at which the Merger becomes
effective is referred to as herein as the "Effective Date." It is presently
contemplated that the Effective Date will be as soon as practicable following
the fulfillment or waiver of each of the conditions to the Merger.
Upon consummation of the Merger, the stockholders of First Federal
shall be entitled to receive new Holding Company Common Stock and/or cash in the
Merger Consideration in exchange for their shares of First Federal Common Stock
held and thereupon shall cease to be stockholders of First Federal, and the
separate existence and corporate organization of New Bank shall cease. The
members of the Board of Directors of First Federal immediately prior to the
Effective Date shall be the members of the Board of Directors of First Federal
after the Effective Date. See also "--Material Agreements Relating to the Merger
and Interests of Certain Persons." Those First Federal shareholders who elect
stock will become shareholders of the Holding Company, which will own all of
First Federal, shareholders electing only cash will have no continuing interest
in First Federal, the Holding Company, or New Bank.
REASONS FOR AND RECOMMENDATION OF THE MERGER
The Board of Directors of First Federal has determined that the Merger
is in the best interest of its stockholders and accordingly, recommends that the
stockholders vote FOR the Merger. After review and due consideration, the Board
of Directors determined that it was in First Federal's best interest to remain
an independent community based financial institution.
In order to provide an opportunity for First Federal's common
stockholders who wish to continue their ownership in First Federal through its
new Holding Company, and also to provide an exit strategy for a majority of
common stockholders of First Federal who had the confidence to invest in the
Institution's future in 1992 (when First Federal converted from a mutual savings
association to a Federal stock institution in order to recapitalize First
Federal), and who now need or wish to sell some or all of their First Federal
Common Stock for cash at this time at an appropriate premium over book value and
the current trading price and who previously indicated to management their
desire to sell the shares in First Federal, the Board of Directors consequently
decided to undertake the Merger and Offering. This Merger and Offering will
permit those stockholders to receive what the Board believes to be an
appropriate level of compensation at an appropriate premium over book value for
more than 51% of the outstanding common stock, based on an independent valuation
appraisal of all of First Federal Common Stock as of March 31, 1997, which
independent valuation is $24.07 per share (1.56x of the Bank's book value at
March 31, 1997).
In addition, the Merger and the formation of the Holding Company as an
independent thrift institution holding company offer First Federal and the
Holding Company various potential advantages, including broader investment
opportunities than those available to a Thrift institution and increased
organizational flexibility. Further, because the Holding Company will not be
subject to certain regulatory capital requirements, borrowing limitations and
other re strictions applicable to First Federal, the Holding Company may have
greater access to capital markets for financing the growth of First Federal and
possible future operating subsidiaries of the Holding Company. A holding company
structure would permit the Holding Company to repurchase shares of Holding
Company Common Stock without
40
<PAGE>
adverse tax consequences, should the Board of Directors determine a repurchase
program to be in the best interests of stockholders. The Holding Company will be
able to diversify its financial services and business activities through the
Holding Company or subsidiaries which it may establish in the future, without
being restricted by the 2% of assets limitation on investments in service
corporations which is generally applicable to federally-chartered thrift
institutions. The Holding Company currently has no specific plans,
understandings or agreements relating to any of these activities permissible to
a thrift institution holding company.
Also, the Holding Company could acquire other thrift institutions
located in Texas (and in certain circumstances outside Texas) and, as a multiple
thrift institution holding company, operate them as separate corporate entities.
For example, an acquired thrift institution could retain its own directors,
officers and corporate name as well as having representation on the Holding
Company's Board of Directors. As a multiple savings and loan holding company,
the activities of the Holding Company are generally limited to those approved by
the OTS and those permissible for bank holding companies. These activities
include financial services related activities, real estate development and
certain insurance agency activities. This ability to offer more autonomous
operations could be decisive in negotiations with acquisition candidates.
However, while management continuously studies potential acquisition
opportunities, there are no specific plans, understandings or agreements at this
time relating to the acquisition of any other financial institutions by the
Holding Company, and management intends to concentrate its consideration of
potential acquisition opportunities primarily on situations where the Holding
Company could remain as a unitary rather than a multiple savings bank holding
company. There can be no assurance that such acquisition opportunities will be
available in the future or, if available, will be on terms deemed advantageous
to the Holding Company.
The types of financial services and business activities currently
permitted to a thrift institution holding company are not substantially broader
than those permitted to service corporations of federal thrift institutions. If,
after becoming a multiple thrift institution holding company by acquiring and
holding as separate entities more than one insured institu tion, the Holding
Company in the future determines that a broader range of business activities is
desirable, it could, sub ject to tax, accounting and other considerations, merge
its insured institution subsidiaries into a single insured institution
subsidiary and thereby have authority to engage in virtually any legal business
activity. This ability to diversify on a limited basis while acquiring other
institutions through a multiple thrift institution holding company structure, or
to have complete authority to diversify as a unitary thrift institution holding
company, is believed by the Board of Directors of First Federal to be a
substantial operating advantage of the proposed holding company structure for
First Federal.
It is anticipated that (subject to the Holding Company's financial
condition) the Holding Company may purchase additional Common Stock issued by
First Federal to provide capital to First Federal when and if needed. If the
Holding Company were not formed, and First Federal sought additional capital
through the issuance of shares of First Federal Common Stock, stockholders
desiring to avoid dilution of their percentage ownership of First Federal would
have to purchase additional shares of First Federal Common Stock with their
personal funds. In contrast, such future infusions of capital may be made by the
Holding Company, through funds available from borrowing or from the operations
of other subsidiaries which may be acquired by the Holding Company in the
future, without affecting the percentage ownership of stockholders of the
Holding Company. Capital infusions made by the Holding Company with borrowed
funds will be included in the capital of First Federal. In contrast, such funds
if borrowed by First Federal either would not be treated as capital or would be
treated only as supplemental capital, depending upon the remaining term to
maturity and only to the extent that supplemental capital does not exceed First
Federal's core capital. See "PROPOSAL II -- THE MERGER -- Regulatory Oversight."
In the opinion of management, an independent, predominantly community
owned holding company will serve the interests of the public and of First
Federal's stockholders, depositors and borrowers by improving its capabilities
for service in a highly competitive environment and by permitting it to continue
as one of the few remaining independent financial institutions in the
Bryan-College Station area.
CONSIDERATION TO BE RECEIVED
The common stockholders of First Federal at the Effective Date of the
Merger will elect to receive for each share of First Federal Common Stock held
either (i) two and one-half shares of Holding Company Common Stock (fractional
shares will be rounded up to the next whole number) or (ii) a combination of
Holding Company Common Stock at two and one-half shares of Holding Company
Common Stock for each share of First Federal Common Stock
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held by the stockholder and cash at $24.07 per share for each other share of
First Federal Common Stock held by the stockholder, or (iii) all cash at $24.07
per share of First Federal Common Stock; provided, however, that no more than
80% of existing First Federal common stock can be sold for cash. The Holding
Company will be permitted to allocate cash and stock pro rata to those
shareholders who elect the oversubscribed cash consideration. All shareholders
will be treated the same for purposes of proration. First Federal stockholders
who do not elect to receive shares of Holding Company Common Stock will have no
continuing stockholder relationship with First Federal or the Holding Company.
For example, if cash elections were oversubscribed, and 90% of the
consideration elected to be received was for cash in the Merger, a shareholder
who owned 1%, or 2,396 shares of First Federal Common Stock, and elected only
cash in the Merger would receive $51,269 (2,396 shares divided by 90% multiplied
by 80% multiplied by $24.07) and 665 shares in the Holding Company (266 shares
for which cash was not received times 2.5).
Management intends that the transaction qualify for treatment as a
leveraged buy-out (LBO) in accordance with Issue No. 88-16 of the Emerging
Issues Task Force (EITF 88-16). EITF 88-16 permits a partial or complete change
in accounting basis only if a new controlling stockholder or group of
stockholder has been established. Under the proposed transaction, a group of
First Federal stockholders (including members of First Federal management) and
others who do not have unilateral (over 50%) control of First Federal intend to
acquire control of the Company through the exchange of First Federal stock for
Company stock and the purchase of newly issued Company stock. Accordingly, the
accounting basis of exchanged shares will be carried over while the new Company
shares issued will reflect a new basis of accounting.
In the event that the proposed transaction does not qualify for LBO
treatment, the Company would not record a partial new basis of accounting, but
would instead reflect a recapitalization, with the purchase of shares recorded
as treasury stock and the issuance of new shares at their price less costs of
issuance. Accordingly, pro forma June 30, 1997 stockholders' equity of Company
would be reduced by $1.4 million to $873,000. Thus, management prefers that the
proposed transaction qualify for LBO treatment. See "PROPOSAL II - THE MERGER --
Consideration to be Received."
For tax purposes it is necessary that currently existing stockholders
of First Federal owning in the aggregate 50% or more of the First Federal Common
Stock own less than 50% of the stock in the new holding company. The transaction
is intended to qualify under Internal Revenue Code Section 351. Under Section
351, any gain related to the distribution of cash to the stockholders will be
taxed as a capital gain. However, if 50% or more of the new holding company
stock is acquired by currently existing stockholders in First Federal owning in
the aggregate 50% or more of the First Federal Common Stock, the transaction
will not qualify under Section 351 and any cash distribution to the stockholders
electing both cash and stock may be treated as dividend income and taxed as
ordinary income.
If for any reason, between May 21, 1997 (the date of the Merger
Agreement) and the Effective Date, the number of shares of First Federal Common
Stock outstanding or the number of unexercised "Stock Options" outstanding (as
defined in the next section ("First Federal's Stock Option and Incentive Plan"))
changes for any reason other than exercise of existing options as of May 21
(whether or not in breach of the Merger Agreement), then the amount of cash into
which shares of First Federal Common Stock are to be converted will be adjusted
as provided in the Merger Agreement. The Board of Directors of First Federal has
no present intention of issuing additional shares of First Federal Common Stock
or additional stock options prior to the date of the Merger Agreement or the
Effective Date.
FIRST FEDERAL STOCKHOLDER ELECTION PROCEDURES
Each First Federal stockholder will have the opportunity to elect
whether to receive either two and one-half shares of Holding Company Common
Stock (the "Stock Distribution") per share of First Federal Stock Common Stock
(a "Stock Election, in which case, such holder's shares shall be deemed to be
"Stock Election Shares"), or a Stock Distribution for those shares of First
Federal Common Stock designated by the holder as Stock Distribution Shares and
cash (the "Cash Distribution") for the remaining shares equal to $24.07 per
share for his or her First Federal Common Stock (a "Cash Election," in which
case, such holder's shares shall be deemed to be "Cash Election Shares") or a
Cash Distribution for all of the holder's shares. Enclosed with this Joint Proxy
Statement/Prospectus is an election form for use by stockholders of First
Federal (the "Election Form") whereby stockholders may indicate
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a Stock Election, a combination of cash and stock or a Cash Election. In order
for an Election Form to be deemed to be effective, such Election Form must be
properly completed and duly executed by the First Federal stockholder and
returned to the Holding Company (in its capacity as exchange agent) no later
than the date of the First Federal Annual Meeting (the "Election Deadline").
Each stockholder shall be presumed to be a separate and distinct holder
of record of First Federal's Common Stock. Any election may be revoked or
changed by the person submitting an Election Form or any other person to whom
the subject shares are subsequently transferred by submission of a later dated
Election Form, properly completed and duly executed, and received by the Holding
Company by the Election Deadline.
Any First Federal stockholder who fails to deliver a properly completed
and duly executed Election Form by the Election Deadline shall be deemed to have
made no election (a "No Election, " in which case, such holder's shares shall be
deemed to be "No Election Shares"). Unless the aggregate Cash Distribution
elected by the holders of Cash Election Shares is required to be reduced as
described below, No Election Shares will be treated as Cash Election Shares for
purposes of determining the type and amount of the Merger Consideration payable
pursuant to the Merger.
The actual Merger Consideration that will be paid to each First Federal
common stockholder upon consummation of the Merger may differ from the form of
Merger Consideration elected by such stockholder pursuant to his or her Election
Form in the event that the number of shares of First Federal Common Stock
exchanged for Holding Company Common Stock and to be issued pursuant to the
Merger would be less than 20% of the total value of the Merger Consideration
(the "Minimum Stock Consideration Shares").
In the event that the number of shares of the Holding Company Common
Stock that would be issuable to Stock Election Shares on the basis of the
stockholders' elections is less than the Minimum Stock Consideration Shares,
then the Cash Distribution payable will be reduced. First, all No Election
Shares will be converted to additional Stock Election Shares in a manner to
equal to the extent possible the Minimum Stock Consideration Shares (when added
to the original Stock Election Shares). Then if necessary, the Cash Election
Shares (other than Dissenting Shares) will be reduced pro rata and be
substituted with the Stock Distribution such that the Minimum Stock
Consideration Shares will be issued in the Merger.
^
A detailed description of the manner in which the Merger Consideration
will be paid to the First Federal stockholders upon consummation of the Merger,
including the terms and conditions under which a portion of the consideration
elected by the First Federal common stockholders will be reallocated into the
other category of Merger Consideration is set forth below.
Within five days after the Effective Date, the Holding Company will
allocate among the holders of First Federal Common Stock the right to receive
the Cash Distribution or the Stock Distribution pursuant to the Merger Agreement
and distribute such distributions promptly thereafter as follows:
If the number of shares of Holding Company Common Stock distributable
in respect of the Stock Election Shares is less than the number of the Minimum
Stock Consideration Shares then:
(i) all Stock Election Shares will be converted into the right to
receive the Stock Distribution;
(ii) all No Election Shares will be converted to Stock Election
Shares (the "Additional Stock Election Shares") in the event
that the conversion of all No Election Shares to Additional
Stock Election Shares would cause the aggregate number of
Stock Election Shares (including Additional Stock Election
Shares) to exceed the number of Minimum Stock Consideration
Shares exchanged for the Stock Distribution, the Additional
Stock Election Shares shall be reduced so that the aggregate
number of Stock Election Shares (including Additional Stock
Election Shares) equals the number of Minimum Stock
Consideration Shares, with the aggregate Additional Stock
Election Shares created upon the conversion of No Election
Shares being allocated pro rata to each holder of No Election
Shares in the proportion that the total No Election Shares of
such holder bear to the total number of No Election Shares of
all holders;
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(iii) in the event that conversion of all No Election Shares to
Additional Stock Election Shares pursuant to (ii) above would
cause the aggregate number of Stock Election Shares (including
Additional Stock Election Shares) to be less than the number
of Minimum Stock Consideration Shares, the Holding Company (in
addition to converting all No Election Shares) shall convert a
number of Cash Election Shares to Stock Election Shares and
exchange the same for the Stock Distribution such that the
aggregate number of Stock Election Shares (including
Additional Stock Election Shares) shall equal the number of
Minimum Stock Consideration Shares, with the aggregate Stock
Election Shares that are to be created upon the conversion of
Cash Election Shares being allocated pro rata to each holder
of Cash Election Shares in the proportion that the total Cash
Election Shares of such holder bear to the total number of
Cash Election Shares of all holders;
(iv) after the allocations set forth in (ii) and (iii) above have
been made, all remaining shares of First Federal Common Stock
(other than Dissenting Shares) will be converted into the Cash
Distribution.
^
First Federal common stockholders should carefully consider the tax
implications involved in electing to receive either cash, stock or a combination
of both. Cash proceeds are immediately taxable while taxation is deferred on
stock received by stockholders of First Federal in the exchange. For a detailed
discussion of the federal income tax consequences to First Federal common
stockholders, see "PROPOSAL II -- THE MERGER -- Federal Income Tax
Consequences." Also, First Federal common stockholders should consider the
liquidity of Holding Company Common Stock as well as the uncertainty as to the
future value of Holding Company Common Stock.
OPINION OF FINANCIAL ADVISOR
First Federal's Board of Directors retained Hoefer & Arnett to render a
written opinion (the "Fairness Opinion") as to the fairness, from a financial
point of view, to the holders of shares of First Federal Common Stock of the
proposed acquisition of First Federal Common Stock at a cash price of $24.07 by
the Holding Company. Hoefer & Arnett was selected based upon discussions with
the Board, its expertise with respect to financial institutions and its
reputation in the banking and investment communities. No limitations were
imposed by the First Federal Board of Directors upon Hoefer & Arnett with
respect to the investigations made or procedures followed in rendering the
Fairness Opinion.
A copy of the Fairness Opinion of Hoefer & Arnett, dated as of April
16, 1997, which sets forth certain assumptions made, matters considered and
limits on the review undertaken by Hoefer & Arnett, is attached as an Exhibit to
this Proxy Statement/Prospectus. First Federal shareholders are urged to read
the Fairness Opinion in its entirety. The following summary of the procedures
and analysis performed, and assumptions, used by Hoefer & Arnett is qualified in
its entirety by reference to the text of such Fairness Opinion. Hoefer &
Arnett's Fairness Opinion addresses only the fairness, from a financial point of
view, to the holders of shares of First Federal Common Stock of the proposed
acquisition of First Federal Common Stock at a cash price of $24.07 per share by
the Holding Company and does not constitute a recommendation to any First
Federal shareholder as to how such shareholder should vote at the First Federal
Shareholder Meeting.
In arriving at its opinion, Hoefer & Arnett reviewed and analyzed,
among other things, the following: (i) the Merger Agreement; (ii) Annual Reports
to Shareholders of First Federal for the years ended September 30, 1995 and
September 30, 1996; (iii) Quarterly OTS Call reports for the quarters ended
December 31, 1996, and March 31, 1997; (iv) certain other publicly available
financial and other information concerning First Federal; (v) publicly available
information concerning other thrifts, banks and holding companies, the trading
markets for their securities and the nature and terms of certain other merger
transactions we believe relevant to its inquiry; and (vi) evaluations and
analyses prepared and presented to the Board of Directors of First Federal or a
committee thereof in connection with this reorganization with Holding Company.
Hoefer & Arnett held discussions with senior management and the Board of
Directors of First Federal concerning its past and current operations, financial
condition and prospects, as well as the results of regulatory examinations.
Hoefer & Arnett reviewed with senior management of First Federal
earnings projections for 1997 through 2001 for First Federal as a stand-alone
entity, assuming the Merger does not occur, prepared by First Federal. Certain
pro forma financial projections for the years 1997 through 2001 for the combined
entity were derived by
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Hoefer & Arnett based partially upon the information discussed above, as well as
Hoefer & Arnett's assessment of general economic, market and financial
conditions.
In conducting its review and in arriving at its opinion, Hoefer &
Arnett relied upon and assumed the accuracy and completeness of the financial
and other information provided to it or publicly available, and did not attempt
to independently verify the same. Hoefer & Arnett relied upon the management of
First Federal as to the reasonableness of the financial and operating forecasts,
projections, and Hoefer & Arnett assumed that such forecasts, projections
reflect the best currently available estimates and judgments of the management
of First Federal. Hoefer & Arnett also assumed, without independent
verification, that the allowances for loan losses for First Federal are adequate
to cover such losses. Hoefer & Arnett did not make or obtain any evaluations or
appraisals of the properties of First Federal, nor did it examine any individual
loan credit files. For purposes of its opinion, Hoefer & Arnett assumed that the
Merger will have the tax, accounting and legal effects described elsewhere
herein and relied, as to legal matters, exclusively on counsel to First Federal,
as to the accuracy of the disclosures set forth herein. Hoefer & Arnett's
opinion is limited to the fairness, from a financial point of view, to the
holders of shares of First Federal Common Stock of the proposed acquisition of
First Federal Common Stock at a cash price of $24.07 per share by the Holding
Company and does not address the other terms of the Merger of First Federal's
underlying business decision to proceed with the Merger.
As more fully discussed below, Hoefer & Arnett considered such
financial and other factors as Hoefer & Arnett deemed appropriate under the
circumstances, including among others the following: (i) the historical and
current financial position and results of operations of First Federal, including
interest income, interest expense, net interest income, net interest margin,
provision for loan losses, non-interest income, non-interest expense, earnings,
dividends, internal capital generation, book value, intangible assets, return on
assets, return on shareholders' equity, capitalization, the amount and type of
non-performing assets, loan losses and the reserve for loan losses, all as set
forth in the financial statements for First Federal; (ii) the assets and
liabilities of First Federal, including the loan, investment and mortgage
portfolios, deposits, other liabilities, historical and current liability
sources and costs and liquidity; and (iii) the nature and terms of certain other
merger transactions involving thrifts, banks and bank holding companies. Hoefer
& Arnett also took into account its assessment of general economic, market and
financial conditions and its experience in other transactions, as well as its
experience in securities valuation and its knowledge of the banking industry
generally. Hoefer & Arnett's opinion is necessarily based upon conditions as
they existed and could be evaluated on the date of its opinion and the
information made available to it through that date.
In connection with rendering its Fairness Opinion to the First Federal
Board of Directors, Hoefer & Arnett performed certain financial analyses, which
are summarized below. Hoefer & Arnett believes that its analysis must be
considered as a whole and that selecting portions of such analysis and the
factors considered therein, without considering all factors and analysis, could
create an incomplete view of the analysis and the processes underlying Hoefer &
Arnett's Fairness Opinion. The preparation of a fairness opinion is a complex
process involving subjective judgments and is not necessarily susceptible to
partial analysis or summary description. In its analyses, Hoefer & Arnett made
numerous assumptions with respect to industry performance, business and economic
conditions, and other matters, many of which are beyond the control of First
Federal. Any estimates contained in Hoefer & Arnett's analyses are not
necessarily indicative of future results or values, which may be significantly
more or less favorable than such estimates. Estimates of values of companies do
not purport to be appraisals or necessarily reflect the prices at which
companies or their securities may actually be sold. Except as described below,
none of the financial analyses performed by Hoefer & Arnett was assigned a
greater significance by Hoefer & Arnett than any other.
The financial forecasts and projections of First Federal prepared by
Hoefer & Arnett were based on projections provided by First Federal as well as
Hoefer & Arnett's own assessment of general economic, market and financial
conditions. All such information was reviewed with the management of First
Federal. First Federal does not publicly disclose internal management financial
forecasts and projections of the type provided to Hoefer & Arnett in connection
with its review of the proposed Merger. Such forecasts and projections were not
prepared with a view towards public disclosure. The forecasts and projections
prepared by Hoefer & Arnett were based on numerous variables and assumptions
which are inherently uncertain, including, without limitation, factors related
to general economic and market conditions. Accordingly, actual results could
vary significantly from those set forth in such forecasts and projections.
In order to determine the fairness from a financial point of view, to
the holders of shares of First Federal Common Stock of the proposed acquisition
of First Federal Common Stock at a cash price of $24.07 per share by the
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Holding Company, Hoefer & Arnett utilized net asset value, market value and
investment value approaches, as explained below.
Net asset value, for these purposes, is defined as the value of the net
equity of a financial institution, including every kind of property and value.
This approach normally assumes liquidation on the date of appraisal with
recognition of securities gains or loses, real estate appreciation or
depreciation and any adjustments to the loan loss reserve, discounts to the loan
portfolio or changes in the net value of other assets. As such, it is not the
best approach to use when valuing a going concern, because it is based on
historical costs and varying accounting methods. Even if the assets and
liabilities are adjusted to reflect prevailing prices and yields (which is often
of limited accuracy because readily available data is often lacking), it still
results in a liquidation value for the concern. Furthermore, since this method
does not take into account the values attributable to the going concern such as
the interrelationship among the company's assets, liabilities, customer
relations, market presence, image and reputation, and staff expertise and depth,
little weight is given to the net asset value method of valuation.
Market value, for these purposes, is defined as the price, established
on an "arm's-length" basis, at which knowledgeable, unrelated buyers and sellers
would agree. The market value is frequently used to determine the price of a
minority block of stock when both the quantity and the quality of the
"comparable" data are deemed sufficient. However, the relative thinness of the
specific market for the stock of the financial institution being appraised may
result in the need to review alternative markets of comparative pricing
purposes. The "hypothetical" market value for a small bank with a thin market
for its stock is normally determined by comparison to the average price to
earnings, price to equity and dividend yield of local or regional
publicly-traded bank issues, adjusted for lack of marketability or liquidity.
The market value in connection with the evaluation of control of a bank
is determined by the previous sales of banks in the state or region. In valuing
a business enterprise, when sufficient comparable trade data is available, the
market value deserves greater weighting then the net asset value and equal or
possibly greater weighting than the investment value. In analyzing the fair
market value of First Federal, Hoefer & Arnett has considered the market
approach and has evaluated price to equity and price to earnings multiples of
thrifts that were sold in 1996. This data was obtained from SNL Securities, L.P.
and is shown on the following chart.
STATISTICAL SUMMARY OF ALL THRIFT DEALS IN 1996
1996
------------
Number of Deals................................ 89
Total Deal Value (000's)....................... $ 11,305
Total Assets (000's)........................... $ 101,898
Total Deposits (000's)......................... $ 67,250
Price to Book (Average)........................ 1.49
Price to Tangible Book (Average)............... 1.53
Price to Earnings (Median)..................... 17.8
Price to Assets (Average)...................... 15.0
Hoefer & Arnett calculated an "Adjusted Book Value" of First Federal
based on March 31, 1997 equity and the price to book value multiples paid for
thrifts in 1996 at $23.07. The "Adjusted Book Value" of First Federal for this
calculation was the book value of First Federal as of March 31, 1997 multiplied
or "adjusted" for the average price to book value multiple thrifts paid in
thrift acquisitions in 1996. Hoefer & Arnett calculated an "Adjusted Earnings
Value" for First Federal based on First Federal's 1996 earnings , and based on
management's estimate of First Federal's 1997 earnings utilizing the price to
earnings multiples paid for thrift organizations in 1996, at $10.88 and $43.37,
respectively. The "Adjusted Earnings Value" as of a specified date for First
Federal is the estimated earnings per share for First Federal as of that date
multiplied or "adjusted" for the average price to earnings multiple thrifts were
sold for in 1996. The financial performance characteristics of the thrifts sold
in 1996 vary, sometimes substantially, from those of First Federal. When the
variance is significant for relevant performance factors,
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adjustment of the values computed using price multiples is appropriate when
comparing them to the fair market value conclusion.
Hoefer & Arnett analyzed the value of the aggregate consideration to be
received in the transactions that were announced in 1996 in relationship to the
stated book value and earnings as compared to the value of the aggregate
consideration to be received in the Merger by holders of First Federal's Common
Shares.
Investment value is sometimes referred to as the income value or the
earnings value. The investment value is frequently defined as an estimate of the
present value of future benefits, e.g. earnings or dividends. Another popular
investment value method is to determine the level of the current annual benefits
and then capitalize one or more of the benefit types using an appropriate
capitalization rate such as an earnings or dividend yield. Using a net present
value discount rate of 12%, an acceptable discount rate considering the
risk-return relationship most investors would demand for an investment such as
the First Federal Common Stock as of the valuation date, the net present value
of future earnings equaled $44.17.
In order to analyze the reasonableness of the fair market value, the
return on investment is calculated to determine the return that would accrue to
a potential buyer at the fair market value. The return on investment assuming
sale at the current average multiple of book value in 2001 equaled 13.75%.
Additionally, the fair market value to assets was calculated and compared to the
average purchase price to assets for thrifts sold in 1996. Based on the proposed
cash price of $24.07 per share, the price to assets equaled 9.16%. Lastly,
Hoefer & Arnett calculated the net present value to fair market value, as it has
been recognized that there is a relationship between the net present value of a
community financial institution and the fair market value of a majority block of
the financial institution's stock. The net present value to fair market value
ratio equaled 183.50%.
Based on the foregoing analysis, Hoefer & Arnett concluded that the
cash price of $24.07 per share was fair, from a financial point of view, to the
holders of First Federal Common Stock.
Pursuant to a letter agreement dated August 8, 1997 (the "Engagement
Letter"), First Federal engaged Hoefer & Arnett to render a fairness opinion in
connection with the proposed sale of First Federal Common Stock for cash int he
Merger. First Federal will pay Hoefer & Arnett a fees of $5,000 for its services
pursuant to the terms of the Engagement Letter, plus reimbursement of its
reasonable out of pocket expenses, not to exceed $500. Pursuant to a separate
letter agreement, First Federal has agreed to indemnify Hoefer & Arnett, its
subsidiaries and affiliates, the directors, officers and shareholders of Hoefer
& Arnett, and the assigns, heirs, beneficiaries and legal representatives of
each indemnified entity and person against certain liabilities incurred in
connection with such engagement.
Hoefer & Arnett has also been engaged by the Holding Company to offer,
on a best efforts basis, a minimum of 3,400 and a maximum of 3,700 Units, at a
price of $1,000 per Unit. The net proceeds of the sale of the Units will be used
partially to fund the payment of the consideration to be received by holders of
First Federal Common Stock in the Merger. Each Unit consists of a $1,000
aggregate principal amount Debenture and nine Warrants, each of which entitles
the holder thereof to purchase one share of Holding Company Common Stock at a
price of $12.50 per share of Debentures and Warrants. Hoefer & Arnett will
receive a commission of 7% for each Unit sold. The Holding Company has agreed to
reimburse Hoefer & Arnett for its reasonable out of pocket expenses incurred in
connection with the offer and sale of the Units, and to indemnify Hoefer &
Arnett, its affiliates, and their respective partners, directors, officers,
agents, consultants, employees and controlling persons, against certain
liabilities, including liabilities under the federal securities laws.
EFFECTIVE DATE
The Merger shall become effective at the time and on the date specified
in the certificate and articles of merger to be filed with the Secretary of
State of Delaware and with the OTS (the "Effective Date"). Such filing will
occur only after the receipt of all requisite regulatory approvals, approval of
the Merger Agreement by the requisite vote of First Federal stockholders and the
satisfaction or waiver of all other conditions to the Merger. The closing of the
Merger will occur on a date mutually agreed upon by First Federal and the
Holding Company. In the absence of such agreement, the closing shall occur on
the tenth business day after the last to occur of : (i) the receipt of all
requisite regulatory approvals and the expiration of all applicable statutory
waiting periods; and (ii) the requisite approval of the Merger by stockholders
of First Federal.
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FIRST FEDERAL'S STOCK OPTION AND INCENTIVE PLAN
Unless exercised, each option granted under the First Federal Savings
Bank 1993 Stock Option and Incentive Plan (the "Stock Option and Incentive
Plan") issued and outstanding immediately prior to the Effective Date (a "Stock
Option") will expire.
RIGHTS OF DISSENTING STOCKHOLDERS
If the Merger is approved by the required vote at the Meeting and is
consummated, any record holder of First Federal's Common stock may require First
Federal to pay the fair or appraised value of his or her Common Stock,
determined as of the effective date of the Merger (the "Effective Date"), by
complying with Section 552.14 of the Office of Thrift Supervision ("OTS") Rules
and Regulations. The computation of fair or appraised value will exclude any
element of value arising from the accomplishment or expectation of the Merger.
Stockholders who exercise such appraisal rights are herein called dissenting
stockholders.
To perfect the rights of a dissenting stockholder, a holder of First
Federal Common Stock must:
(1) deliver to First Federal, before voting on the Merger, a
writing identifying himself or herself and stating his or her intention
thereby to demand appraisal of and payment for his or her shares (this
demand must be in addition to and separate from any proxy or vote
against the Merger by the stockholder); and
(2) not vote in favor of the proposed Merger.
Any holder of Common Stock of First Federal who fails to comply with
the detailed procedures set forth in Section 552.14 may be bound by the terms of
the Merger. Neither a vote against the approval of the Merger nor the giving of
a proxy directing a negative vote will be sufficient to meet the requirement
described in clause (1) above. Further, because a proxy signed and left blank
will, unless revoked, be voted FOR approval of the Merger, a stockholder
electing to exercise rights as a dissenting stockholder who votes by proxy must
not leave his proxy blank, but must vote AGAINST approval of the Merger or
ABSTAIN from voting.
Within ten days after the effective date of the Merger, First Federal
must mail to each stockholder who has complied with the provisions of Section
552.14 written notice of the Effective Date of the Merger and make an offer to
pay for his or her First Federal Common Stock at a price deemed by First Federal
to be the fair value of such stock.
If within 60 days after the Effective Date of the Merger, First Federal
and any such stockholder do not agree as to the fair value, the stockholder may
then file a petition with the OTS, with a copy sent by registered or certified
mail to First Federal, demanding a determination of the fair market value of the
First Federal Common Stock held by such stockholder. A stockholder who fails to
file such petition within the 60-day period is deemed to have accepted the terms
offered in the Merger. However, if within 60 days of the Effective Date the fair
value is agreed upon between First Federal and any dissenting stockholder who
has complied with the procedures set forth in Section 552.14, payment therefor
shall be made within 90 days of the Effective Date.
Within such 60-day period, each stockholder demanding appraisal and
payment for his First Federal Common Stock must submit to First Federal his or
her Common Stock certificates for notation thereon that he or she is exercising
his or her appraisal rights. Any stockholder who fails to submit his or her
certificates for such notation will no longer be entitled to the appraisal
rights and will be deemed to have accepted the terms of the Merger.
The OTS will then, in the prescribed manner, appraise the First Federal
Common Stock to determine its fair market value as of the Effective Date of the
Merger, and will direct payment of the appraised fair market value. Payment will
then be made, with interest from the Effective Date, at a rate deemed equitable
by the OTS.
The cost and expenses of any proceedings in respect of the exercise of
dissenter or appraisal rights may be apportioned and assessed by the OTS as it
may deem equitable against all or some of the parties. Any stockholder who has
demanded appraisal rights shall thereafter not be entitled to vote such stock
for any purpose nor be entitled to the payment of dividends or other
distributions on the stock, unless such stockholder withdraws his demand for
appraisal rights.
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At any time within 60 days after the Effective Date, any stockholder
may withdraw his demand for appraisal and accept the terms of the Agreement.
The foregoing summary does not purport to be a complete statement of
the provisions of the federal regulation relating to rights of dissenting
stockholders, and is qualified in its entirety by reference to such regulation,
a copy of which is attached hereto as Appendix B. Failure by a stockholder to
follow the steps required by the federal regulation for perfecting rights as a
dissenting stockholder may result in a loss of such rights. Stockholders'
notices of intent to demand appraisal of all payment for their shares should be
sent to: Charles Neelley, Secretary of the Board of Directors of First Federal,
2900 Texas Avenue, Bryan, Texas 77802. Correspondence to the OTS should be
addressed to Office of Thrift Supervision, 1700 G Street, N.W., Washington, D.C.
20552.
In addition, if the Bank should abandon its plans to consummate the
Merger, the right of a dissenting stockholder to be paid the fair value of his
shares shall cease. In the event that the holders of more than 10% of the Bank's
Common Stock perfect their rights to appraisal, First Federal may determine not
to consummate the Merger. See "-- Waiver and Amendment; Termination."
FRACTIONAL SHARES
No certificates representing fractional shares of the Holding Company
will be issued upon the surrender for exchange of certificates representing
First Federal Common Stock. Fractional shares will be rounded up to the next
whole share.
EXCHANGE OF CERTIFICATES
At the Effective Date, holders of certificates formerly representing
shares of First Federal Common Stock (other than shares held by First Federal
stockholders who have exercised appraisal rights) will cease to have any rights
as First Federal stockholders and their certificates automatically will
represent only the right to receive the shares of Holding Company Common Stock
or cash (or both), as elected by the shareholder, into which their shares of
First Federal Common Stock will have been converted by the Merger. Promptly
after the Effective Date, the Holding Company (acting as the exchange agent)
will send written instructions and a letter of transmittal to each holder of
record of First Federal Common Stock (other than stockholders who have exercised
appraisal rights), indicating the method for exchanging such holder's stock
certificates for cash in respect thereof. HOLDERS OF FIRST FEDERAL COMMON STOCK
SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE INSTRUCTIONS FROM THE
HOLDING COMPANY. The Holding Company, upon receipt of such certificates (or
affidavits of lost certificates and indemnity bonds) and a properly completed
letter of transmittal, will promptly pay the holder by check.
REPRESENTATIONS AND WARRANTIES
In the Merger Agreement, First Federal and the Holding Company have
made certain customary representations to each other relating to, among other
things, the parties' respective organization, capitalization, qualification to
do business and compliance with applicable law, authority relative to the Merger
Agreement, the timely filing of all regulatory reports, reliability of financial
statements, taxes, employee benefit plans, compliance, the truth or accuracy of
information prepared and provided by them in connection with the Merger, the
absence of certain legal proceedings and other events, including material
adverse changes in the parties' business, financial condition, operations or
properties. For detailed information on such representations and warranties, see
the Merger Agreement attached hereto as Appendix A.
CONDITIONS TO THE MERGER
The consummation of the Merger is conditioned upon, among other things:
(i) approval by the OTS (and any other applicable regulatory bodies) and the
stockholders of First Federal; (ii) the sale of a minimum of $1.5 million of
Holding Company Common Stock and a minimum of $3.4 million of Units required to
be sold by the Holding Company to finance the Merger; and (iii) the receipt of a
favorable opinion of counsel with respect to the matters summarized above under
the caption "-- Federal Income Tax Consequences." It is contemplated that these
conditions will be complied with before consummation of the Merger. See
"--Effective Date of the Merger." However, the Merger Agreement provides that
First Federal, the Holding Company and New Bank, without approval
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of their stockholders, may waive any of the conditions (other than the necessary
approvals of stockholders and government authorities and the consummation of the
financing required) to their respective obligations to consummate the Merger.
Except with the specific approval of its stockholders, First Federal
will not, subsequent to the approval of the Merger by First Federal's
stockholders, waive any condition to the Merger set forth in the Merger
Agreement if, in the judgment of its Board of Directors, such waiver would be
materially adverse to First Federal or its stockholders.
An application has been filed with the OTS for approval of the proposed
Merger. It is anticipated, although there can be no assurance, that final
approval by the OTS will be received before approval of the Merger by First
Federal's stockholders. By approving the Merger, the stockholders will be
approving compliance by First Federal and the Company with any condition which
may be imposed by the OTS in connection with its approval of the Merger and
which is not deemed by First Federal to be materially adverse to First Federal
or its stockholders.
REGULATORY APPROVAL
The Merger is subject to the approval of the Office of Thrift
Supervision (the "OTS"). First Federal filed an application for approval of the
Merger with the OTS, and anticipates obtaining the approval of the OTS in the
third quarter of 1997. There can be no assurance as to the timing of such
approval or that the OTS will approve the Merger.
It is a condition to the consummation of the Merger that First Federal
and the Holding Company shall have received all applicable regulatory approvals
and consents to consummate the Merger Agreement. There can be no assurance that
such approvals or consents will not contain terms, conditions or requirements
which cause such approval to fail to satisfy such conditions to the consummation
of the Merger.
In addition, under federal law, a period of 30 days (subject to
reduction to 15 days) must expire following approval by the OTS within which
period the United States Department of Justice (the "Department of Justice") may
file objections to the Merger under the federal antitrust laws. The Department
of Justice could take such action under the antitrust laws as it deems necessary
or desirable in the public interest, including seeking to enjoin the Merger
unless divestiture of an acceptable number of branches to a competitively
suitable purchaser could be made. While First Federal believes that the
likelihood of such action by the Department of Justice is remote in this case,
there can be no assurance that the Department of Justice will not initiate such
a proceeding.
WAIVER AND AMENDMENT; TERMINATION
Prior to the Effective Date, the First Federal and Holding Company
Boards may extend the time for performance of any obligations under the Merger
Agreement, waive any inaccuracies in the representations and warranties
contained in the Merger Agreement and waive compliance with any agreements or
conditions of the Merger Agreement.
Subject to applicable law, the Merger Agreement may be amended by
action of First Federal and the Holding Company Boards at any time before or
after approval of the Merger Agreement by the stockholders of First Federal and
the Holding Company. However, the Merger Agreement may not be amended after
stockholder approval which changes the form of consideration or the value of the
consideration to be received by the common stockholders of First Federal without
the approval of the common stockholders of First Federal.
The Merger Agreement may be terminated at any time prior to the
Effective Date: (i) by the mutual written consent of the Board of Directors of
First Federal and the Holding Company; (ii) by First Federal or the Holding
Company if there is a final judicial or regulatory determination that any
material provision of the Merger Agreement is illegal, invalid or unenforceable
or denying any regulatory application the approval of which is a concern
precedent to First Federal or the Holding Company's obligations under the Merger
Agreement (iii) if the conditions precedent to the obligations of the other
party are rendered impossible to be satisfied or fulfilled; (iv) if the
stockholders of First Federal and the Holding Company fail to approve the
Merger; (v) the other party (First Federal or the Holding Company) has
materially breached any representation, warranty, covenant or agreement set
forth in the Merger Agreement and has failed to or cannot in a timely manner
rectify such breach after receiving written notice of such breach; or (vi) if
the Merger is not consummated by the 270th day (360 days if there is a CRA
protest).
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CONDUCT OF BUSINESS OF FIRST FEDERAL PENDING THE MERGER
The Merger Agreement contains covenants of First Federal concerning the
conduct of its business. The covenants remain in effect until the Effective Date
or until the Merger Agreement has been terminated. They include, among others,
an agreement that First Federal will (i) allow the Holding Company access to
certain information regarding First Federal's business; (ii) operate the
business in the ordinary course and consistent with past practices; (iii) advise
and cooperate with the Holding Company with respect to anticipated renewals or
extensions of existing data processing service and related agreements; (iv)
permit the Holding Company to conduct an environmental assessment of each parcel
of First Federal's real property and, at the Holding Company's option, any other
real estate formerly owned by First Federal or First Federal's subsidiaries; and
(v) promptly seek to obtain from each employee of First Federal who, as a result
of the change of control of First Federal in the Merger, would be entitled to an
"Excess Parachute Payment" (as defined below), a mutually satisfactory amendment
to any such agreement to adjust or otherwise modify the amount or timing of
compensation due.
Nothing contained in the Merger Agreement will preclude First Federal
from declaring and paying cash dividends on First Federal Preferred Stock
quarterly at a rate not to exceed $10.00 per share in a manner, on dates, and
with respect to record dates consistent with past practice. The Board of
Directors of First Federal is under no obligation to pay dividends on First
Federal Preferred Stock, but has elected to do so since the Preferred Stock was
issued approximately four years ago.
MATERIAL AGREEMENTS RELATING TO THE MERGER AND INTERESTS OF CERTAIN PERSONS
As of June 30, 1997, the Holding Company had received indications from
holders of 43,235 shares of First Federal Common Stock, or approximately 18.4%
of the First Federal Common Stock outstanding, that such holders will exchange
their First Federal Common Stock for Holding Company Common Stock. These shares,
when exchanged for Holding Company Common Stock, will represent approximately
42.4 percent of the anticipated total assuming approximately 260,000 outstanding
shares of Holding Company Common Stock following the Merger and Offering.
First Federal and the Holding Company have agreed to certain treatment
of the Stock Options (See " -- First Federal's Stock Option and Incentive
Plan"). Those individuals who hold such Stock Options and the respective amount
held are set forth in "PROPOSAL I - ELECTION OF DIRECTORS -- Voting Securities
and Principal Holding Thereof" below.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax
consequences of the merger to holders whose shares of First Federal Common Stock
are converted to shares of Holding Company Common Stock and/or cash in the
merger (including pursuant to the exercise of appraisal rights). The discussion
applies only to holders of shares of First Federal Common Stock in whose hands
shares of First Federal Common Stock are capital assets, and may not apply to
shares of First Federal Common Stock received pursuant to the exercise of
employee stock options or otherwise as compensation, or to holders of shares of
First Federal Common Stock who are in special tax situations (such as insurance
companies, tax-exempt organizations, or non-U.S. persons). First Federal will
resolicit its shareholders prior to proceeding with the transaction if the
condition of receiving a tax opinion is waived and the material federal income
tax consequences are materially different than as described herein.
The statements of law or legal conclusions 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.
THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH BELOW ARE BASED UPON
CURRENT LAW. BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, THE FOREGOING
DISCUSSION MAY NOT APPLY TO EACH FIRST FEDERAL STOCKHOLDER AND EACH HOLDER OF
SHARES OF FIRST FEDERAL COMMON STOCK SHOULD CONSULT SUCH HOLDER'S OWN TAX
ADVISOR TO DETERMINE THE APPLICABILITY OF THE RULES DISCUSSED BELOW TO SUCH
STOCKHOLDER AND THE PARTICULAR TAX EFFECTS OF THE MERGER, INCLUDING THE
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APPLICATION AND EFFECT OF FOREIGN, STATE, LOCAL AND OTHER INCOME, AND OTHER TAX
LAWS.
The receipt solely of shares of Holding Company Common Stock will be a
non-taxable transaction for federal income tax purposes (and also may be a
non-taxable transaction under applicable foreign, state, local and other income,
and other tax laws). Accordingly, no gain or losses will be recognized by a
First Federal stockholder who exchanges shares of First Federal Common Stock
solely for shares of Holding Company Common Stock. In general, the adjusted tax
basis of the Holding Company Common Stock received by a First Federal
stockholder will be the same as the adjusted tax basis of the First Federal
Common Stock surrendered in exchange therefor. Also, the holding period of the
Holding Company Common Stock received by a First Federal stockholder will
include the period during which the First Federal Common Stock surrendered in
exchange therefor was held.
Assuming currently existing shareholders in First Federal owning in the
aggregate 50% or more of the First Federal Common Stock own less than 50% of the
Holding Company Common Stock, a First Federal stockholder whose shares of First
Federal Common Stock are converted into shares of Holding Company Common Stock
and cash will recognize gain, but not loss, in the transaction for federal
income tax purposes (determined separately as to each block of First Federal
Common Stock exchanged). The amount of gain recognized by the First Federal
shareholder who receives shares of Holding Company Common Stock and cash will
equal the lesser of: (i) the difference between his or her adjusted tax basis in
the shares of First Federal Common Stock converted to shares of Holding Company
Common Stock and cash and the sum of the fair market value of the shares of the
Holding Company Common Stock and the amount of cash received; or (ii) the amount
of cash received. In general, the adjusted tax basis of the Holding Company
Common Stock received by a First Federal stockholder who receives Holding
Company Common Stock and cash will be the same as the adjusted tax basis of the
First Federal Common Stock surrendered in exchange therefor, decreased by the
amount of cash received and increased by the amount of gain recognized on the
exchange. Also, the holding period of the Holding Company Common Stock received
by a First Federal stockholder will include the period during which the First
Federal Common Stock surrendered in exchange therefor was held.
In the event that currently existing shareholders of First Federal
owning in the aggregate 50% or more of the First Federal Common Stock own 50% or
more of the common stock of the Holding Company, any cash distribution to a
shareholder electing to receive shares of Holding Company Common Stock and cash
may be treated as dividend income taxed as ordinary income. In such case, each
shareholder should consult with his or her own tax advisor.
The receipt solely of cash for shares of First Federal Common Stock
pursuant to the Merger (including pursuant to the exercise of appraisal rights)
will be a taxable transaction for federal income tax purposes (and also may be a
taxable transaction under applicable foreign, state, local and other income and
other tax laws). In general, for federal income tax purposes, a holder of shares
of First Federal Common Stock will recognize gain or loss equal to the
difference between his or her adjusted tax basis in the shares of First Federal
Common Stock converted to cash in the Merger and the amount of cash received
therefor. Gain or loss must be determined separately for each block of shares of
First Federal Common Stock (i.e., shares of First Federal Common Stock acquired
at the same cost in a single transaction) converted to cash in the Merger. Such
gain or loss will be capital gain or loss and will be a long-term gain or loss
subject to a maximum tax rate of 28% if, on the date of the Merger, the shares
of First Federal Common Stock were held for more than one year but less than 18
months, or a long-term gain or loss subject to a maximum tax rate of 20% if held
for more than 18 months. With respect to stockholders exercising appraisal
rights, amounts, if any, that are or are deemed to be interest for federal
income tax purposes will be taxed as ordinary income.
Payments in connection with the Merger may be subject to "backup
withholding" at a rate of 31%. Backup withholding generally applies if a
stockholder (i) fails to furnish to the exchange agent his or her social
security number or taxpayer identification number ("TIN"), (ii) furnishes an
incorrect TIN, (iii) fails properly to include a reportable interest or dividend
payment on such stockholder's federal income tax return, or (iv) under certain
circumstances, fails to provide a certified statement, signed under penalties of
perjury, that the TIN provided is such stockholder's correct number and that
such stockholder is not subject to backup withholding. Backup withholding is not
an additional tax but merely an advance payment that may be refunded to the
extent it results in an overpayment of tax. Certain persons generally are
entitled to exemption from backup withholding, including corporations and
financial institutions. Certain penalties apply for failure to furnish correct
information and for failure to include
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reportable payments in income. Each stockholder should consult with his or her
own tax advisor as to qualification for exemption from backup withholding and
the procedure for obtaining such exemption.
ACCOUNTING TREATMENT
The proposed transaction will be preferably accounted for as a
leveraged buy-out, with the common stock of the directors and executive officers
contributed to the Holding Company recorded at its carrying value. The assets
acquired and liabilities assumed in the acquisition for the remainder of the
Bank will be recorded at their estimated fair values, with the excess of the
purchase price over the net fair value recorded as goodwill. To reflect the new
basis of reporting, the purchased portion of the transaction will be recorded on
the Holding Company's books. Since this new basis is not required to be
"pushed-down" to the Bank, the equity, assets and liabilities at the Bank will
remain unchanged. The equity of the Holding Company will be the carrying value
of the directors and executive officers' and their families' interest in First
Federal plus the value of the new shares issued, net of offering expenses. It is
estimated that goodwill and deposit intangibles of approximately $589,000 and
$969,000, respectively, will be recorded on the Holding Company's books.
Management intends that the transaction preferably qualify for
treatment as a leveraged buy-out (LBO) in accordance with Issue No. 88-16 of the
Emerging Issues Task Force (EITF 88-16). EITF 88-16 permits a partial or
complete change in accounting basis only if a new controlling stockholder or
group of stockholder has been established. Under the proposed transaction, a
group of First Federal stockholders (including members of First Federal
management) and others who do not have unilateral (over 50%) control of First
Federal have present intentions to acquire control of the Company through the
exchange of First Federal stock for Company stock and the purchase of newly
issued Company stock. Accordingly, the accounting basis of exchanged shares will
be carried over while the new Company shares issued will reflect a new basis of
accounting.
In the event that the proposed transaction does not qualify for LBO
treatment, the Company would not record a partial new basis of accounting, but
would instead reflect a recapitalization, with the purchase of shares recorded
as treasury stock and the issuance of new shares at their price less costs of
issuance. Accordingly, proforma June 30, 1997 stockholders' equity of Company
would be reduced by $1.4 million to $873,000. Thus, management prefers that the
proposed transaction qualify for LBO treatment. See "PROPOSAL II - THE MERGER --
Consideration to be Received."
For tax purposes it is necessary that stockholders of First Federal
owning in the aggregate 50% or more of the First Federal Common Stock own less
than 50% of the stock in the new holding company. The transaction is intended to
qualify under Internal Revenue Code Section 351. Under Section 351, any gain
related to the distribution of cash to the stockholders will be taxed as a
capital gain. However, if 50% or more of the new holding company stock is
acquired by old stockholders in First Federal owning in the aggregate 50% or
more of the First Federal Common Stock, the transaction will not qualify under
Section 351 and any cash distribution to the stockholders electing both cash and
stock may be treated as dividend income and taxed as ordinary income.
MANAGEMENT OF THE HOLDING COMPANY
The Board of Directors of the Holding Company is currently identical to
the Board of Directors of First Federal. See "Proposal I - Election of
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 identical to the executive officers of First
Federal. See "Proposal I -Election of Directors--Executive Officers Who Are Not
Directors." 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."
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COMPARISON OF STOCKHOLDER RIGHTS
Various features of the Certificate of Incorporation and Bylaws of the
Holding Company differ from those of First Federal. The following discussion
does not purport to be a complete statement of such differences but summarizes
the differences that are deemed by First Federal to be material. For additional
information, reference is made to the Certificate of Incorporation and the
Bylaws of the Holding Company and the Charter and Bylaws of First Federal, each
of which may be obtained by stockholders upon written request to the Secretary,
First Federal Savings Bank, 2900 Texas Avenue, Bryan, Texas 77802.
Choice of Delaware Law. For many years Delaware has followed a policy
of encouraging incorporation in that state. In furtherance of that policy, it
has adopted comprehensive, modern and flexible corporate laws which are
periodically updated and revised to meet changing business needs. As a result,
many major corporations, including a number of the largest and most successful
enterprises, choose Delaware for their domicile. Because of Delaware's
significance as the state of incorporation for many major domestic corporations,
the Delaware judiciary has become particularly familiar with matters of
corporate law and a substantial body of court decisions has developed construing
Delaware law. As a consequence, Delaware corporate law has been interpreted and
explained in a number of significant court decisions, which may provide greater
predictability with respect to the Holding Company's corporate legal affairs.
Issuance of Additional Capital Stock. First Federal has 3,000,000
shares of authorized common stock and 1,000,000 shares of authorized serial
preferred stock, of which 239,612 shares of common stock were issued and
outstanding as of June 30, 1997. Under First Federal's Charter, no shares of
capital stock may be issued, unless their issuance or the plan under which they
would be issued receives stockholder approval, directly or indirectly to
officers, directors or controlling persons of the Bank other than as part of a
general public offering or as qualifying shares to a director. Stockholder
approval under First Federal's Charter would require the affirmative vote of a
majority of the total votes eligible to be cast.
The Holding Company's Certificate of Incorporation authorizes 3,000,000
shares of common stock and 1,000,000 shares of preferred stock, issuable in
series, which may generally be issued by action of the Board of Directors
without stockholder approval.
Amendment of Governing Instruments. Amendments to First Federal's
Charter must be preliminarily approved by the OTS, and First Federal's Bylaw
amendments are required to be consistent with Preferred Stock OTS regulations
governing permitted Bylaw provisions. Amendments to the Holding Company's
Certificate of Incorporation and Bylaws are not subject to OTS approval.
Transactions With Affiliates. First Federal, as a federally-insured
thrift, is subject to certain restrictions, limitations, conditions and
prohibitions with respect to transactions with directors, officers and
affiliated persons. These include, but are not limited to, limitations upon
deposit relationships, loan services, loan procurements, and restrictions on
loans and investments. These requirements and restrictions will continue to
apply to First Federal following the Merger.
Under Delaware law, no contract or transaction between a corporation
and one or more of its directors or between a corporation and another
organization in which one or more of its directors is a director or officer or
is financially interested shall be void or voidable solely for this reason,
provided that the material facts of the relationship of the party to the
transaction are disclosed and the contract or transaction is authorized by a
majority of the disinterested directors or by a majority of the stockholders
entitled to vote or, at the time of such authorization, the contract or
transaction was fair and reasonable to the corporation.
Additionally, the Holding Company will be subject to certain federal
regulations relating to transactions between insured thrift institutions and
their holding company.
Number of Directors. First Federal's Charter sets a range of number of
directors at a minimum of seven and a maximum of fifteen, while the Holding
Company's Certificate of Incorporation provides that the number of directors
shall be fixed by the Board of Directors pursuant to a resolution adopted by a
majority of the whole board. Under Delaware law, the Holding Company must have
at least one director, but no maximum number is specified.
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Appraisal Rights. Holders of First Federal's Common Stock have certain
dissenter and appraisal rights for certain mergers, consolidations or sales of
assets, including the right to demand payment of the fair or appraised value of
their shares. These rights do not apply to certain transactions (such as the
proposed Merger) if First Federal's Common Stock is listed on a national
securities exchange or quoted on the Nasdaq-NMS and stockholders are required to
accept only "qualified" consideration (i.e., cash and/or stock listed on a
national securities exchange or quoted on the Nasdaq-NMS). The Holding Company's
Common Stock will not be listed on the Nasdaq-NMS.
Holders of the Holding Company Common Stock would have generally
similar dissenter and appraisal rights for any plan of corporate merger or
consolidation. Delaware law provides that unless the certificate of
incorporation of the corporation otherwise provides, no appraisal rights are
accorded to stockholders of any corporation involved in a merger or
consolidation if their stock is registered on a national securities exchange or
held of record by more than 2,000 stockholders or to stockholders of a
constituent corporation surviving a merger if the merger does not require the
approval of such stockholders, except that appraisal rights are provided to
stockholders of a constituent corporation if they are required to accept as
consideration anything other than (i) stock of the surviving or resulting
corporation, (ii) stock registered on a national exchange or held of record by
more than 2,000 stockholders, (iii) cash in lieu of fractional shares, or (iv)
any combination of cash and stock of the types described in the foregoing
clauses (i) and (ii). However, under Delaware law these dissenter and appraisal
rights do not exist with respect to sale of assets transactions.
Reports to Stockholders. First Federal is required to transmit proxy
materials and annual reports containing financial statements to its
stockholders. Following the Merger, these obligations will be assumed by the
Holding Company, which will transmit proxy materials and annual reports
containing financial statements to its stockholders and will file with the SEC
periodic reports, which will be available for public inspection, to provide
current financial and other information about the Holding Company.
Liability and Indemnification of Directors, Officers and Employees.
Federal regulations require the indemnification of certain costs and expenses
and judgment liability for any action brought or threatened by reason of the
fact that a person is or was a director, officer or employee of First Federal.
Such indemnification is authorized, subject to certain conditions and
limitations, including the requirement that such action results in either a
final judgment on the merits in favor of the indemnitee or a judgment not on the
merits or settlement as to which the majority of the Board of Directors
determines that such indemnitee was acting in good faith within what he or she
was reasonably entitled to believe, under the circumstances, was within the
scope of his or her employment or authority and was acting for a purpose that he
or she was reasonably entitled to believe, under the circumstances, was in the
best interests of First Federal or its stockholders and after notice to, and
without objection by, the OTS. First Federal has insurance to protect its
officers, directors, employees and the Bank itself from potential liability
expenses and other costs arising from such claims. No such insurance, however,
may be provided for losses incurred as a consequence of willful or criminal
conduct.
Delaware law provides corporations with broad indemnification powers.
Such powers include the ability to provide forms of indemnification in addition
to the type of indemnification set forth in the Delaware statute. The
Certificate of Incorporation of the Holding Company authorizes rights of
indemnification that are broader than those applicable to First Federal and do
not require any notice or right of objection to be afforded the OTS. The Holding
Company's Certificate of Incorporation provides that a director, officer,
employee or agent of the Holding Company or of any Subsidiary, or any person
serving in such capacity at the request of the Holding Company shall be
indemnified by the Holding Company from and against expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred in connection
with a threatened, pending or completed suit or proceeding, including a
proceeding by or on behalf of the Holding Company, in which such person is
involved due to such person's position with the Holding Company, provided that a
determination has been made that such person acted in good faith and in a manner
that such person reasonably believed to be in, or not opposed to, the best
interests of the Holding Company and in the case of a criminal proceeding, such
person had no reason to believe his or her conduct was unlawful. The
determination that indemnification is proper shall be made by a majority vote of
a quorum of directors who were not parties to such proceedings, or if a quorum
cannot be obtained or such a quorum so directs, by a written opinion of
independent legal counsel or by stockholders. Expenses incurred in defending or
investigating a threatened or pending suit or proceeding may be paid by the
Holding Company in advance of the final disposition of such suit or proceeding
upon receipt of an undertaking by or on behalf of such person to repay such
amount if it shall ultimately be determined that he or she is not entitled to
indemnification by the Holding Company.
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The Holding Company intends to purchase insurance (if available) to
protect its officers, directors and employees. If the Holding Company does not,
or is not able to, purchase such insurance, or to the extent that such insurance
is inadequate, the Holding Company will be required to fund any amount that may
ultimately be paid under the indemnification provision. The Board of Directors
of the Holding Company has not considered whether the Holding Company will enter
into indemnification agreements with its directors. Notwithstanding the
foregoing, indemnification for liability under the federal securities laws may
be considered void as against public policy. The provisions in the Certificate
of Incorporation regarding indemnification and limitation of liability may only
be amended or repealed by the affirmative vote of the holders of 80 percent of
the votes eligible to be cast at a legal meeting of stockholders.
Under Delaware law, each director owes certain fiduciary duties to the
corporation and to its stockholders. These duties include a duty of loyalty and
a duty of care. Applicable decisional law requires not only that a director
refrain from fraud, bad faith, self-dealing and transactions involving material
conflicts of interest (the duty of loyalty), but also that the director exercise
his or her business judgment on an informed basis (the duty of care). Delaware
law permits the inclusion in the certificate of incorporation of a Delaware
corporation of a provision limiting or eliminating the potential monetary
liability of directors to the corporation or its stockholders by reason of any
failure to perform their fiduciary duty as directors, subject to certain
important exceptions which are reflected in Article Twelfth of the Holding
Company's Certificate of Incorporation and discussed below. Subject to these
exceptions, this section would relieve directors (but not officers) from such
personal liability, including liability for any breach of the duty of care which
involves gross negligence in the performance of such duty in the various
contexts in which directors are called upon to act, including consideration of
proposed mergers or other business combinations.
As provided in the Delaware statute, the Holding Company's Certificate
of Incorporation eliminates a director's personal liability to the Holding
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director, except for liability (i) for any breach of the director's duty of
loyalty to the Holding Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit. This provision does not affect the availability of equitable remedies,
such as an injunction or rescission, for a breach of fiduciary duty.
First Federal has not received notice of any suit or proceeding as to
which this provision could have the effect of reducing the likelihood of
derivative litigation against directors in the future. This proposition also may
discourage or deter stockholders from bringing a lawsuit against directors for
breach of their fiduciary duty or gross negligence even though such an action,
if successful, might result in a judgment in favor of the Holding Company and
its stockholders.
Since these provisions limit the potential liability of directors and
provide for indemnification of directors, and the Certificate of Incorporation
requires a 80 percent vote of the total votes eligible to be cast by
stockholders to amend, alter or repeal these provisions, it should be noted that
the Board of Directors has an interest in and may benefit from these provisions.
The Board is nevertheless of the view that the advantages of these provisions in
encouraging qualified persons to serve and to exercise their best judgment
without concern for personal monetary liability significantly outweigh the
potential disadvantages.
Preemptive Rights. The certificate of incorporation of the Holding
Company 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.
Voting Rights. All voting rights are vested in the holders of First
Federal Common Stock, each share being entitled to one vote. Upon the Merger,
holders of Holding Company Common Stock will have the same voting rights.
Neither First Federal's Charter nor the Holding Company's Certificate of
Incorporation permits cumulative voting for the election of directors.
First Federal may, in general, effect a merger or consolidation or sale
of all or substantially all of its assets, if approved by the holders of
two-thirds (or a majority in the case of certain transactions with an interim
institution) of the outstanding First Federal Common Stock. Under Delaware law,
the Holding Company will be able to merge
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or consolidate with other corporations, or sell all or substantially all of its
assets, with the approval of the holders of a majority of its outstanding
Holding Company Common Stock.
The Holding Company Common Stock, like that of First Federal, has no
redemption, sinking fund or conversion privileges, and will be fully paid and
non-assessable.
Legal Investments. Under the laws of some jurisdictions, shares of
Holding Company Common Stock may not be legal investments for certain
institutions and fiduciaries, whereas shares of First Federal Common Stock are
more likely to be. For example, under the laws of some jurisdictions, certain
pension funds may not be permitted to invest in common stock or other securities
of thrift institution holding companies. Stockholders of First Federal should
consult their personal advisors or plan administrators regarding the
permissibility under state law of investment in the Holding Company Common
Stock.
Continuation of Certain Provisions. The Holding Company's Certificate
of Incorporation will continue certain provisions already contained in First
Federal's Charter or Bylaws. Certain of these provisions, including those
restricting removal of directors, could be deemed to have an anti-takeover
effect and to render more difficult the removal of management. As described
elsewhere in this Joint Proxy Statement/Prospectus, First Federal's 1993 Stock
Option and Incentive Plan would also provide or accelerate benefits in certain
events involving a change of control or takeover attempt.
Certain regulatory provisions may also have a takeover defensive
effect. OTS regulations generally require persons who intend to acquire control
of a federally-insured capital stock savings institution to give 60-days' prior
written notice to the OTS. OTS regulations also require prior OTS approval
before any company may acquire control of savings institution.
Limitations on Action by Stockholders. Under First Federal's Charter
and Bylaws, special meetings may be called upon the written request of the
holders of not less than one-tenth of all the outstanding capital stock of the
Bank entitled to vote at the meeting. Under Delaware law, special meetings of
stockholders may be called only by the board of directors or by any other person
authorized to do so in the certificate of incorporation or bylaws. The
Certificate of Incorporation of the Holding Company provides that a special
meeting of stockholders may be called only by a majority of the Board of
Directors.
The stockholders of First Federal may presently take action without a
meeting with the written consent of all the holders of the common stock entitled
to vote on such matters approving such action. The Certificate of Incorpora tion
of the Holding Company provides that its stockholders may act only at an annual
or special meeting.
Amendment to Certificate of Incorporation and Bylaws. Amendments to the
Holding Company's Certificate of Incorporation must be approved by the Holding
Company's Board of Directors and also by a majority of the outstanding shares of
the Holding Company's voting stock, provided, however, that approval by at least
80% of the outstanding voting stock is generally required for certain provisions
(i.e., provisions relating to number, classification, election and removal of
directors; amendment of bylaws; call of special stockholder meetings; director
liability; power of indemnification; and amendments to provisions relating to
the foregoing in the certificate of incorporation).
The bylaws may be amended by a majority vote of the Board of Directors
or the affirmative vote of at least 80% of the total votes eligible to be voted
at a duly constituted meeting of stockholders.
Purpose and Takeover Defensive Effects of the Holding Company's
Certificate of Incorporation and Bylaws. The Board of Directors of First Federal
believes that the provisions described above are prudent and will reduce the
Holding Company's vulnerability to takeover attempts and certain other
transactions which have not been negotiated with and approved by its Board of
Directors. The Board of Directors believes these provisions are in the best
interest of First Federal and of the Holding Company and its stockholders. In
the judgment of the Board of Directors, the Hol ding Company's Board will be in
the best position to determine the true value of the Holding Company and to
negotiate more effectively for what may be in the best interests of its
stockholders. Accordingly, the Board of Directors believes that it is in the
best interests of the Holding Company and its stockholders to 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
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that these provisions should not discourage persons from proposing a merger or
other transaction at prices reflective of the true value of the Holding Company
and which is in the best interests of all stockholders.
Attempts to take over financial institutions and their holding
companies have become increasingly common. Takeover attempts which have not been
negotiated with and approved by the Board of Directors present to stockholders
the risk of a takeover on terms which may be less favorable than might otherwise
be available. A transaction which is negotiated and approved by the Board of
Directors, on the other hand, can be carefully planned and undertaken at an
opportune time in order to obtain maximum value for the Holding Company and its
stockholders, with due consideration given to matters such as the management and
business of the acquiring corporation and maximum strategic development of the
Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above then
current market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
which is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Holding Company's remaining stockholders of the benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners becomes less
than the 300 required for Exchange Act registration.
Despite the belief of First Federal and the Holding Company as to the
benefits to stockholders of these provisions of the Holding Company's
Certificate of Incorporation and bylaws, these provisions may also have the
effect of discouraging a future takeover attempt which would not be approved by
the Holding Company's Board, but pursuant to which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, these provisions may prevent stockholders who might desire to
participate in such a transaction from doing so even if such transaction is
favored by a majority of the Holding Company's stockholders. Such provisions
will also render the removal of the Holding Company's Board of Directors and of
management more difficult. The Board will enforce the voting limitation
provisions of the Certificate of Incorporation in proxy solicitations and
accordingly could utilize these provisions to defeat proposals that are favored
by a majority of the stockholders. The Boards of Directors of First Federal and
the Holding Company, however, have concluded that the potential benefits
outweigh the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders, the Holding Company may adopt additional charter provisions
regarding the acquisition of its equity securities that would be permitted to a
Delaware corporation. The Holding Company and First Federal do not presently
intend to propose the adoption of further restrictions on the acquisition of the
Holding Company's equity securities.
OTHER RESTRICTIONS ON ACQUISITIONS OF STOCK
Delaware Anti-Takeover Statute. The Delaware General Corporation Law
(the "DGCL") provides that buyers who acquire more than 15% of the outstanding
stock of a Delaware corporation, such as the Holding Company, are prohibited
from completing a hostile takeover of such corporation for three years. However,
the takeover can be completed if (i) the buyer, while acquiring the 15%
interest, acquires at least 85% of the corporation's outstanding stock (the 85%
requirement excludes shares held by directors who are also officers and certain
shares held under employee stock plans), or (ii) the takeover is approved by the
target corporation's board of directors and two-thirds of the shares of
outstanding stock of the corporation (excluding shares held by the bidder).
However, these provisions of the DGCL do not apply to Delaware
corporations with less than 2,000 stockholders or which do not have voting stock
listed on a national exchange or listed for quotation with a registered national
securities association. If this statute were applicable to the Holding Company,
the Holding Company could exempt itself from the requirements of the statute by
adopting an amendment to its Certificate of Incorporation or Bylaws electing not
to be governed by this provision. At the present time, the Board of Directors
does not intend to propose any such amendment.
Federal Regulation. Federal law provides that no company, "directly or
indirectly or acting in concert with one or more persons, or through one or more
subsidiaries, or through one or more transactions," may acquire
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"control" of a savings association at any time except upon application and the
prior approval of the OTS. In addition, Federal regulations require that, prior
to obtaining control of a savings association, a person, other than a company,
must give 60 days' prior notice to the OTS and have received no OTS objection to
such acquisition of control. Any company that acquires such control becomes a
"savings and loan holding company" subject to registration, examination and
regulation as a savings and loan holding company. Under federal law (as well as
the regulations referred to below) the term "savings association" includes state
and federally chartered SAIF-insured institutions and federally chartered
savings banks whose accounts are insured by the FDIC's Bank Insurance Fund and
holding companies thereof.
Control, as defined under federal law, in general means ownership,
control of or holding irrevocable proxies representing more than 25% of any
class of voting stock, control in any manner of the election of a majority of
the savings association's directors, or a determination by the OTS that the
acquiror has the power to direct, or directly or indirectly to exercise a
controlling influence over, the management or policies of the institution.
Acquisition of more than 10% of any class of a savings association's voting
stock, if the acquiror also is subject to any one of eight "control factors,"
constitutes a rebuttable determination of control under the regulations. Such
control factors include the acquiror being one of the two largest stockholders.
The determination of control may be rebutted by submission to the OTS, prior to
the acquisition of stock or the occurrence of any other circumstances giving
rise to such determination, of a statement setting forth facts and circumstances
which would support a finding that no control relationship will exist and
containing certain undertakings. The regulations provide that persons or
companies which acquire beneficial ownership exceeding 10% or more of any class
of a savings association's stock must file with the OTS a certification that the
holder is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable. These federal regulations can make a change
in control more difficult, even if desired by the holders of the majority of the
shares of the stock. See "General Information -- Voting Securities and Principal
Holders Thereof."
THE OFFERING
The Holding Company is offering for sale a minimum of 150,000 shares
and a maximum of 200,000 shares of Common Stock at $10.00 per shares and a
minimum of 3,400 units and a maximum of 3,700 Units ("Units") at $1,000 per
Unit, each Unit consisting of $1,000 of 11 1/2% debentures due March 31, 2003
(the "Debentures") and nine warrants ("Warrant"). The Holding Company Common
Stock and Units are to be issued to finance the purchase of the outstanding
shares of First Federal Common Stock pursuant to the merger agreement between
First Federal and the Holding Company dated May 21, 1997 as amended. The net
proceeds of this Offering will be used to effectuate the purchase of some of the
outstanding First Federal Common Stock pursuant to the Merger, resulting in a
thrift holding company structure with First Federal as the wholly-owned, sole
subsidiary of the Holding Company. Consummation of the Offering is contingent
upon all conditions to the Merger being satisfied or waived, except that if
regulatory and shareholder approvals are not obtained, the Offering will
terminate.
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 following 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
---------------- ---------- ---------- ------------ ---------- ---------
DIRECTORS
<S> <C> <C> <C> <C> <C>
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 cancelled in the
transaction.
(3) Director Hobson intends to resign from the Board of Directors prior to
the closing of the Merger.
DEBENTURES
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 March 31, 2003. The Debentures will bear interest at the rate of
11 1/2 percent per annum 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, 1998, 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.
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The Indenture provides that the Holding Company will not (i) declare or
pay any dividend or make any other distribution on any Junior Securities, except
dividends or distributions payable in Junior Securities, or (ii) purchase,
redeem or otherwise acquire or retire for value any Junior Securities, except
Junior Securities acquired upon conversion thereof into other Junior Securities,
or (iii) permit a Subsidiary to purchase, redeem or otherwise acquire or retire
for value any Junior Securities if, at the time such dividend, distribution,
purchase, redemption or other acquisition is effected, a default in the payment
of any interest upon any Debenture when it becomes due and payable or a default
in the payment of the principal of (or premium, if any, on) any Debenture at its
Maturity shall have occurred and be continuing.
The term "Junior Securities" means (i) shares of Common Stock of the
Holding Company, (ii) shares of any other class or classes of capital stock of
the Holding Company, (iii) any other non-debt securities of the Holding Company
(whether or not such other securities are convertible into Junior Securities),
or (iv) debt securities of the Holding Company (other than the Debentures) as to
which, in the instrument creating or evidencing the same or pursuant to which
the same is outstanding, it is provided that such debt securities are not Senior
Indebtedness with respect to, or do not rank pari passu with, the Debentures.
WARRANTS
Each Unit issued in the Offering will contain nine Warrants, each of
which will entitle the holder thereof to purchase one share of the Holding
Company's Common Stock at an exercise price of $12.50 at any time prior to 5:00
p.m., Eastern Time on March 31, 2003. The number of shares purchasable upon
exercise of the Units and the exercise price shall be subject to adjustment to
reflect among other things, stock dividends on or stock splits of the Common
Stock or reclassification of its shares of Common Stock. In such situation, the
number of shares purchasable upon exercise will be adjusted so that the Warrant
holder shall be entitled to receive the kind and number of shares which the
holder thereof would have owned or been entitled to receive after the occurrence
of any of such events if the Units had been exercised prior thereto. The
exercise price will be adjusted accordingly. It is not anticipated that the
Units will be traded publicly, and therefore investors may experience
substantial difficulty liquidating their investment in the Units. If a market
should develop for the Units, the market price may be greater or less than the
portion of each Unit's price which is attributable to the Warrants offered
hereby. The Warrants have no value other than as the right to acquire Common
Stock of the Holding Company at the exercise price. The Warrants do not confer
upon the holders thereof any of the rights or privileges of a stockholder.
Accordingly, the Warrants do not entitle holders thereof to receive any
dividends, to vote, to call meetings or to receive any distribution upon a
liquidation of the Company. The Holding Company has authorized and reserved for
issuance a number of shares of Common Stock sufficient to provide for the
exercise of the rights represented by the Warrants. Shares issued upon exercise
of the Warrants will be fully paid and nonassessable. Warrants not exercised
prior to 5:00 p.m., Central Time, on March 31, 2003 shall become null and void.
Exercise of Warrants may give rise to a rebuttable presumption of control or
result in a change in control for which prior approval of the OTS may be
necessary. See "Other Restrictions on Acquisitions of Stock - Federal
Regulation."
PROPOSAL III - RATIFICATION OF THE APPOINTMENT OF AUDITORS
The Board of Directors has renewed First Federal's arrangement for
Crowe, Chizek and Company LLP ("Crowe Chizek") to be its auditors for the 1997
fiscal year, subject to the ratification of the appointment by First Federal's
stockholders. A representative of Crowe Chizek is expected to attend the Meeting
to respond to appropriate questions and will have an opportunity to make a
statement if he so desires.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
RATIFICATION OF THE APPOINTMENT OF CROWE, CHIZEK AND COMPANY LLP AS FIRST
FEDERAL'S AUDITORS FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 1997.
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PROPOSAL IV - ADJOURNMENT OF MEETING
The Merger, as described above, must be approved by a majority of the
outstanding shares of Common Stock. The form of Revocable Proxy sent to
stockholders with this proxy statement sets forth a proposal to permit the proxy
holder to vote the proxy in favor of adjournment of the Meeting in order to
solicit additional proxies if, by the date of the Meeting, a majority of the
shares of Common Stock are not voted in favor of the Merger. The proposal to
authorize such adjournment must be approved by a majority of the votes present
in person or by proxy at the Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THIS
PROPOSAL AND REQUESTS THAT STOCKHOLDERS CHECK THE BOX PERMITTING ADJOURNMENT OF
THE MEETING IN THE EVENT SUFFICIENT VOTES ARE NOT CAST IN FAVOR OF THE MERGER.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Holding Company has only recently been formed and, accordingly, has
no results of operations. The following discussion is intended to provide
information to facilitate the understanding and assessment of significant
changes and trends related to the financial condition of First Federal and the
results of its operations. This discussion and analysis should be read in
conjunction with First Federal's audited financial statements and notes thereto
included elsewhere in this Joint Proxy Statement/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.
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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. See "Management's
Discussion of Recent Results."
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 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 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
63
<PAGE>
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
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
64
<PAGE>
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.
65
<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>
66
<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.
67
<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
---- ---- ----
Weighted average yield on:
<S> <C> <C> <C>
Loans receivable............................................................. 9.15% 8.82% 8.41%
Mortgage-backed securities................................................... 6.29 6.64 6.29
Securities................................................................... 4.60 4.20 3.30
Other interest-earning assets................................................ 5.89 6.02 3.97
Combined weighted average yield on interest-earning assets.................. 8.71 8.39 7.83
Weighted average rate paid on:
Deposits..................................................................... 4.60 4.30 3.56
Borrowings................................................................... 5.62 7.10 8.39
Combined weighted average rate paid on interest-bearing liabilities......... 4.60 4.42 3.63
Spread........................................................................ 4.11 3.97 4.20
Net interest margin (net interest-earnings divided by average interest-
earning assets, with net interest-earnings equaling the difference
between the dollar amount of interest-earned and paid)...................... 4.45% 4.29% 4.40%
</TABLE>
68
<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 Increase
(Decrease) (Decrease)
Due To Total Due To Total
----------------- Increase -------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
--------- ------- ---------- -------- --------- ---------
(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>
69
<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
General. First Federal reported net income of $234,000 for the year
ended September 30, 1996 compared to $211,000 for the year ended September 30,
1995, an increase of $23,000, or 10.9%. Excluding the nonrecurring September
1996 SAIF assessment, after tax net income would have been $454,000. This
represents a 115% increase over net income from the previous year. The increase
in net income resulted primarily from an increase in service charge income of
$172,000 coupled with an increase in gain on sale of loans and mortgage
servicing rights of $117,000. In addition, the Bank recorded a negative
provision for loan losses of ($52,000) for the year ended September 30, 1996
compared to $27,000 for the year ended September 30, 1995. These items were
largely offset by a $333,000 special SAIF assessment for SAIF insured deposits
as a result of a federal law enacted on September 30, 1996. These items are more
fully discussed below.
Net Interest Income. Net interest income increased $61,000 to $2.5
million for the year ended September 30, 1996 from $2.4 million for the year
ended September 30, 1995. This increase resulted primarily from increases in
both the yield earned and the average balance of the Bank's loan portfolio,
offset in part by an 18 basis point increase in the Bank's cost of funds. The
increase in the yield on loans of 33 basis points was primarily the result of an
increase in consumer automobile loans which yield a higher rate of interest than
traditional mortgage loans and the origination of three year balloon loans at
higher initial rates. As a result, First Federal's net interest margin increased
to 4.45% for the year ended September 30, 1996 from 4.29% for the year ended
September 30, 1995. The spread between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities also increased from
3.97% for the year ended September 30, 1995 to 4.11% for the year ended
September 30, 1996.
Provision for Loan Losses. The Bank recorded a $52,000 negative
provision for loan losses for the year ended September 30, 1996 compared to a
$27,000 provision for loan losses for the year ended September 30, 1995. The
decrease in the provision for loan losses was a result of management
reevaluation of estimates used in calculating the allowance for loan losses due
to a decrease in delinquencies and nonaccrual loans, continued low levels of
actual charge-offs over the last three fiscal years relative to the allowance
for loan losses and the use of credit-default loss insurance coverage for new
automobile loans to limit the Bank's loan loss exposure. The provision for loan
losses is based on management's periodic review of the Bank's loan portfolio
which considers, among other factors, past actual loan loss experience, the
general prevailing economic conditions, changes in the size, composition and
risks inherent in the loan portfolio, independent third-party loan reviews, and
specific borrower considerations such as the ability to repay the loan and the
estimated value of the underlying collateral. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for estimated losses on loans. Such agencies may require
the Bank to provide additions to the allowance based upon judgments which differ
from those of management.
Noninterest Income. 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, the Bank realized
a $117,000 increase in the gain on sale of loans and mortgage servicing rights
due to a large extent to the sale of all Federal Home Loan Mortgage Corporation
("FHLMC") servicing rights.
Noninterest Expense. 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,
70
<PAGE>
the Bank will experience a reduction in its SAIF insurance expense in future
periods. In addition, occupancy and equipment expense increased $37,000 due to
an increase in depreciation and the remodeling of the main office, and data
processing expense increased $37,000 as a result of the Bank's full year's
operations on the new data processing system, which was implemented to provide
full service retail banking to First Federal customers.
Income Taxes. 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
General. First Federal reported net income of $211,000 for the year
ended September 30, 1995 compared to $193,000 net income in fiscal 1994,
excluding $264,000 (after-tax) additional net income due to the settlement of a
lawsuit filed by First Federal. Total net income for fiscal 1994 was $457,000,
including proceeds from the settlement of the lawsuit. Thus, the net income of
$211,000 for the year ending September 30, 1995, was $246,000 less than the
total net income for the year ending September 30, 1994 (including income from
settlement of the law suit). In addition, for the years ending September 30,
1994, and September 30, 1995, significant one-time expenses were incurred in
connection with the transition of the Bank into full-service retail banking.
Therefore, this decrease resulted primarily from an increase in the provision
for loan losses from a $401,000 (before-tax) negative provision (resulting from
the lawsuit recovery) to a $27,000 provision in 1995.
Net Interest Income. Net interest income increased $142,000 to $2.4
million for the year ended September 30, 1995 from $2.3 million for 1994. This
increase resulted primarily from increases in both the yield earned and the
average balance of the Bank's loan portfolio, offset in part by an increase in
the Bank's cost of deposits reflecting an increase in general market interest
rates and, to a lesser extent, an increase in the average deposit balance. As a
result, for the year ended September 30, 1995, First Federal's net interest
margin decreased to 4.29% and the spread between the average yield on interest
earning assets and the average cost of funds decreased from 4.20% for 1994 to
3.97% for 1995.
Provision for Loan Losses. During the year ended September 30, 1995,
First Federal recorded a provision for loan losses of $27,000 based on
management's analysis of the loan portfolio, as described above. During the year
ended September 30, 1994, the Bank recorded a negative loan loss provision of
$401,000 primarily as a result of $400,000 of proceeds received ($264,000 net of
income tax) from the settlement of a lawsuit filed by First Federal and related
to a previously charged-off pool of automobile loans.
Management will continue to monitor the appropriate factors when
considering future levels of provisions and the allowance for loan losses. While
management believes that it uses the best information available to determine the
allowance for estimated loan losses, unforeseen market conditions could result
in adjustments to the allowance for estimated loan losses and net earnings could
be significantly affected if circumstances differ substantially from the
assumptions used in determining the allowance. In addition, the OTS as part of
its review process may require the Bank to establish additional general or
specific allowances.
Noninterest Income. 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. Noninterest expense declined by $448,000 to $2.6
million for the year ended September 30, 1995 from $3.1 million for the year
ended September 30, 1994. This decrease reflects management's continuing efforts
to reduce expenses in all areas of operations of the Bank, while at the same
time absorbing some one-time expenses in connection with the transition into
full-service retail banking.
Income Taxes. Income tax expense decreased $124,000 to $110,000 for the
year ended September 30, 1995 as compared to $234,000 for the previous year,
reflecting the lower 1995 pretax earnings of the Bank.
71
<PAGE>
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.
72
<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.
Year Ended Year Ended
September 30, September 30,
1996 1995
------------- ---------
(In Thousands)
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
======= =======
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 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.
73
<PAGE>
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.
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.
74
<PAGE>
BUSINESS
The Holding Company is a newly organized financial institution holding
company that was formed to acquire First Federal. Upon consummation of the
Offering and the Merger, the Holding Company will hold all of the outstanding
shares of First Federal, and First Federal will be the Holding Company's sole
subsidiary. At present, the Holding Company does not have any assets, and does
not conduct any significant business. The Holding Company and First Federal are
headquartered in Bryan, Texas. The executive offices of the Holding Company and
First Federal are located at 2900 Texas Avenue, Bryan, Texas 77802 and its
telephone number at that address is (409) 779-2900.
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 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
75
<PAGE>
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.
Loan originations come primarily from walk-in customers, real estate
brokers, homebuilders and other contractors. All loans in which the aggregate
lending relationship is under $50,000 are approved by First Federal's senior
management and all loan applications for over $50,000 aggregate debt to one
borrower are approved by the Board of Directors.
First Federal requires, in connection with the origination and purchase
of residential real estate loans, title insurance and fire and casualty
insurance coverage, as well as flood insurance where appropriate, to protect
First Federal's interest. The cost of this insurance coverage is paid by the
borrower.
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<PAGE>
Loan Portfolio Composition. The following table sets forth information
concerning the composition of First Federal's loan portfolio, including
mortgage-backed securities, in dollar amounts and in percentages (before
deductions for loans in process, deferred fees and discounts and allowances for
losses) as of the dates indicated.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- -------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- -------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
Residential....................... $30,477 58.70% $30,966 61.10% $27,128 59.76%
Residential held for sale......... 419 .80 1,840 3.63 2,114 4.66
Commercial........................ 4,175 8.04 3,643 7.19 3,062 6.74
Construction...................... 4,365 8.41 4,261 8.41 4,838 10.66
-------- ------- -------- ------ ------- -------
Total real estate loans........ 39,436 75.95 40,710 80.33 37,142 81.82
Other Loans:
Consumer loans:
Deposit accounts................ 967 1.86 705 1.39 789 1.74
Purchased automobile 02
receivables................... --- --- 4 .01 10 .
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 1,966 3.79 1,664 3.28 1,847 4.07
construction loans...............
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>
77
<PAGE>
The following table shows the fixed- and adjustable-rate composition of
First Federal's loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
1996 1995 1994
-------------------- -------------------- ---------------------
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
Fixed-Rate Loans:
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Residential...................... $22,931 44.16% $24,739 48.81% $27,128 59.76%
Residential held for sale........ 419 .80 1,840 3.63 2,114 4.66
Commercial....................... 2,162 4.17 2,824 5.57 3,062 6.74
Construction..................... 4,365 8.41 4,261 8.41 4,838 10.66
-------- ------ -------- ------- ------- ------
Total real estate loans....... 29,877 57.54 33,664 66.42 37,142 81.82
Consumer loans.................... 11,892 22.90 9,323 18.40 7,979 17.58
Commercial business loans......... 595 1.15 643 1.27 271 0.60
-------- ------ -------- ------ ------- ------
Total fixed-rate loans......... 42,364 81.59 43,630 86.09 45,392 100.00
------- ------ ------- ------ ------- ------
Adjustable-Rate Loans:
Real estate:
Residential...................... 7,546 14.54 6,227 12.29 --- ---
Commercial....................... 2,013 3.87 819 1.62 --- ---
------- ------- -------- ------ ------- ------
Total adjustable rate loans... 9,559 18.41 7,046 13.91 --- ---
------- ------ -------- ------ ------- ------
Total loans................... 51,923 100.00 50,676 100.00 45,392 100.00
Less:
Undisbursed portion of
construction loans............... 1,966 3.79 1,664 3.28 1,847 4.07
Consumer loans in process......... --- --- --- --- --- ---
Deferred fees and discounts....... 128 0.25 87 0.17 92 0.20
Deferred income................... 3 0.01 3 0.01 13 0.03
Allowance for losses on loans..... 247 0.47 317 0.63 313 0.69
-------- ------- -------- ------ ------- ------
Net loans...................... $49,579 95.48% $48,605 95.91% $43,127 95.01%
======== ======= ======= ====== ======= ======
</TABLE>
First Federal has the authority to purchase loans and loan
participations, but has elected not to do so since 1991.
78
<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.
79
<PAGE>
The following schedule illustrates the maturities of First Federal's
loan portfolio, excluding loans held for sale at September 30, 1996. Loans which
have adjustable or renegotiable interest rates and amortizing loans are shown as
maturing in the period during which the loan is contractually due. This schedule
does not reflect the effects of possible prepayments or enforcement of
due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
--------------------------------------------------------------
Residential Commercial Construction Consumer Business Total
-------------------- ------------------ ------------------- ----------------- ------------------ ----------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
-------- ------ ------- ------ ------- ------ ------ ------ ------ ------ -------- -------
(Dollars in Thousands)
Due During
Years Ended
September 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997(1)........... $ 7,565 8.42 $ 507 9.13% $4,365 9.18% $ 1,585 8.60% $ 280 9.72% $14,302 8.72%
1998 and 1999..... 12,717 9.26 1,168 9.36 --- --- 3,818 11.00 --- --- 17,703 9.64
2000 and 2001..... 893 9.40 925 9.55 --- --- 6,397 13.28 79 9.96 8,294 12.41
2002 to 2006...... 1,073 8.89 86 11.25 --- --- 71 11.80 86 10.81 1,316 9.33
2006 to 2016...... 1,988 8.99 643 9.81 --- --- 21 8.00 150 11.00 2,802 9.28
2017 and following 6,660 8.98 846 8.75 --- --- --- --- --- --- 7,506 8.95
------- ------ ------ --- --- ------- ----- ----- --- -----
$30,896 8.97 $4,175 9.36% $4,365 9.18% $11,892 11.91% $ 595 10.23% $51,923 9.70%
======= ==== ====== ==== ====== ======= ======= ======= ===== ===== ======= ====
- -------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
</TABLE>
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<PAGE>
The total amount of loans due after September 30, 1997 which have fixed
rates of interest (including 3-year balloon home loans and other types of loans
with balloon maturities) is $28.0 million while the total amount of loans due
after such date which have floating or adjustable rates of interest is $9.6
million.
ONE-TO-FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING
One of First Federal's primary lending programs is the origination of
loans secured by mortgages on owner-occupied one- to four-family residences.
Historically (before the 1980's), most of First Federal's residential loans were
made on a fixed rate basis and had contractual maturity (and amortization
schedules) of 30, or to a lesser extent, 15 years. Since 1979, however, in order
to increase the interest rate sensitivity of its residential loan portfolio,
First Federal has emphasized the origination of non-conforming three year
balloon loans (generally with 30 year amortization schedules). At September 30,
1996, $19.7 million or 37.9%, of First Federal's gross loan portfolio consisted
of three-year fixed-rate balloon loans on one- to four-family residences. On the
same date, First Federal had $3.7 million of other fixed-rate residential loans
or 7.1% of the gross loan portfolio. All of these loans were secured by
residential (primarily owner-occupied) properties located in the State of Texas,
with a majority located in First Federal's primary market area.
First Federal's residential loans are generally underwritten and
documented to permit their sale in the secondary market. In the event they are
non-conforming to secondary market standards, First Federal will underwrite such
loans to the extent feasible in accordance with such standards. First Federal
evaluates both the borrower's ability to make principal and interest payments
and the value of the property (and any other collateral) that will secure the
loan. One- to four-family loan originations are generally made in amounts up to
90% of the appraised value of the security property. The determination as to
whether to lend in excess of 80% of the appraised value is made on a
case-by-case basis and is based on a variety of factors, including the
borrower's payment history, length of employment and debt to income ratio, as
well as the quality of the security property. 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 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
----------------------------------------------------------------------------- Balance
6 Months 6 Months 1 to 3 to 5 5 to 10 10 to 20 Over 20 Sale
or Less to 1 Year 3 Years Years Years Years Years Outstanding
----------- --------- --------- ------- ------- --------- -------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Home Loan $ --- $ --- $ --- $ --- $ 5 $231 $636 $ 872
Mortgage Corporation.......
Federal National
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.
82
<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 totaled $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 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
83
<PAGE>
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.
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,
84
<PAGE>
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.
85
<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.
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<PAGE>
The following table sets forth information concerning delinquent
mortgage and other loans at September 30, 1996 in dollar amounts and as a
percentage of First Federal's total loan portfolio. The amounts presented
represent the total remaining principal balances of the related loans, rather
than the actual payment amounts which are overdue.
<TABLE>
<CAPTION>
Loans Delinquent at September 30, 1996
-------------------------------------------------------------
Total
90 Days Delinquent
30-59 Days 60-89 Days and Over Loans
---------- ---------- --------- ----------
(Dollars in Thousands)
<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.
87
<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."
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
88
<PAGE>
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.
The following table sets forth an analysis of First Federal's allowance
for loan losses.
Year Ended September 30,
--------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
Balance at beginning of period ................... $317 $313 $339
Charge-offs (consumer loans) ..................... (23) (27) (39)
Recoveries (consumer loans) ...................... 5 4 414
Provisions for losses on loans ................... (52) 27 (401)
----- ----- -----
Balance at end of period ......................... $247 $317 $313
===== ===== =====
Ratio of net charge-offs (recoveries) during the
period to average loans outstanding during the
period ........................................... .04% .05% (.87)%
===== ===== =====
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<PAGE>
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.
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>
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<PAGE>
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 intersection in northern Bryan. This immediate area presently has no nearby
banking facility servicing its financial needs.
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<PAGE>
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)
Certificate accounts:
<S> <C> <C> <C> <C> <C> <C>
0.00 - 2.99............................. --- ---% $ --- ---% $ 59 0.1%
3.00 - 4.99............................. $16,448 31.8 12,854 23.4 28,689 56.4
5.00 - 6.99............................. 17,505 33.9 23,371 42.5 5,943 11.7
7.00 - 8.99............................. 933 1.8 921 1.7 --- ---
9.00 - 9.99............................. --- --- --- --- --- ---
------- ------ -------- ------- ------- -----
Total Certificate Accounts............... 34,886 67.5 37,146 67.6 34,691 68.2
Other Accounts:
Passbook accounts........................ 4,177 8.1 5,014 9.1 5,039 9.9
NOW and Other Demand Deposit 5,387 10.4 4,117 7.5 3,510 6.9
Accounts.................................
Money market accounts.................... 4,653 9.0 5,650 10.3 5,486 10.8
Commercial checking accounts............. 1,185 2.3 1,295 2.4 1,660 3.3
Other noninterest-bearing accounts....... 1,389 2.7 1,717 3.1 460 0.9
------- ------ ------- ------- ------- -----
Total other accounts..................... 16,791 32.5 17,793 32.4 16,155 31.8
------- ------ ------- ------- ------- -----
Total deposits........................... $51,677 100.0% $ 54,939 100.0% $50,846 100.0%
======= ====== ======== ======= ======= =====
</TABLE>
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<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>
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.
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<PAGE>
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
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."
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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.
New, innovative checking accounts have been recently introduced by
First Federal. These accounts are targeted to those individuals age 50 or over
("Golden Eagle Account") and age 30 to 49 ("30 Something Account"), both of
which include special benefits and planned trips.
First Federal considers its primary market for deposits and lending
activities to be the Bryan-College Station area (Brazos County), and the
surrounding counties of Burleson, Grimes, Leon, Madison, Robertson and
Washington county, Texas. This area may be characterized principally as a
college community centered around Texas A&M University; however, during 1995 and
1996 additional private businesses have located in the area. A significant
portion of the region's deposit base is comprised of depositors associated with
Texas A&M University. At September 30, 1996 there was one thrift institution,
one state savings bank and seven commercial banks with offices in Bryan-College
Station, Texas, where First Federal's principal offices and full-service branch
are located.
EMPLOYEES
At September 30, 1996, the Bank had a total of 50 employees, including
12 part-time employees. The Bank's employees are not represented by any
collective bargaining group. Management considers its employee relations to be
good.
DESCRIPTION OF PROPERTY OWNED
First Federal owns the building and land for its main office at 2900
Texas Avenue, Bryan, Texas, which was built in 1956 and acquired by First
Federal in 1978. This office now has 8,700 square feet and is situated on almost
an acre of land with over 200 feet of frontage situated on the principal
thoroughfare in Bryan-College Station. The net depreciated net book value of
this office and land (with recent parking lot improvements) was $325,000 at
September 30, 1996. An expansion of 800 square feet was added in 1995, and
additional drive-in facilities were added in 1994.
First Federal also opened and owns a branch office at 2202 Longmire in
College Station in March of 1994. This office has approximately 2320 square feet
and is situated on almost two acres of land. The book value of this office and
land was $316,000 at September 30, 1996.
Management's present intentions are to develop a branch in northern
Bryan to better serve the Hispanic and minority community, low income population
and other residents in this part of the community not presently served with a
nearby banking facility, and has recently acquired a site at a key intersection
in northern Bryan. Management believes its current check clearing capability can
service these additional accounts.
The Bank maintains a database of depositor and borrower customer
information. The net book value of the data processing and computer equipment
and software utilized by the Bank at September 30, 1996 was $71,000.
LEGAL PROCEEDINGS
First Federal is, from time to time, a party to certain lawsuits
arising in the ordinary course of its business. First Federal believes that none
of these lawsuits would, if adversely determined, have a material adverse effect
on its financial condition.
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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.
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
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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.
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
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.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.
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.
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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.
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.
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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 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 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.
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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.
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."
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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.
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."
102
<PAGE>
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 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.
103
<PAGE>
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
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.
104
<PAGE>
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 carryovers 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.
105
<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.
106
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
First Federal Savings Bank
Bryan, Texas
We have audited the accompanying consolidated statements of financial condition
of First Federal Savings Bank and its wholly-owned subsidiary, First Service
Corporation of Bryan, as of September 30, 1996 and 1995 and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended September 30, 1996. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Federal
Savings Bank and its wholly-owned subsidiary, First Service Corporation of
Bryan, as of September 30, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended September 30,
1996 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Bank
changed its method of accounting for securities for the year ended September 30,
1995.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Oak Brook, Illinois
November 9, 1996
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>
OTHER MATTERS
The Board of Directors is not aware of any business to come before the
Meeting other than the matter described above in this Joint Proxy
Statement/Prospectus. However, if any other matters should properly come before
the Meeting, it is intended that holders of the proxies will act in accordance
with their best judgment.
The cost of solicitation of proxies will be borne by the Bank. The Bank
will reimburse brokerage firms and other custodians, nominees and fiduciaries
for reasonable expenses incurred by them in sending proxy materials to the
beneficial owners of Bank Common Stock. In addition to solicitation by mail,
directors, officers and regular employees of the Bank may solicit proxies
personally or by telegraph or telephone, without additional compensation.
BY ORDER OF THE BOARD OF DIRECTORS
----------------------------------
Bryan, Texas
____________, 1997
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
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;
<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
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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
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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.
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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
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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.
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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 Stock.
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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.^
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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
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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.
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13.3 Any notice or waiver to be given to any party shall be in writing
and shall be deemed to have been duly given if delivered, mailed, or sent by
prepaid telegram, addressed to such party at 2900 Texas Avenue, Bryan, Texas
77802.
13.4 The captions contained in this Agreement are solely for
convenient reference and shall not be deemed to affect the meaning or
interpretation of any paragraph hereof.
13.5 First Federal will pay all fees and expenses incurred in
connection with the transactions contemplated by this Agreement.
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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:
---------------------- ---------------------------
ATTEST: THE BRYAN-COLLEGE STATION
FINANCIAL HOLDING COMPANY
By: /s/ Charles Neelley By: /s/ J. Stanley Stephen
---------------------- ---------------------------
Charles Neelley, Secretary J. Stanley Stephen
President and Chief Executive Officer
Date: Date:
---------------------- ---------------------------
Witness:
/s/ Charles Neelley /s/ J. Stanley Stephen
- ---------------------- ---------------------------
Charles Neelley J. Stanley Stephen
Date: Date:
---------------------- ---------------------------
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SCHEDULE A
OFFICES OF SURVIVING INSTITUTION
MAIN OFFICE
2900 Texas Avenue
Bryan, Texas 77802
BRANCH OFFICE
2200 Longmire
College Station, Texas
LOAN PRODUCTION OFFICES
510 N. Valley Mills Drive
Waco, Texas 76710
701 Normal Park, Suite 208E
Huntsville, Texas 77340
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SCHEDULE B
DIRECTORS OF SURVIVING INSTITUTION
Term
Name Address Expires
- ------------------- -------------------- -------
J. Stanley Stephen 2900 Texas Avenue 1997
Bryan, Texas 77802
Ken Hayes 2900 Texas Avenue 1997
Bryan, Texas 77802
Charles Neelley 2900 Texas Avenue 1997
Bryan, Texas 77802
George Koenig 2900 Texas Avenue 1997
Bryan, Texas 77802
Ernest A. Wentrcek 2900 Texas Avenue 1998
Bryan, Texas 77802
Robert H. Conaway 2900 Texas Avenue 1998
Bryan, Texas 77802
Richard L. Peacock 2900 Texas Avenue 1999
Bryan, Texas 77802
Jack W. Lester, Jr. 2900 Texas Avenue 1999
Bryan, Texas 77802
Phil Hobson 2900 Texas Avenue 1999
Bryan, Texas 77802
J. Roland Ruffino 2900 Texas Avenue 1999
Bryan, Texas 77802
Successor or substitute directors may be named, subject to compliance
with the requirements of applicable law and the Charter and Bylaws of the
Surviving Institution.
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APPENDIX B
SECTION 552.14 OF HOME OWNERS LOAN ACT
OF 1993, AS AMENDED
RIGHTS OF DISSENTING STOCKHOLDERS
SECTION 552.14 OF THE OFFICE OF THRIFT SUPERVISION
RULES AND REGULATIONS
SS. 552.14 DISSENTER AND APPRAISAL RIGHTS.
(A) RIGHT TO DEMAND PAYMENT OF FAIR OR APPRAISED VALUE. Except as
provided in paragraph (b) of this section, any stockholder of a Federal stock
association combining in accordance with ss.552.13 of this part shall have the
right to demand payment of the fair or appraised value of his stock: Provided,
That such stockholder has not voted in favor of the combination and complies
with the provisions of paragraph (c) of this section.
(B) EXCEPTIONS. No stockholder required to accept only qualified
consideration for his or her stock shall have the right under this section to
demand payment of the stock's fair or appraised value, if such stock was listed
on a national securities exchange or quoted on the National Association of
Securities Dealers' Automated Quotation System ("NASDAQ") on the date of the
meeting at which the combination was acted upon or stockholder action is not
required for a combination made pursuant to ss. 552.13(h)(2) of this part.
"Qualified consideration" means cash, shares of stock of any association or
corporation which at the effective date of the combination will be listed on a
national securities exchange or quoted on NASDAQ or any combination of such
shares of stock and cash.
(C) PROCEDURE.
(1) NOTICE. Each constituent Federal stock association shall notify all
stockholders entitled to rights under this section, not less than twenty days
prior to the meeting at which the combination agreement is to be submitted for
stockholder approval, of the right to demand payment of appraised value of
shares, and shall include in such notice a copy of this section. Such written
notice shall be mailed to stockholders of record and may be part of the
management's proxy solicitation for such meeting.
(2) DEMAND FOR APPRAISAL AND PAYMENT. Each stockholder electing to make
a demand under this section shall deliver to the Federal Stock association,
before voting on the combination, a writing identifying himself or herself and
stating his or her intention thereby to demand appraisal of and payment for his
or her shares. Such demand must be in addition to and separate from any proxy or
vote against the combination by the stockholder.
(3) NOTIFICATION OF EFFECTIVE TIME AND WRITTEN OFFER. Within ten days
after the effective date of the combination, the resulting association shall;
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(i) Give written notice by mail to stockholders of constituent Federal
Stock associations who have complied with the provisions of paragraph (c)(2) of
this section and have not voted in favor of the combination, of the effective
date of the combination;
(ii) Make a written offer to each stockholder to pay for dissenting
shares at a specified price deemed by the resulting association to be the fair
value thereof; and
(iii) Inform them that, within sixty days of such date, the respective
requirements of paragraphs (c)(5) and (6) of this section (set out in the
notice) must be satisfied.
The notice and offer shall be accompanied by a balance sheet and statement of
income of the association the shares of which the dissenting stockholder holds,
for a fiscal year ending not more than sixteen months before the date of notice
and offer, together with the latest available interim financial statements.
(4) ACCEPTANCE OF OFFER. If within sixty days of the effective date of
the combination the fair value is agreed upon between the resulting association
and any stockholder who has complied with the provisions of paragraph (c)(2) of
this section, payment therefor shall be made within ninety days of the effective
date of the combination.
(5) PETITION TO BE FILED IF OFFER NOT ACCEPTED. If within sixty days of
the effective date of the combination the resulting association and any
stockholder who has complied with the provisions of paragraph (c)(2) of this
section do not agree as to the fair value, then any such stockholder may file a
petition with the Office, with a copy by registered or certified mail to the
resulting association, demanding a determination of the fair market value of the
stock of all such stockholders. A stockholder entitled to file a petition under
this section who fails to file such petition within sixty days of the effective
date of the combination shall be deemed to have accepted the terms offered under
the combination.
(6) STOCK CERTIFICATES TO BE NOTED. Within sixty days of the effective
date of the combination, each stockholder demanding appraisal and payment under
this section shall submit to the transfer agent his certificates of stock for
notation thereon that an appraisal and payment have been demanded with respect
to such stock and that appraisal proceedings are pending. Any stockholder who
fails to submit his stock certificates for such notation shall no longer be
entitled to appraisal rights under this section and shall be deemed to have
accepted the terms offered under the combination.
(7) WITHDRAWAL OF DEMAND. Notwithstanding the foregoing, at any time
within sixty days after the effective date of the combination, any stockholder
shall have the right to withdraw his or her demand for appraisal and to accept
the terms offered upon the combination.
(8) VALUATION AND PAYMENT. The Director shall, as he or she may elect,
either appoint one or more independent persons or direct appropriate Staff of
the Office to appraise the shares to determine their fair market value, as of
the effective date of the combination, exclusive of any element of value arising
from the accomplishment or expectation of the combination.
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Appropriate staff of the Office shall review and provide an opinion on
appraisals prepared by independent persons as to the suitability of the
appraisal methodology and the adequacy of the analysis and supportive data. The
Director after consideration of the appraisal report and the advice of the
appropriate staff shall, if he or she concurs in the valuation of the shares,
direct payment by the resulting association of the appraised fair market value
of the shares, upon surrender of the certificates representing such stock.
Payment shall be made, together with interest from the effective date of the
combination, at a rate deemed equitable by the Director.
(9) COSTS AND EXPENSES. The costs and expenses of any proceeding under
this section may be apportioned and assessed by the Director as he or she may
deem equitable against all or some of the parties. In making this determination
the Director shall consider whether any party has acted arbitrarily,
vexatiously, or not in good faith in respect to the rights provided by this
section.
(10) VOTING AND DISTRIBUTION. Any stockholder who has demanded
appraisal rights as provided in subparagraph (c)(2) of this section shall
thereafter neither be entitled to vote such stock for any purpose nor be
entitled to the payment of dividends or other distributions on the stock (except
dividends or other distribution payable to, or a vote to be taken by
stockholders of record at a date which is on or prior to, the effective date of
the combination): Provided, That if any stockholder becomes unentitled to
appraisal and payment of appraised value with respect to such stock and accepts
or is deemed to have accepted the terms offered upon the combination, such
stockholder shall thereupon be entitled to vote and receive the distributions
described above.
(11) STATUS. Shares of the resulting association into which shares of
the stockholders demanding appraisal rights would have been converted or
exchanged, had they assented to the combination, shall have the status of
authorized and unissued shares of the resulting association.
<PAGE>
APPENDIX C
OPINION OF HOEFER & ARNETT, INCORPORATED,
INVESTMENT BANKERS
[HOEFER & ARNETT, INCORPORATED LETTERHEAD]
April 16, 1997
Members of the Board of Directors
First Federal Savings Bank
2900 Texas Avenue
Bryan, Texas 77802
Members of the Board:
You have requested our opinion as investment bankers as to the
fairness, from a financial point of view, to the holders of shares of First
Federal Savings Bank ("First Federal") of the terms of the proposed acquisition
of shares of common stock of First Federal by The Bryan-College Station
Financial Holding Company ("Holding Company") as defined in the Prospectus.
Subject to the terms and conditions therein, holders of up to 80% of First
Federal Stock shall be entitled to receive from First Federal, as of the
Effective Date, $24.07 in cash for each share of First Federal Stock owned by
such holder at the Effective Date. Holders of at least 20% of First Federal
Common Stock shall be entitled to receive two and one-half shares of Holding
Company Common Stock for each share of First Federal Common Stock held by such
holder.
As part of its investment banking business, Hoefer & Arnett,
Incorporated is continually engaged in the valuation of bank, bank holding
company and thrift securities in connection with mergers and acquisitions
nationwide. Prior to being retained for this assignment, we have not provided
investment banking or financial advisory services to First Federal. Concurrent
with this assignment, Hoefer & Arnett, Incorporated is prepared to serve as
manager on a best efforts basis for the proposed public offering of shares of
common stock and units of Senior Subordinated Debentures and warrants to
purchase common stock by the new holding company to be formed by First Federal,
which shall be named The Bryan-College Station Financial Holding Company.
In arriving at our opinion, we have reviewed and analyzed, among other
things, the following: (i) the Prospectus (ii) Annual Reports to Shareholders of
First Federal for the years ended September 30, 1995 and September 30, 1996;
(iii) Quarterly OTS Call reports for the quarters ended December 31, 1996, and
March 31, 1997 for First Federal; (iv) certain other publicly available
financial and other information concerning First Federal; and (v) publicly
available information concerning other thrifts, banks and holding companies, the
trading markets for their securities and the nature and terms of certain other
merger/acquisition transactions we believe relevant to our inquiry. We have held
discussions with senior management of First Federal concerning their past and
current operations, financial condition and prospects, as well as the results of
regulatory examinations.
We have reviewed with senior management of First Federal earnings
projections for 1997 through 2001 for First Federal as a stand-alone entity,
assuming the merger does not occur, prepared by First Federal.
<PAGE>
In conducting our review and in arriving at our opinion, we have relied
upon and assumed the accuracy and completeness of the financial and other
information provided to us or publicly available, and we have not assumed any
responsibility for independent verification of the same. We have relied upon the
management of First Federal as to the reasonableness of the financial and
operating forecasts, projections (and the assumptions and bases therefor)
provided to us, and we have assumed that such forecasts and projections reflect
the best currently available estimates and judgments of the management of First
Federal. We have also assumed without assuming any responsibility for the
independent verification of same, that the allowance for loan losses for First
Federal is adequate to cover such losses. We have not made or obtained any
evaluations or appraisals of the property of First Federal, nor have we examined
any individual loan credit files. For purposes of this opinion, we have assumed
that the transaction will have the tax, accounting and legal effects described
in the Prospectus and assumed the accuracy of the disclosures set forth in the
Prospectus. Our opinion as expressed herein is limited to the fairness, from a
financial point of view, to the holders of First Federal Stock of the terms of
the proposed acquisition of up to 80% of the common stock of First Federal by
Holding Company and does not address Holding Company's underlying business
decision to proceed with the acquisition.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others the following: (i)
the historical and current financial position and results of operations of First
Federal, including interest income, interest expense, net interest income, net
interest margin, provision for loan losses, non-interest income, non-interest
expense, earnings, dividends, internal capital generation, book value,
intangible assets, return on assets, return on shareholders' equity,
capitalization, the amount and type of non-performing assets, loan losses and
the reserve for loan losses, all as set forth in the financial statements for
First Federal; (ii) the assets and liabilities of First Federal, including the
loan, investment and mortgage portfolios, deposits, other liabilities,
historical and current liability sources and costs and liquidity; and (iii) the
nature and terms of certain other merger/acquisition transactions involving
thrifts, banks and bank holding companies. We have also taken into account our
assessment of general economic, market and financial conditions and our
experience in other transactions, as well as our experience in securities
valuation and our knowledge of the banking industry generally. Our opinion is
necessarily based upon conditions as they exist and can be evaluated on the date
hereof and the information made available to us through the date hereof.
Based upon and subject to the foregoing, we are of the opinion as
investment bankers that, as of the date hereof, the terms of proposed
acquisition of up to 80% of the outstanding common stock of First Federal by
Holding Company are fair, from a financial point of view, to the holders of
First Federal Stock.
It is understood that this letter ^ does not constitute a
recommendation ^ with respect to any approval of the acquisition. We hereby
consent to the reference to our firm in the proxy statement or prospectus
related to the merger transaction and to the inclusion of our opinion as an
exhibit to the proxy statement or prospectus related to the transaction.
Very truly yours,
/s/ Hoefer & Arnett, Incorporated
---------------------------------
Hoefer & Arnett, Incorporated
<PAGE>
====================================== ======================================
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
COMPANY OR THE BANK SINCE ANY OF THE
DATES AS OF WHICH INFORMATION IS
FURNISHED HEREIN OR SINCE THE DATE
HEREOF. THE BRYAN-COLLEGE STATION
FINANCIAL HOLDING COMPANY
-----------------
TABLE OF CONTENTS
Page
Prospectus Summary..................
The Unit Offering...................
Risk Factors........................
Selected Consolidated Financial
Data..............................
Recent Financial Data............... COMMON STOCK
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- PROSPECTUS
Looking Statements................
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.
Counsel fees and expenses.......................................... $100,000
Accounting fees and expenses....................................... 35,000
Marketing Agent fees............................................... 5,000
OTS Filing Fees.................................................... 14,525
Printing, postage and mailing...................................... 15,000
Registration and Filing Fees....................................... 893
Other expenses..................................................... 7,500
--------
TOTAL......................................................... $177,918
========
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 corporation or enterprise,
<PAGE>
as appropriate; (iii) with respect to a criminal proceeding, has no reasonable
cause to believe his conduct was unlawful; and (iv) was not adjudged to be
liable to the corporation or other corporation or enterprise (unless the court
where the proceeding was brought determines that such person is fairly and
reasonably entitled to indemnity).
Unless ordered by a court, indemnification may be made only following a
determination that such indemnification is permissible because the person being
indemnified has met the requisite standard of conduct. Such determination may be
made (i) by the Board of Directors of the Holding Company by a majority vote of
a quorum consisting of directors not at the time parties to such proceeding; or
(ii) if such a quorum cannot be obtained or the quorum so directs, then by
independent legal counsel in a written opinion; or (iii) by the stockholders.
Section 145 also permits expenses incurred by directors and officers in
defending a proceeding to be paid by the corporation in advance of the final
disposition of such proceedings upon the receipt of an undertaking by the
director or officer to repay such amount if it is ultimately determined that he
is not entitled to be indemnified by the corporation against such expenses.
Item 15. Recent Sales of Unregistered Securities
The Registrant is newly incorporated, solely for the purpose of acting
as the holding company of First Federal Savings Bank pursuant to the Merger
Agreement (filed as Exhibit 2 herein), and no sales of its securities have
occurred to date, other than the sale of one share of the Registrant's stock to
its incorporator for the purpose of qualifying the Registrant to do business in
the State of Delaware.
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
2 Agreement and Plan of Merger**
3.1 Certificate of Incorporation of the Holding Company*
3.2 Bylaws of the Holding Company*
3.3 Charter of First Federal*
3.4 Bylaws of First Federal*
4 Form of Stock Certificate of the Holding Company*
5 Opinion of Silver, Freedman & Taff, L.L.P. with respect to legality
of stock*
8.1 Opinion of Crowe Chizek & Company, L.L.P. with respect to Federal
income tax consequences of the Merger*
10.1 1993 Stock Option and Incentive Plan*
10.2 Form of Employment Agreement of J. Stanley Stephen*
10.3 Form of Employment Agreement of George Koenig*
10.4 Form of Employment Agreement of Mary Lynn Hegar*
10.5 Form of Employment Agreement of Kay Watson*
23.1 Consent of Silver, Freedman & Taff, L.L.P.*
23.2 Consent of Crowe, Chizek & Company, L.L.P.
23.3 Consent of Hoefer & Arnett, Inc.*
24 Power of Attorney (set forth on signature page)
99.1 Fairness Opinion*
99.2 Form of Proxy to be furnished to First Federal Stockholders*
99.3 Form of Election of First Federal Stockholders*
- ------------------------------
* Previously filed
** Filed as an exhibit to the Company's Amendment No. 2 to the Form S-1
registration statement filed on October 31, 1997 (File No. 333-28179)
pursuant to Section 5 of the Securities Act of 1933. Such previously
filed exhibit is hereby incorporated herein by reference in accordance
with Item 601 of Regulation S-K.
<PAGE>
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Proxy Statement/Prospectus any facts or events
arising after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in
the information set forth in the Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and it will be governed by the final adjudication
of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Bryan, State
of Texas on 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>
<TABLE>
<CAPTION>
<S> <C>
/s/ J. Stanley Stephen /s/ Mary Lynn Hegar
- ------------------------------------- -------------------------------------
J. Stanley Stephen, Director, Mary Lynn Hegar, Vice President,
President and Chief Executive Officer Secretary and Chief Financial Officer
(Chief Operating Officer) (Principal Accounting Officer)
/s/ Richard L. Peacock /s/ Ernest A. Wentrcek
- ------------------------------------- -------------------------------------
Richard L. Peacock, Chairman of the Board Ernest A. Wentrcek, Vice Chairman of the
Board
/s/ Charles Neelley /s/ George Koenig
- ------------------------------------- -------------------------------------
Charles Neelley, Director and Secretary/ George Koenig, Director and Executive Vice-
Treasurer President
/s/ Jack W. Lester /s/ Robert H. Conaway
- ------------------------------------- -------------------------------------
Jack W. Lester, Director and Assistant Robert H. Conaway, Director
Secretary/Treasurer Director
/s/ Ken Hayes /s/ Phil Hobson
- ------------------------------------- -------------------------------------
Ken Hayes, Director Phil Hobson, Director
/s/ J. Roland Ruffino
- -------------------------------------
J. Rolan Ruffino, Director
</TABLE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
First Federal Savings Bank
We consent to the use in this Prospectus on Form S-1 filed with the
Securities and Exchange Commission and the Office of Thrift Supervision, of our
report dated November 9, 1996, on the financial statements of First Federal
Savings Bank for the year ended September 30, 1996. We also consent to the
reference to us under the heading "Experts" in this Prospectus on Form S-1.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
Oak Brook, Illinois
October 31, 1997
