As filed with the Securities and Exchange Commission on February 5, 1999
Registration No. 333-28179
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1 TO THE FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 6035 36-4153491
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
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2900 TEXAS AVENUE, BRYAN, TEXAS 77802
(409) 779-2900
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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J. STANLEY STEPHEN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
2900 TEXAS AVENUE
BRYAN, TEXAS 77802
(409) 779-2900
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:
Dave M. Muchnikoff, P.C.
SILVER, FREEDMAN & TAFF, L.L.P.
(a limited liability partnership including professional corporations)
1100 New York Avenue, NW
Washington, DC 20005-3934
(202) 414-6100
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Post-Effective Amendment becomes effective.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration for the same
offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
This Post-Effective Amendment shall become effective upon order of the
Commission pursuant to Section 8(c) of the Securities Act of 1933.
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EXPLANATORY NOTE
The post-effective amendment is being filed for the purpose of
deregistering under the Securities Act of 1933, as amended, 639 shares of Common
Stock, par value $.01 per share, and 71 Units each consisting of $1,000
principal amount of 11 1/2% subordinated debentures due March 31, 2003 and nine
detachable warrants. These shares and Units have not been issued as of the date
hereof and are no longer being offered. Each warrant entitles the holder to
purchase one share of Common Stock of The Bryan-College Station Financial
Holding Company at an exercise price of $12.50 per share, subject to adjustment,
through March 31, 2003 covered by Registration Statement No. 333-28179. The
offering resulted in the sale of 200,000 shares of the Registrant's Common Stock
and 3,629 Units. This post-effective amendment is also being filed to permit the
offering of the 32,661 shares of Common Stock which may be issued upon exercise
of the warrants.
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PROSPECTUS
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
32,661 SHARES OF COMMON STOCK
This Prospectus relates to 32,661 shares of our common stock, par value
$.01 per share ("Common Stock") that may be issued upon the exercise of our
outstanding stock warrants. The warrants were part of units issued on April 1,
1998 at $1,000 per unit upon the closing of our initial public offering. Each
unit consists of $1,000 principal amount of 11 1/2% subordinated debentures due
March 31, 2003 and nine detachable warrants. Each warrant entitles the holder to
purchase one share of our common stock at an exercise price of $12.50, subject
to adjustment, at any time prior to 5:00 p.m. central time on March 31, 2003
(the "Warrants").
The Warrants may be exercised upon surrender of the warrant certificate on
or prior to the expiration date at our offices, with the "Subscription Form" on
the reverse side of the warrant certificate filled out and executed as
indicated, accompanied by payment of the full exercise price (preferably by
certified check payable to the order of The Bryan-College Station Financial
Holding Company) for the number of Warrants being exercised.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT
SUPERVISION, THE FEDERAL DEPOSIT INSURANCE CORPORATION OR BY ANY
STATE SECURITIES AUTHORITIES, HAS APPROVED OR DISAPPROVED OF THESE
SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER
OBLIGATIONS OF ANY BANK OR NON-BANK SUBSIDIARY AND ARE NOT
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR
ANY OTHER FEDERAL OR STATE GOVERNMENT AGENCY.
-------------------------------------
This Prospectus contains information you should consider when making your
investment decision. You should rely only on the information provided in this
Prospectus. We have not authorized anyone else to provide you with different
information. We are not making an offer of the Common Stock in any state where
the offer is not permitted. The information in this Prospectus is accurate only
as of the date of this Prospectus, regardless of the time of delivery of this
Prospectus or any sale of the Common Stock.
WE URGE YOU TO CAREFULLY READ "RISK FACTORS" AT PAGE 5 FOR A DISCUSSION OF
MATTERS WHICH YOU SHOULD CONSIDER BEFORE YOU MAKE YOUR INVESTMENT DECISION.
(cover page continues)
THE DATE OF THIS PROSPECTUS IS ___________, 1999.
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AVAILABLE INFORMATION
We are subject to the information reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and we file or have filed
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission") and the Office of Thrift Supervision ("OTS"),
respectively. The Registration Statement discussed below, as well as reports,
proxy statements and other information filed by us pursuant to the informational
requirements of the Exchange Act, can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following regional offices of the Commission:
the Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New
York 10048; and the Midwest Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. Additional information may
also be obtained at no cost from the Commission internet site at
http://www.sec.gov.
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[INSERT MAP]
[MAP ILLUSTRATES FIRST FEDERAL'S OFFICES IN TEXAS]
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PROSPECTUS SUMMARY
On the cover page, in this summary and in the "Risk Factors" section, the
words "we," "our," "ours" and "us" refer to The Bryan-College Station Financial
Holding Company and not to our subsidiary, the First Federal Savings Bank of
Bryan, Texas. The following summary contains basic information about this
offering. It likely does not contain all the information that is important to
you. For a more complete understanding of this offering, we encourage you to
read this entire document.
THE COMPANY
The Bryan-College Station Financial Holding Company (the "Holding Company")
was formed to act as a unitary thrift holding company for First Federal Savings
Bank, Bryan, Texas ("First Federal" or the "Bank") by acquiring 100% of the
stock of First Federal through the exchange of approximately 32% of First
Federal common stock for our Common Stock and the purchase of approximately 68%
of First Federal common stock for cash (the "Acquisition"). We received approval
from the Office of Thrift Supervision (the "OTS") to acquire all of the common
stock of the Bank outstanding upon completion of the Acquisition. The
Acquisition was completed on April 1, 1998. All references to the Company refers
to The Bryan-College Station Financial Holding Company including its subsidiary,
the Bank. All references to the Company, unless otherwise indicated, at or
before April 1, 1998 refer to the Bank.
First Federal is a federally chartered, independent thrift institution,
headquartered in Bryan-College Station, Texas, which began operations in 1965.
The Company is predominantly a locally-based home lender, originating loans
primarily in Bryan-College Station and the surrounding immediate trade area, and
to a lesser extent other communities in the general trade area between Houston,
Austin and Dallas, Texas. The Company also originates a significant amount of
consumer loans primarily secured by automobiles originated through selected
automobile dealers, many of which are partially insured against loss by
credit-default insurance. In addition, to lesser extent, the Company originates
construction, Small Business Administration ("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 the Company began its
transition to full-service retail banking in order to compete more effectively
and to increase overall profitability. In addition to its core single-family
lending business, since fiscal 1994 the Company has increased its focus on the
following products:
o Indirect automobile financing through select automobile dealers,
including credit-default insured "second chance" auto finance lending
o Direct consumer lending
o SBA loans (partially government guaranteed)
o Commercial lending to small and medium-sized businesses
o Commercial real estate lending, primarily to small and medium-sized
businesses
o Home improvement loans
The Company 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, which comprise its immediate trade area. The Company currently
operates four full-service offices, two of which are located in Bryan (including
its principal office, situated in the middle of the Bryan-College Station
community, and a new facility located at a key highway intersection in North
Bryan), one full-service residential mortgage loan office on a major
thoroughfare in adjacent College Station and one full-service branch in College
Station, which is the home of the third largest university in the nation, Texas
A&M University, and the new George Bush Presidential Library. The Company has
concentrated on the middle-class population as its targeted "niche" in order to
provide banking products and services, which had led to its loan-to-deposit
ratio of 97.9% at September 30, 1998, consisting primarily of residential loans
and consumer loans which are secured primarily by automobiles. At September 30,
1997 and 1996, the Company's loan to deposit rate was 110.9% and 95.9%,
respectively. These types of loans have enabled the Company to enjoy a spread
between the interest it earns on its loans and the interest it pays for deposits
of 5.10% at September 30, 1998 as compared to 4.56% and 4.67% at September 30,
1997 and 1996, respectively. In addition, over the past three fiscal years, the
Company has experienced an average of only $21,000 in actual annual net loan
charge-offs, resulting from an average total loan portfolio of $57.4 million.
See "Loan Delinquencies; Nonperforming Assets and Classified Assets."
Our principal executive offices are located at 2900 Texas Avenue, Bryan,
Texas 77802, and our telephone number at that address is (409) 779-2900.
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THE WARRANTS
Each warrant entitles the holder to purchase one share of our Common Stock
at an exercise price of $12.50, subject to adjustment, at any time prior to 5:00
p.m. Central Time on March 31, 2003. The Warrants are detachable and may trade
separately from the debentures although we are not aware of any trades. See
"Description of Warrants."
USE OF PROCEEDS
The net proceeds from the issuance of our shares upon the exercise of the
Warrants (approximately $408,263 upon exercise of all the Warrants), will become
part of our general funds for use in our business. See "Use of Proceeds."
RISK FACTORS
An investment in our common stock involves a high degree of risk and
substantial dilution. You should carefully review and consider the factors
described under "Risk Factors" and "Dilution".
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RISK FACTORS
The Securities offered by this Prospectus involve a high degree of risk.
The following risk factors, in addition to those factors discussed elsewhere in
this Prospectus, should be carefully considered you before deciding whether to
exercise your Warrants. The cautionary statements set forth below and elsewhere
in this Prospectus should be read as accompanying forward looking statements
included under "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere herein. The risks described in
the statements set forth below could cause our results to differ materially from
those expressed in or indicated by such forward-looking statements. See
"Disclosure Regarding Forward-Looking Statements."
RISK OF RELIANCE ON NONINTEREST INCOME
In recent years, noninterest expense has exceeded net interest income and
the Company has relied upon gains on sales of assets to record net income. There
can be no assurance that the Company will continue to record significant gains
on sales of assets as these gains are subject to market and other risks. The
Company 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. See"Management's Discussion and Analysis of Financial
Condition and Results of Operations."
ADEQUACY OF LOAN LOSS ALLOWANCE
Management and the Board of Directors regularly review our 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 the loss allowances will be adequate to cover costs and losses
in connection with any foreclosures or repossessions. Increases in allowances,
if necessary, are most probable in connection with the nonperforming assets and
other loans of concern discussed in this Prospectus. When future examinations
are conducted by the OTS or the Federal Deposit Insurance Corporation (the
"FDIC"), the examiners may require us 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 Company's successful operation depends heavily upon the active
involvement of J. Stanley Stephen, age 65, whose loss could have an adverse
effect on us. Mr. Stephen has been President and Chief Executive Officer of
First Federal since 1991 and the Holding Company since inception. We currently
have no plans to purchase "key-man" life insurance with respect to Mr. Stephen;
however, we have an employment agreement with Mr. Stephen through 2002. See
"Management of First Federal -- Employment Agreements."
INTEREST RATE RISK
The Company's profitability, like that of many financial entities, is
dependent to a large extent upon net interest income, which is the difference or
"spread" between the interest the Company 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, the
Company's profitability may be adversely affected by rapid changes in interest
rates. The Company generally attempts to maximize net interest income by
achieving a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. The Company believes these 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.
The Company 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.
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DILUTION
As of September 30, 1998, the net tangible book value available to common
stockholders of the Holding Company amounted to $1.87 million or approximately
$4.80 per share. After giving effect to the maximum number of Shares of Holding
Company Common Stock that may be issued upon exercise of the warrants at
September 30, 1998 and the receipt of the estimated net proceeds thereof, and
assuming no exercise of options currently outstanding, the net tangible book
value of the Holding Company will amount to approximately $2.28 million or
approximately $5.40 per share of Holding Company Common Stock. As a result, the
purchasers of the Holding Company Common Stock will incur an immediate dilution
of $7.10 per share of Holding Company Common Stock after exercise of all
warrants for the $12.50 per share exercise price, representing the difference
between their purchase at $12.50 per share and the net tangible book value per
share of Holding Company Common Stock. 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.
CASH DIVIDENDS NOT LIKELY
The Holding Company has not paid any cash dividends on its Common Stock.
For the foreseeable future, it is anticipated that any earning will be used to
finance our growth and that cash dividends will not be paid to stockholders.
Accordingly, any investor, who anticipates the need for current cash dividends
from an investment in Common Stock should not exercise their Warrants.
LIMITED MARKET FOR OUR COMMON STOCK; POTENTIAL ILLIQUIDITY OF OUR COMMON STOCK
Our Common Stock is traded in limited amounts in the over-the-counter
market. 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 us nor any
market maker has any control. Accordingly, there can be no assurance that an
active or liquid trading market for our Common Stock, will develop, or that if a
market develops, it will continue. The Common Stock may not be appropriate as a
short-term investment. Furthermore, there can no assurance that you will be able
to sell your Common Stock at or above the exercise price.
See "Market Information."
VOTING CONTROL OF SHARES BY THE BOARD AND EXECUTIVE OFFICERS
The Board of Directors and management of the Holding Company and members of
their immediate families have 97,413 or 25.01% of Common Stock which would
render it more difficult to obtain majority support for shareholder proposals
opposed by the Board and management. This level of stock ownership by directors
and executive officers, if voted as a block, would enable the Board and
management to block the approval of transactions requiring the approval of 80%
of the shareholders under our Certificate of Incorporation. There are no voting
or other agreements among the Board of Directors and management. We cannot
predict the effect of such shares on the liquidity of the market or the price of
our Common Stock. See "-- Limited Market for Our Common Stock; Potential
Illiquidity of Our Common Stock," and "Restrictions on Acquisitions of Stock and
Related Takeover Defensive Provisions."
CONCENTRATION OF LENDING ACTIVITIES; RISKS ASSOCIATED WITH NONCONFORMING LOANS
Substantially all of the aggregate principal amount of our real estate
mortgage loans are secured by one- to four-family residential properties located
in our primary market area. While a substantial portion of the loans originated
for portfolio by us 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 all of the requirements for sale to Federal
National Mortgage Association (the "FNMA") or Federal Home Loan Mortgage
Corporation (the "FHLMC") (i.e., conforming loans), because they may 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 us securing the loan by
additional collateral), the borrower may have an insufficient employment history
or the property may 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 the Company currently believes that its loans are
adequately secured or reserved for and has experienced over the past three
fiscal years average annual net charge-offs (net of recoveries) of approximately
$21,000, on an average loan portfolio of $57.4 million, in the event that real
estate prices in its primary market area weaken or economic conditions in its
primary market area deteriorate, thereby reducing the value of properties
securing its 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 we may experience increased levels of
delinquencies and related losses having an adverse impact on income and
stockholders' equity.
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RISKS ASSOCIATED WITH AUTOMOBILE LOANS
At September 30, 1998 the Company had $24.6 million of automobile loans, of
which $13.5 million were issued pursuant to the Company's "Second Chance" auto
program to borrowers with less than perfect credit. The Company has had a policy
of not purchasing from brokers any "Second Chance" auto loans, and originates
these loans generally from applications received from automobile dealers.
Although the Company 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 insurer, the Company
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 the Company, because the Company'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, the Company may permit the origination of a loan in excess of the
manufacturer's suggested retail price, in the case of new vehicles, or the value
established by used car reference publications. Therefore, a repossessed
automobile may not provide an adequate source of repayment of the outstanding
loan balance. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans. See "Business -- Consumer Lending."
EVOLUTION OF BUSINESS
The Company's strategy is to focus on increasing its commercial real estate
and commercial business loans and consumer loans. Commercial real estate,
commercial business loans and consumer loans are expected to represent a growing
portion of our business. Full-service retail banking activities, while
potentially more profitable, generally entail a greater degree of credit risk
than does single family lending, the historical focus of the Company.
Specifically, the performance of commercial real estate, commercial business and
consumer loans are more sensitive to regional and local economic conditions.
Collateral valuation requires more detailed analysis and is more variable than
single family mortgage lending. Loan balances for commercial real estate and
commercial business loans are typically larger than those for single family
mortgage loans and, thus, when there are defaults and losses, they can be
greater on a per loan basis than those for single family mortgages. Similarly,
loss levels are more difficult to predict. Full-service retail banking typically
includes a greater amount of unsecured lending, or lending secured by rapidly
depreciable assets such as automobiles, which presents different risks than
secured single family mortgage lending. The sources of repayment are not related
to collateral and can be more difficult to understand and pursue. Similarly,
loan default prevention and collection for commercial real estate, commercial
business and consumer lending also can be more complex and difficult than that
for single family mortgage lending. For example, business loans are not
typically made with standardized loan documents. Thus, the opportunity for
mistakes and documentation risks are increased. Moreover, a liquid secondary
market for most types of commercial real estate and business loans does not
exist. The operational, interest rate, and competitive risks associated with
commercial real estate, commercial business and consumer lending are different
than those for single family mortgage lending and require skills and experience
of management and staff different than that for single family mortgage lending.
When evaluating such credits, more factors need to be considered. Management
must be more knowledgeable of a wider variety of business enterprises and
industries that borrow money. Intensive, ongoing customer contact is required,
as well as complex analysis of financial statements at the time of loan approval
and on an ongoing basis. Servicing these customers requires closer monitoring
and more individualized analysis than does single family mortgage lending.
Commercial real estate, commercial business and consumer lending pricing is very
competitive and more subjective than that for single family mortgage lending. As
a result, the Company's risk of credit default is higher on these loans, which
would adversely affect net income. The Company generally discourages unsecured
loans. There can be no assurance given that we can increase the amount of these
loans in its portfolio.
YEAR 2000 COMPLIANCE
As the year 2000 approaches, concerns have been raised that existing
computer software programs and operating systems may not be able to process data
containing dates after December 31, 1999. Many existing software products were
designed to accommodate only a two digit year (e.g., 1998 is reflected as "98").
Our operating, processing and accounting operations are maintained on computers
and could be affected by Year 2000 issues. We also rely on third-party vendors
for data processing. We are currently working with our third-party vendors to
assess their Year 2000 readiness. While no assurance can be given that our
third-Party vendors will be Year 2000 compliant, we have been advised that our
vendors are taking appropriate steps to address the issues on a timely basis.
Based on certain preliminary estimates, we believe the our expenses related to
upgrading our systems and software for Year 2000 issues will not exceed
$250,000. We also believe that our testing for Year 2000 compliance should be
completed by the first quarter of 1999. While we currently have no reason to
believe that the cost of addressing these issues will materially affect our
products, services or our ability to compete effectively, no assurance can be
made that we or our third-party vendors will successfully and timely become Year
2000 compliant. We do not believe, however, that the cost of
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addressing Year 2000 issues presents a material event or uncertainty reasonably
likely to affect our future financial results.
RISKS ASSOCIATED WITH ANTI-TAKEOVER PROVISIONS
Holding Company and Bank Governing Instruments. Certain provisions of our
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 voting rights, limitations on the calling of special meetings, a fair
price/supermajority vote requirement at 80% for certain business combinations
with "Interested Stockholders," (including mergers or consolidations, sale,
lease or other disposition of assets, issuances or transfers of securities,
adoption of any plan of liquidation proposed by the Interested Stockholders, or
any reclassification of securities which increases the Interested Stockholders
percentage ownership of the Holding Company) and certain notice requirements.
Any or all of these provisions may serve to entrench current management and to
discourage potential proxy contests and other takeover attempts, particularly
those which have not been negotiated with the Board of Directors.
Regulatory and Statutory Provisions. Federal law requires OTS approval
prior to the acquisition of "control" (as defined in OTS regulations) of an
insured institution, including a holding company thereof. In the event that
holders of revocable proxies for more than 25% of the shares of our Common Stock
acting as a group or in concert with other proxy holders seek, among other
things, to elect one-third or more of the Holding Company's Board of Directors,
to cause the Holding Company's shareholders to approve the acquisition or
corporate reorganization of the Holding Company or to exert a continuing
influence on a material aspect of the business operations of the Holding
Company, such actions could be deemed to be a change of control, subject to OTS
approval. A Delaware statute also limits the circumstances under which a
Delaware corporation may engage in any business combinations (as defined by the
statute) with an interested shareholder (i.e., any person or entity that owns
15% or more of the voting stock). See "Restrictions on Acquisitions of Stock and
Related Takeover Defensive Provisions."
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 is 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.
COMPETITION
The Company experiences significant competition in its local market area in
both originating real estate and other loans and attracting deposits. This
competition arises from thrift institutions as well as commercial companies,
mortgage companies, banks, credit unions and national and local securities
firms. Such competition may limit the Company'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.
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SELECTED CONSOLIDATED FINANCIAL DATA
The following tables present selected consolidated financial data for the
Holding Company and its wholly-owned subsidiary, First Federal Savings Bank 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 the Holding Company included elsewhere in this Prospectus.
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At September 30,
--------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
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(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
- ---------------------------------
Total assets........................... $82,634 $75,089 $57,597 $61,432 $56,089
Loans receivable, net(1).............. 71,994 65,237 49,579 48,605 43,127
Mortgage-backed securities............. 954 1,150 1,292 2,278 2,693
Investment securities.................. --- --- 1,000 1,000 1,000
Deposits............................... 73,554 58,808 51,677 54,939 50,846
Debentures............................. 3,629 --- --- --- ---
Other borrowings....................... 4,429 10,000 --- 1,088 ---
Stockholders' equity................... 1,870 4,834 4,316 4,170 4,047
</TABLE>
- ----------
(1) Including loans held for sale of $328,000, $204,000, $419,000, $1.8 million
and $2.1 million at September 30, 1998, 1997, 1996, 1995 and 1994,
respectively.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
- ------------------------
Total interest income............................................. $6,891 $5,597 $4,828 $4,698 $4,020
Total interest expense............................................ 3,417 2,659 2,363 2,294 1,758
-------- --------- ------ ------ ------
Net interest income............................................. 3,474 2,938 2,465 2,404 2,262
Provision for loan losses......................................... 79 25 (52) 27 (401)(1)
-------- --------- ------ ------ ------
Net interest income after provision for loan losses............. 3,395 2,913 2,517 2,377 2,663
Service charges................................................... 602 585 527 355 202
Gain on sales of loans, mortgage servicing rights, mortgage-
backed securities and investment securities..................... 229 148 343 213 908
Income from operation of foreclosed real estate................... (20) (20) (9) (2) ---
Other noninterest income.......................................... 120 62 12 26 14
SAIF Special Assessment........................................... --- --- 333 --- ---
Other noninterest expenses (operating expenses)................... 3,870 2,771 2,715 2,648 3,096
-------- ---------- ------ ------ ------
Income before income taxes...................................... 456 917 342 321 691
Income tax expense ............................................... 164 312 108 110 234
-------- ---------- ------ ------ ------
Income before extraordinary item and cumulative effect of
change in accounting for income taxes......................... 292 605 234 211 457
Income tax benefit from utilizing net operating loss
carryforwards and cumulative effect of change in accounting
for income taxes................................................ --- --- --- --- ---
------- ---------- ------ ------ ------
Net income........................................................ $ 292 $ 605 $ 234 $ 211 $ 457(1)
======= ========== ====== ====== ======
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended September 30,
------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Other Data:
- ----------
Interest rate spread information:
Average during period(2)...................... 4.49% 4.47% 4.11% 3.97% 4.20%
End of period(3).............................. 5.10 4.56 4.67 4.17 4.29
Net interest margin for the period(4)........... 4.80 4.85 4.45 4.29 4.40
Average interest-earning assets as a percentage
of average interest- bearing liabilities........ 106.51 108.61 108.01 107.95 106.00
Non-performing assets to total assets at end of
period(5)..................................... 1.46 1.71 1.50 .62 .87
Total equity to total assets (end of period).... 2.26 6.44 7.49 6.79 7.22
Total equity to assets ratio (ratio of
average equity to average total assets)........ 4.54 7.23 7.26 6.91 7.11
Return on assets (ratio of net income to
average total assets)........................... .38 .94 .40 .36 .84
Return on assets, excluding special SAIF
assessment.................................... .38 .94 .77 .36 .84
Return on total equity (ratio of net income
to average equity)............................. 8.40 13.03 5.46 5.15 11.87
Return on total equity, excluding special
SAIF assessment................................ --- --- 10.60 --- ---
Non-interest expenses to average total assets... 5.05 4.32 5.17 4.47 5.71
Non-interest expense to average total assets
excluding special SAIF assessment.............. --- --- 4.60 --- ---
Ratio of earnings to fixed charges including
interest on deposits(6)........................ 1.12 1.30 1.10 1.10 1.33
Ratio of earnings to fixed charges excluding
interest on deposits(6)........................ 1.86 4.25 3.73 1.99 5.19
Earnings per share(7)........................... .55 .86 .24 .21 .62
Number of deposit accounts...................... 10,203 8,783 7,903 7,266 5,073
Number of full-service offices.................. 3 2 2 2 2
</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
by $265,000.
(2) 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).
(3) Represents the weighted average yield on interest-earning assets (primarily
loans) at the end of the period minus the weighted average cost of
liabilities (primarily deposits) at the end of the period.
(4) Net interest income divided by average interest-earning assets (primarily
loans).
(5) Non-performing assets include loans that are 90 days or more delinquent as
well as repossessed assets.
(6) 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 and Bank preferred stock dividends.
(7) Adjusted to reflect stock dividends paid to the stockholders, and to
reflect the 2.5 exchange ratio of Holding Company common stock for Bank
common stock.
10
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization, including
savings deposits, of the Holding Company at September 30, 1998 and the pro forma
capitalization of the Holding Company as of that date, after giving effect to
the exercise of all Warrants.
<TABLE>
<CAPTION>
Consolidated Capitalization
September 30, 1998
---------------------------
(Dollars in Thousands)
Holding Holding
Company Company
Historical Pro Forma
------------ -------------
<S> <C> <C>
Deposits.................................................. $ 73,554 $ 73,554
Other Borrowings.......................................... 800 800
Debentures due............................................ 3,629 3,629
--------- ---------
Total deposits and other borrowings..................... $ 77,983 $ 77,983
========= =========
Minority Interest......................................... $ 873 $ 873
========= =========
Stockholders' equity:
Holding Company Common Stock, par value $.01 per share:
Authorized shares to be outstanding as shown.............. $ 4 $ 4
Additional paid-in capital................................ 1,849 2,257
Retained earnings......................................... 17 17
-------- --------
Total stockholders' equity................................ $ 1,870 $ 2,278
======== ========
</TABLE>
DILUTION
As of September 30, 1998, the net tangible book value available to common
stockholders of the Holding Company amounted to $1.87 million or approximately
$4.80 per share. After giving effect to the maximum number of Shares of Holding
Company Common Stock that may be issued upon exercise of the warrants at
September 30, 1998 and the receipt of the estimated net proceeds thereof, the
net tangible book value of the Holding Company will amount to approximately
$2.28 million or approximately $5.40 per share of Holding Company Common Stock.
As a result, the purchasers of the Holding Company Common Stock will incur an
immediate dilution of $7.10 per share of Holding Company Common Stock after
exercise of all warrants for the $12.50 per share exercise price, representing
the difference between their purchase at $12.50 per share and the net tangible
book value per share of Holding Company Common Stock. 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.
11
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in this
Prospectus, including without limitation, statements under "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" regarding the Company's financial position, business
strategy and plans and objectives of management of the Company for future
operations, are forward-looking statements. When used in this Prospectus, the
words "anticipate," "believe," "estimate," "expect" and "intend" and words or
phrases of similar import, as they relate to the Company or Company management,
are intended to identify forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from the Company's expectations ("cautionary statements") are
disclosed under "Risk Factors" and elsewhere in this Prospectus, including,
without limitation, in conjunction with the forward-looking statements included
in this Prospectus. Based upon changing conditions, should any one or more of
these risks or uncertainties materialize, or should any underlying assumptions
prove incorrect, actual results may vary materially from those described herein
as anticipated, believed, estimated, expected or intended. The Company does not
intend to update these forward-looking statements. All subsequent written and
oral forward-looking statements attributable to the Company or persons acting on
their behalf are expressly qualified in their entirety by the applicable
cautionary statements.
USE OF PROCEEDS
The net proceeds, if any, will become part of the Holding Company's general
funds for use in its business. The Holding Company reserves the right to use the
proceeds in any manner authorized by law.
MARKET INFORMATION
The Holding Company's Common Stock is traded on the over the counter market
and is only traded infrequently. The Holding Company's Common Stock was issued
at $10.00 per share in connection with the acquisition of the Bank on April 1,
1998. At December 24, 1998, there were 562 holders of the Holding Company's
Common Stock and 389,436 shares of Common Stock issued and outstanding. At
February 1, 1999, the last known sales price of the Holding Company's Common
Stock was $10 per share.
DIVIDENDS
The Holding Company will pay dividends upon the determination of the Board
of Directors in its discretion that such payment is consistent with the
long-term interests of the Holding Company. The factors affecting this
determination include the Company's consolidated financial condition and results
of operations, tax considerations, industry standards, economic conditions,
regulatory restrictions, general business practices and other relevant factors.
The Holding Company did not declare cash dividends on its Common Stock during
fiscal 1998 and does not anticipate paying cash dividends in the foreseeable
future. Accordingly, any investor, who anticipates the need for current cash
dividends from an investment in Common Stock should not exercise their Warrants.
First Federal may not declare or pay a cash dividend or repurchase shares
of its stock if the effect thereof would be to cause its regulatory capital to
be reduced below the amount required for the liquidation account or to meet
applicable regulatory capital requirements. Federal regulations limit the Bank's
capital distributions during a calendar year to one hundred percent of its net
income plus one-half of its capital surplus ratio at the beginning of the
calendar year. In addition, the Bank must give the OTS thirty days notice prior
to the declaration of a dividend.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Holding Company is headquartered in Bryan, Texas and operates through
its subsidiary, First Federal. First Federal's major goals are to provide high
quality full-service retail banking on a profitable basis to its targeted
"niche" of customers, the middle-class population, 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 automobile loans and home improvement
loans, construction loans, and commercial business loans, some of which are
partially guaranteed by the SBA. In addition, First Federal also seeks to
continue improving its asset quality and minimizing 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 losses on repossessed
assets, 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 and the sale of loans, without
requiring additional capital.
During this past fiscal year, management has transitioned First Federal to
prepare for future growth and in order to provide more convenient banking
services to its customers, by (i) upgrading its tellers with more experienced,
full-time professionals; (ii) opening a new full-service branch in north Bryan,
adjacent to a key intersection between two major highways, in the heart of a
large area where many of First Federal's targeted middle class customers live,
and an area not presently served by a banking facility; (iii) doubling the size
of its staff in its expanding Second Chance Auto Lending Program (which requires
up to $6,000 of insurance per loan for losses due to the borrower's loan
default); (iv) hiring new management and adding to the staff of its Residential
Lending Department and providing this department with new and larger offices on
the main east-west artery in College Station; (v) providing 24-hour telephone
banking; (vi) addressing the challenges of the Year 2000 issue, with much time
and expense, and (vii) increasing salaries to retain quality people on its
staff. As a result, noninterest expenses increased slightly from 4.32% of
average assets for the year ended September 30, 1997 to 5.05% for the year
ending September 30, 1998. Management believes that this strategy will enable
First Federal to enhance profitability in the future and meet the needs of its
customers in a highly competitive market.
First Federal's restructuring and expansion, as described above, in order
to provide additional full-service banking and convenience to its customers in
fiscal 1998 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, 1998.
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
transition to full-service banking. Total noninterest income increased from
$775,000 in 1997 to $931,000 in 1998, while noninterest expense increased $1.1
million to $3.9 million in 1998 primarily due to the factors described above.
Noninterest
13
<PAGE>
expense (operating expenses which do not include interest paid on deposit
accounts and other borrowings) increased to 4.32% of average assets for the year
ended September 30, 1997 to 5.05% for the year ended September 30, 1998.
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 $55.5 million or 75.2% of total loans, while loans maturing over
five years total $18.3 million or 24.8% of total loans. 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/Chief
Financial Officer and Manager 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 in
order 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 continued to emphasize growth in
noninterest-bearing deposits such as checking accounts or lower interest-bearing
savings deposits by offering full-service retail banking. In order to minimize
the possible adverse impact that a rise in interest rates may have on net
interest income, First Federal has developed several strategies to manage its
interest rate risk. Primarily, First Federal is currently selling all
newly-originated one-to four-family residential mortgage loans which are
saleable in the secondary market--most of which are long-term fixed-rate loans.
In addition, First Federal currently offers three-year fixed rate balloon loans
and other adjustable rate loans to be held in its loan portfolio, 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, 1998 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 September 30, 1998, 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
14
<PAGE>
significant rise in market value for these loans because borrowers prepay at
relatively high rates. OTS assumptions are used in calculating the amounts in
this table.
<TABLE>
<CAPTION>
Acceptable Limits
Change in At September 30, 1998 Established by
Interest Rate Estimated ------------------------- Board of Directors
(Basis Points) NPV $ Change % Change % Change
- -------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+400 $7,937 $ 73 1% 75%
+300 8,068 204 3 (50)
+200 8,099 235 3 (30)
+100 7,998 134 2 (15)
0 7,864 --- --- ---
-100 7,872 8 --- (15)
-200 8,105 241 3 (30)
-300 8,409 545 7 (50)
-400 8,703 839 11 (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 11% increase in NPV in a declining rate environment and a 1%
decrease in a rising rate environment. As of September 30, 1998, an increase in
interest rates of 200 basis points would have resulted in a 3% 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% increase 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.
15
<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 interest 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>
For the Fiscal Year Ended September 30,
---------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------
Average Average
Outstanding Interest Outstanding Interest
Balance Earned Yield Balance Earned Yield
---------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net................... $68,050 $6,686 9.83% $56,090 $5,351 9.54%
Mortgage-backed securities.............. 1,053 63 5.98 1,221 73 5.98
Securities.............................. --- --- --- --- --- ---
Interest bearing deposits
with Federal Home Loan Bank............ 2,613 96 3.67 2,402 115 4.79
Other interest-earning assets........... 640 46 7.19 864 58 6.71
------- ------ ------- ------
Total interest-earning assets......... 72,356 6,891 9.52 60,577 5,597 9.24
Noninterest-earning assets............... 4,248 3,620
------- -------
Total assets............................ $76,604 $64,197
======= =======
<CAPTION>
For the Fiscal Year Ended September 30,
---------------------------------------
1996
---------------------------------------
Average
Outstanding Interest
Balance Earned Yield
---------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net................... $48,185 $4,407 9.15%
Mortgage-backed securities.............. 1,573 99 6.29
Securities.............................. 1,000 46 4.60
Interest bearing deposits
with Federal Home Loan Bank............ 3,870 227 5.87
Other interest-earning assets........... 817 49 6.00
------- ------
Total interest-earning assets......... 55,445 4,828 8.71
Noninterest-earning assets............... 3,478
-------
Total assets............................ $58,923
=======
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
For the Fiscal Year Ended September 30,
----------------------------------------------------------------------------
1998 1997
----------------------------------------------------------------------------
Average Average
Outstanding Interest Outstanding Interest
Balance Earned Yield Balance Earned Yield
----------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-bearing liabilities:
Deposits................................. $62,133 $ 2,981 4.80% $52,707 $2,491 4.73%
FHLB advances............................ 3,984 226 5.67 3,067 168 5.48
Notes payable............................ 1,815 210 11.57 --- --- ---
------- ------- ----- ------- ------ ----
Total interest-bearing liabilities..... 67,932 3,417 5.03 55,774 2,659 4.77
------- ------
Other liabilities(2)..................... 5,195 3,780
------- -------
Total liabilities ....................... 73,127 59,554
Stockholders' equity..................... 3,477 4,643
------- -------
Total liabilities and
stockholders' equity.................... $76,604 $64,197
------- =======
Net interest income; interest rate spread $ 3,474 4.49% $2,938 4.47%
======= ==== ====== ====
Net interest margin(1).................... 4.80% 4.85%
Average interest-earning assets to average
interest-bearing liabilities............ 106.51% 108.61%
<CAPTION>
For the Fiscal Year Ended September 30,
---------------------------------------------
1996
---------------------------------------------
Average
Outstanding Interest
Balance Earned Yield
---------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-bearing liabilities:
Deposits................................. $51,243 $2,358 4.60%
FHLB advances............................ 89 5 5.62
Notes payable............................ --- --- ---
------- ------ ----
Total interest-bearing liabilities..... 51,332 2,363 4.60
------- ------
Other liabilities(2)..................... 3,306
-------
Total liabilities ....................... 54,638
Stockholders' equity..................... 4,285
-------
Total liabilities and
stockholders' equity.................... $58,923
=======
Net interest income; interest rate spread $2,465 4.11%
====== ====
Net interest margin(1).................... 4.45%
Average interest-earning assets to average
interest-bearing liabilities............ 108.01%
</TABLE>
- ----------
(1) Net interest margin is net interest income divided by average
interest-earning assets (primarily loans).
(2) Including noninterest-bearing deposits.
17
<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,
-------------------------------
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable........................................................... 10.55% 9.75% 9.35%
Mortgage-backed securities................................................ 6.63 6.63 6.59
Securities................................................................ --- --- 4.51
Other interest-earning assets............................................. 5.37 6.13 5.79
Combined weighted average yield on interest-earning assets................ 10.23 9.48 9.00
Weighted average rate paid on:
Deposits................................................................... 4.81 4.80 4.33
Borrowings................................................................. 5.43 5.55 ---
Notes payable.............................................................. 11.50 --- ---
Combined weighted average rate paid on interest-bearing liabilities........ 5.13 4.92 4.33
Spread..................................................................... 5.10% 4.56% 4.67%
<CAPTION>
For the Fiscal Year Ended
September 30,
-------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable.......................................................... 9.83% 9.54% 9.15%
Mortgage-backed securities................................................ 5.98 5.98 6.29
Securities................................................................ --- --- 4.60
Other interest-earning assets............................................. 4.37 5.30 5.89
Combined weighted average yield on interest-earning assets............... 9.52 9.24 8.71
Weighted average rate paid on:
Deposits.................................................................. 4.80 4.73 4.60
FHLB advances............................................................. 5.67 5.48 5.62
Notes payable............................................................. 11.57 --- ---
Combined weighted average rate paid on interest-bearing liabilities...... 5.03 4.77 4.60
Spread..................................................................... 4.49 4.47 4.11
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 on assets and interest
paid on deposits and FHLB advances)...................................... 4.80% 4.85% 4.45%
</TABLE>
18
<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 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 rate.
<TABLE>
<CAPTION>
For the Fiscal Year Ended September 30,
-----------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
-----------------------------------------------------------------------------------
Increase Total Increase Total
(Decrease) Increase (Decrease) Increase
Due To (Decrease) Due To (Decrease)
-----------------------------------------------------------------------------------
Volume Rate Volume Rate
------------------- ---------- -------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans........................................... $1,171 $164 $1,335 $748 $196 $944
Mortgage-backed securities...................... (11) --- (11) (21) (5) (26)
Securities...................................... --- --- --- (46) --- (46)
Interest bearing deposits with Federal
Home Loan Bank 9 (28) (19) (75) (37) (112)
Other interest-earning assets................... (16) 5 (11) 3 6 9
-------- ------ -------- ------ ------ ------
Total interest-earning assets.................. 1,153 141 1,294 609 160 769
Interest-bearing liabilities:
Deposits........................................ 444 46 490 68 65 133
FHLB advances .................................. 52 6 58 163 --- 163
Notes payable................................... 210 --- 210 --- --- ---
------- ------ ------ ------ ------ ------
Total interest-bearing liabilities............ 706 52 758 231 65 296
------- ------ ------ ------ ------ ------
Net interest income.............................. $ 447 $ 89 $378 $ 95
====== ==== ==== ====
Net increase in net interest income.............. $ 536 $473
====== ====
</TABLE>
RESULTS OF OPERATIONS
The Company'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. The Company 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. The Company'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, 1998 TO SEPTEMBER 30, 1997
The Company reported consolidated net income of $292,000 for the year ended
September 30, 1998 as compared to $605,000 for the year ended September 30,
1997, a decrease of $313,000, or 51.7%. The decrease in net income was primarily
due to increased costs and expenses related to the formation of the Holding
Company, including interest expense on debentures of $138,000, amortization of
debt issue costs of the Holding Company and Holding Company organizational costs
of $50,000, and Holding Company franchise taxes of $21,000, all of which are
after tax. In addition, compensation and benefits at the Bank level increased as
a result of an increase in the number of employees due to the restructuring and
expansion of First Federal.
Net interest income increased by $536,000 to $3.5 million for the year
ended September 30, 1998 from $2.9 million for the year ended September 30,
1997. This increase primarily resulted from increases in the average balance
19
<PAGE>
and yield of the loan portfolio, offset in part by increases in the volume and
cost of deposits and advances. In addition, the Company issued debentures in
April of 1998, resulting in an increased volume of notes payable. The average
yield on loans increased 29 basis points as a result of an increase in the
volume of insured consumer automobile loans and direct consumer loans which
yield a higher rate than traditional mortgage loans. The average balance of
loans also increased as a result of a concerted effort to increase the consumer
loan portfolio through building relationships with auto dealerships and
promoting the Second Chance Auto Loan Program. These increases were partially
offset by an increase in the cost of funds resulting from a $9.4 million
increase in the average balance of deposits and a $2.7 million increase in the
average balance of FHLB advances and notes payable. In addition, the average
cost of funds increased 26 basis points as a result of increased rates in order
to remain competitive and due to the 11 1/2% debentures due March 2003
("Debentures") issued in connection with the acquisition of the Bank by the
Holding Company. As a result, the Company's average interest margin decreased
slightly to 4.80% for the year ended September 30, 1998 from 4.85% for the year
ended September 30, 1997. The ratio of interest-earning assets to
interest-bearing liabilities declined slightly to 106.51% at September 30, 1998
from 108.61% at September 30, 1997. The net interest spread increased slightly
to 4.49% from 4.47% for the same periods.
The Company recorded a $75,000 provision (expense) for reserves for loan
losses for the year ended September 30, 1998 compared to a $25,000 provision for
reserves for loan losses for the year ended September 30, 1997. The increase in
the provision for loan losses was largely a result of a $5.1 million increase in
gross loans during the year. This increase was partially offset by continued low
levels of charge-offs relative to the allowance for loan losses and the use of
credit-default insurance coverage for certain automobile loans to limit the
Company's loan loss exposure. The provision for loan losses is based on
management's periodic review of the Company'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 Company's
allowance for estimated loan losses on loans. Such agencies may require the
Company to provide additions to the allowance based upon judgments which differ
from those of management.
Noninterest income increased $156,000 to $931,000 for the year ended
September 30, 1998 from $775,000 for the year ended September 30, 1997. This was
primarily a result of increased gains on sales of loans and mortgage servicing
rights of $81,000 combined with an increase in service charges of $17,000 as a
result of an increase in transactional deposit accounts. In addition, other
income increased $58,000 primarily as a result of the recognition of excess
dealer reserves maintained on older credit default insured automobile loans that
paid off during the year.
Noninterest expense increased $1.1 million from $2.8 million for the year
ended September 30, 1997 to $3.9 million for the year ended September 30, 1998.
The increase primarily resulted from the formation, restructuring and expansion
of the Holding Company and its wholly-owned subsidiary, First Federal.
Compensation and benefits increased $438,000 as a result of an increase in the
number of employees due primarily to the opening of a new branch and increased
expenses related to the expansion of the mortgage lending and second chance
automobile lending departments. Occupancy expense increased $115,000 primarily
as a result of the opening of the new North Bryan branch and the recently
expanded mortgage lending offices in College Station. Office supplies increased
$48,000 and data processing fees also increased $21,000 as a result of increased
production and increased number of transactions. The increase in the volume of
consumer loans has resulted in additional telephone and postage costs of
$62,000, related largely to loan collections. Other expense increased $334,000,
which consisted of various items, including $67,000 of amortization of debt
issue costs and organizational costs related to the formation of the Holding
Company and franchise tax expense of $32,000 for the Holding Company. The
Company had increased expenses of $86,000 related to the establishment of a
$59,000 reserve for repossessed vehicles and the remainder for losses on other
repossessed assets. Various other expenses have also increased primarily as a
result of the overall growth and increased loan production of the Company.
Income tax expense decreased $148,000 from $312,000 for the year ended
September 30, 1997 to $164,000 for the year ended September 30, 1998 primarily
as a result of the $461,000 decrease in pretax income. Income tax expense
reflected a tax rate of 35.9% for the year ended September 30, 1998 compared to
34.0% for the year ended September 30, 1997.
20
<PAGE>
COMPARISON OF FISCAL YEAR ENDED SEPTEMBER 30, 1997 TO SEPTEMBER 30, 1996
The Company reported net income of $605,000 for the year ended September
30, 1997 as compared to $234,000 for the year ended September 30, 1996, an
increase of $371,000, or 158.5%. The increase was primarily due to the absence
of a $220,000 after tax charge due to the special Savings Association Insurance
Fund ("SAIF") by a decrease in noninterest income of $98,000. These items are
more fully discussed below.
Net interest income increased $473,000 to $2.9 million for the year ended
September 30, 1997 from $2.5 million for the year ended September 30, 1996. This
increase resulted primarily from an increase in the yield and average balance of
the loan portfolio, offset in part by an increase in the volume of Federal Home
Loan Bank ("FHLB") advances and an increase in the average cost of funds for
deposits. The average yield on loans increased 39 basis points primarily as a
result of an increase in the average balance of insured consumer automobile
loans which yield a higher rate than traditional mortgage loans. The average
balance of loans also increased as a result of a concerted effort to increase
construction and commercial loans. These increases were partially offset by an
increase in the cost of funds resulting from a $3.0 million increase in the
average balance of FHLB advances and an increase in interest rates on deposits
to remain competitive in the market. As a result, the Company's net interest
margin increased to 4.85% for the year ended September 30, 1997 from 4.45% for
the year ended September 30, 1996. The net interest spread increased to 4.47%
from 4.11% for the same periods.
The Company recorded a $25,000 provision for loan losses for the year ended
September 30, 1997 compared to a $52,000 negative provision for the year ended
September 30, 1996. The increase in the provision for loan losses was largely a
result of a $17.2 million increase in the gross loan portfolio combined with an
increase in nonperforming assets as compared to the prior year. These factors
were offset in part by continued low levels of charge-offs relative to the
allowance for loan losses and the use of credit-default insurance coverage for
new automobile loans to limit the Company's loan loss exposure. The provision
for loan losses is based on management's periodic review of the Company'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 Company's allowance for estimated loan losses on loans.
Such agencies may require the Company to provide additions to the allowance
based upon judgments which differ from those of management.
Noninterest income decreased $98,000 to $775,000 for the year ended
September 30, 1997 from $873,000 for the year ended September 30, 1996. The
decrease was primarily a result of a $182,000 decrease in gains on loan sales
and loan servicing rights. In the prior year, the Company sold all servicing
rights on loans sold to Freddie Mac, which resulted in increased gain on
servicing rights. This decrease was partially offset by an increase in service
charges and fees of $58,000 primarily resulting from increased volume and a
concerted effort by management to collect all service charges and fees assessed.
Noninterest expense decreased $277,000 to $2.8 million for the year ended
September 30, 1997 from $3.0 million for the year ended September 30, 1996
primarily as a result of a $333,000 special Federal Deposit Insurance
Corporation assessment on SAIF-insured deposits as of September 30, 1996. This
was offset in part by an increase in other expense in 1997 related primarily to
data processing, advertising, postage, and expenses related to the new loan
production office opened in August 1996 in College Station.
Income tax expense increased $204,000 from $108,000 for the year ended
September 30, 1996 to $312,000 for the year ended September 30, 1997 primarily
as a result of a $575,000 increase in pretax income. Income tax expense
reflected a tax rate of 34.0% for the year ended September 30, 1997 compared to
31.6% for the year ended September 30, 1996.
FINANCIAL CONDITION
The Company's total assets increased $7.5 million, or 10.0%, to $82.6
million at September 30, 1998 from $75.1 million at September 30, 1997. The
increase was a result of an increase in loan originations under the Second
Chance Auto Loan Program resulting in an increase in the loan portfolio of $6.7
million, funded primarily through increased deposits of $14.8 million and
Debentures of $3.6 million. This was partially offset by a decrease in advances
from the FHLB of $9.2 million.
21
<PAGE>
Net loans receivable (excluding loans held for sale) increased $6.7 million
to $71.7 million at September 30, 1998 from $65.0 million at September 30, 1997.
The increase resulted primarily from continued growth in originations of
credit-default insured automobile loans and other direct consumer loans.
Deposits increased $14.8 million or 25.1%, consisting primarily of $9.8
million in certificate of deposits and $4.2 million in demand deposits. The
increase in certificates of deposit was a result of competitive rates and
promotion. In addition, the Company issued $3.6 million in Debentures. The
increase in deposits from the Debentures allowed the Company to pay off advances
from the FHLB.
LIQUIDITY AND CAPITAL RESOURCES
The Company'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, the Company has borrowed
funds from the FHLB 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.
The Company 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 September30, 1998, First Federal's regulatory liquidity
ratio was 5.98% or 1.98% above the 4% 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. First Federal's tangible, core and risk-based capital ratios
were $5.3 million, $5.5 million and $5.5 million, which exceeded the minimum
required capital ratios of 1.5%, 3.0% and 8.0%, respectively.
At September 30, 1998, the Company had commitments to originate loans,
including loans in process, totaling $ 5.31 million. The Company also had $1.0
million of outstanding unused lines of credit and $73,000 of letters of credit.
The Company considers its liquidity and capital resources to be adequate to meet
its foreseeable short and long-term needs. The Company expects to be able to
fund or refinance, on a timely basis, its material commitments and long-term
liabilities. First Federal intends to expand its Second Chance Auto Loan Program
with additional select automobile dealers throughout the State of Texas,
retaining a portion of these loans for its own portfolio, and selling excess
loan originations in order to maintain capital compliance and liquidity needs.
The Company also has the ability, if needed, to borrow up to $23.6 million from
the FHLB of Dallas for liquidity purposes. At September 30, 1998, the Company
had $800,000 in advances outstanding from the FHLB.
22
<PAGE>
The Company's liquidity, represented by cash equivalents, is a product of
its operating, investing and financing activities. These activities are
summarized below for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------
1998 1997
------------------------------
(In Thousands)
<S> <C> <C>
Operating Activities:
Net income............................................................. $ 292 $ 605
Adjustment to reconcile net income or loss to net
cash provided by operating activities................................. 836 (1,108)
------- ----------
Net cash provided by operating activities.............................. 1,128 (503)
Net cash used in investing activities.................................. (6,524) (14,995)
Net cash provided by (used in) financing activities.................... 6,292 17,123
------- -------
Net increase (decrease) in cash and cash equivalents................... 896 1,625
Cash and cash equivalents at beginning of period....................... 4,431 2,806
------- ---------
Cash and cash equivalents at end of period............................. $5,327 $ 4,431
====== =======
</TABLE>
The primary investing activity of the Company is lending. Loans originated
net of repayments and sales used $6.7 million and $15.7 million in cash for the
years ended September 30, 1998 and September 30, 1997, respectively. During the
years ended September 30, 1998 and 1997, deposits increased $14.8 million and
$7.1, respectively. FHLB advances decreased in 1998 by $9.2 million compared to
an increase of $10.0 million in 1997.
YEAR 2000 ISSUE
General. The year 2000 ("Y2K") issue confronting the Company and its
suppliers, customers, customers' suppliers and competitors centers on the
inability of computer systems to recognize the year 2000. Many existing computer
programs and systems originally were programmed with six digit dates that
provided only two digits to identify the calendar year in the date field. With
the impending new millennium, these programs and computers will recognize "00"
as the year 1900 rather than the year 2000.
Financial institution regulators recently have increased their focus upon
Y2K compliance issues and have issued guidance concerning the responsibilities
of senior management and directors. The Federal Financial Institutions
Examination Council has issued several interagency statements on Y2K project
management awareness. These statements require financial institutions to, among
other things, examine the Y2K implications of their reliance on vendors and with
respect to the data exchange and the potential impact of the Y2K issue on their
customers, suppliers, and borrowers. These statements also require each
federally regulated institution to survey its exposure, measure its risk and
prepare a plan to address the Y2K issue. In addition, the federal banking
regulators have issued safety and soundness guidelines to be followed by insured
depository institutions, such as the Bank, to assure resolution of any Y2K
problems. The federal banking agencies have assessed that Y2K testing and
certification is a key safety and soundness issue in conjunction with regulatory
exams and thus, that an institution's failure to address appropriately the Y2K
issue could result in supervisory action, including reduction of the
institution's supervisory ratings, the denial of applications for approval of
mergers or acquisitions or the imposition of civil money penalties.
Risks. Like most financial service providers, the Company and its
operations may be significantly affected by the Y2K issue due to its dependence
on technology and date-sensitive data. Computer software and hardware and other
equipment, both within and outside the Company's direct control, and third
parties with whom the Company electronically or operationally interfaces
(including without limitation its customers and third party vendors) are likely
to be affected. If computer systems are not modified in order to be able to
identify the year 2000, many computer applications could fail or create
erroneous results. As a result, many calculations, which rely on date field
information such as interest, payment on due dates, and all operating functions,
could generate results which are significantly misstated, and the Company could
experience an inability to process transactions, prepare statements or engage in
similar normal business activities. Likewise, under certain circumstances, a
failure to adequately address the Y2K issue could adversely affect the viability
of the Company's suppliers and creditors and the creditworthiness of its
borrowers. Thus, if not adequately addressed, the Y2K issue could result in a
significant adverse impact on the Company's operations and, in turn, its
financial condition and results of operations.
23
<PAGE>
State of Readiness. During October 1997, the Company formulated its plan to
address the Y2K issue. Since that time, the Company has taken the following
steps:
o Established senior management advisory and review responsibilities;
o Completed a company-wide inventory of applications and system software;
o Built an internal tracking database for applications and system software;
o Developed compliance plans and schedules for all lines of business;
o Completed a computer network, hardware, and software upgrade;
o Completed in-house testing of all systems;
o Obtained data processor vendor compliance certification;
o Completed data processor vendor testing;
o Began awareness and educational activities for employees through existing
internal communication channels; and
o Developed a process to respond to customer inquiries as well as help
educate customers on the Y2K issue.
The following paragraphs summarize the phases of the Company's Y2K plan:
Awareness Phase. The Company formally established a Y2K plan that is headed
by a senior manager, and a project team was assembled for management of the Y2K
project. The project team created a plan of action that includes milestones,
budget estimates, strategies, and methodologies to track and report the status
of the project. Members of the project team also attended conferences and
information sharing sessions to gain more insight into the Y2K issue and
potential strategies for addressing it. This phase is substantially complete.
Assessment Phase. The Company's strategies were further developed with
respect to how the objectives of the Y2K plan would be achieved, and a Y2K
business risk assessment was conducted to quantify the extent of the Company's
Y2K exposure. A corporate inventory (which is periodically updated as new
technology is acquired and as systems progress through subsequent phases) was
developed to identify and monitor Y2K readiness for information systems
(hardware, software, vendors, and utilities) as well as environmental systems
(security systems, facilities, etc.). Systems were prioritized based on business
impacts and available alternatives. Mission critical systems supplied by vendors
were researched to determine Y2K readiness. If Y2K ready versions were not
available, the Company began identifying functional replacements which were
either upgradable or Y2K ready, and a formal plan was developed to repair,
upgrade or replace all mission critical systems. This phase is substantially
complete.
The Company will begin Y2K discussions with its larger borrowers. All
credits greater than $50,000 will be evaluated for Y2K exposure by a
relationship account officer using a questionnaire developed by the Company's
credit administration staff. As part of the current credit approval process, all
new and renewed loans are evaluated for Y2K risk. During the course of these
evaluations, Company personnel will meet individually with each of its larger
borrowers to discuss and obtain information regarding each borrower's dependence
on information technology and third party vendors and the nature of steps being
taken by the borrowers to address their own Y2K issues.
Renovation Phase. The Company's corporate inventory revealed that Y2K
upgrades were available for all vendor supplied mission critical systems, and
all these Y2K ready versions have been delivered and placed into production and
have entered the validation process.
Validation Phase. The validation phase is designed to test the ability of
hardware and software to accurately process date-sensitive data. The Company has
substantially completed the validation testing of each mission critical system.
The Company hired two outside firms to perform this phase. These firms tested
independent of each other verifying the other's validation of all systems.
During the validation testing process, no significant Y2K problems have been
identified relating to any modified or upgraded mission critical systems.
Implementation Phase. The Company's plan calls for placing Y2K ready code
into production before having actually completed Y2K validation testing. Y2K
ready modified or upgraded versions have been installed and placed into
production with respect to all mission critical systems.
Company Resources Invested. The Company's Y2K project team has been
assigned the task of ensuring that all systems across the Company are
identified, analyzed for Y2K compliance, corrected if necessary, tested, and
have the changes into service by the end of the first quarter of 1999. The Y2K
project team members represent all functional areas of the Company, including
branches, data processing, loan administration, accounting, item processing and
operations, compliance, internal audit, human resources, and marketing. An
assistant vice president who reports directly
24
<PAGE>
to a member of the Company's senior management heads the team. The Company's
Board of Directors oversees the Y2K plan and provides guidance and resources to,
and receives quarterly updates from, the Y2K team.
The Company is expensing all costs associated with required system changes
as those costs are incurred, and such costs are being funded through operating
cash flows. The total cost of the Y2K conversion project since commencement in
October 1997 for the Company is estimated to be $250,000. The Company does not
expect significant increases in future data processing costs related to Y2K
compliance.
Contingency Plans. During the assessment phase, the Company began
developing back-up or contingency plans for each of its mission critical
systems. Virtually all of the Company's mission critical systems are dependent
upon third party vendors or service providers. Therefore, contingency plans
include selecting a new vendor or service provider and converting their system.
In the event a current vendor's system fails during the validation phase and it
is determined that the vendor is unable or unwilling to correct the failure, the
Company will convert to a new system from a pre-selected list of prospective
vendors. In each case, realistic trigger dates have been established to allow
for orderly and successful conversions. For some systems, contingency plans
consist of using spreadsheet software or reverting to manual systems until
system problems can be corrected.
The majority of the Company's mission critical system falls into the
categories of its core-banking software and its proof of deposit system. The
Company has received warranties from vendors to the effect that the proof of
deposit and core-banking system is Y2K ready.
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 the Company'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 the Company's assets and liabilities are critical to the maintenance of
acceptable performance levels.
EFFECT OF NEW ACCOUNTING STANDARDS
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 the Company.
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
25
<PAGE>
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 the Company.
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 the Company.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 standardizes the accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts. Under the standard, entities are required to carry all
derivative instruments in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e. gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and, if so, on the reason for holding it. If certain
conditions are met, entities may elect to designate a derivative instrument as a
hedge of exposures to changes in fair value, cash flows, or foreign currencies.
If the hedged exposure is a fair value exposure, the gain or loss on the
derivative instrument is recognized in earnings in the period of change together
with the offsetting loss or gain on the hedged item attributable to the risk
being hedged. If the hedged exposure is a cash flow exposure, the effective
portion of the gain or loss on the derivative instrument is reported initially
as a component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amount excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss is reported in earnings immediately.
Accounting for foreign currency hedges is similar to accounting for fair value
and cash flow hedges. If the derivative instrument is not designated as a hedge,
the gain or loss is recognized in earnings in the period of change. This
statement is effective for fiscal years beginning after June 15, 1999. Early
adoption is permitted as of the beginning of an entities fiscal quarter. This
statement will have no effect on the Company.
BUSINESS
The Holding Company, a Delaware corporation, was formed to act as a unitary
thrift holding company for First Federal by acquiring 100% of the stock of First
Federal through the exchange of approximately 32% of First Federal common stock
for Holding Company common stock and the purchase of approximately 68% of First
Federal common stock for cash. The Acquisition was completed on April 1, 1998.
First Federal is a federally chartered, 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 immediate trade area, and
to a lesser extent other communities in the general trade area between Houston,
Austin and Dallas, Texas. First Federal also originates a significant amount of
consumer loans primarily secured by automobiles originated through selected
automobile dealers which are partially insured against loss by credit-default
insurance. In addition, to lesser extent, First Federal originates 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 profitability 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 Indirect automobile financing through select automobile dealers,
including credit-default insured "second chance" auto finance lending
o Direct consumer lending
o SBA loans (partially government guaranteed)
26
<PAGE>
o Commercial lending to small and medium-sized businesses
o Commercial real estate lending, primarily to small and medium-sized
businesses
o Home improvement loans
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, which comprise its immediate trade area. First Federal currently
operates four full-service offices, two of which are located in Bryan (including
its principal office, situated in the middle of the Bryan-College Station
community, and a new facility located at a key highway intersection in North
Bryan), and one full-service residential mortgage loan on a major thoroughfare
in adjacent College Station, and one full-service branch in College Station
which is the home of the third largest university in the nation, Texas A&M
University, and the new George Bush Presidential Library. First Federal has
concentrated on the middle-class population as its targeted "niche" in order to
provide traditional and proprietary banking products and services, which had led
to its loan-to-deposit ratio of 97.9% at September 30, 1998, consisting
primarily of residential loans and consumer loans which are secured primarily by
automobiles. At September 30, 1997 and 1996, First Federal's loan to deposit
rate was 110.9% and 95.9%, respectively. These types of loans have enabled First
Federal to enjoy a spread between the interest it earns on its loans and the
interest it pays for deposits of 5.10% at September 30, 1998 as compared to
4.56% and 4.67% at September 30, 1997 and 1996, respectively. In addition, over
the past three fiscal years, First Federal has experienced an average of only
$21,000 in actual annual net loan charge-offs, resulting from an average total
loan portfolio of $57.4 million. See "Loan Delinquencies; Nonperforming Assets
and Classified Assets."
MARKET AREA
As of September 30, 1998, Bryan-College Station, Texas had the lowest
unemployment rate in the state of Texas. Bryan-College Station is located in
Brazos County, Texas and is centrally located in the triangle between Houston,
Austin, and Dallas. It is the home of Texas A&M University, which has an
enrollment of over 43,000 students and the new George Bush Presidential Library.
In addition, the community was recently named the fourth most livable city, in
the country by the Editor & Publisher Market Guide. Management considers the
Bryan-College Station area, and the surrounding Texas counties of Brazos,
Burleson, Grimes, Leon, Madison, Robertson and Washington to be its primary
market and trade areas for deposits and lending activities. The Bryan-College
Station area is primarily a college community, centered around Texas A&M
University and Blinn College with an enrollment of over 10,000 students. Recent
diversification, however, includes a new computer manufacturing plant now under
construction, a new poultry processing plant, a new juvenile detention center
which is the largest in the State of Texas, several specialty chemical plants,
including one just announced by Koch Industries, a new Compaq Computer Research
Center, one of the largest aluminum window and door manufacturing plants in the
nation, a new regional computer service center to be built by Decision One, and
expansion of a regional medical facilities including the construction of a new
hospital, and other computer-related and high-tech industries. The University's
annual budget of over $622 million is responsible for the vast majority of the
government jobs in the area.
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 Wall
Street Journal article, Brazos County, home of Bryan-College Station, was listed
as one of the top metropolitan areas and which is expected to have the third
highest population increase in the United States as well as the fastest
household growth in the U.S. metropolitan area. Brazos County, was ranked by the
American Demographics as third among "The 10 Hottest Counties," in terms of
"market potential." Kiplinger's Personal Finance of April 1997 indicated that
Bryan-College will be the fifth fastest growing city in the United States in
terms of population growth. In addition, the 1997-98 American Almanac of Jobs
and Salaries named Bryan-College Station as the third fastest growing U.S.
metropolitan area in terms of job growth for the years 1995-2025. Data from the
U.S. Census estimates that the Bryan-College metropolitan area should have a 20%
growth rate from 1990 to the year 2000. The 1998 American Chamber of Commerce
Researchers Association Cost of Living Index issue indicated that the
Bryan-College Station is one of the least expensive places to live in the United
States. The city ranks as the second least expensive city out of 29 surveyed
Texas cities and fifth least expensive city out of 329 surveyed cities in the
nation. Using 100% as the average cost of the living index for the 329 surveyed
cities, Bryan-College Station rated 87.0%, 13% below the national average as
compared to cities like Philadelphia at 126.9%, New York City at 226.2%, and
Boston at 134.5%.
Since 1990, numerous independent financial institutions have been acquired
in the Brazos County area, some by out-of-state multi-bank holding companies.
Currently, there is only one other thrift institution operating in the area,
which is a branch owned by an organization out of the Brazos County area.
Consequently, management believes the opportunity exists for the continued
expansion of First Federal's lending and deposit gathering activities as one of
the
27
<PAGE>
few remaining independent, community-owned financial institutions in its primary
trade-area, offering full-service banking to its targeted "niche", middle class
segment of the population.
LENDING ACTIVITIES
GENERAL. The principal lending activities of First Federal are originating
first mortgage real estate loans secured by owner occupied one- to four-family
residential property and originating and purchasing automobile loans from
automobile dealers selected by First Federal.
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 Fannie Mae
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). These loans
may not conform for several reasons. Some loans may exceed the maximum
loan-to-value ratio to qualify for sale to FNMA or FHLMC, or may have some
credit deficiencies (which in certain cases will result in First Federal
securing the loan by additional collateral). In addition, the borrower may have
an insufficient length of employment history for the loan to qualify for sale to
FNMA or FHLMC or the residence may not qualify because of its rural location or
there exists insufficient, recent sales of comparable properties for appraisal
purposes. As a result, the loan may pose a higher risk than secondary market
conventional mortgage loans. All long-term, fixed rate conventional mortgage
loans are sold immediately to the secondary market. Loans which do not comply
with FNMA or FHLMC underwriting requirements are held in First Federal's loan
portfolio if they meet First Federal's credit underwriting requirements.
In recent years, First Federal has significantly increased its consumer
lending area, consisting of direct consumer loans primarily secured by vehicles
or other collateral, indirect lending from automobile dealers, and its Second
Chance Auto Lending Program, which has as additional protection credit-default
insurance of up to $6,000 per loss in the event the borrower fails to make
timely payments and the vehicle is repossessed. This Second Chance Auto Lending
Program has gradually been expanded to select auto dealers (primarily franchised
new car dealers) located throughout First Federal's immediate trade area in
surrounding counties, and to a lesser extent, throughout the triangle between
Houston, Austin and Dallas. First Federal also originates construction loans,
small commercial real estate and small to medium commercial business loans. In
addition, First Federal has begun originating SBA business loans and Farmers
Home Administration rural home loans for moderate income home buyers.
First Federal's 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
originates three-year balloon and adjustable rate, one- to four-family
residential mortgage loans, consumer loans (especially automobile loans) and
short-term construction loans. At September 30, 1998, First Federal had $20.1
million of three-year balloon loans, $19.4 million of adjustable rate loans and
$26.8 million of consumer loans (predominately automobile loans with a term of
four years) out of a total of $73.8 million in gross loans.
Loan originations come primarily from walk-in customers, real estate
brokers, homebuilders, referrals from existing customers, and a number of
automobile dealers. Non-residential loans in which the aggregate lending
relationship to one borrower does not exceed $100,000 are approved by First
Federal's President or Chief Financial Officer, and all non-residential loan
applications for over $100,000 in aggregate debt to one borrower are approved by
the Board of Directors' Loan Committee. Residential loans which do not exceed
$200,000 are approved by the President or Chief Financial Officer, with loans of
this type over $200,000 approved by the Board of Directors' Loan Committee.
First Federal's total loan portfolio increased $15.6 million from fiscal
years 1996 to 1997; however, in order to maintain its regulatory capital ratios
in excess of the minimum regulatory requirements, First Federal intentionally
slowed its loan growth to $6.7 million during the fiscal year from 1997 to 1998.
28
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table sets forth information
concerning the composition of First Federal's loan portfolio 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,
--------------------------------------------------------------------------
1998 1997 1996
----------------------- ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent
----------- ---------- ---------- --------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
Residential................................ $32,846 44.50% $35,541 51.72% $30,477 58.70%
Residential held for sale................ 328 .44 204 .30 419 .80
Commercial................................. 4,616 6.26 4,166 6.06 4,175 8.04
Construction............................... 6,166 8.36 10,305 15.00 4,365 8.41
------- ------ ------- ------- ------- ------
Total real estate loans................. 43,956 59.56 50,216 73.08 39,436 75.95
Other Loans:
- -----------
Consumer loans:
Secured by automobile.................... 24,636 33.38 15,082 21.95 9,435 18.17
Secured by deposit accounts.............. 951 1.29 925 1.34 967 1.86
Other.................................... 1,236 1.67 726 1.06 1,490 2.87
--------- ------ ------- ------- ------- ------
Total consumer loans.................... 26,823 36.34 16,733 24.35 11,892 22.90
Commercial business loans 3,024 4.10 1,766 2.57 595 1.15
--------- ------ ------- ------- ------- ------
Total other loans....................... 29,847 40.44 18,499 26.92 12,487 24.05
-------- ------ ------- ------- ------- ------
Total loans ............................ 73,803 100.00 68,715 100.00 51,923 100.00
Less:
- ----
Undisbursed portion of construction loans.. 2,089 2.83 3,452 5.02 1,966 3.79
Net deferred fees and discounts............ 30 .04 131 .19 128 .25
Deferred income............................ 3 --- 3 --- 3 .01
Allowance for losses on loans ............. 307 .42 273 .40 247 .48
Premiums, net of discounts................. (620) (.84) ( 381) (.55) --- ---
-------- ------ ------- ------- ------- ------
Net loans .............................. $71,994 97.55% $65,237 94.94% $49,579 95.47%
======= ======= ======= ======= ======= ======
</TABLE>
29
<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,
--------------------------------------------------------------------
1998 1997 1996
------------------- ------------------- ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
Residential.................................... $18,370 24.89% $21,486 31.27% $22,931 44.16%
Residential held for sale...................... 328 .44 204 .30 419 .80
Commercial..................................... 2,321 3.16 2,470 3.59 2,162 4.17
Construction................................... 5,924 8.02 10,305 15.00 4,365 .41
------- ------ ------- ------ ------- ------
Total real estate loans...................... 26,943 36.51 34,465 50.16 29,877 57.54
Consumer loans................................. 26,823 36.34 16,733 24.35 11,892 22.90
Commercial business loans...................... 642 .87 1,271 1.85 595 1.15
------- ------ ------- ------ ------- ------
Total fixed-rate loans....................... 54,408 73.72 52,469 76.36 42,364 81.59
Adjustable-Rate Loans:
Real estate:
Residential.................................... 14,476 19.61 14,055 20.45 7,546 14.54
Commercial..................................... 2,295 3.10 1,696 2.47 2,013 3.87
Construction................................... 242 .34 --- --- --- ---
Commercial business loans...................... 2,382 3.23 495 .72 --- ---
------- ------ ------- ------ ------- ------
Total adjustable rate loans.................. 19,395 26.28 16,246 23.64 9,559 18.41
------- ------ ------- ------ ------- ------
Total loans.................................. 73,803 100.00 68,715 100.00 51,923 100.00
Less:
Undisbursed portion of construction loans...... 2,089 2.83 3,452 5.02 1,966 3.79
Deferred fees and discounts.................... 30 .04 131 .19 128 .25
Deferred income................................ 3 --- 3 --- 3 .01
Allowance for losses on loans.................. 307 .42 273 .40 247 .48
Premiums, net of discounts..................... (620) (.84) (381) (.55) --- ---
------- ------ ------- ------ ------- ------
Net loans ................................... $71,994 97.55% $65,237 94.94% $49,579 95.47%
======= ====== ======= ====== ======= ======
</TABLE>
30
<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,
--------------------------------------
1998 1997 1996
--------- ------------- --------
(In Thousands)
<S> <C> <C> <C>
Loans Funded:
- ------------
Real estate - residential......................... $14,966 $18,468 $19,104
- commercial................................... 2,269 1,485 1,026
- construction or development.................. 10,880 12,142 5,697
Non-real estate - consumer........................ 20,384 13,052 8,534
- commercial business.......................... 7,615 2,446 1,980
-------- ------- --------
Total loans originated......................... 56,114 47,593 36,341
Loans Sold:
Loans sold........................................ 8,571 7,243 13,839
Principal repayments and refinancings............. 42,455 23,558 21,255
------- ------- -------
Total reductions.................................. 51,026 30,801 35,094
Change in other items, net........................ 1,669 (1,134) (273)
-------- -------- --------
Net increase...................................... $ 6,757 $15,658 $ 974
======== ======= ========
</TABLE>
At September 30, 1998, First Federal serviced $2.0 million in loans for
others.
31
<PAGE>
The following schedule illustrates the maturities of First Federal's loan
portfolio, excluding loans held for sale at September 30, 1998. Loans which have
adjustable or renegotiable interest rates and amortizing loans are shown as
maturing in the period during which the loan is contractually due. This schedule
does not reflect the effects of possible prepayments or enforcement of
due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
----------------------------------------------------------------
Residential Commercial Construction Consumer
--------------------- ------------------------------------------ ---------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
---------- ----------------------------------------------------- ---------- -----------
(Dollars in Thousands)
Due During
Years Ended
September 30,
- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999(1)..................... $ 4,695 9.13% $1,134 9.14% $5,712 8.98$ 2,001 9.21%
2000 and 2001............... 12,212 9.08 1,194 8.67 --- --- 6,640 14.97
2002 and 2003............... 1,831 8.73 233 9.28 90 8.88 17,712 14.70
2004 to 2008................ 1,192 8.72 368 8.99 364 9.74 423 9.28
2009 to 2018................ 2,361 8.60 828 10.41 --- --- 19 8.00
2019 and following.......... 10,883 8.57 859 8.91 --- --- 28 8.87
------- ------ ------ -------
$33,174 8.85% $4,616 9.20% $6,166 9.02% $26,823 14.26%
======= ====== ====== =======
<CAPTION>
Business Total
--------------------- ---------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
---------- -------------------------------
(Dollars in Thousands)
Due During
Years Ended
September 30,
- -------------
<S> <C> <C> <C> <C>
1999(1)..................... $1,391 9.22% $14,933 9.09%
2000 and 2001............... 104 10.76 20,150 11.01
2002 and 2003............... 581 10.22 20,447 13.95
2004 to 2008................ 502 10.40 2,849 9.26
2009 to 2018................ 326 11.10 3,534 9.25
2019 and following.......... 120 8.75 11,890 8.60
------ -------
$3,024 9.85% $73,803 10.90%
====== =======
</TABLE>
- -------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
32
<PAGE>
The total amount of loans due after September 30, 1999, that have fixed
rates of interest (including three-year balloon home loans and other types of
loans with balloon maturities) is $39.7 million while the total amount of loans
due after such date which have floating or adjustable rates of interest is $19.2
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, and to a lesser degree on
non-owner occupied one- to four-family residences. In order to increase the
interest rate sensitivity of its residential loan portfolio, First Federal has
emphasized since 1979 the origination of non-FNMA and FHLMC conforming
three-year balloon loans (generally with 30 year amortization schedules). At
September 30, 1998, $17.8 million or 27.2%, 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 $900,000 of other
fixed-rate residential loans or 1.2% of the gross loan portfolio. All of these
loans were secured by residential properties located in the State of Texas, with
a majority of the property 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 do not conform
to FNMA and FHLMC 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 cost or appraised value of the security property, whichever is lower.
The determination as 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 credit and payment history, length of employment and debt to income
ratio, as well as the quality of the property securing the loan. First Federal
neither requires nor obtains private mortgage insurance on loans that it retains
in its portfolio. As a result, in most instances, concerning its loans with
loan-to-value ratios over 80% (but not exceeding the 90% maximum) which have no
private mortgage insurance, in the event of a foreclosure, First Federal is
subject to a greater risk of loss on the foreclosure and disposition of such
property in the event of a decrease in the 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 $21,000 in actual
annual net loan charge-offs, resulting from an average total loan portfolio of
$57.4 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, when the loan
is not repaid in full. First Federal generally enforces these due-on-sale
clauses. First Federal requires, in connection with the origination 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.
MORTGAGE-BACKED SECURITIES. First Federal has a limited portfolio of
mortgage-backed securities that 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.
Consistent with First Federal's asset/liability policy to minimize interest
rate risk, approximately 90.4% of First Federal's mortgage-backed securities
carry adjustable interest rates.
The following table sets forth the book value of the Bank's mortgage-backed
securities at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
Issuers:
-------
Federal Home Loan Mortgage Corporation................ $655 $ 774 $ 872
Federal National Mortgage Association................. 299 376 420
---- ------ -------
Total............................................. $954 $1,150 $ 1,292
==== ====== =======
</TABLE>
33
<PAGE>
The following table sets forth the contractual maturities of the Bank's
mortgage-backed securities at September 30, 1998. Not considered in the
preparation of the table below is the effect of prepayments, periodic principal
repayments and the adjustable rate nature of these instruments.
<TABLE>
<CAPTION>
Due in
-------------------------------------------------------------------------------
6 Months 6 Months 1 to 3 to 5 5 to 10 10 to 20 Over 20
or Less to 1 Year 3 Years Years Years Years Years
-------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation......... $--- $--- $--- $--- $10 $167 $478
Federal National Mortgage Association.......... --- --- --- --- --- 123 176
---- ---- ---- ---- ---- --- ----
Total..................................... $--- $--- $--- $--- $10 $290 $654
==== ==== ==== ==== === ==== ====
<CAPTION>
------------------------
Balance
Outstanding
------------------------
<S> <C>
Federal Home Loan Mortgage Corporation......... $655
Federal National Mortgage Association.......... 299
----
Total..................................... $954
====
</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. See
"Investments Activities."
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.
First Federal discourages unsecured loans.
As part of management's strategy to shorten the average effective maturity
of its loans and thereby minimize its interest rate risk, and also to increase
the average yield of its loan portfolio, 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 currently originates substantially all of its consumer loans
in its primary market area, except for loans originated pursuant to its Second
Chance Auto Lending Program. Direct consumer loans are made when First Federal
extends credit directly to the borrower as compared to indirect loans made
through automobile dealers selected by First Federal. First Federal has more
recently increased the origination of indirect automobile loans through its
Second Change Auto Lending Program.
In September 1991, upon the initiative of present management, 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 December 1995, First
Federal expanded this type of lending by initiating a credit-default insured
indirect automobile loan origination program for borrowers with less than prime
credit, and involving automobile dealers selected by First Federal located
primarily in First Federal's primary market area ("Second Chance Auto Loans").
Second Chance Auto Loans are currently insured by The Royal & Sun Alliance
Company (which carries a rating of A-14 by A.M. Best's, an insurance rating
company) for credit-default by the borrower and for up to $6,000 per loan in the
event there is a deficiency between the unpaid balance of the loan and the
resale price of the repossessed vehicle. At September 30, 1998, $5.3 million of
First Federal's Second Chance Auto Loans was insured by other insurers subject
to their limitations. On that date, Second Chance Auto Loans averaged, at the
time of origination, $12,700 per loan. At September 30, 1998, Second Chance Auto
Loans totaled $13.5 million while total automobile loans totaled $24.6 million
or 33.4% of First Federal's gross loan portfolio.
In the future, First Federal may elect to make credit-default automobile
loans to sub-prime borrowers without credit-default insurance, although it has
no current plans to do so, but with additional special loan loss reserves at a
level which First Federal believes will be adequate to absorb any future loan
losses. First Federal may also elect to insure its Second Chance Auto Loans
against credit- default through different insurance companies which may result
in different levels of insured coverage.
Second Chance Auto Loans are underwritten according to the credit-default
guidelines developed by First Federal and agreed to by First Federal's insurer
while other retail installment automobile sales contracts are underwritten
pursuant to First Federal's own credit underwriting guidelines. Each sales
contract is fully amortized and provides for
34
<PAGE>
level payments over the term of the contract. The contracts are non-recourse to
the originating automobile dealer and are purchased, in First Federal's sole
discretion, from the dealers on a case-by-case basis, after the Bank's review of
the borrower's credit-worthiness. First Federal also conducts a personal
interview with the borrower prior to approving the loan.
Second Chance Auto Loan's retail installment automobile contracts are
reviewed by First Federal's internal automobile loan review personnel, and
monthly random sample reviews are conducted by an independent outside audit firm
specializing in these types of loans. All monthly audits to date have reflected
First Federal's substantial compliance with the credit underwriting guidelines
of First Federal and the credit-default insurance company. Among other things,
the Bank considers the market value, durability and useful life of the vehicle
being financed in conjunction with the term of the loan along with the stability
and creditworthiness of the buyer. Used vehicles are generally not financed
longer than 60 months.
Under the approved credit underwriting guidelines, the maximum amount
financed may not exceed 125% of the manufacturer's suggested retail price for
new vehicles or retail value for used vehicles as provided in the "NADA Official
Used Car Guide," including the cost of service and warranty contracts and
premiums for, credit life and disability insurance obtained in connection with
the vehicle (such amounts in addition to the sales price, collectively referred
to as "Additional Vehicle Costs"). First Federal will generally use the
Southwest edition of the "NADA Official Used Car Guide" to assign a value to a
used vehicle for underwriting purposes. The primary focus, however, is on the
ability of the borrower to repay the loan rather than the value of the
underlying collateral. The amount financed by First Federal generally includes
these Additional Vehicle Costs, which are refunded pro rata as a credit to the
loan in the event the borrower prepays the loan or the borrower defaults in
payment of the loan and the vehicle is repossessed. First Federal requires
comprehensive insurance coverage on vehicles securing consumer loans, paid for
by the borrower. However, First Federal pays for borrower credit-default
insurance on its Second Chance Auto Loan Program.
All automobile dealers enter into a Dealer Agreement with First Federal.
First Federal has two kinds of Dealer Agreements which are substantially
similar. Automobile dealers selling loans pursuant to the Second Chance Auto
Lending Program are not required to establish dealer reserves; however, the loan
amount of the automobile sales contract is discounted by First Federal prior to
purchase. Otherwise, the Dealer Agreement provides for a reserve account to be
established, requiring 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 automobile dealer due to loan prepayments, payoffs, or for
repossession expenses plus any related losses. Minimum reserve balances and the
method of disbursement are outlined in each Dealer Agreement. If the reserve
account falls below the agreed upon levels, the automobile dealer is required to
increase the balance up to the agreed upon minimum amount. Automobile dealers
are also required to make an immediate deposit to cover any shortages under this
type of a Dealer Agreement. At September 30, 1998, First Federal had $2.8
million of automobile loans requiring automobile dealer reserves.
Consumer loans may entail greater risk than do residential mortgage loans,
particularly consumer loans that are secured by rapidly depreciable assets such
as automobiles. First Federal makes a very limited amount of unsecured loans,
which entail an even greater risk. 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 of the vehicle or other collateral. 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 borrower against an
assignee of the loan, who may then be able to assert against the assignee, the
claims and defenses that he or she has against the seller of the underlying
collateral. Consumer loan delinquencies may often increase over time as the
loans age. Lastly, there can be no assurance that First Federal can collect any
amount due under the applicable insurance policy.
At September 30, 1998, less than one percent of First Federal's consumer
loans were nonperforming. 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 also for residences that
have not been pre-sold when First Federal believes that the residence will be
sold in the relatively short term.
35
<PAGE>
Construction loans to individuals for their residences generally have terms
of nine months and are made on a non-amortizing (interest only, payable
monthly), balloon basis, to be repaid from the permanent mortgage loan when the
construction is completed. 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, 1998, First Federal had $5.4 million in residential construction
loans, of which $2.8 million are to borrowers who have indicated to First
Federal that they intend to live in the properties upon completion of
construction.
Residential construction loans are generally made up to a maximum
loan-to-value ratio of 80% based on an independent appraisal and estimate of
costs. Residential 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 experience and reputation of 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. Residential 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.
COMMERCIAL REAL ESTATE LENDING. In order to enhance the yield of its
assets, First Federal originates 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 small business properties. First Federal generally makes
only commercial real estate loans secured by income producing property, and
discourages large commercial real estate loans. At September 30, 1998, First
Federal had one commercial real estate loan in excess of $250,000 that is
secured by a building which contains several retail businesses. This loan had a
balance of $296,000 at September 30, 1998 and is performing in accordance with
its loan repayment 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, 1998.
<TABLE>
<CAPTION>
Number
of Principal
Loans Balance
--------------------------------
(Dollars in Thousands)
<S> <C> <C>
Bryan-College Station area:
Retail................................... 18 $1,511
Churches................................. 7 846
Multi-family residential................. 3 837
Office................................... 6 788
Land..................................... 10 186
Other.................................... 4 448
--- ------
Total......................... 48 $4,616
=== ======
</TABLE>
Commercial real estate loans included in First Federal's portfolio have
terms generally ranging from 3 to 5 years with a balloon payment 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 are secured by properties located in First Federal's principal
market area where First Federal personnel are familiar with current market
values and marketability. 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, the value of the underlying collateral and
the level of experience and reputation of
36
<PAGE>
the contractor. In determining the borrower's creditworthiness, the Bank
considers the character, experience, management ability and financial strength
of the borrower as well as the ability of the property securing the loan to
generate adequate funds to cover both operating expenses and debt service.
Commercial real estate lending generally 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
risk is primarily attributed to several factors, including the concentration of
principal in a limited number of loans and borrowers, the effects of general
economic conditions on income producing properties and the increased difficulty
of evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by commercial real estate is typically dependent upon the
successful operation of the related real estate project and thus, may be subject
to a greater extent to adverse conditions in the real estate market or the
economy generally. If the cash flow from the project is reduced (for example, if
leases are not obtained or renewed), the borrower's ability to repay the loan
may be impaired. For these reasons, First Federal limits the amount of
commercial real estate loans held in its loan portfolio.
COMMERCIAL BUSINESS LENDING. First Federal engages in a limited amount of
commercial business lending, primarily to small businesses. Many of these loans
are SBA guaranteed; however, First Federal sells the guaranteed portion of the
loan. At September 30, 1998, First Federal had $3.0 million or 4.1% of First
Federal's gross loan portfolio in commercial business loans outstanding of which
$800,000 represents the unguaranteed portion of SBA loans. As of the same date,
First Federal's largest commercial business loan was a $207,000 line of credit
secured by the borrower's residence and other real property. The next largest
commercial business loan was $95,000 and was secured by a first lien on a
grocery store and convenience store. Each of these loans are performing in
accordance with their respective loan repayment terms. First Federal discourages
large commercial business lending because of the larger risk exposure to the
Bank's capital if such loans do not perform.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to repay from employment and other income and are secured
by real property, business loans pose a higher risk and typically are made on
the basis of the borrower's ability to make repayment from the cash flow of the
business and to a lesser extent, the borrower's 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 loan may depreciate
over time, may be difficult to appraise and may fluctuate in value based
generally on the success of the business and the economy. Partial guarantees
(75% or more) by the SBA 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
three days past due, First Federal's collections department will contact the
borrower by telephone and letter and continue that contact on a regular basis.
Between 30-45 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 or repossess the collateral. If foreclosed on, real
property is sold at a public sale and may be purchased by First Federal.
Repossessed vehicles are resold through First Federal's personnel and through
select auto dealers. A decision as to whether and when to initiate foreclosure
or repossession 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 aggressively pursues delinquent loans and as a
result has experienced minimum foreclosure and losses thereon over the past
three years.
37
<PAGE>
The following table sets forth information concerning delinquent mortgage
and other loans at September 30, 1998 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, 1998
------------------------------------------------------------
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..................... --- 17 8 25
Amount.............................. $ --- $1,003 $ 446 $1,449
Percent of total loans.............. ---% 3.02% 1.34% 4.36%
Commercial Real Estate:
Number of loans..................... --- 1 --- 1
Amount.............................. $ --- $ 88 $ --- $ 88
Percent of total loans.............. ---% 1.91% ---% 1.91%
Consumer:
Number of loans..................... 81 24 15 120
Amount.............................. $ 839 $ 222 $ 135 $1,196
Percent of total loans.............. 3.13% .83% .50% 4.46%
Total:
Number of loans..................... 81 42 23 146
Amount.............................. $ 839 $1,313 $ 581 $2,733
Percent of total loans.............. 1.13% 1.78% .79% 3.70%
</TABLE>
38
<PAGE>
The table below sets forth the amounts and categories of non-performing
assets in First Federal's loan portfolio. Loans are placed on non-accrual status
when the collection of principal and/or interest becomes doubtful or there is
insufficient collateral to prevent a loss. 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,
--------------------------------
1998 1997 1996
--------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
Residential.............................. $ --- $ --- $ 18
Consumer................................. --- 8 38
-------- ------- -----
Total.................................. --- 8 56
-------- ------- -----
Accruing loans delinquent more than
90 days:
Residential.............................. 446 370 ---
Commercial Real Estate................... --- --- ---
Consumer................................. 135 126 122
------ ------- -----
Total.................................. 581 496 122
------ ------- -----
Foreclosed assets:
Residential.............................. 282 520 577
Commercial real estate................... --- --- ---
Other Repossessed Assets (Vehicles)...... 479 258 108
------- -------- -----
Total.................................. 761 778 685
------- -------- -----
Total non-performing assets................ $1,210 $1,282 $ 863
====== ====== =====
Total as a percentage of total assets
at end of period........................ 1.46% 1.71% 1.50%
==== ==== ====
</TABLE>
For the most part, nonperforming assets at September 30, 1998, consisted of
repossessed vehicles and residential homes.
As of September 30, 1998, there were no concentrations of loans in any
types of industry which exceeded 10% of First Federal's total loans, that are
not included as a loan category in the table above.
At September 30, 1998 there were no non-accruing loans and there was no
interest income recognized relative to non-performing loans during the year
ended September 30, 1998.
OTHER LOANS OF CONCERN. As of September 30, 1998, there was an aggregate of
$1.3 million of loans 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 nine, one- to four-family loans totaling $1.0
million, four construction loans totaling $145,000, one commercial business loan
of $60,000 and 15 consumer loans totaling $112,000 at September 30, 1998. See "
- -- Consumer Lending."
CLASSIFIED ASSETS. Federal regulations require that each insured
institution classify its own assets on a regular basis. First Federal classifies
its assets no less often than quarterly. In addition, in connection with
examinations of insured institutions, the Principal Regulatory Agency has
authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: substandard,
doubtful and loss. "Substandard" assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. "Doubtful" assets have
the weaknesses of substandard assets, with the additional characteristics that
the weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified "Loss" is
39
<PAGE>
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 a "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 OTS District Director. Generally, all
assets of First Federal which have been classified are included in the
discussion above of other loans of concern and assets for which repayment by the
borrower may be in doubt.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy. First Federal's Board of
Directors has established an Asset Review Committee, which regularly reviews all
loans of any concern with senior management and applicable loan collection
personnel, to determine which loans should be classified under applicable
regulations. Classified assets loans, as described above, of First Federal at
September 30, 1998 were as follows:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
Substandard........................... $847
Doubtful.............................. 7
Loss.................................. ---
----
$854
====
</TABLE>
ALLOWANCE FOR LOSSES ON LOANS
First Federal'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. While the Company 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
sub stantially differ from the assumptions used in making the initial
determination.
The following table sets forth an analysis of First Federal's allowance
for loan losses.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------
1998 1997 1996
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period................... $ 273 $247 $ 317
Charge-offs...................................... (75) (5) (23)
Recoveries....................................... 30 6 5
Provisions for losses on loans................... 79 25 (52)
----- ---- -----
Balance at end of period......................... $ 307 $273 $ 247
===== ==== =====
Ratio of net charge-offs during the period to
average loans outstanding during the period...... .06% .01% .04%
</TABLE>
40
<PAGE>
The allocation of the allowance for losses on loans at the dates indicated
is summarized as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------------
1998 1997 1996
----------------------- ---------------------- -------------------------
Percent of Percent of Percent of
Loan in Loan in Loan in
Each Each Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ----- ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Real Estate............. $183 59.56% $200 73.08% $120 75.95%
Other................... 124 40.44 73 26.92 127 24.05
---- ------- ----- ------ ---- ------
Total................ $307 100.00% $273 100.00% $247 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
For information on First Federal's allowance for losses on real estate
owned, see Note 1 of the Notes to Financial Statements.
INVESTMENT ACTIVITIES
The Holding Company's liquid assets (other than loans and some
mortgage-backed securities receivable), are invested primarily in
interest-bearing deposits with banks, and the FHLB of Dallas, and FHLB stock.
First Federal is required by federal regulations to maintain a minimum amount of
liquid assets that may be invested in specified secur ities 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, 1998, First Federal's liquidity ratio (liquid assets as a
percentage of net withdrawable savings and current borrowings) was 5.98% as
compared to the regulatory requirement of 4%. At September 30, 1998, First
Federal had $800,000 in borrowings from the FHLB; however, First Federal had the
ability, if needed, to borrow up to $23.6 million from the FHLB of Dallas for
additional liquidity purposes.
The following table sets forth the composition of the Company's investment
portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------------
1998 1997 1996 1995
-------------------- -------------------- -------------------- --------------------
Book Market Book Market Book Market Book Market
Value Value Value Value Value Value Value Value
--------- ------- -------- -------- ------- -------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits......... $3,892 $3,892 $3,675 $3,675 $1,145 $1,145 $5,666 $5,666
Federal agency obligations....... --- --- --- --- 1,000 1,000 1,000 988
FHLB stock........................ 382 382 896 896 845 845 796 796
------ ------ ------- ------- ------- ------- ------- -------
Total liquid assets, investment
securities and FHLB stock. $4,274 $4,274 $4,571 $4,571 $2,990 $2,990 $7,462 $7,450
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
SOURCES OF FUNDS
GENERAL. Deposit accounts have traditionally been the principal source of
First Federal's funds for use in lending and for other general business
purposes. In addition to deposits, First Federal derives funds from loan
repayments and cash flows generated from its overall operations. Scheduled loan
payments are a relatively stable source of funds, while deposit inflows and
outflows and the related cost of such funds vary. Borrowings from the FHLB of
Dallas 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 on hand over and above liquidity requirements.
41
<PAGE>
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 special "Golden Eagle"
checking, designed for persons of age 50 or more, and its relatively new "30
Something" checking account designed for persons between 30 and 49 years of age
and its new "Working People's" checking account designed for its new north Bryan
branch facility), 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, 1998, First
Federal had $6.5 million in "Golden Eagle" accounts, $841,000 in its "30
Something" accounts, and $44,000 in its "Working People's" checking 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 and types of accounts 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 of 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. As are other financial institutions, 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. The measures undertaken in
connection with this marketing campaign include increasing in the proportion of
First Federal's employees that speak Spanish, advertising in Spanish language
publications, making direct contact with local Hispanic community organizations
and the planned opening of a new office at a later date in the north Bryan area
with a significant Hispanic influence. In the spring of 1995, First Federal
increased its checking or transaction accounts through an aggressive marketing
campaign aimed at, among others, local college students and faculty, with a
branch in College Station, Texas, (immediately south of Bryan) opened in the
first half of 1994 and its new north Bryan full-service branch opened in June,
1998, at a key intersection of a principal north-south highway and a principal
east-way highway through Bryan. This immediate area in north Bryan presently has
no other banking facility nearby to service its financial needs.
The following table sets forth the deposit flows at First Federal during
the periods indicated. Net increase (decrease) refers to the amount of deposits
during a period less the amount of withdrawals during the period. In order to
reduce excess cash on hand, First Federal implemented a planned reduction in
higher cost deposits from 1995 to 1996.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------
1998 1997 1996
------ --------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance...................... $58,808 $51,677 $54,939
Net deposits (withdrawals)........... 12,557 5,308 (4,916)
Interest credited.................... 2,189 1,823 1,654
------- ------- -------
Ending balance....................... $73,554 $58,808 $51,677
======= ======= =======
Net increase (decrease).............. $14,746 $ 7,131 $(3,262)
======= ======== =======
Percent increase (decrease).......... 25.07% 13.80% (5.94)%
======= ======== =======
</TABLE>
42
<PAGE>
The following table sets forth the dollar amount of savings deposits, by
interest rate range, in the various types of deposit programs offered by First
Federal at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
----------- --------- ----------- -------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate Accounts:
- --------------------
0.00- 2.99%......................... $ 45 .1% $ 88 .2% --- ---%
3.00- 4.99%......................... 5,509 7.5 4,250 7.2 16,448 31.8
5.00- 6.99%......................... 43,093 58.6 34,489 58.6 17,505 33.9
7.00- 8.99%......................... 911 1.2 978 1.7 933 1.8
--------- ----- ------- ----- - ------- ------
Total Certificate Accounts........... 49,558 67.4 39,805 67.7 34,886 67.5
Other Accounts:
Passbook Accounts.................... $ 5,199 7.1 4,393 7.5 4,177 8.1
NOW Accounts......................... 9,735 13.2 6,970 11.8 5,387 10.4
Money Market Accounts................ 4,595 6.2 4,229 7.2 4,653 9.0
Commercial Checking Accounts......... 2,178 3.0 1,232 2.1 1,185 2.3
Other non-interest bearing accounts.. 2,289 3.1 2,179 3.7 1,389 2.7
--------- ----- ------- ----- - ------- ------
Total Other Accounts................. 23,996 32.6 19,003 32.3 16,791 32.5
--------- ----- ------- ----- ------- ------
Total Deposits....................... $ 73,554 100.0% $58,808 100.0% $51,677 100.0%
========= ===== ======= ===== ======= ======
</TABLE>
At September 30, 1998 scheduled maturities of certificates of deposit are
as follows.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------
2001 and
1999 2000 thereafter Total
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
0.00- 2.99%................. $ --- $ 45 $ --- $ 45
3.00- 4.99%................. 5,435 64 10 5,509
5.00- 6.99%................. 30,913 9,398 2,782 43,093
7.00- 8.99%................. --- 911 --- 911
---------- --------- -------- ----------
Total.................. $ 36,348 $ 10,418 $ 2,792 $ $49,558
========== ========= ======== ==========
</TABLE>
The following table indicates the amount of First Federal's certificates of
deposit by time remaining until maturity as of September 30, 1998.
<TABLE>
<CAPTION>
Maturity
---------------------------------------------------------------------
3 Months 3 to 6 6 to 12 Over 12
or Less Months Months Months Total
---------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000......... $ 9,966 $7,674 $11,871 $10,938 $40,449
Certificates of deposit of $100,000 or more........ 2,176 2,233 2,428 2,272 9,109
------- ------ ------- ------- -------
Total.............................................. $12,142 $9,907 $14,299 $13,210 $49,558
======= ====== ======= ======= =======
</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
43
<PAGE>
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.
On April 1, 1998, the Holding Company issued $3,629,000 of 11 1/2%
subordinated debentures due on March 31, 2003 (the "Debentures"). The proceeds
from the issuance of the Debentures were used to partially fund the acquisition
of First Federal stock by the Holding Company. Interest on the Debentures is
payable quarterly on the fifteenth day of January, April, July and October of
each year. See Note 13 to the Notes to Consolidated Financial Statements of the
Company.
For additional information relating to borrowings, see Note 7 to the Notes
to Consolidated Financial Statements of the Company.
The following table sets forth the maximum month-end balance and average
balance of FHLB advances and other borrowings during the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------
1998 1997 1996
------------------- ---------------- -----------
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
- ---------------
FHLB advances............................................. $ 10,000 $ 3,067 $ 89
Debentures................................................ $ 3,629 $ --- $ ---
Average Balance:
- ---------------
FHLB advances............................................. $ 3,984 $ 3,067 $ 89
Debentures................................................ $ 1,815 $ --- $ ---
</TABLE>
The following table sets forth certain information as to First Federal's
FHLB advances and other borrowings at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------
1998 1997 1996
---------------- -------------- ---------------
(In Thousands)
<S> <C> <C> <C>
FHLB advances............................................. $ 800 $10,000 $ ---
Debentures................................................ 3,629 --- ---
------- ------- -------
Total borrowings.......................................... $ 4,429 $10,000 $ ---
======= ======= =======
Weighted average interest rate of FHLB advances........... 5.43% 5.55% ---%
Weighted average interest rate on Debentures.............. 11.5 ---% ---%
</TABLE>
SERVICE CORPORATION
Federally chartered institutions are permitted to invest in the capital
stock, obligations, or other specified types of securities of subsidiaries
(referred to as "service corporations") and to make loans to such subsidiaries,
and joint ventures in which such subsidiaries are participants, in an aggregate
amount not exceeding 2% of an institution's assets, plus an additional 1% of
assets if the amount over 2% is used for specified community or inner city
development purposes. Federal regulations also 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, 1998, First Federal had a total investment
of $13,260 in its service corporation. See "Regulation - Federal Regulation of
Thrift Institutions."
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<PAGE>
COMPETITION
First Federal's deposits increased 25% in the fiscal year ending September
30, 1998, and its loan-to-deposit ratio was 97.9%, as of September 30, 1998;
however, 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 checking accounts have been 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 along with its new north Bryan special "Working People's"
checking account designed for the majority of the population who live or work in
that area.
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 and the new George Bush
Presidential Library. However, during 1995 through 1998, additional private
businesses located to the area, thereby adding to the diversification of the
local economy. A significant portion of the region's deposit base is comprised
of depositors associated with Texas A&M University. At September 30, 1998 there
was one local, community-owned thrift institution (First Federal), one state
savings bank and seven commercial banks with retail offices in Bryan-College
Station, Texas, where First Federal's principal offices and full-service
branches are located.
EMPLOYEES
At September 30, 1998, the Company had a total of 60 full-time and 15
part-time employees. None of the Company's employees are represented by any
collective bargaining agreement. Management considers its employee relations to
be good, with a staff committed to the goals of the Company.
EXECUTIVE OFFICERS 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 Company.
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 and Chief Financial Officer in January 1993. Ms. Hegar primarily
coordinates the accounting functions of the Bank, monitors First Federal's
investments and is responsible for regulatory reporting. Ms. Hegar is a member
of the Asset/Liability and Personnel Committee.
DESCRIPTION OF PROPERTY OWNED
First Federal owns the building and land for the Company's and its
executive 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 depreciated net book
value of this office and land (with recent parking lot improvements) was
$426,000 at September 30, 1998. An expansion of 800 square feet was added in
1995, and additional drive-in facilities were added in 1994 and 1997. Additional
land was acquired in fiscal 1998, located near First Federal's principal
offices, to construct a new, larger drive-in facility when the need arises in
the future.
First Federal also opened and owns a branch office at 2202 Longmire in
College Station in March of 1994, located adjacent to one of the key highway
intersections in College Station. This office was renovated and expanded after
its acquisition by First Federal from the FDIC. The office has approximately
2320 square feet and is situated on
45
<PAGE>
almost two acres of land, with adequate expansion space for the growth of the
branch and the offices of First Federal's expanding Second Chance Auto Loan
Program. The book value of this office and land was $311,000 at September 30,
1998.
First Federal also acquired in fiscal 1998 approximately one acre of land
at a key intersection of two major highways in north Bryan, as the site for its
new north Bryan full-service branch. It opened in June 1998, with a special bank
modular facility pending construction of the permanent facility, which is
tentatively schedule to commence in early spring of 1999. First Federal is very
pleased to date with the acceptance by the community of this new facility. This
branch is intended to better serve the Hispanic and minority community, working
class population and other residents in this part of the community not presently
served by a nearby banking facility. Management believes its current check
clearing capability can service these additional accounts. The book value of
this office and land was $150,000 at September 30, 1998.
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, 1998 was $187,000.
LEGAL PROCEEDINGS
The Company is, from time to time, a party to certain lawsuits arising in
the ordinary course of its business. The Company believes that none of these
lawsuits would, if adversely determined, have a material adverse effect on its
financial condition.
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 a
financial institution holding company of First Federal, the Holding Company also
is subject to federal regulation oversight. The purpose of the regulation of the
Holding Company and other holding companies is to protect subsidiary thrift
institution. First Federal is a member 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 First Federal, to either convert to a
national bank or a state chartered financial institution by a specified date to
be determined. However, there can be no assurance that such legislation or any
similar legislation if enacted will be enacted, or, would not have a material
adverse effect on the institution.
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 January 12, 1998. 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, 1998, was $25,000.
46
<PAGE>
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 collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
September 30, 1998, First Federal's legal lending limit under this restriction
was $788,000. 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 SAIF or the BIF.
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 10%) 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.
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.
Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points. However, SAIF-insured
institutions are required to pay a Financing Corporation (FICO) assessment, in
order to fund the interest on bonds issued to resolve bank and thrift failures
in the 1980s, equal to approximately 6.48 basis points for each $100 in domestic
deposits, while BIF-insured institutions pay an assessment equal to
approximately 1.52 basis points for each $100 in domestic deposits. The
assessment is expected to be reduced to 2.43 basis points no later than January
1, 2000, when BIF insured institutions fully participate in the assessment.
These assessments, which may be revised based upon the level of BIF and SAIF
deposits will continue until the bonds mature in the year 2017.
47
<PAGE>
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. At September 30, 1998, the Bank did not have any intangible
assets.
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, 1998.
At September 30, 1998, First Federal had tangible capital of $5.3 million,
or 6.43% of adjusted total assets, which is approximately $4.0 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, 1998,
First Federal had no intangibles which were subject to these tests.
At September 30, 1998, First Federal had core capital equal to $5.3
million, or 6.43% of adjusted total assets, which is $2.8 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires thrift institutions to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a thrift institution to maintain an additional
amount of total capital to account for concentration of credit risk and the risk
of non-traditional activities. At September 30, 1998, First Federal had no
capital instruments that qualify as supplementary capital and $307,000 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, 1998.
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
48
<PAGE>
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, 1998, First Federal had total capital of $5.6 million and
risk-weighted assets of $65.3 million, or total capital of 8.5% of risk-weighted
assets. This amount was $337,000 above the 8% requirement in effect on that
date. First Federal has very recently initiated a strategy to profitably sell
some of its 100% risk-weighted loans in order to increase its risk-weight
capital ratio.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against thrift institutions that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any thrift institution that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
thrift institution, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized.
At September 30, 1998, First Federal fell within the regulatory definition
of "adequately 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 the
Holding Company or First Federal may have a substantial adverse effect on the
Company's operations and profitability.
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. The Company may
pay dividends in accordance with this general authority.
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<PAGE>
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 without notice to the OTS (unless it is a subsidiary of a
holding company) 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
undercapitalized 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 a capital
distribution and/or dividends that could be imposed upon it by the OTS or the
FDIC.
LIQUIDITY
All thrift institutions, including First Federal, are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what First Federal
includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
thrift institutions. At the present time, the minimum regulatory liquid asset
ratio is 4%.
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, 1998, First Federal was in compliance with both
requirements, with an overall liquid asset ratio of 5.98% and a short-term
liquid assets ratio of 5.98%.
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, 1998, First Federal met the test and has
always met the test since its effectiveness.
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<PAGE>
Any thrift institution that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a thrift institution and a national bank, and it is limited
to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "-- Holding Company Regulation."
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of First
Federal, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by First
Federal. An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.
The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the past
few years, First Federal may be required to devote additional funds for
investment and lending in its local community.
First Federal was examined for CRA compliance in 1998 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 Company is a unitary savings and loan holding company and can engage in
any safe and sound business that is lawful to conduct, subject to regulatory
oversight by the OTS. As such, the 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 Company and its non-thrift
institution subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary thrift
institution. Otherwise, the Company can engage in any safe and sound business,
which is lawful to conduct for any type of business. The Company is exploring
offering financial services through another subsidiary of the Holding Company.
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
thrift institution as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than First Federal or any
51
<PAGE>
other SAIF-insured thrift institution) would become subject to such restrictions
unless such other institutions each qualify as a QTL and were acquired in a
supervisory acquisition.
If First Federal fails the QTL test, the 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
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the 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 much more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See "--Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control of
any other SAIF-insured institution. Such acquisitions are generally prohibited
if they result in a multiple savings and loan 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 is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Holding
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
The Holding Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Company may not be resold
without registration or unless sold in accordance with certain resale
restrictions. 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, 1998,
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, 1998, First Federal had $382,000 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 5.64% and were 5.98% for fiscal year
1998.
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.
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<PAGE>
For the year ended September 30, 1998, dividends paid by the FHLB of Dallas
to First Federal totaled $38,428, which constitute a $12,662 decrease from the
amount of dividends received in fiscal year 1997. The $38,000 dividend received
for the year ended September 30, 1998 reflects an annualized rate of 5.98%, or
0.15% above the rate for fiscal 1997.
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.
In August 1996, legislation was enacted that repealed the percentage of
taxable income method used by many thrifts, including First Federal, to
calculate their bad debt reserve for federal income tax purposes. As a result,
small thrifts such as First Federal must recapture that portion of the reserve
that exceeds the amount that could have been taken under the experience method
for tax years beginning after December 31, 1987. The recapture will occur over a
six-year period, the commencement of which will be delayed until the first
taxable year beginning after December 31, 1997, provided the institution meets
certain residential lending requirements. The management of the Company does not
believe that the legislation will have a material impact on the Company. At
September 30, 1998, First Federal had approximately $343,000 in bad debt
reserves subject to recapture for federal income tax purposes. The deferred tax
liability related to the recapture has been previously established so there will
be no effect on future net income.
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.
A portion of First Federal's reserves for losses on loans 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, 1998, the portion of First Federal's reserves
subject to this treatment for tax purposes totaled approximately $478,000.
The Holding Company will file a consolidated federal income tax return with
First Federal on a fiscal year basis using the accrual method of accounting.
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. Management is not aware of any examination of issues related to
still open returns (including returns of subsidiaries and predecessors of, or
entities merged into, First Federal) which would result in a deficiency that
could have a material adverse effect on the financial condition of the Company.
TEXAS 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 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.
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.
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<PAGE>
MANAGEMENT OF THE HOLDING COMPANY
INDEMNIFICATION
The certificate of incorporation of the Holding Company provides that a
director or officer of the Holding Company shall be indemnified by the Holding
Company to the fullest extent authorized by the General Corporation Law of the
State of Delaware against all expenses, liability and loss reasonably incurred
or suffered by such person in connection with his or her activities as a
director or officer or as a director or officer of another company, if the
director or officer held such position at the request of the Holding Company.
Delaware law requires that such director, officer employee or agent, in order to
be indemnified, must have acted in good faith and in a manner reasonably
believed to be not opposed to the best interests of the Holding Company and,
with respect to any criminal action or proceeding, did not have reasonable cause
to believe his or her conduct was unlawful.
The certificate of incorporation of the Holding Company and Delaware law
also provide that the indemnification provisions of such certificate and the
statute are not exclusive of any other right which a person seeking
indemnification may have or later acquire under any statute, provision of the
certificate of incorporation or bylaws of the Holding Company, agreement, vote
of shareholders or disinterested directors, or otherwise.
These provisions may have the effect of deterring shareholder derivative
actions, since the Holding Company may ultimately be responsible for expenses
for both parties to the action.
In addition, the certificate of incorporation of the Holding Company and
Delaware law also provide that the Holding Company may maintain insurance, at
its expense, to protect itself and any director, officer, employee or agent of
the Holding Company or another corporation, partnership, joint venture, trust or
other enterprise against any expense, liability or loss, whether or not the
Holding Company has the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law. The Holding
Company intends to obtain such insurance.
DIRECTORS
The Holding Company's Board of Directors currently consists of 12 members,
each of whom is also a director of the Bank. Directors of the Holding Company
are elected annually and serve their one year term or until their respective
successors shall have been elected and qualified.
The following table sets forth certain information as of September 30, 1998
regarding the composition of the Holding Company's Board of Directors.
<TABLE>
<CAPTION>
Shares of
Stock
Director Term to Beneficially Percent
Name Age(1) Position(s) Held Since(2) Expire Owned(3) of Class
- ------------------ --------------- ----------------------- -------------- ---------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert H. Conaway 45 Director 1995 1999 5,290 1.36%
Arthur Davila 69 Director 1998 1999 11,987 3.08
Ken L. Hayes 59 Director 1993 1999 570 (4)
George Koenig 54 Director/Executive Vice 1996 1999 240 (4)
President
Joseph W. Krolczyk 59 Director 1998 1999 3,000 (4)
Jack W. Lester, Jr. 58 Director, Assistant 1992 1999 10,650 2.73
Secretary/Treasurer
Charles Neelley 69 Director, Secretary/Treasurer 1993 1999 10,905 2.80
Richard L. Peacock 80 Chairman of the Board 1965 1999 5,787 1.49
Roland Ruffino 48 Director 1995 1999 12,500 3.21
Gary A. Snoe 41 Director 1998 1999 10,000 2.57
J. Stanley Stephen 65 Director, President/Chief 1991 1999 29,800 7.65
Executive Officer
Ernest A. Wentrcek 70 Vice Chairman of the Board 1965 1999 6,299 1.62
</TABLE>
- ----------
(1) At September 30, 1998.
54
<PAGE>
(2) Includes service as a director of the Bank.
(3) 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.
(4) Less than one percent.
55
<PAGE>
The principal occupation of each director is set forth below. All directors
have held their present position for at least five years unless otherwise
indicated.
ROBERT H. CONAWAY. Mr. Conaway is the founder and President of Progress
Supply located in Bryan, Texas, a distributor of wholesale supply plumbing
fixtures.
ARTHUR DAVILA . Mr. Davila is retired from Texas A&M University, where he
worked as an air-conditioning specialist. Mr. Davila has been active in several
civic organizations, including serving as a trustee on the Bryan Independence
School District for 14 years, First Vice President of the Brazos County
Community Action Committee and is a former President of the Brazos Valley
Community Action Program.
KEN L. HAYES. Mr. Hayes is the owner of Aggieland Travel, located in
College Station, a full-service travel agency.
GEORGE KOENIG. Mr. Koenig is currently serving as Executive Vice President
of the Bank. Mr. Koenig was previously employed as an operations officer with a
local financial institution located in Bryan, Texas.
JOSEPH W. KROLCZYK. Mr. Krolczyk has served as the owner and President of
KESCO Supply Inc., a food service equipment and supply firm located in Bryan,
Texas for over 20 years.
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.
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.
ROLAND RUFFINO. Mr. Ruffino is a partner of Readfield Meats, Inc., a
long-time leading wholesale and retail meat distributor located in Bryan, Texas.
GARY A. SNOE. Mr. Snoe is the owner and President of Snoe Inc., a machining
and welding plant located in the Bryan, Texas trade area, and previously the
owner of a machine and welding plant for over 19 years.
J. STANLEY STEPHEN. Mr. Stephen was appointed President and Chief Executive
Officer in February 1991. From 1965 until 1986, Mr. Stephen worked with First
Bank and Trust, Bryan, Texas and served as Executive Vice President, President,
Chairman and Chief Executive Officer and Senior Chairman until he retired in
1986. From June 1986 until February 1990, Mr. Stephen was President and Chief
Executive Officer of University National Bank, College Station, Texas. Mr.
Stephen was a financial institutions consultant from March until October 1990.
In the past five years, Mr. Stephen has been involved in several lawsuits,
most of which were commenced by him in the early 1980's against financial
institutions outside the Bryan-College Station area. The lawsuits sought
compensatory damages against those lenders for failure to honor loan commitments
and other related claims with respect to several real estate partnerships of
which Mr. Stephen was a partner but not a managing partner. Those financial
institutions filed counter-claims against the real estate partnerships and their
individual partners for amounts previously advanced.
Subsequent to the commencement of litigation by Mr. Stephen, certain of
those financial institutions were taken over by their respective federal
regulatory agencies, including the FDIC.
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.
56
<PAGE>
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, rental 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 a member 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.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
Meetings of the Holding Company'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 15 times during the fiscal year ended September 30, 1998. No
incumbent director of the Holding Company 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 1998.
The Board of Directors of the Holding Company has standing Executive, Audit
and Personnel Committees.
The Executive Committee is currently composed of Directors Stephen
(Chairman), Wentrcek, Peacock, Neelley and Lester. This Committee meets as
needed and handles major policy questions between regularly scheduled board
meetings. The Committee met five times during fiscal 1998.
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 five times during fiscal 1998.
The Personnel Committee is currently composed of Directors Peacock
(Chairman), Stephen, Neelley, Wentrcek, Hayes, and Senior Vice President Hegar.
This Committee met five times during fiscal 1998.
The entire Board of Directors acts as a nominating committee for selecting
nominees for the election of directors. While the Board of Directors of the
Holding Company will consider nominees recommended by stockholders, the Board
has not actively solicited such nominations.
DIRECTOR COMPENSATION
Outside directors received $225.00 for each board meeting attended and
$75.00 for each committee meeting attended.
EXECUTIVE COMPENSATION
The Holding Company has not paid any compensation to its executive officers
since its formation. The following table sets forth information concerning the
compensation paid or granted to the Bank's Chief Executive Officer for services
rendered by him. No other executive officer of the Holding Company has aggregate
compensation (salary plus bonus) in excess of $100,000 in fiscal 1998.
57
<PAGE>
<TABLE>
<CAPTION>
============================================================================================================================
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------------------
Long Term Compensation
--------------------------------
Annual Compensation Awards Payouts
- ---------------------------------------------------------------------------------------------------------
RESTRICTED
OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
Name and Salary Bonus COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J. Stanley Stephen 1998 $ 74,000 $--- $--- $--- --- --- $40,000 (1)
President and Chief 1997 102,000 --- --- --- --- ---
Executive Officer 1996 89,875 --- --- --- --- --- ---
=============================================================================================================================
</TABLE>
- ----------
(1) Represents a contribution to Mr. Stephen's Supplemental Executive
Retirement Plan.
EMPLOYMENT AGREEMENTS
The Bank has entered into employment agreements with President J. Stanley
Stephen, Executive Vice President George Koenig, Chief Financial Officer and
Senior Vice President Mary L. Hegar, Senior Vice President Sam Urso, Senior Vice
President Tommy Nierdicek, Vice President Mike Johnson, and Vice President Kay
Watson. The employment agreements are designed to assist the Bank in maintaining
a stable and competent management team. The continued success of the Bank to a
significant degree relies on the skills and competence of its officers.
The Bank's employment agreement with Mr. Stephen, which became effective
July 1, 1997, provides for an initial term of three years 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, which commenced
July 1, 1997, and will continue to vest completely if he discontinues his
employment due to disability. The agreement further provides that if the Bank
terminates Mr. Stephen's employment other than for cause, without his consent,
it shall pay him his salary for the then- remaining term of the agreement and
consulting fees until June 30, 2002.
The employment agreements with Mr. Koenig, Ms. Hegar, Mr. Urso, Mr.
Nierdicek, Mr. Johnson and Ms. Watson 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 one year and for termination upon death,
termination of employment for cause or certain events specified by the Office of
Thrift Supervision (the "OTS") regulations. The agreements also provide that in
the event the employee is involuntarily terminated without cause, he or she
shall receive one 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 (the "Code"). 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 Holding
Company's voting stock.
Based on their current salaries, if Mr. Stephen, Mr. Koenig, Ms. Hegar, Mr.
Urso, Mr. Nierdicek, Mr. Johnson, or Ms. Watson were terminated as of December
31, 1998, 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 $285,000, $105,000, $100,000, $140,000, $110,000, $69,200 and
$77,000, respectively.
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<PAGE>
STOCK OPTION AND INCENTIVE PLAN
The Holding Company's Board of Directors adopted the 1998 Stock Option and
Incentive Program (the "Stock Option Plan"), which was later ratified by
stockholders of the Holding Company, in order to attract and retain qualified
personnel in key positions and provide directors, officers and key employees
with a proprietary interest in the Holding Company as an incentive to contribute
to the success of the Holding Company. Under the terms of the Stock Option Plan,
stock options covering shares representing an aggregate of up to 40,000 shares
of Holding Company Common Stock may be granted to directors, officers and
employees of the Holding Company or its subsidiaries.
Options granted under the Stock Option Plan may be either options that
qualify under the Code as "incentive stock options" (options that afford
preferable tax treatment to recipients upon compliance with certain restrictions
and that do not normally result in tax deductions to the employer) or options
that do not so qualify. The exercise price of stock options granted under the
Stock Option Plan is required to be at least equal to the fair market value per
share of the stock on the date of grant. Among other things, all grants are made
in consideration of position and years of service, value of the participant's
services to the Holding Company and the Bank and the added responsibilities of
such individuals as directors, officers and employees, and in an amount deemed
necessary to encourage the continued retention of the directors, officers or
employees who are considered necessary for the continued success of the Holding
Company and the Bank. The term of stock options may not exceed 10 years in the
case of an "incentive stock option" or 15 years in the case of a "non-qualified
stock option" from the date of grant. Stock options granted under the Stock
Option Plan will be funded either from authorized but unissued shares or from
issued shares reacquired and held as treasury shares.
The Stock Option Plan provides for the grant of stock appreciation rights
("SARs") at any time, whether or not the participant then holds stock options,
granting the right to receive the excess of the market value of the shares
represented by the SARs on the date exercised over the exercise price. SARs
generally will be subject to the same terms and conditions and exercisable to
the same extent as stock options.
The Stock Option Plan will be administered by the Stock Option Committee of
the Board of Directors of the Holding Company (the "Stock Option Committee")
which is comprised of all non-employee directors of the Holding Company. The
Stock Option Committee will select the recipients and terms of awards made
pursuant to the Stock Option Plan.
CERTAIN TRANSACTIONS
The Bank, 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 and business loans, if the borrower
is credit-worthy. All loans to the Bank'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.
All loans by the Bank to its directors and executive officers are subject
to OTS regulations restricting loans and other transactions with affiliated
persons of the Bank. Federal law currently requires that all loans to directors
and executive officers generally be made on terms and conditions comparable to
those for similar transactions with non-affiliates. Loans to all directors and
executive officers and their associates totaled $649,411 at September 30, 1998,
which was 12.35% of the Bank's equity capital at that date. All loans to
directors and executive officers were performing in accordance with their terms
at September 30, 1998.
DESCRIPTION OF CAPITAL STOCK
HOLDING COMPANY CAPITAL STOCK
The 2,500,000 shares of capital stock authorized by the Holding Company's
certificate of incorporation are divided into two classes, consisting of
1,500,000 shares of Holding Company Common Stock (par value $.01 per share) and
1,000,000 shares of serial preferred stock (par value $.01 per share). As of the
date of this Prospectus, the Holding Company had 389,436 shares of Common Stock
outstanding and no shares of serial preferred stock.
59
<PAGE>
Each share of Holding Company Common Stock has the same relative rights and
are identical in all respects with each other share of Holding Company Common
Stock. THE HOLDING COMPANY COMMON STOCK REPRESENTS NON-WITHDRAWABLE CAPITAL, IS
NOT OF AN INSURABLE TYPE AND IS NOT INSURED OR GUARANTEED BY THE FDIC.
Under Delaware law, the holders of Holding Company Common Stock possess
exclusive voting power in the Holding Company. Each shareholder is entitled to
one vote for each share held on all matters voted upon by shareholders, subject
to the limitation discussed under "Restrictions on Acquisitions of Stock and
Related Takeover Defensive Provisions -- Provisions of the Holding Company's
Certificate of Incorporation and Bylaws." If the Holding Company issues
preferred stock, holders of the preferred stock may also possess voting rights.
Liquidation or Dissolution. In the unlikely event of the liquidation or
dissolution of the Holding Company and First Federal, the holders of Holding
Company Common Stock will be entitled to receive -- after payment or provision
for payment of all debts and liabilities of the Holding Company (including all
deposits in First Federal and accrued interest thereon) and after distribution
of the Liquidation Account previously established upon the conversion of First
Federal from the mutual to stock form in 1993 -- all assets of the Holding
Company available for distribution, in cash or in kind. If preferred stock is
issued, the holders thereof may have a priority over the holders of Holding
Company Common Stock in the event of liquidation or dissolution.
Preemptive Rights. The certificate of incorporation of the Holding Company
provides that shareholders have preemptive rights except with respect to any
stock options issued pursuant to a plan approved by the stockholders and the
Warrants. The Common Stock is not subject to call for redemption.
Preferred Stock. The Board of Directors of the Holding Company is
authorized to issue preferred stock in series and to fix and state the voting
powers, designations, preferences and relative participating, optional or other
special rights of the shares of each such series and the qualifications,
limitations and restrictions thereof. Preferred stock may rank prior to Holding
Company Common Stock as to dividend rights, liquidation preferences, or both,
and may have full or limited voting rights. The holders of preferred stock are
entitled to vote as a separate class or series under certain circumstances,
regardless of any other voting rights which such holders may have.
Except as discussed above, the Holding Company has no present plans for the
issuance of the additional authorized shares of Holding Company Common Stock or
for the issuance of any shares of preferred stock. In the future, the authorized
but unissued and unreserved shares of Common Stock will be available for general
corporate purposes including but not limited to possible issuance as stock
dividends or stock splits, in future mergers or acquisitions, under a cash
dividend reinvestment and stock purchase plan, in a future underwritten or other
public offering, or under an employee stock ownership plan. The authorized but
unissued shares of preferred stock will be similarly available for issuance in
future mergers or acquisitions, in a future underwritten public offering or
private placement or for other general corporate purposes. Except as described
above or as otherwise required to approve the transaction in which the
additional authorized shares of Holding Company Common Stock or authorized
shares of preferred stock would be issued, no shareholder approval will be
required for the issuance of these shares. Accordingly, the Board of Directors
of the Holding Company, without shareholder approval, can issue preferred stock
with voting and conversion rights which could adversely affect the voting power
of the holders of Common Stock.
Restrictions on Acquisitions. See "Restrictions on Acquisitions of Stock
and Related Takeover Defensive Provisions" for a description of certain
provisions of the Holding Company's certificate of incorporation and bylaws
which may affect the ability of the Holding Company's shareholders to
participate in certain transactions relating to acquisitions of control of the
Holding Company.
Dividends. Dividends from First Federal are the primary source of income
for the Holding Company. Should First Federal elect or be required by its
regulators to retain its income, the ability of the Holding Company to pay
dividends to its own shareholders may be adversely affected. Furthermore, if at
any time in the future the Holding Company owns less than 80% of the outstanding
stock of First Federal, certain tax benefits under the Code as to inter-company
distributions will not be fully available to the Holding Company and it will be
required to pay federal income tax on a portion of the dividends received from
First Federal, thereby reducing the amount of income available for distribution
to the shareholders of the Holding Company. For further information concerning
the ability of First Federal to pay dividends to the Holding Company, see
"Dividend Policy," "Regulation -- Regulatory Capital Requirements" and " --
Limitation on Dividends and Other Capital Distributions."
60
<PAGE>
RESTRICTIONS ON ACQUISITIONS OF STOCK AND
RELATED TAKEOVER DEFENSIVE PROVISIONS
Although the Board of Directors of the Holding Company is not aware of any
effort that might be made to obtain control of the Holding Company, the Board
believes, as discussed below, that it is appropriate to include certain
provisions as part of the Holding Company's certificate of incorporation to
protect the interests of the Holding Company and its shareholders from takeovers
which the Board of Directors of the Holding Company might conclude are not in
the best interests of First Federal, the Holding Company or the Holding
Company's shareholders. The Holding Company intends to operate First Federal as
an independent, predominantly community-owned financial institution.
The following discussion is a summary of all material provisions of the
Holding Company's certificate of incorporation and bylaws and certain other
regulatory provisions, which may be deemed to have an"anti-takeover" effect and
could potentially discourage or even prevent a bid for the Holding Company which
might otherwise result in shareholders receiving a premium for their stock.
Further, ownership restrictions imposed by federal law could potentially serve
as a basis to invalidate or otherwise restrict the use or exercise by management
or others of revocable proxies. The description of certain of these provisions,
as set forth below, is necessarily general and, with respect to provisions
contained in the Holding Company's certificate of incorporation and bylaws and
First Federal's charter and bylaws, reference should be made in each case to the
document in question, each of which is part of the Holding Company's
Registration Statement filed with the SEC. See "Available Information."
PROVISIONS OF THE HOLDING COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
Directors. Certain provisions of the Holding Company's certificate of
incorporation and bylaws will impede changes in majority control of the Board of
Directors. The Holding Company's certificate of incorporation provides that the
Board of Directors will be elected annually. The Holding Company's certificate
of incorporation provides that the size of the Board of Directors may be
increased or decreased only by a majority vote of the Board. The certificate of
incorporation also provides that any vacancy occurring in the Board of
Directors, including a vacancy created by an increase in the number of
directors, shall be filled for the remainder of the unexpired term by a majority
vote of the directors then in office. Finally, the Holding Company's bylaws
impose certain notice and information requirements in connection with the
nomination by shareholders of candidates for election to the Board of Directors
or a proposal by shareholders of business to be acted upon at an annual meeting
of shareholders.
The Holding Company's certificate of incorporation provides that a director
may only be removed for cause by the affirmative vote of 80% of the shares
eligible to vote.
Restrictions on Call of Special Meetings. The certificate of incorporation
of the Holding Company provides that a special meeting of shareholders may be
called only pursuant to a resolution adopted by a majority of the Board of
Directors. Shareholders are not authorized to call a special meeting.
Absence of Cumulative Voting. The Holding Company's certificate of
incorporation provides that there shall be no cumulative voting rights in the
election of directors.
Authorization of Preferred Stock. The certificate of incorporation of the
Holding Company authorized 1,000,000 shares of serial preferred stock, $.01 par
value. The Holding Company is authorized to issue preferred stock from time to
time in one or more series subject to applicable provisions of law, and the
Board of Directors is authorized to fix the designations, powers, preferences
and relative participating, optional and other special rights of such shares,
including voting rights (which could be a multiple or separate class) and
conversion rights. In the event of a proposed merger, tender offer or other
attempt to gain control of the Holding Company that the Board of Directors does
not approve, it might be possible for the Board of Directors to authorize the
issuance of a series of preferred stock with rights and preferences that would
impede the completion of such a transaction. An effect of the possible issuance
of preferred stock, therefore, may be to deter a future takeover attempt. The
Board of Directors has no present plans or understandings for the issuance of
any preferred stock and does not intend to issue any preferred stock except on
terms which the Board deems to be in the best interests of the Holding Company
and its shareholders.
Limitation on Voting Rights. The Holding Company's certificate of
incorporation provides that in no event shall any record owner of any
outstanding Common Stock which is beneficially owned, directly or indirectly, by
a person who beneficially owns in excess of 10% of the then outstanding shares
of Common Stock (the "Limit"), be entitled or permitted to any vote in respect
of the shares held in excess of the Limit. This limitation would not inhibit
61
<PAGE>
any person from soliciting (or voting) proxies from other beneficial owners for
more than 10% of Holding Company Common Stock or from voting such proxies.
Beneficial ownership is to be determined pursuant to Rule 13d-3 of the General
Rules and Regulations of the Exchange Act, and in any event includes shares
beneficially owned by any affiliate of such person, shares which such person or
his or her affiliates (as defined in the certificate of incorporation) have the
right to acquire upon the exercise of conversion rights or options and shares as
to which such person and his or her affiliates have or share investment or
voting power, but shall not include shares beneficially owned by directors,
officers and employees of the Holding Company or the Bank. This provision will
be enforced by the Holding Company's Board of Directors to limit the voting
rights of persons beneficially owning more than 10% of the Common Stock and
thus, could be utilized in a proxy contest or other solicitation to defeat a
proposal that is desired by a majority of the stockholders.
Procedures for Certain Business Combinations. The Holding Company's
certificate of incorporation requires that certain business combinations,
(including mergers or consolidations, sale, lease or other disposition of
assets, issuances or transfers of securities, adoption of any plan of
liquidation proposed by the Interested Stockholder, or any reclassification of
securities which increases the Interested Stockholders share of the Holding
Company), between the Holding Company (or any majority-owned subsidiary thereof)
and a 25% or more shareholder either (i) be approved by at least 80% of the
total number of outstanding voting shares, voting as a single class, of the
Holding Company, (ii) be approved by a majority of the continuing Board of
Directors (i.e., persons serving prior to the 25% shareholder becoming such and
who are not affiliated with the 25% shareholder) or (iii) involve consideration
per share generally equal to the highest per share price paid by such 25%
shareholder to acquire its stock.
Amendment to Certificate of Incorporation and Bylaws. Amendments to the
Holding Company's certificate of incorporation must be approved by a majority
vote of the Holding Company's Board of Directors and also by a majority of the
outstanding shares of the Holding Company's voting stock; provided, however,
that approval by at least 80% of the outstanding voting stock is generally
required to amend certain provisions (i.e., provisions relating to number,
classification, election and removal of directors; limitation on voting rights;
amendment of bylaws; call of special shareholder meetings; offers to acquire and
acquisitions of control; director liability; certain business combinations;
power of indemnification; and amendments to provisions relating to the foregoing
in the certificate of incorporation).
The Holding Company's bylaws may be amended by a majority vote of the Board
of Directors or the affirmative vote of at least 80% of the total votes eligible
to be voted at a duly constituted meeting of shareholders.
Purpose and Takeover Defensive Effects of the Holding Company's Certificate
of Incorporation and Bylaws. The Board of Directors of the Holding Company
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
interests of First Federal, the Holding Company and the Holding Company's
shareholders. In the judgment of the Board of Directors, the Holding Company's
Board will be in the best position to determine the true value of the Holding
Company and to negotiate more effectively for what may be in the best interests
of its shareholders. Accordingly, the Board of Directors believes that it is in
the best interests of the Holding Company and its shareholders to encourage
potential acquirors to negotiate directly with the Board of Directors of the
Holding Company and that these provisions will encourage such negotiations and
discourage hostile takeover attempts. It is also the view of the Board of
Directors that these provisions should not discourage persons from proposing a
merger or other transaction at prices reflective of the true value of the
Holding Company and which is in the best interests of all shareholders.
Attempts to take over financial institutions and their holding companies
have become increasingly common. Takeover attempts which have not been
negotiated with and approved by the Board of Directors present to shareholders
the risk of a takeover on terms which may be less favorable than might otherwise
be available. A transaction which is negotiated and approved by the Board of
Directors, on the other hand, can be carefully planned and undertaken at an
opportune time in order to obtain maximum value for the Holding Company and its
shareholders, with due consideration given to matters such as the management and
business of the acquiring corporation and maximum strategic development of the
Holding Company's assets.
Effect of Takeover Defenses on Shareholder Interests. An unsolicited
takeover proposal can seriously disrupt the business and management of a
corporation and cause it great expense. Although a tender offer or other
takeover attempt may be made at a price substantially above then current market
prices, such offers are sometimes made for less than all of the outstanding
shares of a target company. As a result, shareholders may be presented with the
alternative of partially liquidating their investment at a time that may be
disadvantageous, or retaining their investment in an
62
<PAGE>
enterprise which is under different management and whose objectives may not be
similar to those of the remaining shareholders. The concentration of control,
which could result from a tender offer or other takeover attempt, could also
deprive the Holding Company's remaining shareholders of the benefits of certain
protective provisions of the Exchange Act, if the number of beneficial owners
becomes less than the 300 at which the Exchange Act registration is required.
Potential Negative Impact of Takeover Defenses on Shareholder Interests.
Despite the Holding Company's belief of the benefits to shareholders of these
provisions of the Holding Company's certificate of incorporation and bylaws,
these provisions may also have the effect of discouraging a future takeover
attempt which would not be approved by the Holding Company's Board, but pursuant
to which shareholders may receive a substantial premium for their shares over
then current market prices. As a result, shareholders who might desire to
participate in such a transaction may not have any opportunity to do so. Such
provisions will also render the removal of the Holding Company's Board of
Directors and management more difficult. The Board of Directors, however, has
concluded that the potential benefits outweigh the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
shareholders, the Holding Company may adopt additional charter provisions
regarding the acquisition of its equity securities that would be permitted to a
Delaware corporation. The Holding Company does not presently intend to propose
the adoption of further restrictions on the acquisition of the Holding Company's
equity securities.
OTHER RESTRICTIONS ON ACQUISITIONS OF STOCK
Delaware Anti-Takeover Statute. The State of Delaware has enacted
legislation which provides that subject to certain exceptions a publicly held
Delaware corporation may not engage in any business combination with an
"interested shareholder" for three years after such shareholder became an
interested shareholder, unless, among other things, the interested shareholder
acquired at least 85% of the corporation's voting stock in the transaction that
resulted in the shareholder becoming an interested shareholder. This legislation
generally defines "interested shareholder" as any person or entity that owns 15%
or more of the corporation's voting stock. The term "business combination" is
defined broadly to cover a wide range of corporate transactions, including
mergers, sales of assets, issuances of stock, transactions with subsidiaries and
the receipt of disproportionate financial benefits. Under certain circumstances,
either the board of directors or both the board and two-thirds of the
shareholders other than the acquiror may approve a given business combination
and thereby exempt the corporation from the operation of the statute.
However, these statutory provisions do not apply, among other situations,
to Delaware corporations with fewer than 2,000 shareholders or which do not have
voting stock listed on a national exchange or listed for quotation with a
registered national securities association.
Federal Regulation. Federal law provides that no company, "directly or
indirectly or acting in concert with one or more persons, or through one or more
subsidiaries, or through one or more transactions," may acquire "control" of a
savings association at any time without the prior approval of the OTS. In
addition, federal regulations require that, prior to obtaining control of a
savings association, a person, other than a company, must give 60 days' prior
notice to the OTS and have received no OTS objection to such acquisition of
control. Any company that acquires such control becomes a "savings and loan
holding company" subject to registration, examination and regulation as a
savings and loan holding company. Under federal law (as well as the regulations
referred to below) the term "savings association" includes state and federally
chartered SAIF-insured institutions and federally chartered savings institutions
whose accounts are insured by the FDIC's BIF, and holding companies thereof.
Control, as defined under federal law, means ownership of, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the OTS that the acquiror has the
power to direct, or directly or indirectly exercise a controlling influence
over, the management or policies of the institution. Acquisition of more than
10% of any class of a savings association's voting stock, if the acquiror also
is subject to any one of eight "control factors," constitutes a rebuttable
determination of control under the regulations. Such control factors include the
acquiror being one of the two largest shareholders. The determination of control
may be rebutted by submission to the OTS, prior to the acquisition of stock or
the occurrence of any other circumstances giving rise to such determination, of
a statement setting forth facts and circumstances which would support a finding
that no control relationship will exist and containing certain undertakings. The
regulations provide that persons or companies which acquire beneficial ownership
exceeding 10% or more of any class of a savings association's stock must file
with the OTS a certification form that the holder is not in control of such
institution, is not subject to a rebuttable determination of control and will
take no action which would result in a determination or rebuttable determination
of control without prior notice to or
63
<PAGE>
approval of the OTS, as applicable. Therefore, a warrant holder who upon
exchange of Warrants would acquire ownership of more than 10% of the issued and
outstanding of the Holding Company's Common Stock must obtain OTS approval prior
to exercise.
DESCRIPTION OF WARRANTS
Each Warrant entitles the holder thereof to purchase one share of Holding
Company Common Stock at an exercise price of $12.50, subject to adjustments, at
any time prior to 5:00 p.m., Central Time on March 31, 2003. The number of
shares purchasable upon exercise of the Warrants and the exercise price shall be
subject to adjustment to reflect among other things, stock dividends on or stock
splits of Holding Company Common Stock or reclassification of its shares of
Holding Company Common Stock. In such situations, the number of shares
purchasable upon exercise will be adjusted so that the Warrant holder shall be
entitled to receive the kind and number of shares which the holder thereof would
have owned or been entitled to receive after the occurrence of any of such
events if the Units had been exercised prior thereto. The exercise price will be
adjusted accordingly.
The Warrants have no value other than as the right to acquire Holding
Company Common Stock at the exercise price. The Warrants do not confer upon the
holders thereof any of the rights or privileges of a stockholder. Accordingly,
the Warrants do not entitle holders thereof to receive any dividends, to vote,
to call meetings or to receive any distribution upon a liquidation of the
Holding Company. The Holding Company has authorized and reserved for issuance a
number of shares of Holding Company Common Stock sufficient to provide for the
exercise of the rights represented by the Warrants. Shares issued upon exercise
of the Warrants will be fully paid and nonassessable. Warrants not exercised
prior to 5:00 p.m., Central Time, on March 31, 2003 shall become null and void.
The Warrants may be exercised during the exercise period stated above by
delivery of the Warrant Certificate, with the subscription form on the reverse
side of the Warrant Certificate fully executed, to the Holding Company with a
check payable to the Holding Company in an amount equal to the Warrant exercise
price multiplied by the number of shares of Holding Company Common Stock being
purchased. The Holding Company or its transfer agent will issue a new Warrant
Certificate representing the unexercised but not expired Warrants. The Warrants
are detachable and may trade separately from the Debentures.
A complete statement of the terms and conditions pertaining to the Warrants
is contained in the Warrant Certificate, copies of which can be obtained from
the Holding Company. The description contained in this Prospectus is qualified
in its entirety by the text of the Warrant Certificate.
LEGAL MATTERS
The legality of the Holding Company Common Stock has been passed upon for
the Holding Company by Silver, Freedman & Taff, L.L.P (a partnership including
professional corporations), 1100 New York Avenue, N.W., Washington, D.C.,
special counsel to the Holding Company. Silver, Freedman & Taff, L.L.P. has
consented to the reference herein to its opinion.
EXPERTS
The Consolidated Financial Statements of The Bryan-College Station
Financial Holding Company as of September 30, 1996, 1997 and 1998 and for each
of the years in the three year period ended September 30, 1998 included in this
Prospectus have been audited by Crowe, Chizek and Company LLP, independent
certified public accountants. Such Consolidated Financial Statements have been
included herein in reliance upon the report of Crowe, Chizek and Company LLP,
appearing elsewhere herein, and upon the authority of such firm as experts in
accounting and auditing.
64
<PAGE>
<TABLE>
<CAPTION>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
Index to Consolidated Financial Statements
Page
----
<S> <C>
Report of Independent Auditors................................................................................ F-2
Consolidated Statements of Financial Condition at September 30, 1998 and 1997................................ F-3
Consolidated Statements of Income for the years ended September 30, 1998, 1997 and 1996...................... F-4
Consolidated Statements of Stockholders' Equity for the years ended September 30, 1998, 1997 and 1996......... F-6
Consolidated Statements of Cash Flows for the years ended September 30, 1998, 1997 and 1996................... F-7
Notes to Consolidated Financial Statements for the years ended September 30, 1998, 1997 and 1996.............. F-9
</TABLE>
All schedules are omitted because the required information is not
applicable or is included in the Consolidated Financial Statements and related
Notes.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Bryan-College Station Financial Holding Company
Bryan, Texas
We have audited the accompanying consolidated statements of financial condition
of The Bryan-College Station Financial Holding Company and its wholly-owned
subsidiary, First Federal Savings Bank of Bryan, as of September 30, 1998 and
1997 and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended September 30,
1998. These financial statements are the responsibility of the Company'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 The Bryan-College
Station Financial Holding Company and its wholly-owned subsidiary, as of
September 30, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1998 in
conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
Oak Brook, Illinois
November 14, 1998
F-2
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1998 and 1997
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,435 $ 756
Interest-bearing deposits in other financial institutions 3,892 3,675
----------- -----------
Total cash and cash equivalents 5,327 4,431
Securities available-for-sale 5 -
Securities held-to-maturity (fair value:
1998 - $945; 1997 - $1,129) 954 1,150
Loans held for sale 328 204
Loans receivable, net 71,666 65,033
Federal Home Loan Bank stock 382 896
Foreclosed real estate 282 520
Premises and equipment 1,636 1,117
Accrued interest receivable 608 537
Other assets 1,446 1,201
----------- -----------
$ 82,634 $ 75,089
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 73,554 $ 58,808
Advance payments by borrowers for insurance and taxes 863 862
Advances from Federal Home Loan Bank 800 10,000
Debentures 3,629 -
Deferred income taxes 198 219
Accrued interest payable and other liabilities 847 366
----------- -----------
79,891 70,255
Minority interest 873 -
Commitments and contingent liabilities
Stockholders' equity
Preferred stock - par value $.01 per share (liquidation
preference of $873,000); authorized 1,000,000 shares,
issued 87,263 shares - 1
Common stock - par value $.01 per share; authorized
3,000,000 shares, issued 389,436 shares at September 30,
1998 and 239,612 shares at September 30, 1997 4 2
Additional paid-in capital 1,849 2,743
Retained earnings, substantially restricted 17 2,088
----------- -----------
1,870 4,834
----------- -----------
$ 82,634 $ 75,089
=========== ===========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1998, 1997, and 1996
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans $ 6,686 $ 5,351 $ 4,407
Securities - - 46
Mortgage-backed securities 63 73 99
Other 142 173 276
---------- ---------- ----------
Total interest income 6,891 5,597 4,828
Interest expense
Deposits 2,981 2,491 2,358
Debentures 210 - -
FHLB advances 226 168 5
---------- ---------- ----------
Total interest expense 3,417 2,659 2,363
---------- ---------- ----------
NET INTEREST INCOME 3,474 2,938 2,465
Provision for loan losses 79 25 (52)
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,395 2,913 2,517
Noninterest income
Service charges 602 585 527
Gain on sale of loans 116 54 125
Gain on sale of mortgage servicing rights 113 94 205
Gain on sale of mortgage-backed securities - - 13
Operation of foreclosed real estate (20) (20) (9)
Other 120 62 12
---------- ---------- ----------
Total noninterest income 931 775 873
Noninterest expense
Compensation and benefits 1,806 1,368 1,337
Occupancy and equipment expense 471 356 335
SAIF special assessment - - 333
Federal insurance premiums 43 45 125
Net (gain) loss on real estate owned,
including provision for losses 27 (12) 8
Loan expense 56 24 33
Office supplies 122 74 73
Professional fees 141 134 179
Advertising 83 78 57
Data processing 192 171 148
Telephone 99 61 57
Postage 108 84 62
Other 722 388 301
---------- ---------- ----------
Total noninterest expense 3,870 2,771 3,048
---------- ---------- ----------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
F-4
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1998, 1997, and 1996
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INCOME BEFORE INCOME TAX EXPENSE $ 456 $ 917 $ 342
Income tax expense 164 312 108
---------- ---------- ----------
NET INCOME 292 605 234
Dividends on Bank preferred stock (44) (87) (88)
---------- ---------- ----------
Net income available to common stockholders $ 248 $ 518 $ 146
========== ========== ==========
Earnings per common share $ .50 $ .86 $ .24
========== ========== ==========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 1998, 1997, and 1996
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Additional
Preferred Common Paid-In Retained
Stock Stock Capital Earnings Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at
October 1, 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
Net income - - - 605 605
Dividends ($1.00 per
preferred share) - - - (87) (87)
----------- ----------- ----------- ----------- -----------
Balance at
September 30, 1997 1 2 2,743 2,088 4,834
Issuance of 200,000
shares of Company common
stock, net of stock issue
cost of $276,000 - 2 1,722 - 1,724
Purchase of fractional shares of
Bank stock and stock of
dissenting stockholders - - (1,744) (2,199) (3,943)
Minority interest (1) - (872) - (873)
Cash dividends paid by Bank
($.50 per common share,
$.50 per preferred share) - - - (164) (164)
Net income - - - 292 292
----------- ----------- ----------- ----------- -----------
Balance at
September 30, 1998 $ - $ 4 $ 1,849 $ 17 $ 1,870
=========== =========== =========== =========== ===========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1998, 1997, and 1996
(In thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 292 $ 605 $ 234
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Depreciation 232 166 167
Amortization of premiums and discounts on mortgage-
backed securities, net 4 4 5
Amortization of debt issue costs 67 - -
Net change in loans held-for-sale (8) 269 1,546
Change in deferred loan origination fees 124 39 (41)
Change in deferred income taxes (21) 133 (60)
Net (gains) losses on sales of
Real estate owned 27 (12) 1
Mortgage-backed securities - - (13)
Mortgage loans (116) (54) (125)
Mortgage servicing rights (113) (94) (205)
Provision for losses on loans and real estate owned 79 25 (45)
Federal Home Loan Bank stock dividend (38) (51) (49)
Change in
Accrued interest receivable (71) (208) 48
Other assets 190 (956) 26
Accrued interest payable and other liabilities 480 (369) 556
---------- ---------- ----------
Net cash provided by (used in) operating activities 1,128 (503) 2,045
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans receivable (6,613) (15,960) (2,677)
Purchase of available-for-sale securities (5) - -
Principal payments on mortgage-backed securities 192 138 418
Proceeds from sale of mortgage-backed securities - - 576
Proceeds from maturities of held-to-maturity securities - 1,000 -
Proceeds from sale of mortgage servicing rights 113 94 205
Proceeds from redemption of Federal Home Loan Bank stock 552 - -
Capital expenditures on premises and equipment, net (751) (359) (57)
Capital expenditures on foreclosed real estate (40) (67) (83)
Proceeds from sale of real estate owned 28 159 3
---------- ---------- ----------
Net cash used in investing activities (6,524) (14,995) (1,615)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 14,746 7,131 (3,262)
Net increase (decrease) in advance payments by borrowers
for insurance 1 79 (127)
Net increase (decrease) in Federal Home Loan Bank Advances (9,200) 10,000 -
Net proceeds from issuance of debentures 3,128 - -
Repayment of other borrowings - - (1,088)
Net proceeds from issuance of common stock 1,724 - -
Purchase and retirement of Bank stock (3,943) - -
Dividends paid on preferred and common stock (164) (87) (88)
---------- ---------- ----------
Net cash provided by (used in) financing activities 6,292 17,123 (4,565)
---------- ---------- ----------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
F-7
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1998, 1997, and 1996
(In thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Change in cash and cash equivalents $ 896 $ 1,625 $ (4,135)
Cash and cash equivalents at beginning of year 4,431 2,806 6,941
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,327 $ 4,431 $ 2,806
========== ========== ==========
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 3,305 $ 2,628 $ 2,369
Income taxes 156 165 139
Supplemental disclosure of noncash investing activities
Net transfer between loans and real estate acquired through
foreclosure 223 23 (375)
Transfer of securities to available-for-sale at fair value - - 563
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1998, 1997, and 1996
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying consolidated financial statements for
the year ended September 30, 1998 include the accounts of The Bryan-College
Station Financial Holding Company (the "Company") and its wholly-owned
subsidiary First Federal Savings Bank (the "Bank"). On April 1, 1998, the
Company was capitalized through the issuance of 200,000 shares of common stock
at $10 per share. The Bank concurrently became a wholly-owned subsidiary of the
Company in a stock-for-stock exchange with bank stockholders. Stock of
dissenting stockholders and fractional shares were purchased by the Company for
$24.07 per share. Since the transaction was an internal reorganization, the
historical cost basis of accounting is continued for the Bank.
The 1998 consolidated financial statements include the accounts and results of
operations of the Company, the Bank, and the Bank's wholly-owned subsidiary
First Service Corporation of Bryan. The September 30, 1997 and 1996 consolidated
financial statements include the accounts of the Bank and its wholly-owned
subsidiary. All significant intercompany transactions and balances have been
eliminated in consolidation.
Nature of Operations: The only business of the Company is the ownership of the
Bank. The Bank is a federally chartered stock 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. 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. The collectibility of loans, fair value of financial
instruments, and status of contingencies are particularly subject to change.
Securities: Securities are classified as held-to-maturity when management has
the intent and the Company has the ability to hold those securities to maturity.
All other securities are classified as available-for-sale since the Company may
decide to sell those securities in response to changes in market interest rates,
liquidity needs, changes in yields or alternative investments, and for other
reasons. These securities are carried at fair value with unrealized gains and
losses charged or credited, net of income taxes, to a valuation allowance
included as a separate component of stockholders' equity. Premiums and discounts
are recognized in
- --------------------------------------------------------------------------------
(Continued)
F-9
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1998, 1997, and 1996
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
interest income using methods that approximate the level-yield method. Realized
gains and losses on disposition 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
Company has established an allowance for loan losses. Increases to the allowance
are recorded by a provision for loan losses charged to expense. Estimating the
risk of the loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate to cover possible losses that are currently anticipated based on past
loss experience, general economic conditions, information about specific
borrower situations including their financial position and collateral values,
and other factors and estimates which 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.
The Company measures 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. 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.
Smaller balance homogeneous loans are defined as residential first mortgage
loans secured by one-to-four-family residences, residential construction loans,
and consumer 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
- --------------------------------------------------------------------------------
(Continued)
F-10
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1998, 1997, and 1996
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 do not 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.
Loan Fees and Costs: The Company 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 Company sells a portion of its mortgage loan production in the
secondary market. The Company 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 in the aggregate. Net
unrealized losses are recognized by charges to income.
Premises and Equipment: The Company's premises and equipment are stated at cost
less accumulated depreciation. The Company'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
Company'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 Company 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.
- --------------------------------------------------------------------------------
(Continued)
F-11
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1998, 1997, and 1996
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Common Share: Earnings per share is computed under the provisions
of Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
which was adopted retroactively by the Company at the beginning of the first
quarter of fiscal 1998. Amounts reported as Earnings Per Common Share for each
of the three years ended September 30, 1998 reflect earnings available to common
stockholders for the year divided by the weighted average number of common
shares outstanding during the year. Earnings per share for the years ended
September 30, 1997 and 1996 have been restated to reflect the 2.5 exchange ratio
of Company common stock for Bank common stock. Weighted average common shares
were 494,233 for the year ended September 30, 1998 and 599,030 for the years
ended September 30, 1997 and 1996. The warrants attached to the 3,629 units
issued by the Company on April 1, 1998 have an exercise price of $12.50 per
share. The warrants are not included in diluted earnings per share since the
exercise price exceeds the market price of the stock.
NOTE 2 - SECURITIES
The amortized cost and fair values of securities at September 30 are as follows:
<TABLE>
<CAPTION>
---------------------------1 9 9 8-----------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available-for-sale
Equity stock $ 5 $ - $ - $ 5
=========== =========== =========== ===========
Held-to-maturity
FHLMC certificates $ 655 $ 2 $ (14) $ 643
FNMA certificates 299 4 (1) 302
----------- ----------- ----------- -----------
$ 954 $ 6 $ (15) $ 945
=========== =========== =========== ===========
<CAPTION>
---------------------------1 9 9 7-----------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Held-to-maturity
FHLMC certificates $ 774 $ 5 $ (27) $ 752
FNMA certificates 376 3 (2) 377
----------- ----------- ----------- -----------
$ 1,150 $ 8 $ (29) $ 1,129
=========== =========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-12
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1998, 1997, and 1996
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
Mortgage-backed securities have varying maturities. 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.
NOTE 3 - LOANS
Loans receivable at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
First mortgage loans Principal balances:
Secured by one-to-four-family residences $ 32,846 $ 35,541
Secured by other properties 4,616 4,166
Construction loans 6,166 10,305
----------- -----------
43,628 50,012
Less:
Undisbursed portion of loans (2,089) (3,452)
Net deferred loan origination fees (140) (167)
Deferred gain (3) (3)
----------- -----------
Total first mortgage loans 41,396 46,390
Consumer and other loans Principal balances:
Automobile loans 24,636 15,082
Home equity and second mortgage 37 54
Loans secured by deposit accounts 951 925
Commercial loans 3,024 1,766
Other consumer loans 1,199 672
----------- -----------
29,847 18,499
Net deferred loan origination costs 110 36
Net premiums on indirect loans 620 381
----------- -----------
Total consumer and other loans 30,577 18,916
Less allowance for loan losses (307) (273)
----------- -----------
$ 71,666 $ 65,033
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-13
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1998, 1997, and 1996
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
A summary of the activity in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 273 $ 247 $ 317
Provision charged to operations 79 25 (52)
Charge-offs (75) (5) (23)
Recoveries 30 6 5
----------- ----------- -----------
Balance at end of year $ 307 $ 273 $ 247
=========== =========== ===========
</TABLE>
There were no impaired and nonaccrual loans at September 30, 1998. Nonaccrual
loans totaled approximately $8,000, and $56,000 at September 30, 1997 and 1996,
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 not material.
The largest portion of the Company'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, 1998, approximately 45% of the
Company's loans were secured by owner-occupied, one-to-four-family residential
property. The Company requires collateral on all loans and generally maintains
loan-to-value ratios of 80% or less.
The Company has granted loans to certain officers and directors of the Bank and
Company. 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.
Activity in the loan accounts of executive officers, directors, and principal
stockholders is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance at beginning of year $ 678 $ 699
Loans disbursed 379 54
Principal repayments (251) (56)
Change in persons classified as related parties (157) (19)
----------- -----------
Balance at end of year $ 649 $ 678
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-14
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1998, 1997, and 1996
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 4 - SECONDARY MORTGAGE MARKET OPERATIONS
The following summarizes the Company's secondary mortgage market activities:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Proceeds from sale of mortgage loans $ 11,526 $ 7,821 $ 13,839
=========== =========== ===========
Gain on sale of mortgage loans $ 116 $ 54 $ 125
Gain on sale of mortgage servicing rights 113 94 205
----------- ----------- -----------
$ 229 $ 148 $ 330
=========== =========== ===========
Loans serviced for others $ 1,966 $ 1,588 $ 966
=========== =========== ===========
</TABLE>
NOTE 5 - PREMISES AND EQUIPMENT
A summary of premises and equipment at September 30 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 423 $ 358
Buildings and improvements 987 771
Furniture and equipment 1,730 1,218
----------- -----------
Total cost 3,140 2,347
Accumulated depreciation (1,504) (1,230)
----------- -----------
$ 1,636 $ 1,117
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-15
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1998, 1997, and 1996
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 6 - DEPOSITS
Certificate of deposit accounts with a minimum denomination of $100,000 or more
totaled $9,109,000 and $5,210,000 at September 30, 1998 and 1997, respectively.
At September 30, 1998, scheduled maturities of certificates of deposit are as
follows:
Year Ending
1999 $ 36,348
2000 10,418
2001 2,085
2002 468
2003 239
-------------
$ 49,558
=============
NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK AND DEBENTURES
At September 30, secured advances from the Federal Home Loan Bank were as
follows:
Balance
Interest Rate Maturity Date 1998 1997
------------- ------------- ---- ----
5.52% 10/2/98 $ 500 $ -
5.29 10/5/98 300 -
5.55 10/1/97 - 5,500
5.55 10/7/97 - 4,500
--------- ---------
$ 800 $ 10,000
========= =========
The maximum amount of credit available, secured by a blanket lien on first
mortgages, is the lesser of 75% of qualifying collateral or 35% of total assets
of the Bank. At September 30, 1998, the Bank had the ability, if needed, to
borrow up to $23.6 million from the Federal Home Loan Bank of Dallas.
The Bank maintains a collateral pledge agreement covering secured advances
whereby the Bank has agreed to at all times keep on hand, free of all other
pledges, liens, and encumbrances, first mortgage loans on residential property
(not more than 90 days delinquent), aggregating no less than 133% of the
outstanding secured advances from the Federal Home Loan Bank of Dallas.
- --------------------------------------------------------------------------------
(Continued)
F-16
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1998, 1997, and 1996
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK AND DEBENTURES
(Continued)
Debentures consist of 3,629 units, each unit consisting of a $1,000 debenture
and nine detachable warrants exercisable at an exercise price of $12.50 per
share. At September 30, 1998, notes payable are summarized as follows:
Interest Rate Maturity Date Balance
------------- ------------- -------
11.5% March 31, 2003 $ 3,629,000
NOTE 8 - 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 1997, 1,553
stock options expired due to the resignation of an officer and a director who
did not exercise their options. At September 30, 1997, 13,461 options were
outstanding. Concurrent with the merger and formation of the Holding Company on
April 1, 1998, all outstanding stock options were cancelled.
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.
The funded status of the plan at September 30 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Change in benefit obligation:
Beginning benefit obligation $ 595 $ 499
Service cost 82 69
Interest cost 41 35
Actuarial (gain) loss (6) 18
Benefits paid (36) (26)
----------- -----------
Ending benefit obligation $ 676 $ 595
=========== ===========
Change in plan assets:
Beginning fair value $ 437 $ 333
Actual return 21 21
Employer contribution 120 109
Benefits paid (36) (26)
----------- -----------
Ending fair value $ 542 $ 437
=========== ===========
Funded status $ (134) $ (158)
Unrecognized net actuarial loss 55 62
Unrecognized net transition obligation 104 111
Additional minimum liability - (30)
----------- -----------
Prepaid (accrued) benefit cost $ 25 $ (15)
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-17
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1998, 1997, and 1996
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 8 - BENEFIT PLANS (Continued)
<TABLE>
<CAPTION>
--------Year Ended September 30,---------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net pension cost includes the following components:
Service cost earned during the period $ 82 $ 69 $ 73
Interest cost 42 35 25
Expected return on plan assets (31) (23) (16)
Net amortization and deferral 16 9 7
----------- ----------- -----------
Net periodic pension cost $ 109 $ 90 $ 89
=========== =========== ===========
</TABLE>
The assumptions used to develop the net periodic pension cost were:
<TABLE>
<CAPTION>
--------Year Ended September 30,---------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount rate 7% 7% 7%
Expected long-term rate of return on assets 7% 7% 7%
Rate of increase in compensation levels 5% 5% 5%
</TABLE>
The Bank entered into an employment, consulting, and supplemental retirement
agreement on July 1, 1997 with the President and Chief Executive Officer of the
Bank. The employment and consulting portions of the agreement have a combined
term of five years from the commencement date of July 1, 1997. The consulting
portion commences upon completion of the three-year employment period and calls
for annual consulting fees equal to $58,200 payable in equal monthly
installments. The supplemental retirement agreement commences on the later of
the retirement date or July 1, 2002 and is based on services commencing on July
1, 1997. The President's salary is reduced by 50% of the amount of the
retirement expense incurred each month by the Bank.
NOTE 9 - REGULATORY AND CAPITAL MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
- --------------------------------------------------------------------------------
(Continued)
F-18
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1998, 1997, and 1996
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 9 - REGULATORY AND CAPITAL MATTERS (Continued)
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, 1998, the most
recent notification from the Office of Thrift Supervision categorized the Bank
as adequately 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, and Tier I leverage ratios. At September
30, 1998 and 1997, the Bank did not meet the minimum requirement to be well
capitalized under prompt corrective action regulations.
At year end, actual capital levels of the Bank and minimum required levels were:
<TABLE>
<CAPTION>
Minimum Required
to Be Well
Minimum Required Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1998
- ----
Total capital (to risk-weighted assets) $ 5,563 8.52% $ 5,226 8.00% $ 6,533 10.00%
Tier 1 (core) capital (to risk-weighted assets) 5,256 8.04 2,615 4.00 3,922 6.00
Tier 1 (core) capital (to adjusted total assets) 5,256 6.43 2,453 3.00 4,088 5.00
Tier 1 (leverage) capital (to average assets) 5,256 6.86 3,064 4.00 3,830 5.00
Tangible capital (to adjusted total assets) 5,256 6.43 1,226 1.50 N/A N/A
1997
- ----
Total capital (to risk-weighted assets) $ 5,107 9.11% $ 4,486 8.00% $ 5,608 10.00%
Tier 1 (core) capital (to risk-weighted assets) 4,834 8.62 2,243 4.00 3,365 6.00
Tier 1 (core) capital (to adjusted total assets) 4,834 6.43 2,256 3.00 3,760 5.00
Tier 1 (leverage) capital (to average assets) 4,834 7.53 2,568 4.00 3,210 5.00
Tangible capital (to adjusted total assets) 4,834 6.43 1,128 1.50 N/A N/A
</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 stockholders;
brokered deposits; and transactions with affiliates.
Federal regulations require the Bank to comply with a Qualified Thrift Lender
(QTL) test which requires that 65% of assets be maintained in housing-related
finance and other specified assets. If the QTL test is not met, limits are
placed on growth, branching, new investments, FHLB advances, and dividends or
the institution must convert to a commercial bank charter. Management considers
the QTL test to have been met.
- --------------------------------------------------------------------------------
(Continued)
F-19
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1998, 1997, and 1996
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 9 - REGULATORY AND CAPITAL MATTERS (Continued)
Bank 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. The Bank preferred stock is
reflected as minority interest in the consolidated statement of financial
condition.
NOTE 10 - COMMITMENTS, CONTINGENT LIABILITIES, AND CONCENTRATIONS
The Company 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 Company'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 Company 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:
<TABLE>
<CAPTION>
Contract
Amount
------
1998 1997
---- ----
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to make loans $ 3,197 $ 8,610
Loans-in-process 2,089 3,452
Lines of credit 974 1,371
Letters of credit 73 175
</TABLE>
The Company had $3,197,000 of fixed rate commitments to originate loans, ranging
from 6.125% to 12.99% at September 30, 1998. 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 Company to concentrations of
credit risk include interest-bearing deposit accounts in other financial
institutions and loans. At September 30, 1998, the Company had deposit accounts
with balances totaling approximately $3,667,000 at the Federal Home Loan Bank of
Dallas. Concentrations of loans are described in Note 3.
- --------------------------------------------------------------------------------
(Continued)
F-20
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1998, 1997, and 1996
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS, CONTINGENT LIABILITIES, AND CONCENTRATIONS (Continued)
The Company 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 Company entered into a noncancelable operating lease
for office space relating to mortgage operations. The lease expired August 31,
1998 and the Company is leasing the space month-to-month until December 31,
1999. The Company has entered into a new noncancelable operating lease for the
mortgage operations effective January 1, 1999 with a term of three years and one
option to renew for an additional three years. Rental expense on this space was
approximately $29,000 for the year ended September 30, 1998. Projected minimum
payments under the terms of the lease, not including insurance and maintenance,
are as follows:
1999 $ 16
2000 21
2001 21
2002 5
--------
$ 63
========
NOTE 11 - INCOME TAX EXPENSE
The provision for income tax expense consists of the following:
<TABLE>
<CAPTION>
---------Year Ended September 30,---------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current income tax expense $ 185 $ 179 $ 168
Deferred income tax expense (benefit) (21) 133 (60)
----------- ----------- -----------
$ 164 $ 312 $ 108
=========== =========== ===========
</TABLE>
The provision for income tax differs from that computed at the statutory
corporate tax rate as follows:
<TABLE>
<CAPTION>
---------Year Ended September 30,---------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax expense at statutory rate (34%) $ 155 $ 312 $ 116
Other tax effects 9 - (8)
----------- ----------- -----------
$ 164 $ 312 $ 108
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-21
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1998, 1997, and 1996
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAX EXPENSE (Continued)
The Bank has qualified under provisions of the Internal Revenue Code which
permit it to deduct from taxable income a provision for bad debts which differs
from the provision charged to income in the financial statements. Retained
earnings at September 30, 1998 include approximately $478,000, 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 $175,000 and is payable over a six-year period, beginning in
fiscal year 1997. The remaining amount of deferred tax liability which must be
recaptured at September 30, 1998 is $116,000.
Deferred tax assets (liabilities) are comprised of the following at September
30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Supplemental employee retirement agreement $ 34 $ -
Depreciation 8 -
Other - 3
----------- -----------
Total deferred tax assets 42 3
Depreciation - (23)
Federal Home Loan Bank stock dividends (141) (128)
Loans, principally due to allowance for losses (99) (71)
----------- -----------
Total deferred tax liabilities (240) (222)
----------- -----------
Net deferred tax liabilities $ (198) $ (219)
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-22
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1998, 1997, and 1996
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The approximate carrying amount and estimated fair value of financial
instruments at September 30 is as follows:
<TABLE>
<CAPTION>
-------------1998------------ ------------1997------------
Approximate Approximate
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 5,327 $ 5,327 $ 4,431 $ 4,431
Securities 959 950 1,150 1,129
Loans, net of allowance for
loan losses 71,666 72,589 65,033 65,683
Loans held for sale 328 328 204 204
Federal Home Loan Bank stock 382 382 896 896
Accrued interest receivable 608 608 537 537
Financial liabilities
Demand deposits (18,797) (18,797) (14,610) (14,610)
Savings deposits (5,199) (5,199) (4,393) (4,393)
Time deposits (49,558) (49,719) (39,805) (39,891)
Advance payments by borrowers
for taxes and insurance (863) (863) (862) (862)
Federal Home Loan Bank Advances (800) (800) (10,000) (10,000)
Debentures (3,629) (3,752) - -
Accrued interest payable (168) (168) (56) (56)
</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 Company would
charge for similar loans with similar maturities, applied for an estimated time
period until the loan is assumed to be repriced or repaid.
- --------------------------------------------------------------------------------
(Continued)
F-23
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1998, 1997, and 1996
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Federal Home Loan Bank Stock: The fair value of Federal Home Loan Bank stock is
assumed to approximate its carrying value.
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 Company 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.
Federal Home Loan Bank Advances and Advance Payments by Borrowers for Taxes and
Insurance: The fair values are assumed to approximate the carrying values.
Debentures: The estimated fair value of debentures is based on calculating the
present value of future cash flows using the current rate for a note with
similar risk characteristics and similar length to maturity. The current rate
was obtained from inquiry of investment bankers familiar with the thrift
industry and the risk associated with debentures based on recent issuance of
similar debentures.
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 Company 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 Company disposed of these
items on September 30, 1998, the fair value would have been achieved, because
the market value may differ depending on the circumstances. The estimated fair
values at September 30, 1998 should not necessarily be considered to apply at
subsequent dates.
- --------------------------------------------------------------------------------
(Continued)
F-24
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1998, 1997, and 1996
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 13 - MERGER AND FORMATION OF HOLDING COMPANY
On April 1, 1998, First Federal Savings Bank became a wholly-owned subsidiary of
The Bryan-College Station Financial Holding Company through an agreement and
plan of merger. The Company issued 200,000 shares of common stock at a price of
$10 per share and 3,629 units, each unit consisting of a $1,000 debenture
bearing an interest rate of 11.5% due March 31, 2003 and nine detachable
warrants. Each warrant entitles the unit holder to purchase one share of Company
common stock for $12.50 through March 31, 2003. Existing stockholders of First
Federal Savings Bank exchanged one share of existing First Federal common stock
for two and one-half shares of new holding company stock or sold their common
stock for cash of $24.07 per share. The Bank preferred stock was not affected by
the reorganization and is recorded as minority interest in the consolidated
statement of financial condition.
Delaware law generally limits dividends of the Company to an amount equal to the
excess of its net assets over its paid-in capital or, if there is no such
excess, to its net profits for the current and immediately preceding fiscal
year. In addition, the Company is prohibited from paying dividends on junior
securities such as the Company's common stock unless all interest payments with
respect to the debentures have been made.
Merger costs totaling $276,000 were deducted from the proceeds of the shares
sold in the formation of the new holding company.
NOTE 14 - PARENT COMPANY ONLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
September 30, 1998
ASSETS
<S> <C>
Cash $ 441
Equity interest in bank subsidiary 5,256
Other assets 764
--------------
$ 6,461
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 3,629
Accrued interest and other liabilities 89
--------------
Total liabilities 3,718
Minority interest 873
Stockholders' equity
Common stock 4
Additional paid-in capital 1,849
Retained earnings 17
--------------
Total stockholders' equity 1,870
--------------
$ 6,461
==============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-25
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1998, 1997, and 1996
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 14 - PARENT COMPANY ONLY FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF INCOME
For the period April 1, 1998 through September 30, 1998
<S> <C>
Income
Interest income $ 3
Other income 10
--------------
Total income 13
Expenses
Interest expense 210
Other expenses 300
--------------
Total expenses 510
--------------
LOSS BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARY (497)
Equity in undistributed earnings of Bank subsidiary 354
--------------
Loss before income tax benefit (143)
Income tax benefit (160)
--------------
Net income $ 17
==============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-26
<PAGE>
THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1998, 1997, and 1996
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 14 - PARENT COMPANY ONLY FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
For the period April 1, 1998 through September 30, 1998
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 17
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of subsidiary (310)
Amortization of debt issuance and reorganization costs 67
Increase in other assets, net of liabilities (242)
--------------
Net cash used in operating activities (468)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock 1,724
Net proceeds from issuance of debentures 3,128
Purchase and retirement of Bank stock (3,943)
--------------
Net cash provided by financing activities 909
--------------
Change in cash and cash equivalents 441
Cash and cash equivalents at beginning of period -
--------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 441
==============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 121
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-27
<PAGE>
<TABLE>
<S> <C>
====================================================================== ====================================================
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 UP TO 32,661 SHARES OF
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
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 THE BRYAN-COLLEGE STATION
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT FINANCIAL HOLDING COMPANY
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.
-----------------
TABLE OF CONTENTS COMMON STOCK
Page
Prospectus Summary................................................. 3
Risk Factors....................................................... 5 -----------------------------------
Selected Consolidated Financial Data.............................. 9
Capitalization.....................................................11
Dilution.......................................................... 11 PROSPECTUS
Disclosure Regarding Forward-Looking Statements....................12
Use of Proceeds....................................................12 -----------------------------------
Market Information.................................................12
Dividends..........................................................12
Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................13
Business...........................................................26
Regulation........................................................ 46
Management of the Holding Company..................................54
Description of Capital Stock.......................................59
Restrictions on Acquisitions of Stock and Related
Takeover Defensive Provisions....................................61
Description of Warrants............................................64
Legal Matters......................................................64
Experts............................................................64 __________, 1999
-------------------
===================================================================== ====================================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Set forth below is an estimate of the amount of fees and expenses to be
incurred in connection with the issuance of the shares and units.
<TABLE>
<S> <C>
Counsel/Accounting fees and expenses..................... $5,000**
Printing, postage and mailing............................ 2,000**
Registration and Filing Fees............................. 1,500*
Blue Sky fees and expenses............................... 31,085*
Other expenses........................................... 2,000**
--------
TOTAL............................................... $9,000
======
</TABLE>
- ----------------
*Previously paid in connection with this S-1 Registration Statement.
**Estimated.
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) reasonably 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, 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.
<PAGE>
Item 15. Recent Sales of Unregistered Securities
The Registrant is newly incorporated, solely for the purpose of acting as
the holding company of First Federal Savings Bank pursuant to the Merger
Agreement (filed as Exhibit 2 herein), and no sales of its securities have
occurred to date, other than the sale of one share of the Registrant's stock to
its incorporator for the purpose of qualifying the Registrant to do business in
the State of Delaware.
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
<TABLE>
<S> <C>
1 Form of Agency Agreement*
2 Agreement and Plan of Merger*
3.1 Certificate of Incorporation of the Holding Company*
3.2 Bylaws of the Holding Company*
3.3 Charter of First Federal*
3.4 Bylaws of First Federal*
4.1 Form of Stock Certificate of the Holding Company*
4.2 Indenture, including Form of Debenture*
4.3 Form of Warrant*
4.4 Form of Escrow Agreement*
5.1 Opinion of Silver, Freedman & Taff, L.L.P. with Respect to Legality
of Stock*
5.2 Opinion of Silver, Freedman & Taff, L.L.P. with respect to Legality of Debentures*
5.3 Opinion of Silver, Freedman & Taff, L.L.P. with respect to Legality of Warrants*
8 Opinion of Crowe Chizek & Company, L.L.P. with respect to Federal
income tax consequences of the Units*
10.1 1993 Stock Option and Incentive Plan*
10.2 Form of Employment Agreement of J. Stanley Stephen*
10.3 Form of Employment Agreement of George Koenig*
10.4 Form of Employment Agreement of Mary Lynn Hegar*
10.5 Form of Employment Agreement of Kay Watson*
23.1 Consent of Silver, Freedman & Taff, L.L.P.*
23.2 Consent of Crowe, Chizek and Company L.L.P.
24 Power of Attorney (set forth on signature page)*
25 Statement of eligibility of trustee*
99.1 Stock Order Form and Order Form Instructions*
99.2 Unit Order Form and Order Form Instructions*
</TABLE>
- -----------------------------
* Previously filed.
<PAGE>
(b) Financial Statement Schedules:
All schedules have been omitted as not applicable, is included in the
Consolidated Financial Statements and related Notes or not required under the
rules of Regulation S-X.
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and it will be governed by the final adjudication
of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, 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 February 4, 1999.
THE BRYAN-COLLEGE STATION FINANCIAL
HOLDING COMPANY
By: /s/ J. Stanley Stephen
-------------------------------
J. Stanley Stephen, Director, 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 or her and in his or her 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
or she 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, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ J. Stanley Stephen /s/ Jack W. Lester, Jr.
- ------------------------------------------- ------------------------------------------
J. Stanley Stephen, Director, President and Jack W. Lester, Jr., Director, Assistant Secretary
Chief Executive Officer and Treasurer
(Principal Executive Officer)
Date: February 4, 1999
Date: February 4, 1999
/s/ Richard L. Peacock /s/ George Koenig
- ------------------------------------------ ------------------------------------------
Richard L. Peacock, Chairman of the Board George Koenig, Director and Executive Vice President
Date: February 4, 1999 Date: February 4, 1999
/s/ Ernest A. Wentrcek /s/ Robert H. Conaway
- ------------------------------------------ ------------------------------------------
Ernest A. Wentrcek, Vice Chairman of the Board Robert H. Conaway, Director
Date: February 4, 1999 Date: February 4, 1999
/s/ Charles Neelley /s/ Ken L. Hayes
- ------------------------------------------ ------------------------------------------
Charles Neelley, Director, Secretary and Ken L. Hayes, Director
Treasurer
Date: February 4, 1999 Date: February 4, 1999
<PAGE>
/s/ Joseph W. Krolczyk
- ------------------------------------------
Joseph W. Krolczyk, Director
Date: February 4, 1999
/s/ Gary A. Snoe
- ------------------------------------------
Gary A. Snoe, Director
Date: February 4, 1999
/s/ J. Roland Ruffino
- ------------------------------------------
J. Roland Ruffino, Director
Date: February 4, 1999
/s/ Mary Lynn Hegar
- ------------------------------------------
Mary Lynn Hegar, Vice President, Secretary
and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: February 4, 1999
</TABLE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
First Federal Savings Bank
We consent to the use in this Post-Effective Amendment No. 1 to Form S-1
filed with the Securities and Exchange Commission, of our report dated November
14, 1998, on the financial statements of The Bryan-College Station Financial
Holding Company for the year ended September 30, 1998. We also consent to the
reference to us under the heading "Experts" in this Post-Effective Amendment No.
1 to Form S-1.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
Oak Brook, Illinois
February 1, 1999
